Sukuk and Dubai World/GFH, innovation in Islamic finance, sukuk investor relations

It is "incredibly unlikely" that the Nakheel sukuk due on May 13th will be repaid according to an anonymous source quoted by Reuters. Dubai World is still negotiating with its creditors to deal with its debts and the Dubai Financial Support Fund, which has lent money to keep Dubai World entities operating has signaled its intention to give up its senior status as a concession to other creditors. Another source speaking to Reuters said that "it is fully expected the banks will say they don't like it" but the source also described the plan as being "very very fair". The problems with Dubai World and other sukuk issuers will lead to the issuance remaining weak this year according to Hussein Hassan. The head of Deloitte's Islamic Finance Knowledge Centre says that the troubles with Gulf Finance House who recently extended part of a sukuk issue that was maturing are "not sign of weakness in Islamic finance".

A Finance professor at the American University of Sharjah described Islamic banks compared to conventional banks' performance and efficiency:

"Islamic banks are less cost efficient and more profitable than conventional banks, but their profit efficiency is slightly lower. The differences in profit efficiency can be attributed to lower cost efficiency. Islamic banks have been more successful than conventional banks in terms of revenue efficiency and accounting profitability, but both Islamic and conventional banks in the region need to become more profit efficient"

The 9th annual Islamic Finance Summit, which was held in London discussed the opportunities that Islamic finance has, as well as some it has missed in the financial crisis. One interesting warning came from Mohamad Nedal Alchaar, secretary general of AAOIFI, who said "mimicking is a dangerous business and would strip our uniqueness". This comment followed another participant who said that Islamic finance needs greater product innovation.

It is a tricky balance between meeting the financial needs of the customers of Islamic financial institutions and remaining distinct from the conventional financial industry. There are benefits to making products, even some derivatives, available in Shari'ah-compliant forms because they can provide valuable opportunities for businesses to hedge some risk not directly connected with their primary business (currency/interest rate/commodity price fluctuations). However, in my opinion, the best way to look at innovation and determine whether it's valuable is not necessarily to determine whether it is 'different' from conventional financial products, but whether it receives approval from a Shari'ah board and which meets a need beyond generating income for the financial institution structuring it. One thing that would be useful for the industry as a whole (although it could be difficult to convince each bank to support) would be for there to be a publicly available, central database of fatwa that describe the thought process of the Shari'ah scholars in reaching their conclusion about the compliance of a given product. This would be difficult to accomplish in practice, especially for new products, because it would allow other institutions to potentially take new structures and copy them without bearing the cost of their development.

Frank Kane wrote an interesting article about the impact of the financial crisis on Islamic finance. He makes an important point: "the tangibility of assets under a Sharia-compliant system did nothing to halt the decline in asset values that spread inexorably from the West to the Gulf". In addition, he quotes a Bank of New York Mellon report on sukuk investor relations (IR): "The adoption of sukuk IR can improve the quality of due diligence, foster an open dialogue between stakeholders and contribute to an ongoing process of disclosure beyond what is nominally contained in a prospectus".

Other News

• Arcapita reported a loss in the quarter ending December 31, 2009 on lower placement fees and asset valuations.
  
• BPA Malaysia signed an agreement to provide information on ringgit-denominated sukuk data to Thomson Reuters' new Islamic Finance Gateway.
  
• Gulf-based investors are expected to approach South African authorities to launch an Islamic investment bank with capital of $1 billion.
  
• The resumption of trading in Tamweel, which the company will request, is separate from its merger with Amlak Finance and there remain many issues that need to be resolved.
  
• The Brunei Times has an interview with Dr. Mohamed Sharif Bashir, the dean of Faculty of Business and Management Science at the Sultan Sharif Ali Islamic University in Brunei.