ABSTRACT
Referring to a benchmark for pricing products and services is a common practice in the global banking and financial industry. The base rate benchmarks generally represent cost of fund, which plays a decisive role in determining the profit or margin for banks. The pricing mechanism of the Islamic financial industry in general converges with the mechanism of its conventional counterpart due to the fact that both the industries use the same or similar benchmarks. There are arguments both in favor and against the practice of using a conventional benchmark for pricing Islamic products and services. Over the years, attempts have been made to develop a distinctive benchmark for the Islamic finance industry, but with limited success. Thus, conventional benchmarks find repeated usage at Islamic financial institutions (IFIs). Being one of the most widely used benchmarks globally, the London Interbank Offered Rate (LIBOR) is frequently referred to by IFIs in their contracts. However, with the planned discontinuation of the LIBOR by end of 2021, and its replacement with the proposed risk-free rate (RFR) benchmark, the challenge for the financial industry in general and IFIs in particular is to adjust their pricing mechanisms. This study analyzes the role and status of benchmarking in IFIs followed by underlining the impacts and implications of the LIBOR transition for IFIs.
