Mg at 10:36, 28 March 2012

2012-03-28T10:36:25Z

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An arrangement, which results into a similar cash flow as an interest rate swap. It is often based on [[Tawarruq]], [[Commodity murabaha]] or [[Waad]].

==Profit-Rate Swap Using Commodity Murabaha==

In a profit-rate swap (Mubadalatul Arbaah) using [[commodity murabaha]], two parties enter into a series of separate contracts. For example, take a profit rate swap is undertaken to swap a five-year fixed rate contract for a variable rate which is adjusted annually. The fixed-rate side of the transaction is a [[commodity murabaha]] in which a commodity is sold with a markup where installment payments are equal to the fixed rate profit payments and there is a balloon payment of the pricipal at maturity in five years. Upon delivery of the commodity, it is sold for the current market price. On the floating-rate side, a commodity is sold with a markup priced with a spread over an [[interest rate benchmark]] where installments are equal to the floating rate profit payment and there is a balloon payment of the pricipal at maturity in one year. Upon delivery of the commodity, it is sold for the current market price. The parties repeat the floating-rate contract annually for five years using the [[interest rate benchmark]] at the time each contract is signed, with no contracts being dependent upon the existence of any others.

==Profit Rate Swap Using Waad==

In a profit-rate swap using [[Waad]]: Each of two parties issue an undertaking [[Waad]] to enter into a Murabha transaction if it is beneficial for the other party. The party out of the money at each date pays a premium above market price being the equivalent of the difference of the fixed rate versus variable rate.

==Critics==

The critics regarding [[Tawarruq]] apply to both methods. Addtionally there are concerns regarding the usage of two unilateral [[Waad]] from the perspective of closing the means to a forbidden end and that the two [[Waad]] amounting simply to a forward contract, which itself is prohibited by [[Shariah]].

A counterargument is that risk management is a necessity, which could overrule a prohibition. Furthermore the formalistic differences on the contractual side show at least an effort for Sharia compliance.

==Industry Standard==

The [[International Islamic Financial Market]] has published in 2010 a standardised agreeement, called [[Ta'hawwut]], which is approved by a wide variety of scholars to foster risk management among Islamic financial institutions.

==References==

* Uberoi, Priya; Evans, Nick: [http://www.allenovery.com/AOWeb/binaries/47753.PDF Profit Rate Swap]
* [http://islamic-finance-resources.blogspot.com/2009/06/shariah-compliant-profit-rate-swap.html Shariah Compliant Profit Rate Swap]
* [http://www.azmilaw.com/Article/Article_6_&_7/Article_6_Developments_of_Islamic_Swaps_in_Malaysia_00068949-2.pdf Developments of Islamic Swaps in Malaysia] Azmi and Associates
* [http://www.google.ch/url?sa=t&source=web&ct=res&cd=10&ved=0CEMQFjAJ&url=http%3A%2F%2Fiimm.bnm.gov.my%2Fview.php%3Fid%3D37%26dbIndex%3D0%26website_id%3D14%26ex%3D1261116005%26md%3DtGuX%2580h%25A1%25C3r%25D0%251E%253C%2509I%25FE%25E1&ei=I8SOS8WBKpaanwPEg9WuCw&usg=AFQjCNEZyJ6l9BwvTz0aR4iO9q0XVUhVUw&sig2=kfBhSv4jW5StATmbHa9vPA ISLAMIC DERIVATIVES SOLUTIONS: METHODOLOGY, ISSUES AND PRODUCT STRUCTURING WITH SPECIAL REFERENCE TO PROFIT RATE SWAP AND FORWARD FOREX] Presentation by Sheikh Daud Bakar
* [http://isda.informz.net/z/cjUucD9taT0xNTUwNTMzJnA9MSZ1PTc2MjY1OTg2NSZsaT03MTQ1MjI0/index.html Profit Rate Swap templates related to the ISDA/IIFM Master Agreement]

Profit Rate Swap - Revision history

Mg at 10:36, 28 March 2012