Indonesia sukuk, rules on forward currency transactions, ISRA to set up Shari'ah scholar org

Indonesia sold sukuk through a private placement for 336 billion rupiah ($37.45 million). There was an indication that the government would move away from the auction method towards private placements after several auctions where the yields demanded by investors were higher than the Ministry of Finance was willing to expect. The higher yields versus conventional bonds were attributed to lower liquidity in secondary markets for sukuk compared to conventional bonds in Indonesia, something that is common in other countries as well. The current issue is non-tradable sukuk with a yield of 7.3% maturing in 2014.

The Shari'ah Advisory Council of Bank Negara Malaysia, the country's central bank, ruled that no payment can be made in exchange for a forward currency transaction used for hedging (based on a binding promise, wa'ad). The basis for the ruling was that the upfront fee would turn the transaction into a bilateral wa'ad, which is viewed as a contract, which is not permissible. The unilateral (binding) promise is viewed as acceptable because it is a promise made without compensation. The issue of bilateral wa'ad also emerged as a stumbling block in the IIFM report on sukuk repo transactions.

The International Shari'ah Research Academy for Islamic Finance (ISRA) may set up an international body for Shari'ah scholars with the hope of creating a (self-)regulatory organization for Shari'ah scholars. Currently, there is no international body that regulates Shari'ah scholars, although the procedures for Shari'ah-compliance are standardized through AAOIFI and the IFSB. I think it is a good effort, but I agree with Muneer Khan, head of Islamic finance at the law firm Simmons & Simmons, who is quoted saying that "It's very difficult to set up an international body which actually has the power to effect these changes [...] It all depends on voluntary cooperation. A lot of work would have to take place behind the scenes to get regulators to sign up".

The editor of Arabian Business, Damian Reilly, wrote an opinion piece in the paper about Moody's recent downgrading of Bahrain's rating from A2 to A3. He says that, despite Moody's claim that the ratings downgrade was based on its budget deficits and dependence on higher oil prices of $80 to balance its budget, it was based on Moody's view that the outlook for Islamic banking in 2011 was diminished. The Moody's analysis also cited the size of Bahrain's banking sector--much of which is Islamic banks--that has assets of three times the country's GDP. Mr. Reilly counters that the large size of Islamic banking as a share of the country's banking sector--and that industry's better performance in the financial crisis--suggests that Moody's is becoming more cautious on Islamic banking. In my opinion, his point avoids the real detriment that a global recession can have on an Islamic banking system. Even if the Islamic banking system performs better than conventional banks, the government would find it hard to support the banking industry if things became worse. The budget deficit is currently 7.3% of GDP (expressed another way, 2.4% of total banking assets) and even a small requirement for cash from the government by the banking industry would have a disproportionally large share of the country's GDP and also a large increase in the budget deficit, which could make the country's creditors uneasy.

JP Morgan estimates that the tradable sukuk paid to Nakheel's creditors for 60 percent of what they were owed (with the remaining 40 percent paid in cash) are worth about 60% of their value if they made all principal and periodic payments. The estimates of their fair value is based on Nakheel being able to pay "almost all" coupon payments but JP Morgan doubts Nakheel's ability to repay the principal in 2015. The five-year sukuk have a coupon of 10% per year. The terms of Nakheel's payment to trade creditors was higher than their offer to debt holders of Dubai World, who extended maturities of debt with a 1% yield. The holders of Nakheel's 2009 and 2010 sukuk received redemption in full with funds from the Dubai Financial Stability Fund and the 2011 sukuk are expected to be repaid in full from the same source.

Other News

• The Islamic Development Bank's $3.5 billion sukuk program securities will be listed in Kuala Lumpur and London. So far $1.1 billion has been issued and another $1 billion will be issued by year end in 5-, 7-, and 10-year sukuk. This is separate from the RM1 billion sukuk that was listed on Bursa Malaysia yesterday.
  
• The bill to put sukuk on equal footing with conventional bonds in the tax code in South Korea has been held up by the (unfounded) concern that it could lead to money laundering and financing of terrorist groups. This is unfortunately not an isolated case where unfounded fears hamper the growth of Islamic finance.
  
• The East Asian region lead the Dow Jones Islamic Indices in August according to a report from Dow Jones.
  
• Affin Bank has applied for the first Islamic bank license in China, according to an article in Business Times. The Ningxia Hui Autonomous Region was working in 2009 to develop a pilot Islamic financial services institution in northwest China.
  
• Indonesian bank BNI Syariah wants to partner with foreign investors to expand its Islamic banking business.
  
• Another article discusses the dichotomy between the GCC and Malaysia in the state of their Islamic finance sectors, primarily new sukuk issuance.
  
• The CEO of the Qatar Exchange, Andre Went, says it is drafting new rules to cover trading in bonds and sukuk. Trading was expected to begin in September, but Mr. Went did not say when trading would begin.