Sharia-compliant structured products

Sharia-compliant investment is now an increasingly popular form of saving among the Islamic community. It is estimated that, presently, Islamic banks and financial institutions manage around US$250 billion of funds globally, and that this market is growing at a 15% annual rate. The industry has attracted the attention of many financial institutions, which have developed specific products to serve this growing market.

Sharia-compliant products

Islamic law sets out specific investment principles that directly impact product structuring. Among major rules, the charging and receipt of interest are prohibited, as well as uncertainty and gambling. Also, under Islamic principles, capitalism is defined as risk sharing. This implies that all parties involved in a transaction must share the rewards and the risks equitably. Although such principles disqualify many traditional option payoffs, various leverage, CPPI and coupon-paying structures consistent with Sharia principles have been seen in the market lately.

Structuring products in a Sharia-compliant manner requires strong innovation capabilities, as well as a robust infrastructure to accompany the development of such investments. Therefore, it is no surprise that the leading banks involved in this industry are the cutting-edge equity derivatives houses; they now encompass a supervisory committee consisting of Islamic legal scholars, which endeavours to determine whether or not proposals for new transactions or products conform to Sharia law.

BNP Paribas, a leading provider of Islamic structured products

BNP Paribas is a good illustration of the change within international banks resulting from the adoption of an Islamic finance capability. Having set up a dedicated team (the Islamic Banking Unit) to handle the origination, structuring and marketing of Sharia investment products, the bank has a commitment of over 19 years to Islamic banking and has become a leading player in this industry. The activity of the unit is strictly controlled by a Sharia Supervisory Committee, chaired by Sheikh Nizam Yakuby.

Within such framework, BNP Paribas has developed solid in-house competencies to offer Sharia-compliant equivalents to derivatives. Recently, the bank has established a net leadership in being able to structure a wide range of equity- and fund-linked products in accordance with Sharia principles, through innovative contracts approved by a fatwa. As Jean-Marc Riegel, head of BNP Paribas Islamic Banking Unit, says: “Our clients are looking for a structuring partner that truly understands their needs and is able to deliver the relevant products in a way that does not conflict with their beliefs but satisfies their return expectations”.

Example of a typical Sharia-compliant equity derivatives transaction: Rolling, six-monthly, 100% capital-protected fund linked to a basket of 25 equities from the Dow Jones Islamic Index Every six months, the fund matures at its initial value plus 30% of the positive performance of the equity basket over the latest six-month period. This product offers investors the possibility to earn profits at regular intervals, while incurring no uncertainty. The annual profit earned is the difference between the basket value on rollover date and the basket value on the previous rollover date.

Contacts Christian Kwek, global head of structured products marketing Tel: [phone] Email: [e-mail] Toby Lanyon, structured products marketer (Bahrain) Tel: [phone] Email: [e-mail]

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