Friday, May 22, 2009

according to sharia principles, and used for hedging risk rather than speculation.

TO BE NOTED: From the FT:

Derivatives forecast to make gradual return

By Robin Wigglesworth in Abu Dhabi

Published: May 20 2009 16:36 | Last updated: May 20 2009 16:36

Derivatives have become a bit of a bugbear for some regulators. They blame certain unregulated, over-the-counter instruments for exacerbating the financial crisis but sometimes lump them together with more common, listed derivatives.

The Gulf is no exception. As regulators across the world study the entrails of the financial crisis for lessons, there will be a natural slowdown in their introduction in the Gulf as well, bankers say. But most expect it only to be a matter of time before their use is more widely sanctioned.

Even in the relatively unsophisticated Gulf, many banks dabble in derivatives, but occasionally to disastrous effect.

Several Bahraini banks, and Abu Dhabi Commercial Bank in the United Arab Emirates, have lost significant amounts on credit derivatives such as asset-backed securities and collateralised debt obligations.

Most dramatically, Gulf Bank, one of Kuwait’s oldest and largest lenders, suffered a rare bank run and had to be rescued by the government after a large currency derivatives trade on behalf of a client went awry.

This has hardened attitudes among regional regulators towards such instruments, bankers admit.

Youssef Kamal, the Qatari finance minister, told the Financial Times last year that Gulf Bank’s predicament could never happen in Qatar because its institutions are prohibited from using derivatives.

But regional bankers insist a blanket ban is a mistake. “Derivatives are like a chainsaw,” observes one expert. “If you don’t know how to use one you can cause serious damage, but if you use them correctly and are well protected you will be fine.”

While the market for complex credit derivatives is unlikely to be resuscitated soon, bankers argue that simple, listed equity derivatives would be a boon for regional stock markets.

“There are some very opaque and complex derivatives, but many – such as futures, options and swaps – are very useful and important instruments for risk management and the proper functioning of capital markets,” says Jamal Al Kishi, head of Deutsche Securities Saudi Arabia.

Indeed, while Nasdaq Dubai is at present the only bourse that offers listed equity derivatives – it rolled out futures contracts on 21 UAE shares and a Nasdaq Dubai index last November – most exchanges in the region are keen to introduce full derivatives platforms to boost trading volumes.

NYSE Euronext has signed deals with the Qatar and Abu Dhabi stock exchanges to help provide technical support and expertise for derivatives, and the recently launched Bahrain Financial Exchange has targeted the instruments as a way to muscle in on the Middle East exchange market.

Though often thought of as un-Islamic, Muslim scholars say derivatives are permissible as long as they are structured according to sharia principles, and used for hedging risk rather than speculation.

Even Saudi Arabia has introduced them – albeit indirectly. Last year it introduced swap structures to allow foreigners to acquire the “economic rights” of individual Saudi stocks."

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