Canadian company sukuk, Islamic finance in China, faith-based ETFs in the U.S.

The wave of sukuk defaults will test the industry as well as the prospect for investors to receive judgements in English courts that govern the sukuk SPVs. The next step will be to try and enforce these judgements in the GCC, according to an article in Euromoney.

Bear Market Resorts is planning a $380 million sukuk that will be issued in August. It would be the first sukuk in Canada and one of few by North American issuers. Siraj Capital is working with the company on the sukuk having previously worked on the East Cameron sukuk which is currently being affected by the issuer's bankruptcy. Following the East Cameron sukuk issue, Siraj Capital announced it was nearing a commitment to work on a sukuk for a NYSE-listed oil and gas company that was never issued.

A research economist at the Qatar Central Bank, Syed A. Basher, writes in an article published in Gulf News that despite the growth of Islamic finance throughout the GCC, the level of government support for the industry has varied widely with Bahrain and Kuwait being the most supportive and Oman and Saudi Arabia lagging behind.

Following the launch of the first U.S.-based Islamic ETF, The Dow Jones Islamic Market International Index Fund (NYSE: JVS), another companies, FaithShares, there is an article about FaithShares which requested approval in April to launch its own ETFs to meet screening criteria of other faith groups including Baptist, Catholic, Christian, Lutheran and Methodist.

The Bank of Ningxia plans a pilot project to test the offering of Islamic financial products in the region which would be the first within China.

Other News

• Islamic microfinance industry is being encouraged in Pakistan by a group, the Alhuda Centre of Islamic Banking and Economics which has launched a helpdesk to help microfinance institutions that want to shift form coonventional to Islamic finance.
  
• Moody's says that Islamic banks in the GCC should 'change their business model' to adapt to the post-financial crisis world.
  
• The joint-Islamic Development Bank/Asian Development Bank Islamic Infrastructure Fund announced that it had raised $266 million towards the $500 million it expects to begin with, most of which came from the Islamic Development Bank and the Asian Development Bank.
  
• As part of its regulatory reforms, France plans on changing laws to ensure that Islamic financial products can be offered in the country which has one of the largest Muslim population in Europe.
  
• The Central Bank of Bahrain redeemed its $250 million ijara sukuk that was issued in 2004 following its maturity.
  
• Islamic banking could grow in Africa following Al Baraka's listing on the Johannesburg Stock Exchange according to an article in African Banker.
  
• Malaysia and Singapore have both been making regulatory changes to encourage inflows of capital from the Middle East, including through Islamic finance.
  

Islamic ETF in the U.S., sukuk data from 2009Q2

One of the areas of Islamic finance in the United States that has remained relatively stagnant in terms of developing new products and the entrance of new companies is Islamic investing. However, with the launch of the first Islamic ETF in the US, this is changing. The new ETF is the Dow Jones Islamic Market International Index Fund and it is based on the Dow Jones Islamic Market Titans 100 Index composed of 100 large international Shari'ah-compliant equities. The new ETF was launched by Javelin Investment Management. The index will be rebalanced annually except for corporate actions like delistings and mergers which will be adjusted as needed.

Despite a recent surge of sukuk issues in the GCC, the pricing of these sukuk remain elevated compared with the pricing from a year or two ago. The latest reminder is the Saudi Electricity Corporation sukuk which was priced at SAIBOR+160bps compared with SAIBOR+45bps for their first sukuk in 2007. The increase could be due to a combination of factors including recent defaults as well as the impact of the credit crisis which reduced risk appetite and a fall in the oil price since its highs of $147 per barrel last year which has reduced capital inflows into the GCC.

The sukuk market for new issuance in the second quarter is 35% below the same period last year, but a pickup in activity of 164% in the second quarter compared to the first quarter as well as a healthy pipeline indicates that recovery may be in sight, according to Zawya.

Other News

• First Community Bank, an Islamic bank in Kenya, launched an investment banking subsidiary, FCB Capital, the first of its kind in the country.
  
• Mawarid Finance, an Islamic financial company in the UAE, signed an agreement to cooperate with the Dubai government in promoting small and mid-sized enterprises (SMEs) and hopes to sign similar agreements in the other Emirates.
  
• A law passed in the Malaysian parliament would make rulings by the Shari'ah Advisory Council binding on courts when the courts refer disputes to the Council. A member of parliament complained during debates that the Islamic financial industry is too focused on profits and rates in line with conventional financial industry interest rates are too high.
  
• Growth of the HSBC Amanah brand in the UAE suggests a lot of demand for Shari'ah-compliant financial services, according to Frank Kane writing in The National.
  
• The six major Pakistani Islamic Banks are close to launching an Islamic interbank market to avoid relying on conventional short-term financing.
  
• Islamic finance is finding a nexus between Shari'ah-compliant investments and a focus on sustainability with recent investments in the water industry and agriculture.
  
• Sukuk holders of the Golden Belt 1 sukuk were unable to reach a decision on whether to dissolve the sukuk and receive a payout. The sukuk was issued by the troubled Saad Group.
  
• At a time when some sukuk issuers are under pressure to meet their obligations, Kingdom Installment Company is redeeming the full value of their ijara sukuk that financed 5,000 home purcahses and was launched in 2006.
  

Nakheel may try to tender its sukuk, interview with Anouar Hassoune, opinion piece by Rushdi Siddiqui

Nakheel may make a tender offer for its $3.52 billion sukuk that comes due in December at a discount. However, many investors are likely to reject the tender offer in the hope of receiving full repayment at maturity, in part because Nakheel may receive government support from the Dubai government if it is unable to make payment on its own, as Phillip Lotter, a vice president at Moody's Investors Services said June 10. The prices in the secondary market fell to 63.5 cents on the dollar before rebounding to 87 cents yesterday. I wrote a summary of the Nakheel sukuk on my Zawya blog back in May.

Emirates Business 24/7 has a great interview with Anouar Hassoune, the Vice President and Senior Credit Officer at Moody's Investors Service about the Islamic finance, in particular, the resiliency of the industry at a time when several stand-alone Islamic investment banks have defaulted on their obligations.

Rushdi Siddiqui, head of Islamic finance for Thomson Reuters has an opinion piece saying that Islamic financial institutions should undergo stress tests like the major banks in the U.S. did earlier this year to increase confidence in the industry.

European banks, including a German bank but no French banks, have expressed interest in financing and running the $3 billion IPO planned for Istikhlaf, the planned $10 billion mega-Islamic bank. Sheikh Saleh Kamel and Adnan Yousef who have been the driving force for the bank's launch are not going to take management roles in the banks following the IPO.

Other News

• The Islamic Development Bank is planning to issue the first $500 million sukuk over the next few weeks as part of its planned 5-year, $6 billion sukuk offering.
  
• Indonesia's exchange-backed bond pricing agency will begin publishing daily prices of bonds and sukuk to facilitate greater liquidity in the secondary markets and help issuers price new issues.
  
• The Dubai government is providing AED 5 billion ($1.36 billion) in financing to merge two banks together into the Emirates Development Bank. However, despite the expectation that Amlak and Tamweel, the troubled Islamic mortgage lenders, would be included in the new entity they were not part of the announced plan.
  
• The flood of new sovereign sukuk issues continues as the Ras Al Khaimah Investment Authority (RAKIA) is planning to issue a $500 million sukuk in July.
  
• A Bahraini Islamic investment bank is financing construction of a $50 million mall in the country.
  
• Gulf news has two articles about Islamic banking and in particular the use of Islamic financial institutions by non-Muslims in the Gulf.
  

Islamic finance development in the US, Islamic debt trading, GCC wants to develop local debt markets

New global regulations on financial markets in the wake of the financial crisis--particularly those surrounding the securitization markets--could adversely affect the Islamic financial insdustry. In other U.S. news, Russell Investments is launching its own Islamic indexes with its fund partner Jadwa Investments.

U.S. real estate financing company W.P. Carey believes there is a 50% chance it will be able to launch an Islamic fund to purchase real estate. The idea dates back to 1997 when it planned to launch a Shari'ah-compliant fund, but abandoned the launch because of lack of attractive investments. The initial fund was focused on U.S. based property but the new one will probably have an international focus. The company specializes in sale and lease-back transactions which make it an attractive type of business in which to use Islamic finance.

A lawyer, Megat Hzaini Hassan, writes for Reuters about the permissibility of diifferent types of debt sales in the context of securitization of portfolios of different types of Islamic financial products. Apart from Malaysia, where debt sales (bay al'dayn) is more likely to be viewed as Shari'ah-compliant, the general sense is that if the majority of the assets being securitized are ijara (rather than murabaha), then debt re-sale is permissible because the ijara provides the financier with ownership of the underlying assets, rather than just a future stream of cash flows.

The recent wave of sovereign bond and sukuk issues in the GCC are part of a strategy to create a yield curve, encourage the development of more liquid secondary markets and increase corporate issuance following a steep drop-off in new issues as a result of the credit crisis. Out of the $750 million CBB sukuk 55% of the investors were from the region and there was enough demand for the entire issue to be subscribed by GCC-based investors.

Other News

• The Central Bank of Bahrain issued another of its regular sukuk al-ijara (No. 46) that have a return of 1.25% and mature in 182 days. It was oversubscribed 200%.
  
• The University of Leicester is holding a conference to look at whether the Islamic financial industry is more robust than the conventional financial industry as well to examine lessons from the crisis for Islamic finance.
  
• Africa Reinsurance Corp is planning a new takaful business. AfricaRe was founded in 1976 by the African Development Bank.
  The Reims Management School in France is planning to offer an Islamic Banking & Finance course as part of its Masters in Management program.
  
• Shariah Fortune, a relatively new think tank based in Dubai, issued a report about Islamic finance gaining mommentum as well as the dangers from lack of standardization in the quality of Islamic finance.
  

New monthly newsletter from Opalesque on Islamic finance

The editors of a few groups on LinkedIn and the Islamic Finance Resources blog are now writing a free monthly newsletter for Opalesque. The newsletter's team is: described:

"With this in mind, OIFI has been jointly developed by Opalesque and Amsar Partners, an independent Islamic finance consultancy, which brings together a multi-disciplinary team that includes Bernardo Vizcaino CAIA, Managing Director; Nikan Firoozye Ph.D., Director of Shariah Structuring; and Khalil Jarrar J.D., Director of Jurisprudence. They combine highly regarded financial, academic and research backgrounds with a global industry network."

The first issue is available now and it is a great new addition to the Islamic finance industry.

Tawarruq, commodity murabaha, corporate governance, Shari'ah scholar licensing

Zawya has a good article describing the potential impact of the International Council of Fiqh Academy of the OIC on organized and reverse tawarruq which condemns the practice as a 'deception'. I discussed the rationale for the decision on my Zawya blog back in early May. The primary issue that is raised in the new article is whether the condemnation of organized tawarruq applies to commodity murabaha, which is akin to the permissible classical tawarruq. If commodity murabaha were prohibited as well, there would be a significant impact on the industry because, at least in the short run, commodity murabaha can fairly easily replace tawarruq. If commodity murabaha is also prohibited, there could be signficant turnmoil in the industry despite the non-binding nature of the OIC Fiqh Academy ruling. One interesting note from the article was a quote indirectly attributed to Sh. Mohamed Elgari. "In Bahrain in May 2009, the senior Saudi Shariah advisory, Mohamed Elgari, appealed for a more scientific approach to issuing resolutions by Shariah scholars and organizations relating to Fiqh Al-Muamalat and suggested a rigorous peer review process and market consultation before any resolution is adopted."

Another positive development in the Islamic finance industry besides Sh. Elgari's suggestion for peer review and market consultation of significant fatawa like the one on tawarruq is on corporate governance issues. Specifically, the suggestion by several scholars that the central bank (or another institution independent of the Islamic financial institutions) should be responsible for paying scholars instead of their being compensated by the companies whose products they are supposed to regulate.

Dubai World has hired AlixPartners, a restructuring firm based in New York that recently helped General Motors with its bankruptcy filing. One of the most important issues to deal with is how to pay the $3.52 billion Nakheel sukuk that matures in December. I wrote a summary of the Nakheel sukuk on my Zawya blog.

Although much of the talk about the shortage of Shari'ah scholars abated as the market for Islamic finance and especially sukuk slowed during the last year, there is still a shortage. There is also talk in the article of imposing licensing standards to ensure that all members of any Shari'ah boards are adequately qualified which should paradoxically increase the number of Shari'ah scholars because it will provide a way for lesser known but equally qualified Shari'ah scholars to take seats on boards that would otherwise be reserved for the best known scholars who sit on dozens of Shari'ah boards each.

Other News

• Saudi Arabia continues to study how to create a Shari'ah-compliant version of Fannie Mae to improve liquidity in the country's mortgage and property markets to increase home ownership.
  
• Arcapita, the Bahrain- and Atlanta-based Islamic private equity firm is selling Church's Chicken to another private equity group.
  
• Dar al-Istithmar and the Dinar Standard are starting a social responsibility surv ey of Islamic financial companies.
  
• The new sukuk markets in the Saudi Arabian Tadawul exchange may have attracted another new issuer following shareholder approval for a sukuk issue by Saudi developer firm Jabal Omar.
  
• Russian firm VTB Capital is opening a Dubai office and working with Kuwait Finnance House to issue sukuk on behalf of three Russian companies worth between $100 and $300 million each.
  
• Australia's state of Victoria is working on a fact finding mission to learn more about Islamic finance.
  
• There is an article describing the Islamic financial industry in MENAfn.
  
• GCC Islamic funds are outperforming their benchmarks according to research by Emirates Business 24/7.
  

The Economist on the mega-Islamic bank, regulatory changes to accomodate Islamic finance being abused in the UK, lessons from the crisis

The Economist has an article about the launch of a mega-Islamic bank called Istikhlaf that the founders Sheikh Saleh Kamel and Adnan Yousif envisage to be an "Islamic Goldman Sachs".

The rule introduced to avoid double taxation in Islamic home finance purchases in the UK is being abused by high-net worth (conventional mortgage) clients. This should serve as a reminder that regulations introduced to facilitate Islamic finance should be carefully designed so that they are not abused in other settings to avoid taxation.

Islamic finance: can it provide lessons for conventional finance to avoid future crashes and can Islamic finance learn things from the crisis? The head of Islamic finance proposes a way for central banks to create money (monetization) in a way that is Shari'ah-compliant, in a similar thought process to an article I wrote in 2007 for Clear Profit on GDP-linked bonds ("Debt alternative for Islamic states should be explored," Clear Profit, Issue 44, May 27, 2007, page 5).

In an interview with Emirates Business 24/7, Rushdi Siddiqui, the head of Islamic finance for Thomson Reuters, discusses the lessons that Islamic finance can provide the conventional financial industry as well as the direction it is likely to take in the next decade.

Another Malaysian Shari'ah scholar, Engku Rabiah Adawiah Engku Ali, weighs in on the debate over tawarruq saying they are premissible but "The fact is more on how it's being done rather than what it is. It is more on whether the asset is available, whether it can be delivered".

Other News

• The London Stock Exchange saw its first sukuk listing of 2009 with the listing of the Central Bank of Bahrain sukuk which was increased from $500 million to $750 million after $4 billion in subscriptions were received.
  
• Al Salam Bank-Bahrain which recently bought a property in London's financial district is focused on finding private equity opportunities in Europe.
  
• Brunei issued another short-term sukuk al-ijara, its 32nd, for B$20 million ($13.7 million) with a 91 day maturity and a return of 0.30%.
  
• The FT reports that the new bond and sukuk market in Tadawul has only four sukuk available so far for trading, 3 from the Saudi Arabia Basic Industries Corp (SABIC) and one from the Saudi Electric Corporation.
  
• HSBC Amanah credits the $650 million Indonesian sovereign sukuk for sparing a rally in new issuance of sukuk after the market ground to a halt in March 2009.
  
• Islamic banking continues to develop slowly in India as the Minister for State for Minority & Corporate Affairs met with the head of the National Committee on Islamic Banking. The development of the industry continues at nearly the same slow pace in another BRIC country, Russia.