Malaysia's EONCap Islamic eyes equity venture: Reuters

Malaysia's EONCap Islamic Bank plans to launch its first profit-sharing property financing by June, its chief executive said on Friday, reflecting the industry's move towards more equity funding, reports Reuters (25 March 2010).
Profit-sharing ventures are a cornerstone of Islamic finance but sharia banks have mostly granted straight financing to avoid the risk of failure of the projects funded. But some practitioners expect the industry to slowly use more equity financing as it tries to distinguish itself from conventional lending, a move that could transform Islamic banks from capital providers to project partners, the report said.
EONCap Islamic, which is part of Malaysia's seventh largest banking group EON Bank, said it is evaluating several property projects for development.

In an interview, Reuters quoted EONCap Islamic chief executive Fozia Amanulla as saying: "We really hope to kick off in the first half of this year but we'll see how it goes.
"There's a lot of due diligence to be done, a lot of homework to be done first before we embark on it."

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Some Islamic banks have used structures such as mudaraba and musharaka to fund building projects. Kuwait Finance House had earlier used the mudaraba concept to develop a 1.3 billion ringgit ($392.1 million) shopping mall in the Malaysian capital's main shopping district.
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.
Some practitioners say any shift towards more equity-based financing would be slow as Islamic banks seem reluctant to assume added risks.
"It's also encouraged by the central bank because they want to see differentiation between conventional and Islamic banking activities," Fozia said of EONCap Islamic's move into profit-sharing projects.
EONCap Islamic, which is mainly focused on the retail business, hopes to expand its assets by a fifth this year, with personal financing expected to post strong growth, she said. The bank has 6.8 billion ringgit of assets.
"Even though there was a 25 basis point rate hike, there hasn't been any impact and demand is still there," Fozia said, referring to the Malaysian central bank's interest rate rise this month.