Thursday, June 11, 2009

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.

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