Commodity Murabaha House, other news

Apologies for the lack of posting over the last month or so but I have been furiously finishing a report on Islamic finance in North America which will be released by Yasaar Media shortly. While it is being finalized, I would strongly suggest that you visit the Yasaar Media website and read the Islamic Investment Banking 2009 report (PDF) they released recently.

The Malaysian plans to encourage commodity murabaha through a trading house are progressing with a few details coming out about the Commodity Murabaha House (CMH). The CMH will offer trading in palm oil and be distinct from the palm oil futures market becasue it will only be spot trading. The CMH is beneficial by organizing the commodity murabaha participants thus likely reducing costs, but could attract similar controversy as the 'organized' tawarruq did specifically because all of the transactions were 'organized' by the bank offering financing and therefore was viewed to be blurring the lines betweeen a trade-based financing and interest-based financing.

Other News

• Arab News sits down with Thomson Reuters global head of Islamic finance Rushdi Siddiqui.
  
• Bank of London & the Middle East set up a Shariah Dollar Income Fund, an Islamic money market fund with seed capital of $50 million.
  
• A writer in the Huffington Post suggests that Islamic banks should adopt more mobile banking products.
  
• Petronas is planning to issue bodns including a five-year sukuk.
  
• Capital ME has an interview with Nizam Hamid, the Managing Director for iShares Europe about ETFs including three Shari'ah-compliant ETFs available in the U.K.
  
• Islamic finance will play a large part in the reviaval of Asian economies following the global financial crisis according to Kuwait Finance House.
  
• Plans are underway for Kuwait's fourth Islamic bank, which will be 24% owned by the sovereign wealth fund Kuwait Investment Authority.
  
• Indonesia's government will issue IDR 1 trillion ($100 million) in sukuk using an auction rather than a bookbuilding. The government could begin auctioning sukuk monthly if demand is robust.
  
• Saturna Capital announced its Director of Islamic Investing Monem Salam will become the President and CEO of Saturna Brokerage Services.
  
• Citibank Bhd, the Malaysian arm of Citigroup is expanding its Malaysian operations including adding an Islamic subsidiary.
  

SRI and Islamic finance: similar but disconnected

I had a chance to read through the recent report from Novethic (linked in the previous post), a SRI firm in France, about the compatibility and similarities between Islamic finance and socially-responsible investing/sustainability. The report did a fairly good job at laying out the ethical/religious underpinnings of both areas although there was more content about 'what' for each that the section on the comparison between the two was somewhat lacking in depth.

The main conclusion of the report is that the two areas share many of the same motivations for the screening of investments, although Islamic finance has a larger list of prohibited areas of investment due to the prohibition of riba as well as additional 'sin' screens. In contrast, SRI includes additional environmental, social and governance (ESG) screens (including those from the UN Global Compact) than Islamic finance. SRI, in contrast to most Islamic finance, has expanded the way in which it looks at possible areas of investment in that in addition to removing the negative, it encourages the positive through investment decisions that focus on 'best-in-class' companies, for example, in the various areas of interest (primarily ESG-related).

This analysis is, in my view, largely correct and does not necessarily mean that the Islamic finance industry does not care about promoting the positive, but the industry is still young and has other more pressing challenges due to the prohibition of riba that excludes many of the financing methods used elsewhere in the financial world. However, Islamic finance is not necessarily only focused on avoiding 'bad' companies/investments/financial products and to move the entire industry from catering to the needs of Muslims to avoid many areas that contradict the religious rules to one that offers an alternate vision of the relation between the financial world and the rest of the economy, there should continue to be work done on moving beyond negative screens.

One way that is currently more talked about than acted upon comes up when some commentators say that the Islamic financial industry is 'immune' to crisis or that it avoided the bulk of the crisis. Part of that was due to its relative newness; it did not have time yet to run out of investment opportunities in the traditional areas which many conventional banks had in some ways and to continue to produce profit growth ventured into subprime housing markets with disasterous consequences. Although some asset-based rather than asset-backed sukuk are raising important questions about the claims investors have over underlying assets, the linkage (not always absolute) between investments and assets should serve as a point for the Islamic finance industry to reach out to the SRI industry.

It may not be a focus of the SRI industry that there are other important areas of the financial system that have ethical dimensions involved besides those that are socially detrimental or environmentally damaging. However, the current economic crisis does show a case where the financial structure on which the housing market, for example, was based to some degree on the fallacy that housing prices CANNOT fall. All it took was a little deregulation and some financial sector 'innovation' to take this fallacy and create a situation where housing supply was excessive and the banks who securitized the mortgages and encouraged the lending spread the harm across many areas of the economy when housing prices violated the fundamental assumption.

That is not to say that a housing bubble could not occur with Islamic finance. It did, for example in Dubai where Islamic finance has a sizeable stake, and sukuk, for example, are currently suffering as a result. However, the more conservative nature of the Islamic financial industry leaves less room for excessive securitization and the search for fees through re-securitization and creating derivatives on these securities. While it may not be the case that Islamic finance makes a different mortgage (the economic outcome is usually identical), there are more incentives from the ethical framework to strive towards creating economically-distinct products that can provide a model by which SRI can expand beyond its investment focus and towards becoming socially responsible finance.

DIFC report, IsDB considering financing options, working paper on SRI & Islamic finance

• A report from the Dubai International Financial Centre says the industry could have assets of $4 trillion dollars in ten years. That would represent about a four-fold increase from the estimated $750 billion to $1 trillion in assets in the industry today. The report is an update to a similar report released earlier.
  
• The Islamic Development Bank is considering several options to raise money and their sukuk issue, projected at $500 million, may end up being $750 million or $1 billion depending on investor interest. The sukuk issue is a part of the bank's multi-year, $6 billion sukuk program.
  
• A working paper from Novethic, a French socially responsible investing research center, explores the similarities between Islamic finance and socially responsible investing/corporate social responsibility.
  
• The emirate of Ras Al Khaimah's sukuk issue will be rated 'A' by Standard & Poor's and Fitch. The sukuk will be raised through a Cayman Islands-domiciled SPV, RAK Capital. The sukuk will raise $400 million with a 5-year maturity.
  

Yasaar Media report, Canadian sukuk, corporate sukuk market in the GCC

Yasaar Media released a report on Islamic investment banks recently. I am still reading the report and hope to have a post dedicated to it here and on my blog at Zawya.com. The report is available from Yasaar Media's website (pdf)

The second North American sukuk is expected to come from of Canadian company, Bear Mountain Resorts, by October. The sukuk will fund part of a resort community near Victoria, British Columbia and is expected to be about $380 million. The sukuk is being launched with the assistance of Siraj Capital whose CEO Ibrahim Mardam-Bey worked on the East Cameron sukuk which is now in bankruptcy while he was at Lebanese firm BSEC.

A new fund being offered by Dubai Islamic Bank provides investors with capital-protected returns based on a long-short strategy tracking the Rogers International Commodity Index Enhanced ex-Lean Hog, a commodity index. The structure of the transaction is not specified but seems like it is similar to a controversial product that used a total-return swap on an index and is likely to restart arguments about the products' desirability from a Shari'ah perspective that were raised by Sheikh Yusuf DeLorenzo.

Despite the many sovereign sukuk being issued by GCC governments, the corporate sukuk issuance market may remain largely frozen until 2010 according to Arab Banking Corporation managing director Naveed Khan. The delay between new sovereign issues and new corporate issues is expected to be caused by the higher pricing of the sovereign sukuk compared to where they were before the credit crisis.

Other News

• HBG Holdings will invest in companies listed on London's Alternative Investment Market (AIM) through a Cayman Islands-domiciled Shari'ah-compliant private equity fund. HBG Holdings' shareholders are primarily institutional and private investors from the Gulf region.
  
• One of the sukuk funds launched recently, Emirates Investment Services' Emirates Sukuk Fund No. 1, announced it had gained 8.5% in the first 3 months since inception.
  
• Investors in Saad Group's Golden Belt 1 Sukuk are forming a committee to represent them, according to Reuters.
  
• Malaysia is 'well positioned' to help Islamic finance in Europe according to Malaysia's ambassador to Brussels, Hussein Hanif.
  
• An article about Abu Dhabi National Energy (Taqa) includes the note that the planned sukuk from Ras al Khaimah may offer a coupon between 8% and 8.5%.
  
• In the Islamic finance industry, aggregate size numbers are always rather suspect because there is no centralized methodology on how it is calculated, but according to one article, the industry now has more than $1 trillion in assets.
  
• Despite attempts by the Japanese government to attract Islamic finance, it is having difficulties gaining steam and the Japan Bank for International Cooperation (JBIC) sukuk that has been planned for a while may be further delayed.
  
• Australian investment bank Macquarie is in Malaysia and may be considering issuing a sukuk.
  
• Islamic finance may provide benefits to Muslim and non-Muslim homeowners in Scotland, according to an article.
  

Twitter

I have decided that Sharing Risk needs a Twitter page to provide updates on the Islamic financial industry. The new page is www.twitter.com/sharingrisk. Please check there for the most up-to-date news and come back to the Sharing Risk dot Org blog for the analysis of the news.

Wa Salam.

Blake Goud
Sharing Risk dot Org

Islamic finance in Australia, U.K.; sukuk issuance in the GCC; the problems of default in sukuk markets

The Assistant Treasurer of Australia gave a speech (text of speech) at the opening of an Islamic banking & finance seminar at Latrobe University. The text of the speech, which includes a review of the industry in Australia. The Muslim Community Co-operative (Australia) Ltd. (MCCA) hopes to receive a banking license to convert to become the first Islamic bank in the country within the next three years. It is currently licensed as a non-bank financial institution. Regardless, the Assistant Treasurer beliees that there will be an Islamic bank in Australia within five years.

The UK treasury minister responsible for Islamic finance policy, Sarah McCarthy-Fry, said in a speech at the Sukuk Summit that the UK Treasury's decision not to issue a sukuk "in no way reflects a diminished government commitment to Islamic finance in the UK. I hope that other progress, including the measures announced in the recent Finance Bill (2009), will pave the way for the Islamic finance industry to grow".

The Emirate of Ras Al Khaimah is marketing the second part of its $2 billion sukuk. The Islamic Development Bank could increase its $500 million bond which is part of a five-year plan to issue $6 billion in sukuk.

Up to 5-8% of all sukuk could be at risk of default, according to industry experts, particularly those financing real estate projects and which are not backed by any sovereign or quasi-sovereign company. Also, Malaysian Central Bank governor Zeti Akhtar Aziz does not see any systemic implications of the default of the Saad Group sukuk.

In addition to GCC-based Istikhlaf, there are several groups considering launching a mega-Islamic financial institution with more than $1 billion in paid up capital in Malaysia according to Bank Negara, the Malaysian Central Bank.

There is an interesting article from Reuters that describes the tension between the Shari'ah restrictions and pressure from institutions seeking the highest return for their investors. The article also notes that this desire for profits as well as some compensation from company management is paid to scholars as 'incentive' payments stoking fears of conflict of interest, particularly for scholars who sit on many institutions' Shari'ah boards.

Other News

• The National has a good article on the development of takaful, and in particular the recent growth in re-takaful.
  
• Moody's revises its JAFZ sukuk rating to reflect a greater degree of inter-dependence with Dubai world than originally indicated in the original assumptions.
  
• HSBC Holdings head of capital markets for the MENA region, Rajiv Shukla, says that the Saudi Electric Company sukuk could mark a turning point in the sukuk market because "There is a solid pipeline of potential issues, and we should see more in the second half of this year".
  
• There is a summary of the sukuk market and its potential that is fairly comprehensive.
  
• Another Islamic fixed income fund is launced, this one by Badr Al-Islami and Mashreqbank.
  
• Noor Islamic Bank converted the UAE government deposit into Tier II capital to improve its balance sheet and raise its capital adequacy ratio.
  

Canadian company sukuk, Islamic finance in China, faith-based ETFs in the U.S.

The wave of sukuk defaults will test the industry as well as the prospect for investors to receive judgements in English courts that govern the sukuk SPVs. The next step will be to try and enforce these judgements in the GCC, according to an article in Euromoney.

Bear Market Resorts is planning a $380 million sukuk that will be issued in August. It would be the first sukuk in Canada and one of few by North American issuers. Siraj Capital is working with the company on the sukuk having previously worked on the East Cameron sukuk which is currently being affected by the issuer's bankruptcy. Following the East Cameron sukuk issue, Siraj Capital announced it was nearing a commitment to work on a sukuk for a NYSE-listed oil and gas company that was never issued.

A research economist at the Qatar Central Bank, Syed A. Basher, writes in an article published in Gulf News that despite the growth of Islamic finance throughout the GCC, the level of government support for the industry has varied widely with Bahrain and Kuwait being the most supportive and Oman and Saudi Arabia lagging behind.

Following the launch of the first U.S.-based Islamic ETF, The Dow Jones Islamic Market International Index Fund (NYSE: JVS), another companies, FaithShares, there is an article about FaithShares which requested approval in April to launch its own ETFs to meet screening criteria of other faith groups including Baptist, Catholic, Christian, Lutheran and Methodist.

The Bank of Ningxia plans a pilot project to test the offering of Islamic financial products in the region which would be the first within China.

Other News

• Islamic microfinance industry is being encouraged in Pakistan by a group, the Alhuda Centre of Islamic Banking and Economics which has launched a helpdesk to help microfinance institutions that want to shift form coonventional to Islamic finance.
  
• Moody's says that Islamic banks in the GCC should 'change their business model' to adapt to the post-financial crisis world.
  
• The joint-Islamic Development Bank/Asian Development Bank Islamic Infrastructure Fund announced that it had raised $266 million towards the $500 million it expects to begin with, most of which came from the Islamic Development Bank and the Asian Development Bank.
  
• As part of its regulatory reforms, France plans on changing laws to ensure that Islamic financial products can be offered in the country which has one of the largest Muslim population in Europe.
  
• The Central Bank of Bahrain redeemed its $250 million ijara sukuk that was issued in 2004 following its maturity.
  
• Islamic banking could grow in Africa following Al Baraka's listing on the Johannesburg Stock Exchange according to an article in African Banker.
  
• Malaysia and Singapore have both been making regulatory changes to encourage inflows of capital from the Middle East, including through Islamic finance.
  

Islamic ETF in the U.S., sukuk data from 2009Q2

One of the areas of Islamic finance in the United States that has remained relatively stagnant in terms of developing new products and the entrance of new companies is Islamic investing. However, with the launch of the first Islamic ETF in the US, this is changing. The new ETF is the Dow Jones Islamic Market International Index Fund and it is based on the Dow Jones Islamic Market Titans 100 Index composed of 100 large international Shari'ah-compliant equities. The new ETF was launched by Javelin Investment Management. The index will be rebalanced annually except for corporate actions like delistings and mergers which will be adjusted as needed.

Despite a recent surge of sukuk issues in the GCC, the pricing of these sukuk remain elevated compared with the pricing from a year or two ago. The latest reminder is the Saudi Electricity Corporation sukuk which was priced at SAIBOR+160bps compared with SAIBOR+45bps for their first sukuk in 2007. The increase could be due to a combination of factors including recent defaults as well as the impact of the credit crisis which reduced risk appetite and a fall in the oil price since its highs of $147 per barrel last year which has reduced capital inflows into the GCC.

The sukuk market for new issuance in the second quarter is 35% below the same period last year, but a pickup in activity of 164% in the second quarter compared to the first quarter as well as a healthy pipeline indicates that recovery may be in sight, according to Zawya.

Other News

• First Community Bank, an Islamic bank in Kenya, launched an investment banking subsidiary, FCB Capital, the first of its kind in the country.
  
• Mawarid Finance, an Islamic financial company in the UAE, signed an agreement to cooperate with the Dubai government in promoting small and mid-sized enterprises (SMEs) and hopes to sign similar agreements in the other Emirates.
  
• A law passed in the Malaysian parliament would make rulings by the Shari'ah Advisory Council binding on courts when the courts refer disputes to the Council. A member of parliament complained during debates that the Islamic financial industry is too focused on profits and rates in line with conventional financial industry interest rates are too high.
  
• Growth of the HSBC Amanah brand in the UAE suggests a lot of demand for Shari'ah-compliant financial services, according to Frank Kane writing in The National.
  
• The six major Pakistani Islamic Banks are close to launching an Islamic interbank market to avoid relying on conventional short-term financing.
  
• Islamic finance is finding a nexus between Shari'ah-compliant investments and a focus on sustainability with recent investments in the water industry and agriculture.
  
• Sukuk holders of the Golden Belt 1 sukuk were unable to reach a decision on whether to dissolve the sukuk and receive a payout. The sukuk was issued by the troubled Saad Group.
  
• At a time when some sukuk issuers are under pressure to meet their obligations, Kingdom Installment Company is redeeming the full value of their ijara sukuk that financed 5,000 home purcahses and was launched in 2006.