Monetary and Banking Research Institute
Date:2/24/2020 9:24:41 AM   |   Code : 334695   |   View: 259

Open Market Operations in accordance with the Principles of Islamic Law

The Shari'a Repurchase Agreement Functions (Repo) roundtable in Money and Capital Market was held at the Monetary and Banking Research Institute and the effects of the Islamic Repurchase Agreement on Iran's financial markets were evaluated.

According to the Public Relations of the Monetary and Banking Research Institute, a meeting on " Repurchase Agreement Functions (Repo) in accordance with Shari'ah in the Money and Capital Market" was attended by Seyed Abbas Mousavian, Member of the Central Bank Jurisprudence Council, Ali Saleh Abadi, President of the Islamic Financial Association of Iran, Amir Hamouni, CEO of Farabours, deputy director of economic policy and research and professor at Mofid University, at the Monetary and Banking Research Institute of the Central Bank.

Central Bank Tools for Monetary Policy

Sayed Abbas Mousavian, a member of the Central Bank's Jurisprudence Council, said the Central Bank's monetary policy was one of the main missions of the Central Bank, adding that the Central Bank's monetary policy had three instruments: changing the legal reserve rate, discount rate and open market banking. Which, in the meantime, and in the long term, the change in the legal reserve rate is the accountable medium. But given the possibility of turmoil in the banking system and the lack of rapid change, it is not responsive in the short term and cannot be acted upon; on the other hand, the discount rate is responsive and effective in the short run but not responsive in the long run.

He continued: The best tool for fast, accurate and timely monetary policy of the Central Bank is the open market banking. Open market operations platform is an effective and efficient tool for guiding the volume of liquidity and controlling interest rates.

Open Market Operations in Western Banking

Mousavian pointed out the use of open market operation model by Western banks and noted that open market operations in western banking are conducted in different ways and in Iran this should be done in accordance with Islamic sharia principles.

Central Bank Jurisprudential Council Member added: The Central Bank conducts its monetary and banking policies in the open market banking through the purchase and sale of certain securities in the interbank market and the repurchase agreement of those securities. According to which the sale of securities must be conditional on redemption.

Legal Models of Repurchase Agreements

Referring to legal models of repurchase agreements, he said, the first form of repurchase agreement was debt or collateral, which typically involves government bonds with interest and usury which is not applicable to Islamic banking, but the second model, which is based on buying and selling securities and is subject to redemption, is applicable to Islamic banking.

One important point to discuss is the use of the Western Repo model for borrowing and selling securities, which cannot be exploited in Islamic society and the Islamic banking system because the Islamic repurchase agreement is not based on debt and collateral, Mousavi said. Rather, it is based on buying and selling securities.

A member of the Central Bank Jurisprudence Council emphasized that the Islamic repurchase agreement should be based on legitimate securities such as Islamic Treasury documents, bonds, leases and other Islamic government securities.

Capital Market Profit from Islamic Redemption Agreement

Amir Hamouni, CEO of Farabours in another part of the scientific meeting, noting that Iran's Farabours have modeled Repo trading optimization based on the Black-Scholes formula to create an interest rate corridor, said: In the proposed forward-looking method, an optimal strategy for maintaining the interest rate corridor is calculated using Repo.

He explained that maintaining the equilibrium interest rate and return curve to maturity rates is the goal of a corridor and is maintained through tools such as trading options and repo.

An Effective Step Towards Islamic Banking

The CEO of Farabour said that with the implementation of the Islamic repurchase agreement (Islamic Repo) is an effective step towards Islamic banking, he noted: This will happen with the help and cooperation of the money and capital market and has numerous benefits for the country's financial market.

Hamouni said that the Shariah repurchase agreement helps finance the working capital of companies that have received Islamic Treasury Documents for their obligations to the government, as well as deepening the debt market, transparency of interest rates and proper implementation of Central Bank’s monetary policies. The open market operations are another Repo's benefits in the money and capital markets.

Repo in accordance with Islamic Law

Ali Saleh Abadi, head of the Islamic Finance Association and CEO of the Export Development Bank of Iran, also referred to open market operations and actions of the Central Bank in this regard, saying: "Open market operations can be effective with due structure and in accordance with Islamic Law and have good impact on money market management."

He said: Repo in accordance with Islamic law in the money market can be used by the Central Bank for monetary policy through open market operations as well as in the interbank market with the aim of providing short-term liquidity.

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