Tuesday, August 11, 2009

Moody's report, takaful for sukuk, development of Islamic finance industry, tawarruq, AAOIFI stepping into Shari'ah-compliance

Moody's released a Special Comment about Islamic banks that highlights their relative stability despite their rapid growth because they are conservatively leveraged, have maintained generally high profit margins and retain significant liquidity. However, beneath this positive outlook, Moody's highlights some of the risks facing Islamic banks. For example, if they are not able to develop sufficient investment of their liquidity, an economic boom could leave them lagging. In part, Islamic banks are limited in their utilization of this liquidity because they lack long-term funding sources and therefore keep additional liquidity to meet shorter-term liquidity needs. The same day (yesterday), Moody's placed four UAE banks' ratings on review for possible downgrade including Dubai Islamic Bank.

The Islamic financial industry is developing outside of Muslim-majority countries but none have the regulatory framework as well developed to allow Islamic finance than the United Kingdom according to two articles looking at the West Midlands in England and Scotland. An article in The Lawyer has a good analysis of of the future of Islamic finance for the GCC and the prospects for the region to be outdone in some areas by non-Muslim majority countries if there is a sovereign sukuk from another region. Another article from Gulf News talks about Islamic asset management and the scarcity of Islamic money markets.

AAOIFI is going to review the Shari'ah-compliance of Islamic financial products to "homogenize the market" on a limited basis. It presents an interesting expansion of the role of AAOIFI which has been limited until now on establishing accounting standards for the industry but which I believe could be a significant development in bridging the gap between the Malaysian model of nation-wide Shari'ah boards and the GCC where each institution has its own Shari'ah board.

Sheikh Yusuf DeLorenzo added his support to tawarruq for its necessity for Islamic finance to function while adding that it should not be used as a financing instrument on its own and rather should be "a means to an end".

Takaful providers could offer sukuk insurance, according to a Reuters article. However, this raises some questions about how much Islamic finance should replicate conventional finance because a takaful policy on sukuk would essentially replicate the credit default swaps (CDS) that led to some problems in the conventional market during the credit crisis. However, the products do provide investors with an assurance they will not lose their entire investment in a sukuk should the issuer default. It would likely be a requirement that the insurance is only available to holders of sukuk and not available as a speculative tool as it has become for some investors with CDS.

Jadwa Investment has a report on sukuk.

Other News

  • The Star in Malaysia has an interview with central bank governor Dr. Zeti Akhtar Aziz.
  • The Malaysian central bank believes it is a good time for the government to issue sukuk.
  • HSBC says that Indonesia could tap up to $4.75 billion by issuing sukuk.
  • Saudi Arabian firm Zain Saudi Arabia closed a $2.5 billion murabaha financing facility, in part being used to roll over existing murabaha.
  • Yasaar Human Capital believes hiring in the Islamic finance industry will pick up after Ramadan.
  • A lawyer experienced in Islamic finance has moved to a Polish law firm and hopes to use this experience in Poland. There has been little Islamic finance activity in Poland save for a deal by the Qatar Investment Authority to buy two shipyards.

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