Tax incentive in Malaysia, Pakistan sukuk

Malaysia announced tax breaks on fees and profits from the issuance of non-Ringgit sukuk for three yeras. The tax breaks were implemented to promote more sukuk issuance for international companies and distribution outside of Malaysia. Although Malaysia has one of the best developed sukuk market it is primarily concentrated on local issues & sold to domestic investors. Part of this is due to concerns about the Shari'ah-compliance of Malaysian sukuk, which are reviewed more liberally than those in the GCC. The government also introduced tax credits that make Islamic finance education more affordable to increase the number of Islamic finance professionals.

Pakistan is launching its first domestic rupee-denominated sukuk in September for PKR 15-20 billion ($197-263 million) with a coupon close to 11.49%. The structure of the bonds was not described.

Islamic finance in Malaysia continues to grow rapidly, according to Bernama. A few statistics from the release:
• Industry as a whole grew 12.6% to 177 billion Ringgit ($52 billion)
• Deposits grew 17% to 142.7 billion Ringgit ($42 billion)
• Islamic financing accounted for 14.2% of the total
• Takaful premiums grew 23% to 1.4 billion Ringgit ($412 million)

Sukuk, new investment banks, Islamic credit cards

Following the Rupiah-denominated sukuk, Indonesia's first dollar-denominated sukuk "will probably be slightly more ambitious than intended" according to an anonymous person involved in the offering.

Several GCC banks are launching three new large investment banks with focuses on infrastructure, agricultural and hospitality. The banks will use the excess liquidity created by high oil prices to direct investment in large projects with long time horizons.

Not everyone is happy about the development of Shari'ah-compliant credit cards. Some of them are significantly more expensive than their conventional alternatives without much difference in terms of how the issuer earns money from customers.

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.

First Indonesian sovereign sukuk

The first Indonesian government sukuk, denominated in Indonesia Rupiah, was slightly undersubscribed with IDR 4.7 trillion ($514.2 million), short of the target of IDR 5 trillion. Despite having the largest Muslim population in the world, Islamic finance has been slow to develop in Indonesia, in large part because of the lack of a government sukuk to benchmark returns, in addition to an unfavorable tax and regulatory environment. The government plans a dollar-denominated sukuk later this year, probably in October. The seven- and ten-year sukuk were priced slightly lower than conventional Indonesian government bonds (11.8% versus 11.93% and 11.95% versus 12.02% for seven- and ten-year maturities, respectively).

Egypt, despite having the first Islamic bank in the 1970s, has not become very important in Islamic finance. The government has not been as accomodative to the industry as in many other GCC countries, Malaysia and even the U.K.

More sukuk news: global growth, Singapore, Bahrain, Indonesia, GCC issuers

The CEO of CIMB Islamic believes that although sukuk issuance this year will not surpass last year's $16 billion, it will grow more rapidly next year as the impact of the credit crisis becomes less important.

The dollar-denominated Indonesian sovereign sukuk will be arranged by Barclay's Capital, HSBC and Standard Chartered and is expected to be issued in October or November and could be as large as $1 billion. The dollar-denominated sukuk will also be an ijara sukuk like the rupiah-denominated sukuk and will have maturities of between 7 and 10 years. A sukuk is also expected from Singaporean firm City Developments for up to S$1 billion ($709 million).

The 182-day maturity, BD5 million ($13.3 million) ijara sukuk from the Central Bank of Bahrain was oversubscribed by 100%.

Despite the rapid growth in sukuk in the UAE, the laws regarding default are not tested and are less favorable to creditors than other jurisdictions according to Standard & Poors.

GCC companies are leading the growth in Islamic finance with the large amount of capital in the region, particularly in Saudi Arabia, being invested in Shari'ah-compliant financial products like sukuk.

Islamic finance could appeal to investors damaged in the credit crisis; new sovereign sukuk

Continued woes in the conventional financial system may make Islamic finance attractive as the industry has not been significantly affected by the credit crisis. A few issuers have delayed sukuk issues, but there have been no writedowns since Islamic financial institutions do not participate in any of the markets for products that were at the center of the credit crisis. Islamic financial institutions had no exposure to toxic products like CDOs and Auction Rate Securities because they do not pass the relatively conservative Shari'ah screens adopted by the industry. The Reuters article linked to did note one way where Islamic finance may be more risky than conventional finance—Shari'ah screens exclude several asset classes, reducing the possibility for diversification. One asset class that is heavily overweighted in the GCC region is real estate. Mohamed Damak at Standard & Poors comments: "A correction of the real estate sector would impact Islamic banks involved in this business line. Islamic finance is not immune from risk"

The Indonesian sukuk could spur greater development in the Indonesian sukuk market. As of July 31, there were 4.18 trillion Indoonesian Rupiah ($488 million) in sukuk outstanding, comprising about 5% of the total corporate debt market. In Malaysia, by contrast, sukuk account for nearly 1/3rd of total outstanding corporate debt.

Islamic finance practitioners in the UK expect the number of Islamic investment banks based there to double to 10 in the next five years as part of the international growth of Islamic finance, growing by an estimated 15 percent per year.

Malaysian bank Hong Leong is the first to receive a license to offer Islamic banking services in Hong Kong. Two other banks, Standard Chartered Bank and Royal Bank of Scotland, announced plans to begin offering Islamic banking through subsidiaries in Malaysia. Standard Chartered has received a license and RBS plans to apply for a license.

RGE Monitor analyst Rachel Ziemba provides an analysis of the recent Moody's report on Islamic finance, particularly relating to the influence of GCC sovereign wealth funds in the Islamic finance industry.

An Israeli lawyer working in London suggests that cooperation between Israelis and Palestinians could be helped if Israeli banks began offering Islamic finance or even a sukuk.

Pakistan sovereign sukuk

Pakistan is planning its first rupee-denominated sovereign sukuk in September. It joins several other 'firsts' for sovereign sukuk. Indonesia is in the process of launching its first sovereign sukuk for just over $500 million in August and Hong Kong's Airport Authority may launch its first sukuk, the first from a government entity in Hong Kong.

Sovereign sukuk from new places

Employees of Kuwait Finance House recently travelled to Spain to share their knowledge about Islamic banking. There is little Islamic banking in Europe outside of the U.K. although countries like Sweden and France have begun to explore how to develop an Islamic financial industry. The German region of Saxony-Anhalt became the first Western government to issue a sukuk when it issued one for € 100 million in 2004.

Indonesia set the total issue amount of its Rupiah-denominated sukuk at IDR 5 trillion ($538 million). Hong Kong expects to resolve the taxation issues that prevent sukuk in two or three months. Under current tax law, the transfer of assets between the issuer and the SPV would be taxed twice, once when they are purchased by the SPV and again when they are resold to the issuer upon maturity. Initially, the tax changes would be done on a case-by case basis. It could pave the way for the first sukuk, from the Airport Authority, as early as October.

Gulf African Bank, which recently began operating in Kenya, may expand into Uganda and Tanzania, in addition to further expansion within Kenya.

Hong Kong wants to attract Islamic finance; Can hedge funds be Shari'ah complaint?

The CEO of Hong Kong's Securities & Futures Commission, Martin Wheatley, continued the drive to attract Shari'ah-compliant finance to the city-state in a speech today (the speech is available as a pdf). In the speech, Mr. Wheatley noted that the Hong Kong exchange presents a way for investors to "capture the investment opportunities in an emerging market [China], while enjoying the services and investor protection of a developed market". Mainland Chinese firms account for only 19% of the total listings on the Hong Kong exchange, but for 57% of total market capitalization and 70% of total volume. There are already tracking funds for the Dow Jones Islamic Market Hong Kong/China Titans Index as well as a large Malaysian sukuk (one of the Khazanah exchangeable sukuk) and the prospect for a sovereign sukuk from the Airport Authority.

U.K.-based think tank Chatham House released a survey about the GCC's development as a global financial center, including a brief discussion of the Islamic finance industry there. The report (available as a PDF) notes that "the subjective element can also create long delays and uncertainty [so a] number of Islamic investors are not fully tapped into or committed to this market [because they are] unsure what products really are Sharia-compliant". However, "broadly speaking, Sharia scholars are now in agreement on product design and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is taking some steps in the direction of harmonization. This should help create greater trust and clarity among ordinary potential clients, generate more demand and help the industry to expand more widely."

CPI Financial has commentary by Bill Gibbon, a lawyer at Voison, and Trevor Norman of Volaw Trust & Corporate Services, on the Shari'ah-compliance of hedge funds and ways in which some funds have adapted some Islamic finance products to replicate short sales and margin. What is not covered is whether a hedge fund, which they define as ‘a fund that uses derivatives, leverage, shorting, margin trading and option techniques to achieve its absolute return investment goals’ is in its whole, Shari'ah-compliant. Instead, they focus on the component transactions that run into problems with Shari'ah scholars.

Islamic finance in the GCC has a concentration of government ownership larger than would generally be predicted, according to a recent Moody's report on Islamic finance.

Qatar Islamic Bank plans to launch its own takaful provider. A number of takaful companies are sprouting up around the GCC following the success of Islamic finance in the region.

The first publicly-listed Shari'ah-compliant REIT will soon be available in Singapore. The REIT will be converted from a conventional REIT with a large stake in the management company being taken by the National Bank of Australia. The debt currently owed by the REIT, the Cambridge Industrial Trust, will be converted in Shari'ah-compliant financing.

Islamic finance needs tighter regulation to avoid future problems

Islamic finance, driven by economic growth in the GCC and Asia as well as high oil prices, still faces potential pitfalls from lack of product diversification and a lack of clearly understood regulatory treatment. The Dubai Financial Services Authority (DFSA) also recently warned that Islamic finance needs tighter standards to avoid some of the problems affecting conventional financial markets.

A Malaysian retakaful provider, MNRB Retakaful, plans further expansion into other regions including the GCC and South Africa. Shari'ah-compliant insurance and reinsurance is currently underdeveloped but predicted to see growth at a rate close to the Islamic finance industry as a whole.

HSBC plans to issue sukuk in Turkey once the regulatory & legal environment becomes accomodative.

Islamic finance in the West: Can it survive and thrive?

Emirates 24/7 has an open article about whether Islamic finance will succeed in the West. There are some factors that indicate high potential for Islamic finance to succeed, while other factors that could limit the industry's growth in the West. On the positive side, Islamic finance has many similarities with socially responsible investing. The socially responsible industry in the West has grown rapidly and there are now over $1 trillion in assets under management that go through at least one ethical screen. Because Islamic finance shares many of the socially responsible screens, there is great potential to use the same techniques used by Islamic finance to broaden socially responsible investing to other areas of finance. On the negative side, the Muslim population in the West is relatively small compared with other areas like Malaysia and the GCC, so there is a limited base of consumers who would be willing to use Islamic financial products, even if they are more expensive initially. There are also some significant legal, regulatory and tax changes required to put Islamic finance on a level playing field with conventional finance that may not necessarily be made. On balance, positive regulatory support reported by some within Islamic finance and the strong interest in ethically-based finance support the potential for Islamic finance, in my opinion.

Dr. Malik Muhammad Al-Awan, director at Furqan Research, belives Islamic banking in Malaysia should focus on developing innovative new products to support and accelerate its growth. The growth in Islamic finance should continue because of high commodity prices creates greater liquidity in and demand for Islamic finance products.

Takaful premiums have grown rapidly in the last year, although its size and development continues to lag the Islamic finance industry as a whole. Last year, total takaful premiums were $2 billion and are expected it increase to $7 billion in 2015, an annual growth rate of 17% per year. The total assets of takaful providers in Malaysia are $2.5 billion, 6.8% of the total assets of the insurance and takaful industry in the country. Globally, there are now over 120 takaful providers. Many of these providers are investing assets in sukuk, potentially contributing to the excess supply (and buy-and-hold mentality) which has contributed to slowness in the secondary market for sukuk .

Euromoney has an article on opinions of fund managers about offering Shari'ah-compliant versions of their funds to attract institutional and high-net worth money from the GCC region. FinanceAsia.com has an article about how Islamic finance is finding ways to replicate more complex financial structures in sukuk.

JBIC financing, Tamweel into Egypt

Japan Bank for International Cooperation (JBIC) provided its first Shari'ah-compliant financing. The project it is cofinancing is a power and water desalination plant in Qatar, 80km from Doha, which costs $3.9 billion, of which JBIC will provide financing for $1.5 billion.

Tamweel, the UAE-based Shari'ah-compliant home finance company, began operations in Egypt. The Islamic finance market in Egypt, where some of the first Islamic finance companies emerged, has been relatively less successful than many other MENA countries, particularly those in the GCC like the UAE.

Exchange Traded Commodity (ETC) funds, IFQ, Arcapita, Tamweel and CBB Sukuk Al Salam

Some of the first Shari'ah-compliant Exchange Traded Commodity (ETC) were launched by ETF Securities with ETCs for Gold, Silver, Palladium, Platinum Silver and Precious Metal Basket. They are trading on five exchanges in Europe.

The Islamic Finance Qualification from the Securities & Investment Institute will soon be available in Singapore through Praesidium PTE.

Shari'ah-compliant investment firm Arcapita reported higher profits in fiscal 2008 nearly twice the profits in 2007.

Tamweel, a Shari'ah-compliant mortgage lender in the UAE, Egypt and Saudi Arabia sold $300 million of sukuk to finance the expansion outside of the UAE. The 87th issue of the Central Bank of Bahrain short-term 90-day sukuk was oversubscribed by many times, a common occurrence for some of the few short-term sukuk available. The Sukuk Al Salam sukuk issues have been 6 million Bahraini Dinar (about $17 million), just sufficient to replace maturing sukuk according to the Central Bank of Bahrain (pdf, page 10).

Transparency through publicly available fatawa

Syed Farook, a lecturer in Islamic finance at BIBF in Bahrain, wrote an article on CPIFinancial.net about the prospects for providing greater transparency in the development of fiqh by providing publicly available fatawa that will allow junior Shari'ah scholars to view senior Shari'ah scholars' fatawa and hopefully reduce the number of senior Shari'ah scholars who sit on more than twenty Shari'ah boards (currently six).

Bank Negara Malaysia governor Dr. Zeti Akhtar Aziz, speaking at the launch of a training seminar on Islamic finance commented on the progress Malaysia is making to become a global hub in Islamic finance, "Due to wide ranging liberalisation measures, we have seen the entry of new foreign Islamic financial groups into our financial system and increased foreign interest in domestic Islamic financial institutions". The Malaysian Islamic finance market, although one of the most developed in the world, received some skepticism from foreign Islamic finance institutions, particularly in sukuk, where Shari'ah regulations are viewed as more liberal than those in the GCC.

Des Moines, Iowa-based Principal Global Investors is the latest Western company to enter the Islamic finance market and will do so in Malaysia in partnership with CIMB Islamic.

Takaful House, a Dubai-based takaful company listed on the Dubai Financial Market, the domestic stock exchange for companies in the UAE. The IPO offering price was AED 1 per share.

The Islamic Bank of Thailand (IBT) chairman wants to see non-Muslims use the bank, in addition to Muslims, who make up 6 million (just under 10%) of the population. There may also be plans in the future for the bank to become listed on the Thai Stock Exchange. IBT is one of the smallest state-owned banks in Thailand and has a high level of non-performing loans, at 16%.

The slowdown in Western financial markets coupled with the rise in Middle Eastern finance, including Islamic finance, has led to Western law firms, particularly those with a focus on the financial markets, opening branch offices throughout the GCC in Dubai, Abu Dhabi, Bahrain, Kuwait and Saudi Arabia.

IBB moves into continental Europe, Islamic wealth management

The Islamic Bank of Britain plans to open branches in Sweden and Germany. The branch in Sweden would be the country's first Islamic bank, although not the first 'interest-free' one. JAK Members Bank, a co-operative that began operating in 1970 and received a banking license in 1997, provides interest-free credit to its members with administrative costs paid for by annual membership fees. Currently the bank has 53,000 members and the total savings of € 97 million and borrowings of € 86 million as of 2008.

Douglas Johnson, CEO of Calyx Financial, discussed the need for more strategic work, particularly involving research into new products and approaches for Islamic wealth management to become more widely available. An edited version of his speech, given at the World Islamic Funds Conference in Dubai, is available online.

The Financial Times describes Islamic bank Gulf Finance House.

A story on the first Shari'ah-compliant car insurance company in the U.K., Salaam Insurance, includes a concise description of how takaful works.

The Islamic Development Bank has begun a sukuk issuance in Malaysia to fund the IsDB's work in the country.

India could emerge as a large market for Islamic finance if regulations are changed to allow Islamic banking. The Muslim population of India is estimated at 150 million. Islamic banking has been successful in Thailand, particularly in the southern region, which has a significant Muslim population. The Islamic Bank of Thailand is the country's main bank.

Malta's Financial Services Authority ended its consultation period on Islamic financial products and plans to issue guidelines for sukuk by the end of 2008 and for takaful in early 2009.

Leaving the Institute of Halal Investing

As of August 1, 2008, I have left my position as executive director of the Institute of Halal Investing for personal reasons. I will continue my work researching Islamic finance, as well as continue this blog. I have also established a new website for my continuing work, SharingRisk.org.