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Wednesday January 19, 2011
KUALA LUMPUR: Malaysia Debt Ventures Bhd (MDV), which funds tech start-ups, will offer Islamic loans convertible into equity in March to boost its earnings and pave the way for it to undertake musharaka and mudaraba partnership financing.
The scheme would give the government agency an option to convert part of the loan into equity upon the occurrence of stipulated events such as mergers, acquisitions or initial public offerings, its chief executive Zubir Ansori Yahaya said.
“To concentrate on loans itself has its limitations,” Zubir said. “We do have a fixed cost when we issue in the bond market. We need to find new products that will offset too low a margin.”
MDV will begin disbursing convertible loans with an initial sum of RM100mil (US$33mil) to test their viability before embarking on bigger loans, he said.
“Eventually when we have stabilised, we will start moving to mudaraba and musharaka,” Zubir said. “To move straight from debt to equity would be too abrupt for MDV, especially for very high-risk sectors.”
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 largely mirrors conventional lending.
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.
Under mudaraba, a bank provides capital for a project while the entrepreneur manages the deal; profits are split according to a pre-determined ratio and the bank bears any monetary losses that arise.
In musharaka, parties contribute capital to a venture with profits to be shared in an agreed ratio, while losses are generally divided in line with capital contributions.
“Sometimes the perception is that Islamic finance is just the same person in different clothes,” Zubir said.
“In the case of information communications technology, we still have to convince our customers that it would not impact any of their operations, any of their cost of funds.
“Initially there was some scepticism but after two years, the response is no longer a problem.”
He also said MDV would set up a RM1bil programme to sell sukuk next year, after an earlier RM1.5bil Islamic funding programme established in 2008. Since it started in 2003, Malaysia Debt Ventures has approved about RM4.9bil of loans and disbursed RM4.4bil. - Reuters
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