Monday, Feb 05, 2007
By Carolyn Lim
Of DOW JONES NEWSWIRES
KUALA LUMPUR (Dow Jones)--Malaysian companies should embrace innovative Shariah-compliant financing since it often results in cheaper funding as well as contributes to the development of the Islamic financial markets, said RHB Islamic Bank Bhd. chief executive Khalid Bhaimia.
Many Malaysian borrowers opt, for example, for standard Shariah bond structures such as bai' bithaman ajil, or deferred payments, which are only acceptable under Malaysia's interpretation of Islamic law.
However, the Malaysian government is trying to build on the country's lead as the world's biggest issuer of Shariah-compliant bonds notably by encouraging borrowers to adopt standards acceptable in the Middle East.
Malaysian borrowers currently have $91.76 billion in outstanding Islamic bonds.
Borrowers usually follow the well-trodden path when deciding how to borrow because the up-front costs are low.
However, over the life of an instrument, highly structured Islamic borrowing where the company's cash-flows are closely matched with liabilities to avoid "idle cash," could mean substantial savings, Bhaimia told Dow Jones Newswires in a recent interview.
A midsize Islamic bank in Malaysia, RHB Islamic last year structured the country's first ringgit-denominated corporate bond that was fully compliant with the Middle Eastern interpretation of Shariah or Islamic law.
Bhaimia is unfazed by the entry of major Middle Eastern banks into Malaysia's already-crowded Islamic finance industry, saying the increased competition will benefit consumers and "because it brings new ideas into the market".
"Malaysia has the ambition of being an Islamic financial center and cannot keep itself locked in," he said.
In 2004, Malaysia's central bank gave an Islamic banking license each to Kuwait Finance House K.S.C., Saudi Arabia's Al-Rajhi Bank and a consortium comprising Qatar Islamic Bank, RUSD Investment Bank Inc. and Global Investment House.
That will add to the over 20 locally-incorporated banks in Malaysia providing Islamic financial services.
Risk-Sharing And Risk-Mitigating
While Middle Eastern banks have easy access to petrodollars from the Gulf, local banks in Malaysia have ready domestic funding sources due to high levels of excess surplus cash floating seeking a home in the country's markets.
"With so much excess liquidity domestically available, what's the advantage of having Middle East money here?," he said.
Investors also need to understand the different role of an Islamic bank versus a conventional bank if they are to take full advantage of what the Islamic sector can offer.
"You (an Islamic bank) are now stepping into the shoes of an entrepreneur...and you see where all the risks are, and how will you hedge all those risks for your depositors' sake, and for your shareholders' sake," he added.
As Shariah deems interest rates as usury, Islamic banks instead pool deposits from customers and invest the funds. Rather than pay an interest rate, the returns from the investment are shared with depositors.
Although the profit-and-loss sharing element of Islamic banking may seem risky to investors, Bhaimia said many Shariah-compliant deals have risk-mitigating factors - such as ownership of assets - built into their structures.
Bhaimia also urged regulators worldwide to try to assess Islamic finance from a different perspective than its conventional peer. He suggests regulators create a separate set of codes for Islamic banking rather than trying to incorporate it into existing regulation.
-By Carolyn Lim, Dow Jones Newswires; 603-2692-5254; carolyn.lim@dowjones.com
-Edited by Karen Lane
Copyright (c) 2007 Dow Jones & Company, Inc.
(END) Dow Jones Newswires
05-02-07 0529GMT
