KUALA LUMPUR: Islamic short-selling would help develop Sharia capital markets, Malaysia s stock exchange chief said on Thursday, defending plans for a controversial platform it hopes will improve market liquidity.
Some Sharia scholars frown on short-selling, saying it amounts to selling what one does not own. Malaysia wants to allow regulated Islamic short-selling, a move criticized as sacrificing religious principles for market expediency.
Bursa Malaysia, the country s bourse, plans to roll out a platform which would help facilitate regulated Islamic short-selling and hedge fund activities towards the year-end.
Bursa chief executive Yusli Mohamed Yusoff said Islam allows short-selling provided it is done within the Sharia s confines, adding that such activities would help develop the market.
For the Islamic capital market to be developed, it will need to have many different features, Yusli said at the Reuters Islamic banking summit.
We want to have an Islamic capital market that offers many different types of products and services that meet the Sharia s standards.
The structure of Bursa s platform is still being developed. But one way to allow Islamic short-selling is for investors to buy – instead of borrowing – a stock by paying a fraction of the stock price and executing a simultaneous agreement to sell it back to the seller at a later date.
This would ensure compliance with the Sharia s requirement that one can only sell what one has.
Yusli said Islamic hedge funds would be in demand.
There will be some demand given that people will be looking for investment products which expose them to less risk, he said. Sharia-compliant securities might have an edge over conventional (securities}.
Mostly Muslim Malaysia has the world s largest Islamic bond market and a thriving domestic industry where almost a fifth of banking assets are Sharia-compliant.
But it has built an image, especially in the Gulf, of being more market-driven than Sharia-based in its approach to Islamic banking, allowing some contracts which classical jurists reject.
Malaysia s stock market is one of Asia s most illiquid, due partly to government-linked firms holding on to large chunks of shares in top firms.
Short-sellers can boost market liquidity and lift returns for fund managers who lend out their shares for a fee.
Eighty-seven percent of securities listed on Bursa Malaysia meet Islamic law standards, which forbid activities such as interest-based lending, gambling, alcohol and tobacco.
The Malaysian stock exchange reintroduced regulated short selling in 2007 after a gap of nearly a decade in an attempt to boost turnover and foreign interest in the domestic market.
The Southeast Asian country outlawed the practice in 1997 at the outset of the Asian financial crisis in order to curb speculative selling.
