FiNETIK – Asia and Latin America – Market News Network

Malaysia’s structured products market is benefiting from the development of a liquid Islamic capital market.

slamic finance is coming of age. Today, for the first time, Islamic structurers in Malaysia and the Middle East are starting to create new financial products and infrastructure from scratch – developments that do not simply wrap their conventional counterparts in a Shar’iah structure but which are Islamic from start to finish.

Already this year, in its effort to develop a wholesale Islamic capital market, Malaysia’s Syariah Advisory Council has approved a Shar’iah-compliant commodity exchange and it has also given the go-ahead for securities borrowing and lending, which will support the creation and redemption of Islamic exchange-traded funds, or ETFs. The first Islamic ETF was launched in January this year.

A broad universe of Shar’iah-compliant underlyings is particularly significant for the structured products market, and most of all for equities structurers. Shar’iah-compliant underlyings often have no volatility market, which makes it difficult for providers to manage their risks, and they are typically illiquid, expensive and difficult to access.

Fixed-income structurers have an easier time of it. The increasing popularity of Islamic bonds has given them more to work with and, in fact, sukuk issuance is now starting to spread outside the Islamic world as borrowers learn to appreciate their value as a way to access new markets. A German state recently issued a sukuk and the UK is also considering one.

But the conventional structured products market in Asia is overwhelmingly dominated by equity and this is where the greatest development in Islamic products is focused……

Risk sharing

Islamic structures are sometimes criticised as mere financial jiggery pokery – a clever dodge that lets Muslim investors achieve the exact same results as conventional investors. There are certainly some structures and products in the market that deserve such criticism, but Ahmad Chaudry, an Islamic finance specialist at Royal Bank of Scotland, argues that Islamic finance techniques can also offer very different solutions to conventional finance, which can appeal to Muslims and non-Muslims alike.

Islamic mortgages are a good example, he says. With a regular home loan, the would-be homeowner borrows money from a bank, invests it in a property and pays back the loan over time, plus interest. “The only circumstance under which the bank cares about the value of your property is if you default,” says Chaudry. “In Islamic finance, the bank buys the property with you – you share the risk.”

In this type of Islamic mortgage, the investor might buy 10% of the property, while the bank buys the rest. The investor reclaims equity stakes from the bank over time and also pays rent on the bank’s stake. Most important, the investor buys this equity at the prevailing market values, which means the bank is taking risk on changes in the value of the property over time. “This is something we don’t see in conventional finance,” says Chaudry. “The sharing of risk is something that is extremely central to Islamic finance.”….

“Islamic banks have too much cash and not enough assets to buy into,” says Lee Kok Kwan, head of treasury at CIMB. “There is always a lot of liquidity on the deposit side.”

This is one of the principal motivations for Malaysia to develop its Islamic capital market – to provide a way for all these deposits sitting in Islamic banks to find a productive use in the economy. The creation of new Islamic underlyings and a greater diversity of products should certainly help in that effort.

Source: FinanceAsia.com 15.11.2008 for full article click here.

Filed under: Islamic Finance, Malaysia, News, CIMB, Derivatives, Islamic Capital, Islamic Finance, Malaysia