Islamic Bank of Britain raises GBP20 million; sukuk markets send mixed signals

There are a number of articles on the Islamic Bank of Britain's raise of GBP20 million at 1 pence per share. The most detailed is from Ovum. There are a couple other articles. Mushtak Parker wonders whether the capital raise "addresses the bank's fundamental shortcomings". At the end of 2009, the bank had 546 million shares issued and outstanding so the 2 billion shares issued in the offering represent significant dilution for existing shareholders and will require approval of the bank's existing shareholders. From a cursory look at the annual report, the increase in the loss in 2009 compared with 2008 was due to a sharp decline in the profits on the bank's assets, despite an increase in the bank's deposits. As the company describes it: "In addition, those customer deposits that have not been used to fund asset growth produced lower returns due to declining yields in the Islamic inter-bank markets affecting the Company's margin."

In short, the balance sheet expanded with the deposit base increasing although those extra deposits were largely placed with other banks in commodity murabaha and wakala agreements (many of whom are based outside of the UK). This is the wrong direction for a bank, particularly an Islamic bank that is supposed to be focused primarily on pure intermediation: mobilizing profit-sharing deposits to finance businesses. Instead, the bank has been able to attract the deposits but has not found enough demand for those funds (or was constrained by capital requirements that would have required more capital based on their risk weighting on the asset side of the balance sheet). There was growth in home purchase plans (Islamic mortgages) from GBP7 million to 33 million, which does provide one good sign for the bank, but as described below, the reliance on Islamic inter-bank markets as a destination for the bank's assets remains high.

If the bank is focused on attracting deposits (GBP186 million in 2009 compared with 153 million in 2008) that it cannot use in a way that attracts a higher rate of return, it is not working the way it needs to be a profitable institution. As the deposits grew, the commodity murabaha and wakala with other banks increased from GBP152 million to 156 million out of total assets that were GBP207 million in 2009 compared to 181 million in 2008. This is a retail bank where around three-quarters of the assets are lent to other banks. I agree with Mushtak Parker; this is a temporary solution to the bank's needs to offset losses and it remains to be seen whether the bank can address its limited ability to find credit-worthy borrowers to finance. [NOTE: As described in the disclaimer on this blog, nothing contained here should be considered investment advice or an offer to buy or sell any security mentioned]

Sukuk yield premiums in the GCC are widening as conventional yields are falling. Another article points to the best month for sukuk since March with yields on some sukuk falling. The discrepancy is probably due to the selection of sukuk; the latter article primarily focusing on Asian sukuk like the Malaysian sovereign and Petronas sukuk. The planned $1 billion sukuk that was reported to be part of a joint venture financing between Saudi Aramco and Total has been abandoned because of market conditions. A Bloomberg article has another take on the Saudi sukuk market, pointing to the likelihood that issuance of sukuk from the kingdom will double in 2010 compared to 2009 and lead the GCC region. Taking these four articles together suggests that investors remain hesitant to invest in GCC-based sukuk after the Dubai debt crisis despite significantly different economic conditions across the countries of the GCC. At the same time, Malaysian sukuk remain attractive to investors.

Other News

• AAOIFI released two new accounting standards. One which covers sukuk, shares and similar instruments breaks down the accounting treatment based on whether it more closely resembles debt or equity. The other standard provides institutions adopting AAOIFI standards for the first time with a starting point.
  
• Sameer Abdi of Ernst & Young was on CNBC talking about the E&Y report on Islamic fund management. I posted a few links when the report was released in May.
  
• Arab News provides a short article on the IIFM report on a potential Islamic repurchase agreements (repos).