KUALA LUMPUR: Malaysian sharia bankers on Wednesday dismissed as impractical a proposed Islamic pricing benchmark, highlighting the industry’s struggle to replace conventional interest rates as a pricing tool.
Despite the sharia’s ban on usury, Islamic financial products are routinely priced using conventional rates such as London Interbank Offered Rates (LIBOR) in the absence of a sharia-compliant benchmark.
The International Sharia Research Academy for Islamic Finance (ISRA), a research group backed by Malaysia’s central bank, has proposed that Malaysian Islamic banks use industry-specific benchmark pricing rates that are derived from underlying assets.
ISRA has suggested a benchmark could be computed using industrial production and money supply data, the ringgit exchange rate, the Malaysian stock market’s key index and industry-specific factors.
But the plan drew a lukewarm response from industry members on Wednesday, with discussions largely focused on the difficulties of running two policy rates within one banking system.
"Can the country actually afford a system where suddenly the price of Islamic financing is lower than conventional, then everyone flocks to Islamic (banks)?" Standard Charterd Saadiq chief operating officer Nasiruddin Kamaruddin told a meeting held to gather industry feedback.
"Tomorrow if LIBOR drops then everyone will go back to conventional (banks)."
Azidy Daud, treasurer of Asian Finance Bank, said the proposed benchmark was better suited for private equity ventures.
"This is a good benchmark but it is not applicable to the banking industry. We are bankers, we are from financial intermediaries where the concern is not so much the required rate of return but more on the cost of funding."
Malaysian central bank sharia adviser Mohamad Akram Laldin said it could be difficult to apply different Islamic benchmark pricing rates for different industries.
The ban on usury aside, Islamic religious scholars dislike conventional interest rates on the premise that they are not derived from real economic activities.
"Islamic finance pricing benchmark should be based on the risk profiles of the real economic ventures," ISRA said in a research paper. "Therefore it must be tied to the real economy and based on productivity and profitability of assets."
Islamic banking assets in Malaysia totaled about $95 billion or 19.6 percent of total banking system assets as at December 2009, according to central bank data.
The country has the world’s largest sukuk market, accounting for about 40 percent of total global issuance of $19.1 billion last year, Thomson Reuters data showed.
