1. Foremost, I would like to extend my warm welcome to all the guests to the 8th Indonesia Shari’ah Economic Festival (ISEF 2021). I wish to express my sincere thanks and appreciation to IIFM and IILM with the support of Bank Indonesia as the gracious host, for organising this seminar to update on global benchmark rate reforms. It is a pleasure for me to join you in this virtual seminar, which I am sure will be an illuminating and enlightening session of expert panellists, in sharing their extensive knowledge and thoughts on the current development of phasing out the Inter-Bank Offered Rate (IBOR) and transition to Risk-Free Rates (RFR’s) or Alternative Benchmark Rates.

2. The announcement made by the former Chief Executive of the UK’s Financial Conduct Authority (FCA), Mr. Andrew Bailey in 2017, marked a formal confirmation that the IBOR settings will be permanently ceased as the interest rate benchmark by December 2021. Due to the inadequacy of underlying IBOR transactions, the benchmark rate is potentially inaccurate to reflect market conditions and unsustainable. Following this development, the global financial market has agreed to use the alternative Risk-Free benchmark Rates (RFR) as it is more reflective of market conditions .

3. The implications of the cessation of IBOR to Islamic finance transactions are still in deliberation by the Islamic organisation bodies, such as IIFM, in developing a unified benchmark rate transition as well as to put forth a plan of potential solutions for the Shariah-compliant use of near risk-free reference rate. According to Fitch Ratings, Islamic banks face more complexities than their counterparts do in the transitioning away from legacy IBOR because of the need to ensure compliance to Shariah. Islamic banks face similar uncertainties to conventional banks from IBOR transition, including increased exposure to profit-rate, basis, operational and legal risks, and unclear implications for derivatives hedging and accounting. But the transition could be more challenging due to sharia-compliance implications .

4. In the case of Malaysia, the Shariah Advisory Council (SAC) of the Central Bank of Malaysia has ruled that the use of the RFR as an alternative benchmark rate to the IBOR, or as a fallback benchmark replacement rate after the permanent cessation of IBOR, is permissible, based on the following justifications :
(i) The compounding methodology is merely an arithmetic method in determining the term rate which does not affect compliance of the transactions with Shariah requirements; and
(ii) Uncertainty (gharar) from the adoption of average RFR or backward-looking term rate at the point of payment is mitigated via proper determination and disclosure of the ceiling price and formula to derive the periodic payment amount to the customer at the inception of the contract.

5. As a midshore centre, the Labuan International Business and Financial Centre (Labuan IBFC) provides global investors and international businesses with well-regulated and supervised jurisdiction, along with certainty in a currency neutral operating environment. Since our Labuan Banks are predominantly international banks, they are free and allow to adopt any RFRs that suit with their clientele preferences and their business propositions as long as they remain adherence to the international standards setting policies. Nonetheless, we foresee that the IBOR transition will potentially impact the Labuan banks and financial institutions, in the following ways:
(i) They might need to renegotiate their existing contractual agreement based on the rate used by their counterparts,
(ii) The different in fall back rates are only for short term solutions and could increase liquidity risks, and
(iii) Increasing in operational cost, particularly in IT and back office costs.

6. In line with the global development trend in embracing fintech and digitalisation, I would like to take this occasion to highlight that Labuan FSA as the regulator of the Labuan IBFC, is currently developing its 5-year Strategic Roadmap for 2022 to 2026 with the theme “Revitalising Business and Enhancing Sustainability of Labuan IBFC as Asia’s Preferred Centre”. One of the strategic thrusts is to intensify the Islamic finance footing in the region focusing on advancing innovative digital business solutions including incorporating the environmental, social and governance-related or in short ESG as well as other Islamic finance agenda. In 2020, we have issued the Framework on Digital Banking and more than 60 digital financial services have been established in Labuan. We envisioned that the initiatives would further enhance Labuan as the preferred jurisdiction which offers a wider range and quality digital-based solutions that are also Shariah-compliant.

Ladies and Gentlemen,

7. Before we continue with our event today, I would like to thank the IIFM for its ongoing efforts to market unification specifically on global standardization of Islamic documentation and product confirmation. I believe many of us here would like to understand more about this benchmark rate reforms especially in terms of “Whys” of the transition? “Whats” of IBOR and RFR? and “Hows” relating to impacts of Islamic finance?. And here we are today blessed by the Almighty, an opportunity to hear directly from our fellow distinguished experts to provide us with deeper insights on the IBOR transition, its challenges to Islamic finance industry, and strategies to develop a robust Islamic finance structures and solutions, among others.

8. With the anticipation that the IBOR will no longer be published by the end of 2021, financial market players should plan the transition of all IBOR-based exposures including all existing contracts to risk-free interest rates, in the next couple of months. With the recent publication by IIFM on Shariah-Compliant Standard Structuring Solutions for RFR's Implementation for Murabahah and Ijarah transactions, the standard undoubtedly provides tremendous benefit in providing a smooth transition for the Islamic finance industry away from the IBOR benchmark rate. IIFM has once again demonstrated its dedication and commitment to playing a pivotal role in shaping the future of Islamic finance. In this regard, I would like to sincerely thank and applaud the IIFM and the entire core working group for their exceptional efforts and significant contribution to the industry.

9. With this, I wish to express my deepest appreciation to everyone present here today, and I look forward to the panel session ahead. Thank you and Wassalaamu’alaykum Warahmatullahi Wabarakatuh.


Reference:

https://www.iifm.net/wp-content/uploads/2021/03/IIFM-White-Paper-on-Global-Benchmark-Rate-Reforms-and-Implications-of-IBOR-Transition-for-Islamic-Finance.pdf

https://www.wfw.com/articles/libor-transition-implications-for-islamic-finance/

https://www.wfw.com/articles/libor-transition-what-why-when-how/

https://www.kslaw.com/news-and-insights/libor-transition-challenges-for-islamic-finance-transactions

https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2020/07/transitioning-from-libor-implications-for-islamic-finance.pdf

https://www.federalreserve.gov/newsevents/speech/quarles20210322a.htm

https://www.fsb.org/wp-content/uploads/P090720.pdf

https://www.ironmountain.com/resources/general-articles/t/the-end-of-libor-are-you-prepared-#:~:text=First%2C%20it%20is%20important%20to,banks%20lend%20to%20one%20another.&text=Banks%20had%20been%20falsely%20reporting,turn%2C%20borrowers%20overpaid%20on%20interest.

https://www.bnm.gov.my/-/sac-bnm-210th-meeting

https://www.islamicfinancenews.com/sac-rules-rfr-permissible-as-libor-alternative.html