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Malaysia bourse plans “shariah short selling platform”

Posted on: March 31, 2009


Reuters – Tuesday, March 31

KUALA LUMPUR, March 30 – Malaysia’s stock exchange plans to launch a platform to facilitate regulated Islamic short-selling and hedge fund activities towards the end of the year, the bourse’s head said on Monday.

Short-selling — the sale of borrowed stock with a view to buying it back more cheaply later — is controversial among Islamic scholar, as some believe that sharia does not permit selling what one does not own.

Bursa Malaysia <BMYS.KL> is still working out the platform’s structure, but one way to enable Islamic short-selling is for investors to buy — instead of borrowing — a stock by paying a fraction of the stock price and executing a simultaneous agreement to sell it back to the seller at a later date.

“This is being worked on, and we hope to offer an alternative way of stock borowing and lending which is sharia-compliant,” Bursa Malaysia <BMYS.KL> chief executive Yusli Mohamed Yusoff told Reuters.

“This will help in bringing in Islamic hedge fund activities. Short-selling is an essential ingredient for capital markets to perform efficiently.”

Short-sellers can boost market liquidity and lift returns for fund managers who lend out their shares for a fee.

Eighty-seven percent of securities listed on Bursa Malaysia meet Islamic law standards, which forbid activities such as interest-based lending, gambling, alcohol and tobacco.

The practice of short-selling has come under criticism in the West recently, with some politicians saying it has helped to fuel sharp tumbles in the price of shares, particularly for banks reeling from the global credit crisis.

The Malaysian stock exchange reintroduced regulated short selling in 2007 after a gap of nearly a decade in an attempt to boost turnover and foreign interest in the domestic market. The Southeast Asian country banned the practice in 1997 at the outset of the Asian financial crisis in order to halt speculative selling. (Click on [ID:nISLAMIC] for more Islamic finance stories and <ISLAMIC> for a speed guide)

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