ICD unveils new hedging instrument in Baku to expand access to local currency financing

The Islamic Corporation for the Development of the Private Sector and The Currency Exchange Fund (TCX) have entered into a long-term partnership agreement to jointly develop a non-deliverable hedging instrument designed in accordance with the principles of Islamic finance.

According to Report, the announcement was made during the 51st Annual Meeting of the Islamic Development Bank Group in Baku.

The initiative aims to expand access to financing in local currencies across developing and frontier markets. It seeks to address one of the key challenges in development finance - the limited availability of effective currency risk hedging solutions for currencies whose offshore markets traditionally have low liquidity.

In many ICD member countries, exchange-rate volatility can weaken borrowers' repayment capacity, increase the cost of raising funds, and reduce the effectiveness of lending in hard currencies. By developing a Shariah-compliant non-deliverable hedging instrument, ICD and TCX intend to provide multilateral development banks, Islamic financial institutions, and development partners with a more practical and sustainable mechanism for extending local-currency financing to sovereign borrowers, infrastructure projects, financial institutions, and small and medium-sized enterprises (SMEs).

The proposed instrument is expected to be structured under the Tahawwut (hedging) Master Agreement developed by the International Islamic Financial Market and the International Swaps and Derivatives Association, which is widely recognized as the standard framework for Islamic hedging transactions.

The potential scale of the partnership is significant. Based on TCX's list of supported currencies and ICD's sovereign shareholder base, the current overlap covers 43 of ICD's 56 sovereign member countries, representing 76.8% of its total sovereign membership. This is particularly important for markets where private hedging solutions are limited or unavailable, and where currency delivery is difficult or restricted.