Nakheel may try to tender its sukuk, interview with Anouar Hassoune, opinion piece by Rushdi Siddiqui

Nakheel may make a tender offer for its $3.52 billion sukuk that comes due in December at a discount. However, many investors are likely to reject the tender offer in the hope of receiving full repayment at maturity, in part because Nakheel may receive government support from the Dubai government if it is unable to make payment on its own, as Phillip Lotter, a vice president at Moody's Investors Services said June 10. The prices in the secondary market fell to 63.5 cents on the dollar before rebounding to 87 cents yesterday. I wrote a summary of the Nakheel sukuk on my Zawya blog back in May.

Emirates Business 24/7 has a great interview with Anouar Hassoune, the Vice President and Senior Credit Officer at Moody's Investors Service about the Islamic finance, in particular, the resiliency of the industry at a time when several stand-alone Islamic investment banks have defaulted on their obligations.

Rushdi Siddiqui, head of Islamic finance for Thomson Reuters has an opinion piece saying that Islamic financial institutions should undergo stress tests like the major banks in the U.S. did earlier this year to increase confidence in the industry.

European banks, including a German bank but no French banks, have expressed interest in financing and running the $3 billion IPO planned for Istikhlaf, the planned $10 billion mega-Islamic bank. Sheikh Saleh Kamel and Adnan Yousef who have been the driving force for the bank's launch are not going to take management roles in the banks following the IPO.

Other News

• The Islamic Development Bank is planning to issue the first $500 million sukuk over the next few weeks as part of its planned 5-year, $6 billion sukuk offering.
  
• Indonesia's exchange-backed bond pricing agency will begin publishing daily prices of bonds and sukuk to facilitate greater liquidity in the secondary markets and help issuers price new issues.
  
• The Dubai government is providing AED 5 billion ($1.36 billion) in financing to merge two banks together into the Emirates Development Bank. However, despite the expectation that Amlak and Tamweel, the troubled Islamic mortgage lenders, would be included in the new entity they were not part of the announced plan.
  
• The flood of new sovereign sukuk issues continues as the Ras Al Khaimah Investment Authority (RAKIA) is planning to issue a $500 million sukuk in July.
  
• A Bahraini Islamic investment bank is financing construction of a $50 million mall in the country.
  
• Gulf news has two articles about Islamic banking and in particular the use of Islamic financial institutions by non-Muslims in the Gulf.
  

Islamic finance development in the US, Islamic debt trading, GCC wants to develop local debt markets

New global regulations on financial markets in the wake of the financial crisis--particularly those surrounding the securitization markets--could adversely affect the Islamic financial insdustry. In other U.S. news, Russell Investments is launching its own Islamic indexes with its fund partner Jadwa Investments.

U.S. real estate financing company W.P. Carey believes there is a 50% chance it will be able to launch an Islamic fund to purchase real estate. The idea dates back to 1997 when it planned to launch a Shari'ah-compliant fund, but abandoned the launch because of lack of attractive investments. The initial fund was focused on U.S. based property but the new one will probably have an international focus. The company specializes in sale and lease-back transactions which make it an attractive type of business in which to use Islamic finance.

A lawyer, Megat Hzaini Hassan, writes for Reuters about the permissibility of diifferent types of debt sales in the context of securitization of portfolios of different types of Islamic financial products. Apart from Malaysia, where debt sales (bay al'dayn) is more likely to be viewed as Shari'ah-compliant, the general sense is that if the majority of the assets being securitized are ijara (rather than murabaha), then debt re-sale is permissible because the ijara provides the financier with ownership of the underlying assets, rather than just a future stream of cash flows.

The recent wave of sovereign bond and sukuk issues in the GCC are part of a strategy to create a yield curve, encourage the development of more liquid secondary markets and increase corporate issuance following a steep drop-off in new issues as a result of the credit crisis. Out of the $750 million CBB sukuk 55% of the investors were from the region and there was enough demand for the entire issue to be subscribed by GCC-based investors.

Other News

• The Central Bank of Bahrain issued another of its regular sukuk al-ijara (No. 46) that have a return of 1.25% and mature in 182 days. It was oversubscribed 200%.
  
• The University of Leicester is holding a conference to look at whether the Islamic financial industry is more robust than the conventional financial industry as well to examine lessons from the crisis for Islamic finance.
  
• Africa Reinsurance Corp is planning a new takaful business. AfricaRe was founded in 1976 by the African Development Bank.
  The Reims Management School in France is planning to offer an Islamic Banking & Finance course as part of its Masters in Management program.
  
• Shariah Fortune, a relatively new think tank based in Dubai, issued a report about Islamic finance gaining mommentum as well as the dangers from lack of standardization in the quality of Islamic finance.
  

New monthly newsletter from Opalesque on Islamic finance

The editors of a few groups on LinkedIn and the Islamic Finance Resources blog are now writing a free monthly newsletter for Opalesque. The newsletter's team is: described:

"With this in mind, OIFI has been jointly developed by Opalesque and Amsar Partners, an independent Islamic finance consultancy, which brings together a multi-disciplinary team that includes Bernardo Vizcaino CAIA, Managing Director; Nikan Firoozye Ph.D., Director of Shariah Structuring; and Khalil Jarrar J.D., Director of Jurisprudence. They combine highly regarded financial, academic and research backgrounds with a global industry network."

The first issue is available now and it is a great new addition to the Islamic finance industry.

Tawarruq, commodity murabaha, corporate governance, Shari'ah scholar licensing

Zawya has a good article describing the potential impact of the International Council of Fiqh Academy of the OIC on organized and reverse tawarruq which condemns the practice as a 'deception'. I discussed the rationale for the decision on my Zawya blog back in early May. The primary issue that is raised in the new article is whether the condemnation of organized tawarruq applies to commodity murabaha, which is akin to the permissible classical tawarruq. If commodity murabaha were prohibited as well, there would be a significant impact on the industry because, at least in the short run, commodity murabaha can fairly easily replace tawarruq. If commodity murabaha is also prohibited, there could be signficant turnmoil in the industry despite the non-binding nature of the OIC Fiqh Academy ruling. One interesting note from the article was a quote indirectly attributed to Sh. Mohamed Elgari. "In Bahrain in May 2009, the senior Saudi Shariah advisory, Mohamed Elgari, appealed for a more scientific approach to issuing resolutions by Shariah scholars and organizations relating to Fiqh Al-Muamalat and suggested a rigorous peer review process and market consultation before any resolution is adopted."

Another positive development in the Islamic finance industry besides Sh. Elgari's suggestion for peer review and market consultation of significant fatawa like the one on tawarruq is on corporate governance issues. Specifically, the suggestion by several scholars that the central bank (or another institution independent of the Islamic financial institutions) should be responsible for paying scholars instead of their being compensated by the companies whose products they are supposed to regulate.

Dubai World has hired AlixPartners, a restructuring firm based in New York that recently helped General Motors with its bankruptcy filing. One of the most important issues to deal with is how to pay the $3.52 billion Nakheel sukuk that matures in December. I wrote a summary of the Nakheel sukuk on my Zawya blog.

Although much of the talk about the shortage of Shari'ah scholars abated as the market for Islamic finance and especially sukuk slowed during the last year, there is still a shortage. There is also talk in the article of imposing licensing standards to ensure that all members of any Shari'ah boards are adequately qualified which should paradoxically increase the number of Shari'ah scholars because it will provide a way for lesser known but equally qualified Shari'ah scholars to take seats on boards that would otherwise be reserved for the best known scholars who sit on dozens of Shari'ah boards each.

Other News

• Saudi Arabia continues to study how to create a Shari'ah-compliant version of Fannie Mae to improve liquidity in the country's mortgage and property markets to increase home ownership.
  
• Arcapita, the Bahrain- and Atlanta-based Islamic private equity firm is selling Church's Chicken to another private equity group.
  
• Dar al-Istithmar and the Dinar Standard are starting a social responsibility surv ey of Islamic financial companies.
  
• The new sukuk markets in the Saudi Arabian Tadawul exchange may have attracted another new issuer following shareholder approval for a sukuk issue by Saudi developer firm Jabal Omar.
  
• Russian firm VTB Capital is opening a Dubai office and working with Kuwait Finnance House to issue sukuk on behalf of three Russian companies worth between $100 and $300 million each.
  
• Australia's state of Victoria is working on a fact finding mission to learn more about Islamic finance.
  
• There is an article describing the Islamic financial industry in MENAfn.
  
• GCC Islamic funds are outperforming their benchmarks according to research by Emirates Business 24/7.
  

The Economist on the mega-Islamic bank, regulatory changes to accomodate Islamic finance being abused in the UK, lessons from the crisis

The Economist has an article about the launch of a mega-Islamic bank called Istikhlaf that the founders Sheikh Saleh Kamel and Adnan Yousif envisage to be an "Islamic Goldman Sachs".

The rule introduced to avoid double taxation in Islamic home finance purchases in the UK is being abused by high-net worth (conventional mortgage) clients. This should serve as a reminder that regulations introduced to facilitate Islamic finance should be carefully designed so that they are not abused in other settings to avoid taxation.

Islamic finance: can it provide lessons for conventional finance to avoid future crashes and can Islamic finance learn things from the crisis? The head of Islamic finance proposes a way for central banks to create money (monetization) in a way that is Shari'ah-compliant, in a similar thought process to an article I wrote in 2007 for Clear Profit on GDP-linked bonds ("Debt alternative for Islamic states should be explored," Clear Profit, Issue 44, May 27, 2007, page 5).

In an interview with Emirates Business 24/7, Rushdi Siddiqui, the head of Islamic finance for Thomson Reuters, discusses the lessons that Islamic finance can provide the conventional financial industry as well as the direction it is likely to take in the next decade.

Another Malaysian Shari'ah scholar, Engku Rabiah Adawiah Engku Ali, weighs in on the debate over tawarruq saying they are premissible but "The fact is more on how it's being done rather than what it is. It is more on whether the asset is available, whether it can be delivered".

Other News

• The London Stock Exchange saw its first sukuk listing of 2009 with the listing of the Central Bank of Bahrain sukuk which was increased from $500 million to $750 million after $4 billion in subscriptions were received.
  
• Al Salam Bank-Bahrain which recently bought a property in London's financial district is focused on finding private equity opportunities in Europe.
  
• Brunei issued another short-term sukuk al-ijara, its 32nd, for B$20 million ($13.7 million) with a 91 day maturity and a return of 0.30%.
  
• The FT reports that the new bond and sukuk market in Tadawul has only four sukuk available so far for trading, 3 from the Saudi Arabia Basic Industries Corp (SABIC) and one from the Saudi Electric Corporation.
  
• HSBC Amanah credits the $650 million Indonesian sovereign sukuk for sparing a rally in new issuance of sukuk after the market ground to a halt in March 2009.
  
• Islamic banking continues to develop slowly in India as the Minister for State for Minority & Corporate Affairs met with the head of the National Committee on Islamic Banking. The development of the industry continues at nearly the same slow pace in another BRIC country, Russia.
  

Sukuk defaults attracting wider attention

In addition to an article about sukuk defaults in the Wall Street Journal, there are a number of pieces of news about sukuk. The Wall Street Journal article focuses on the defaults and provides some updates about the bankruptcy case that were not available when I wrote an article for Islamic Business & Finance about the bankruptcy in March. Where the case was left when I wrote the article that an announcement was expected on whether the sale of the overriding royalty interest (ORRI) in the East Cameron fields would be judged a true sale which would have protected sukukholders' interests from other creditors' claims. East Cameron claimed that the ORRI was not actually transferred to the SPV, Louisiana Offshore Holdings, and thus the loan was just secured by the ORRI.

As I mentioned in the article, a law professor I spoke to familiar with US bankruptcy laws and its effect on securitizations (which involve similar true sales), absent unusual circumstances, the sale would be judged a true sale. So far the judge has agreed with sukukholders' claims that the transfer of the ORRI to the SPV was in fact a 'true sale' saying that "holders invested in the sukuk certificates in reliance of the characterization of the transfer of the royalty interest as a true sale". If this ruling is finalized, the prospects for sukukholders will be strengthened and, more importantly for the industry, there will be a case history in US courts that supports the legal basis for many types of sukuk that rely on sales of assets to SPVs. With respect to sukukholders who will probably end up losing money they invested in the sukuk, the East Cameron Bankruptcy could provide impetus for new issues of sukuk by US-based companies shut out of the conventional financial markets in the wake of the credit crisis.

Reuters blogger Felix Salmon adds his take to the sukuk default story from the WSJ with some interesting comments about the difference between sukuk and conventional bonds:

"The first sukuk (Islamic bond) defaults have arrived, and no one has a clue how they’re going to shake out. Which might actually be a feature rather than a bug, going forwards.

Bondholders often have a large amount of complacency derived from the fact that an enormous amount of equity needs to be wiped out before they take any hit at all. And that complacency does the system no favors in the long term. If capital structures get muddied a little, and debt takes on more equity-like uncertainty — as seems to be the case in the sukuk market — then maybe investors will be more assiduous about examining underlying risks, rather than relying on capital structures to protect them."

Another sukuk, the Golden Belt 1 sukuk issued by the troubled Saudi firm Saad Group, will provide another test of how sukuk function in a reorganization as the company restructures its debts.

In addition to the ongoing sukuk default and restructuring, the issuance of new sukuk fell during the year to June 14 compared to the same period in 2008. The number of issued fell 21.5% from 88 to 69 while the total value of new sukuk issues fell from $9.35 billion to $8.46 billion, a decline of 9.4%. There is some good news in this release in that the average sukuk size increased year-over-year. One of the developments in 2008 was that the average size of each sukuk declined compared with previous years, most likely because of an absence of large sukuk like the $3.52 billion Nakheel sukuk which was issued in 2006.

Other News

• Following the launch of a bond and sukuk markeet on Tadawul, Shuaa Capital said it may structure and sell sukuk for Saudi firms.
  
• After reports came out that The Investment Dar had failed to block the National Bank of Kuwait's acquisition of a 19.2 percent stake in Islamic bank Boubyan Bank, it now appears that the sale has been temporarily blocked.
  
• Indonesia is increasing its planned sukuk issuance for 2009, although the spokesman from the Ministry of Finance declined to provide a number.
  
• Fawad Butt, the CEO of Chicago-based Islamic finance advisory firm working to launch an Islamic community bank in Chicago, is speaking at the World Affairs Council of Pittsburgh tomorrow.
  
• Following a difficult year for Islamic finance, Bahrain-based Seera Bank is optimistic about the industry's prospects following its receipt of an award for its acquisition of UK water treatment specialty company BWA.
  

Weekend Update

• Islamic bank PT Bank Rakyat Indonesia Syariah (BRI Syariah) expects its assets to double to 3 trillion rupiah ($297.6 million). In 2008, the share of assets held by Islamic banks was 2% of total assets which is expected to increase to 3 percent in 2009.
  
• Following legal changes earlier this year, Kazakhstan expects to see three or four Islamic banks open this year according to central bank head Grigory Marchenko.
  
• Bahrain-based Gulf Finance House plans to continue its planned investments in North Africa despite the economic crisis.
  
• Following supportive comments from the Australian government, National Australian Bank plans to offer Islamic financial products on a trial basis.
  
• Al Salam Bank-Bahrain is investing in a building in London's financial district.
  

Update on Islamic banking applications in Canada; more on Islamic finance 'immunity' to the economic crisis

There is a very detailed article about the hold-up of Islamic banking license applications in Canada which includes details that the Department of Finance has returned applications to the regulator responsible for approving them "for normal processing".

An interesting article describes the ways in which the Islamic finance industry has reacted in the wake of the credit crisis but contains a few points which are not entirely true and again raise the issue of whether Islamic finance is 'immune' from financial crisis. I have discussed at length (here, here, here, and here, for example) several cases in which this claimed immunity from crisis is not true and that Islamic financial institutions face challenges that are in some ways similar to those facing conventional financial institutions. One paragraph which cites Rodney Wilson of Durham University attributes to him:

"claims that in the current crisis no Islamic bank has failed, and in contrast to conventional banks, none have needed government funds to save them from collapsing"

The first part of the statement may be true (so far) from if looking strictly at banking institutions, but if the crisis has taught us anything it is that non-bank financial institutions may be more vulnerable than banks. One needs to only look to The Investment Dar, an Islamic investment company based in Kuwait, which recently defaulted on $100 million in sukuk as well as the Saad Group, which are now pricing in a future default according to ING Investment Management, to find counter examples. As for the assertion that Islamic financial institutions are not reliant on government bailouts, the cases of Nakheel, Amlak and Tamweel serve as counter examples.

In my mind, however, the fact that some Islamic banks are having difficulties is not an indictment of the industry in any way. Islamic finance is a business operating in difficult economic times and the whole principal of sharing risks and rewards should lead to some banks failing if they make investments which go sour. Continuing to promote the idea that Islamic finance is somehow 'immune' from the economic crisis does a grave disservice in my opinion to the industry and especially the people who work long hours to move the industry more towards profit-and-loss sharing models.

In other news, the Bahrain $500 million sukuk which was raised to $750 million and priced at 350 basis points over 5-year US Treasuries was 8 times oversubscribed with total subscriptions coming in at a whopping $4 billion for the sukuk. A press release from the Central Bank of Bahrain notes that "This issue reaffirmed the market's appetite to invest Bahrain's debt securities and was well received internationally, with a major portion of subscriptions coming from outside the GCC". This oversubscription probably comes from an unfreezing of global credit markets, the shortage of sovereign sukuk and an underlying latent demand for sukuk that had been suppressed in part because low oil prices put off potential investors in GCC issuers.

Other News

• Nakheel will provide a test case to see how state-affiliated companies manage to roll over their debt including sukuk. Nakheel has $3.52 billion in sukuk that mature in December this year.
  
• The Investment Dar met with investors to update them on restructuring, according to a press release from the company. On June 8, 2009, the sukuk investors passed a resolution stating that "the Certificateholders would in due course like to further consider the potential of asserting priority claims in respect of the Sukuk Assets"
  
• Saudi Electricity, the region's largest utility, plans $1.33 billion in sukuk.
  
• Malaysia is confident it can retain its leading position in the Islamic finance industry according to national news agency Bernama.
  
• Amara Holdings, a Dubai based Islamic investment company will partner with New China Trust to identify Shari'ah-compliant investment opportunities in China. This is one of the first cases where Shari'ah-compliant investents will be made in China.
  

Bahrain sukuk increased to $750 million, pricing at 350 bps over 5-year Treasuries; other news

Bahrain increased the size of its dollar-denominated $500 million sukuk to $750 million and it is expected to be priced at 350 basis points above US Treasuries of similar five-year maturities. The managing director of Dubai-based Algebra Capital which invested in the sukuk was disappointed at the pricing of the sukuk commenting that "It would have been better had they left some juice in there to attract a wider audience". An article describes the impact of the sukuk and also provides a summary of the other developments in the sukuk market including sukuk funds and the CBB recurring sukuk al-salam and al-ijara issuances, which have seen greater oversubscription recently.

Other News

• Australia is considering attracting more Islamic finance to Sydney to recover from the global recession. LM Australia Alif Fund was recently launched. It is an on-shore Islamic real estate fund.
  
• There is an interesting interview with the managing director of State Street's Doha office, Rod Ringrow.
  
• An Indonesia oil company cancelled a (small) planned sukuk issuance in favor of an expanded conventional bond issuance. No reason was provided.
  
• The Saudi exchange Tadawul, is launching a bond and sukuk market.
  
• A study by the Islamic International Ratings Agency (IIRA) found that Islamic banks "face challenges in managing their liquidity in adverse markets" mostly due to holding less liquid assets although most Islamic banks have "adequate liquidity".
  
• Islamic mortgage companies Amlak and Tamweel need a total of AED 18.7 billion including AED 5.7 billion by June 30 to meet their commitments according to an article in Emirates Business 24/7. The problems facing the two institutions are largely caused by a severe asset/liability mismatch following the drying up of liquidity particularly securitizations.
  
• The CBB sukuk al-ijara received a preliminary A rating from Standard & Poor's in line with the country's sovereign rating.
  
• An Islamic finance training program was launched in Wales at the Cardiff University Business School.
  

A Malaysian scholar supports tawarruq, NBK Ijara Fund launched

A Malaysian Shari'ah scholar, Mohammad Akram Laldin, says that tawarruq is permissible, although there "might be an issue when debt creation is very much emphasised rather than the real economic activity". The organized tawarruq, in which a bank organizes a three way transaction where (usually) metals are exchanged to synthesize a loan with deferred repayment including a markup, was recently criticized as a 'deception' in a fatwa from the OIC Fiqh Academy. Malaysia's stock exchange will launch a tawarruq-based program in June based on commodity murabaha. I commented about the OIC Fiqh Academy ruling on my Zawya blog recently.

The National Bank of Kuwait launched a KD40 million ($139 million) ijara fund. Normally this would just receive a cursory mention, but it shows an interesting dynamic in how the Islamic finance industry may be adapting in the wake of the global economic slowdown. NBK's Managing Director of Asset Management, Nabil Maroof descibes what the fund is capitalizing on:

"Ijara transactions have shown that they typically outperform during economic recessions as companies substantially decrease their capital expenditure, preferring to lease their mission critical equipment instead. Lessees also tend to retain equipment for longer periods, offsetting the increased credit losses that result from a typical recession"

If NBK is correct, then the return on this type of asset (a stream of lease payment plus the liquidation value of the assets when the leases expire) are greater during a recession. The initial price of assets may be lower if suppliers are cutting prices to sell their production and the 5 year maturity gives plenty of time for economic markets to require, which would be expected to increase the liquiditation value of the assets. If this occurs it could signal a way that Islamic banks can adapt in future recessions by changing the focus of their investment activity. However, the credit market crisis make it more difficult for Islamic financial institutions to manage these assets. An advisory company that focuses on the secondary leasing market was launched recently.

Other News

• The Financial Times notes that the recent flurry of bond and sukuk issuance in the Gulf could lead to some 'indigestion'.
  
• A blog at The National provides a very concise explanation of mudaraba.
  
• Yemen has changed its banking laws to encourage more Islamic financial institutions to open.
  
• Brunei issued another of its recurring sukuk al-ijara, its 31st.
  
• Malaysian rating agency MARC expects "a subdued outlook for sukuk issuance owing to weaker demand and supply fundamentals".
  
• A speaker at an Islamic finance conference in Turkey says that the country needs to adapt laws to facilitate the country's Islamic financial industry.
  
• An INSEAD report on the Middle East includes a brief discussion of the region's Islamic finance industry.
  
• Emirates Islamic Bank is planning a $300 million rights issue.
  

Islamic finance regulatory risk, US Islamic mortgages, Islamic financial practices and the crisis, IsDB/ADB Infrastructure Fund announced

The Islamic finance industry is at risk from an over exposure to equities and real estate and a lack of regulatory oversight in some jurisdictions may leave Isalmic financial institutions less able to withstand further deterioration in the real estate or equity markets. Reuters quotes Raj Madha an EFG-Hermes banking analyst describing the quasi-debt products used by Islamic finance institutions:

"Quite often you have a lot of mezzanine products so banks have a lot of latitude on whether to report those things under one or the other category [...] It allows for opacity which certainly some banks are able to take advantage of, and at least in principle, it creates the opportunity for not disclosing some losses"

An article in a UAE-based newspaper, The National, provides as good an article about the Islamic home finance market in the US as I have seen recently. The article focuses on Guidance Residential, one of the Islamic finance companies in the US which has financed 6,000 customers home purchases for a combined value of $1.5 billion. Although a tiny slice compared to the overall housing market in the US, the Islamic mortgages have experienced far lower rates of delinquincy, approximately half of the nationwide rate of 7.8%, and the company has only served five foreclosure notices.

The Islamic Development Bank and the Asian Development Bank agreed to set up the first Asian multi-country Islamic infrastructure fund. It is the Asian Development Bank's first foray into the Islamic finance market. Providing for infrastructure is a challenge globally and Asia is no exception and this could provide a model for other Islamic infrastructure projects to meet the needs of many countries not only just in Asia.

Khurshid Khan is interviewed in an article about the lessons that can be learned from looking at Islamic financial principles in the context of the recent crisis.

Other News

• Dawood Ahmedji, head of Deloitte's European Islamic finance unit, believes that Islamic finance would be able to fund some projects derailed by the onset of the credit market crisis by attracting funds from the GCC.
  
• The Monetary Authority of Singapore revised its regulations to put Islamic financial products on a level playing field with conventional products but decided against instituting a separate regulatory regime for Islamic financial institutions.
  
• Islamic Finance Info Inc, an online company providing information on the Islamic finance industry, has launched a website with information about Islamic financial institutions, Shari'ah scholars and Islamic financial products, IslamicFinanceInfo.com
  
• Qatar's planned bond issuance may include some sukuk as a way of diversifying the government's financing needs.
  
• An interview with the head of Kauthar Bank, an Islamic bank in Azerbaijan, describes how the bank uses mudaraba, musharaka and ijara on both sides of its balance sheet. While most Islamic banks have a heavy reliance on murabaha, Kauthar is restricted by banking laws from using this product. The success of a bank that does not use murabaha could provide an indication about the direction that Islamic banking is heading as there is some criticism of murabaha because of its similarity with conventional interest-bearing loans.
  
• An article summarizes some of the recent developments in the Islamic finance market including planned issuance of sukuk by the Islamic Development Bank and a sovereign issue from Bahrain as well as improved sukuk prices in the secondary markets and developments in the UK.
  

(Late) Weekend Update

The Saudi government plans on starting a Fannie Mae-like institution to encourage the growth of sukuk and conventional bond markets. The counry is estimated to have a home ownership is 62% according to Ibrahim al-Assaf, the finance minister for the country, although some analysts estimate it at less than 1/2 this level. The development would provide a boost for Islamic banks by allowing them to remove assets from their balance sheet and also providing a large source of supply of sukuk to the market, which in turn could help provide Islamic banks with a better, more liquid investment to hold against short-term liabilities like deposits. However, the securitization into sukuk would have restrictions on the number of various types of Islamic mortgages. Although ijara mortgages are generally considered transferrable because they include ownership of an underlying assets, murabaha mortgages would not (except at par vale) because transfer represents the sale of cashflow from a loan, not an actual asset.

A Central Bank of Bahrain official, Abdul Rahman Al-Baker, executive director of financial supervision pointed out that as the industry crosses the $1.5 trillion mark (estimates of the size of the Islamic financial industry vary widely), it needs to broaden the customer base it addresses:

"In addition to adequate regulations there is a need for creating the necessary framework for investment instruments targeting small investors, medium size investors, as well as professional or high net-worth individuals, who would like to invest their funds in accordance with Shariah principles,"

HSBC Amanah is joining a growing number of companies launching sukuk funds with their HSBC Amanah Sukuk Fund that will be domiciled in Saudi Arabia. The fund is expected to hold about 12 to 14 companies' sukuk from the GCC region and have a 4-year maturity.

Banking officials in Iraq are looking at ways to encourage Islamic banks according to Central Bank advisor Mudher Kasim. The article describes the difficulty facing Islamic banks due to the regulation about banks investing in real estate and their mandatory capital reserves.

Advantage Consulting Company Managing Director Safa Abdul Rahman Al-Hashem provides a criticism of products that replicate conventional financial products.