Tuesday, August 26, 2008

Cagamas looking to securitizing Islamic mortgages in the GCC; Details on purchasers of Indonesian sukuk

Cagamas Bhd, a Malaysian firm that issues securitized Islamic mortgages, plans expansion into the GCC region where mortgage securitization is far less common due to Shari'ah-objections about trading debt (bay al-dayn). The CEO of Cagamas, Steven Choy suggested one possible way around this problem: "If I could buy some assets from the Middle East that are globally or Gulf sharia-compliant and if I issue (bonds) out of here, there's no reason why they can't buy it back there". Whether this would be acceptable to Shari'ah boards in the GCC is unclear, but I can think of a few stipulations that would likely be put on any transaction like this (note: this my best guess because I am not a qualified Shari'ah scholar). One would be on the type of financing products which would be allowed. In general, ijara and mudaraba would be the most likely candidate. The former would include transfer of ownership in the underlying real property while the latter would be similar to trading in equities, which has been approved by Shari'ah scholars subject to some constraints.

More details about the purchasers of the Indonesian Rupiah-denominated sovereign sukuk emerged today. About 90 percent of the sukuk was purchased by domestic investors. Only 10 percent of the investors in the sukuk were Islamic banks and many of the investors were conventional banks and insurance companies in Indonesia. The amount of the issue purchased by local investors was a little surprising because Western investors like hedge funds snap up between 1/3rd and 1/2 of many sukuk. The reason may be that Western investors want to mitigate some risk by removing currency risk from an investment in an emerging market with a large budget deficit instead investing in the forthcoming dollar-denominated sukuk.

A U.K.-based Shari'ah scholar believes that the subprime crisis was the result of a lack of market discipline that would be less likely if structures used in Islamic finance were used in conventional finance.

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