Entry of Shariah-compliant derivatives into the Malaysian market will fulfill a need and allow the Islamic finance industry to continue growing, with new products from Standard Chartered Plc and Bank Islam Malaysia Bhd. Standard Chartered customers will be able to hedge against price fluctuations in commodities like rice and oil, while Bank Islam Malaysia’s products allow two parties to exchange different forms of payment for an underlying asset.

The word ‘derivatives’ can be contentious in Islamic finance, which often promotes itself as a more ethical and less risky alternative to ‘conventional’ finance. Derivatives trading is often cited as one of the causes of the global financial crisis and similar Islamic products have been more difficult to market, limited hedging opportunities for customers and possibly inhibiting the industry’s growth.

The Bahrain-based International Islamic Finance Market provided standardized legal documentation for Islamic derivatives in March 2010. Standard Chartered’s products are also approved by a panel of Shariah experts to ensure they fulfill the requirement that Islamic investments must be backed by underlying tangible assets.

Derivative products are seen as necessary in all areas of finance to protect against the large number of variables affecting international investment and trade. Fluctuating values of anything from stocks, commodities, real estate currencies and even weather may have a large impact on an investment’s performance. The Islamic finance industry has been innovating for years to create accepted standards for products to match this demand, and is optimistic the new offerings will further consolidate the sector in Southeast Asia and worldwide.

source & full article: Bloomberg