Islamic finance in the global financial system

A commenter on The Review Middle East to an earlier blog post asked me to discuss how Islamic finance can make a name for itself within the global financial system. I have covered many aspects of what I think Islamic finance needs in order to be a significant part of the global financial system. It was on the verge of breaking out and becoming more significant following the financial crisis when markets in the GCC were continuing to grow even as the financial system in the West faltered.

However, the Islamic finance industry became part of the financial crisis with the debt crisis in Dubai after the real estate market peaked and began a sharp decline. Although I suggested that the idea that Islamic finance was not immune from crisis, despite that being a popular narrative during and after the crisis, it was not until after the Dubai debt debacle that the narrative disappeared. As with conventional finance in the US where real estate woes translated into a significant drop in financial service activity, the Dubai real estate crash (and also lingering effects of the Western financial crisis) led to the issuance of sukuk falling sharply in Asia and particularly the GCC.

The decline was sharper first in Asia and the GCC benefiting from rising oil prices in the summer of 2008 that buffered early symptoms of the credi crisis. However, after the Dubai debt crisis, the primary sukuk market within that region saw very few issuers, most of them sovereign. At the same time, the sukuk issuance out of Asia rebounded quickly and until the last month or so, Asian issuers have led the resurgence of sukuk.

Now, not all Islamic finance is sukuk. There are many other players from asset managers to Islamic banks (both commercial and investment) to takaful providers. These have fared better (with the exception of investment banks dependent upon new sukuk and other large investment deals) through the crisis. However, they also face challenges coming out of the crisis to define their place in the global financial system.

Getting to the issue of the question posed by the commenter, the first point that the Islamic finance industry should be willing to accept is that it is not immune from a future crisis that looks very much like the last one (in the conventional industry). Islamic finance may be based on more tangible assets, but it is still a financial system structured in a similar way as the conventional industry. It acts as an intermediary between people with excess capital and those needing access to capital. It is structured differently, to receive approval as being Shari'ah-compliant, but it performs the same role as the conventional financial industry.

Therefore, it must do that in a different way in order to establish its place in the global financial system. The easiest (although not most effective, in my opinion) way would be to focus narrowly on providing financial services to Muslims. This would place its focus on the people who will not deal with the conventional financial system. However, this would be ineffective particularly if it wants to shed the 'niche' label because it would limit its market. Despite the growth of Islamic finance in the West, this is the logical end of its current focus on replicating conventional products with Shari'ah-compliant alternatives. If Islamic finance continues on its current track and even if it becomes price competitive with conventional finance, it will be limited in its size within non-Muslim markets to providing a way for non-Muslim borrowers to access the wealth held by Muslims.

If the current track of 'replication' is not effective, then is there another way to move forward that will make it able to compete with conventional banks for non-Muslim markets? There is in my opinion, but it will take a shift in direction for the industry. First, while the replication of conventional products has its place, the news should not be filled with stories of the 'first Islamic [insert conventional product]'. These products are necessary in many cases in making the industry stronger (for example money markets) and in providing financial products that consumers understand (for example Islamic mortgages). The limit of replication is that it does not create a competitive advantage for Islamic finance among any groups except devout Muslims who would otherwise be un-banked if there were not a Shari'ah-compliant alternative available.

Second, the industry should borrow from other 'ethical' financial trends. For example, socially responsible investing has been growing rapidly, particularly in the West. This is a market where many consumers are non-Muslim and are looking for alternatives to the 'business as usual' approach in investing. There are few barriers for Islamic finance to adopt the screening criteria and combine it with the back-to-basics banking approach that is adopted by many Islamic banks. Currently, the issue of social responsibility is limited to investing (the screening-based methodology used by SRI funds is similar to what Islamic funds are using) and to putting pressure on financial institutions (e.g., the Equator Principles for project finance, which is voluntary and has no Islamic banks as participants).

Third, Islamic financial institutions should use their basis as 'ethical' financial institutions to pursue greater focus on poverty alleviation and use their experience with innovative products to further that focus. Islamic banks, while not commonly, do use mudaraba and musharaka, which are financing methods that more closely resemble equity than debt. If they used these (and other) products within a sustained effort to promote Islamic microfinance, it could represent a significant innovation within microfinance. Microfinance institutions around the world have branched out to offer micro-insurance and deposit services, as well as their main debt-based lending programs. Islamic financial institutions could step in and provide equity financing to microbusinesses. They could also provide takaful to microfinance clients, which fits in well with the microfinance ethos of 'group-based lending'.

Fourth, Islamic financial institutions could integrate their profit-and-loss sharing products more into their businesses. This would provide them with a 'unique' product (especially for commercial banks) that would create differentiation from conventional banks, which focus on debt financing. Within this move, the Islamic financial institutions could align themselves more closely with institutions like credit unions which are member owned (rather than being owned by external shareholders). The member ownership of credit unions fits in well with the back-to-back mudaraba concept that was initially devised as a model for an Islamic bank.

These ideas are very general and do lack specificity needed to actually turn them into a reality, but they should serve as a basis by which new developments in Islamic finance can be viewed. Is the new development furthering the status quo of 'replication' of conventional products? Are new products filling the essential gaps where replication is neutral? Is a new product providing the industry with a model for a way to attract a broader market towards Islamic finance? Only time will tell regarding the direction Islamic finance (through the financial institutions that mak it up) will take.

How can Islamic finance in the West grow?

One of the key drivers for Islamic finance in the West has been the immigration of Muslims into those countries. As these immigrants have moved in, the domestic banks have tried to develop products that cater to their needs. However, the process has been slower than one might expect, particularly in some countries like France and Germany which have relatively large shares of Muslim residents compared to their populations. The first Islamic bank branch in Germany, a branch of Kuveyt Turk, opened earlier this year in Mannheim. Al Baraka Bank says it plans on opening an Islamic bank in France in 2011, something it has planned for several years.

An article recently described the growth of multicultural banking in Canada and alluded to the relative shortage of Islamic banking in the country despite the growing Muslim population, that is growing in large part because of immigrants to the country. The country has had Islamic home finance co-operatives for decades and in the last several years, UM Financial has offered Islamic mortgages (as well as a pre-paid Shari'ah-compliant debit card and some work on forthcoming sukuk). The larger banks, including Bank of Montreal and Scotiabank are considering whether to enter the market while RBC offered Islamic mortgages, before dropping the product due to low volumes. In Canada, it appears that the large banks entering the market have been hamstrung by difficulties entering the Muslim marketplace, while the smaller institutions have been set back by shortage of capital for new originations. In the United States, the shortage of capital has been eased with the entrance of Freddie Mac, which provides the financing for Shari'ah-compliant mortgages. There is not a similar institution in Canada, so the best way forward may be for the large banks to work through the smaller providers to combine the former to benefit from the latter's better exposure within the Muslim community and the latter to benefit from the former's access to capital. Were this to happen, it would open up the possibility of the larger banks securitizing Islamic mortgages, which could then be sold to fund managers to allow them the investment possibilities they need to offer retail Shari'ah-compliant fixed income investment products to the Muslim marketplace where fixed income is always a challenge (and very often limited or absent from the market).

Sukuk in the next year

The sukuk market has been one of the most commonly discussed areas of Islamic finance, and not without reason. It is one of the more dynamic (and cyclical) parts of the Islamic finance industry. It has also been an area that companies from the West and multilateral institutions (GE Capital, the World Bank, the International Finance Corporation, for example) have become engaged with the Islamic finance industry. When the sukuk issuance volume collapsed in 2008 and early 2009, it was viewed as the end of growth beyond 'traditional' markets for Islamic finance. This was, of course, a rush to judgement, but the rush was on in all areas from the conventional financial sector in the West, Islamic finance and in equities. In a crisis, the first thing that is lost is optimism for the future.

In the year following the bottoming of equity markets in the West following the crisis, the sukuk markets became divergent. Initially, the drop in issuance was more pronounced in the Asian markets and the GCC was able to continue on (in part, probably due to a recovering price of oil). However, around November 2009, with the onset of the Dubai debt crisis and the oncoming maturity of the $3.52 billion Nakheel sukuk, the trends changed sharply. The GCC was viewed as too risky and demand dried up for new sukuk. The primary issuance was from sovereigns with a few corporate issuers sprinkled in here and there. In contrast, the Asian sukuk markets rebounded sharply and issuance of sukuk (along with the equity markets in countries like Indonesia and Malaysia) grew rapidly. However, the recent news indicates that the growth in sukuk may be returning in the GCC and also to the West (particularly the UK, with politics interfering in the US--see my post on Thursday). Consider the headlines from just the last couple of days.

• "Sukuk Entice Canada Issuing $2 Billion to Spread Funding: Islamic Finance"
  
• "UK government ‘seriously considering’ first sukuk issue "
  
• "Gatehouse plans to launch Pounds70m sukuk next month, says chairman"
  
• "Saudi Aramco, Total ink $1b Sukuk for Jubail JV"
  
• "Saudi firms to launch 10 sukuk"
  
• "Nakheel to issue sukuk by January 2011 - CEO"
  
• "Abu Dhabi Islamic to Meet Investors Before Bond Sale"
  
• "Sukuk eye record on Asia growth and Gulf issuance"
  
• "GCC bond issuance jumps 140% in Q3" (Conventional)
  
• "Emirate of Ras al-Khaimah eyes benchmark bond issue-paper" (Conventional)
  

Arguably, the two most important sukuk coming are the potential UK sovereign sukuk and the Total-Saudi Aramco sukuk. The former would be the completion of an effort that has stretched back several years to when Gordon Brown was prime minister. The latter would be important because of its potential size. The $1 billion sukuk would be one portion of at least $12 billion in total cost of the planned Jubail refinery.

In the regrowth of GCC credit markets, it is interesting, but not surprising, that the conventional bond market in the region has rebounded quicker following the first part of a Dubai debt restructuring and the expected resolution of trade creditor's claims of Nakheel (which will also include a sukuk for 60% of the claims). According to NCB Capital, conventional GCC bond issuance rose from $4.5 billion in the second quarter to $10.8 billion in the third quarter (14 issues in Q2 versus 26 issues in Q3). During the last quarter, issuance in the GCC was below the level of the first quarter of 2010 even as total issuance was $10.3 billion in the quarter ($9.2 billion of which came from Malaysia).

In addition to the potential issuance from the GCC, which would follow the recent growth in the conventional bonds from GCC issuers, one of the notable pieces of news is that there may be corporate and government-related sukuk coming from Canada, which has not been the source of any sukuk so far. According to Omar Kalair, the CEO of UM Financial, which is based in Toronto, HSBC Bank Canada may offer $500 million and three government-related borrowers from one Canadian province may issue $1.5 billion of sukuk (quoted by Bloomberg). As the past few years have demonstrated, the potential for sukuk is only a guide for future issuance, but regardless, it is another step forward for the internationalization of Islamic finance that new issuers could enter the market.

The fourth quarter will be a good guide to whether the regrowth of sukuk issuance globally (particularly ex-Asia and in the West) will likely continue into 2011 and the breakdown between sovereign/corporate, regional and the different structures will provide a guide to what the next year and more will bring.

Islamic Finance in the U.S.

Reuters has an article on the "political hurdles" facing Islamic finance in the U.S. I think the title is a little misleading; it is not politics (or regulation) that has pulled Islamic finance into an ugly argument about Islam and America, but politics. I have always hesitated to give any credence to the 'anti-Islamic finance' arguments because they are so disconnected from reality that I feel giving coverage on this blog would elevate them to the discussion on Islamic finance would give them undue credibility. However, at many times, I have thought of a way to cover the 'anti-' side without giving it additional credibility, but I have always come up lacking a good way to address it. However, the Reuters article makes it clear that opposition to Islamic finance as a subtext in an argument over Islam in America is becoming a narrative that needs to be addressed.

The first thought in my discussion is that the rise of opposition to things that are viewed as 'foreign' is a common thread in American history and one that has been expressed in ugly displays. In the 19th century, immigrants from China, Ireland and southern European countries like Italy faced significant discrimination. In general, religion was not the primary reason for this, but it was in some cases. America's history with Catholicism has many rather embarassing episodes. A blogger for the LA Times quotes a professor at the Ohio State University:

"the popularity of the Ku Klux Klan exploded after it rebranded itself a "patriotic" fraternal organization dedicated to safeguarding America against the threat of Catholics, Jews and the immigrants flooding the country in unprecedented numbers. […] At the time, these men did not consider themselves religious bigots. They believed themselves patriots, upright fathers and sons, husbands and brothers protecting their families, and the nation, against a foreign threat they feared was intent on their destruction."

The author was specifically focusing on the anti-Catholicism of the early 20th century, but the sentiment lasted well later in the 20th century: John F. Kennedy was viewed skeptically for his Catholicism and it was feared that he would be an agent of the Pope as president.

Of course, this was unfounded and the positive in American history is that the country does move past this type of fear mongering--no one questioned whether John Kerry's Catholicism would hurt his ability to be president when he ran in 2004. However, it is not a quick process for Americans as a whole to move beyond past their suspicions towards groups of people for which they have no justifiable reason to lump together as a 'threat' to America.

And today, the 'other' that nativist politicians have focused on is Muslims. Every effort of Muslims to express their religiousness is viewed by some as a 'threat' to America's values and American freedom itself (the Economist deals with this issue in a good recent article). However, just as the "Catholic threat" was unjustified as a reason to suspect all Catholics, the "Muslim threat" is equally as unjustifiable. And Islamic finance is being lumped into this broader narrative in an equally unjustifiable way.

Now then, what can be done to counter this suspicion of Islamic finance and help the industry to thrive in America? Can there be a way to demonstrate that Islamic finance is no more foreign than the growing popularity of socially responsible investing, or even other forms of religious-based financial products like the Timothy Plan, a Christian mutual fund.

In some areas, there may not be a need at all. The Amana Funds, a series of three Islamic mutual funds, has already moved well beyond being a 'niche' product for Muslims and has attracted significant investments by non-Muslims who are generally drawn to the fund by its good performance. However, other financial products that are Shari'ah-compliant, from mortgages to insurance, have not attracted as large interest from non-Muslims.

In these areas, it will be imperative for the Islamic finance industry to continue to reach out not only to their mainly Muslim consumers to explain how they work and also highlight that they are not much different from conventional financial products. They have a different structure and follow certain rules that other mortgage providers do not have to, but besides these differences, they are just another flavor of mortgage available to all consumers.

In areas like takaful--which is less well known than even Islamic finance--there are other ways in which they could be marketed to attract non-Muslims. Unlike conventional insurers, the funds of the takaful provider are owned by the members, rather than being run through a corporate structure where the liabilities (claims) are obligations of the corporation. In an era where many insurers have been 'demutualized', this return to a 'mutualization' may attract non-Muslim consumers in a similar way that credit unions have been able to differentiate themselves from the much maligned conventional banks on the difference that their depositors are also their owners (rather than external shareholders).

There are substantive differences in Islamic finance and there will continue to be 'anti-Islamic' sentiment stirred up by opportunistic, nativist politicians. These are the givens. It is up to the industry to decide whether the political sentiment will be a hinderance to the industry or will spur it towards better explaining its competitive advantages to its conventional competitors. For what has become an emotional and reflexive issue, it will be more likely that Islamic finance can break through on its business merits, rather than by appealing to other arguments.

Liquidity Management in Islamic Finance

Sorry for the lack of posting in the last week. I've had a cold that has put me on the sidelines.

What need does the ILMC fill?

The issue of asset-liability maturity mismatch has been a common one in Islamic finance, just as it is in conventional banking. However, in Islamic banking, the maturity mismatch has been accentuated by the lack of short-term, money market instruments that allow for managing excess liquidity and temporary liquidity needs. The solution until now has been interest-free deposits with central banks and bilateral commodity murabaha and wakala agreements where banks place excess liquidity with other banks in need of that liquidity. However, this setup is insufficient for the industry and the flaws of this method was demonstrated in the conventional banking industry in the latest crisis.

In the last crisis, the failure of Lehman Brothers led to a nearly complete freeze in commercial paper markets. Commercial paper is issued with maturities of less than 270 days (to get an exemption from some securities rules in the US). Commercial paper is issued by many corporations, but banks make up a large share of the total issuance. It is also a large portion of the investments held by money market funds. When Lehman collapsed, the purchasers of these securities pulled out of the market, fearing that another large CP issuer's collapse could impose significant losses on them. The market for CP did not return to vibrancy until the US government stepped in to support the market.

In Islamic finance, the current money market alternatives available resemble the commercial paper market (although being far less liquid than commercial paper). A bank with excess liquidity will find a counterparty with a short-term liquidity need and enter into a short-term commodity murabaha or wakala agreement. It will essentially loan its surplus funds to the other institution for a short period and generate a return on the surplus funds. However, these types of bilateral agreements leave the lending bank with exposure to credit risk that the counterparty will fail before it gets its money (with a return) back. In a liquidity crunch like the one following the failure of Lehman, Islamic banks (like the investors in conventional commercial paper) will be far less likely to lend out their surplus liquidity if they feel there is a chance it will be lost.

Because of the counterparty risk involved in these bilateral agreements, the Islamic finance industry is vulnerable to a crisis that could threaten the solvency of Islamic banks. If some banks with liquidity needs cannot find short-term financing through bilateral agreements, they may have to resort to asset sales, which will occur at fire sale prices, and the liquidity needs of the institution could turn into a solvency crisis. The fire sale of assets will deplete the bank's assets compared to its liabilities (which will remain mostly fixed) and for the balance sheet to 'balance', the difference will come out of the bank's capital.

There has not been much in the way of alternatives available to Islamic banks until recently (except on a country-by-country basis--with many countries having no Islamic short-term instruments issued by the government or central bank). The International Islamic Liquidity Management Corporation (ILMC), which was announced recently and will be launched on October 25 in Kuala Lumpur, Malaysia by the Islamic Financial Services Board members (mostly central banks and regulatory bodies).

What will come from the ILMC specifically is not yet clear, but it will be some form of short-term investment and the Malaysian central bank governor Zeti Akhtar Aziz says they will be "short term, and they will be, we expect, highly rated instruments". The fact that ILMC is being established by the central bank members of the IFSB will probably be the factor that makes them highly-rated. The high rating is important for the capital rules under Basel 2 (and soon Basel 3) for how banks classify their holdings of the securities. It is not clear exactly the degree of support the IFSB members will put behind the securities, but having central banks behind the issuer of these securities will also limit the degree to which a future liquidity crisis could lead to Islamic banks losing confidence in the ability of their counterparty (the ILMC) to make good on the obligation to redeem the short-term securities. I keenly await more details on the structure of the ILMC's products as well as details on the degree of explicit support from the IFSB members, but at this stage, it looks like the Islamic finance industry could take a big step forward with the establishment of the ILMC, which could start issuing bills regularly beginning "early next year".

UAE central bank's Islamic CDs

The news about short-term investments for Islamic banks does not end with the ILMC. The UAE central bank announced plans earlier this year for Islamic certificates of deposits (CDs) and new details are being reported on this front as well. Standard Chartered, which sits on the central bank's liquidity management committee, says the UAE central bank will use murabaha for its Islamic CDs. This is mixed news. It is certainly a positive for another country to offer short-term liquidity management tools for its Islamic banks for the reasons I outlined above. However, the use of murabaha for these does little to find a creative solution that does not entrench the industry in more commodity murabaha transactions.

The use of commodity murabaha transactions is common in Islamic finance and is accepted as legitimate by scholars (with some divergence from the OIC and the head of Shari'ah at the IFSB). In the end, it is a case of whether the perfect should be the enemy of the good. The benefits from the availability of short-term liquidity management tools surely outweighs concerns that commodity murabaha is 'too similar' to interest-based loans in the near term. However, the greatest skepticism about the Islamic finance industry is that its products do nothing but replicate conventional interest-based loans with different structures to receive approval.

As much as this criticism is valid--there are some products that do nothing but apply a 'Shari'ah wrapper' to conventional products--it overlooks the fundamental paradox in the prohibition of riba. To paraphrase, trade is like riba, but trade is permitted but riba is prohibited. I am certainly in no position to argue the theological points of the Qur'anic verse I paraphrased; that is, as they say, well above my pay grade (not to mention my qualifications). However, it is important from the level of consumer perception of the Islamic finance industry. At what point does a product which the scholars agree is Shari'ah-compliant become too close to an interest-based product for a consumer to accept it as preferable to an interest-based product.

I don't have an answer to the question and I don't think anyone in the industry does. However, it is a fundamental point for the industry's growth: if 'purity' in perception is the goal, products will likely be too unfamiliar to attract demand from enough people to be profitable (and the costs of those products will be too much higher to elicit much consumer demand). However, if (when) financial engineering is taken to its limit, the distinction between Shari'ah-compliant and conventional products becomes meaningless for enough consumers that the industry will have to compete almost entirely on price alone, which it will be hard pressed to do. Some middle ground is required and I think that some form of cost-benefit analysis can provide a guide and for the murabaha-based Islamic CDs, I think the benefits outweigh the costs and the product will benefit the industry.

Other Items
Reuters reports that according to the Assistant Secretary General of AAOIFI, a regional mandatory Shari'ah body is "years away". This is not surprising, but it is relatively new to have AAOIFI publicly acknowledge it.

I weighed in on my own views on the potential for Islamic finance to lead conventional finance by increasing the role of women in the industry (both conventional and Islamic finance industries are male-dominated). Rushdi Siddiqui adds his take on the issue.

Sukuk issuance from Europe, Amlak & Tamweel merger 'unlikely'

The Bank of London & the Middle East (BLME), a UK-based Islamic wholesale bank launched a division to advise on sukuk to attract investors from the GCC and Asia to UK and European companies. They expect to close their first deal within a year. The move comes shortly after the first UK corporate sukuk was launched. I have not had a chance to view the prospectus for that sukuk, but it was a 5-year convertible musharaka sukuk (with 10% coupon) issued to one investor, Millenium Private Equity. The conversion from debt into equity will occur on the meeting of pre-determined performance milestones, according to an article in Khaleej Times. The structure is likely to be complicated to incorporate both the convertible nature of the sukuk with a fixed coupon and remain in compliance with the new AAOIFI rules on musharaka sukuk. However, from the perspective of a private equity investor, the structure of a sukuk rather than an equity contribution makes sense. It gives the investor a higher priority claim on the business' assets than equity and also a coupon, although that will be unlikely to benefit the investor if the sukuk sours. The coupon on the sukuk (if both principal and coupon are convertible) provides the company with the incentive to meet the milestones for conversion earlier because the accrued coupon payments will translate into more dilution for the company's other owners the longer it takes to reach those milestones. One of the features of a musharaka is that both partners are permitted to be engaged in the management of the business (akin to private equity investors taking board seats of companies they finance). At the risk of generalizing without having read the prospectus myself, this structure sounds like a good way for Shari'ah-sensitive private equity investors to both provide themselves with greater security (or equivalent security to conventional private equity) but also use a structure that some scholars describe as "more genuine".

The Amlak and Tamweel merger is now 'unlikely' according to the chairman of Tamweel following Dubai Islamic Bank's acquisition of a majority stake in the Islamic mortgage company in Dubai. The lender still has a significant way to go before it can resume operations as normal and will likely need a capital injection. Tamweel is working on a plan to resume lending in the market and expects to release a plan in 'the next few months'. Another article citing the chairman of Tamweel says that they expect Q3 results to resemble the first two quarters of the year. They took significant provisions in 2009 and expect to "translate our revenues into some profits". In many ways the issue facing Tamweel is similar to what is facing other mortgage lenders in countries that have experienced a real estate boom and bust. The pain may be over (or nearly over) but a resumption of 'business as normal' will not happen overnight. The economic recovery globally has remained slow and the appetite for new debt is likely to be significantly constrained (the 'new normal'). The recovery for mortgage lenders like Tamweel will most likely be slow both because borrowers are more hesitant to take on new debt but also because the standards on which Tamweel will lend are likely to be far more stringent than before the property bubble collapsed.

There is a fantastic article in The Asset magazine about an interview with CIMB Islamic CEO Badlisyah Abdul Ghani that covers a broad variety of topics including the impact (and potential impact) of the credit crisis on Islamic finance and the need for better regulation of Islamic finance. It is a good, brief read. A few exerpts:

"One reason why Islamic banks were not as affected as conventional Western banks, argues Badlisyah, is that they were not sophisticated enough to participate in derivatives and other leveraged transactions. "The situation could have been much worse if the Islamic banks had been as sophisticated in employing leverage as their conventional banks’ counterparts were in the previous years."

"As in conventional finance, he says, Islamic finance relies on the creditworthiness of an issuer or a client to decide where liquidity is channelled and directed. "Whatever structure is in place – whether it is Islamic or conventional – credit is still credit and it needs to be paid."

"Badlisyah argues that everything that exists in Western capital markets that is of genuine value to banks and corporates has already been incorporated in Malaysia under the Islamic derivatives regime. This, he argues, is the reason why Malaysian Islamic banks have been successful in managing the volatility and fluctuations that have buffeted the industry in recent years. The ban on credit default swaps is completely justified, he feels, and will likely be for keeps."

"From Badlisyah’s point of view, that Malaysian Islamic banks emerged from the global financial crisis relatively stable and unscathed is due to the regulatory framework that was put in place. "Malaysian banks found themselves totally isolated from the crisis because they had not been allowed to invest as much overseas after the Asian financial crisis."

• AAOIFI is expected to provide rules governing the entry into and exit from contracts that are Shari'ah-compliant. However, it is unclear at this time what this will mean.
  
• Central Bank of Bahrain Governor Rasheed Al Maraj is quoted from a dinner honoring Professor Simon Archer: "Many remain comparatively small and focused on niche markets. The result is that we have an industry that comprises many small-scale firms engaged in very similar activities and with comparatively high concentrations of risk. As I have said several times in the past, for the long-term health of the industry it is important to generate greater scale and diversity. [...] the events of the past few years should have given the industry a clear signal that it must reduce its reliance on real estate as an asset class [and] The industry should look instead at the scope for increasing the finance it provides for productive assets such as factories, ports, mines and oil processing facilities. Financing these activities may appear less profitable in the short-term, but may be a better proposition on a risk-adjusted basis." I agree.
  
• Islamic Finance Asia has a good article on the challenges to developing secondary market liquidity in sukuk.
  
• The IMF study on Islamic vs. conventional banks in the crisis has been released.
  
• A look back at the post-crisis (and especially post-Dubai debt crisis) dominance within the primary market for sukuk from Asia. A Bloomberg looks forward towards the potential issuance that could result from the 10-year, $444 billion Malaysian development plan.
  

QIB sukuk issued, Islamic Development Bank raises sukuk program size

The Qatar Islamic Bank sukuk for $750 million received subscriptions of $6 billion and pricing at 237.5 basis points above midswaps, which was 25 basis points below expectatons. This represents a step forward for primary markets in sukuk in the GCC and should encourage other companies (partcularly those with investment grade ratings) to bring sukuk to market. The resolution of Dubai World's $25 billion debt restructuring, which had made investors more reluctant to invest in the GCC (compared to Asia and particularly Malaysia where sukuk issuance had recovered much more from the financial crisis).

With the purchase of a majority stake by Dubai Islamic Bank, Fitch raised its rating watch on Tamweel to 'positive', although noted significant headwinds for the Islamic mortgage company. The other Islamic mortgage company in Dubai, Amlak Finance, may become part of Emirates Islamic Bank, which is also in talks to acquire Dubai Bank to create a "massive Islamic banking unit".

The Islamic Development Bank increased its sukuk program from $1.5 billion to $3.5 billion, with an unnamed source saying the additional sukuk would be issued to fund rebuilding assistance the IDB was planning in Pakistan after the huge floods in the country. This is positive for the sukuk market and increases the pipeline of new issuance, which seems poised to grow significantly in the GCC over the next few quarters.

GCC sukuk markets may grow in Q4, Shari'ah scholars and standards, women in Islamic finance

One of the many themes I have tried to articulate on this blog is the areas where Islamic finance can differentiate itself from conventional finance.  An article in Maktoob Business points to one area that may be difficult  for Islamic finance, but should not be impossible given the low bar set by conventional finance.  This is the role of women in Islamic finance.  Currently, there are few women in top roles in Islamic finance although there are several exceptions in Malaysia (with the head of one Islamic bank, the central bank and one Shari'ah scholar being women).  As I mentioned, there is a relatively low bar set by conventional finance: the industry is one of the more male-dominated industries across the world.  As the article mentions, Islamic finance has not yet seen as much participation by women in top roles, but there is no inherent reason why this cannot be the case.  Should Islamic finance be successful n becoming more balanced in terms of gender participation, it would set an example for conventional finance, but also counter popular misconceptions about women and Islam more generally.

The move by Dubai Islamic Bank to up its stake in Tamweel to 57.33% has led to rumors that Emaar, the largest shareholder of Amlak Finance, will sell its stake in the other Islamic mortgage company in Dubai, which was expected to be merged with Tamweel.

Qatar Islamic Bank has reportedly priced its five-year, $750 million sukuk at 262.5 basis points over midswaps.  There has been little corporate sukuk issuance in the GCC outside of regular Bahraini Central Bank short-term issues and Saudi corporate issues.  The resolution of the Dubai World debt agreement for $25 billion of debt has led to a revived pipeline that at $5.5 billion which now surpasses the pipeline in Asia of $2.1 billion.  Particularly since the Dubai debt crisis, Asian issuers have been much more active in the primary market for sukuk as investors have viewed the GCC as being significantly more risky, even though most of the problems were contained to Dubai (and to a few Kuwaiti investment banks).  However, the Dubai World situation is not resolved entirely and remains dynamic, which could quickly increase the risk aversion of investors towards the GCC.

The issue of ensuring proper governance with respect to Shari'ah scholars has become a widely discussed issue since ISRA proposed a global certification, which Reuters describes as having 'overwhelmed' the industry.  The ISRA proposal and the issue of coordination of Shari'ah standards in general has received a cool reception from Megat Hiziani Hassan, a lawyer at Malaysian firm Zaid Ibrahim.  In an opinion article in Maktoob Business, Dr. Rusni Hassan, a Shari'ah advisor to HSBC Amanah Malaysia, reminds the Islamic finance industry that Shari'ah scholars are best suited as 'guides', not 'police'.  I agree in general--Shari'ah scholars should have a 'teaching' role to ensure that practitioners understand the rules around Shari'ah-compliance and the reasons for them.  However, there is a role for Shari'ah scholars as 'police' as well that will prevent or at least mitigate the Shari'ah risk associated with future reversals in approval of controversial products' Shari'ah-compliance.  In many ways, Shari'ah scholars are 'regulators' of the Islamic finance industry and without their setting firm boundaries, financial engineering can be taken too far in creating products that meet the letter but not the spirit of the rules governing the industry.