A forum on Islamic finance held in Tokyo. The remarks given by Hamad Saud Al-Sayari, the governor of the Saudi Arabian Monetary Authority (SAMA), the Saudi central bank focused on the growth the industry has experienced in recent years and the regulatory changes needed for the industry to continue growing. The governor of Bank Negara, the Malaysian central bank, Dr. Zeti Akhtar Aziz provided remarks on the stability of the Islamic financial industry despite the global credit crunch. Remarking on her country's Islamic financial industry's stability during the Asian Financial Crisis in 1997-1998, she said “We are pleased to report that the Islamic financial system demonstrated its resilience to the stress that occurred 10 years ago during the financial crisis". Her comments about the robustness of the Islamic financial industry followed comments by the Bank of Japan governor Toshihiko Fukui that the industry has not faced the stresses that will demonstrate its robustness.
Apart from Malaysia, his comment makes sense: the Islamic financial industry has seen the most rapid growth since 2001, a period of relative stability apart from the recent subprime crisis. In my opinion, however, the credit crisis does not pose much of a threat to the industry; not because it is fundamentally insulated from the conventional financial industry but because oil prices are still high. The industry's growth has occurred during a period in which oil prices, the source of additional liquidity, particularly in the Middle East that has fueled the industry's growth, rose from $20-30 in 2000 to $100 per barrel in 2008. The stability of the Islamic financial industry will face its greatest test if oil prices drop significantly, something not particularly likely unless the credit crunch produces a significant fall in demand across the world.
The Gulf Finance House in Bahrain announced the launch of a Shari'ah-compliant "Energy Bank", which will invest in energy production projects. No mention of any renewable/sustainable energy projects, which could benefit the Islamic finance industry due to greater demand for alternative energy.
The U.K. government will go ahead with plans to issue government sukuk, the first sovereign sukuk to come out of the G8. The Times (U.K.) has an article discussing the growth of Islamic finance in London in light of the recent comments of the Archbishop of Canterbury.
The first Islamic bank in Italy will open later this year and could be part of the London-based European Islamic Investment Bank (EIIB).
Moody's has a new report on the differences, from a ratings perspective, between conventional and Shari'ah-compliant finance.
Saturday, February 23, 2008
Sunday, February 10, 2008
Islamic finance in Malaysia
A visiting scholar at the Carnegie Endowment for International Peace has an opinion piece in the Los Angeles Times about Malaysia's development of Islamic finance.
Saturday, February 09, 2008
Islamic finance in the West, new products may attract criticism within the industry
An editorial in Middle East Times by an Indonesian journalist, Wahyuana, describes the growth of Islamic finance in Indonesia, which has been rather subdued and less visible than growth elsewhere in the world like the GCC, Malaysia and the U.K. In something that is not as frequently mentioned is that the prohibition of interest-based finance is contained not just in the Qur'an (2:275, 278-279) but also the New Testament (Luke 6:34-35 - "And if ye lend to them of whom ye hope to receive, what thank have ye? for sinners also lend to sinners, to receive as much again. But love ye your enemies, and do good, and lend, hoping for nothing again; and your reward shall be great, and ye shall be the children of the Highest: for he is kind unto the unthankful and to the evil.") and the Torah (Exodus 22:25 - "If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.")
The Investment Dar, the Kuwaiti investment firm, is considering an investment in European or American telecom companies, which could include a 3 percent stake in SprintNextel. The Investment Dar also plans on opening an Islamic bank in the U.K. The familiarity of financial regulators with Islamic banking in the U.K. have made the country a gateway into the European market. Countries like France and Germany have minimal Islamic financial services available and Muslim populations between 5 and 10 percent of the population. European Finance House, the U.K. subsidiary of the Qatar Islamic Bank, received FSA approval to begin banking in the U.K. Initially, the bank will focus on commercial and investment banking, but has authorization to operate personal banking as well.
In the wake of comments about Shari'ah law made by the Archbishop of Canterbury, a paper in North East England describes how Islamic finance has become widely accepted and available in the country, even outside of London. The BBC has a general Q&A about Shari'ah law. There is also a thoughtful editorial in the Guardian by Asim Siddiqui.
Reuters describes the challenges facing Islamic finance in the United States, including differing state banking regulations, concentrations of Muslims in a few areas of the country and the lack of national financial institutions offering Islamic financial products, issues I have addressed in two articles I have written for Islamic Business & Finance magazine.
Sukuk growth in the GCC (largely issued in US dollars) has been led by the UAE but the majority are still coming from Malaysia, denominated in Ringgit. Credit Suisse says that the Islamic financial sector has been largely insulated from the credit crisis, despite several sukuk being delayed in the last few quarters of 2007. One of the challenges to Islamic financial growth is Islamic banks liquidity management, something I will discuss in the forthcoming issue of the Institute of Halal Investing newsletter. To be added to the mailing list, please email me at blake@investhalal.org.
The International Islamic Financial Market (IIFM) is planning to initiate greater research about sukuk, the fastest growing area of Islamic finance. The organization is also working with the International Swaps & Derivatives Association on developing a framework for Shari'ah-compliant derivatives. A key challenge is how to ensure that any derivatives are used for hedging purposes and not speculation. In addition, Islamic financial institutions are using real estate investments as an alternative to long-term bonds since long-maturity sukuk are not yet common. Deutsche Bank sees future growth in Islamic hedge funds, still seen as controversial by many people within the Islamic finance industry.
Morgan Stanley plans to be the first multi-national corporation to issue a sukuk. Given that most of the company's business is in conventional finance, there could be question about whether financing a conventional financial institution with an Islamic bond, whether or not the deal is structured to be Shari'ah compliant.
The Kuwait central bank governor Sheikh Salem Abdul Aziz Al-Sabah says Islamic banks need greater liquidity management tools. The Islamic Development Bank Solidarity Fund to fight poverty is continuing to receive contributions towards the $10 billion target. The fund has raised $1.6 billion so far.
The Investment Dar, the Kuwaiti investment firm, is considering an investment in European or American telecom companies, which could include a 3 percent stake in SprintNextel. The Investment Dar also plans on opening an Islamic bank in the U.K. The familiarity of financial regulators with Islamic banking in the U.K. have made the country a gateway into the European market. Countries like France and Germany have minimal Islamic financial services available and Muslim populations between 5 and 10 percent of the population. European Finance House, the U.K. subsidiary of the Qatar Islamic Bank, received FSA approval to begin banking in the U.K. Initially, the bank will focus on commercial and investment banking, but has authorization to operate personal banking as well.
In the wake of comments about Shari'ah law made by the Archbishop of Canterbury, a paper in North East England describes how Islamic finance has become widely accepted and available in the country, even outside of London. The BBC has a general Q&A about Shari'ah law. There is also a thoughtful editorial in the Guardian by Asim Siddiqui.
Reuters describes the challenges facing Islamic finance in the United States, including differing state banking regulations, concentrations of Muslims in a few areas of the country and the lack of national financial institutions offering Islamic financial products, issues I have addressed in two articles I have written for Islamic Business & Finance magazine.
Sukuk growth in the GCC (largely issued in US dollars) has been led by the UAE but the majority are still coming from Malaysia, denominated in Ringgit. Credit Suisse says that the Islamic financial sector has been largely insulated from the credit crisis, despite several sukuk being delayed in the last few quarters of 2007. One of the challenges to Islamic financial growth is Islamic banks liquidity management, something I will discuss in the forthcoming issue of the Institute of Halal Investing newsletter. To be added to the mailing list, please email me at blake@investhalal.org.
The International Islamic Financial Market (IIFM) is planning to initiate greater research about sukuk, the fastest growing area of Islamic finance. The organization is also working with the International Swaps & Derivatives Association on developing a framework for Shari'ah-compliant derivatives. A key challenge is how to ensure that any derivatives are used for hedging purposes and not speculation. In addition, Islamic financial institutions are using real estate investments as an alternative to long-term bonds since long-maturity sukuk are not yet common. Deutsche Bank sees future growth in Islamic hedge funds, still seen as controversial by many people within the Islamic finance industry.
Morgan Stanley plans to be the first multi-national corporation to issue a sukuk. Given that most of the company's business is in conventional finance, there could be question about whether financing a conventional financial institution with an Islamic bond, whether or not the deal is structured to be Shari'ah compliant.
The Kuwait central bank governor Sheikh Salem Abdul Aziz Al-Sabah says Islamic banks need greater liquidity management tools. The Islamic Development Bank Solidarity Fund to fight poverty is continuing to receive contributions towards the $10 billion target. The fund has raised $1.6 billion so far.
Wednesday, February 06, 2008
Reuters Summit on Islamic Banking and Finance
Reuters recently put together a Summit on Islamic banking and finance in Manama, Bahrain and has a dedicated site that lists all of the articles (and several video interviews with industry leaders):
http://www.reuters.com/business/summit/IslamicBankingandFinance08
The articles are too numerous to mention individually, but range from the controversy over commodity murabaha to sukuk issuance in 2008 (estimated by Ernst & Young at around $100 billion, a huge leap over the total from 2007) and a new Shari'ah-compliant REIT (the first) in China to finance shopping malls.
http://www.reuters.com/business/summit/IslamicBankingandFinance08
The articles are too numerous to mention individually, but range from the controversy over commodity murabaha to sukuk issuance in 2008 (estimated by Ernst & Young at around $100 billion, a huge leap over the total from 2007) and a new Shari'ah-compliant REIT (the first) in China to finance shopping malls.
Saturday, February 02, 2008
Stir over Islamic finance study in Canada, criticism of commodity murabaha
Reuters has an article that describes the success of Islamic finance in growing rapidly with a discussion of some of the challenges it faces in the next few years. The main challenge, which has been enumerated many times, is the shortage of skilled practitioners in the field, particularly Shari'ah scholars who are instrumental in adding legitimacy to the industry by certifying products as Shari'ah-compliant.
One area which is not as frequently mentioned is the need to spread awareness of the industry as it moves out of majority Muslim countries in the GCC and Asia into Western countries where Muslims are in the minority. This challenge has been accepted by the Institute of Halal Investing, which is working to demystify Islamic finance globally, with a particular focus of spreading knowledge and understanding of Islamic finance within the United States. The Reuters also mentions an informal poll of Islamic finance practitioners who pick Indonesia, Pakistan and the U.K. as the next significant growth opportunities for Islamic finance.
A further challenge to the industry is the wide use of murabaha, particularly commodity murabaha, by Islamic banks to invest surplus cash. Recent criticisms from within the Islamic finance industry have focused on repurchase agreements in ijara sukuk but Ruggiero Lomonaco, of ABN Amro and Aznan Bin Hasan, an assistant professor at the International Islamic University Malaysia both made strong criticisms of commodity murabaha at the recent Islamic Finance Forum in Dubai.
Mr. Lomonaco suggested that because the commodity murabaha often doesn't involve the delivery of the metals involved, it may reduce the legitimacy of Islamic finance and could "cause the fall of the industry in a very short period of time". Mr. Bin Hasan, in addition to criticizing the practice, suggested that where other options are not available, Islamic financial institutions could use commodity murabaha out of necessity. One alternative, using a wa'ad swap where the returns are determined by external benchmarks that was suggested by Mr. Lomonaco was the subject of a forceful criticism in a paper by Sheikh Yusuf DeLorenzo, a prominent Shari'ah scholar.
Moody's warns that Islamic financial institutions face significant risk if they are not seen as being fully Shari'ah compliant. In addition, the use of new products with different risk profiles from conventional financial products makes it difficult for Islamic banks to know the true risks. The presence of Islamic finance predominantly in emerging economies also means there is greater systemic risk to the industry as a whole because regulatory systems are less developed than in Western nations.
Disagreements over whether Islamic finance is beneficial to Muslims in Canada has lead to open disagreement over a Canadian Mortgage and Housing Corporation study about Islamic banking. Critics like Tarek Fatah, founder of the Muslim Canadian Congress call Islamic finance a "con job". Islamic financial institutions like UM Financial, headed by Omar Kalair, disagree and say that Islamic finance is not being forced upon Muslims in the country and provides a valuable tool for those Muslims who would not otherwise participate in the financial industry or purchase homes because of the interest charges in conventional mortgages. The Canadian Mortgage and Housing Corporation, stuck between the opposing groups, says the study is needed to understand the growing industry. CMHC vice president in charge of policy and planning Douglas Stewart says that the CMHC "wanted to get a better understanding of the nature of this type of lending and what some of the implications might be for the Canadian housing system."
Despite the credit crunch spreading across the world financial system, most bankers and analysts in the Islamic finance industry expect a similar volume of sukuk issues in 2008 as 2007, about $12 billion.
The growth of Islamic finance outside of the GCC along with it reaching 'critical mass' in places like Dubai is a significant development for the industry says Majid Dawood, the CEO of Yasaar Research, Inc.
Yasaar Research recently worked as independent Shari'ah consultants for the FTSE Shari'ah Indexes. The new indices, in addition to being overseen by an independent Shari'ah organization, are also using financial ratios calculated using total assets, rather than 12 month trailing market capitalization. The use of the latter as the denominator in the financial ratios has attracted criticism that it forces Shari'ah-compliant investment managers to buy high (when the market capitalization is large enough to drive the ratio lower) and sell low (when falling market capitalization increases the value of the ratios above the level allowed by the Shari'ah screens.
In another development for indices based upon religious and ethical principles, Dow Jones Indexes, the creator of the Dow Jones Islamic Market Index, one of the most commonly used benchmarks for Shari'ah-compliant funds, has launched the Dow Jones Dharma Indexes. The Dharma indexes use screens that aim to appeal to Hindus, Bhuddists, Jains and Sikhs. Briefly, the screens exclude companies that create violence and do not promote sustainable stewardship.
The Harvard Business Review included a paper on Islamic finance in its list of breakthrough ideas for 2008.
A website critical of the World Bank and IMF has a description of how the multilateral organizations approach Islamic finance.
The Islamic Development Bank is moving forward in the development of an anti-poverty fund called the National Islamic Fund. The board of directors are scheduled to meet in Tehran on February 17th.
One area which is not as frequently mentioned is the need to spread awareness of the industry as it moves out of majority Muslim countries in the GCC and Asia into Western countries where Muslims are in the minority. This challenge has been accepted by the Institute of Halal Investing, which is working to demystify Islamic finance globally, with a particular focus of spreading knowledge and understanding of Islamic finance within the United States. The Reuters also mentions an informal poll of Islamic finance practitioners who pick Indonesia, Pakistan and the U.K. as the next significant growth opportunities for Islamic finance.
A further challenge to the industry is the wide use of murabaha, particularly commodity murabaha, by Islamic banks to invest surplus cash. Recent criticisms from within the Islamic finance industry have focused on repurchase agreements in ijara sukuk but Ruggiero Lomonaco, of ABN Amro and Aznan Bin Hasan, an assistant professor at the International Islamic University Malaysia both made strong criticisms of commodity murabaha at the recent Islamic Finance Forum in Dubai.
Mr. Lomonaco suggested that because the commodity murabaha often doesn't involve the delivery of the metals involved, it may reduce the legitimacy of Islamic finance and could "cause the fall of the industry in a very short period of time". Mr. Bin Hasan, in addition to criticizing the practice, suggested that where other options are not available, Islamic financial institutions could use commodity murabaha out of necessity. One alternative, using a wa'ad swap where the returns are determined by external benchmarks that was suggested by Mr. Lomonaco was the subject of a forceful criticism in a paper by Sheikh Yusuf DeLorenzo, a prominent Shari'ah scholar.
Moody's warns that Islamic financial institutions face significant risk if they are not seen as being fully Shari'ah compliant. In addition, the use of new products with different risk profiles from conventional financial products makes it difficult for Islamic banks to know the true risks. The presence of Islamic finance predominantly in emerging economies also means there is greater systemic risk to the industry as a whole because regulatory systems are less developed than in Western nations.
Disagreements over whether Islamic finance is beneficial to Muslims in Canada has lead to open disagreement over a Canadian Mortgage and Housing Corporation study about Islamic banking. Critics like Tarek Fatah, founder of the Muslim Canadian Congress call Islamic finance a "con job". Islamic financial institutions like UM Financial, headed by Omar Kalair, disagree and say that Islamic finance is not being forced upon Muslims in the country and provides a valuable tool for those Muslims who would not otherwise participate in the financial industry or purchase homes because of the interest charges in conventional mortgages. The Canadian Mortgage and Housing Corporation, stuck between the opposing groups, says the study is needed to understand the growing industry. CMHC vice president in charge of policy and planning Douglas Stewart says that the CMHC "wanted to get a better understanding of the nature of this type of lending and what some of the implications might be for the Canadian housing system."
Despite the credit crunch spreading across the world financial system, most bankers and analysts in the Islamic finance industry expect a similar volume of sukuk issues in 2008 as 2007, about $12 billion.
The growth of Islamic finance outside of the GCC along with it reaching 'critical mass' in places like Dubai is a significant development for the industry says Majid Dawood, the CEO of Yasaar Research, Inc.
Yasaar Research recently worked as independent Shari'ah consultants for the FTSE Shari'ah Indexes. The new indices, in addition to being overseen by an independent Shari'ah organization, are also using financial ratios calculated using total assets, rather than 12 month trailing market capitalization. The use of the latter as the denominator in the financial ratios has attracted criticism that it forces Shari'ah-compliant investment managers to buy high (when the market capitalization is large enough to drive the ratio lower) and sell low (when falling market capitalization increases the value of the ratios above the level allowed by the Shari'ah screens.
In another development for indices based upon religious and ethical principles, Dow Jones Indexes, the creator of the Dow Jones Islamic Market Index, one of the most commonly used benchmarks for Shari'ah-compliant funds, has launched the Dow Jones Dharma Indexes. The Dharma indexes use screens that aim to appeal to Hindus, Bhuddists, Jains and Sikhs. Briefly, the screens exclude companies that create violence and do not promote sustainable stewardship.
The Harvard Business Review included a paper on Islamic finance in its list of breakthrough ideas for 2008.
A website critical of the World Bank and IMF has a description of how the multilateral organizations approach Islamic finance.
The Islamic Development Bank is moving forward in the development of an anti-poverty fund called the National Islamic Fund. The board of directors are scheduled to meet in Tehran on February 17th.
Subscribe to:
Posts (Atom)