Tuesday, June 22, 2010

Islamic finance 'flops' in the UK? New sukuk and AAOIFI standards

Junaid Bhatti wrote an article saying the Islamic finance industry in the UK has 'flopped' based on its inability to achieve rapid growth and profitability using his experience working at the Islamic Bank of Britain from its founding. The article describes, in addition to IBB's losses notes that:
"Well, the UK’s first 'Halal' insurance firm, Salaam Insurance, spectacularly shut up shop in 2009 after less than 18 months of trading. Lloyds TSB, which made a half-hearted stab at Shariah-compliant products in 2004, doesn’t seem to have promoted its offering for years. alburaq – owned by Arab Banking Corporation – has effectively withdrawn its savings and mortgage products from the mass market and now serves only the wealthiest of customers. Even HSBC Amanah, probably the most credible and efficient provider of Halal banking in the UK, has dramatically reduced its dedicated Islamic banking staff in Britain, and its marketing volume has been turned way down. "
Salaam Takaful was sold in April 2010 to Al Salam Group Holding Company, which is based in Kuwait, following its closure to writing new policies.

Mr. Bhatti's article is rather gloomy, however, he does not cite any significant obstacle to Islamic finance in the UK, but rather focuses on their poor marketing effort as a way to attract the Muslim consumers who may prefer Shari'ah-compliant financial services, but are not willing to sacrifice in cost, customer service and who are attracted by marketing that focuses on their emotional rather than rational side. I don't want to get too much into the marketing side, because it is far ouside my expertise. However, his criticism does mesh with my own concern about the Islamic finance industry's work in the West to attract non-Muslims. Cost competitiveness is one factor but the experience in Malaysia has demonstrated that costs of Shari'ah-complaint products can become competitive.

Beyond the issue of cost, there is a significant portion of people in the West, particularly younger people like myself, who are interested in the ethics of their financial activities. I moved my own bank accounts from one of the big banks to a local credit union recently, in part based on costs, but primarily because my money is more likely to be recirculated in my own community. If I had the option between a conventional credit union and an Islamic or other ethically-based credit union, I would (and I suspect many others like me would also) choose the ethical alternative. That is an area where conventional banks have a distinct disadvantage and an area within the West where Islamic finance could focus on to attract both Muslims and non-Muslims. Islamic finance may be focused on religious criteria important to Muslims, but they are not that different from the religious or ethical criteria of non-Muslims and that remains an untapped market in the West for banking services. The business case has been demonstrated by sustainable/socially responsible investment products, now it is time for banking. With that, I will step off my marketing soapbox.

The Malaysian firm Axiata will issue MYR 4.2 billion (1.32 billion) of sukuk by the end of July to refinance variable rate, 2-year debts. The sukuk will be based on commodity murabaha with maturities of 5, 7 and 10 years. While the prospect for new, longer dated sukuk is encouraging, the use of a commodity murabaha structure is less encouraging. I don't know how the Malaysian Shari'ah standards treat commodity murabaha for secondary market trading, but standards in the GCC, which are applied by most other issuers outside of Malaysia, do not permit trading in murabaha sukuk except at par because they represent a debt rather than ownership of a tradable asset.

AAOIFI adopted three new Shari'ah standards covering disposal of rights, bankruptcy and the management of liquidity, collection and use. These standards cover important subjects. However, it is somewhat disappointing that AAOIFI has not published the standards online like the IFSB. The publication of the standards in printed form only makes it difficult for consumers of Islamic financial products to see the standards under which the products they consume have been issued. Without either the AAOIFI standards or detailed publicly-available fatawa, consumers are hard pressed to understand the basis for the Shari'ah-compliance of the products being offered.

An article in The Star newspaper in Malaysia questions "What's going on in Kuwait Finance House?". The Malaysian subsidiary of the bank has discontinued the ratings services of RAM Ratings. The bank has retained Malaysia Rating Corp Bhd (MARC). The bank says it is part of a cost rationalization move. The questions arise because in November 2009, RAM put a negative outlook on KFH (Malaysia) based on the deterioration in the financial metrics of the bank and its parent institution while MARC said in April that it did not expect a status audit to affect the rating it has for KFH (Malaysia).

Other News

  • Islamic mortgage company Tamweel returned to profit based on lower depositors' share of profits and lower expenses while Amlak Finance lowered its losses for the first quarter from AED 68.1 million to AED 2.7 million. The two institutions' futures remain in question with no definitive news on a possible merger of the companies.
  • NASDAQ OMX launched two Islamic indexes, the NASDAQ-100 Sharia Index and the OMX Stockholm Benchmark Sharia Index with Shari'ah monitoring provided by BMB Islamic.
  • Brunei issued two ijara sukuk totalling $58 million at the end of April and May. The sukuk mature in 91 days. An Islamic finance expert in Malaysia, Sri Anne Masri, said that Brunei's large firms could issue sukuk to finance their businesses.
  • Three lawyers from Clifford Chance provide their thoughts on the Islamic finance industry.
  • Credit default swaps on Dubai's debts have fallen 30% while Nakheel's $750 million sukuk maturing in January 2011 has risen to $106.75 from a low of $35 on December 10, 2009.
  • The blog Credit Slips asks for input and information on the concept of bankruptcy in Islamic law.
  • Bloomberg has an update on the future issuance of sukuk.
  • The National Bank of Abu Dhabi issued a MYR 500 million ($156.9 million) sukuk with a 4.75% coupon, one of a few GCC-based issuers who have issued sukuk in Malaysia. The expected coupon range had been 3.5% to 5.9%. The sukuk was oversubscribed 3.6 times. The bank received a banking license on June 17.
  • The Islamic Bank of Thailand is still planning to issue its first sukuk, a 5-7 year issue of Baht 5 billion ($155 million) this year, although it said the process had been held up by political unrest.
  • The Central Bank of Bahrain's latest Sukuk al-Ijara was oversubscribed by 300%.
  • Maybank Singapore is offering a commercial property financing product for up to 10-years.
  • Some Dubai-based financial institutions are considering expanding into Ghana according to a senior director at the Dubai Chamber of Commerce. Uganda will make changes to its banking laws to allow financial institutions to offer Shari'ah-compliant financial products.
  • Irish law and accounting firms need to improve their knowledge of Islamic finance to attract the industry to the country, according to Eamonn Walsh, a professor of accounting at University College Dublin.

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