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.