Tuesday, May 05, 2009

FT special report, Tamweel and Amlak, and other news

Financial Times Special Report on Islamic Finance

One article focuses on the Shari'ah scholars and includes details about the dissent among the Shari'ah scholar community about Sheikh Usmani's criticism of some sukuk forms. I have been generally supportive of his criticism as an example of how the Shari'ah scholars are using their influence to shape the future of the industry, but the focus on strict interpretation also limits innovation in the industry. The issues of standardization and workload on the Shari'ah scholars (as well as the shortage of 'brand name' scholars) has hampered the industry's growth by focusing scholars efforts on certifying plain vanilla Islamic financial products instead of allowing them to focus on more controversial products and help shape the dialogue about the future direction of the industry.

Another article takes up the breather given to scholars caused by the global credit crisis to debate and deliberate on the industry's future. This is a vital topic for an industry that has grown so rapidly in recent years and will ultimately help the industry's progress. One interesting tidbit from the article is that the industry appears near to seeing an alternative to commodity murabaha for short-term liquidity management. Another article focuses on this issue and on standardization.

The sukuk market could be set for a resurgence as global credit conditions are under less stress and one of the principal sources of liquidity--oil revenues--should rebound a bit with the rise of oil prices from lows around $30 to $50. The sukuk market, however, will not be the same and most of the issuance will probably be local currency ijara deals because the recent AAOIFI ruling (Feb. 2008) cast doubt on the Shari'ah-compliance of many mudaraba and musharaka sukuk.

Islamic banks are not necessarily immune from the spill-over effects of the credit crisis into an economic crisis, especially those with high exposure to real estate as the property markets in the Gulf have tumbled. This article also cites a Nomura study of Islamic banks in Turkey during the crisis in 2001 and find no significant advantage. Further, the 'profit equalization reserves' set aside by Islamic banks may not be sufficient to offset losses and could cause Islamic bank deposits to 'break the buck'. I highlighted this potential problem several months bank in Business Islamica and it is a serious problem that may require government intervention if property markets continue to deteriorate.

Two other articles discuss Islamic finance in Asia and the West. One talks of the goal of Malaysia to become an Asian hub for Islamic finance, the other focuses on France and the US as potential challengers to the UK's lead in accommodating Islamic finance following the delay in a UK sovereign sukuk.

The special report concludes with a column by HSBC Amanah's chief executive Mukhtar Hussain.

Tamweel, Amlak and liquidity issues in Islamic finance

Tamweel reported profits for 2008, although it had a loss in the fourth quarter due to "a sharp rise in funding costs, significantly lower business origination levels which affected fee income, substantially lower income from property sales [...[ and higher prudential provisioning on the home finance portfolio". It also excludes a significant amount which was off balance sheet following securitization. The results demonstrate the difficulties caused by the economic crisis and property market crash that affects Islamic and conventional financial institutions alike. Amlak Finance, the Islamic mortgage company in Dubai that will be likely merged with Tamweel is also seeing a rise in delinquencies. The first-hand crisis in subprime mortgages and derivatives has led to a liquidity crunch hitting parts of the Islamic finance industry as a whole.

Other News

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