Wednesday, October 15, 2008

Boeing Capital Corp to encourage sukuk, sukuk issuance falls, Islamic financial institutions not immune from credit crisis

The managing director of a Shari'ah-compliant microfinance institution in Uttar Pradesh provides a short description of microfinance and the priorities for Islamic financial institutions adapting their products to incorporate microfinance.

Boeing Capital Corp, the financial services subsidiary of the airplane manufacturer, encourages the creation of more types of Islamic financial products that use airplanes as the underlying asset. The regional managing director, John Matthews, said that "aircraft are ideal for Islamic financing since a fundamental criterion is that such investments be asset based". The company wants to introduce sukuk that mimic an enhanced equipment trust certificate (EETC). The ETC is similar to an ijara sukuk where funds are raised for the purchase of an airplane from investors and the airplane is then leased-to-own to the airline. An enhanced ETC is like an ETC, but has multiple tranches of certificates.

Sukuk issuance continues to remain weak, falling below 2006 for the first three quarters this year. In the most recent quarter, there were $3.21 billion issued, compared with $11.34 billion in 2007. For the first three quarters of 2008, only $14.77 billion have been issued compared with $36 billion in 2007 and $18 billion in the same period in 2006.

Two people at Deutsche Bank, Mohamad Safri Shahul Hamid and Manar Mahmassani, say that Islamic finance is not necessarily safer, but is more ethical than conventional finance. The Islamic finance industry is not 'insulated' from conventional finance and responds to similar underlying economic realities as a conventional product. A senior economist at Bank Islam adds to this commentary that until Islamic finance has a benchmark that is distinct from an interest rate benchmark like LIBOR, "it’s a fallacy to think that movements in global interest rates will not have any implications for Islamic securities". Islamic finance institutions are not immune from the credit crisis, according to the CEO of CIMB Islamic, Badlisyah Abdul Ghani.

No comments: