Malaysia’s OSK Investment Bank plans to set up an Islamic stock broking business and offer sharia equity-linked investments as it explores a greater use of equity products, its Islamic banking chief said.
Islamic banks worldwide are considering the use of more equity or risk-sharing structures, estimated to make up only a tenth of Islamic financing globally, prodded by criticism that their industry mirrors conventional banking.
The industry is seeking more equity-based instruments rather than debt-based instruments because that ideally is what Islamic finance is all about, OSK’s Islamic banking head Yazit Yusuff said in an interview on Tuesday.
Islam espouses financing models such as mudaraba and musharaka where banks partner project entrepreneurs though many sharia banks prefer debt instruments like sukuk and straight financing.
OSK Investment Bank, part of financial group OSK Holdings, wants to set up Islamic stockbroking services next year to serve the domestic and foreign markets, including the Middle East, Yazit said.
We are hoping that this (stockbroking) infrastructure, when it’s in place, will include the trading system, the margin, the settlement, all will be sharia-compliant.
Investors can buy Islamic stocks through conventional banks but Yazit said an Islamic platform would ensure that the entire process was sharia-compliant such as the levy of a profit instead of interest for late payment.
Eighty-eight percent of shares listed on Malaysia’s stock exchange satisfy the sharia’s rules on investing which prohibits profiting from activities related to pork, pornography and alcohol.
AMMB Holdings, Malaysia’s No. 5 lender, set up an Islamic stockbroking unit in 2008. To encourage more sharia stockbrokers, the government said last year that expenses incurred in setting up such firms would continue to get a deduction in the calculation of income tax until 2015.
Experts say it would be difficult to wean Islamic finance off its heavy reliance on debt-based financing as banks would be required to bear more risks.
Yazit said OSK was also looking into developing equity-linked investment products based on the salam contract where advance payment is made for goods.
The bank is also pitching for a mandate for sukuk worth 1.5 billion ringgit ($464.4 million) to be issued by government agencies, he said.
OSK Holdings arranged $224 million of sukuk last year, placing it as No. 21 on the Thomson Reuters Islamic bond league table.
Yazit said OSK has applied for an international Islamic banking licence from Malaysia’s central bank, which would allow it to provide non-ringgit Islamic banking services. ($1=3.230 Malaysian Ringgit)