Performance brings non-Muslims

The Amana Funds, a Shari'ah-compliant mutual fund company in the U.S., was profiled today in the Wall Street Journal and one of the most interesting bits of information was that many of the investors in the funds recently are likely non-Muslims drawn in by the funds' good performance compared with mutual funds generally.

Shari'ah scholar appointed at Deloitte

Deloitte, one of the four major international accounting firms, became the first to appoint a Shari'ah scholar. The scholar they appointed is Mufti Hassam Kaleem, a Pakistani Shari'ah scholar educated at Jamia Dar ul Uloom, Karachi with Mufti Muhammad Taqi Usmani.

Qatar Islamic Bank eyes U.K., U.S.

Qatar Islamic Bank expects to receive a U.K. banking license "within weeks" and is reportedly beginning talks with the U.S. Federal Reserve about expanding into the U.S. as well, according to AMEinfo.

Shari'ah issues with 85% of Gulf sukuk, NY Times article, and others

A personal finance website in the U.K. analyzes the subprime crisis and compares it to the outcome possible using ethical (and Islamic) finance. The upside is that Islamic finance places restrictions on credit creation, but at the possible expense of limiting credit. The managing director of an ethical and Islamic finance company in Nigeria, Lotus Capital believes that West Africa is fertile ground for expansion of ethical and Islamic finance.

The Shari'ah board of Bahrain-based AAOIFI, the standards setting body for Islamic financial institutions (along with Malaysian-based IFSB) has put the Shari'ah-compliance of up to 85 percent of GCC region issued sukuk at risk by criticising the repurchase agreements included in them. Under the repurchase agreements, the issuer agrees to repurchase the sukuk at facee value upon maturity or default. According to Shari'ah board chairman Taqi Usmani, "risk is not shared and reward is not shared according to the actual venture proceeds". Prohibiting or limiting repurchase agreements would make sukuk "more of a profit sharing instrument ... from a debt-like instrument to equity, and that's a fundamental change of mindset for investors and issuers" according to Harris Ifran, a director at Deutsche Bank in Dubai. Meanwhile, the Consul General for Saudi Arabia in Hong Kong encourages the introduction of sukuk in Hong Kong to "catch up with the rest of global financial markets".

A spokesman at the UK Debt Management Office says that a U.K. government sukuk would enable the expansion of retail Islamic finance in the country.

The New York Times provides a well researched piece on Islamic finance, that unlike many other news stories digs a little deeper into Islamic finance beyond just the prohibition of interest and also describes the historical similarities between the Islamic prohibition of riba and Christian and Jewish (and Aristotelian) teachings.

The Korean central bank is studying ways to attract money from the Gulf by using Islamic finance. Despite having a long-standing requirement for banks to be Shari'ah-compliant, the first 'interest-free' bank recently opened in the country.

Two articles from Dinar Standard look at Islamic finance in the U.S. and Islamic private equity.

Islamic real estate fund in Japan, Malaysia introduces new rules about Islamic financial institutions, forthcoming report on Islamic banks

Boubyan Bank, a Kuwait-based bank announced plans to launch the first Shari'ah-compliant real estate financing fund in Japan. The fund will be called the Boubyan Global Real Estate Fund.

Malaysia hopes that new measures introduced today will make the Islamic financial industry more dynamic. The measure highlighted in the article from Bernama, the Malaysian National News Agency, requires all Islamic financial institutions in the country to have full-time Shari'ah experts to ensure that operations of the institutions complies with the Shari'ah standards set by the national Shari'ah advisory council.

The World Islamic Banking Competitiveness Report 2007/08 will be released next month in Bahrain. The report will be compiled with assistance from international consulting firm McKinsey.

Islamic finance in the Financial Times

The Financial Times has a few articles on Islamic finance in the past few days' issues. The first, from Sunday, provides a few additional details about the recent progress in the U.K. government's plan to be the first western country to issue a soverign sukuk. Another article describes efforts from within the Islamic financial industry to make a clear distinction between Islamic finance and 'political Islam'. Two other articles discuss the lack of internationally-recognized Shari'ah scholars and the drive to create global standards.

In other news, the CEO of the Dubai International Financial Centre (DIFC) Authority discussed the challenges to future growth in Islamic finance at the beginning of DIFCweek. He focused on transparency, an underdeveloped infrastructure, insufficient human capital and a lack of globally accepted standards.

Michael Ainley, head of the Wholesale Banks and Investment Firms Department at the U.K. Financial Services Authority (FSA) believes that Islamic banking is catching on in Europe noting that "So far we have issued three licenses for Islamic banks and very soon the first Islamic insurance company will be open in the UK".

Renewable energy financing made Shari'ah-compliant and other news

Doha Bank in Qatar is planning a $1 billion sukuk to finance renewable energy. The is one of the first cases I have seen where Shari'ah-compliant financing has been used for the finance of renewable energy, but an area that has great potential for Islamic finance.

A Medill Reports story about Islamic finance and the above average performance by Islamic mutual funds today. One paragraph was unusual and I think missed something in the ellipsis used in the quoted text:

"Murabaha, an Islamic money market instrument, allows Islamic investors to participate in a wider range of funds because rather than using interest, it sets an agreed-upon value. 'Say I hand you a dollar,' [Shari'ah Capital Managing Director and Treasurer William] Redman explains, 'Let’s agree that in a year’s time, my dollar will be repaid to me as $1.05. That’s perfectly legal… because we agreed on the value.'"

The murabaha contract is not a loan of money with deferred repayment of an amount greater than the principal amount, it is a sale with markup, a subtle difference which is pivotal for the contract's Shari'ah-compliance.

Islamic investment funds are mostly headquartered in the GCC countries with only 5% in the U.S. and 2% in the U.K.

Pervez Said, Head of Islamic Banking at the State Bank of Pakistan, the country's central bank, believes that Islamic banks must work with the central bank to develop Baitul Maal certificates (Islamic Treasury bills) in order to help Islamic banks manage liquidity needs.

Delegates at the World Islamic Infrastructure Finance Conference (WIIFC) predict larger transaction sizes of sukuk in the future following strong growth in sukuk issuance since 2006. 54 percent of sukuk issued in the third quarter of 2007 were denominated in Malaysian ringgit.

Kuwait Finance House (Malaysia) will expand treasury management products into Brunei.

More development of Shari'ah-compliant structured products. Meanwhile, Islamic investing is still taking its first steps in India.

Al Salam Bank-Bahrain CEO Yousif Taqi believes Islamic finance has done well coping with current developments in the financial markets.

U.K. government sukuk on track

Despite fears of delay following Ed Balls' move to Schools Secretary, Treasury minister Kitty Ussher says the first Western government sukuk will not be delayed.

Islamic microfinance in Afghanistan

The USAID's microlinks highlights the development of Shari'ah-compliant microfinance to meet client demands in Afghanistan. The note has a link to a prior note also on the Islamic microfinance program run under the ARIES program as well as information from USAID's FIELD group.

Singapore-based Overseas Chinese Banking Corp (OCBC) and HSBC received licenses to open Islamic banking subsidiaries in Malaysia.

Islamic finance is losing its share of GCC area project finance.

The IFSB released a compilation of prudential and structural Islamic finance indicators.

The Central Bank of Bahrain executive director Abdul Rahman Al Baker discussed the possibility that the Arboon contract could be used to mimic a short sale for use by hedge fund managers. He also suggested the possibility of using a Salam sale in a similar way. The Arboon contract is used by Shari'ah Capital's hedge fund platform. The use of Shari'ah-compliant short selling is still controversial as many people have not been provided with more of a description of the Shari'ah principles which allow short-selling through the arboon contract. Shari'ah Capital will release a Q&A on their technique shortly, according to Chief Shari'ah Officer Sheikh Yusuf DeLorenzo in response to a question at the recent Islamic Finance in North America conference in New York.

The Times newspaper discusses the slowdown of sukuk issuance during the subprime crisis. The article contains two glaring errors. First, it describes Islamic finance as being based on the idea that there is no time value of money. There is still the recognition of a time value of money in Islamic economics, it is just that a fixed compensation for the time value of money loaned (typically included in an interest rate along with compensation for the opportunity cost of the money) is not present. For example, a sale on the spot market of a widget could occur at price $x (the cost of the good). If the buyer wanted to defer payment for 1 month, the seller could require that the buyer pay in 1 month at price x*(1+m), where m is a markup (the profit rate). This profit rate would reflect the time value of money, but would be profit on a sale, not interest on a monetary loan. Second, the article disputes that sukuk are no different from conventional bonds, and instead draw Western interest only because "there is an element of fashion that is flirting with novelty". As the working paper released by the IMF describes, sukuk do behave differently than sukuk.

A Swedish bank is operating an 'interest-free' loan program.

News on sukuk, the Islamic finance industry and government sukuk

The International Herald Tribune has an article about the fast growth of Islamic finance despite slowdowns in other areas of finance in the wake of the subprime mortgage (and mortgage-backed securities/CDOs) crisis. The article describes the potential future growth areas: financial services to high-net worth individuals (which has been a focus of the industry) and microfinance (which has not): "growth will come from providing services to high net worth Muslims and, at the opposite end of the wealth scale, to the many Muslims who do not have access to bank accounts. A form of microcredit that avoids interest payments is an obvious area."

The Boston Globe released a good article about the Islamic finance industry following the working paper from the IMF which compared a portfolio comprised of conventional bonds with one blended between conventional bonds and sukuk and found that the blended portfolio had a lower Value-at-Risk. I wrote a summary of the paper a few weeks back.

Issuers of sukuk in the GCC area are looking at expanding their roadshows to include the United States because it is the "deepest pool of funds". The focus of the article was Barclay's, which is involved in a number of sukuk issues. The approach likely to be used is private placements (under rule 144a), which are easier from a regulatory perspective than public sales.

The Japan Bank for International Cooperation (JBIC) is looking to be the first G-8 country to have a state-sponsored institution issue sukuk. JBIC is planning a $100 million issue denominated in Malaysian Ringgit. A sovereign sukuk being explored by the U.K. has seen its momentum slowed since Ed Balls moved to become Schools Secretary.

Banks offering Shari'ah-compliant products is expected to increase globally by 50% by 2009 according to the Global Banking Corp CEO Mark Hanson. Global Banking Corp is a newly-licensed Shari'ah-compliant investment bank in Bahrain.

An unspecified 'Gulf Arab government' is planning a sukuk issue. The sukuk is envisioned to become a benchmark for Shari'ah-compliant products. Currently, only a few governments in the GCC issue sukuk including Bahrain. The global market for sukuk accounted for $37.3 billion in new issuance in the first 3 quarters of 2007, 110.7% over the previous year according to the Islamic Finance Information Service (IFIS).

In another move forward for Islamic finance in Africa, the First Community Bank in Kenya, the first Shari'ah-compliant lender in the country, is planning to expand its branch networks across the country.