April 16, 2009 / 2:41 PM / 11 years ago

Reuters Summit-Sharia hedge funds seen boosting market liquidity

(For other news from the Reuters Islamic Banking Summit, click here)

By Liau Y-Sing

KUALA LUMPUR, April 16 (Reuters) - Islamic hedge funds can add to market liquidity, Malaysia’s capital markets regulator said on Thursday, amid some scholars’ criticism that such funds open the back door to gambling in Islam.

Hedge funds have been blamed for the recent rout in financial stocks but some bankers say hedge fund tools such as derivatives can help Islamic banks manage risks as the industry grows beyond its traditional niche markets.

Some sharia scholars view common hedging techniques as speculative bets on currency and stock movements, which the sharia says is haram, meaning not allowed.

Malaysia’s market watchdog, the Securities Commission, said it would award licences to Islamic hedge funds that meet its requirements.

“The regulatory framework is available,” the commission’s chairman Zarinah Anwar told the Reuters Islamic banking summit.

“Should applications be submitted, then we will assess and consider whether they meet all our licensing criteria before a decision is made.”

She said Islamic hedge funds can add to market liquidity and enhance price discovery and “they will operate very much like conventional hedge funds except that the investment strategies that they employ must be sharia compliant.”

Some Islamic institutions are planning to launch hedge funds to meet demand for alternative investments. Islamic asset manager Amiri Capital has said it will launch a sharia hedge fund this year.

Debate on the extent to which Islam allows the use of derivatives has left sharia banks with fewer hedging tools than conventional lenders.

The differences in opinion arise due to varying interpretations of the sharia.

Zarinah also said the commission plans to launch a compilation of global sharia rulings on the ijara, musharaka and mudaraba contracts by the third quarter of the year.

"The publication of the sharia ruling will contribute towards the compilation of knowledge on sharia aspects of financing," she said. (Click on [ID:nISLAMIC] for more Islamic finance stories and ISLAMIC for a speed guide) (For summit blog: summitnotebook.reuters.com/) (Editing by Andrew Macdonald)

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