KUALA LUMPUR, Nov 10 – The Malaysian government plans to roll out a new shariah-compliant investment platform next year, aiming to broaden the traditional role of Islamic banks from credit provider to investment intermediary. The government is backing the Investment Account Platform (IAP) with an initial start-up fund of RM150 million, intending that the IAP will serve as a central marketplace to finance small and medium-sized businesses.
Under the scheme, announced as part of the 2015 budget, Islamic banks would vet businesses seeking funds, provide a secondary market for investors and in some cases underwrite the equity transactions. “This initiative will open new kinds of activities revolving around investment intermediation within the Islamic financial market,” said Badlisyah Abdul Ghani, chief executive of CIMB Islamic, a unit of CIMB Group Holdings Bhd.
The IAP would complement the existing credit intermediation activities of Islamic banks while adding momentum to the private equity and venture capital industries, he added. With elements of crowd funding and microfinancing, the IAP would raise the profile of Islamic banks as investment houses, said Baljeet Kaur Grewal, managing director and vice chairman of KFH Research, a unit of Kuwait Finance House.
“The IAP is expected to spur a wider use of risk-sharing and equity-based Islamic contracts of mudaraba and musharaka that are currently sparingly utilised in the global Islamic financial system.” Mudaraba is an investment management partnership in which one party provides funds while the other contributes expertise and management.
Musharaka is another form of partnership in which two or more parties agree to provide capital, share profits according to a stipulated ratio, and share losses on the basis of equity participation. Both structures are equity-based. At present, fewer than 8% of Islamic bonds (sukuk) issued globally use such equity-based contracts, and the IAP could open a new market for shariah-compliant instruments, Kaur said.
“This can create an all-new Islamic investment asset class, IAP-linked investments, that can be offered by Islamic banks to both institutional and retail investors.” Some scholars have called for greater use of equity-based contracts in Islamic finance, and this is now getting a helping hand from regulators. Basel III banking standards being phased in around the world will require Islamic banks to more clearly distinguish their deposits as either being equity-based or debt-based.
This is mirrored in Malaysia’s own Islamic Financial Services Act which came into effect in June last year, requiring Islamic banks to transition some deposit accounts into investment accounts over a five-year period. Islamic banks could use the IAP to raise more of their funds through profit-sharing formats than they do at present, Kaur said.
“This will instrumentally overcome a notable concern that Islamic banks’ depositors are usually those who prefer principal protection and would not want the bank to take risky positions.” Islamic banks could effectively offer clients IAP-linked deposits that might earn higher returns compared to other shariah-compliant deposits, she added. The IAP could also appeal to international investors, as the government has placed no restrictions on inflows of foreign capital into the IAP, profits from which are exempt from income tax for the first three years.