Deutsche Bank has signalled its commitment to launching sharia-compliant products. Last month the bank, along with Abu Dhabi Commercial Bank (ADCB), completed the first ever sharia-compliant transaction for high-net-worth clients, linked to a basket of commodities. Other banks active in the market include BNP Paribas and HSBC.
Under sharia law, investors cannot engage in transactions that could be deemed speculative, pay interest, involve contractual uncertainty, or are linked to businesses such as nightclubs and casinos. Money can only be used as a purchasing tool, and all transactions need to be asset-backed (see box).
Deutsche's principal-protected transaction allows investors to benefit from the upside in prices of three key commodities: platinum, aluminium and crude oil. Previously, Islamic high-net-worth investors had no way to access the commodities market in a structured format and were denied the opportunity to gain from the recent rallies in this asset class, says Ahmed Barakat, Investment Services Product Manager at ADCB.
"This ground-breaking Islamic structure will allow high-net-worth investors to take exposure to this exciting asset class and to benefit from the diversification play in their portfolios, in addition to taking advantage of the surging prices of commodities in response to strong demand pulls," Barakat adds.
Nizar Al-Shubaily, the global head of Islamic finance at Deutsche Bank, says the bank is growing its suite of innovative, sharia-compliant asset and liability products for capital raising, hedging and yield enhancement purposes, as well as for retail and private banking uses.
Riding the commodities boom
Commodities are one of the hot growth areas for structured products. Also last month, Deutsche launched a metals-linked investment fund aimed at retail customers in Hong Kong. The Metal Drive Guaranteed Fund has a tenor of just under four years and is designed to offer customers exposure to aluminium, copper, gold and zinc prices. It provides a fixed payout of 5% after six months, and a 100% capital guarantee at maturity. Metals performance will be gauged by a Deutsche commodity index.
Observers note that the rising demand for commodity-linked products meant it was only a matter of time before a bank issued a sharia-compliant product. And Deutsche's rivals are expected to launch similar products in the future, according to one London-based private banker.
Deutsche has also noted rising interest in foreign exchange-linked investments and has just structured what it claims to be the first sharia-compliant forex option, for Bahrain-based Gulf Finance House (GFH). The €30 million deal will enable GFH's clients to hedge their portfolios against dollar/euro volatility.
The forex option is based on a promissory currency sale undertaking that GFH has entered into with the German bank. Under this mechanism, Deutsche promises to buy the euro in the future at a pre-determined price.
"If the euro falls, this will benefit our clients. If the euro continues to rise, the option does not need to be exercised, and this will also benefit our clients," explains Abdul Rahman Al-Jasmi, deputy chief executive of GFH. He adds that the bank has been looking for a way to shield clients from foreign exchange risk for some time, particularly with regard to the euro, which has appreciated strongly against the dollar.
The documentation for the forex option must make clear it is a protective contract rather than a tradable instrument for speculative purposes.