Benchmarks for Payments

LIBOR as a bench-mark

Since Islamic banking is centered on the avoidance of riba or interest based transactions, any mention or reference to interest raises doubts. The banks need a benchmark to determine the fair market value of profit they should charge in case of markup in Murabaha or rental rates in Ijarah. They have used LIBOR as that benchmark. Since LIBOR is an interest rate benchmark, it has been questioned.

The debate about interest rate benchmark could be only solved once Islamic banking evolves to a point where there are reasonable Islamic profit rates benchmarks on Islamic products. Since interest is prohibited and reference to any interest based product is undesirable. But the Islamic banks have to compete with the traditional banks and if they charge more than what other banks are charging, it will drive the customers away. Islamic banks have to offer Halal products yet stay competitive so the customers do not feel cheated that Islamic loans are costing them more. The use of LIBOR has been an accepted practice to keep the Islamic banks competitive with traditional banks. The scholars have allowed the use of LIBOR for price determination as long as it is not being used to charge interest itself.

There have been efforts by Islamic bankers for their own landmark rates. In November 2011, Thomson Reuters launched Islamic Interbank Benchmark Rate (IIBR) in Bahrain. IIBR is based on rates from 16 Islamic banks and Islamic sections of conventional banks. There have been other attempts in the past such as KLIBOR ((Kuala Lumpur Offered Interbank Rate) in Malaysia which is derived from LIBOR but applies to Islamic Financing products. However, some bankers have questioned the necessity of even having an Islamic Index. LIBOR is only used as a benchmark and not used to charge interest for a transaction. (Arab News)