DUBAI • Dubai-based Mashreqbank is structuring an Islamic energy futures contract for trading on the Gulf Arab emirate’s new energy bourse next year, a senior bank official said.

Taha El Tayeb Ahmed, vice-president of Mashreqbank’s Islamic finance unit Badr Al Islami which will launch services later this year, said the bank’s product development team is working on a contract for oil or gas assets for future delivery.

It is due to be traded on the Dubai Mercantile Exchange (DME) from the second half of 2007.

The contract will be based on the Islamic principle of salam, which involves the sale of commodities at a future date for a cash price.

“The salam contract provides the impetus for the development of futures and forwards contracts that are backed by commodities,” Ahmed told Reuters on the sidelines of an Islamic funds conference.

“What we are proposing is an idea in Sharia that has been there for a long time but it is not exploited.”

Ahmed said listing an Islamic futures contract would open up a new, short-term avenue for Islamic banks to invest depositors’ money. Islamic banks face a shortage of instruments in which to invest funds.

“Islamic banks have liquidity and they have customers who are looking for alternatives to investing their money, rather than leaving it sitting idle in the bank,” Ahmed said.

DME Chief Executive Officer Gary King said on Tuesday the exchange would consider listing an Islamic commodities contract if it would fill a market need.

The DME, a joint venture between the Dubai government and the New York Mercantile Exchange (NYMEX), will debut with an Oman crude oil futures contract before the end of the year.

“We are open to new products that are suggested by the market. Islamic products are very interesting to us,” King said.

Ahmed said product developers must tackle how Muslim investors can trade in non-deliverable futures contracts in a way that complies with Islamic law.

Conventional futures contracts used solely as an investment vehicle are widely considered as forbidden by Islamic law since they involve the buying and selling of money.

However, some Islamic scholars contend that the buyer of a futures contract does not need to accept physical delivery, Ahmed said. Using this starting point, Badr Al Islami’s Sharia scholars must overcome three pitfalls typical of conventional futures contracts that are prohibited by Islamic law.

The first, riba, involves the payment of interest, while the second, jahala, refers to any ambiguities in the futures contract that may lead to the third potential pitfall, gharar, which is effectively the risk of speculation when trading the contract.

“This is where we want to do something of value - to take those futures and clean out all of these problems,” Ahmed said.

The bank would also strive to standardise the salam transaction, so that all futures have the same maturity and same quantities.

Once the structure is in place and approved by the bank’s Sharia board, probably by the end of this year, the bank would then approach management for approval, Ahmed said.

Following that, it will search for a partner in the oil and gas sector in the United Arab Emirates with which to launch its initial contract. Ahmed identified Abu Dhabi National Oil Company as a potential partner.

Emaar shares drive Dubai’s sharpest drop since May 15

DUBAI • Dubai stocks posted their sharpest one-day decline in almost four months yesterday as developer Emaar Properties tumbled 3.3 per cent to a one-week low.

Analysts said Emaar’s failure to break decisively above the key 15 dirham ($4.08) resistance level triggered some panic selling.

“There was also a lot of profit-taking after the rally of the past week or so,” said Mohammed Yasin of Emirates Securities.

The main Dubai index closed at 456.02 points, down 3.85 per cent, its steepest one-day drop in since May 15.

Emaar, the largest listed company in the UAE, was the most heavily traded stock, closing 3.34 per cent down at 14.45 dirhams. It was Emaar’s lowest close since September 2.

The property giant’s shares have risen around 35 per cent in the past month, lifting the market out of a slump that by June had wiped away all the gains of last year’s record breaking rally.