KUALA LUMPUR, March 5 (Reuters) - Malaysia’s stock exchange will launch in June a platform to allow banks to execute a popular but controversial Islamic contract with a market worth more than $100 billion.
Bursa Malaysia’s (BMYS.KL) Commodity Murabaha House system will enable Islamic institutions to carry out commodity murabaha transactions which are commonly used to structure sharia bonds, financing and derivatives, said Norfadelizan Abdul Rahman, Bursa’s head of product development for Islamic capital market.
“It’s a commodity trading platform with the objective to assist Islamic finance and capital markets,” Norfadelizan said.
Commodity murabaha enables sharia lenders to create financing transactions which involve specific assets, fulfilling Islam’s demand that all deals must involve real economic activity.
When an Islamic bank uses commodity murabaha to give out financing, it will first buy an asset which it then sells to the borrower.
The borrower then sells the commodity to a third party using the bank as its agent, and it receives payment and secures the financing it had sought.
Any tangible asset that is sharia-compliant can be used in commodity murabaha transactions and palm oil is one obvious example. Malaysia is the world’s No. 2 palm oil producer.
The International Islamic Financial Market, an industry body backed by the central banks of several Muslim countries, has estimated that the global commodity murabaha market is valued at more than $100 billion.
But some religious scholars have criticised the structure, saying it resembles conventional-based lending instruments.
The Accounting and Auditing Organisation for Islamic Financial Institutions, a globally recognised standard-settings body, is of the view that the contract, while not invalid, is not ideal. (Click on [ID:nISLAMIC] for more Islamic finance stories and ISLAMIC for a speed guide) (Reporting by Liau Y-Sing; Editing by Lincoln Feast)