Repurchase Agreements and their Sharia Complaint Alternatives: An Analytical Perspective within Liquidity Management Context

Zakaria S Hegazy, Mohammed S Ismael

Abstract


This paper aims to analyze the repurchase agreement (Repo) in the light of Islamic Shari’ah principles, legally and financially. After clarifying the liquidity issue and its relation to the repo agreement, the study begins with examining the legal aspects of such agreement. Then, the analysis financially explores issues relating to sharia-compliant repurchase agreement substitutes. The current paper shows that the repo is not a loan contract. As the article clarified that, the repo differs from the mortgage of financial securities. Modification of these agreements should be done to be appropriate for Islamic financial institutions. Particular care should be given to some contracts that illegitimate from Islamic Sharia point of view. Contracts such as reciprocal loans, SBBA, Organized Tawarruq should be revised before using. Some issues should be considered such as capacity risk, governing rules, and mixed funds for initiating Wakala investment contract. As sharia-compliant Repo research is limited, the authors confronted a challenge withthe conceptual base of Islamic alternatives and their real application in banking transactions. The paper contains challenges and implications for the future developments ofsharia-compliant liquidity risk management instruments. This article provides the sharia-compliant perspective of managing liquidity risk through alternatives to repurchase agreements, where the current knowledge and application are very limited.

Aus. J. Isla. Finan. & Busi. Vol 2(2), October 2016, P 105-118


Keywords


Islamic banks; Repurchase agreement; Liquidity management; sharia-compliant; Reciprocal Loans; Tawarruq; Wakala investment; Sell and Buy Back Agreement; Reciprocal Deposits.

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