HSBC talks about its Shariah-compliant structured product in Malaysia

Malaysia's first Shariah-compliant dual-currency, structured investment product is now on offer. Here's how it works.
As Malaysia continues to try to establish itself as the Asian hub for Islamic financing, HSBC has stepped up its offerings. Earlier this month, HSBC Bank Malaysia launched the nation's first Shariah-compliant (consistent with Islamic law) dual-currency, structured-investment product.áHSBC's Adrian Loo,áhead ofáwealthámanagementásales, Malaysia, talks about the new offering.

What is this new structured product?

The HSBCáAmanah Islamicádualácurrencyástructuredáinvestment is an Islamic compliant version of a dual currency structured product. It is made of two components.

The first part is the ôCommodity Murabaha-Iö, which you may know is based on the concept of ædeferred payment saleÆ. That concept ensures that the underlying is an actual commercial transaction, which is required under Shariah law.áIt allows an investor to invest a sum of funds through the purchase and sale of an underlying commodity, such as a metal, which gives the profit rate. The profit rate is similar to the return that you would get on a money market deposit of a similar tenor and credit.

The second part is that the client makes a unilateral promise to exchange currencies at a pre-agreed rate to the bank atáaáfixed date and price; and if the bank wants to buy the currency it has the right to do so. Obviously, a unilateral promise to exchange currencies offers investors the opportunity of earning enhanced returns on short-term surplus funds.

How long did it take to create this structure?

The advantage of HSBC is that we have a global network that has these products already. So we brought over ideas from other countries and adapted them to the Malaysian market. It took somewhere around seven months or so û a lot of it had to do with ensuring it was Shariah compliant.

In this case, because it is a structured product, we had to satisfy the Islamic regulatory divisions of both Bank Negara Malaysia, the central bank, as well as the Securities Commission, that the product we were proposing wasáconsistent with Islamic principles.

What was the biggest hurdle?

The difficulty is that we are trying to access a new market, so we had to make sure that the structuring of this particular product was done in a manner that would satisfy the regulatory divisions. However, the principal of Murabaha is already widely accepted throughout the Islamic world. It was just a matter of applying it to a new product.

This was introduced on April 18, so how has the take-up been thus far?

So far weÆre in the stage of raising awareness ofáthe product. But going forward, we have high expectations, particularly in line of the recent (back in April 2005) trends in Malaysia of relaxing exchange controls. More and more Malaysian investors are looking for investments in overseas conventional products... the Shariah-compliant angleáof our product gives it a bit of an edge.

Given that many Malaysian companies are importing and exporting, they already have a natural exposure to two or more currencies, so they are looking for products to help manage their currency exposure in a way that is consistent with Shariah principles. But for some customers, the conventional structured products wouldnÆt have been a viable choice because they are not Shariah-compliant. We are filling that niche.

Will you be offering more such products in the future?

We are continuously looking toádevelopáa wholeárange ofáproducts in the future. However, because of the competitive nature of the market we canÆt go into too much detail on that...
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