EXPLORING SHARIAH-COMPLIANT MARKET BENCHMARK ALTERNATIVES FOR ISLAMIC FINANCIAL INSTITUTIONS

Abstract

Islam is the second largest religion with 1.8 billion Muslim population making almost 24% of the world population. Muslim world, with its energy rich resources especially middle east countries, contributes considerably in world GDP. Islam provides complete guide with respect to Islamic Finance. Muslim world, despite being significant contributor, couldn’t give worldwide recognition to Islamic finance. Islamic Interbank Benchmark Rate was introduced through collective efforts of six Muslim countries in 2011 through Thomas Reuters to meet the shariah compliant requirements of Islamic countries. However, it couldn’t get due acceptance and becomes dormant in 2016. Islamic financial institutions have been using Libor as benchmark which is being phased out. The present study is aimed at determination of co-integration relationship between Islamic benchmark rates with conventional benchmarks. Auto Regressive Distributed Lags methodology was employed to ascertain the long-term co-integration between the variables of interest. Present study was able to identify long term co-integration between IIBR, Dow Jones Islamic market returns, London Interbank offer rate and daily gold market returns. Phasing of Libor is providing a lucrative opportunity for the Muslim countries to revive IIBR or adopt new benchmarking mechanism free from interest (Riba).