IFSB summit, Moody's weighs in on sukuk form versus substance, Sheikh DeLorenzo on Islamic home finance in the US

Moody's released a report looking at the future of the sukuk market with a suggestion that investors look not just at the form of the structure, but the substance as well. Although many sukuk use standard forms (as approved by AAOIFI), they can vary significantly across different individual sukuk using the same form. This is particularly important, Moody's notes, because "The assets in the structure are commonly there for Shari'ah compliance purposes only, and ultimately have no bearing on the risk or performance of the sukuk investments, particularly in a distress situation." This is an important point because it raises questions about whether the sukuk market has focused too much on structuring transactions to receive Shari'ah-compliance and too little on creating a different asset class.

There is an interesting opinion article written by Shari'ah scholar Sheikh Yusuf DeLorenzo describing the benefits from the Islamic home finance product in the US for both Muslims and non-Muslims. These benefits are due to the participatory structure of many forms of Islamic home finance in the US and the non-recourse nature of the loans. The combination of these two factors, according to Sheikh DeLorenzo, leads to a lower rate of foreclosure following delinquency because the Islamic finance companies can only take the house in a foreclosure and if this value is below the outstanding amount owed (the mortgage is 'under water'), the bank faces a loss. Although this is the case in many states for all mortgages, it is not always the case in conventional mortgages.

The IFSB says that Islamic finance regulators need to focus on the entire system instead of having a narrow focus on individual institutions to prevent a repeat of the current crisis facing the conventional financial industry in the Islamic finance industry. I think this is very important because there are fewer safeguards on the industry to prevent contagion from spreading from one troubled institution to healthy institutions, like inter-bank money market and a 'lender of last resort'. The president of the Islamic Development Bank Dr. Ahmad Mohamed Ali said at the IFSB summit that the industry still has a significant amount of innovation needed to continue its rapid growth. The head of the IFSB was also quoted speaking to the Straits Times: "It all comes down to risk management. You've to have proper risk management and proper governance and practices so that an institution doesn't fall down".

Bank Negara deputy governor is quoted speaking about two critical issues that the Islamic finance industry needs to deal with to become more resilient in the future:

"There are a lot of issues that need to be addressed, for example the link to economic activity also has got its shortcomings because they are too focused on real estate for example. The absence of a money market that is also a source of risk."

Other News

• France's new laws that put Islamic finance on equal footing with conventional financial institutions for taxes has attracted the first institution, the Islamic Finance Advisory and Assurance Services, a UK-based consultancy.
  
• There is an article in Foreign Policy magazine that I may have already linked to about Shari'ah scholars and the Islamic finance industry.
  
• The Islamic Development Bank is planning a $500 million sukuk in the first half of 2009. The proceeds will fund the IsDB's activities in member countries this year. This is the bank's first issue in a five-year bond program that aims to raise $1 billion per year. The Monetary Authority of Singapore expects $1.3 billion in sovereign sukuk issues from Singapore, Malaysia and Indonesia in the first half of 2009. The Monetary Authority of Singapore also unveiled measures to attract Islamic finance to the city-state including legal and regulatory changes that allow Singaporean dollar sukuk to be treated identically with conventional government bonds.
  
• Dubai Islamic Bank is going to buy back $200 million of its $750 million outstanding sukuk in a tender offer at between 86% and 90% of par. The Shari'ah-compliance of debt buybacks was not raised in the article. The sukuk last traded March 13 on the London Stock Exchange at 82. The buy back is therefore being offered between a 5% to 10% premium.
  
• RHB Islamic, the Malaysian bank, is expanding its business to Singapore and has applied for a full banking license in the country.
  
• Gatehouse Bank in the UK is setting up a Shari'ah-compiant investment strategy focused on the water industry with Sustainable Asset Management (SAM).
  
• Islamic mortage companies Amlak and Tamweel will receive "major government support" due to their losses caused by the collapsing property markets, increased funding costs and halt in financing.
  
• Fattah Finance, a Shari'ah-compliant brokerage subsidiary of Almaty Financial Centre, is the first Islamic finance company to open in Kazakhstan following the changes in law to allow Islamic finance. Mauritius' first Islamic bank, HSBC Mauritius Amanah, opened today.
  
• A Shari'ah manager at BMB Islamic provides an overview of the basic principles of Isalmic finance.