Wednesday, April 29, 2009

A lot of news about the sukuk market

Sukuk

Some analysts believe that greater regulation of the sukuk market is needed to attract foreign issuers like Malaysia has. The greater availability of daily prices of sukuk would also help to make the asset class more transparent and appealing to both issuers and investors.

Bahrain is planning a $500 million government sukuk issue to cover the deficits caused by the steep fall in oil prices in 2008. The Central Bank of Bahrain, which issues short-term Al-Salam and Al-Ijara sukuk is planning to issue five year sukuk of unspecified size and coupon.

GS Caltex Corp, a South Korean oil refiner, will become the first Korean issuer of sukuk when it completes its RM1 billion ($278 million) raise in Malaysia.

The London Review of Books has an article on Islamic finance that is generally interesting although not everything in it squares with reality.

The Turkish government sold Lira 737.8 million ($461.1 million) in "revenue-indexed bonds" which links the coupon payments to the government's share of revenue generated by state companies. The government planned on selling up to Lira 1.854 billion in the Islamic bonds that resemble musharaka. Although the maximum issue amount was not met, the proportion of the maximum that was issued was greater than the country's first issue in January 2009 where one-quarter of the planned issue of Lira 1.89 billion was purchased.

Malayia's Securities Commission chairman believes that only $10 billion in sukuk will be issued globally in 2009. This would be significantly below the level in 2008 which was well short of the total issued in 2007. The first quarter was weak but if credit markets in general and sukuk markets in particular unfreeze, there is a large pipeline of sukuk waiting to come to market. Islamic banks are more optimistic, expecting to see between $4 and $7 billion in sukuk from Southeast Asia alone.

Other News

The Dow Jones Islamic Market Index commentary for April is available.

Amlak and Tamweel, two Islamic mortgage lenders in Dubai, will begin lending as separate entities before the final plan that is likely to lead to a merger is announced. Prices in the property markets in Dubai fell over 40% in the first quarter of 2009 according to the Colliers International Housing Price Index.

AAOIFI will initiate a study about how the Islamic finance industry "adheres to its benchmarks with a view to standardizing products". They will seek to determine the degree of Shari'ah-compliance with the institution's 40 standards.

Standard & Poor's and Moody's came out with reports on the GCC and Asian sukuk markets, respectively and the general message was that the market conditions in global credit markets had hampered new issuance, but that the industry was well positioned to grow.
Moody's said: "Sovereign sukuk issuance has already brought significant vitality to the Asian market in 2009. In the medium term this could allow activity to fully rebound,"

S&P said: "We believe that the underperformance in sukuk issuance is due in large part to the effects of the global economic downturn, specifically its influence on capital market issuance in GCC states. We are of the view, however, that notwithstanding the current state of the financial markets, the GCC will be the focus of most infrastructure and project finance sukuk activity in the short to medium term. This is because sukuk funding structures provide an alternative to the traditional bank financing that shows no immediate signs of return in the currently dislocated financial markets."

Monday, April 27, 2009

Catch up from a busy week

  • The Asian sukuk market has rebounded slightly in 2009 as a few sovereign issuers, including Indonesia and Malaysia's government and the Monetary Authority of Singapore have issued sukuk. There are a few other soverign sukuk issues planned this year that could include Tailand and China as well as additional issues from Singapore, the first issue by a government entity in Hong Kong and regular issuance by Malaysia.
  • The 2009 budget for the UK includes taxation changes that provide relief for sukuk from stamp duty for the transactions involved in transferring land between the financer and the SPV. The government had considered issuing a sovereign sukuk, but those plans remain on hold but could come at the end of 2009 or beginning of 2010 at the earliest.
  • A new provider of Islamic home finance was authorized by the FSA in the UK. The newest company is Pink Home Loans.
  • Al Baraka Banking Group, the Bahraini-based Islamic bank that is spearheading the new mega-Islamic bank is planning to launch an Islamic bank in France. The CEO Adnan Yousif indicated on CNBC Arabiya that French regulators have expressed interest in the bank's plans to start an Islamic bank in France.
  • The Central Bank of Bahrain issued BD6 million ($15.9 million) more Al-Salam 91 day maturity sukuk for which there were more than BD25m (a bid-to-cover ratio of 4.17).
  • The Houston Chronicle has an article on Islamic home finance which also provides a criticism of the Islamic home finance from Dr. Mahmoud El-Gamal.

Monday, April 20, 2009

New Islamic bank to have $200 billion in capital; Rushdi Siddiqui on 'opportunity' for Islamic finance

The mega Islamic bank being planned for launch in Bahrain at some point this year will have total capital of $200 billion, according to Sheikh Saleh Kamel, president of Saudi bank Dallah Albaraka Group. The banks shareholders will include the Islamic Development Bank, Albaraka Group, Kuwait Real Estate Bank and '10 other banks'. $100 billion will be raised in investment funds and sukuk. There is a $3 billion IPO that will be listed in Dubai and Bahrain, probably in the fourth quarter. The new bank will be named either "Al-Istikhlaf or Al-Emaar" according to Kamel.

Rushdi Siddiqui, the head of Islamic finance for ThomsonReuters and formerly head of Dow Jones Islamic Market Indexes is quoted describing the 'unprecedented' opportunity available to Islamic finance:
"This is an unprecedented opportunity to seek a 'new or improved' financial intermediation, investing and trading paradigm. In fact I'd go as far as saying that this is a once in a lifetime opportunity to present an ethical alternative to what has been described as an unscrupulous, often highly leveraged instruments, derivatives based without the base investments. Shari'ah law really could be an interesting pathway for G-20 countries on asset backed/based financial intermediation, investing and trading"

France may be the next country in Europe to encourage the development of Islamic finance alongside conventional banking like the U.K. has done. Between 5 and 10% of the country's population is Muslim.

The huge interest in the Indonesian sovereign sukuk may pave the way for other sukuk issuance. The global credit crisis and revisions to AAOIFI standards for sukuk have significantly dampened issuance of new sukuk in the past 4 or 5 quarters.

Saturday, April 18, 2009

Islamic finance liquidity, hedge funds and virtual banking

  • Many Islamic finance practitioners believe that hedge funds are 'unsuitable' for Islamic finance because the costs would make them uncompetitive compared with conventional hedge funds. There is also significant disagreement about the Shari'ah-compliance of many products used in hedge funds such as leverage, swaps and derivatives. The head of Malaysia's Securities Commission, the country's capital markets regulator, believes that hedge funds could help add to market liquidity and they would "assess and consider whether they meet licensing criteria" if an application were submitted.
  • Islamic banks are hurting their resilience and ability to manage liquidity, market and credit risk by relying too heavily on debt-based products like murabaha because they cannot be securitized to meet liquidity needs of banks according to an article in Asharq Alaswat. The article cites the role of Fannie Mae and Freddie Mac in the United States as a model of how securitization can help banks expand and increase the liquidity of their assets.
  • Although only four of Yemen's 18 banks are Islamic banks, they have been gaining market share according to the Central Bank of Yemen and now account for 31 percent of the total assets held by banks in the country. The growth rate of 22 percent in Islamic banks' assets represent 40 percent of the total growth during 2008, a greater than proportional increase.
  • Indonesia's growing deficits are providing a source of supply of sukuk that could increase the country's involvement in the Islamic finance industry. The country just sold $650 million in its first dollar-denominated sukuk and the issue was seven times oversubscribed. The five-year ijara sukuk was sold to a geographically diverse set of investors including 30% from the GCC, 19% from the US and 11% from Europe. The junk-rated (BB-) issue offering a return of 8.8% is rated on par with other external debt issued by the country by Standard & Poor's.
  • Neil Miller, a lawyer with Norton Rose, says that Islamic firms in the GCC are eyeing acquisitions in the West in the wake of the credit crisis and economic recession and could act in the second or third quarters of 2009. He cautioned that the merger process within a Shari'ah-compliant framework is still not well developed.
  • With many investment banks reducing headcount there is a growing pool of experienced bankers looking to enter the Islamic finance industry. The managing director of Global Islamic Banking at Calyon Simon Eedle says that this means "the days of a shortage of Islamic bankers and the outrageous compensation that some were being paid are finished". However, Hidayathullah Baig, the head of Islamic finance at Islamic bank, the First Energy Bank, warns that "there is a danger of these conventional investment bankers trying to impose their ideas onto Islamic structures" that he believes is "very dangerous".
  • Malaysia is continuing to increase the centralization of the country's Islamic finance industry under proposed legislation that would force civil courts to look to Shari'ah advisory board at either the Central Bank, Bank Negara, or the capital markets regulator. The move which comes following several contentious cases looking at the Shari'ah-compliance of the bai bithaman ajil (BBA) contract. BBA is a form of financing similar to murbaha but it is viewed as non-Shari'ah-compliant outside of Malaysia because of its similarities with conventional interest-bearing loans. Judges currently have discretion about whether to seek the advise of the national Shari'ah advisory boards.
  • Islamic banks in the GCC could expand into the West by setting up virtual banks or an online Islamic bank in the UK, Canada or the US according to Mohammed Badi, Principal at the Boston Consulting Group.
  • While there is not universal consensus among Shari'ah scholars of the compliance of several products including BBA and bai al inah, the products in common use are converging towards similar forms. Some of the controversial products like BBA are being phased out in order to attract more clients.
  • The uncertain regulatory environment around Islamic finance, particularly relating to Shari'ah-compliance could hamper the industry's growth. In addition, the economic crisis has led to a near halt in the issuance of sukuk during 2008 and the first quarter of 2009 and, although there is a significant amount of sukuk in the pipeline, if liquidity is not restored to the industry, "there is a real threat to the business of Islamic banking" and "we may not be able to continue doing our business" according to the CEO of Dar al-Shari'ah, Sohail Zubairi. A recovery in the global economy, however, could help the industry recover, as could mergers between institutions.

Tuesday, April 14, 2009

Reuters Islamic finance conference raises a number of important issues

Real estate exposure at Islamic banks

The Islamic International Ratings Agency reports that Islamic banks are weathering the economic crisis better than conventional banks, but "there will be an adverse effect of real estate exposure on their balance sheets, but we don't expect it to be critical". This is a point I have been making for quite some time as some industry practitioners have claimed that the industry is 'immune' to the current economic crisis because they were prohibited from the subprime lending and derivatives trading that sparked it. The reason is not difficult to understand: Islamic banks are closer to what banks have been throughout history in that they act as intermediaries between savers and borrowers to finance business and consumption. This is their appeal outside of their Shari'ah-compliance. However, their exposure to the economic activities they finance mean that changes in the general economic environment have a significant impact on their balance sheets. In the absence of perfect diversification which even banks in huge, developed markets lack, they will be hit by changes in asset prices in the economic sectors in which they have the most exposure. In the GCC for Islamic banks, this is largely (although not exclusively) in energy and real estate because both sectors are 'tangible asset rich'. Islamic financial products as they are designed currently favor these sectors because they provide a tangible asset on which financers can seek recourse if their clients run into difficulty and are not as susceptible to adverse selection. Adverse selection, having clients more likely to default because of the structure of products, is more of a problem with profit-sharing arrangements like mudaraba and musharaka because they give away more of any upside gain (profits) but cushion against some losses. The adverse selection process arises because clients who are most likely to be successful will seek more debt-like products to keep all their gains while those that are less likely to be successful (either naturally more risky projects or less qualified businesspeople) are willing to trade some possible upside for the downside protection that a profit-and-loss sharing arrangement provides.

Another idea that I have been pressing for several months, greater transparency, is also coming onto the front burner as AAOIFI highlights the need for greater disclosures from Islamic financial firms.

Sukuk

The sukuk market was negatively affected by Shari'ah-compliance standard changes during the second half of 2008. Contrary what has been reported, including on this blog, the fall of sukuk issuance during 2008 was probably impacted by the new AAOIFI rules issued in February 2008. According to the CEO of Dubai Islamic Bank which owns Islamic structuring consultancy Dar al-Sharia, "we lost at least $10bn to $15bn since the onset of the crisis". Among the reasons given were that companies approached the sukuk market with a mindset that was identical to that which they approached a conventional bond issue. DIB CEO Sohail Zubairi explained that "sukuk collapsed because the starting point was conventional. If the starting point would have been correct, I'm sure we would still have been up and running". While pinning much of the blame on the issuers not understanding the difference, the freeze up in the global economy still does bear some responsibility for the fall in sukuk issuance in 2008. A Shari'ah adviser with another Shari'ah consultancy Minhaj, Amin Fateh Amer says that "about 85% of what people are dealing with in the sukuk market are not Shari'ah-compliant at all". This was the same figure mentioned by Sheikh Usmani in November 2007 that caused the controversy which led to the AAOIFI Shari'ah board which he chairs to issue further guidance in February 2008.

Other News
  • The takaful market in the GCC has a significant growth potential with estimates from Ernst & Young projecting it will rise to $7.7 billion by 2012. Other participants at the World Takaful Conference 2009 in Dubai provided estimates that it could reach $11 billion by 2015. The growth has slowed from previous estimates like one from HSBC which predicted that the global takaful market would reach $14.4 billion by 2010. European insurers are still weighing whether to enter the market to capture first mover advantage or wait for it to become better developed.
  • There are a number of quotes compiled together from the recent Islamic Business & Finance conference organized in four cities around the world simultaneously by ThomsonReuters. Reuters also has a timeline of the growth of the industry.
  • The Bahrain Financial Exchange plans on launching 10-15 contracts soon including metal-related contracts, up to one-third which will be Shari'ah-compliant.
  • The market for Islamic financial products in Nigeria could grow significantly following the passage of the "Law Governing the Operation of Islamic Banks" which was introduced in mid-March 2009.
  • The overall market decline has caused a proposed Islamic equity fund to be cancelled and put another one in doubt.
  • Islamic investment bank Unicorn is planning a $425 million sukuk by the third quarter of 2009 to fund its expansion, planned largely through expansion. The bank had planned a $1.5 billion sukuk last year that was delayed because of market conditions.
  • The head of the International Islamic Financial Market (IIFM) says that sovereign regulators need to establish more standards for Islamic banking and in particular he pointed out that "we don't have a lender of last resort". Reuters provides a factbox about the regulatory bodies currently operating to regulate the Islamic financial industry.
  • HSBC Amanah, the Islamic finance division of the banking group has scaled back its plans for its worldwide growth and will focus on its largest markets, Saudi Arabia, the United Arab Emirates and Malaysia with a secondary focus on Indonesia, Pakistan, Egypt, Turkey and the U.K.. The group has offered Islamic financial products since 1994.
  • Mashreq unit Badr al-Islami is planning an open-ended sukuk fund to capitalize on the high yields on outstanding sukuk include Aldar Properties, Dubai Electricity & Water Authority and Dar al-Arkan and perhaps also property developer Nakheel. As the sukuk market develops, foreign firms may tap the market starting in 2010.
  • National Bank of Kuwait is awaiting central bank approval to buy 40% of Boubyan Bank, an Islamic bank partly owned by The Investment Dar which has considered selling its stake in Boubyan.
  • Lloyd's plans to begin offering Islamic reinsurance (retakaful) globally beginning in 2010.

Saturday, April 11, 2009

Sukuk illiquidity & the pipeline for sukuk

The sukuk market illiquidity is now having an impact on the issuance of new sukuk as issuers are afraid that it will distort the pricing of new sukuk. Back at the beginning of February, I wrote a post on my blog over at Zawya that the lack of liquidity in sukuk markets was distorting the pricing of outstanding sukuk using the Jebel Ali Free Zone sukuk which had traded at 66, but for which there was little trading. This translates into a yield to maturity of 18%. Since then this sukuk has traded as low as 53, which means it would yield 29% if held to maturity (using the EIBOR+1.31% as of April 10 which is 4.31%).

An article in Arabian Business describes the additional impact this lack of liquidity is having for new issues and cites an estimate from Standard & Poor's that there are $45 billion in new issuance in the pipeline. Badlisyah Abdul Ghani, the CEO of CIMB Islamic, describes "the problem of reluctance on the part of the issuer to issue in the sukuk market. If it's illiquid, then price distortion may occur, and it might reflect badly on them. It creates a benchmark for themselves". The illiquidity of outstanding sukuk--only 25% are publicly listed according to a report by McKinsey--means that when new issues are being priced, they will be based on the prices of sukuk trading in the sukuk market, and a distorted price will increase the cost to issuers. In comparison with conventional bonds, even the most liquid secondary market for sukuk in Malaysia is illiquid. The total trading volume of sukuk in Malaysia is 88% of the total outstanding value compared with 209% for conventional bonds. One of the impediments to secondary market trading is that, besides the good yields offered by sukuk, there are few sukuk traded that one could buy to replace a sukuk sold. It's a vicious circle for creating a secondary market: in order for a secondary market to develop, there need to be sukuk available to buy for holders of sukuk to be willing to part with the ones they have.

PBS, the U.S. public television channel, has a segment on the availability of Islamic home finance in the U.S. and focuses the segment on the Islamic finance company Guidance Residential. Guidance is one of the largest Islamic finance companies in the U.S. and has financed over 5,000 home purchases and during the middle of 2007, the company passed the $1 billion mark for total value of financing closed. Although there is some criticism of Islamic finance companies receiving financing for the Islamic mortgages from government-sponsored enterprises like Fannie Mae and Freddie Mac, an alternative is currently lacking.

Reuters has an article on the growth in Islamic finance that is fairly broad in its scope but includes some focus on the growth of the industry in non-Muslim majority countries.

Wednesday, April 08, 2009

Sukuk to rebound in second quarter?

Shari'ah scholar Dr. Hussain Hamid Hassan says that there will be "several sukuk issues hitting the market within months". The sukuk market has been struggling in the past year as economic and credit market conditions have been challenging. Most recently, sukuk issues fell 37% in the 1st quarter of 2009 compared with the same period in 2008 according to Zawya. The Islamic Development Bank plans issuance of $5 billion in sukuk over the next five years for new programs. The issue will be phased in $500 million initially with a goal of raising $1 billion each year.

The first salary and bonus survey was published for the Islamic financial industry. William Allum, the head of Napier Scott's Middle East practice which conducted the survey pointed out:
"We are seeing pay scale differentials favouring Islamic Banking because of a shortage of skilled, experienced staff. A managing director in Sharia'a structuring, for example, can expect to receive a combined salary and bonus of Pounds 275,000, whereas a similar post in say Russia would attract Pounds 200,000, a significant different [sic]."

Other News
  • Assets in the Islamic finance industry could reach $1.6 trillion by 2012 according to Oliver Wyman.
  • Another Islamic finance company is launching in Sri Lanka, First Barakah Investments Ltd.
  • India's first Shari'ah-compliant mutual fund was launched with Rs. 50 million (about $1 million) in assets.
  • The Swiss Federal Institute of Technology Zurich's International Relations and Security Network, partially funded by the Swiss government, has an article on Islamic finance that provides a description of the industry and includes the arguments of some critics of the industry.
  • The Islamic Bank of Thailand's debut sukuk issue will be for $200 million.
  • Jordan will issue its first sovereign sukuk.
  • The Qatar Islamic Bank is starting a European sukuk fund.
  • The Bank of London and the Middle East plans a listing on the London Stock Exchange in 2010.

Sunday, April 05, 2009

Liquidity risks in Islamic finance; news from Japan and South Africa

An opinion piece in Reuters discusses the possibility for a $10 billion 'mega Islamic bank' to be launched by the end of the year. The most interesting part of the article to me was a few paragraphs that describe the potential for Islamic banks to 'break the buck' on depositor accounts if they suffer more severe writedowns on the real estate projects they financed. Margaret Doyle explains:
"But investors are taking a risk if they assume that Islamic finance is a whole lot safer than its discredited western counterpart. After all, most Gulf banks are heavily exposed to real estate. As Spanish and Irish banks have found to their cost, it is little consolation to avoid complex U.S. sub-prime debt if you are hammered by a local property bust.

"More generally, Islamic banks have yet to test the central tenet of Islamic banking-that depositors are co-investors who share in the risks that they take on. In practice, like U.S. money-market funds, they strain every sinew to ensure they don't "break the buck", or give customers back less than they deposited.

"But big real-estate write-downs could mean that banks do not have enough to repay deposits in full. That would test depositors' loyalty. And many Islamic banks, like their western counterparts, have lent long. Therefore, if depositors turn away from their local banks, they could face a liquidity squeeze just as acute as when wholesale markets closed to western banks in August 2007.
. The bolded sentence was the focus of an article I wrote for Business Islamica magazine last fall that described a hypothetical banking crisis triggered by writedowns on real estate that led to a liquidity crisis following the departure of many depositors afraid their deposits were not safe.

An article on Zawya has an interview with the head of Japanese financial firm Daiwa Asset Management, which recently became the first Japanese company to offer a Shari'ah-compliant ETF which is currently listed on the exchange in Singapore. The Japanese parliament passed revisions to its banking laws in December 2008 that open the way for Islamic finance companies to operate in the country, albeit only allowing them to use a few types of products now, primarily ijara and murabaha.

There is another article that interviews the managing director of the Islamic banking division of Absa, a bank in South Africa.

Other News
  • The Dubai government completed a $600 million ijara facility to refinance the ijara facility coming to maturity this month for Dubai Civil Aviation. The emirate has had its ratings outlook cut.
  • A British website describes the benefits of Islamic banking to an audience of non-Muslims. The head of the Islamic Bank of Britain is quoted as saying: "The concept of sharing profits is quite appealing to non-Muslims as well as Muslims. Up until recently, when banks were making huge profits, the shareholders were obviously taking a share but the depositors were not. I think that grated with many people. Here, the shareholders and depositors are more linked."
  • The Islamic Bank of Britain is launching its first expansion into the Scottish market. The bank is headquartered in Birmingham and has been exclusively focused on the British market until this announcement.
  • Malaysian-based airline AirAsia completed an ijara transaction with French investors to finance the purchase of new airplanes, the first French-Malaysian Islamic finance transaction according to the article.

Thursday, April 02, 2009

Sukuk news and Q1 numbers below 2008

Data from Zawya, which is usually comparable to IFIS data, shows that sukuk issuance in the first quarter of 2009 was $1.8 billion compared with $2.84 billion in the same period in 2008. The 37% fall in sukuk issuance was not completely unexpected because the GCC economies ran into some difficulty as the global economic crisis spilled into the GCC and oil prices, the main source of liquidity, were lower. In 2008Q1, Brent crude oil prices were between $90 and $110 compared with $30 to $50 in 2009Q1. About half of all the first quarter sukuk ($900 million) were issued in Malaysia. However, the widening spreads have attracted investors to the sukuk market and oil prices have been near $50 which could bode well for sukuk issuance in the rest of the year. The percent of sukuk issues originating from Malaysia (50%) are lower than in 2006 (55%) and 2007 (58%) according to International Islamic Financial Market (IIFM). This percentage fell to 36% in 2008 according to Saudi Islamic investment company NCB.

"Brunei has sold B$165 million ($109 million) of Islamic leasing bonds, the government said." According to the article, the small sultanate has continued its issuance of sukuk which began back in 2006. Brunei has large oil and gas reserves and does not need to issue debt in order to cover the governments fiscal expenses but does so in order to aid the development of the sukuk market globally. The ijara sukuk were primarily short-maturity (91-day) sukuk, but there were B$11 million ($7.25 million) in one-year notes issued as well. Since the sukuk issuance began in 2006, the total volume of short-term sukuk issued is B$1.5 billion ($1 billion).

Comments from a scholar and legal rulings in Malaysia on Islamic finance products wa'ad and BBA

A Malaysian Shari'ah scholar says that a promise (waad) made in an Islamic financial transaction is not legally enforceable but said that the other party may be entitled to compensation for the unfulfilled promise. Waad are used in the context of several different products like murabaha and istisnaa. The scholar, Abdulazeem Abozaid, also criticised the Malaysian stock exchange plans to allow Shari'ah-compliant short selling. He said, "First of all, you are selling things that you don't own. Secondly, you're borrowing shares and in return for borrowing, you will be charged some money so it's a conventional loan." A Malaysian appeals court also ruled that the controversial financing product bai bithaman ajil (BBA) is valid. The contract is widely used in Malaysia but is viewed as a disguised loan in many other regions.

Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank, continues his call for increased regulation of the Islamic finance industry to protect it against further problems and deal with 'internal contradictions' caused by standards that vary widely across jurisdictions.

Other News
  • The Sacramento Bee has an article about Islamic finance that is interesting although some of the claims that Islamic finance could prevent the recession are questionable, as I have described in previous posts.
  • HSBC Amanah received approval from the Hong Kong Monetary Authority to issue sukuk.
  • University Bank in Michigan received a cease-and-desist order from the FDIC relating to compliance issues at the bank that the bank says have already been addressed. None specifically mentioned the bank holding company's Islamic banking subsidiary.
  • The Islamic Bank of Britain is attempting to broaden its client base outside of the group of clients who will be drawn by their faith by describing their product's price competitiveness. The commercial director at the IBB describes: "The bank is open to customers of all faiths, so my call to UK homebuyers and homeowners is to put any misapprehensions to one side and come and find out how a Home Purchase Plan from IBB can really make a difference to your pocket."
  • Fitch cut its rating on Kuwait Finance House due to its exposure to other GCC investment banks. Other investment banks, including a few Islamic banks, have run into trouble in the economic crisis.
  • The latest Central Bank of Bahrain al-salam sukuk was significantly oversubscribed.

Wednesday, April 01, 2009

FT article on the Islamic financial services industry

The Financial Times has a fantastic article about the Islamic financial services industry that includes some very interesting descriptions that, while not new, are described clearer than I have seen in other articles about the industry. A few quites:
"To be clear, many of the Gulf’s Islamic banks have not been immune to the financial crisis – the liquidity squeeze in the region has put pressure on these banks just as much as their conventional counterparts."
[...]
"As Emmanuel Volland, analyst with Standard & Poor’s, the rating agency, says: 'Islamic banks were not caught by toxic assets as sharia law prohibits interest. At the same time, you can create and invest in very risky assets and be sharia compliant.'"
[...]
"Now, as their profits decline, banks are dipping into “profit equalisation reserves” to keep depositors satisfied. But they will face a dilemma if the economic downturn continues. Devout Muslims have increasingly migrated to Islamic banks in recent years, but will the trend survive if some of them start losing their money?"
[...]
"Last year a leading sharia scholar questioned a popular type of sukuk that promised to pay back the face value of the bond at maturity or in case of default. The scholar argued – and others had to agree – that this guarantee ran counter to the spirit of Islamic finance, which stipulates that risk must be shared."

"For those who closely watch the industry, there are more pressing concerns. As a recent S&P report noted, because of a lack of liquid sharia-compliant asset classes, some Islamic banks invested in equities, exposing themselves to the correction of recent months. The leading risk today, however, comes from the exposure to the real estate market. The rating agency estimates that this amounts to 20 per cent of total loans."
[...]
"It may have been lucky so far, and perhaps it will learn lessons from the troubles of conventional banks. But Islamic bankers will also have to think harder about how the industry can develop, and how it can resolve the tensions within."

I fully agree that the industry has to some degree avoided problems because of its relative youth. The liquidity management concerns have been a frequent area of concern for me because the global economic crisis is not over yet and the industry, partly because of lack of interbank money markets, has been more cash-rich than conventional banks. The institutions including a few Islamic investment banks and mortgage providers have had difficulties and many in the GCC region have relied upon government capital infusions to shore themselves up as they faced difficulty issuing sukuk.