Malaysia leads the way in the Far East

"Malaysia is definitely driving things in the Asia-Pacific," says Jean-Marc Riegel, head of Islamic banking at BNP Paribas in Bahrain. "There is a strong political will, a strong Islamic banking infrastructure, a developed banking supervision infrastructure and an economy supporting the infrastructure." Joseph Tan, economist at Standard Chartered in Kuala Lumpur, says: "To my knowledge no other country is pushing Islamic banking as hard."

The biggest challenge facing any financial institution offering Islamic banking services is hedging currency risk Islamically. "Hedging depends on derivatives, which do not have any value in themselves," Tan explains. "That means under Islamic rules you cannot charge for them -- so you run into a major glitch."

The number of banks offering Islamic banking services has grown in recent years. In the past 12 months, both UBS and BNP Paribas have set up Islamic banking units that comply with sharia law -- the rules laid out in the Koran that govern all aspects of a Muslim’s life.

Sharia laws are open to interpretation but it is generally accepted that, while currency trading is permissible if backed up by a need to purchase a permissible product or service in another currency, the rules on usury mean that many Muslims view traditional hedging tools as unacceptable.

However, some banks are trying to offer the equivalent of options and forwards, and have introduced panels of Islamic scholars to decide whether new financial products are acceptable. BNP Paribas, for example, introduced a sharia board of three independent Muslim scholars last June.

"If we come up with a new forward product to take to the market, we submit it to our sharia board. They decide whether the product is sharia compliant," said Riegel. Although the bank has not yet submitted any FX products to the board, BNP has products in the pipeline that Riegel expects to put to the panel by the end of 2003.

Daniel Hanna, international economist for the Middle East at Standard Chartered in Dubai, said that sharia-compliant currency products are still very much on a case-by-case basis and there is no equivalent to a forward or option. "But there’s a lot of commodity financing as an alternative, so you can agree to buy some oil or silver in euros and then agree that in two months’ time you will buy it back in dollars. It’s a kind of proxy hedge against the underlying inflation of these currencies."

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Mixed forecast for FX

LONDON - Foreign exchange teams will avoid the worst of the job cuts in the City of London, although market sources warn no-one will be immune from redundancies.

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