Malaysian Islam banks avoid subprime hit

By Sebastian Tong

LONDON (Reuters) - None of Malaysia's Islamic banks have been hit by writedowns resulting from the U.S. subprime crisis, and the resulting global credit crunch has spurred greater interest in Sharia-compliant financing, Malaysia's second finance minister said on Monday.

"There is a feeling that the way Islamic finance is structured -- the lack of freedom in leveraging, the need for real assets -- that there will be some who will find Islamic financing interesting," Nor Mohamed Yakcop said at the Reuters Islamic Finance Summit.

Holders of sukuk or Islamic bonds, who are paid returns derived from underlying assets instead of interest, have been shielded from the worst effects of the subprime mortgage meltdown which have hit the conventional banking sector, the minister said.

He said interest in financial instruments that comply with Islamic prohibitions against investing in sectors such as alcohol, pornography and gambling was starting to emerge in China and South Korea, adding that officials from Hong Kong had consulted with Malaysia on Islamic finance.

Non-traditional players, facing credit tightening from their usual sources of borrowing, are reported to be looking to tap into demand from the world's 1.3 billion Muslims who are keen for Sharia-compliant financial assets.

A Deutsche Bank executive told Reuters that it was helping U.S. and Canadian firms to sell Islamic bonds in Malaysia this year worth between $300-500 million in ringgit.

"Sukuk has now become a very popular product," said Nor Mohamed, adding that he was not aware of any potential issuance from North American companies.

LOOKING FOR INNOVATION  Continued...