U.A.E. Margin Trade Crackdown Fans Shariah Push: Islamic Finance

Brokerages in the United Arab Emirates, where the market regulator last month vowed it may create new rules to control so-called margin trading, are increasingly offering Shariah-compliant versions of the service.

Mena Corp. Financial Services LLC, an Abu Dhabi-based investment firm, signed a 50 million-dirham ($13.6 million) accord last week with Dubai-based Aafaq-Islamic Finance Company to offer Shariah-compliant margin trading, where banks and brokers lend money to investors to trade. Al Safwa Islamic Financial Services was one of five firms accredited to provide margin trading this month, the Dubai Financial Market announced Aug. 5.

“You have more and more firms acquiring licenses,” Abu Dhabi-based Fathi Ben Grira, chief executive officer of Mena Corp., said by phone yesterday. “We’re pretty convinced there will be a strong appetite.” The deal with Aafaq may grow to as much as 350 million dirhams by year-end, he said.

The practice contributed to stock market volatility in the country this year that sent Dubai’s benchmark index from a bull market into a bear and back again in less than a month. The U.A.E. said it may amend the rules governing lending against shares after reviewing the price swings. Increased monitoring by the central bank and Securities & Commodities Authority is creating more clarity for investors and is fueling client demand, Grira said.

Limited Supply

Shares of Shariah-compliant companies globally advanced 5.2 percent this year through yesterday, according to the Dow Jones Islamic Market World Index. Dubai’s gauge jumped 42 percent in the period and is the best-performing index in dollar terms among more than 90 tracked by Bloomberg. Abu Dhabi’s measure added 17 percent.

Islamic margin trading allows investors, predominantly high-net-worth individuals, to borrow cash according to terms that adhere to the religion’s ban on interest to trade shares, Grira said.

“We’re giving interest-free loans, others offer Murabaha,” Sherif Zohdy, head of brokerage at Al Safwa said by phone from Sharjah yesterday. In a Murabaha contract, goods are bought and then resold with a pre-agreed mark-up to allow lenders to cater for customers who want to lock in payments in the future.

“I have lots of clients who need margin trading, but I cannot offer it,” Zohdy said. “Our capital is 130 million dirhams. Only banks can deal with margin trading on a big scale.”

Total margin accounts at Dubai Islamic Bank PJSC (DIB) rose almost 30 percent to 291.5 million dirhams in the second quarter from the end of last year, according to its latest financial statement.

New Rules

The benchmark DFM General Index soared into a bull market July 15, about three weeks after entering a bear rout fueled by speculation over the ownership structure at Arabtec Holding Co. (ARTC), the U.A.E.’s largest publicly traded construction company. Banks and brokerages exacerbated the selloff as they offloaded stocks to pay back some of the money that was borrowed to buy them.

Representatives of the SCA, the central bank and the country’s two main stock exchanges met to consider the volatility, and said they will make changes to lending regulations if necessary, the SCA said July 7.

Further regulation will help boost the total volume of Islamic margin trading, according to Mena Corp.’s Grira. “We’re for regulation,” he said. “The market has been hurt in the past.”

To contact the reporter on this story: Daria S Solovieva in Dubai at dsolovieva1@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net Dana El Baltaji

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