IJARAH

Kuwait Finance Sells Islamic Swaps to Allow Hedging for Rates
By Shanthy Nambiar

Oct. 4 (Bloomberg) -- Kuwait Finance House, the Persian Gulf's largest Islamic investment bank, is selling a hedging contract for companies to manage interest-rate risk while complying with religious principles.

The so-called Ijarah Rental Swap aims to protect customers against volatility in profit rates, which take the place of interest rates in Islamic finance, said Mohamed Iqbal, director of Treasury at Kuwait Finance House (Malaysia) Bhd. It lets them swap floating rate liabilities into fixed rates or vice versa.

``One of the areas that has been lacking has been hedging and risk management,'' Iqbal said in Kuala Lumpur. The contract ``is a tool for market participants, corporate clients and borrowers to hedge their long-term Islamic exposure.''

Shariah, or Islamic law, bans the exchange of interest and investment in businesses such as tobacco, alcohol and gaming, ruling out conventional derivatives.

Kuwait Finance is expanding services in Malaysia and the Persian Gulf as record oil prices this year have increased the funds held by investors in Muslim-majority Middle East nations.

Malaysia plans to become a hub for Islamic finance. It has granted business licenses to banks including Kuwait Finance and Saudi Arabia's Al-Rajhi Banking & Investment Corp., the nation's largest lender by market value. London-based Standard Chartered Bank Plc, which earns two-thirds of its profit in Asia, started selling an Islamic currency swap in Malaysia in August.
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Ijarah

The Ijarah Rental Swap can be used by companies to hedge against interest-rate risks in project, auto and asset acquisition financing, and for Islamic bonds, Iqbal said. The swap is available for dollar and ringgit-denominated funds and its tenure may be 10 years or longer.
An Ijarah is an Islamic lease agreement.

Instead of lending money and earning interest, Ijarah allows a bank to earn profit by charging rental on the asset leased to the customer. Islamic bonds sold under Ijarah principles are typically secured by assets such as real estate or businesses, and investors are paid from rental income. At maturity, the assets are sold to pay the principal.

The swap allows Kuwait Finance House and another party to exchange fixed rental payments for floating payments, or vice versa, for an agreed period.

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Well, it appears that moslems can bypass the edicts of the qur'an when it comes to interest (gasping in surprise) and yet when it comes to the 6th pillar of islam - JIHAD - they cannot find a way to bypass it...

Tsk...Tsk...Tsk...


Pertinent Links:

1) Kuwait Finance Sells Islamic Swaps to Allow Hedging for Rates