ISLAMIC FINANCE PLAYERS URGED TO EXPLORE EQUITY-BASED FINANCING

KUALA LUMPUR, April 2 (Bernama) -- Islamic finance players should explore
opportunities in equity-based financing in making the industry more attractive.

Making this call, Bank Negara Malaysia's (Central Bank of Malaysia) Deputy
Governor Muhammad Ibrahim said through equity-based financing, industry players
could move away from mimicking conventional products and operate truly on
syariah compliance.

He said in terms of risk assessment, such transactions will necessary inject
greater market discipline among industry players.

"This business model is premised on a few fundamental assumptions. The bank
and its staff will have to be good at risk assessment, due diligence, assets
valuation, good at project financing and management, a good landlord, skillful
in project monitoring and have the necessary expertise on specific areas such as
construction, agriculture and manufacturing," he said.

He was speaking at the opening ceremony of a conference here Friday on
contemporary issues in Islamic home, personal and auto financing.

Muhammad said the shift from asset based financing to equity-based financing
however did not mean Islamic banks would operate without any risks.

Islamic banking should be the conduit for the financing model if the
business climate is good.

If the environment in certain sectors decline significantly, it could
adversely impact Islamic finance, he said.

Muhammad also said a shift from debt based financing to equity-based
financial system would not necessarily lead to a better equitable outcome to
society.

If it is not properly implemented it could cause uneven benefits to various
stakeholders, he explained.

Equity-based financing in Islamic model is based on the sharing of business
risks, as well as rewards by the bank and its client.

Both parties would have to contribute for the basic ingredients of a
business venture such as capital, management, know-how, labour, and other
related
professional attributes.

Profits are distributed based on an agreed profit distribution ratio while
losses are prorated to each party’s capital participation.

Equity financing is cemented by entering in either one of two contracts,
namely a partnership contract and a trust financing contract.