Malaysia's EONCap Islamic Bank plans to launch its first profit-sharing property financing by June, its chief executive said on Friday, reflecting the industry's move towards more equity funding. Profit-sharing ventures are a cornerstone of Islamic finance but sharia banks have mostly granted straight financing to avoid the risk of failure of the projects funded.
But some practitioners expect the industry to slowly use more equity financing as it tries to distinguish itself from conventional lending, a move that could transform Islamic banks from capital providers to project partners.
EONCap Islamic, which is part of Malaysia's seventh largest banking group EON Bank, said it is evaluating several property projects for development.
"We really hope to kick off in the first half of this year but we'll see how it goes," EONCap Islamic chief executive Fozia Amanulla said in an interview. "There's a lot of due diligence to be done, a lot of homework to be done first before we embark on it." Some Islamic banks have used structures such as mudaraba and musharaka to fund building projects. Kuwait Finance House had earlier used the mudaraba concept to develop a 1.3 billion ringgit ($392.1 million) shopping mall in the Malaysian capital's main shopping district.
Under mudaraba, a bank provides capital for a project while the entrepreneur manages the deal; profits are split according to a pre-determined ratio and the bank bears any monetary losses that arise.
In musharaka, parties contribute capital to a venture with profits to be shared in an agreed ratio, while losses are generally divided in line with capital contributions.