Dubai update, Islamic finance & foreclosures

Dubai will issue at least $1 billion in bonds in two tranches, one of 5-year tenor and one of 10-year tenor. The (conventional) bonds would be the first issued by Dubai since the debt crisis sparked by the near-default of the Nakheel sukuk. Nakheel, which has received 85% approval from trade creditors, close to its target of 95 percent acceptance, is reported to have applied for listing of $1.6 billion in sukuk with NASDAQ Dubai. The sukuk will be issued to pay 60% of the trade creditors' claims, with the remainder being paid in cash.

In other Dubai-related news, Dubai Islamic Bank took a majority stake in Tamweel, the troubled Islamic mortgage company in Dubai, which led to a sharp rise in the price of Tamweel's sukuk. The move reduces the prospects of a merger between Amlak Finance and Tamweel, which was reported to be likely as a way of dealing with the troubled Islamic mortgage companies. Tamweel has also begun foreclosures on properties owned by people who have left the Emirate and they say in cases where people are still in the Emirate, they are trying to "find a resolution which is satisfactory to both". The issue of default and foreclosure on Islamic mortgages is one that should be balanced between the commercial needs of the mortgage holders and the ethics underlying Shari'ah, which urges lenders to be patient with borrowers who run into financial difficulties.

In general, the commercial logic will outweigh the ethical obligation to work with creditors to avoid causing undue harm for the creditor. However, this is an area where I think Islamic finance can set itself apart from conventional finance. In the post-credit crisis where foreclosures have become commonplace, there have been a number of reported excesses where banks have been overzealous in foreclosures: GMAC Mortgage has come under investigation for problems with the legal documentations and in a bizarre incident, a man in Florida with no mortgage had his home foreclosed on. In many foreclosures, there is no hope for the borrower to become current on the mortgage and foreclosure is nearly inevitable. However, there are many other cases where a negotiated settlement can be reached that is better for the borrower as well as for the lender, who will see a higher recovery value than if they foreclosed on the property and sold it into a depressed market. And one solution that has been proposed (for the conventional market) would seem ideal for an Islamic bank committed to moving towards greater profit-and-loss sharing. Instead of foreclosing on the property, there would be a negotiated refinance into a more affordable mortgage and in exchange for the concession, the lender would have right to a share of any appreciation in the home price when it is sold.

Rushdi Siddiqui focuses his latest column on the need for "reflection, reassessment and reality check" (his 'R-cubed'). He makes some great points including some that I have also highlighted like the problem facing takaful providers (none of which have failed to date): "The link between Takaful operators and Islamic investing is close, as premiums must be deployed in a Sharia-compliant manner. Although there have been no bankruptcies announced in the Takaful industry since beginning of 2009, there have been challenges."

The Lawyer has a great article on the effect of Sheikh Usmani's comments on sukuk, which were followed by a ruling from the AAOIFI Shari'ah Board, as well as the financial crisis. It cited a KFH Research/NCB Capital report on the recovery in sukuk during the past year.

• Efforts to establish an Islamic bank in South Korea have faced significant hurdles.
  
• An article in the National says that Islamic finance can thrive in Dubai. The article notes that Islamic finance is based on an opposition to excess and describes the cause of the financial crisis as "excess risk, excess rewards, excess concern with short term results" without explaining how some companies--most notably Nakheel, which financed many projects with sukuk--became ensnared in the crisis themselves.
  
• Nigeria plans to issue a sovereign sukuk within the next 12 months as it tries to become the Islamic finance hub for Africa.
  
• Indonesia plans to issue 1 trillion rupiah from sukuk in an auction on October 5.
  
• Armen Papazian, a fellow of the Judge Business School at the University of Cambridge, says that Islamic finance should focus on creating an entire financial system based on Shari'ah-compliance, not just individual products.
  
• Standard Chartered is launching a nostra account product in the US for international clients that will be based on commodity murabaha.
  grow significantly and the VP of global wealth management at HSBC Amanah, Shahzad Wairach, estimates its potental of "20 percent growth over the next three to five years".
  
• Bank of London and the Middle East is planning to offer a Shari'ah-compliant Absolute Return Fund that is "in no way a hedge fund". Efforts to create Shari'ah-compliant hedge funds have been criticized for their synthesized short sales.
  
• The Central Bank of Bahrain's latest issue of sukuk al-salam was oversubscribed.
  
• Kuwait's banking system has 35 percent of assets in Islamic banks.