Friday night bullets

• A London-based healthcare organization may be the first corporate issuer of a sukuk, according to reports. The sukuk is expected to be GBP50 million ($76 million).
  
• Nakheel has asked for information on the identities of 2010 sukuk and bond holders, which may be an indication that they may want to restructure those obligations.
  
• The Saudi mortgage finance law is expected to increase the demand for Islamic banking services although there are concerns about the diminished liquidity if banks add illiquid Islamic mortgages to their balance sheets.
  
• Gulf Finance House continues to work through its debt deal and is close to a deal of another $100 million in debt coming due soon.
  
• The IIFM, now with a new website, released a sukuk report, which looks to focus on case studies, although I have not yet read it.
  
• The Philippines is considering its first sukuk issuance for about $500 million.
  
• Sukuk issuance is expected to be $31 billion globally, with $10-15 billion coming from the Middle East according to Bank of America Merrill Lynch. Deutsche Bank sees sukuk issuance being 'weaker' in 2010.
  
• Standard Chartered's Malaysian Islamic banking subsidiary Saadiq is planning on offering new products targeted at small-and-mid-sized businesses. Standard Chartered will also begin offering Shari'ah-compliant hedging contracts.
  
• Arcapita is cutting workers to control costs.
  
• HSBC named William Ross as a co-head of Islamic finance at the bank. HSBC's chairman Stephen Green says that London can expand its financial business by offering more Islamic banking products.
  

CGAP microfinance competition

The description is:

"CGAP, Deutsche Bank, Islamic Development Bank, and Grameen-Jameel are pleased to announce Islamic Microfinance Challenge 2010: Innovating Sustainable, Scalable, and Market-Driven Models. The contest is a joint initiative to promote the innovative design of Shariah-compliant products for Islamic microfinance clients.

We are seeking original Islamic microfinance business proposals which are profitable, sustainable, scalable, and Shariah-compliant. Finalists of this competition will be awarded with grant funds as well as need-based technical support to launch a pilot project of their proposed business idea.

This is an opportunity for you to showcase innovative business ideas, gain industry-wide recognition, and benefit from the funds and technical expertise of leading institutions in the microfinance and Islamic finance sectors."

The deadline is May 3, 2010 and more information can be found on CGAP's website.

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.
  

Malaysian Islamic finance, Saudi Aramco/Total sukuk, real estate funds announced

Malaysian Islamic banks will see more competition in the next couple years as global banks enter the market, but Islamic bankers are confident they can handle the competition. This domestic competition may also lead to Malaysian Islamic banks to look elsewhere in the region and globally for new areas of business. The article provides a good summary of where the industry is in Malaysia and it is likely that the country will pass the 20% market share mark for Islamic banks as a total share of banking assets sometime this year. CIMB's Indonesian subsidiiary has seen strong growth in the past year.

Saudi Aramco and Total are reported to have hired bankers for a $1 billion sukuk, which would be the largest sukuk issued this year. The sukuk would help finance a $12 billion oil refinery the two companies expect to build in a joint venture.

A couple new real estate funds were announced. One is from Ajman Bank in the UAE. The other is Al Rajhi Bank and Arcapita Bank, who announced a $500 million real estate income fund.

Other News

• The FT has an interesting article on the pinch that is hitting many Kuwaiti investment firms, both conventional and Islamic.
  
• The Islamic financial industry should look towards alternative energy sukuk (among many areas) to cut the over-reliance on real estate-backed sukuk.
  
• An article describes a brief history of Islamic banking and also has a good look of the different types of products which make up a typical Islamic bank's assets and liabilities.
  
• Troubled Islamic mortgage lender in Dubai, Tamweel, says it will need AED1 billion ($272.3 million) in debt guaratees or equity at minimum, but will request a resumption of trading in its shares that have been suspended since 2008. The merger with Amlak Finance, another Islamic mortgage company is still "feasible" according to the chairman of Tamweel.
  
• If pension funds in Muslim majority countries shifted 30% of their assets into Shari'ah-compliant investments, it could provide the industry with a "massive boost".
  

The importance of sukuk funds

One of the areas that has been picking up in newsflow in Islamic finance is the launch of a number of sukuk funds that are, in part, motivated by distressed situations of several sukuk issuers in the past year. These funds, in part, are aiming on capitalizing on the availability of sukuk at possibly overly distressed prices. The financial crisis led to problems at institutions and companies which either held or issued sukuk and it appears that this has led to greater secondary market activity in sukuk.

However, the formation of sukuk funds should not look exclusively towards just the distressed assets, but can become an integral part of the Islamic finance marketplace by increasing secondary market activity in sukuk now and after the defaults have faded from th e headlines. They can provide a valuable part in the new issuance of sukuk and complement takaful providers and banks, which tend to hold sukuk on their books until maturity. Together, these two groups can be instrumental in restarting the market for new sukuk issuance as economic conditions improve.

The long-term holders (banks and takaful providers) and the shorter-term investors (sukuk funds) can provide a source of reliable demand for both primary and secondary sukuk transactions. At this point, however, the sukuk funds are in a rather nascent stage. If they grow to provide more demand for secondary market trading activity, they can have a significant impact on the primary market for new sukuk. By creating a more liquid secondary market for sukuk, the pricing of new sukuk may come down by reducing the premium demanded by investors for the illiquidity in the secondary markets now.

A reduction in illiqudiity premiums will make it (other things being equal), more likely that issuers consider sukuk instead of conventional bonds for those issuers that are ambivalent between the two forms of debt financing. These issuers, who may not be motivated towards sukuk issue strictly by their need for Shari'ah-compliiant financing. These issuers are likely to be more diverse than the current sukuk issuers, who are often banks and real estate companies, both in industries that have been hit the hardest by the recent credit crisis and economic downturn (and who are therefore least likely to have significant growth into the future).

The GE Capital sukuk was one example of where the diversity can come from. While GE Capital is a financial institution, it is attached to a large, global industrial firm, which may view the GE Capital sukuk as a test case of an alternative source of financing. Many other large, global companies may also look to the GE Capital sukuk as a test case for tapping a new source of capital to diversify their sources of funding. The credit crisis showed, among other things, that they can be hurt significantly if financial markets seize up based on financial conditions in one country.

One of the areas where this financial crunch was most acute was in the commercial paper markets where short maturities meant the debt had to be frequently rolled over and where the primary buyers of this debt were money market funds connected to the very financial institutions facing the most severe pressure. Thus, diversifying their funding sources away from the domestic commercial paper market should be a high priority.

If some of these issuers can be convinced that plain vanilla sukuk products represent a relatively stable source of funding, they may be willing to become regular issuers of sukuk alongside their conventional bond programs. This can bring in much greater volumes of new sukuk that will provide banks and takaful, as well as sukuk funds, with new sukuk in which they can invest.

A growth in new issuance from global companies also benefits the industry and the consumers who look to it for Shari'ah-compliant alternatives to conventional financial products. For example, although the two largest Islamic equity funds (the Amana Income and Growth funds) are based in the United States, there are no funds providing fixed income investment opportunities in the U.S., although a small mutual fund company, the Azzad Funds, has filed documents to start a fixed income Wise Capital Fund. The hold up for that fund, and others like it, is a shortage of investment opportunities. These funds don't necessarily need sukuk, they can invest in murabaha or ijara contracts that are held to maturity, but sukuk are preferable because of their ability to be liquidated if necessary.

The shortage of Islamic fixed income funds makes it extremely difficult for the average Muslim investor within the United States to construct a portfolio that meets their long-term needs. Few investors find portfolios composed entirely of equities to be suitable for their risk tolerance and investment goals. They need to balance the allocation within their portfolios between equities, fixed income and other asset classes and right now, they are unable to do so.

There are a number of areas where sukuk funds can be instrumental in expanding the sukuk market and also in providing for the needs of Muslim investors, whether high-net worth, institutional or the average Muslim retail investor. This should be an important area for the industry to focus on.

Reuters Islamic finance summit

I don't have as much time to comment as much on the articles today, so I'll just give a few general comments. Any forum or conference is unlikely to get a full, detailed overview of any of the topics covered, but the Reuters summit, in my opinion, has done a good job at describing some of the issues raised by participants in the articles released about the summit.

The four themes that I took from an article about the Reuters summit before it happened were all covered with differing degree of depth (from my reading of the articles about the summit; I wasn't there). The maturity mismatch was not covered in particular depth, although it was mentioned within the context of the second theme of a reliance on transitory sources of profits like private equity and investment banking. It is becoming more evident that at least some players in the industry are willing to say that there has been too much focus on big real estate projects, private equity and investment banking at the expense of plain vanilla banking. With the higher returns from the transitory sources of profits, there will always be a bias towards those areas in boom times because there is more money to be made there and periods of recession and financial crises will see some of these go away. This is unlikely to change, although one would hope that the most recent crisis will instill some more risk management in the riskier areas of Islamic finance to prevent the next crisis from being even bigger for Islamic finance than this one was.

The issue of size of Islamic financial institutions was barely touched with the exception of a timetable for the launch of a mega Islamic bank. Much more attention was paid to the regulatory challenges facing Islamic finance and there are still major differences among different institutions and people within the industry, which is not out of line with the conventional financial industry's views on regulation. There are some special areas where Islamic finance regulation is different from conventional regulation, but in both segments of financial services, regulation is one of the slower moving areas that cannot be resolved by a 3 or 4 day conference covering so many different topics. In this area, there will be much more work to come and hopefully the need for sensible regulatory standardization (across countries and between Islamic and conventional banks) should be more in the forefront of people's minds.

Reuters Islamic finance summit

• The Islamic mega-bank is expected to launch within six months to a year according to Sheikh Saleh Kamel, one of the founders of the bank. The launch was delayed by the financial crisis, but is expected to have capital of $3 billion to $4 billion when it is launched.
  
• The head of Islamic finance at Ernst & Young, Sameer Abdi, says that Islamic finance should refocus its efforts on building a retail base, which provides a more stable base than wholesale funding and investment banking and could allow Islamic banks to compete with global financial institutions with Islamic windows. One comment that may explain the lack of push for retail business is particularly accurate: "What you make in one transaction [in investment banking] may take you three years in a retail book, but ... retail is sustainable". Mr. Abdi also spoke about the need for Islamic finance to move away from real estate.
  
• Not surprisingly, there are differences in opinion between regulators, Shari'ah scholars and practitioners in Islamic finance about the best way to regulate the industry and ensure there is adequate transparency to protect investors in Islamic financial products. One of the interesting things, which I have raised before, but which has not received much attention in articles about Islamic finance is that corporate restructuring involving Islamic finance need to be reviewed for Shari'ah-compliance. This point was raised by Muneer Khan, a partner at Simmons & Simmons. Looking forrward, there will be much more discussion of these topics at the 7th Annual IFSB Summit, which will be held in May in Bahrain.
  
• France or the UK should move forward on bringing corporate sukuk to market to retain their leadership role in Western Islamic finance, according to several participants in the summit. Several participants expressed skepticism that any European sovereign sukuk will be issued in 2010, although expressing optimism for corporate sukuk from European companies.
  
• John Sandwick says that Swiss banks should focus on providing Islamic wealth management services. He criticized the focus of the industry on private equity at the expense of other areas that would help asset managers be able to invest in more prudent asset allocations.
  
• Indonesian banks should focus on providing Shari'ah-compliant financing according to Achmad Riawan Amin, chairman of an association of Islamic banks in Indonesia.
  
• An executive at Citi Islamic Investment Bank, Samad Sirohey, said that sukuk funds should develop not just to purchase distressed assets, but to draw other players into the Islamic securities market. This would, in my opinion, provide greater liquidity that could spur supply of new sukuk because issuers would have to pay lower liquidity premia to investors who now are limited in their ability to sell sukuk in the secondary markets and find other sukuk to replace it with.
  
• Dubai World is planning to present its restructuring plan to creditors in march, although the details will not necessarily be released publicly. According to a spokesperson for the Dubai Government, "That's a confidential matter between the company and its lenders". While that may be strictly the case, the uncertainty about the restructuring of the debts, including several Shari'ah-complaint debts, is very important to the regional credit markets and it would be beneficial to investor perception of the creditworthiness of the Dubai government for these details to be made public. Given their importance to sentiment, they may be leaked anyway. A number of participants at the Reuters summit reiterated the valid point that the problems at some of the Dubai government-related entities like Nakheel should not be taken and generalized across the Islamic finance industry. I agree.
  
• Global sukuk issuance last year (February 2009 to January 2010) was $19 billion, of which $5.6 billion originated from Saudi Arabia and $4 billion was from the UAE.
  
• An article describes the countries where Islamic finance could expand and the factors that could hamper this growth.
  
• A Malaysian takaful firm Etiqa Takaful has seen strong growth recently as many Muslims and some non-Muslims in the country choose takaful over conventional insurance. However, the growth could be restrained by a shortage of long-term Islamic instruments for them to invest in and a shortage of retakaful providers. An Indonesian takaful provider said that it is considering investing directly in domestic equities which rose 87% in 2009 in Indonesia (measured by the Jakarta composite index) for investors with high risk profiles. It will be seen whether this investment in the stock markets will be beneficial for the investors after the significant rise last year.
  

Reuters Islamic finance summit

Reuters Islamic Finance Summit

There are a number of articles about sukuk from the Reuters Islamic finance summit. This is not terribly surprising because of the place of sukuk as the 'face' of Islamic finance, especially among Western investors. There are a few issues raised in these articles.

One article describes how the development of sukuk by French issuers, in particular, an $1.37 billion (1 billion euro) sukuk from an unnamed corporate issuer, has been delayed by the uncertainty about legal rules about sukuk in France. The French parliament passed a law recently clarifying the legal and regulatory treatment of sukuk, but it was thrown out by the courts on procedural grounds. France has said it wants to be a European hub for Islamic finance, but in the absence of a resolution of these issues, it is unlikely that it will be able to catch the U.K. quickly where regulatory and tax changes have already been made to put Islamic finance on a level playing field.

There are a few somewhat conflicting articles about Islamic finance in the Gulf that, despite the seeming contradictions, describe the situation facing Gulf issuers in the wake of Dubai World's request for a debt standstill (which investors were reminded of by recent news as well as other sovereign debt issues in Greece). The capital markets for new sukuk are relatively frozen right now, especially in the UAE and there have been few non-sovereign issues in the past year. However, there is significant latent demand by money market funds for high-grade corporate and sovereign issues.

An advisor to Morgan Stanley, Yavar Moini, does provide some background for what is needed to unlock this latent demand and bring new sukuk to market: domestic capital market development. However, in order for this development to occur, there needs to be greater legal certainty about how sukuk behave in different situations and for different structures. The advantage that many sovereign issuers have over corporate issuers in this environment is that many Gulf states (Dubai excepted) have signficant oil reserves that finance the government budgets and with oil prices having recovered, the revenue to repay debts on time is less uncertain than with corporate issuers whose ability to pay is less certain and more dependent on local economic conditions. This is, of course, accentuated for issuers looking to issue sukuk backed by real estate projects like Dar Al Arkan, which issued a smaller than expected high-yield sukuk (10.75% coupon) to raise $450 million compared to expectations of between $500 million and $750 million.

Worldwide, Mohd Daud Bakar, a Shari'ah scholar, expects that the leading country for new issues (ex-Malaysia) will be Saudi Arabia, based on its need for infrastructure projects and economic growth fueled by the rebound in oil prices. He expects 10 to 15 sukuk issues from Saudi issuers during the year. Bakar is also working for the South Korean Korea Investment & Security Company, which is structuring a sukuk for issue after the country passes a proposed bill to create a tax exemption for sukuk.

Apart from these new issues, there could be additional sukuk activity in the secondary markets with several Gulf-based banks launching sukuk funds. There have been a few sukuk funds launched since the onset of the financial crisis beginning with one launched by Algebra Capital in August of 2008. These funds will probably try to tap the desire for investors to invest in sukuk while taking advantage of depressed prices in some sukuk in the secondary markets. The growth in secondary markets will be aided by these funds who will provide a bid for distressed and other sales of sukuk holdings. The test for the markets will be whether these funds will then warehouse these sukuk until maturity or whether secondary markets will become liquid enough for them to sell holdings before maturity. If these funds become active players in the sukuk secondary markets, they could lower pricing for new sukuk by increasing the liquidity of sukuk (which would lower the liquidity premium attached to new sukuk issues).

An article with quotes from a lawyer in Islamic finance, Farmida Bi, and Toby Birch, the founder of Birch Assets Ltd., provides some interesting comments on the difference between sukuk and conventional bonds. Ms. Bi is quoted: "Investors have realized after Dubai World that what they are buying is not typically something that (gives) recourse to an asset". Mr. Birch described that "If bonds were properly Islamic there would be no guaranteed rate of return: the idea of a sukuk is you share the income flow because you are a co-owner of the real assets". This is, I think, the correct assessment of the situation of the sukuk market, but I am concerned that the selling of Islamic finance as asset-backed, while selling asset-based sukuk may reflect a flaw in how the industry markets itself and in particular, the difference between substance and rhetoric. If Islamic finance promotes itself as different because it is asset-backed, it should offer product that are secured by assets. In other cases, it should use investment structures that share risk between issuer and investors (like the Saudi Hollandi Bank sukuk). What is creating confusion is where structured of a sukuk based on an asset leaves investors without recourse to that asset. Islamic finance is not always asset-backed, but in the structures where an asset is involved, investors should have recourse to that asset.

In a related article, Mohd Daud Bakar, describes that the industry was developed to allow Muslims to buy houses and cars and has not yet moved beyond this area to involvement in the real economy. He is right to some degree; the Islamic finance industry is largely contained to offering products to others within the financial services industry with the exception of retail institutions which....offer financing for houses and cars for consumers. Another article describes the prospects for private equity in Islamic finance and real estate is now again in vogue in Islamic finance. The debate on the connection between the Islamic finance industry and the real economy is somewhat constant in the background, but the questioning of this connection (and the same discussion in conventional finance) somewhat loses the point that finance is by its nature somewhat disconnected from the real economy except that it is engaged in providing financing for everything else. If there were a concern about financial industry people becoming involved directly in the economy to directly benefit others, I think the best outlet would be Islamic microfinance. It is still relatively underdeveloped and could use the (volunteer) efforts of the top minds in Islamic finance.

Despite the growth touted for Indonesia in an article I linked to yesterday, there are a number of hurdles for Islamic finance in Indonesia, despite its large Muslim population. The primary obstacle is tax and regulatory difficulties for Islamic financial products (and I have seen other articles which cited endemic corruption as another obstacle. However, if the information in this article is correct, there may be a simple lack of demand from consumers, either through lack of understanding of Islamic finance or a belief that Islamic finance is not authentic or necessary in its current for, which replicates (or 'camouflaflaged' as it was described by the cheif economist at Bank Danamon, Anton Gunawan) conventional finance.

A company, Halal Industries, plans to establish a halal park in Wales.

Other News

While many Islamic investment banks are selling assets, Unicorn Investment Bank is considering raising between $250 million and $500 million in equity for acquisitions and distressed asset sales.

Reuters Islamic finance summit, AAOIFI Shari'ah review

An article in the Kipp Report describes some of the issues facing Islamic finance if it wants to move forward. The areas are primarily focused on regulation and transparency, which are key areas for the Islamic finance to develop to ensure future growth.

AAOIFI provided a timetable for its review of the Shari'ah-compliance of Islamic financial products. They will begin the process in June and begin screening products in the second half of 2010. This is an interesting expansion of AAOIFI's traditional role of setting standards for the Islamic finance industry, but it is important that the industry remain some degree of consistency in the product's adherence to a common set of overarching Shari'ah standards. The one thing that will be vital to ensure that the industry is engaged in a positive way with the Shari'ah review is for AAOIFI to provide a transparent process to evaluate products' Shari'ah-compliant.

Reuters Islamic Finance Summit

Islamic banks in Indonesia have been and expect to produce returns on equity twice that of conventional banks. The additional return on equity is likely due, at least in part, to the rapid growth of the industry in Indonesia. One area which is somewhat concerning is that Beny Witjaksono, president of Bank Mega Syariah Indonesia, who said that the profitability was in part due to the finance fees being about twice that of conventional financial institutions. This is concerning because the Islamic finance industry needs to remain competitive with conventional financial institutions. It should not be financing growth and profitability at the expense of customers above the cost of finance offered by conventional financial institutions.

The ta'hawwut standardized Shari'ah-compliant derivatives contract's launch (being developed by ISDA and the IIFM) is "imminent" according to Simon Eedle, managing director of Islamic banking at Credit Agricole CIB. I wrote a comment on the FT Alphaville blog (who graciously linked to this blog):

The idea of a Shari'ah-compliant derivative is not necessarily a contradiction in terms. Islamic finance, just like conventional finance, has a need for hedging against unexpected changes in exchange rates, commodity prices, interest rate (which affects the industry through its use as a benchmark for pricing financial products).

However, the tricky part about derivatives from the perspective of Shari'ah-compliance is how to create them so that they can provide the necessary hedging (a transaction that in one way can be thought of as altering the risks and returns between different parties) without providing a way for investors to speculate. For example, the difference between a conventional investor who holds a bond and buys credit default protection on that bond, versus an investor who buys a credit default swap on a bond he does not own.

There is an additional problem from the Shari'ah-compliance perspective (as I understand it, and I am not qualified to give anything more than my opinion on the subject) is that by its very nature, a derivative (whether an option, swap or other product) involves one person gaining at the other's expense, which is viewed as close to gambling and on the face of it, would not be something that Islamic finance should get into. However, creating ways for Islamic investors to hedge risks is something that is useful to the productive running of the economy (why make manufacturers who export goods also be currency market experts?). This could be the reason for the delay.

Alliance Takaful is in talks on a sukuk issue. In part, the move is described as encouragement for the issue of more high-grade corporate issues that takaful companies need to invest in to fill the asset side of their balance sheet to match the longer-term liabilities. The article does a very good job explaining one of the manifestations of the asset-liability maturity mismatch facing other Islamic financial institutions including takaful providers. In addition, the CEO of Allianz Takaful, Abdul Rahman Tolefat, describes the difficulty in competing with banks for new sukuk issues, particularly in sovereign sukuk. He suggests that issuers allocate a percentage (10-15% was his number) of the new issue to takaful providers to allow them to subscribe to high-grade sukuk that they may not otherwise get access to if the issue is significantly oversubscribed.

Standard Chartered is about to launch an Islamic commodity derivative for clients to be able to hedge against the price of various commodities, something they say they have been working on for 15 months. It will be interesting to see how the new product interacts (particularly in terms of acceptance from clients) if the ISDA-IIFM product is launched shortly. The long development process could be a detriment to Standard Chartered based on the price they are able to offer to clients when competing with standardized derivatives under the ISDA-IIFM master agreement. The new products will each have to incorporate the development cost in their product's cost. Standard Chartered undertook the product development cost on their own and absent a subsidy from other areas of the bank, the cost of their Shari'ah-compliant derivative will incorporate additional cost that financial institutions using the ISDA-IIFM master agreement will not necessarily have to bear. That being said, the availability of a number of different products to accomplish the same goal of hedging against external risks is a positive for the industry by forcing industry participants to determine which is the best product and this will ensure that future development is done in a competitive environment.

Sonya van de Graaff, a partner at Brown Rudnick, offered some good commentary on the Islamic finance industry at the Reuters summit which are summarized in an article. She points to the Nakheel sukuk debacle as providing investors with a reminder that the sukuk structure was complex and overlapped several legal systems. I have discussed the Nakheel sukuk in depth in other posts. The article ends with a quote from Ms. van de Graaff that I think should have been recognized by the industry far earlier than it was

"There was sometimes the impression during the crisis that hit western economies from 2007 that the stretched loans-to-value at the root of the problem could never happen in Sharia finance because of restrictions on leverage limits. Well, they did"

There were two other articles from the Reuters summit, one on Bank of London and the Middle East and one on the prospect of asset sales by Gulf Finance House.

Other News

• The new product from Australian bank Westpac is described in a little more detail and there is a link to the government study of Islamic finance (pdf).
  
• The Central Bank of Bahrain's al-ijara sukuk issue was oversubscribed by 200%.
  
• ThomsonReuters launched their Islamic finance gateway.
  
• Indonesia cancelled a 1 trillion rupiah ($107 million) in sukuk it was offering, without specifying a reason. An analyst quoted in the article suggested that the investors demanded returns higher than the government was willing to pay.
  

Dubai, Gulf Finance House, criticism of media descriptions of Islamic finance

Dubai and GFH
The worries over Greece has spilled back into Dubai with the credit default swaps rising to their highest levels since the Thanksgiving crisis over the maturing Nakheel sukuk. The money provided by Abu Dhabi to redeem the Nakheel sukuk will finance payments due until the end of April while Dubai World negotiates a standstill agreements but rumors have been spreading about a request for a standstill on all of Dubai World's debt for six months reported (but not confirmed) in al-Ittihad article.

In the wake of rising CDS premiums and concerns over Dubai World, the price of the Dubai sukuk has fallen significantly raising yields above 10%. It remains unclear about whether the problems with Dubai World will spill over into the Dubai government (which does not explicitly back Dubai World's debt).

The Dubai situation is not the only hotspot in Islamic finance in the Gulf recently. Gulf Finance House rolled over 1/3 of its maturing debt while paying off the remainder, which has brought attention to the offshore banking business (particularly investment banks) in Bahrain. The article above (from Reuters) notes that "most investment houses in Bahrain relied on booking upfront fees on money raised from investors for real estate projects and private equity projects, a market which collapsed following the end to a regional property boom late in 2008."

The terms on which GFH was able to postpone repayment of its entire maturing debt are costly with reports that the $100 million will cost the bank LIBOR+500 basis points plus an extension fee of 100 basis points. An analysis of the market situation for GFH is outside of the scope of what this blog covers, but there are questions about the Shari'ah-compliance of such an agreement.

Little is mentioned about the deal except that the new facility is a murabaha (replacing the old murabaha) and therefore I would imagine Shari'ah scholars signed off on the deal. The transaction itself is relatively unproblematic (if expensive). GFH received a financing facility from a group of investors which happened to be its previous creditors on a murabaha basis with an expensive profit for those investors.

However, the substance of the murabaha may be relatively common as a financing mechanism, the rolling over of debt and inclusion of an 'extension fee' seem problematic in my (untrained) eyes. I don't have the expertise in Shari'ah nor have I seen the documents for the deal, but this deal looks like an increase in the debt load on the $100 million in exchange for additional time for repayment.

However the deal was structured, this particular aspect seems to contradict at least the way that Islamic finance is supposed to operate. As I understand it, the prohibition of interest was at least in part a reaction to the exploitation caused by creditors rolling over debts in exchange for an increase in the amount owed to the creditors. I would hope that someone would come out and publicly explain how the deal was structured to avoid breaching the restrictions imposed by the Shari'ah.

General Islamic finance

The National newspaper has an article on the growth of Islamic finance that has some interesting comments from Michael McMillen, a partner at the U.S. law firm Fulbright & Jaworski. Commenting on the defaults, and the ongoing bankruptcy case of East Cameron Partners, he said "In my view, the impact is likely to be net positive. Thus far, the responses of involved parties provide grounds for optimism."

I think his assessment is correct, except for the impact on the investors in the sukuk. The default resolution process is one of the areas that has been a continuing source of uncertainty. One concern I have with the way Islamic finance is described in the article (not by Mr. McMillen) is the assertion that "Islamic banking is based on five pillars: no interest, no uncertain speculation, no financing of companies involved with goods and services deemed haram, such as weapons, pork and gambling, the sharing of profit and loss and the understanding that all financial transactions must be backed by tangible assets."

There are two points made here that I think are somewhat misleading. Islamic finance does not always involve a sharing of profit and loss. There are several commonly used transactions like murabaha and ijara where profit and loss are not shared.

In a murabaha, the transaction is a sale with a markup. The risk is placed on the debtor who must repay the cost plus profit regardless and if they do not do so, they are generally in default. The way it operates is that the bank operates as a wholesaler and the price they charge includes a markup. The financing feature of the transaction is that the buyer is offered deferred repayments. There is not interest charged on the deferred payments and the buyer must make these payments to remain current on the financing, just as if they were purchasing a good from another wholesaler.

The other statement I think is misleading is that "all financial transactions must be backed by tangible assets". This is also incorrect and does not give a clear picture of how many transactions are structured. To use a generic example, look at an asset-based ijara sukuk. In the standard transaction, the issuer sells the beneficial interest in an asset to an SPV which raises money from investors through a sukuk. The issuer then leases back the asset with a pre-determined rent payment (often benchmarked to an interest rate like LIBOR). At maturity, the issuer repurchases the asset at the sale price to allow the SPV to redeem the sukuk at par.

The transaction involves the sale of the asset, but the transaction is not 'backed' by the asset. If the issuer defaults, the investors can exercise a purchase undertaking granted by the issuer that forces the issuer to repurchase the asset at the par value (often this is the only option provided to the investors). The investors then become unsecured creditors of the issuer on par with all other unsecured creditors of the issuer. There is no additional protection granted by virtue of the asset being involved in the transaction, nor do the investors have recourse to the asset used in the transaction.

The descriptions provided by The National about Islamic finance that I have clarified are not unique to this article. I think that The National provides generally very good coverage of the Islamic finance industry and their articles are mostly very informative. However, this article falls into the 'simple explanation' trap that has most of the coverage of Islamic finance has fallen into.

There are far worse examples of poor description of how Islamic finance works in other news articles, but it is high time that the industry find a different 'simple explanation' that incorporates the essential features of how Islamic finance actually works so that there is not surprise when a situation arises like the Nakheel sukuk where people realize that Islamic finance is not always 'backed' by an asset. In fact, the Nakheel sukuk was different from the traditional ijara structure because investors were provided with recourse against the assets through the granting of a fully perfected mortgage over the assets that the sukuk was based on.

Other News

• Westpac Banking Corp, an Australian bank, is planning to announce an interbank product, most likely based on commodity murabaha, according to the Trade Minister Simon Crean.
  
• Columbia University held a symposium on Islamic finance with Umar Moghul and Taha Abdul-Basser, an Islamic finance lawyer and Shari'ah scholar, respectively.
  
• A college in Canada became the first in the country to offer an online course in Islamic finance.
  
• There will be a workshop on Islamic finance held in Libya by the Union of Arab Banks.
  

Thoughts before the Reuters summit on Islamic finance

The Reuters summit has not occurred yet (it is scheduled for next week) but there is one article which prefaces the summit and discusses how the industry has not yet found a way to move beyond the real estate driven crisis that began over recent years. There were four things mentioned in the article that are relevant as the industry tries to move beyond the crisis. When the summit concludes, it will be interesting to hear the different viewpoints on these areas, but in advance, I'll lay out my opinions on these four topics.

Maturity mismatches
"'This situation is very common whereby companies have gone out to get short-term funding but then put it into illiquid assets (such as real estate),' [Mohieddine Kronfol, managing director at Algebra Capital] said."

The maturity mismatch problem--that of borrowing short term to purchase long-term assets--is one that is important throughout finance. The real estate bust in the U.S. was precipitated in large part by this exact thing. Bank's structured investment vehicles (SIVs) were financed using asset-based commercial paper and then bough mortgage-backed securities. Their difficulties, which led them to be taken back onto bank's balance sheets was an inability to roll this ABCP, which created a liquidity crisis in the SIVs and the rest is history.

The Islamic banking problem is not necessarily as extreme as the SIV problems (commercial paper is debt with a maturity of less than 270 days). However, it serves as a good example of the effects of a maturity mismatch in a crisis. In Islamic banking, the maturities are generally not quite as short, but the problems remain. The financing done by Islamic banks for real estate projects, many of which were not even expected to be completed in a couple years time, was rarely in excess of 5 years. Overall, there have been few (non-Malaysian) sukuk issued with maturities of greater than 5 years and this is not necessarily surprising given that they were issued in emerging markets and the riskiness of a sukuk issue is to some degree affected by its maturity. Changing interest rates (on which the coupons on new sukuk are based), alongside with market, political and credit risks means that investors are wary of investing in longer maturity debt.

That said, the larger problem in Islamic is the over-concentration of investments in one sector (real estate) and the general collapse of several real estate markets. There is always additional risk in not diversifying and the real estate boom in the Gulf coincided with a global boom that ended in 2007-2008. The maturity mismatch is not going to be overcome quickly and the lower-than-expected size of the Dar Al Arkan sukuk suggests that issuers of sukuk who are not sovereigns or high-grade corporate issuers are not going to be received as well as they were in the boom year. The Dar Al Arkan sukuk was a 5-year sukuk, continuing the trend of shorter-maturity issues.

As the market rebounds and investors become more comfortable with sukuk, the maturity of new sukuk could lengthen. However, that will require greater institutional changes in the markets from which sukuk are issued. There needs to be greater legal certainty about whether the rules under which sukuk are issued will remain constant five years from now, let alone ten years from now if the maturity profile of new sukuk is to increase.

Reliance on transitory sources of profits
"Asset management is seen as a key growth area for the industry, but experts say it needs to diversify its products by adding fixed-income components to its funds that are focused on real estate and private equity."

The Islamic finance market has been focused a lot on the high profile deals and also those which net the financial institutions the highest fees during the past few years. There have been many structured products and private equity deals that have captured the headlines of the industry. To be fair, there has also been more development on more plain vanilla products, but it has taken a back seat to these other areas like private equity and large real estate projects.

This is great for banks when everyone's dancing (to paraphrase Chuck Prince on the eve of the crisis). However, it means that the revenue sources for many Islamic banks, particularly investment banks, is very cyclical. When these deals are plentiful, the banks are making bumper profits, but when these opportunities disappear, we see banks run into problems handling their debt load, as recent problems at Gulf Finance House (which was downgraded to 'Selective Default' in the wake of its debt restructuring/rollover) evidence.

There are more stable forms of revenue and asset management is one of them because it has a longer-term focus rather than the transactional focus on the investment banking business. It may be less lucrative in boom times, but it is often more stable in times of stress in the financial markets. This balance between different activities is not one that only applies to Islamic financial institutions, but it is one piece in the puzzle about why some Islamic financial institutions have run into trouble recently.

Lack of standardized regulation
"Regulation also remains fragmented, with central banks, its own standard-setting bodies and scholars interpreting Islamic law all having a say in governing the industry."

The issue of standardization is one of the most complex issues in Islamic finance. I have refined my own views on standardization of individual products and that is a particularly difficult area for the industry to grapple with. However, the standardization of regulation is I think less difficult. Uncertainty of how Islamic finance is in most cases negative to the industry's growth. The uncertainty, for example, on Shari'ah issues plays one factor in the lack of longer maturity sukuk because of doubts that the accepted Shari'ah standards today will be so ten years down the line. When investors look at a sukuk, the risk that the structure will not be viewed as acceptable several years down the road may detract from interest in it. This risk may be heightened by the AAOIFI revision of standards on mudaraba and musharaka, which provide tangible examples how an accepted structure could be frowned upon by Shari'ah standards in a couple years time.

There is very little the industry can do to mitigate this risk because the rules are still in flux and individual Shari'ah scholars may view different products with different levels of acceptance even at one point in time. The only thing that can reduce this uncertainty is to build an institutional framework in which standards can be established and revised. To some degree, this is already taking place with development of standards by AAOIFI and the IFSB. However, there can not be too much work towards the goal of increasing certainty about what is and is not acceptable from a Shari'ah point of view.

Lack of size among local Islamic financial institutions
"The industry also needs to create bigger players, with local banks being too small to grab market share from the Islamic windows of Western conventional banks in syndicating loans and arranging Islamic bonds, or sukuk."

To some degree, the problem with standardization of Shari'ah supervision is intertwined with the lack of local financial institutions of sufficient size to compete with Islamic windows of the global financial firms. These firms are primarily (if not solely) involved in Islamic finance with an eye to the profits from creating products that receive Shari'ah approval. They may be staffed with people who believe that Islamic finance can provide a new model for financial services based on the Shari'ah, but on an institutional level, they are focused on profits.

THe smaller (mostly GCC-based) Islamic financial institutions that compete with them also share the desire to maximize profits, but there may be more of an institutional bias towards the development of the Islamic finance industry longer-term. A fully Shari'ah-compliant financial institution will depend for its survival upon the industry remaining relevant and will have much more difficulty changing businesses if Islamic finance is stymied. The global financial institutions, on the other hand, are able to shift between the businesses (conventional and Islamic) which produce the greatest profits and may act with a short-term focus on pushing the envelope by becoming the first bank to offer a Shari'ah-compliant version of XYZ conventional product.

That being said, there are benefits for the involvement of large financial institutions with their greater resources to develop the industry and their (often) longer history of operating within global financial markets. This benefit may outweigh the short-term costs of their involvement and so long as there is sufficient infrastructure built to support the growth in the Islamic financial industry that is apart from the shorter-term focus of the global financial institutions, the industry can benefit from their involvement.

Gulf Finance House restructures debt; Warde on Islamic finance in the U.S.

Gulf Finance House repaid $200 million of its maturing $300 million debt facility after reaching an agreement with its creditors to defer the remaining $100 million for six months under a new murabaha agreement. The Islamic investment bank has another $50 million maturing on March 3 that is also expected to be delayed. The company saw its credit rating cut to selective default (SD) on the announcement.

Ibrahim Warde suggests that Islamic finance could be beneficial for the United States by creating new financial institutions and demonstrating that the U.S. is interested in "promoting a new era of equal economic prosperity and opportunity for Muslims here and abroad".

Other News

• The sixth monthly issue of the Opalesque Islamic Finance Intelligence is now available. It is a good read, as always.
  
• Amlak is "hopeful" that the UAE federal government will approve its merger with Tamweel.
  
• The Saudi firm Dar Al Arkan will raise $750 million in sukuk, although as other news stories (linked to on Monday's post) note, the uptake has been weak.
  
• Korea Investment & Securities Co says that South Korea needs Islamic finance to curb its trade deficit. The firm recently hired Shari'ah scholar Mohammed Daud Bakar to "help it structure Islamic financial products".
  
• Kuwaiti Islamic bank, Boubyan Bank had only received subscriptions for 85% of its rights issue and said its board would recommend reopening the issue.
  
• Dubai Islamic Bank postponed its board meeting to discuss a wakala arrangement using funds from the UAE ministry of finance.
  
• Indonesian takaful growth will slow to 30%.
  

Islamic banks to adopt more equity-based financial products

Two articles describe that Islamic finance is working to incorporate more equity-based financing structures and move away from its use of tawarruq, although this change will be done very gradually. In general, this is a positive development for the Islamic finance industry because it provides a greater reliance on products which are more differentiated from conventional financial products.

However, this change, however gradual its implementation, will be disruptive to the industry even as it recovers from the impact of the credit crisis. Investors will shy away initially from products that alter the risk profile of what is offered and this will increase the cost to Islamic banks, at least until there is greater familiarity and certainty under different legal systems of the new products. It will also create some disruption for Islamic banks who will have to adjust their risk management and reset the way they determine the cost for borrowers to remain profitable.

One aspect of any shift away from debt-based products and towards equity-based products that will be especially difficult will be that it adds to the difficulty of Islamic banks' business in addition to their already challenging liquidity management challenges. In some cases, the different risk profile of the banks' assets will create some additional risk that the bank will run into difficulty and this will be a challenge for regulators.

This regulatory challenge could make it difficult for Islamic banks to be regulated under identical rules as conventional banks if the risks facing Islamic banks change. In most countries, there is only one regulator of banks and this covers both Islamic and conventional banks. A rapid change in the way Islamic banks operate, especially if the change is codified by standards setting bodies like AAOIFI, could have a perverse effect of slowing the growth of Islamic banking in many countries.

Despite these concerns, it is heartening to see the industry publicly signal that it recognizing the need to differentiate itself from conventional banking. It would be useful if research organizations and standard-setting bodies would provide a more thorough look at the impact of any change towards more equity-based products on the Islamic finance industry.

Other News

• Dubai World is still working on a restructuring plan and is expected to sell assets and no plan will be done until at least the end of February. The creditors committee is made up of seven banks and if one declares Dubai World in default, it would tip the company into bankruptcy and turn the process over to the tribunal established at the DIFC.
  
• An article describes the cooperative Islamic microfinance being offered in Kandahar by the Islamic Investment and Finance Cooperative.
  
• Dar Al-Arkan is expected to issue its sukuk for between $500 and $750 million at the end of the week and it is expected to be priced to yield 10.5%-11%. One anonymous banker commenting on the roadshow described that "they have been struggling. They still haven't closed anything and they have been on the road for a long time now".
  
• Southeast Asia will be the region that will lead the sukuk market in coming years according to the leading arranger CIMB Group.
  
• Indonesia issued a 3-year sukuk for $856.3 million yielding 8.7% with significant uptake from retail investors. The issue was significantly oversubscribed and was more than double the target amount of 3 trillion rupiah ($318 million). Indonesia is also planning on issuing yen-denominated samurai bonds early in the second half of 2010.
  
• Ireland's new law, which is described in greater detail here, comes alongside a growth in the number of Islamic finance funds registered there.
  
• Saudi bank NCB Capital is launching a new Shari'ah-compliant fund focusing on sukuk and murabaha.
  
• Islamic mortgage company Tamweel reported a profit in the fourth quarter of 2009 while reporting a loss for the full year. The company is expected to be merged with Amlak Finance in the first quarter.
  
• Leader Universal Holdings, a power transmission company in Malaysia, received a 13-year, $65 million in istisna'a financing for one of its projects.
  
• First Finance's board of directors approved its acquisition by Barwa Bank.
  

Islamic banking in the crisis, Syrian microfinance

A report on Islamic banking from the Kipp Report provides a good, if brief, look at the impact of the credit crisis on Islamic banking. The most important statement, in my opinion, is a quote from the president of the Islamic Development Bank:

"But it’s becoming clear that Islamic finance’s conservatism did not fully shield it from the ills of the economic crisis. 'The word immune is inappropriate here,' the president of Jeddah-based Islamic Development Bank, Ahmed Muhammed Ali, says."

Syria, which passed a microfinance law in 2007, has seen microfinance institutions, both conventional and Islamic, struggle to find a sustainable business model. Most began not chargin interedt, although now most conventional microfinance institutions charge 1% per month and Islamic microfinance institutions charge markups of 5% (the time horizon for this financing is not provided, so the numbers are not directly comparable). As with all microfinance, in order to make it a part of a poverty-reduction strategy, it does need to integrate its focus on raising incomes, while at the same time making enough money on an institution level to make it self-sufficient.

Other News

• Gulf Finance House is requesting a partial loan deferral for $100 million of the $300 million Islamic debt due next week. A $50 million sukuk due in July 2012 is "in negotiation" according to the acting CEO Ted Pretty. The company issued a short official statement on February 2nd.
  
• Barclay's launched two Islamic finance products in Kenya. Previously, there were two banks (First Community Bank and Gulf African Bank) offering Shari'ah-compliant banking services.
  
• Tamweel is planning to ask for its shares to resume trading. Its shares were halted in November 2008.
  
• RAM Ratings wrote an article about the Malaysian debt markets in The Star newspaper. The article included data on new sukuk programs and issuance in new facilities. (Apologies if the table is not formatted well)
  

	2007	2008	2009
New facilities	RM86.7bn	RM16.1bn	RM41.5bn
	($25.2bn)	($4.7 bn)	($12.0 bn)
Issuance from new facilities	RM39.6 bn	RM8.8bn	RM9.6bn
	($11.5 bn)	($2.6 bn)	($2.8 bn)

• The Irish government is planning tax changes to treat the returns on Islamic finance products the same way as interest is treated in conventional products.
  
• Kuwait Finance House says it does not plan on raising additional capital "for the time being" according to its chief executive.
  

Islamic finance & SRI, Islamic banking in Indonesia

Islamic Finance & SRI - A new report

Dinar Standard and Dar Al Istithmar released the results of a survey on Islamic finance and SRI where they surveyed 29 Islamic financial institutions (including Islamic windows and non-bank financial companies). The results of the study are well documented and, although the sample size is rather small (not something to fault the organizers for), they describe quite clearly the goals, insights and limitations of the data they present.

The final summary of the study is:

Within its limited sample, it is evident that the majority of IFIs have yet to embrace the concept of financial institution utility to enhance their social responsibility. Financial institutions have the ability to redirect funds from the capital rich to the capital deficient to ensure the redistribution of wealth in the long term.
As an example, one method to efficiently utilize an Institutions infrastructure is by maintaining policy targets for financing to SMEs and micro-finance entrepreneurs in the developing world. Micro-finance and SME finance has continuously proven to be a sustainable revenue stream, subject to appropriate risk management strategies, including portfolio diversification, low concentration risk and stringent credit and social collateral requirements.

[...]

At the same token, IFIs can also invest in particular industry sectors that demonstrate social and/ or environmental impact while providing profitable revenue streams, such as education, healthcare addressing the needy water desalination, waste management etc.

I would encourage everyone to take a look through the individual responses (available from the above link as a PDF).

On the conclusions about microfinance, I address my thoughts on Islamic banks and microfinance just below. With regards to the environmental/social/development investments of Islamic financial institutions, it is heartening to see that there are a majority who have investment quotas on these areas, but there remains limited exposure of these activities which may be a question of these quotas being too low. The current environment for business provides benefits for companies that promote their sustainability-related work (whether it is significant or 'greenwashing') and from the preparation of this blog, I read a lot of the press releases and articles about what the Islamic finance industry is doing and there remains limited visibility about sustainability-related business from Islamic banks. So either they are doing very little or they are not promoting what they are doing.

In either case, there is a lot Islamic finance could gain by grasping the sustainability agenda and promoting their involvement in it, especially in the West. I would be hard pressed to come up with a specific reason to switch to a Shari'ah-compliant financial product and many other non-Muslims (with less understanding of how Islamic finance works) may feel similarly. If Islamic financial institutions demonstrated their concern with sustainability, whether environmental, social or developmental, it would surely attract my interest as a non-Muslim consumer with concern for sustainability (for example, I just moved my banking relationship from a major bank to a local credit union). I think there are plenty of other people who share my views and this creates an opportunity for Islamic finance to expand outside of its natural constituency of Muslim consumers (particularly in the West).

I commend Sayd Farook and Rafi-uddin Shikoh (and all others involved in the report) on a job well done creating a thought-proviking and interesting report.

Islamic banking in Indonesia

I thought this article about Islamic banking in Indonesia was interesting. It describes the limited inflows of money into Islamic banking because of unclear regulations and pervasive corruption, but then points out the Islamic banking industry in Indonesia is more focused on small- and medium-sized businesses and microfinance than Islamic banks in other countries.

Although it is clearly sub-optimal for the Islamic banking system to be constrained by regulatory uncertainty and corruption, the Indonesian example shows that Islamic microfinance and banking focused on small and mid-sized businesses can work. I remember seeing Hans Dieter Seibel present a paper (available as a PDF) on institutional diversity in Islamic microfinance in Indonesia and the challenges in terms of capital adequacy and solvency between different types of Islamic microfinance institutions.

One thing I think is certain is that there is too little focus on Islamic microfinance and its impact as one component in poverty alleviation alongside other forms of aid including zakat and waqf. There is certainly enough smarts in the Islamic finance industry to be able to develop cost-effective Islamic microfinancial products and it would be a natural fit for the industry if some of this knowledge and experience were donated to develop Islamic microfinance without having to have the costs of development incorporated into the financial products and passed along to the end-consumers.

Capitas Group

The Islamic Corporation for the Development of the Private Sector signed a deal with Capitas Group, a U.S.-based company that develops Shari'ah-compliant finance companies. Other companies within their portfolio are the U.S.-based Zayan Finance and Zayan Takaful which provide commercial real estate financing and takaful, respectively. The new company will be based in Jeddah, Saudi Arabia and according to Capitas Group CEO Naveed Siddiqui, "there is a huge demand for mortgage finance in Saudi Arabia and the broader region". With a new mortgage law expected soon in Saudi Arabia, this will probably be the focus of the new company.

Other News

• Tamweel is considering its options in case the merger with Amlak falls through. The merger has been in the works since 2008 and is expected in the first quarter of this year, but there appears some doubt on the part of Tamweel officials that it is a sure thing.
  
• Officials at the Philippines' only Islamic Bank, Al-Amanah Islamic Bank, expect the country to miss the growth in Islamic finance in Asia as it continues to 'refurbish' and 'rebrand' the bank after a capital infusion from the Development Bank of the Philippines. S&P released another report on the future growth of Islamic finance today.
  
• The state-owned Islamic Bank of Thailand is planning 55 billion baht ($1.66 billion) sukuk issuance. 5 billion baht would be raised as a local Islamic bond with the remaining 50 billion baht as a sovereign sukuk.
  
• During the last year, the "brand value" of Islamic banks grew rapidly. The article about the study from Brand Finance plc did not define how this was measured.
  
• In a long overdue change, Kuwait Finance House upgraded its website.