IIFM releases report on Shari'ah-compliant repurchase agreements (repos)

Conventional borrowers in the GCC are moving away from sukuk following the Dubai debt crisis. It is not said whether they are moving away from sukuk, which often have higher structuring costs, because of the structures or because the additional costs of structuring sukuk for issuers and a higher illiquidity premium makes it not cost competitive. Despite this there were 98 sukuk issued globally for $13.7 billion in the first half of 2010, up from $7.1 billion in the same period of 2009. S&P provided comments with their data release.

The IIFM released a paper on the possibilities for Islamic Repo transactions (I'aadat Al-Shira'a). You can download the paper from IIFM's website after going through the registration process. I hope to put up a post once I have a chance to read the document.

Other News

• Rushdi Siddiqui takes on the misguided "anti-Sharia" groups in the US who view Islamic finance as a threat.
  
• There is a video of my presentation at the UFANA conference in March in Toronto. It begins at about the 3:50 mark of this video and concludes at the beginning of this video.
  
• In a blog post on Monday I suggested that an article from Bloomberg describing falling yields on sukuk in the GCC was somewhat misleading and now Bloomberg's article that is similar to their earlier article is titled: "Persian Gulf Sukuk Yield Premium Widens on Fourth Default".
  
• Kazakhstan will issue a sukuk after cancelling a conventional bond sale.
  
• The American Prospect interviews Frank Vogel, who co-authored the book Islamic Law and Finance: Religion, Risk and Return with Samuel Hayes, both professors at Harvard University.
  
• A short video of a speech by the governor of Malaysia's central bank, Bank Negara, Zeti Akhtar Aziz.
  
• Khazanah Nasional is raising funds through 5- and 10-year sukuk to finance its bid for hospital operator Parkway Holdings Ltd.
  
• Indonesia's planned global sukuk will be smaller than the $650 million initially expected because the budget deficit is smaller than expected. An unnamed foreign bank is planning an Islamic banking service in Indonesia in the second half of 2010 according to the Head of Research, Development, and Sharia Banking Management of the central bank.
  
• Two Islamic banks in Pakistan became the first merger of two Islamic banks in the country. Emirates Global Islamic Bank and Al Baraka Islamic Bank will merge. The new bank will be called Al Baraka Bank (Pakistan) and will have combined assets of $582 million.
  

How tough is the market for new issues in the GCC?

An article in Bloomberg describes the falling yields on GCC sukuk, Dubai World and the sovereign Dubai bonds and sukuk with some optimism. However, it notes that the spread on Dubai World's debt (it doesn't say what the spread is based on, but one would assume comparable maturity US Treasuries) from 647 basis points after the standstill to 545 basis points (it incorrectly says the spread is 545 percentage points). The yields on sukuk from GCC-based issuers was 7.17 percent on July 23 (compared to 8.76 after the Dubai debt crisis), the Dubai 6.396% soverign sukuk is yielding 7.38% (435 basis points higher than the recently issued Malaysian sovereign sukuk), the Dubai World yield is sitting at 8.4% (for the 6.25% sukuk).

These figures reflect only limited thawing of GCC credit markets in the aftermath of the financial crisis and, in particular, the Dubai debt crisis. It is hardly surprising that other articles written recently describe a move in momentum in sukuk issuance from the GCC to Malaysia. That is in many respects not entirely fair. The Dubai debt crisis was triggered by specific factors--primarily an overvalued real estate market in Dubai that saw significant declients. However, it does suggest a general attitude that sukuk from the GCC are more risky than other emerging market debt (including sukuk) offerings. This will reduce the level of issuance of sukuk in the near term from the GCC, which would hurt the emergence of sukuk secondary markets. If anything, investors need more sukuk issuance to fill the portfolios of long-term, hold-to-maturity investors (like takaful funds) and therefore a reduction in issuance from one of the largest markets (and the regional market for many of the funds investing in sukuk) could reinforce the hold-to-maturity mentality among many investors. Some of those investors are probably sitting on large losses from Dubai-related sukuk that they are unwilling to realize.

Meanwhile, Nakheel is working through its own debt restructuring. Reports suggest that full payment will be made over 5 years for its syndicated banks loans (including Shari'ah-compliant financing) and 7 years for its sukuk. According to Reuters, "Bankers have until the end of August to respond to undisclosed terms of Nakheel's multi-billion dollar restructuring plan, including the rates of interest and repayment schedules for syndicated and bilateral loans. " Reuters is usually pretty good at describing the presence of Shari'ah-compliance in financing facilities, so the description they give (while it may be limited by sources speaking on background) does reflect the lack of a structure for restructuring in Shari'ah-compliant transactions. The restructuring of the loans (many of which are based on ijara) is probably being done in a rather ad hoc manner. The interest rate and payment terms are dealt with first and the Shari'ah-compliant structure are dealt with later. If this is the case, there remain significant gaps in the Islamic finance industry in dealing with distressed situations that should be at the forefront of the agenda before the next crisis comes.

Other News

• Kuwait-based International Investment Group defaulted for a second timek on a sukuk this year, missing a $152.5 million payment.
  
• Mushtak Parker offers his thoughts on the Sukuk ALIM being issued by Cagamas working with Al Rajhi Bank to be viewed as Shari'ah-compliant in both the GCC and Malaysia. He also offers his thoughts on the recent entry into the Islamic finance markets by Japanese firms, several years after the country said it wanted to encourage Islamic finance in the country to attract capital.
  
• A former Supreme Court justice in India, Krishna Iyer, believes that Islamic finance can help in efforts to alleviate poverty.
  
• Arab News has an interview with the CEO of the Islamic Corporation for Development of the Private Sector, part of the Islamic Development Bank group.
  
• The state-owned Islamic bank in the Philippines is planning the country's first sukuk to "fund growth in Muslim Minanao".
  
• A Malaysian firm is providing the first financial guarantee for a sukuk.
  
• A writer in the Business Recorder in Pakistan, Saqib Masood Chisti, suggests that Islamic microfinance could be expanded in the country while criticizing a program that provides cash payments to poor families as causing inflation and creating dependency (I am not knowledgable enough about the program to comment, but the description given resembles the successful Bolsa Familia program in Brazil).
  

Thursday bullets

• Dubai World formally presented its restructuring plan to creditors for $23.5 billion in debts. A Reuters article presents an analysis of what could come following a successful restructuring.
  
• A Bloomberg article describes the rally in Petronas sukuk, which are held by many conventional funds around the world. Petronas' sukuk is now yielding 3.13%, well below its 4.25% coupon.
  
• Bloomberg has an article on the Cagamas sukuk, which is structured to be acceptable in both Malaysia and the GCC.
  
• Citigroup is considering opening Shari'ah-compliant microfinance banks in Pakistan.
  
• The fund manager of the BLME Shari'ah USD Income Fund believes that there will be a revival in sukuk issuance starting this fall.
  
• There is another article on the struggles of the domestic Islamic finance industry in the UK which ends with a grim assessment: "Either way, it doesn’t seem like Shariah-compliant offerings in Europe will be the big boon many had expected a few years ago." I wrote a post on the issue comparing it with the US on Tuesday.
  
• Lahem al-Nasser writes that Islamic windows of conventional banks are viewed with suspicion by Islamic banking clients and it would benefit the industry for CIBAFI to commission a poll of Islamic bank's clients about attitudes towards Islamic windows.
  
• Chase Bank in Kenya is launching Islamic banking products.
  
• A spokesman for the government of Kazakhstan said the government is still "studying the possibility of selling Islamic bonds" despite a Finance Ministry statement that Kazakhstan's banks will not sell bonds overseas this year, removing the need for the government to issue a benchmark bond.
  
• A unit of Qatar-based property developer Barwa Real Estate received $3.5 billion in two murabaha facilities from Qatari Diar Finance. $1 billion will mature in 2015 and the remaining $2.5 billion will mature in 2020.
  
• Kuwait Finance House reported profits for the second quarter was up 22%. The profit was lower than what was reported by a newspaper citing an unidentified source last week.
  

Book Review: Brilliant Marketing for Islamic Banks (Paul McNamara)

Paul McNamara, the co-founder of Yasaar Media, released a book called "Brilliant marketing for Islamic banks" (Business Bookclub, $35). In the introduction, he describes the aim of the book:

"We hope that this book will go some of the way to giving marketers and brand managers something fresh to think about as well as a battery of ideas that they themselves can implement when they next undertake a campaign or brief their agency."

The book is well written and well organized. My background is not in marketing so my impression of the book probably reflects this. However, as a consumer myself, the insights he describes in the book make sense when I reflect how I react to marketing materials from different sources.

If I have one reservation about the book is that it is more focused on marketing and not specifically on the way in which marketing can be tailored to Islamic banks, excepting a section where he reviews the branding of several Islamic banks. However, from my experience reading promotional materials on Islamic finance and attending conferences, there is too much emphasis on Islamic finance being inherently attractive because of its focus on Shari'ah-compliance. My layman's opinion about this is that it could create complacency in marketing efforts: if a product is Shari'ah-compliant, then it is de facto superior to the alternatives and the marketing does not need to 'sell' the product on its other merits.

As I wrote about in a post yesterday, the move from profitable to successful Islamic financial products in the West (and particularly when viewing success as transcending the Muslim audience) is based on their individual traits and how they are marketed. Recent criticism of some institutions has focused on the lack of marketing efforts focused on the attractiveness of the products in areas besides Shari'ah-compliance. For this reason, Paul's book could provide a refresher course that reminds readers of the other areas that marketing can focus on to attract the interest of potential consumers, Muslim or not.

Islamic retail banking in the West: Can the US provide an example?

There are a number of articles about the challenges facing the Islamic finance industry that caught my eye in the last couple days but none challenge the conventional wisdom as much as an article from Bloomberg that Islamic banks or conventional banks Islamic windows in the UK have been set back substantially by the recession. Further, there may be too many banks (22) chasing too small a market ($19 billion versus $93 billion in Malaysia). Another article in the Independent focuses on the withdrawal or shrinkage of retail Islamic finance at large banks in the UK. One of the areas where the Bloomberg article flies in the face of conventional wisdom is that the UK government has not supported the Islamic financial industry sufficiently. This contradicts the widely held view that the UK is preeminent among non-Muslim-majority regions in both its level of development and the scope of government support. As much as this challenges these ideas, there is a caveat that is not mentioned in the article: it is mostly focused on the domestic market, not the participation of UK-based banks in the global Islamic finance industry. However, it does set back the idea that Islamic banking can become a widely accepted subset of the domestic financial industry in non-Muslim-majority countries with sizeable Muslim minorities.

On the scale that Bloomberg is looking, there probably is not a large enough market that can easily be penetrated by large institutions and the one solely retail focused and Shari'ah-compliant institution, the Islamic Bank of Britain represents too small a sample to generalize about the prospects for smaller institutions. In this regard, the United States may provide an example of how Islamic banking can be feasible without participation from large conventional banks. The US market--for reasons of regulation and geographical concentration of the Muslim population--has no product availability among the large banks, but under the radar exist community banks, credit unions and non-bank financial companies that provide Islamic financial services. This may be the maximum size that is profitable currently in countries without sizable Muslim populations and that should be recognized as a success. Although the headlines are drawn by the largest and the newest products and institutions, having financial institutions that recognize the value of remaining small enough to serve their customers and avoid overexpansion is a virtue in itself. Not all areas in the U.S. have remained under the radar. For example, the Amana mutual funds have grown over the past decade and two of the funds are the largest Islamic equity funds in the world, in large part because they have transcended their natural market and attracted non-Muslims based on their performance.

Areas of the Islamic financial industry that are not yet able to attract significant non-Muslim participation but are able to avoid growth-at-any cost may not make the headlines, but the experience of the Amana Funds shows that this is not necessarily a failure. The Amana Funds remained small for many years before starting their rapid growth at the beginning of the last decade. Their growth was "supply-driven"; it was "demand-driven" based on their ability to provide a service demanded by consumers both Muslim and non-Muslim based on its performance. There cannot be a direct analogy that could work elsewhere in non-Muslim majority countries, but the contrast could provide lessons for other non-Muslim-majority countries with aspirations to develop a domestic Islamic finance market. Maybe the next decade will be the decade for retail banking.

Other News

• Rushdi Siddiqui has two great articles in Gulf News. In one article he suggests: "For Islamic finance, a lack of Muslim inclusion should be a greater concern than lack of standardisation. When we speak of convergence, it may well entail technology (mobile phone) and banking for the non-bankable Muslims. Hello, is Islamic finance listening at the other end?". In the other, he interviews Dr. Mohammad Nedal Al Chaar, the Secretary-General of AAOIFI.
  
• As the Islamic finance industry grows in Canada, the Rotman School of Management at the University of Toronto is the first to offer a course on the subject for MBA students.
  
• Saudi Binladin Group sold a short-term sukuk with a maturity of 9 months for $187 million (SAR700 million). Most sukuk have a tenor between 3 and 7 years.
  
• Sukuk sales in 2010 are expected to be $23-$25 billion according to a poll by Reuters. This was close to the $23.3 billion issued last year and lower than a poll conducted in April which forecasted $28 billion in sukuk sales. Asa Fitch wrote a good article in The National about the growth of the sukuk market and the rapid decline during and after the financial crisis.
  
• Even after a four-month rally, the yields on Nakheel's sukuk are twice as high as 2007. A credit analyst at S&P in Paris, Mohamed Damak who also is co-chair of the Islamic finance working group for S&P points to this as evidence that the market is still hard to access for real-estate-based companies.
  
• Kazakhstan has resumed planning for its first sukuk, which is not expected soon and will likely be an ijara sukuk of roughly $300 million. There are a number of regulatory issues that need to be dealt with.
  
• Russian bank Vneshtorgbank (VTB) has also resumed work on a sukuk issuance and "a range of other Islamic financial products". The Association of Regional Banks of Russia established a task force on Islamic financial institutions.
  
• An article in Arab News describes the backlash facing Islamic banks in South Africa over high fees. However, the criticism of the high fees are not limited to Islamic banks.
  
• A report about Islamic banking in Indonesia was released recently.
  
• The Saudi Electric Company is planning a fourth sukuk. The timing, size and pricing are yet to be determined.
  
• Abu Dhabi Ports Company is considering a bond or sukuk of up to $1 billion in early 2011.
  
• Bermuda is trying to attract the Islamic finance industry following a trip by the CEO of the Bermuda Stock Exchange to Bahrain.
  
• An opinion piece in China Daily by the program director of the University of Hong Kong SPACE on the development of Islamic finance in Hong Kong, including the areas where it is being held back, particularly in human capital.
  

Thursday bullets

• The Director of Treasury and International Banking at Bank Muamalat in Indonesia says that the country's Islamic banks may be undercapitalized because none has equity exceeding $200 million. In the last three years, the number of Islamic banks has increased from 3 to 10. The Indonesian government may cancel its global sukuk because domestic conventional bond sales may be sufficient to cover the budget deficit.
  
• Nakheel outlined a restructuring plan covering $10.5 billion in bank debt. Creditors have until August 31 to respond. The debt plans are being linked with lowering yield spreads on GCC sukuk.
  
• Nomura raised $70 million from a commodity murabaha facility in the Middle East following its $100 million sukuk issued in Malaysia. The sukuk will be listed on Bursa Malaysia.
  
• Although Abu Dhabi Islamic Bank updated its sukuk program prospectus, it has "no immediate plan" for a sukuk sale.
  
• Paul McNamara, the co-founder of Yasaar Media, wrote a book on marketing for Islamic banks available as an e-book.
  
• Kuwait Finance House may announce a $266 million first half profit according to unidentified sources.
  

Gulf sukuk market recovering, Asia leads; asset-based vs. asset-backed sukuk

The Gulf sukuk market may begin to open up as yield spreads fall with the issuance of sukuk from highly-rated issuers. This is one step in the process of recovering following the effect of the financial crisis which was most noticeably manifested by the Dubai debt crisis. Since the Dubai debt standstill, most of the few GCC-based issuers have been investment grade with the exception of Dar Al Arkan. GCC-based sukuk represented 30% of the Q2 and previous four quarters total global sukuk issuance value according to data from Zawya's Sukuk Quarterly Bulletin. HSBC expects to see a recovery in sukuk led by Asia as it has during the past year. [UPDATE: Bloomberg released an article about the shrinking yield spreads on Asian sukuk]

As the GCC market opens up and high-grade corporate and multilateral institutions like the Islamic Development Bank issue sukuk, it will provide somewhat of a benchmark for pricing other sukuk, particularly those from lower rated issuers. However, the benchmark from new issues will only become meaningful for encouraging new sukuk if there is liquidity in the secondary markets. In contrast to Malaysia, secondary market liquidity in sukuk is low. However, the new issuance is a start. Bloomberg provides a list of forthcoming or planned sukuk. One of those issuers is Abu Dhabi Islamic Bank, which filed a base prospectus for up to $5 billion in sukuk with the London Stock Exchange on July 8th.

Sheikh Yusuf DeLorenzo is quoted in an article in Bloomberg that suggests investors are more likely to demand asset-backed rather than asset-based sukuk based on the recent defaults. The difference is similar to the difference between a secured and unsecured debt and would also tackle the criticism that using an asset-based structure is fitting the round peg of Islamic finance into the square hole of conventional debt structures.

The European travel firm Thomas Cook failed to place $50 million in sukuk in the GCC because of its small size and investor's belief that the coupon of 7% was too low. It would have been the first European corporate sukuk. Based on its small size, I would tend to minimize the impact of the failure on future European corporate sukuk. If a larger European issuer fails to issue a sukuk, particularly if it is of benchmark size, then it may dissuade other European companies from issuing sukuk.

Indonesia auctioned only Rp246 billion ($27 million) in 15 year (Rp7 billion) and 20 year (Rp 239 billion) sukuk compared to the target of Rp1 trillion. As in previous failed acutions, investors submitted enough bids to cover (Rp 1.18 trillion) but the yields were higher than the Finance Ministry was willing to accept. The higher yields have been attributed to the lack of liquidity in secondary markets.

Other News

• Cagamas, the national mortgage company in Malaysia is expected to issue the first tranche of its sukuk which it developed with Al Rajhi Bank to be in compliance with AAOIFI standards. Many Malaysian sukuk are not accepted in the GCC. The sukuk is an al-Amanah Li al-Istithmar (ALIm). It will be backed by a mixed asset pool, but contain enough ijara assets to be tradable. The remainder of the assets will be based on bai, wakala and bai' bithaman ajil (BBA).
  
• A blog post notices the growth of Islamic banking and wonders if it could take a bigger role than it has. I think it can if Islamic banks decide that supporting and financing Islamic microfinance is a good way for Islamic banks to engage in corporate social responsibility.
  
• Malaysian bank Agrobank announced it plans to go fully Islamic by 2015. It has offered Islamic banking products since 2008. The bank reported that 60% of its non-Muslim clients choose Islamic banking products.
  
• Barwa Bank is close to completing its acquisition of First Finance Company.
  
• Gatehouse Bank acquired One Sovereign Street, a building in Leeds, for GBP40.175 ($60.9 million).
  
• Malaysian property developer LBS Bina is issuing a RM135 million ($42.1 million) sukuk to finance a housing project.
  

Guest Post: Where to Study Islamic Finance

With the explosion of Islamic banking trends worldwide and with the practices making the news in major markets, more and more people want to know all they can about the field. I usually tell them that one of the best ways to learn about Islamic finance is to take an online course or seek out a nearby university. There are many distance learning options available for students and professionals who want to deepen their knowledge of Islamic banking, as well as classes at established schools, and they're offered through a growing number of quality outlets. Here are just a few to get you on your way.

Institute of Islamic Banking and Finance. The IIBI, based in London, offers a variety of courses at multiple levels, whether you want to study takaful or Islamic banking and insurance.

AIMS. Another U.K.-based organization, the Institute of Islamic Finance features several academic programs: MBA in Islamic banking, Islamic finance expert, certified Islamic banker, and certified takaful professional. As always, make sure that any courses you take are going to be recognized by future employers as worthy and accredited.

Islamic Legal Studies Program. Harvard Law School's ILSP is a fantastic resource for students looking to enhance their knowledge of Islamic law and see how it applies to finance and a number of other professional fields.

BIBF. The Bahrain Institute for Banking and Finance offers an advanced diploma in Islamic finance. The course offerings are split into six modules: Islamic commercial jurisprudence; introduction to trust, banking, and business laws; Islamic insurance (takaful); Islamic treasury, capital markets and risk management; Islamic banking operations; and Islamic accounting standards. Contact the school for more info.

Institute for Middle East Studies. The IMES at The George Washington University offers several fantastic courses on international finance and law, which are helpful for those looking to become well-versed in Islamic finance.

Euclid. Euclid University's online business school offers a distance-learning MBA in Islamic finance designed to build a student's math and banking knowledge while deepening their understanding of the tenets of Islam and how they apply to just financial practices.

Again, make sure that any course you take has been checked out and accredited and will be respected by your employers. Good luck!

This guest post is contributed by Jena Ellis, who writes on the topics of Online Certificate Courses. She welcomes your questions and comments at: jena.ellis20@gmail.com.

Ed. Note: The views expressed in this post are the author's own and not those of Sharing Risk.

Is the US unfriendly towards Islamic finance?

In general I try to ignore the fringe groups that believe all Islamic finance is terrorist finance, but an editorial in Investors Business Daily (not the first such article in that paper) makes such a specious argument it demonstrates (through hyperbole) why the US (in particular, Wall Street) lags in Islamic finance. The hyperbole comes when the article claims that lobbyists meeting in a Caribou Coffee (owned by Arcapita) are having "tea with terrorists" (as the article's title implies).

The refutation of Islamic finance offering anything more than conventional finance with a different structure to avoid prohibited activities including interest is easy. Zaid Ibrahim & Co covered the misconception that Islamic finance is "terrorist financing" in a short book (available online as a PDF). However, the hostility towards Islamic finance in the US that this type of article demonstrates is hurting the US financial industry's ability to compete in Islamic finance with other countries that are being more supportive: the UK, Singapore, Japan, South Korea, Australia, and France.

The US should be attractive to Islamic finance because of its deep capital markets and Islamic finance should be attractive to the US financial markets because it brings a small but rapidly growing source of capital and investment opportunities that can replace revenue sources lost when the shadow banking system collapsed. One of the differences between the US and other countries listed above is that the governments have come out and indicated their support publicly for attracting Islamic finance by leveling the regulatory playing field (usually with a desire to be a Western 'hub' for the industry).

Despite the hostility towards Islamic finance demonstrated in this article, there are many US financial institutions that are involved in Islamic finance, but they are doing so largely outside of the United States. This is disappointing because the world's financial system is becoming more interconnected and the growing links between countries increases the supply of capital that could be used to finance investment in the US. Ignorant articles that do nothing but make the US seem unfriendly to one source of capital, particularly one which is growing in importance globally is incredibly shortsighted.

Other News

• Indonesia is considering changing the way it issues sukuk, possibly switching from an auction to a book-building structure because of several failed auctions. The auctions failed primarily because investors asked for yields higher than the government was willing to accept to compensate for the illiquidity of the sukuk.
  
• A joint venture between Alcoa and the Saudi Arabian Mining Company are raising financing, in part through Islamic debt, to finance an aluminum smelter.
  
• Bahrain Islamic Bank is raising its capital by 75% following a loss caused by it taking provisions against its investment portfolio.
  
• A bank in Morocco, Attijariwafa Bank, launched an Islamic banking subsidiary, Dar Assafaa.
  

Thursday bullets

• The UK courts threw out the case brought by the Investment Dar against Blom Bank, which relieves some questions regarding the ex post enforceability of Shari'ah-compliant contracts where one party claims Shari'ah-non-compliance.
  
• Nakheel will issue the sukuk to its largest trade creditors in mid-July according to a large contractor.
  
• Oxford Analytica has an article about the ISDA-IIFM Tahawwut Master Agreement for Shari'ah-compliant hedging.
  
• Bermuda wants to be an Islamic finance hub and may launch its first Islamic bank or takaful company by the fourth quarter. the Bermuda Stock Exchange wants to see the first sukuk listed on the exchange later in the year as well.
  
• Sumitomo Corp is working on the first Islamic financing deal in Japan. This follows the announcement about Nomura's $100 million sukuk being issued in Malaysia.
  
• AmIslamic's musharaka sukuk received a AA3 rating from RAM Ratings.
  
• Barwa Real Estate received murabaha financing from Qatari Diar.
  
• A Malaysian fund, HwangDBS Investment Management had the top performing sukuk fund in the past year.
  
• Khazanah may increase the size of its planned sukuk to $1 billion if it increases its offer for the hospital operator Parkway Holdings.
  

New sukuk issuance, Islamic banks in the credit crisis

There are a number of articles about planned sukuk:

• Nomura's $100 million sukuk will mature in 2012 and will be priced at 160 basis points over LIBOR. It is an ijara sukuk.
  
• An article describes HSBC's work in the sukuk markets, including its work on the $1.9 billion Saudi Electric Company sukuk.
  
• Kuwait Finance House wants to arrange more sukuk in the GCC and Malaysia.
  
• AmIslamic Bank Bhd received approval from the Securities Commission in Malaysia for a RM3 billion ($932 million) sukuk program. The sukuk will be senior musharaka sukuk with tenors of up to 30 years.
  
• The Indonesian sukuk to be issued in October will be "approximately similar to that of last year". Last year's Indonesian sovereign sukuk was $650 million.
  
• Few other details were provided by Pakistan's government about its proposed sale of short-term (less than one year) sukuk which it will sell in the GCC.
  

Gulf Finance House is in talks to extend $100 million in debts for three years because the markets are not good enough for asset sales. The asset sales are part of a restructuring following a crisis at the bank (described in an article by Mohammed Khnifer, Aatef Baig and Frank Winkler). The GFH situation is indicative (although an extreme example) of the effects of the financial crisis on Islamic finance. Bloomberg reports that Islamic syndicated loans fell 40% to $2.2 billion in the first half of 2010, a 5-year low.

Citi plans to offer more Islamic equity products where returns are based on the performance of the equities under certain conditions and where they receive the stock if the price falls. Citi says it wants to offer mudaraba-based products, but there has been little interest.

A study by Mareyah Mohammed Ahmad, a recent graduate of the British Univerity in Dubai, found that Islamic banks had

Late payment penalties, liquidity management, creating secondary markets in sukuk

An article in Arab News discusses the issue of a fee charged by an Islamic financial institution for late payments. In May, Bank Negara Malaysia's Shari'ah Advisory Council said that charging a fee in case of late payment is allowable and separated out the cases where the bank can and cannot keep it and recognize it as income. In the case where the fee is charged as a fine or penalty (gharamah), it must be donated to charity and not recognized as income. Where the fee is for compensation (ta'widh) for actual loss by the Islamic bank, it can be kept and recognized as income. While the distinction is clear between the two concepts, it seems likely to be difficult to distinguish in practice. Perhaps it might be a better practice for Islamic banks that use this to treat everything as ta'widh until the actual costs of collections are met and only then be able to treat any fees as allowable income. However, it is unlikely that such a solution could be approved because it would not be possible to provide ex ante certainty in the contracts between the bank and its customers. Whether this is used or not, it could allow Islamic banks to increase the total fees to Islamic banking customers, which would make the products less competitive and probably result in a slower growth rate for Islamic banking. It would also complicate the Shari'ah audits because it would require that the fees be reviewed to determine whether the bank has basis for compensation if it used the principle of ta'widh.

A fantasstic article from Islamic Business & Finance discusses the challenges facing Islamic finance in developing short-term liquidity management products, despite their importance. The article specifically looks at the UAE commodity murbaha Islamic CDs, the idea of Shari'ah-compliant repo transactions and an electronic wakala/murabaha platform.

Rushdi Siddiqui has another interesting article in Gulf News, this one covering the issue of where is the hub of Shari'ah transactions, which quickly morphs into the discussion of the lack of a hub. One point that he makes, which I agree with and have made before on this blog, is the lack of secondary markets for sukuk. He takes it one step further adding that even where there are secondary markets for sukuk, they are not deep enough or liquid enough to provide much information. He suggests that the Islamic finance industry needs to 'institutionalize' and 'internationalize' itself, primarily by moving from bilateral price discovery through over the counter (OTC) trading to "multiple price discovery". As much as the effort towards creating secondary market platforms for sukuk will help lay the groundwork for this in the future, it is impossible until there is enough supply to sate the demands of hold-to-maturity investors and leave enough exchange-listed sukuk that can be traded in secondary markets to develop meaningful liquidity that provides more information than bilateral trades in illiquid markets can.

Other News

• Sorouh raised $640 million in conventional and Islamic debt, of which $400 million (AED1.47 billion) will be used to redeem the remainder of the sukuk issued in 2008 which I described about a month ago in a blog post. At the time, there was AED1.5 billion remaining of the AED4 billion securitization sukuk.
  
• Malaysia's central bank, Bank Negara, issued its fourth Shari'ah Parameter Reference which covers musharaka. The previous SPRs covered ijara, murabaha, and mudaraba. The bank also issued a concept paper on takaful.
  
• Bloomberg compares the performance of Shari'ah-compliant equity indices with sukuk indices. Equities have lagged sukuk in the past 2 quarters due to an agreement to restructure $23.5 billion of debt by Dubai World and its creditors.
  
• Japanese firm Nomura Holdings plans to issue a $100 million sukuk in Malaysia, the first Japanese company to do so.
  
• The proposed Islamic Bank of Thailand THB5 billion ($154.5 million) is likely to be issued in the second half of 2010 depending on market conditions. The sukuk will have a 5 to 7 year maturity.
  
• Deutsche Bank's Shari'ah-compliant platform is investing in a foreign exchange strategy, based on "investor demand" according to the managing partner of the advisory firm which will create the strategy using a structured note. Deutsche Bank previously created the controversial Total Return Swap structure that allowed investors to receive a return benchmarked to a group of conventional hedge funds.
  
• Singaporean REIT company Mapletree Investments is launching an Islamic REIT whose IPO may be up to $713 million (S$1 billion). The REIT will be marketed in the GCC by Arcapita.