Islamic Bank of Asia may shun LME transactions

The Islamic Bank of Asia, a venture of Singapore’s DBS Group Holdings Ltd, aims to stop using London Metal Exchange transactions as the basis for products after religious advisers said some may not comply with Shariah, reports Bloomberg (May 14, 2009).
The bank is in talks with Olam International Ltd to use its trading in commodities such as rice, coffee, cotton and cocoa as the basis for financing compliant with Muslim law, its chief executive officer, Vince Cook, said in an interview in Singapore recently, it said.
"Industry practice is based on the LME, but our Shariah board would like us to explore alternatives as they’re concerned some t rades through the LME may not involve the physical movement of goods," Cook told the newswire.
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Using contracts including Murabahah sale-and-deferredpayments and Ijarah leases, Islamic banks seek to comply with Shariah’s ban on interest and stipulation that financial agreements are based on the transfer of goods or services.
With the help of Shariah scholars who judge which products are compliant, the Islamic finance industry has attracted as much as US$1 trillion (RM3.56 trillion) of Muslim wealth, according to the Malaysia-based International Islamic Financial Services Board.
The Islamic bond market was roiled last year after a group of scholars led by Pakistan-based Sheikh Muhammad Taqi Usmani said as much as 85% of the securities may not comply fully with the precepts of Shariah. Sales of Islamic bonds, known as sukuk, plunged to US$13.9 billion in 2008 from a record US$31 billion a year earlier, according to data compiled by Bloomberg.
"Olam are doing real business, buying and selling food commodities," Cook said.
"We think we could use this to facilitate an awful lot of our business.
"There would be no time difference and it would also help the local commodity industry create better liquidity."
Olam, which is also based in the city-state, operates in 60 countries and trades more than five million tons of commodities each year, according to its website.
Pioneering work with The Islamic Bank may lead to the creation of a trade-finance system that other banks can use, according to K Ravikumar, Olam’s chief financial officer.
"There is a great requirement in the Islamic world for a product like this," he said in a phone interview from Singapore recently.
"Our commodities are all agri-products and are all Shariah-compliant, so no meat or tobacco."
The Islamic Bank’s board of Shariah scholars comprises Sheikh Nizam Yaquby, Sheikh Mohammed Elgari, Mohammed Daud Bakar and Abdul Sattar Abu Ghuddah, according to its website.
Bahrain-national Yaquby has advised the Islamic units of banks including BNP Paribas SA, Citigroup Inc and Standard Chartered plc, while Saudi Arabia-based Elgari’s clients have included Merrill Lynch & Co, according to the website of HSBC Holdings plc’s Amanah unit.

[See The Malaysian Reserve report on May 11, 2009, entitled 'Islamic organisation bans use of organised tawarruq']