Bank Asya expanding into the Balkans

Bank Asya, a Turkish participation bank (i.e. Islamic bank), made a couple of interesting announcements recently.  First, it plans on a $10-$20 million acquisition in the Balkans in partnership with the Islamic Development Bank.  Secondly, it is planning a $300 million sukuk by year-end, depending on market conditions. Third, it has asked for bids for the bank from interested buyers, and has received some which it says are below the bank's "potential". These three developments highlight areas of Islamic finance that I think are going to be important going forward. 

The first development of an acquisition in the Balkans is important because there is currently very little activity in Islamic banking in the Balkans, despite a sizeable Muslim population in some countries in the region.

Albania - 2.5 million - 79.9%
Bosnia-Herzegovina - 1.5 million - 48%
Bulgaria - 920,000 - 12.2%
Greece - 310,000 - 3%
Kosovo -  2 million - 89.6%
Macedonia - 680,000 - 33%
Montenegro - 111,000 - 17.7%
Serbia - 244,000 - 3.2%
Slovenia - 49,000 - 2.4%

This is probably fertile ground for Islamic banking even as the more developed countries like France and Germany struggle to adapt their legal systems to allow Islamic banking.  It is particularly valuable, I think, for the Islamic banking to be offered through an acquisition by a Turkish participation bank, which has significant experience offering Islamic banking products in an environment where the "Islamic" aspect is minimized for political reasons.  Unlike in GCC where the "Islamic" label is used without much dispute, it is much harder in secular Turkey to brand an Islamic bank as "Islamic".  It is no surprise that the first Islamic banking branch on the Continent (in Germany) was opened by KFH-Turkey.  If this acquisition becomes successful, it is quite likely in my opinion that future growth of Islamic banking in non-Muslim majority countries could adopt a more neutral brand (e.g. participation banking) to offer the same products, while avoiding political challenges from being labeled as "Islamic". 

The second move by Bank Asya is to offer a $300 million sukuk.  While this would be a relatively large sukuk, although not quite of benchmark size, it is pretty small relative to the bank's YTL14.5 billion ($8.5 billion) balance sheet. However, it would be a modest increase to their YTL 191 million ($111 million) reported funds borrowed as of the end of 2010 (compared with deposits of YTL9.1 billion ($5.3 billion)). 

Finally, the fact that the bank is accepting bids from potential buyers is significant, more for the rarity of Islamic banks (particularly outside of southeast Asia) putting themselves up for sale.  Many of the GCC Islamic banks are probably too small and operate in too competitive Islamic banking marketplaces, but are 'trophy assets' and are not open to offers from potential acquirers.  Yet, Bank Asya, even while posting profits and developing acquisition plans of its own is willing to consider bids from potential acquirers.  Perhaps we shall see Turkey take the lead into Europe, while also being open to acquisition by larger players within the global Islamic banking industry. 

AAOIFI head criticizes the chairman of AAOIFI Shari'ah board; Islamic Development Bank launches work team to monitor credit crisis

The Islamic Development Bank is establishing a work team of experts to monitor the effect of the current financial crisis on the Islamic financial crisis. I think it is a good move and recognizes that, although the ethical requirements on the Islamic finance industry can help mitigate the effects, the industry is not completely unscathed from spill-over effects of the financial crisis. The spill-over flows through the conventional credit markets (many if not most sukuk are priced in connection with the LIBOR) and the effects of the crisis on the underlying global economy. While there is little that the work group can do to reduce the effects of the crisis on the Islamic finance industry, monitoring it closely can allow early moves to head off serious repercussions.

The head of AAOIFI, the global standard-setting body, lashed out at the head of the Shari'ah board, Sheikh Taqi Usmani, at the International Islamic Finance Forum for comments about the Shari'ah-compliance of sukuk that were followed by a drop in issuance in sukuk. Mohamad Nedal Alchaar said "The statements that were made by our sharia chairman about the sharia compliance of sukuk wrecked the market". While the timing of the comments were inauspicious, there is little doubt that the financial crisis wracking credit markets worldwide had far more to do with the fall off in sukuk issuance. Sheikh Usmani's comments, to be fair, were not followed quickly by a statement from the full AAOIFI Shari'ah board (that followed several months later). However, the comments in and of themselves, will probably benefit the industry in the long run by pushing the sukuk market, and hopefully Islamic finance in general, towards more differentiation with the conventional financial markets. Until now, most Islamic financial products have emerged from a process of 'Islamicising' of conventional products and have largely the same structure. What Sheikh Usmani was advocating (which was confirmed in the follow-on statement from the AAOIFI Shari'ah board) was removing fixed redemption of sukuk at maturity. This was instituted initially so that it resembled conventional bonds. Forcing instead on repurchase at market prices creates more risk-sharing because sukuk holders share in the appreciation or depreciation of the underlying assets used to back sukuk.

The shortage of qualified professionals, trained in Islamic finance rather than structured finance, could reduce the future growth rate in the Islamic financial industry, according to INCIEF CEO Agil Natt. Ahlibank deputy CEO Yehia Elbatrawi believes that, although the Islamic finance industry has been relatively unscathed by the credit crisis, it is at risk from an overexposure to real estate and private equity: "some of these markets are overpriced, which increases the exposure of many Islamic banks". Shari'ah-compliant investments, although shielded from a lot of the damage have seen indexes screened for Shari'ah-compliance lose $5.6 trillion in value, according to Standard & Poors.

Islam (and other religions) bring ethics back to the financial industry...and to Bosnia. Other countries are also changing regulation to attract capital from the Middle East by encouraging Islamic finance. The U.S. is even getting involved at a governmental level. U.S. deputy secretary of the Treasury Robert M. Kimmitt is in the Middle East learning more about Islamic finance. He noted that Treasury Department officials are increasing their familiarity with the industry and although he was "not sure that Islamic banking will also be itemized in the agenda, but it is a subject that is often dwelt in the public and private sector".

Another sukuk, planned by Deyaar, has been delayed. It's CEO, Markus Giebel says, "There is very little liquidity in the market right now and to launch a sukuk would be foolish. We have to obey market conditions and so we have delayed it but not cancelled our plan for it,"