Tuesday, March 17, 2009

Interbank markets & rates; sukuk preference strongly towards ijara

During the economic crisis, sukuk issuers and investors have shown a preference for ijara sukuk over mudaraba and musharaka because it creates a more stable, asset-backed (secured) stream of cash flows. More than 45% of all sukuk issued in 2008 were ijara sukuk and mudaraba and musharaka sukuk issuance fell by 83% and 68% respectively.

The development of an Islamic alternative to LIBOR could be potentially destabilizing if participants exploit arbitrage opportunities between conventional and Islamic markets according to a Shari'ah scholar. There are two things that stand out to me immediately. First, any IsLIBOR (Islamic interbank offer rate) would function in a similar way to any other LIBOR alternative (KLIBOR, SIBOR, KIBOR) in that it is similar to LIBOR with additional country-specific risk of the market in which the banks operate. Second, unless the Islamic finance industry offers a majority of financing in a way substantively different from the conventional products in the same regions, the IsLIBOR should mirror the interest rate benchmark for an overlapping region.

The Malaysian palm oil Commodity Murabaha House could be a preface to a global Islamic interbank market that is being planned by the Islamic Development Bank. The planned initiative, the International Islamic Inter-Bank (IIIB) market is expected to have initial capital of $10 billion to facilitate inter-bank liquidity management and serve as a 'lender-of-last-resort'.

A Scottish banker says the country could benefit if an Islamic finance house were established by attracting money from the Middle East.

The Investment Dar continues to mull asset sales including stakes in Aston Martin and Boubyan bank

Indonesia's government has been warned that it is a bad time to issue its first global retail sukuk.

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