Malaysia Debt Ventures plans Islamic convertible loans

Malaysia Debt Ventures, which funds tech start-ups, will offer Islamic loans convertible into equity in March to boost its earnings and pave the way for it to undertake musharaka and mudaraba partnership financing.

The scheme would give the government agency an option to convert part of the loan into equity upon the event of stipulated events such as mergers, acquisitions or initial public offerings, its chief executive Zubir Ansori Yahaya said, according to Reuters.

"To concentrate on loans itself has its limitations," Zubir said. "We do have a fixed cost when we issue in the bond market. We need to find new products that will offset too low a margin."

Malaysia Debt Ventures will begin disbursing convertible loans with an initial sum of 100 million ringgit ($33 million) to test their viability before embarking on bigger loans, he said.

"Eventually when we have stabilized, we will start moving to mudaraba and musharaka," Zubir said. "To move straight from debt to equity would be too abrupt for Malaysia Debt Ventures, especially for very high-risk sectors."

Islamic banks worldwide are considering the use of more equity or risk-sharing structures, estimated to make up only a tenth of Islamic financing globally, prodded by criticism that their industry largely mirrors conventional lending.

Mudaraba and Musharaka

Islam espouses financing models such as mudaraba and musharaka where banks partner project entrepreneurs, though many sharia banks prefer debt instruments like sukuk and straight financing.

Under mudaraba, a bank provides capital for projects while the entrepreneur manages the deal; profits are split according to a pre-determined ratio and the bank bears any monetary losses that arise. In musharaka, parties contribute capital to a venture with profits to be shared in an agreed ratio, while losses are generally divided in line with capital contributions.

"Sometimes the perception is that Islamic finance is just the same person in different clothes," Zubir said.

A billion ringgit program

"In the case of information communications technology, we still have to convince our customers that it would not impact any of their operations, any of their cost of funds. Initially there was some skepticism but after two years, the response is no longer a problem."

He also said Malaysia Debt Ventures would set up a 1 billion ringgit programme to sell sukuk next year, after an earlier 1.5 billion ringgit Islamic funding program established in 2008.

Since it started in 2003, Malaysia Debt Ventures has approved about 4.9 billion ringgit of loans and disbursed 4.4 billion ringgit. ($1 = 3.058 Malaysian Ringgit)