CIBAFI lobbying can expand and improve the Islamic finance industry

As CIBAFI expands beyond its GCC base, it will be able to share the experience of the GCC countries where Islamic finance has matured from a new industry to one that now makes up a substantial portion of bank assets.  However, it should also remain focused in its core markets of the GCC where there remains a need to improve governance (including Shari’ah governance) and to clarify for consumers the status of Islamic windows relative to their conventional parents.

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Islamic banks would benefit from guarantees for SME financing

The bank lending to the sector is important, primarily for Islamic banks that are intended to be facilitators of the ‘real economy’ more so than their conventional competitors. Guarantee funds can provide a compelling way to expand financing to SMEs because small guarantee amounts can lead to a African Guarantee Fund provided $1.2 million to guarantee against losses for SME financing provided by the Gulf African #Bank. With SMEs holding the key for employment growth in many economies, incentivizing disproportionate increase in financing provided to SMEs.

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DIFC template for sukuk, Islamic banks in Africa

I am disappointed that it has taken this long, but the DIFC seems poised to provide a standardized template for sukuk based on the recent IFC sukuk. The work has been labeled the "Dubai docs" in reference to the role that the DIFC is playing in providing a standardized set of sukuk documents. Until now, each sukuk has been structured individually and there is no set of documents that creates a standardized offering document so the costs, estimated at $250,000, is borne by each issuer having to build an offering document without a standard reference contract. In other countries like Pakistan, the Central Bank offers standardized contracts for basic products like murabaha and the IIFM has issued a standardized murabaha contract, as well as one for derivatives (tahawwut) with the International Swaps and Derivatives Association (ISDA). I think this will be something that spurs similar documents elsewhere in the world that will reduce the cost of sukuk issuance and encourage new issuers who would have otherwise been deterred by the cost to enter the market. This will, in particular, bring smaller issuers into the market to provide a source for a sukuk yield curve that does not just include sovereign issuers nad high-grade corporate issuers. The more the sukuk market can develop and provide a separate yield curve for sukuk issuers, the more ti will open the market up to other new issuers. The more sukuk that are issued (and especially the diversity in issuer characteristics) will provide alternative investment opportunities to holders of sukuk, which will help the secondary market develop further.

Islamic banks starting in Sub-Saharan Africa face an image problem that they are only catering to Muslims. The Central Bank of Kenya is working on a framework to issue sukuk to attract capital from the Gulf states. The Central Bank governor gave a speech recently at a conference in Nairobi, Kenya along with other representatives of Islamic banks in Kenya and other parts of Africa. The Standard Bank Group is starting to provide Islamic banking products in Tanzania. In addition, recently National Bank of Commerce launched an Islamic banking service.

Other News

• Sukuk is still a niche market and the Nakheel sukuk resolution will not revive the market. Nakheel's 2010 sukuk maturing next week will not revive the market on its own. This is expected to occur even without a restructuring agreement for Dubai World's debts, which HSBC describes as "very fair".
  
• Standard & Poor's rated an Islamic fund, its first such rating. The fund is offered by European Finance House.
  
• Lebanon is not planning to offer a sovereign sukuk. Luxembourg, however, is considering offering a sovereign sukuk.
  
• Another article presents comments on the need for a systemic stability regulator for the Islamic financial industry.
  
• Al Baraka expects to complete the purchase of a stake in Bank Muamalat by the end of the year.
  
• Hawkamah and the American Bar Association organized a conference in Dubai on Islamic finance at the DIFC.
  
• Indonesia's ministry of finance plans to raise 1 trillion rupiah ($110.8 million) in sukuk on May 11. Several recent sukuk auctions have failed recently with investors demanding a higher yield than the ministry of finance is willing to pay.
  
• Several sukuk, including two Nakheel sukuk, have been suspended from NASDAQ Dubai for failure to file financial statements and annual reports.
  
• Cagamas and Al-Rajhi bank are cooperating to issue a sukuk recognized as being in compliance with Shari'ah globally.
  
• Malaysian firm MTD InfraPerdana issued a MYR100 million ($31.2 million sukuk).
  

Sovereign sukuk issues, other news

There have been no benchmark sovereign sukuk issues this year, according to Reuters. Malaysia is considering issuing a global sukuk to provide a benchmark for local sukuk issuance. A benchmark issue is usually over $500 million. The lack of sovereign sukuk comes despite the intentions of a number of countries including the UK, Jordan, Kazakhstan, the Philippines, Indonesia that have stated that they plan to issue sovereign sukuk. Three months into the year, I am not too worried that there will be no sovereign sukuk issues for the year, especially with a smaller (~$100 million) Indonesian sukuk issuance planned for March 30. However, there are still risks. Greece and Dubai were the flash points of the fall and both could shake emerging market credit markets if there are further problems and Portugal's downggrade could also make it harder for emerging market countries to tap the international credit markets. However, the scale of the issuance by countries across the emerging markets, not to mention the developed world like the UK, dwarf the size of a benchmark sukuk issue. The more important point is that many emerging markets (where most of the sukuk pipeline is coming from) are consumed with dealing with the economic recession and do not have the time to deal with the legal and regulatory issues to make a sukuk issue possible. Reuters has a factbox about possible and planned sovereign sukuk issues.

Yasaar Media launched the first issue of "So Far? The Journal of Strategic Thinking in Islamic Finance". I was one of the think tank members contributing my views on the sukuk market and I would recommend it as a source of critical and strategic thinking into the Islamic finance. The current issue delves into the problems of the sukuk market recently. The first issue is available from Yasaar Media's website as a pdf

Malaysia strengthened its rules for Shari'ah board's review process to implement more transparency and documentation in the process. Not having read the rules, I cannot say for sure, but it appears that the rules would be at least in part in harmony with the call for greater Shari'ah transparency by Dr. Mohamed Elgari, which I linked to on Monday.

An article discusses the prospects of Islamic finance becoming involved with rainforest preservation in Indonesia.

A couple articles. discuss the prospects for a Dubai World restructuring proposal expected soon.

The managing director for Islamic finance at Global Commodity Finance says that the central banks in the Gulf region should develop an Islamic 'repo' transaction using sukuk for liquidity management purposes.

Other News

• More central banks in Africa may join the Islamic Financial Services Board (IFSB), the Malaysian-based standards-setting body.
  
• Assets in Islamic banks grew by 13.3% in 2009 compared with 7% growth in conventional banks within Pakistan. This growth rate is encouraging, but with conventional finance representing a much larger proportion of total assets, I would have expected Islamic finance to see growth rates be more significantly different, even given the general economic difficulties in the past year.
  
• An article proposes using the 'space value of money', which I do not completely understand.
  
• The short-term Sukuk al-Ijara issue from the Central Bank of Bahrain was oversubscribed by 330% (BD33 million for BD10 million in securities issued).
  
• Gulf Finance House says it is returning to a "back to basics strategy".
  
• Islamic banking continues to struggle to enter the Indian market.
  
• Despite all of the negative events including Nakheel, Bernama highlights some of the positives for Islamic capital market from 2009.
  
• Indonesia will offer sukuk on March 30 in an auction. There have been a few failed auctions recently with investors asking for too high yields for the government to accept.
  

Islamic finance development in the US, Islamic debt trading, GCC wants to develop local debt markets

New global regulations on financial markets in the wake of the financial crisis--particularly those surrounding the securitization markets--could adversely affect the Islamic financial insdustry. In other U.S. news, Russell Investments is launching its own Islamic indexes with its fund partner Jadwa Investments.

U.S. real estate financing company W.P. Carey believes there is a 50% chance it will be able to launch an Islamic fund to purchase real estate. The idea dates back to 1997 when it planned to launch a Shari'ah-compliant fund, but abandoned the launch because of lack of attractive investments. The initial fund was focused on U.S. based property but the new one will probably have an international focus. The company specializes in sale and lease-back transactions which make it an attractive type of business in which to use Islamic finance.

A lawyer, Megat Hzaini Hassan, writes for Reuters about the permissibility of diifferent types of debt sales in the context of securitization of portfolios of different types of Islamic financial products. Apart from Malaysia, where debt sales (bay al'dayn) is more likely to be viewed as Shari'ah-compliant, the general sense is that if the majority of the assets being securitized are ijara (rather than murabaha), then debt re-sale is permissible because the ijara provides the financier with ownership of the underlying assets, rather than just a future stream of cash flows.

The recent wave of sovereign bond and sukuk issues in the GCC are part of a strategy to create a yield curve, encourage the development of more liquid secondary markets and increase corporate issuance following a steep drop-off in new issues as a result of the credit crisis. Out of the $750 million CBB sukuk 55% of the investors were from the region and there was enough demand for the entire issue to be subscribed by GCC-based investors.

Other News

• The Central Bank of Bahrain issued another of its regular sukuk al-ijara (No. 46) that have a return of 1.25% and mature in 182 days. It was oversubscribed 200%.
  
• The University of Leicester is holding a conference to look at whether the Islamic financial industry is more robust than the conventional financial industry as well to examine lessons from the crisis for Islamic finance.
  
• Africa Reinsurance Corp is planning a new takaful business. AfricaRe was founded in 1976 by the African Development Bank.
  The Reims Management School in France is planning to offer an Islamic Banking & Finance course as part of its Masters in Management program.
  
• Shariah Fortune, a relatively new think tank based in Dubai, issued a report about Islamic finance gaining mommentum as well as the dangers from lack of standardization in the quality of Islamic finance.
  

Can Islamic finance have a crisis?

Umer Chapra, an Islamic economist, recently discussed the reasons he saw for the credit crisis and the reasons that Islamic banks would not create a similar crisis. While I agree that the Shari'ah restrictions on Islamic banks would limit the scope for excessive bad lending, I don't think that on its own Shari'ah-compliant banks would be completely immune from a similar crises caused by the growth of a bubble in real estate (or any other Shari'ah-compliant asset). The additional scrutiny that Shari'ah-compliant financial products face in the Shari'ah review process can potentially reign in excessive speculation and prevent some of the worst excesses that characterized the recent crisis in conventional finance. A lecturer at Al Azhar University, Shiob-bin-Mukhtar, goes further saying that there would be no financial crises if Islamic finance was exclusively used. The head of Global Council of Islamic Banks, Saleh Kamel, announces the failure of capitalism and suggests an Islamic financial system as a replacement.

An article discusses the possible regulatory and market changes in the GCC which are likely following the credit crisis.

An investment company in the UK, cru Investment Management, is creating an asset-backed investment fund that will invest in commercial agriculture in Africa. The investment is seen as good from both an investment perspective (the fund management expect a return of between 15-20 percent) and an ethical perspective: one of the stated goals of the investment fund is to "help to create jobs and give rural Africans the chance to help themselves out of poverty".

Islamic finance in Europe is set to grow, according to speakers at a conference in Paris. It is also starting to emerge and grow in Australia.

Sukuk; Islamic investing; faith and finance; Sunrise Equities' collapse

The sukuk market slowdown is more a case of a liquidity issue and was not created by the AAOIFI Shari'ah board ruling, according to Islamic finance professionals in the GCC.

Gerald Al-Fil, a reporter in the GCC, describes the reasons that Shari'ah-compliant indices have outperformed the market as a whole, as well as some pitfalls like being overconcentrated in certain sectors like basic materials.

The recent al-salam sukuk from the Central Bank of Bahrain was only slightly oversubscribed, compared with issues last year which were many times oversubscribed. Malaysia may issue a second sovereign sukuk. S&P credit analyst Mohamed Damak discusses the potential for sukuk issues coming out of Africa.

The Times has a lengthy comment on the role of money and interest in the three large monotheistic faiths, Christianity, Islam and Judaism.

Sunrise Equities, an Islamic finance company in Chicago, collapsed recently and the CEO Salman Ibrahim, disappeared leaving the clients and investors in the firm with losses of $50 million.

Islamic finance & microfinance, law firms see need for Islamic finance expertise

John Foster comments regarding Ramadan touch on the idea that GCC-based Islamic financial institutions could make a huge difference in reducing poverty if they devoted a fraction of their resources to helping provide financial services to the poor in nearby countries in Asia and Africa.

The head of global strategy for Reed Smith L.L.P., a law firm based in Pittsburg, Pennsylvania, responds to a question about why they feel they need to have expertise in Islamic finance.

Q: Do you have an Islamic finance practice?
A: We do have some Islamic finance work out of Dubai and Abu Dhabi. It is increasingly important because that is where the money is. Let's face it: Money is basically pouring into the Middle East and, to the extent that it is going to be invested in debt instruments, it will have to be in instruments that are sharia [the Islamic legal code] compliant, and you have to have expertise to do that.

DIFC Authority CEO Nasser Al Shaali says that Islamic finance is providing one of the driving forces attracting "new, more sophisticated investors".

La Trobe University in Sydney, Australia launched the country's first master's degree in Islamic commerce.

Indonesia, Africa have potential for growth in Islamic finance, IIFM standardized commodity murabaha contract near completion

A Bloomberg columnist argues in an editorial piece that the slow development of Islamic finance in Indonesia compared with Malaysia is in part due to the change in control from the British to the Dutch in 1816 which led the country to be governed under civil rather than common law. The impediment caused by civil law is that Special Purpose Vehicles (SPVs), a mainstay of the Islamic finance industry, particularly for sukuk are not recognized under the law. Qatar, also a country governed under civil law, has gotten around this difficulty by establishing the common law Qatar Financial Center (QFC) whereas Indonesia is working towards changing the civil laws to allow the development of Islamic finance, a long process. Three banks in Indonesia are now opening Shari'ah-compliant units.

The Economist discusses the potential for growth in Islamic finance in Africa, particularly in the northern half of the continent where most Muslims live. However, the lack of development of the financial sector in general have hampered the growth of Islamic finance. However, the article does point to the continent's need for infrastructure projects for which it will need to attract foreign capital to finance and Islamic finance could be a vehicle to finance these projects using money from the Middle East where the coffers are filling rapidly as the price of oil rises over $125 per barrel.

The Bahrain-based International Islamic Finance Market (IIFM), a standard-setting body, announced it was in the final stages of Shari'ah review on a standardized contract for Islamic treasury management using commodity murabaha. The February 2008 issue of the Institute of Halal Investing (available as a pdf) discusses some of the controversy surrounding commodity murabaha which involves trading commodities to provide cash in exchange for a liability of cost plus markup.

Malaysia's Security Commission recently released guidelines on Islamic venture capital.

Sukuk could grow up to 20 percent a year according to bankers despite the credit crunch.

Citigroup announced a new head of their Islamic finance division, Citi Islamic Investment Bank, which has operated since 1986 (Citigroup has been involved in Islamic finance since 1981).

Hong Kong continues to work on developing its Islamic financial sector, but PriceWaterhouseCoopers recommends that it follow the model of Malaysia rather than the U.K.

Fitch says that the tightening of Shari'ah standards could hamper the development of asset backed sukuk.

The head of Emirates Islamic Bank answers questions on the regulation of Islamic finance and the difference between Islamic financial institutions aiming to provide Shari'ah-compliant products versus those he describes as "those who have found Islamic financial services a profitable business and are just trying to benefit from this trend for commercial reasons".

US News & World Report published a list of mutual funds in which stimulus checks could be invested because they have low minimum investments which includes the Amana Funds which invest in a Shari'ah-compliant way. FTSE predicts that Islamic equity funds and ETFs will see significant growth over the next few years.

Innovation & Standaradization, Islamic Finance in the U.S., Africa, Malaysia & the U.K.

The focus of the International Islamic Capital Market Forum in Malaysia was how to get different "Shari'ah jurisdictions" to cooperate. The growth in Islamic finance, and particularly growth of GCC and Malaysian organizations into each other's region, has led to significant standardization of Shari'ah standards. The rapid growth of Islamic finance does necessitate some standardization to reduce the costs associated with Islamic financial products over and above conventional products. However, too much standardization in current products, most of which replicate conventional products in a Shari'ah-compliant way, could reduce the degree of innovation in Islamic finance. The Bank Negara Malaysia, the Malaysian central bank announced the establishment of the International Shari'ah Research Academy for Islamic Finance (ISRA) as a center of knowledge in Ilsamic finance.

USA Today profiles Devon Bank, a community bank in Chicago that offers Islamic finance. Another organization, SASSO, provides training and Islamic financing in the St. Cloud, Minnesota area.

The Islamic financial industry in Africa is growing rapidly as well as in places more commonly associated with Islamic finance like the CGG and Malaysia. Islamic finance accounts for over 15% of the total assest in the Malaysian banking system. The U.K. is quickly emerging as a center of activity in Islamic finance in the West, although the performance so far of Islamic banks have not been great.

Indian Islamic finance, African retakaful & British Islamic home financing

India may see Islamic banks allowed soon.

A the Cote D'Ivoire offices of Nigeria-based reinsurance company, Africa Reinsurance Corporation, is increasing its authorized share capital to fund a re-takaful venture.

A description of the Islamic home financing available in Britain, murabaha and ijara.

Africa and India on Islamic banks' sites, Turkish IPO & IFIS sukuk report

Standard Chartered, an emerging markets bank based in the U.K., plans to expand its Islamic finance offerings, particularly in India and Africa, two regions underserved by Islamic banks. The article describes the current activities of the bank in the Shari'ah-compliant market as:

"The bank offers current accounts and other shariah-compliant products in five markets and has just launched credit cards in UAE, Pakistan and Bangladesh. In its wholesale bank, it is active in sukuks (asset-based Islamic bonds) and in the first half was the lead arranger for four out of the five local currency sukuk bond issues in Pakistan."

Kuveyt Turk, the third-largest Islamic bank in Turkey 62 percent owned by Kuwait Finance House is planning an initial public offering of roughly 20 percent of tis shares later this year.

According to an Islamic Financial Information Service (IFIS) report, Malaysian bank CIMB Islamic Bank Bhd is the largest bookrunner of sukuk while sukuk issuance in the UAE is driving the market.

Malaysian Islamic Index, American Public Radio program on U.K. government Islamic bonds, other news

Bursa Malaysia Bhd and the FTSE Group launched a new Shair'ah-compliant index of 30 Malaysian stocks. The index is called by FTSE Bursa Malaysia Hijrah Shariah Index.

Citibank Bhd, the Malaysian subsidiary of the global financial firm has no plans to launch an Islamic banking subsidiary this year.

CORECAP lauched a $150 million CORECAP Islamic Private Equity Fund to invest in "Sharia-compliant Private Equity investments in the Middle East and North Africa region, via equity participation and via a Sharia-compliant mezzanine structure".

The American Public Radio program had a segment on the U.K. featuring a woman from the Lawyers Christian Guild who oppose the bonds for reasons which seem unlikely to be relevant based on previous sukuk issues.

The Phillipine government failed again to privatize majority state-owned Al-Amanah Islamic Bank.

South African-based bank Absa Islamic Bank has plans to expand in Africa.

Moroccan banks will be able to offer Islamic banking but will not be able to call them 'Islamic'.

Islamic banks in Kuwait are not currently able to issue sukuk to fund their activities although conventional banks are able to because there is no regulation in place to allow it.

The S&P Brazil, Russia, India & China (BRIC) Index will add four Indian firms. It is "the first time that an international rating agency has developed an index to help Muslim investors across the globe invest in specific Indian companies in an Islamically compliant way".