Citi will offer more equity-type Islamic products such as mudaraba accounts and stock investments to access Middle East funds which chase higher returns, a company official said. The shift towards more risk-sharing investments, which mirrors an industry trend, comes as investors grow increasingly risk-averse on worries about the global economic outlook.
"We are looking at trying to create more products that are equity-based or have direct linkage to the real asset, not just to move towards what the scholars prefer but also to attract Middle East funds into Malaysia," Citi's regional Islamic structuring head Ahmad Shahriman Mohd Shariff said in an interview.
Citi plans to roll out this year stock-related investments which offer enhanced returns if set conditions are met. If the value of the stock drops, investors would receive the shares instead of the cash invested, Shahriman said.
Over the longer term, the bank wants to offer investments based on the Islamic profit-sharing concept of mudaraba, he said. With these accounts, banks invest funds from investors in specific projects such as infrastructure. Returns would be shared and losses would be fully borne by the investor.
Shahriman said the Malaysian central bank allows lenders to offer this investment but there has been little interest.
"Banks have yet to fully capitalise on this flexibility as it does not fit into products that is traditionally offered by a bank where losses are absorbed by the bank." Equity financing models were born out of a belief in Islam that the financier must share the risks if he wants the rewards and that profits should be earned through enterprise.
Traditionally, popular Islamic debt-based instruments such as istisna and murabaha have been likened to interest-based loans where banks take limited risks and are guaranteed a return.
Shahriman said a recent dispute involving Kuwait-based Investment Dar and Lebanon's Blom Bank could affect investor sentiment. Dar has refused to pay Blom Bank $10.7 million, arguing that their original deal involving a wakala or agency arrangement - which was approved by its sharia board - fell foul of religious laws. Dar's charter prohibits it from entering into non-Islamic transactions. Its sharia board has since said the deal was compliant with Islamic law.
"For most investors, they do understand the risks of investing," he said. "What is of concern is how the fund manager behaves in the event of losses. If they start to renege on what they said previously, that's where it becomes an issue.
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