Ratings Agencies' reports on Islamic finance

Moody's Investor's Service has a FAQ (pdf)relating to the relationship between Islamic finance and oil prices that also describes the susceptibility of Islamic financial institutions to the economic crisis. A few quotes from the article:

"The drop in oil prices is a concern for the Islamic finance industry, but not a major one for two main reasons. First, there is still a vital link between oil prices and Islamic banks. The industry remains much intermediated, i.e. dominated by banks. [...] Second, oil liquidity also used to be a big driver of the disintermediation process in the Islamic finance industry, i.e. the slow emergence of Islamic finance without Islamic banks, mainly through sukuk and Shari’ah-compliant funds."

"In addition, prices on such instruments are now completely distorted, simply because oil liquidity is less abundant. This is not a major concern, though. Indeed, in previous benign periods, Islamic banks were wise enough to accumulate asset liquidity and capital on their balance sheets. This is good news in the sense that currently they are using their core asset liquidity to continue to grow their credit portfolios, despite scarcer funding sources. Large capital bases help to buffer asset price declines and possibly also higher delinquency rates in credit portfolios."

"Several Islamic banks therefore are in a position paradoxically to gain market shares at the expense of conventional peers, which have been weakened by toxic sub-prime assets. However, in the absence of long-term funding in the form of sukuk, Islamic banks find it difficult to apply proper asset-liability management and are forced to shorten the maturity profile of their assets, which is not exactly what local economies need. These require long-term finance, especially in infrastructure, and are certain to have to rely on government funding, with the attendant risk of larger budget deficits."

"Both wholesale-funded Islamic financial institutions (IFIs) and disintermediated businesses are significantly affected by the slump in oil prices. Wholesale-funded IFIs are unable to access the retail deposit segment for funding. Retail deposits are more granular, more stable, cheaper, but, typically, Shari’ah-compliant investment and merchant banks and specialised Islamic finance companies cannot use them. In a situation of stress, like at present, wholesale funding is problematic because it is concentrated and becomes more expensive as liquidity gets scarcer. Wholesale depositors are savvy and constantly arbitrage institutions in need of funding. It is no coincidence that Islamic intermediaries like Global Investment House (GIH) in the field of merchant banking and Amlak and Tamweel in specialised mortgage finance are finding it extremely difficult to fund their businesses."

"In summary, Islamic finance is not an island; it has suffered from the liquidity drought, to the point where a few of the sector’s investment banks have defaulted, but as an industry it now has a track record of resilience (which had not been tested before). As such, it can now prepare for the next challenge: globalisation."

IFIs have been more resilient to the ongoing crisis than their conventional counterparts because direct investment for such institutions in sub-prime assets and their derivatives, such as collateralised debt obligations (CDOs) and special investment vehicles (SIVs), is prohibited, as per the principle of ‘no riba and no gharar’. However, IFIs are not risk-immune and, like any financial institution these days, face three types of constraint:

• Liquidity is scarce and liquidity management, one of the structural weaknesses of IFIs, is becoming even tougher;
• Asset price decline: IFIs can and do invest in tangible assets, but these, in a situation of crisis, tend to lose value, and liquidating them means accepting a huge discount; and
• Asset quality is deteriorating across the board because of the impact on the real economy of the ongoing financial turmoil, and IFIs will suffer as much as their conventional peers.

Those IFIs involved mainly in credit – capturing deposits to provide financing to households and companies – are less adversely affected than investment houses. GIH and TID are not banks per se; they have banking licences, but economically they behave as investment funds. Therefore, asset price decline, asset quality deterioration and the liquidity crunch are more painful for them than for deposit-taking commercial banks. Investment houses especially face funding problems; wholesale funded, they face the risk of sharp and sudden fund withdrawals, with no renewal of liquidity lines, which would trigger emergency liquidation of assets at a deep discount."

Standard & Poor's released a report concluding that "Gulf Islamic financial institutions and takaful companies are feeling the repercussions of the current global financial market disruption less than most of their conventional counterparts because Sharia law prohibits interest-based financial products". However, the report does mention that the economic downturn following the credit crisis has not entirely spared the Islamic financial industry.

Humayon Dar, the CEO of BMB Islamic UK, a Shari'ah advisory and structuring services, provides responses to Finance Asia questions about the future of the Islamic finance industry.

Mid-week update

Although Islamic banks are not experiencing write-downs connected to derivatives products, they are experiencing significant losses from falls in the real estate markets, particularly in the GCC. S&P estimates that Islamic banks have nearly 20% of their assets backed by real estate.

UK Trade & Investment and the central bank of Malaysia, Bank Negara, signed a Memorandum of Understanding to work together to promote the global Islamic finance industry. Malaysian central bank governor Dr. Zeti Akhtar Aziz commented on the MoU to Malaysian paper The Star.

Islamic banks in the GCC are likely to go through a round of consolidation that will create larger, better capitalized institutions according to the head of AAOIFI.

Gatehouse Bank, one of the newest Islamic wholesale banks in the UK is closing its first deal. According to CEO David Testa, it will be "a built property with a very strong tenant in continental Europe. It is a refinance deal connected to a governmental entity". There is less interest in general in promoting Islamic finance among governments in continental Europe than in the UK although the French government said it was exploring regulatory and legal changes to put Islamic finance on a level playing field with conventional finance.

Daud Vicary Abdullah, a specialist in Islamic finance at Deloitte in Malaysia says the industry will grow by double digits in the next few years as it experiences rapid growth in Muslim-minority countries.

Reliance Capital, India's largest asset manager, is going to base its Islamic finance unit in Malaysia.

New funds, backlogged sukuk, Hong Kong almost ready with tax changes for Islamic financial products

HSBC Amanah plans to make its equity funds available in the UK. The description of the funds are "active quant" funds. Quant funds typically aim to capitalize of small, short-term arbitrage opportunities using complicated computer models. It is unclear how this type of investment strategy was approved by Shari'ah scholars because it is in some ways highly speculative (probably would raise questions of whether it resembles maysir, or gambling). There are probably ways that this can be explained away, but whether or not they are satisfactory for many investors is unclear.

Other News

• A lecture at Wesleyan University focused on Islamic finance and was given by the Muslim chaplains from Harvard University.
  
• Malaysia and the UAE were the top sources of sukuk issuers in 2008.
  
• Indonesia's retail sukuk raised Rp 5.6 trillion ($467 million).
  
• Hong Kong's government is in the last stages of finalizing tax law changes to encourage Islamic finance by placing it on equal footing with conventional financial products.
  
• Asian Finance Bank, the Malaysian-based Islamic bank sees an opportunity to facilitate South Korean companies' fund raises in the GCC.
  
• There are an estimated 100 sukuk in the pipeline worth up to $38 billion that have not come to market because of the global credit crisis. It is unclear whether the lack of availability of access to capital markets will force some of these companies into bankruptcy or to eliminate expansion plans these sukuk were envisioned to fund.
  

DIFC economist urges GCC government sukuk; University Bank receives acknowledgement for Islamic home finance activity

The chief economist at the Dubai International Financial Center (DIFC) says that GCC governments should issue sukuk to raise funds instead of drawing down accumulated surpluses from times when oil prices were significantly higher. In addition to retaining these surpluses, it will contribute to increasing liquidity in sukuk secondary markets. As I have noted in a post on my other blog at Zawya, the sukuk market is highly illiquid and the prices at which sukuk are traded in that market are likely not indicative of the underlying performance of the companies which issued them. The head of the DIFC, Dr. Nasser Saidi, agrees: "I think this is a temporary phenomenon. I think the pricing is unrelated to the fundamentals".

The Central Bank of Bahrain (CBB) has expanded the types of collateral it will accept from banks for overnight loans to include ijara sukuk, although no Islamic banks had used the facility. I would imagine that there is considerable debate within the Shari'ah boards of Islamic banks in Bahrain about whether borrowing against sukuk is Shari'ah-compliant. The facility was launched near the end of last year.

University Bank, a bank in Michigan with an Shari'ah-compliant subsidiary, University Islamic Financial Corp, was acknowledged by the American Bankers Association, in part for its innovative Shari'ah-compliant home finance products.

"The selection committee lauded University Bank for its innovative programs such as home financings for Muslim customers. Muslims are much less likely to be homeowners on average due to religious prohibitions on the payment or receipt of interest. University Bank designed a program to meet these needs, which has so far resulted in over $50 million of financings for the purchase of homes by Muslim customers of the bank."

Other News

• There are more Shari'ah-compliant funds in Malaysia now than Saudi Arabia, but the funds are still smaller.
  
• The Dow Jones Islamic Market Indexes are 10 years old.
  
• Lebanon is considering a sovereign sukuk issue according to a Lebanese newspaper.
  
• Indonesia, which is planning on instituting a regular issue of sukuk to finance the country's large deficits and the maturity of these sukuk are expected to exceed 5 years.
  
• The Lord Mayor of London said he expects the UK to issue a sovereign sukuk "sooner rather than later" and this issue will be denominated in UK£;
  
• The new governor of Saudi Arabia's central bank, the Saudi Arabian Monetary Authority, said that companies should look to the sukuk market to raise funds.
  
• The IFSB announced new standards for sukuk and REITs.
  
• Kuwait Finance House (Malaysia) is considering acquisitions across Asia including in Japan and China.
  

Truth and fiction in reporting the Islamic finance industry

As I began reading this article about the prospects for Islamic finance in the year to come, I almost cringed as it began with yet another denial of the reality that Islamic finance was significantly affected by the credit crisis that resulted from the subprime mortgage crisis in the United States. However, as I read further, there was a discussion of the impact from the credit crisis on Islamic finance and an acknowledgement of its severity:

"But to suggest that Islamic banking is set to grow strongly despite the global financial crisis may be stretching things a little too far. Last year’s credit crunch hit Islamic bonds much harder than other forms of debt as sharply lower international oil prices deprived oil-rich Middle Eastern investors of cash.

According to rating agency S&P, corporate and government sales of sukuk (syariah compliant bonds) reached US$30.8 billion in 2007, but plunged 56 per cent last year to just US$13.6 billion. By comparison, conventional international bonds and emerging-market debt dropped 5 per cent and 15 per cent, respectively"

The article ends with a very reasonable conclusion that the way Islamic finance is conducted without many of the financial instruments that cause excess speculation can serve as an alternate model to conventional finance. This, I believe, is the contribution of Islamic finance. It can provide an alternative model of financial services based on finance's underlying objective which is to facilitate the real economy. In the wake of the credit crisis, there is finally some understanding that all financial innovation is not necessarily beneficial and that there is too much of a draw created by financial services' pay packages for people qualified and talented in other areas besides finance whose efforts may better benefit the economy in these other fields. One lesson, however, that should not be underestimated is that even conservative areas of finance like Islamic finance can still become involved in speculative bubbles. Witness Dubai. A recent video I have seen on several blogs puts the popping of Dubai's real estate bubble in clear, on-the-ground terms, by interviewing a real estate agent in the Emirate.

Another article discusses the recovery in Islamic financial institutions and describes their advantages in both not being leveraged like conventional banks and also not having 'exposure' to the interbank lending market, which led to the illiquidity that doomed Lehman Brothers and Bear Stearns. On the first point, I agree (with a few exceptions) that Islamic financial institutions are more prudent about leverage than most conventional financial institutions. However, I find the liquidity risk of Islamic financial institutions to be more significant than for conventional financial institutions in most situations. The lack of access to interbank money markets (except in Malaysia) create a significant risk that illiquid Islamic financial institutions could be unnecessarily transformed into insolvent institutions. One area where illiquidity is particularly noticeable is in the secondary market for sukuk where government-backed companies like the Jebel Ali Free Zone (JAFZ) can see their sukuk trading at less than 60 cents on the dollar.

The benefits and limits of Islamic finance in the wake of the credit crisis

An article in The Star describes many of the challenges facing the Islamic finance industry including Shari'ah standardization, the shortage of qualified professionals in Islamic finance, development of risk management systems that incorporate the unique qualities of Islamic finance and liquidity management products. One paragraph, however, illustrates a realistic assessment of Islamic finance vis-a-vis subprime lending:

"Notably, Islamic financial institutions are able to make ‘loans’, such as for financing home purchase and could, in theory, have been exposed to subprime mortgage problems. However, their inherently conservative risk management limits not only their ability to lend as a percentage of their own assets, but also the granting of excessive interest rates which enabled unqualified borrowers to take out such loans."

The essence of the argument made, which I believe is accurate, is that creating home financing products for subprime borrowers could easily be done through financial structuring but one would hope that the Shari'ah screening process would exclude those products that are exploitative or deceptive and also ensure that the level of risk taken on by the Islamic financial institution is not excessive. But I think it is important to recognize that products that replicate the seeds of the current crisis could be synthesized (as short sales already have), but if the industry's review process for Shari'ah-compliance works well, the products would nevertheless not be approved.

Andy Jobst, Heiko Hesse and Juan Solé describe the impact the collapse of the securitization market had on Islamic finance and sukuk in particular as well as the differences in Islamic finance instilled through the Shari'ah review process to mitigate conflicts of interest that were made apparent by the recent crisis.

Western corporate sukuk; Indonesia retail sukuk

Western companies, especially U.K. and French companies, are considering using sukuk to raise funds. The head of BMB Group Adnan Aziz is quotes as saying, "There is a lot of interest from corporates to issue sukuk. My feeling is that as liquidity in the West gets scarce, they will look into the Middle East".

Indonesia's retail sukuk offering is currently open to new investors through a number of domestic companies. The proceeds from the sukuk will be used to fill a budget deficit. The sukuk, structured as an ijara, will pay 12 percent per year and will have a maturity of 3 years. The finance ministry will not disclose the total issue size, which it says will depend on demand, but Standard Chartered said that IDR 969 billion ($82.365 million), 57 percent of the target issue size of IDR 1.7 trillion ($144 million).

Dubai Islamic Bank, the oldest Islamic bank in the world that recently became embroiled in a corruption scandal, has become a founding member of Hawkamah Institute, a corporate governance organization in the Middle East.

In a press release announcing its rating of Bahrain Islamic Bank, Moody's Investors Service, describes some of the factors that are unique to Islamic banks and affect the rating agencies' ratings of Islamic banks: "The D+ BFSR also captures the restrictions that Islamic banks face in managing their liquidity, growing competition in the domestic, regional and international Shari'ah-compliant banking markets, as well as the reputation risks to which Islamic banks tend to be subject."

Necessity, Islamic finance institutions face different risks, Islamic housing co-operatives in the U.S., IFSL Islamic Finance 2009 report released

I don't know whether this is an accurate characterization of the situation, but an article from Datamonitor states that "Union National Bank and Abu Dhabi Islamic Bank will issue capital notes with a principal amount of AED2 billion each. he notes will bear interest at a rate of 6% per annum payable semi-annually". This description is followed by an explanation from the CEO of ADIB (emphasis mine) that "We are firmly behind the government's prudent plan to continue shoring up the local economy and, given that one of the principles of Sharia'a law is acting in the public benefit, these sukuk will provide an ideal base on which to contribute to this plan". The description as 'interest' may be a slip up but should not be written off that quickly: the injection of capital demonstrate considerable flexibility by Islamic banks when times are tough. The interbank money market is nonexistent for Islamic banks and central banks are unlikely to extend qard loans to banks, even to support them. Instead, the governments will step in as they would for most other financial institutions: they will inject funds in and extract their pound of flesh for this support to ensure they do not create any moral hazard for the banks management in the future.

In the case of Islamic banks, they may not necessarily offer this additional capital in a Shari'ah-compliant investment; banks will either take the capital (offering the rationale that it was only taken to ensure the survival of the institution) or close its doors if it cannot find other sources of capital. As I understand it, most Shari'ah scholars would find this outcome unpleasant, but ultimately approve it on the basis of necessity (darura).

An article in The National (UAE) describes the additional risk held by Islamic financial institutions in a collapsing property market:

"The problem is particularly acute because of the off-plan model adopted in the Emirates, where a buyer signs up for a home but pays only 10 per cent until it is built. Under Islamic finance, the bank stumps up all the instalments to the developer during the construction period, but does not start recouping its outlay until after the building is complete, which can take three to five years. Banks typically finance 90 per cent of the purchase and are liable for all instalments to the developer during the construction phase, while the buyer pays nothing.

Under the Islamic model, the lender takes all of the equity risk, while the end-user signs a separate lease agreement with the bank. This exposes Islamic banks to potentially greater liabilities than conventional mortgage banks. As prices continue to fall, there is a large and growing incentive for property buyers and banks to foreclose on home finance.

There's an article that doesn't present much new information, but is one of few to focus on the Islamic home finance co-operatives, an institutional form that started predominantly in Canada and have been largely ignored in articles about Islamic finance in the U.S. Despite their small size, they provide arguably a better model (at least in terms of demonstrating the risk-and-reward-sharing that Islamic finance claims to espouse) than the lenders which sell Islamic loans to Freddie Mac and Fannie Mae.

The Islamic finance industry in the U.K. is larger than in Pakistan when measured by total assets, according to a new report from the International Financial Services London, an organization that promotes London's financial industry. The entire report, Islamic Finance 2009," is available as a PDF and the Excel versions of the tables in the report are available from IFSL's website. Other highlights include:

• "The Islamic finance industry has felt the influence of the credit crunch and downturn in the global economy in 2008, with a drop in Sukuk issuance and a fall in the value of equity funds. Islamic banks, however, have been less affected than many conventional banks because they are not exposed to losses from investment in toxic assets nor have they been dependent on wholesale funds, as they are prohibited from these activities."
  
• "Western countries in Europe and North America. Countries such as the US, France, Germany and the UK each have indigenous Muslim populations of between one and five million. Moreover, the customer base in Western countries is not necessarily restricted to Moslems: other customers may be attracted by the ethical and environmental basis of Islamic finance."
  
• "Islamic banks, like conventional banks, need to have appropriate capital and adequate access to liquidity and manage risks appropriately. This includes managing their exposure to bad debts arising from the general downturn in business."
  
• "Sukuk issuance fell away during 2008 to an estimated $20bn. Key contributing factors were a decline in asset valuation, a lack of liquidity and a lack of market confidence. [...] Although market activity has fallen away, particularly in the second half of 2008, the long term prospects for Sukuk are positive once markets recover."
  

Equator Principles, Islamic VC, Malaysia's SC chairwoman interviewed

Nakheel's The World development is being reviewed to see whether its development has negative environmental impact as a part of complying with the voluntary Equator Principles, nine criteria developed by financial institutions for project finance. UPDATE: I have added a post on my blog at Zawya exploring this a little deeper.

The Qatar Islamic Bank announced profits rose in 2008 at the same time it announced a rights issue to shore up its capital.

One of the few banks that provides venture capital funding, VC Bank, announced that it was profitable and was paying a dividend to its shareholders. My monthly 'Expert Opinion' column in Business Islamica for next month focuses on the current lack of Islamic venture capital, particularly in the GCC, although a few institutions such as VC Bank do provide it.

The Star newspaper in Malaysia conducted an interview with Securities Commission chairwoman Zarinah Anwar which focused on the growth of Islamic finance in Malaysia.

StarBizWeek: At this time of global recession, do you have other priorities apart from corporate governance?

Zarinah: Our thrust is two-fold. One is to ensure that the market continues to be resilient, that laws continue to be enforced and that our market participants continue to subscribe to the highest standards of conduct. This is essential to sustain investor confidence in our markets. There is just no short cut to it.

Equally, we need to take measures to remain competitive and position ourselves to benefit from the market recovery.

StarBizWeek: What is a potential area of focus?

Zarinah: An area that we will continue to invest is the Islamic capital markets where we are an acknowledged global leader and have a niche role. There is a lot of competitive pressure in this space but we have a headstart, due to the amount of work we have done and successes scored, and we are in a good position to grow that segment of the market.

The government is also providing a lot of support. We have seen growth, notwithstanding difficult times. We’ve had a lot of interest from players wanting to set up operations here. In the Islamic fund management side, we recently awarded three new licences to three global fund managers.

StarBizWeek: So far, Islamic finance involves mostly the sukuk and not so much the PLCs, except for Axis Reits which has classified itself as an Islamic Reit. Can anything be done?

Zarinah: What may not really be well-known is that 87% of the companies listed on Bursa are actually Shariah-compliant. So there is a wide selection of companies on the exchange which can be subject of investments by funds and investors looking for Shariah-compliant products.

Our Islamic capital market is very comprehensive. Besides sukuk and Shariah compliant companies, we have three Islamic Reits and Islamic exchange traded fund. We have a sizeable Islamic unit trust industry which makes up 12.% of the the total net asset value of the unit trust industry. Last year, the performance of our Islamic unit trust funds showed more resilience than the conventional funds.

StarBizWeek: One reason why Islamic finance is less known on the corporate side could be due to the fact that we are not a financial centre. Can we get the funds and manage it in a different way, say, regionally?

Zarinah: This is what we are encouraging. There has been significant liberalisation in the Islamic capital market especially in fund management.

We allow 100% foreign fund managers to come in and set up their Islamic fund management operations. So far, the eight that have been given licences have expressed their plans to make Malaysia their international or regional hubs for Islamic fund management.

We have a competitive edge here and we are working in tandem with the Malaysia International Financial Centre (MIFC) initiative. We are going on roadshows, forums and conferences. We also meet fund managers and analysts to make sure that their awareness of the Islamic capital market in Malaysia is enhanced, and these are bringing results.

StarBizWeek: There are opinions that the Islamic finance model can be a viable alternative in view of the failure of conventional models. How long will it take for the Islamic model to catch up, and what are the issues involved?

Zarinah: The financial crisis has demonstrated the resilience of the Islamic financial market. Investors may prefer investment products that are simpler and more reliable and this is likely to grow demand for syariah compliant products which avoid excessive speculation and backed by real economic transactions.

These inherent characteristics distinguish Islamic products from some of the more complex structured products that we have in the markets.

Notwithstanding the achievements in this area, there are still challenges which include coming up with a greater diversity of products, human capital developmenst, interpretation of Shariah and the availability of information on Islamic finance.

We are publishing materials to contribute to the body of knowledge that can be used for research and development purposes.

StarBizWeek: Would the meltdown that is affecting the Middle East have an impact on our efforts to tap this source of funds, that was once considered to be vast?

Zarinah: The activities in Islamic finance are slowing down in tandem with the slowdown in the conventional market and risk aversion amongst investors.

Size of sukuk issuance worldwide was also smaller although there was not much difference in the number of issues between 2008 and 2007

Illusions of the 'immunity' of Islamic finance hinder growth and innovation

The governor of Bank Indonesia, during a speech, made the claim that because of the Shari'ah screens, "if implemented properly, we can say that sharia economy and banking pose no risk of a crisis. Amid the ongoing global crisis, the presence of sharia banking is actually a hope." Although there are benefits in reduced risk created by the restrictions on gharar and maysir, the use of Islamic financial products cannot be said to be entirely free of risk of crisis. Islamic finance is still a tool used to finance purchases, including assets that can be inflated in a bubble (see Dubai's property market) and claims that asset price bubbles cannot happen when using Shari'ah-compliant financial services distracts from the real benefits from using these financial products and could, in the extreme, be detrimental if there is a general belief that crisis cannot happen.

One immediate outcome of a focus on the 'immunity' of Islamic finance from crisis is that it distracts attention from a much needed focus on real risk management, particularly whether and what types of derivatives and forwards could be judged permissible to provide a way to hedge exposure to some of the risks that Islamic banks face. In general, derivatives are not permitted because they are judged as gambling, but there is a valuable place for some hedging products to offset the lack of liquidity of some Islamic financial products, the maturity mismatch between assets and liabilities on banks' balance sheets and the lack of an interbank lending market (outside of Malaysia) that could keep a crisis from spreading by providing a buffer against illiquidity becoming insolvency.

The sukuk market shows no signs of improving despite there being over 100 sukuk issues planned because there are doubts about whether there will be buyers. Also, the AAOIFI ruling on sukuk from February 2008 has led to a greater proportion being ijara sukuk, depriving many issuers without the assets needed for the sale-leaseback transaction. Despite this, there are a few companies raising funds to purchase sukuk in the expectation that the lack of demand has made the future returns greater.

Other News

• Asset managers in India are becoming more interested in offering Shari'ah-compliant services. The equity markets in India are deeper than in other countries with larger Shari'ah-compliant asset management companies like Malaysia and some managers expect that over 60% of the total market capitalization in India pass common Shari'ah screens.
  
• Assets under management by Shari'ah-compliant asset managers in Kuwait fell 45.5% in the second half of 2008 to $4.4 billion, a similar percentage fall as seen by conventional fund managers.
  
• Abu Dhabi Islamic Bank will receive AED2 billion in a capital infusion from the government. The government will receive a sukuk paying 6% semi-annually. The structure of the sukuk is not clear.
  
• The merger of Islamic mortgage lenders Amlak and Tamweel into Emirates Development Bank is being rethought and the companies may be nationalized according to an analyst at EFG-Hermes.
  
• Malaysia's central bank, Bank Negara, will issue Ringgit 400 million ($110 million) in ijara sukuk next week.
  
• The size of a Malaysian bank's Gulf aviation fund may be cut in half as a result of the economic downturn.
  
• The State Bank of Pakistan is developing guidelines for Islamic financial products for the agricultural industry.
  

The Saudi Arabia-based Islamic Development Bank and the Malaysia-based Islamic Financial Services Board are working together to discuss liquidity management issues in the Islamic financial institutions. The liquidity management problems are frequently mentioned, but there is an additional opportunity for the industry with the IDB and IFSB cooperation is that it is one more example of cooperation between industry bodies in the GCC and Malaysia. The different standards in the two regions have created some difficulty with compatibility of products.

Emirates NBD, the UAE-based Islamic financial institution, is launching a sukuk fund to purchase sukuk with depressed prices in the current economic environment. I wrote a blog post at Zawya a few days ago about the secondary market for sukuk and came to the conclusion that the lack of liquidity in the market had caused the steep drop in some prices using the JAFZ sukuk as an example.

South Korea is planning to change laws and regulations to attract Islamic finance, assuming that the industrial base provides an underlying asset to be used in structuring Islamic financial products.

Do Islamic financial institutions avoid high leverage?

The Bank of London and the Middle East (BLME) is launching three new funds, a fixed income fund, a distressed real estate fund and an equity fund. If these funds are well capitalized, they could benefit greatly from the economic difficulties created by the credit crisis and provide another avenue by which the Islamic financial industry gains prominence. I did find one sentence in the article to stretch a little (emphasis mine): "BLME will capitalise on an increasing appetite for Islamic finance, which protects investors from the risk of excess leverage and prevents exposure to toxic assets, short selling as well as derivatives, amid a collapsing global financial system." In general Islamic finance should protect investors from excess leverage, however, as I commented in recent post, this has not always happened: one of the factors mentioned in S&P's downgrade of Arcapita Bank was that they "view[ed] Arcapita's leverage as high".

Kuwait's Islamic financial sector is helping support the country's financial system as the conventional financial institutions run into trouble. However, there are still concerns about lax regulatory oversight in the Islamic financial industry in the country and The Investment Dar requested $1.1 billion from the government to help it refinance its short term debt and may sell part of its 50% stake in Aston Martin, purchased in 2007. The government of Kuwait has announced it will issue a sukuk backed by the banks' assets to support the banking system. In a difficult economic climate and following the developments in the financial system last fall, it strikes me as puzzling that Kuwait's financial sector is healthy with concerns over transparency in the industry while it is requesting $1.1 billion from the government and selling recently investments that it announced with great fanfare (I saw a presentation that included music from a James Bond movie along with the first slide of the presentation which read 'Bond, Islamic bond', a reference to Bond's preference for Aston Martin cars) less than two years ago. Also, two directors quit Boubyan Bank, which is partially owned by The Investment Dar, without providing explanation.

Other News

• Indonesia issued its first sovereign sukuk, which will yield 12%
  
• Despite being of relatively similar sizes, Malaysia's bond market receives less attention, according to an article in The Star. The share of sukuk in the entire bond market has risen to 36.2% from 28.9% in 2005.
  
• After its rating was confirmed by S&P (although the outlook fell to negative from stable), Gulf Finance House says it is looking at making acquisitions.