Benchmarking

Benchmarking in the context of Islamic finance refers to the practice of using LIBOR or other Interbank interest rates as a benchmark when pricing asset finance transactions in Islamic Finance. For example, in an ijara-based transaction, the rent is often quoted based on a spread over LIBOR.

The permissibility for using LIBOR is described by Sheikh Taqi Usmani and Sheikh Nizam Yaquby [1] with the example of two brothers: One is selling alcoholics the other soft drinks. The brother selling alcoholics is adding 20% on the price for alcoholics he buys. The other brother uses the margin on the alcoholic drinks to establish the pricing margin of 20% for his soft drinks.

While this example explains that pricing according to a benchmark otherwise forbidden could be regarded as permissible, the majority of scholars dislike this practice and would prefer that an Islamic benchmark will develop once the industry growths further.

References

• Gassner, Michael Saleh. "Sukuk structures", Banker Middle East, December 2006.
• Fatwa Benchmarking Against LIBOR