Bursa Malaysia’s newly appointed global head of Islamic Capital Markets (ICM), Raja Teh Maimunah Raja Abdul Aziz, believes there is room in Islamic finance for all schools of thought. JENNIFER JACOBS talks to the contemporary face of Islamic finance in Malaysia about her hopes, plans and to-do list.
Raja Teh is excited over what she has been tasked to do — among others, developing ICM infrastructure, products and services as well as strengthening cross border ICM capabilities to take Malaysia to the next level as an Islamic financial hub. Only 10 days into the job when Islamic Finance Asia caught up with her, she has already done the rounds of both the public and private sectors, finding out what everyone wants and figuring out how she is to get there from here.
That’s what she’s good at. The former COO and head of international business at Kuwait Finance House (Malaysia) was handpicked to internationalize what was formerly a little unit within Bursa Malaysia, the country’s sole stock exchange, focusing primarily on ringgit products. She is actively looking at what Malaysian Islamic products she can take abroad and what foreign products she can bring in.
Looking tired but relaxed during the evening interview shoehorned within a flurry of meetings, the attractive doyenne of Islamic finance leaned back on the sofa at the Exchange’s business center and proceeded to outline her plans for the division. “I want to draw up two lanes — ringgit onshore and non-ringgit offshore products. I’ve looked at the 16 products we have and come up with what I think we can market to non-ringgit and offshore investors immediately.”
One product she thinks will have universal appeal, especially to the Gulf Cooperation Council (GCC) markets, is Islamic real estate investment trusts (iREITs). “iREITs didn’t seem very sexy or exciting two years ago, but everyone’s into safe and defensive investments these days. I could take this to the GCC tomorrow and there would be demand.” To Raja Teh, it is a matter of duplicating structures that are already available and getting other investors to come in and use Malaysia’s platform.
However, she is not just looking to take Malaysian products abroad. With her international exposure, especially during her time at KFH where she was instrumental in setting up its Singapore and Australian offices, she is looking to bring foreign products to Malaysian shores. “In the GCC there are some very big leasing funds for the shipping and aviation industries. Those are defensive in nature because they’re rental with long-term contracts on them, to say nothing of the underlying assets. We have leasing houses here but their products tend to be somewhat less sophisticated.”
Although she is looking at cross-border appeal, Raja Teh understands that some products only have appeal in their own markets. “Every market has its own peculiarities and I don’t succumb to the standardization arguments. What works for you may not work for me but it may work for somebody else. So instead of one product that meets the requirements of all markets, I can come up with five.”
The important thing is to understand the limitations of the market one is targeting and to create products that are acceptable within the framework. “Within the GCC there are different levels of tolerance. We have to figure out what these are for the targets we want to zero in on.”
Raja Teh is also looking to encourage offshore funds to list on the Labuan International Financial Exchange (LFX) to tap the Asian market: “There is still a lot of money in Asia and what’s more, with the crisis, many of these funds are looking at Islamic products as safer investments. What appeals to them is that these products are basically old-school, with none of your subprime securitizing five times over.
“You just have to look at KFH or Al-Rajhi and compare them with Barclays. There must be something these people are doing right. Anyway, that’s the thinking going around now, and I have some private banking friends from Hong Kong, China and Singapore who say their clients are now asking for Islamic products.”
On the other hand, there are asset managers out of the GCC searching for capital. “In the good old days, you opened a US$100 million fund in Dubai and closed it in three days. Now, those asset managers have also taken a hit, and are looking elsewhere for funds. “I want to encourage them to come out of the GCC and list on our platform on the LFX so they can tap the Asian market. That means they don’t come onshore at all and we keep the Bursa as a conduit for ringgit transactions. I’m just trying to keep the demarcations clear,” she said with a cheeky ‘let’s not step on anyone’s toes’ grin.
Raja Teh is also looking forward to the establishment of the Commodity Murabahah House (CMH), an international spot commodity platform operating according to Shariah requirements, due to be set up sometime this year. In Malaysia, the Commodity Murabahah program is designed to be the first ever to use crude palm oil (CPO) based contracts as underlying assets. In the GCC, companies generally use aluminum or copper, purchased from the London Metals Exchange (LME) for their Commodity Murabahah transactions.
Commodity Murabahah is one of the most popular techniques to manage short-term liquidity in the Gulf. While it is frowned upon by some of the more orthodox houses because of its use of Tawarruq, it is considered preferable to the Bai-al-Inah contracts, which are largely regarded as a camouflage for interest-based transactions.
Briefly, a Commodity Murabahah program is where a company purchases a certain commodity on the LME at spot for cash and then sells this commodity to a third party on a Murabahah, that is, a cost plus financing, through a deferred payment arrangement which can take anywhere from one week to six months to settle, with spot delivery of the commodities in question.
“There’s been a lot of hype about us being the alternative to the LME. We’re not an alternative per se, because the LME never positioned itself as a Commodity Murabahah platform; it’s really a place to facilitate futures contracts. For a trade to be Shariah compliant there must be physical delivery of the commodities in question.”
“What makes us different is that we can ensure the Shariah compliance of the whole transaction,” she said. Raja Teh added that the CMH is an extension of what is already being offered in Malaysia. “The central bank initiated a Commodity Murabahah program in Malaysia in 2005 where the banks signed an agreement to say they would deal with each other through this program. What we’re doing is providing a platform for them to use.”
The biggest selling point at the moment is that this new platform is regulated. “Everything is contract-based so there is legal remedy as per contract law and you have Bursa there as the facilitating agent. It is completely electronically-enabled which means we can be quite efficient in terms of the number of trades we can do in a day. And if you’re a bank, you have direct access to the suppliers without having to source for a broker, although you can do that if you prefer.”
She said some of the larger houses in the GCC find their own solutions, which usually involve bilateral arrangements. “They procure their own underlying assets and work out their own interbank. What we are providing is the only formal one-stop platform in the world, an exchange that can be accessed from the comfort of your computer screen.” When will the CMH be launched? “We hope to do so by this year. Right now we’re in the second phase of testing the system.” In its recent fatwa, the International Council of Fiqh Academy (ICFA) stated that the transactions known as reverse commodity Tawarruq or simultaneous organized and reverse Tawarruq, which have been commonly used to raise finance on the back of real or fictional commodity trading, are not Shariah compliant. How would that affect CMH going forward?
Raja Teh remained cool: “We consulted the market when we structured our program, and that goes right up to some of the most orthodox GCC houses. I’m pleased to say most of them seemed to find our structure acceptable.
Of course, the best structure for Islamic interbank would be Wakalah but it’s not something people will adopt straightaway because there are still credit issues to address. So for now, I think this is still a real solution to facilitate Islamic interbank liquidity.”
Under a Wakalah agreement, a bank places funds with another bank for it to invest in suitable Shariah compliant projects. Other countries have been moving towards this structure. It was reported recently that in Pakistan, for instance, Islamic banks have finalized two interbank trading agreements, Interbank Musharakah and Interbank Wakalah, as standard contracts for the Islamic banking industry, in a move to develop a Shariah compliant interbank market.
While she believes in taking the middle path between the more orthodox and liberal points of view, Raja Teh doesn’t believe in walking what she calls “that fine line” which flirts with the edges of what is allowable.
“What shouldn’t be confused are the conviction and the belief behind Islamic finance. You should never take a shortcut. Some people trade currencies and have it stamped off as Shariah compliant. Others trade what are essentially futures contracts. Some scholars may say this is acceptable but I’m a bit more guarded.
“And whilst I’m a major proponent of coming up with things that will facilitate our business like the money market, I think there’s so much you can do within the Islamic context like Commodity Murabahah that you really don’t have to walk that fine line. And if you’re efficient enough, the idea of organized Tawarruq would never come into play.”
She has been busy meeting with the various stakeholders in government as well as the private sector and so far the support has been tremendous. At least, I think it has. Ask me again in 100 days.”