Thursday, October 15, 2009

FSA rules on Islamic finance, France law struck down, 10-20% growth in 3 years in Islamic finance, other news

The Financial Services Authority has released the suggestions received on its regulatory proposal for sukuk (Alternative Finance Investment Bonds) that was initially released late last year. The comments are incorporated into a revised proposed law that is open for comment until November 6, 2009.

France's new law on Islamic finance was struck down by the country's high court on procedural grounds although the opposition Socialists who asked for the review by the Constitutional Council who oppose it as a violation of the secular principles of France.

A study by BDO based on a poll of 173 financial services executives involved in Islamic finance puts the growth prospects for the industry at 10-20% over the next 3 years. A substantial percentage, 23%, said the industry could grow quicker and an equal percentage believed there would be little growth, between 0% and 10%, in the next 3 years. The industry continues to enjoy unsaturated markets and growing recognition by companies not necessarily considering Islamic finance based on a need for Shari'ah-compliant funding sources. However, there has been a severe economic downturn that has hurt the industry, a shortage of experienced practitioners and there are a number of issues remaining to be resolved, particularly how sukuk are treated if the issuer defaults on periodic payments. This is not necessarily going to be a quick process and it could be one of the reasons for the large percentage of sukuk this year coming from high-grade companies and sovereign issuers where the probability of default is far lower than some of the issuers in previous years.

The World Bank's International Finance Corporation is planning a $100 million sukuk to show its commitment to the Middle East and Islamic finance. The Reuters article notes that "they [the IFC] have only a few ijara contracts, that's really the limiting factor". This suggests that the structure they are considering would be similar to the Islamic Development Bank sukuk, which is based on a pool of financing provided to other parties by the Bank which can include murabaha and istisna'a, but must have at least 51% in ijara because they represent an underlying asset and not just a debt receivable.

Indonesia rejected all of the bids in its first monthly sukuk auction because investors were asking for higher yields than the Ministry of Finance was willing to accept. The decision is not seemed to be a significant setback because there is an expectation that the Indonesian central bank may raise interest rates. If the Ministry of Finance accepted higher yielding bids from investors in sukuk, it could increase the cost of raising conventional debt.

Investors in the Golden Belt 1 sukuk issued by the Saad Group do not know whether the next periodic payment will be made according to Citigroup, the sukuk trustee.

There is continues to be controversy about whether there need to be more safeguards for borrowers in Malaysia who default on bai' bithaman ajil (BBA) sales contracts. In some cases, a defaulting borrower can end up owing more than the amount of the financing originally taken. There has been controversy before around the BBA contract. A lower court said that the sale was not genuine and there was no difference between the profit charged and interest, although this was reversed by a higher court.

Other News

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