Friday, December 18, 2009

World Bank, ThomsonReuters to provide assistance for standardization and improving data in the Islamic finance industry

The World Bank says it is committed to helping the Islamic finance industry turn its voluntary standards into binding standards. I would imagine that this assistance would be focused primarily on accounting and auditing standards that have been issued by AAOIFI and the IFSB, rather than Shari’ah standards. The former is an admirable goal to ensure that Islamic financial institutions incorporate global accounting standards within the guidelines of the Shari’ah. The latter, however, is a mixed bag. There are areas where some standardization of Shari’ah rulings could benefit the growth of the Islamic financial industry, but too much, especially pushed to quickly, could limit beneficial innovation that will eventually reduce the reliance on controversial products like tawarruq/commodity murabaha. It is also a little curious that the World Bank and not the International Monetary Fund would be taking the lead on this standardization. The World Bank is primarily focused on development, while the IMF has a mandate that focuses more on financial market and exchange rate stability.

Thomson Reuters is launching an Islamic finance portal in 2010 that will provide one source of data on the Islamic finance industry. I think this is essential for the Islamic finance industry to grow, particularly to expand into Western markets and attract more interest from the global financial industry. While this could be a mixed blessing if it reinforces the reliance on conventional financial product replication, However, it should also provide some transparency that is necessary for the industry to mature, as well as providing the needed data for debate within the industry.

I would recommend heading over to Opalesque and downloading the latest Islamic Finance Intelligence (registration required). They offer a (free) monthly newsletter that is always of very high quality.

The Islamic Development Bank is planning another $850 million sukuk issue in 2010. This follows a similar size issue in 2009 and could signal a continued dominance of sovereign, multilateral and high-grade corporate (e.g. GE Capital) issuers in the next year. I have been critical recently about the lack of seeming promise for a wider diversity of issuer quality, but there could be a benefit to these types of issuers dominating the market following the Nakheel debacle. The area where these highly rated issuers can contribute most to the market is by testing the longer maturity issues. Most sukuk are now issued with five to ten year maturities, although the number of issues are clumped more towards the five year maturities. If Islamic finance is going to grow sustainably and if there is a chance for the industry to move away from LIBOR as a pricing through the development of a Shari’ah-compliant yield curve, then two things will have to happen. First, the maturity profile of new sukuk issues will need to expand into the longer maturity sukuk and second, we will need to see a return of lower rated issuers.

The Indian state of Kerala is planning to issue sukuk next year, the country’s first.

The Bank of Kuwait and the Middle East will transform itself into an Islamic bank in the second quarter of next year.

Could the bailout of Dubai that started with the bailout of the Nakheel sukuk lead to Abu Dhabi running out of liquidity? I would lean towards doubting it because Abu Dhabi has made it clear that the funds it has already provided to Dubai are not the sign of an open checkbook by requiring a standstill agreement and pressuring Dubai into taking credible steps to achieving a successful restructuring. However, with little transparency about how much of the Abu Dhabi sovereign wealth fund is in illiquid investments, the question should still be asked and it would be foolish to assume that Abu Dhabi has infinite liquidity to support the other emirates. However, even if investors react positively to the new law in Dubai surrounding the restructuring being judged under DIFC law, there is a long road ahead.

1 comment:

Hisham said...

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