Opening India to Islamic banking

India is a potentially large market for Islamic finance where regulatory opposition (driven by political opposition) to Islamic finance has kept the industry from developing.  The latest change in the Reserve Bank of India’s (RBI) statement about Islamic banking is virtually indistinguishable from past statements, but other developments behind the scenes indicate changes afoot.  

The approval in 2012 of a branch of Turkey’s Asya Bank and the indication of interest in opening a branch in India from Meezan Bank suggest these institutions are becoming more confident in the possibility of Islamic banking activities being allowed in India in the future.  One way forward for the RBI would be to use a substance over form approach to interpret the compliance of Islamic banks with India’s banking laws.

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IILM secondary market success may depend on time elapsed before its second sukuk

The inaugural IILM sukuk issuance is important for the Islamic finance industry, but that body’s second sukuk may be more important in signaling to the market the total outstanding amount of sukuk to anticipate.  Providing the market—and market makers in particular—with confidence that the IILM will not just be a one-off or occasional issuer will provide more support when making their decision about how actively to participate in developing liquid secondary markets, which will be a key factor for the success of the IILM sukuk. 

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Dubai courts void ijara agreement for property that was not completed on schedule

A Dubai court voided an ijara agreement on the basis that it represented not a lease, but a sale contract and the asset being sold was not completed when the developer started collecting payments.  Prior to the Dubai real estate crash, many investors signed agreements that forced them to pay rent upon the anticipated completion date of their property.  However, when the debt crisis hit and projects were mothballed, developers charged rent for uncompleted units.  The court’s ruling—although it does not create precedent—follows criticism by Dubai’s Grand Mufti in 2011 and should lead to changes in ijara contracts used in sales of new residential units.  

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Islamic banks would benefit from guarantees for SME financing

The bank lending to the sector is important, primarily for Islamic banks that are intended to be facilitators of the ‘real economy’ more so than their conventional competitors. Guarantee funds can provide a compelling way to expand financing to SMEs because small guarantee amounts can lead to a African Guarantee Fund provided $1.2 million to guarantee against losses for SME financing provided by the Gulf African #Bank. With SMEs holding the key for employment growth in many economies, incentivizing disproportionate increase in financing provided to SMEs.

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New Sukuk Insurance program could spur development in ICIEC member countries

Analysis of the ICIEC sukuk insurance plan, discussed in the IFG Weekly Briefing (subscribe here), has focused primarily on the benefit for issuers in accessing capital markets with new sukuk issuance, but there may be a greater benefit from modifying the incentives facing lower-rated sovereign issuers that can increase both the quantity of foreign investment they receive, as well as promoting fewer instances of default by mitigating a moral hazard problem facing low-rated sovereigns where insurance is not available.  Combined with more project-based sukuk like is proposed in Egypt’s sukuk law, could provide a way for sukuk to be used to promote development more effectively than conventional debt has in the past.

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