Saturday, January 03, 2009

Non-Muslims not sought out by GCC Islamic banks; Tier II capital sukuk issued; More data on Dubai's real estate market collapse

Most non-Muslims in the GCC do not seek out Islamic banking products at the retail level, instead opting for conventional banking products. However, some seek out Islamic banking products because, in the words of one Malaysian expat: "Malaysians have a sense of what Islamic banking is about. Maybe the returns are not that high, but it feels more secure and safe." In other cases, non-Muslims receive financing from an Islamic bank because that is what is available, for example, at a car dealership. Jawad Ali, a partner at King & Spalding, believes that retail Islamic banking products are not "geared towards retail customers" and receive more attention from high net worth clients who care not only about the cost, but are interested in how the financial product "works" to ensure it is Shari'ah-compliant. There is also very little need for Islamic banks to attract non-Muslim clients because the demand from Muslims has not yet been saturated.

Saudi Hollandi Bank issued a SAR 775 million ($207 million) sukuk as the first tranche of SAR 1.5 billion in Tier II capital. Tier II capital includes debt that is subordinated to the bank's depositors. The sukuk is callable after 5 years and returns Saudi Interbank Offer Rate (SIBOR) plus 200 basis points and is a mudaraba sukuk. This sukuk is an example of one in which additional transparency from the bank and the Shari'ah board about its Shari'ah-compliance would be helpful. It appears to be the equivalent of a floating rate bond benchmarked to an interest rate. It would be useful to see how the return on the investment is related to the underlying profits of the bank, rather than just based on a market-derived interest rate disconnected from the bank's operations.

AIM-listed Tejoori, a Shari'ah-compliant investment trust, released preliminary earnings for 2008 that showed a significant loss and very little remaining cash following a full change in their board in April 2008. The preliminary report for 2008 also mentioned that the new board would reduce its "high exposure to the Dubai real estate market".

I normally do not concentrate on individual company's results (and do not make any recommendations of any investments), but this company has investments primarily concentrated in real estate in Dubai and its difficulties, I believe, are indicative of a collapsing bubble in real estate in parts of the GCC, most noticeably in Dubai. The largest Tejoori investment is in the Lagoons, a project in Dubai managed by Omniyat Properties. Another company working on the Lagoons recently announced layoffs from staff working on other projects. The article described the real estate market in Dubai: "In just two months, Dubai has moved from being a safe haven to a market where virtually no major project is left unaffected by the credit crunch". The difficulties in the real estate market in Dubai may not have anything to do with Islamic finance, but as I have said before in this blog, Islamic finance is affected by global economic conditions and investment companies and banks in the GCC with a lot of exposure to the real estate market may see the greatest declines as the credit crisis sweeps across the globe. This is merely one example.

University Bancorp, the parent company of University Islamic Financial Corp, decided to voluntarily delist itself from the NASDAQ to save money on legal and accounting costs associated with being a publicly traded company.

1 comment:

sanjay said...

Dubai is searching new ways of solution of Global Crisis.
which is solved over problem then living comfortable life.