Investment Dar, zakat fund, SRI and Islamic finance, IBB sees wider loss, France not ready for Islamic banks

The Investment Dar is making progress with its creditors having reached a Standstill Agreement, which will postpone the claims by its creditors as part of its restructuring plan. There is not yet final resolution of the $100 million sukuk which the Investment Dar defaulted on, but the Standstill Agreement is a step on the way to a possible resolution.

A zakat fund managed by BMB Islamic is nearing launch. However, the fund has generated some controversy from Shari'ah scholars who argue that zakat is meant to be distributed to the needy and not invested.

A publication bringing together the contributions of 19 lawyers will explain the legal and Shari'ah aspects of Islamic finance will be published by Chancellor Publications. It was edited by Humayon Dar and Umar Moghul.

The BBC has an article on Islamic finance, one which describes the growth of Islamic finance, particularly in the U.K. following 9/11 when investing in the U.S. became more difficult and was perceived as having additional riskiness.

There is an interesting article from Gulf News about the differences between ethical investing and Islamic investing. While there are similarities in many of the screens used by Islamic and socially responsible investment funds, there are differences that may make some Shari'ah-compliant investments not pass other ethical screens, primarily those around environmental issues because Islamic indices have an overweighting in energy companies which often are not the most green.

Dr. Abbas Mirakhor warns that Islamic finance can face systemic failure and reputation risks because it is not well enough regulated internationally and in some countries. He was speaking at the Malaysian Securities Commission and said that the Malaysian system had the most advanced regulatory system for Islamic financial industry that could serve as a model. He also spoke about the potential for a food and commodity crisis. At an Islamic Financial Services Board seminar, Dr. Zeti Akhtar Aziz, the Bank Negara Malaysia governor said that the Islamic financial industry has been resilient and continues to grow and innovate with new products. However, there remain gaps in the legal framework, Shari'ah standardization and and Islamic financial products face different risks from conventional products. A prominent scholar Mohamed Akram Laldin says that Shari'ah scholars should be held accountable for "clear mistakes in their decisions".

The Islamic Bank of Britain saw its loss widen as the economic conditions and the low benchmark interest rates hurt the profitability of their increased deposits. The bank says it may need to scale back its growth unless it raises additional capital in order to continue its compliance with prudential capital requirements.

The head of France's central bank, Christian Noyer, says that the country is not yet ready to issue an Islamic banking license yet because of concerns over safety and soundness. The French Central Bank, which does not control monetary policy following the foundation of the European Central Bank, has been approached by several institutions looking to establish Islamic banks in the country, but does not yet have the same level of knowledge and familiarity with Islamic banking as the U.K. regulator, the Financial Services Authority.

The lising of sukuk from Petronas and Cagamas could signal the continuing growth in the sukuk markets following the credit crisis. In the wake of the credit crisis as the effects spread globally throughout the financial markets and economies, the issue of new sukuk nearly completely dried up compared to 2007 when a record amount of sukuk were issued.

Other News

• Jamelah Kamaluddin becomes the first woman to head an Islamic bank with her appointment last year as the managing director of RHB Islamic Bank.
  
• South Korea is offering tax incentives to promote the use of sukuk and has changed regulations to ensure that the profits for sukuk holders receives the same tax exemptions as interest payments on conventional bonds.
  
• Kuwait Energy received a $50 million murabaha financing from the World Bank Group's International Finance Corporation.
  
• An article discusses Islamic ETFs, including the recently launched, U.S.-based Javelin ETF, which has not turned interest in it yet into significant trading volume. The ETF market in the U.S. will be broadened with the launch of 2 new funds from ShariahShares, managed by California-based Florentz Investment Management.
  
• Bloomberg will focus on Islamic finance in its expansion in the GCC.
  
• The Muslim Community Cooperative Australia launched another fund, an Income Fund, following its launch of a Mortgage Income Fund.
  
• Bank Negara Malaysia, the Malaysian central bank, has signed an agreement with the Hong Kong Monetary Authority to cooperate on financial issues particularly Islamic finance.
  
• The National Bank of Kuwait launched its third Kuwaiti Dinar-denominated Ijara Fund.
  
• Malaysian firm Sime Darby will issue RM4.5 billion ($1.3 billion) in medium-term Shari'ah-compliant notes
  
• The report I wrote for Yasaar Media is briefly described in a press release available from AMEinfo.
  
• Ernst & Young is organizing a conference on Islamic finance in the Channel Islands. Islamic retail banking executives and Shari'ah scholars will meet for a conference in Dubai on October 12 to discuss the future of the industry.
  

Yasaar Media report to be released on Friday, September 25

UPDATE (Sepember 25): The PDF of the report is available from Yasaar Media.

The report I wrote for Yasaar Media on Islamic Finance in North America will be released tomorrow, but the press release came out today. The report shows the history of how Islamic finance developed in the United States since the 1980s. A lot of the headline grabbing developments have been retail-oriented, but the U.S. represents the destination of significant Shari'ah-compliant investment from the GCC and other parts of the world. The depth of the U.S. capital markets and breadth of the economy has provided a way for investors around the world--including in the GCC--to diversify their investments, and this extends to those using Shari'ah-compliant financing.

The press release is below, but the report will be available tomorrow from Yasaar Media.

Yasaar Media is a specialist media house that focuses exclusively on the Islamic finance domain. The founders of Yasaar Media recognise that there is a serious need for an information provider in the Islamic finance space: a provider that produces in-depth reports and studies on specific market niches, asset classes and countries. These reports are designed to be market-defining works that will become the benchmark in their field. As the Islamic finance industry grows and expands so too does the need for high quality analysis and comment that is produced in a timely fashion.

North America Next Big Growth Market for Islamic Finance

Dubai, 24 September 2009

As world economies struggle to move from recession to recovery, Islamic finance is being hailed as a possible alternative to risk-prone conventional financial services – even in the capitalist heartlands of the USA and Canada. Extensive evidence of this shift in action is presented in a new report called Islamic Finance in North America 2009 published tomorrow by Yasaar Media and co-published by Codexa Capital, UM Financial Group, King & Spalding, and Doha Islamic.

The report explores for the first time the true depth of penetration of Islamic finance in both the USA and Canada and concludes that both core North American markets could be set for a boom.

According to the report Islamic finance in North America has developed along two quite separate paths. The first path focuses on retail Islamic finance and centres mostly on home financing products and credit cards. The second path involves a number of high profile GCC-based Islamic investment banks and their deployment of hundreds of millions of dollars in private equity and real estate developments in North America.

With many global markets showing the first signs of emerging from the worst of the financial crisis, North America could be set to witness a surge in Islamic finance activity along both paths as institutions and individuals look for alternative financing propositions that shun the use of excessive risk. The significant inroads that Islamic finance has made in both the USA and Canada look set to be expanded upon in the years ahead.

Paul McNamara, editorial director of Yasaar Media, says, ‘Investors and businesses alike are still smarting from the worst ravages of the global recession and they are looking for a lower-risk alternative. Islamic financing structures are inherently more risk averse than their conventional counterparts and as a result such structures are now being studied closely in all sorts of markets – including highly sophisticated markets like those of North America’.

These important markets are examined for the first time as growth areas for Islamic finance. ‘Both the USA and Canada are home to some very experienced Islamic finance firms – both on the financial and the legal side – and many market observers are now watching closely to see how they will help accelerate development of Shariah financing in North America. These are lucrative markets and it makes sense that GCC- and Malaysia-based Islamic finance houses are watching them with great interest’, according to Mr. McNamara.

Islamic Finance in North America 2009 is published by Yasaar Media tomorrow (25-09-09)

Sukuk markets, tax changes in France, sukuk could reach $16 billion in 2009

The Saudi Electric Company $1.87 billion sukuk could be the beginning of the resurgence in the sukuk markets according to an HSBC official. He cited a strong pipeline of sukuk. However, there has been a strong pipeline cited for nearly a year (up to $45 billion according to S&P). The catalyst could be the SEC sukuk because of its size (or the Petronas sukuk which came out of Malaysia shortly after). However, despite strong demand for the SEC sukuk which was oversubscribed, it still had a yield of SAIBOR+160bps compared to SAIBOR+45bps for the sukuk it issued in 2007. This suggests that although there is resurgent demand, it is still focused on sukuk issued by high-grade corporate issuers and sovereign issuers. Until there is a large sukuk outside of these categories or the pricing of new issues improve--which may improve following the resolution of the Nakheel sukuk by December of 2009--the sukuk in the pipeline will most likely stay in the pipeline.

France changed laws to facilitate the issuance of sukuk. The sukuk--by an unnamed financial institution--which would be the first in France and is expected to be up to €1 billion is being pushed back to later this year or early 2010 by "a number of challenges from the Shari'ah and legal point of view".

The global sukuk market will reach $16 billion this year according to Badlisyah Abdul Ghani of CIMB Islamic, with a majority coming from Malayisia. Also Gatehouse Bank in the UK executed a cross-border commodity murabaha transaction with CIMB Islamic using the Kuala Lumpur-based Bursa Suq Al Sila. Finally, CIMB Islamic confirmed it had invested "a couple of million dollars" in the Saad Group's Golden Belt 1 Sukuk. In the GCC, the sukuk issuance over the year to July 31 was $4.3 billion compared to $12.8 billion in conventional debt.

Other News

• Delphi Trade Inc is starting a Shari'ah-compliant fund to help US firms finance exports.
  
• Islamic finance must broaden its portfolio in order to continue growing.
  
• The new conservative government in the UK remains committed to enhancing London's stature as a Western center for Islamic finance.
  
• Bursa Malaysia sold 25% of its derivatives business to CME Group which will make these products available in the US through the CME's electronic platform.
  
• Parts of Nakheel may be folded into Istithmar World, the investment arm of Dubai World.
  
• The Nakheel sukuk redemption looms, but other Dubai-based companies may be planning bond offerings.
  
• Indonesia will plan to offer sukuk with maturities of greater than 5 years in their regular offerings beginning this October.
  

Islamic finance workshop in Malaysia

I have preparing for a 2-day workshop on Islamic finance that will take place in Kuala Lumpur, Malaysia on October 12-13 and have not been able to post as frequently as normal. I am looking forward to giving this and I would suggest that anyone interested should take a look at the description of the workshop, available from the conference organizer's website and register. The contact information for the organizer is also available on that site and they can provide a brochure with greater details about the topics covered.

Entering the 4th year of this blog

I began writing this blog exactly three years ago in September 2006 and it has led to a lot of interesting discussions with other people throughout the Islamic financial industry. The landscape of the Islamic financial industry has changed signficantly since 2006 and has gone from being a rapidly growing industry in a positive economic climate to becoming a more established, but still rapidly growing industry that has now survived its first great test with the credit crisis that originated in the United States market for subprime mortgages which spread into a global economic crisis.

The economic recession has placed significant strain on some institutions within the Islamic financial industry and a few have defaulted on their sukuk, but overall the industry has held up rather well. The conservative lending practices and large liquidity buffers that most Islamic banks have has left them standing even as other banks throughout the world have not survived. The industry has not been immune to the crisis, but has for the most part made it through.

Although the Islamic financial industry in its current form is about 35 years old, this is not the first crisis it has weathered, but the tremendous growth, in particular since 2000 means that this is a much larger industry today than it was even a decade ago. The success in surviving one of the most global downturns intact suggests that Islamic finance has staying power and can continue to grow larger and more mature and continue to emerge from the shadows of being considered just a 'niche' industry.

For a glance back at what was being discussed when I began writing this blog, I went and found a few quotes from posts in September 2006.

September 14, 2006: "Dubai International Finance Centre (DIFC) has begun planning to become marketmakers in the sukuk (Islamic bond) market. Currently, there is little in the way of a secondary market for these instruments, so they are illiquid and held until maturity. The DIFC predicts that with sukuk issuance expanding from US$ 13 billion today to US$100 billion in five years, there will be an expansion in secondary markets for sukuk.

September 17, 2006: "Nadim Fattaleh, regional director at Boeing Capital Corporation (BCC), among industry experts, predicts that sukuk (Islamic bonds) backed by aircraft could become a large market. The aircraft would be purchased using investors' funds and then leased to airlines for use (ijara if the asset remains owned by the original purchaser or ijara wa iktina if the lease ends with the transfer of the property to the lessee). "

September 20, 2006: "The offered musharaka sukuk [for The Investment Dar] is the first of its kind to have a put and call options that let the buyer exit at year three with the same provision for the seller. The sukuk has been approved by the Shari'ah boards of both Unicorn Investment Bank and Investment Dar. "

September 21, 2006: "The Texas-based oil company East Cameron Partners made the first U.S. originated sukuk issue with their US$165.67 million issue. The issue was handled by Merrill Lynch and the Beiruit, Lebanon-based company Bemo Securitisation (BSEC), which provides Shari'ah-compliant securitization to SMEs."

Malaysia leading in sukuk, CBK appoints monitor for TID, Nakheel sukuk rises on comments, derivatives framework by year end, Islamic finance in France

Malaysia remains the largest issuer of sukuk representing 45% of total issues followed by Saudi Arabia with 22% in the first 7 months of 2009 according to a report by Standard & Poor's. The largest issuer was Saudi Electric Company which issued a $1.8 billion sukuk. 20% of the sukuk issued were denominated in US$, up from 10% in 2008. 3/4 of all new issues were from sovereign issuers. In another report, the Securities Comission of Malaysia reported that through August 2009, more sukuk had been issued than all of 2008 which amonted to 58.2% of the total issuance of sukuk & bonds in the country through July (p from 57% in 2008).

The Investment Dar, whose sukuk is in default, has not filed its 2008 financial statements yet and will be monitored by a temporary monitor appointed by the Central Bank of Kuwait.

Troubled property firm Nakheel saw its sukuk rise over par in secondary market trading after Shaikh Mohammed bin Rashid Al Maktoum, ruler of Dubai, said he was not worried about either the $1 billion in maturity debt for the Emirate or the $3.52 billion maturing Nakheel sukuk. Speculation has been rising that Dubai will bail out Nakheel using the $20 billion it raised recently with half coming from the UAE Central Bank. I wrote a summary of this sukuk earlier this year when it was trading at a substantial discount to par.

The International Islamic Financial Market (IIFM) will finalize a master agreement for Islamic derivatives by the end of the year. The agreement, called Ta'Hawwut may be based on Arbun, which has been used to replicate call options in a Shari'ah-compliant way. Derivatives like options and swaps have have attracted some significant criticism for simply replicating conventional products. I recently wrote a blog post on whether all innovation is necessarily beneficial within the Islamic financial industry.

France wants to attract Islamic finance, but concerns remain about how well Islamic retail institutions would fit in with the country's strict separation between religion and state. The author of the article in Reuters has a blog post at the website providing additional insight behind the article.

An Australian newspaper has an article on the MCCA co-operative that recently offered a retail Shari'ah-compliant mortgage interest fund. It's an interesting article about a product that is not available in much of the world in Shari'ah-compliant fashion. However, it is available to some extent in the U.S. and Canada also in the co-operative model. However, one of the significant limitations of the co-operative model is that it often faces a shortage of capital to fund the home purchases for the members because it cannot access capital markets by securitizing the mortgages or, in the U.S., by using funding provided by Freddie Mac.

Other News

• The government of the Indian state of Kerala plans to set up an Islamic bank according to the region's finance minister.
  
• Two Bahrain-based Islamic investment firms, Inovest and Tharawat, are investing $32 million in a water filter production company.
  
• An article on the recovery includes what I think is an important reminder that "'Islamic Finance's immunity is a myth which is brought up persistently', says Fares Mourad, Managing Director and Head of Islamic Finance at Swiss private bank Sarasin."
  
• Does Islamic finance need more supervision?
  
• Malaysia's state-owned body which owns transit assets priced RM2 billion ($573m) in 15- and 20-year sukuk.
  
• Kuwait Turkish Participation Bank, majority owned by Kuwaiti firm Kuwait Finance House, received approval to conert its commercial office in Mannheim into an Islamic banking institution by the end of 2009 or early in 2010.
  
• Abu Dhabi's Tourism Development & Investment Company may raise $1 billion in sukuk.
  
• A $125 million syndicated secured ijara facility from a Kuwaiti issuer may have helped the market for other syndicated ijara facilities.
  
• Qatari Diar is raising $962 million through a syndicated Islamic facility to fund investments in Europe.
  

News bullets

• The Islamic Development Bank is selling $500 million in sukuk
  
• S&P has a report on the sukuk market for the first 7 months of 2009.
  
• Islamic banking is growing in Kenya, albeit from a small base. Also, the Kenyan government issued a small 1 billion shilling ($13 million) sukuk to the country's two Islamic banks.
  

Is innovation in Islamic finance always good?

Emirates Business spoke with a number of Islamic finance analysts and one point of consensus was that the Islamic finance industry is not yet viewed as a credible alternative, in part because it is not well understood globally but also in part because there are questions about products which use different means to essentially replicate conventional products. One of the suggestions was that particularly outside of the GCC, Islamic finance should drop the use of Arabic terms to emphasize that the industry does not exclusively target Muslims. This is a point I have heard from other people with in the industry, but replacing the Arabic product names, particularly while retaining the 'Islamic' label could diminish the ability to focus on the differences in how products are structured compared to conventional products, in large part because the outcome is in many cases nearly identical.

This article also leads to consideration of another important question about whether the focus on 'innovation' as it relates to mimicking additional conventional products (for example, Islamic hedge funds and multi-tranched sukuk) makes sense for the industry as a whole. There is clearly room for innovation in Shari'ah-compliant products, but just as the debate rages in the conventional financial world about whether financial innovation is beneficial for society, I think it is important to consider the question about which innovations are beneficial for the investors in the products or whether they are simply a new product that can contribute to the profits of the firms structuring them.

In contrast to the innovations that merely mimic more complex conventional financial products, the focus of innovation would be more beneficial were it to focus on developing alternatives for controversial but incredibly necessary products like commodity murabaha/tawarruq. These products have come under fire recently for their similarity with interest-based products where there is only nominal trade in an underlying asset in order to structure short-term liquidity management tools.

Another area where the industry's efforts would provide a real benefit to the industry would be in creating more standardized types of sukuk which could be priced competitively with conventional debt. Were there ready-made sukuk structures that were accepted by the majority of scholars--an easy one to start with would be ijara--then it could reduce structuring costs and encourage issuers to bring sukuk into the market. The use of similar structures by a broad number of issuers would also have the effect of increasing the comparability between different sukuk issues and holders of one sukuk could use standard credit analysis to compare it to other sukuk in the secondary market without worrying that structuring differences would lead one sukuk to behave differently, for example if there were a default.

Innovation can benefit both the developers of the innovation as well as the broader Islamic financial industry, but this need not always be the case. For example, the Total Return Swap engineered by Deutsche Bank was certainly an innovation--it used a wa'd swap to create a Shari'ah-compliant wrapper for non-Shari'ah-com-pliant hedge funds--but it also led to Sheikh Yusuf DeLorenzo to dub the fatwa permitting it as the "Doomsday Fatwa for Islamic Finance". He dubbed it thus because if it is possible to use a wa'd swap instead of an alternative structure, it makes it possible for any non-compliant product to be fairly inexpensively wrapped using the wa'd swap and could compromise the legitimacy of the entire industry if adopted throughout. Innovation in finance is different from innovation elsewhere because it is possible for the innovation to do little more than generate profits without contributing any broader benefit. In the wake of the global credit crisis, in part caused by this type of innovation, the importance of considering whether a given innovation is beneficial or detrimental.

Another excerpt from the Yasaar Media's Islamic Investment Banking 2009 report is published in AMEinfo, this one focuses on venture capital.

Islamic private equity could be the beneficiary of asset fire sales and mergers & acquisition activity following the economic downturn according to the managing director of Rasameel Structured Finance, Issam Al Tawari.

Other News

• The rankings of largest banks in the GCC is out with four of the banks located in the UAE.
  
• Malaysian asset manager Corston-Smith is planning a $282.5 million Shari'ah-compliant fund.
  
• QInvest has proposed launching a $200 million Shari'ah-compliant fund focusing on shipping assets.
  
• The Azerbaijani Islamic financial industry remains nearly non-existent because there are no laws authorizing Islamic banks, but this could change in the future as there is one bank that now offers Shari'ah-compliant products, although not murabaha due to regulatory restrictions.
  
• Mauritius continues to try and attract Islamic finance as an attractive location to structure Islamic financial products.