These two stories illustrate something important that has been somewhat sidelined in the attention paid to sukuk and other institutional forms of Islamic finance. There is a strong social mandate in Islamic finance and microfinance, both within the Gulf and in other countries, can play a part in fulfilling this mandate. It is also clear that there are many things that microfinance cannot accomplish in terms of poverty reduction, but the Islamic financial industry has largely overlooked the role that microfinance can play in fighting poverty and promoting greater economic equality, which is often cited as one of the fundamental reasons for Islamic finance to exist. I will be interested to see how the microfinance bank develops and if any readers of this blog have information about the products it uses, please email them to me at blake@sharingrisk.org.
An article overviews the impact of Dubai World and Nakheel debt problems on the Islamic finance industries. One of the important conclusions to the article is the claim that "One thing remains certain: Islamic institutions were no different than conventional bankers in ignoring the speculative frenzy that took Dubai by storm and incurred massive losses for many sukuk holders." This is an important point because Islamic banks in the GCC have relatively large exposure to the real estate markets. Regardless of the structure used in the financing, whether conventional or Islamic, a steep decline in real estate values had an impact on the ability of debtors to repay their obligations. There may have been aspects of conventional financing markets that accentuated the decline in these investments, but that does not mean that the crisis avoided having an impact on Islamic financial institutions with large real estate exposures.
The Dubai World debt problems may move into a new phase if reports that a standstill agreement is imminent are accurate. The standstill agreement would protect Dubai World from creditor's claims for six months while a restructuring plan is created and agreed upon. The Nakheel 2 sukuk is scheduled to pay a periodic distribution of $10.3 million on January 19, 2010. Meanwhile, Barclay's Capital recommended that sukukholders sell their sukuk because the current trading value exceeds their projection for recovery values of 40 to 50 percent of par.
Other News
- The National newspaper has a long article about the pending merger between Islamic mortgage firms Amlak and Tamweel.
- Bursa Malaysia was the largest location for new listed sukuk with 12 issues totaling $17.6 billion. The first listing occurred in August 2009.
- Australia's government said in a report that Islamic finance should be placed on an equal tax footing with conventional financial services.
- Morocco, which has lagged in Islamic finance, reduced the value-added tax applicable to Islamic financial products.
- Bangladeshi finance company Bank Asia Limited began offering a musharaka financing product. Musharaka is largely underused by many Islamic banks compared to murabaha and ijara.
- A report from Alpen Capital, an investment banking firm, says that takaful will grow by 16.1% in the Gulf during 2010, faster than conventional insurance. The growth in takaful has lagged the overall Islamic finance industry and is far smaller. Alpen Capital estimates that it will be $3.5 billion in the Gulf at the end of 2010. One of the interesting differences between takaful companies and conventional insurers highlighted in the report is that takaful providers are reliant upon a smaller investment universe including real estate and equities in addition to mudaraba and wakala placements with Islamic financial institutions. The lack of sukuk products could limit the growth of takaful if there is another decline in equities or real estate values.
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