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).
  

Dubai World, Saad Group

The Dubai World debt negotiations hit another potential snag with the repayment of the Nakheel sukuk maturing in May becoming more likely even without a restructuring deal. This compounds the issues caused by the offer of a 1% interest rate for banks who are owed money by Dubai World at the same time that trade creditors are offered 40% cash payment with the remaining 60% paid through a sukuk yielding 10%. A top official at Al Ghurair, which is described as a 'key trade creditor' by Emirates Business 24/7, said the 10% profit was "very generous".

I have previously questioned whether the restructuring would incorporate Shari'ah-complaince and there still has not been a complete reporting of this aspect of the restructuring. However, the use of a sukuk to repay trade creditors indicates that Dubai World remains interested in Islamic finance. The big potential problem is the differential treatment of different creditors, most of which are unsecured creditors. Banks are offered 1%, trade creditors offered 10% on a portion with the remaining being repaid while sukuk holders of the sukuk maturing next month receive full repayment. This differential treatment does no favors to Islamic finance because it reinforces the uncertainty about the rights of creditors in one of the largest geographical concentrations of sukuk issuers. This will make it more difficult for issuers to bring new sukuk to market because although the problems are largely Dubai-related, the uncertainty is generalized to the UAE, if not the GCC. Although the debt holders would suffer delays and would probably come out worse for it, for the Islamic finance industry, it may have been preferable for the whole Dubai World mess to end up in the tribunal in front of internationally recognized judges under DIFC law, which closely resembles English law.

Sukuk holders of the Saad Group have agreed to dissolve the sukuk trust. According to a Reuters factbox, the Saad Group sukuk was an asset-based sukuk, which would mean that the dissolution of the sukuk trust does not provide investors with an avenue to recover their money except through a bankruptcy proceeding as unsecured creditors of Saad Group, where they would be treated equally (pari passu) with other unsecured debt holders and subordinated to any secured creditors.

Khalil Jarrar has an interesting column in the latest Opalesque Islamic Finance Intelligence.

My latest article on the East Cameron sukuk was published by Islamic Business & Finance in the latest issue.

Other News

• The World Bank and the International Finance Corporation will be in Malaysia to discuss a Shari'ah-compliant fund for green technology investments.
  
• The relative strengths and weaknesses of using equity vs. debt in Islamic finance acording to an executive at Elaf Bank in Bahrain.
  
• Arcapita is planning to build a fund management business to reduce the cyclicality of revenues in the private equity business. I believe this is something that more Islamic investment banks and private equity houses will undertake to smooth their revenues and reduce the prospects of being severely harmed in future downturns and this is good for the industry as a whole.
  
• The Abu Dhabi Stock Exchange may begin to indicate which investments are Shari'ah-compliant and which are not.
  
• The CEO of a Malaysian invesmtent bank, Alliance Investment Bank, says that sukuk have a promising future.
  
• Kencana Petroleum Bhd, a Malaysian oil and gas services company, is planning to issue $78 million (MYR250 million) in sukuk sales. Cagamas issued $156 million (MYR500 million) in 5 year sukuk that were rated AAA by MARC because Cagamas is state-owned.
  
• Indonesia issued $22 million in sukuk, about 20% of its planned offering. Demand was limited, according to reports, because of limited liquidity in the sukuk.
  
• KPMG in India has expressed support for the development of guidance from the central bank for Islamic financial institutions in the country which have been slow to develop.
  
• The latest monthly commentary abou the performance of the Dow Jones Islamic Market Indexes for April is now available.
  
• Dundee University in Scotland will offer a postgraduate degree in Islamic finance.
  
• AsiaOne has a summary of Islamic finance structures that are commonly used.
  
• The company offering Salaam Halal, Principle Insurance Holdings, has been sold to a Kuwaiti buyer who was one of the largest shareholders.
  
• AAOIFI will hold its annual meeting at the end of May.
  
• The new Christian ETFs will not be a competition to Islamic financial products, but will encourage greater uptake of ethical products, according to an article in the Malaysian Insider.
  

Can Islamic banks be too big to fail? Dr. Elgari proposes Shari'ah governance standards, Nakheel sukuk options

A poll conducted by FinanceAsia magazine found that over 40% of voters in the poll said that Islamic finance had been damaged in the financial crisis. I agree with them, although it is more relevant whether Islamic finance was more or less damaged than the conventional financial industry in the countries where it is predominant. A direct comparison with the large banks in the U.S. and Europe is not very appropriate because Islamic banks had far less time to create toxic products (although those would have been more difficult under Shari'ah guidelines). The real lesson from the financial crisis was that there are insufficiently clear legal experience for bankruptcy and default compared to conventional finance. U.S. Treasury Secretary Timothy Geithner suggested today that too big to fail institutions should have a

"bankruptcy-like regime for large financial institutions that mismanage themselves into failure and can no longer survive without special government support. In that process, equity holders would be wiped out and the firm will be placed in a form of receivership so it can be broken apart, sold over time, with no exposure to the taxpayer."

While this has no specific bearing on Islamic financial institutions, it does highlight a similar problem facing Western regulators with regards to too-big-to-fail (TBTF) institutions as is facing the government of Dubai as it deals with Dubai World (whose subsidiaries were active in the Islamic capital markets). The problems with the Dubai World resolution mirrors the problem of TBTF institutions: there is no legal history to fall back on for guidance about how to deal with situations of crisis. With an Islamic bank being launched with $3 billion in capital, which could support total assets of between $30 billion and $60 billion assuming a 10-20x leverage ratio, it will be important for Islamic finance to consider whether this creates a systemic risk that even new bankruptcy laws developed for smaller Islamic financial institutions and players in the Islamic capital markets cannot deal with.

There is not anything wrong with a global Islamic bank with assets of upwards of $50 billion: this is far smaller than the TBTF institutions that Secretary Geithner is speaking about. However, with $50 billion in assets, this could account for 5% of total Islamic finance assets in one institutions and would be a significant size relative to many of the economies in the Gulf (ex-Saudi Arabia). For example, it is more than three times the GDP of Bahrain, which could house the bank. That rivals the ratio of RBS, Barclays and HSBC combined as a percent of UK GDP (337%). Creating a resolution regime for large Islamic banks should be a big focus for the Islamic banking industry and it would create a bad image for Islamic finance if it had to wait for an equally large crisis as the one that conventional finance faced in the fall of 2008.

It is hard to provide a good summary of Mohamed Elgari's call for greater Shari'ah governance in the Islamic financial industry and it the article from Arab News deserves a full real. His views cover the many areas including transparency in Shari'ah governance as well as creating greater public dialogue among Shari'ah scholars about the Shari'ah standards under which Islamic products are judged. He rightly notes that there will not be a consensus nor can (or should) there be total standardization of Shari'ah standards. That would remove the ability to adapt the interpretation by Shari'ah scholars to changing environments and lessons learned from how Islamic finance develops.

The first Nakheel sukuk since the one that matured in December will mature on May 13 and there are a number of options being considered according to Reuters reports. The sukuk is likely to be part of the Dubai World debt restructuring plan and the Nakheel sukuk, unlike its predecessor, does not have a guarantee from Dubai World. The most likely option according to Reuters is an extension of the maturity, although this would depend on whether the creditors would be forced to take a haircut and the size of that haircut.

Other News

• Dr. Abdel Fattah M Farah, the Economic Advisor to the Ajman Chamber of Commerce and Industry, proposes a model for a Shari'ah-compliant charitable investment bank that is very interesting.
  
• An Islamic advisory in the Dubai International Financial Centre, Tabarak Partners, will become the first such firm to be wound up under DIFC laws. With a peak valuation of AED1 billion ($272 million, mis-stated in the article as $27.2 million), it would be relatively small compared to Dubai World, but could provide an example for future (larger) cases.
  
• Al Hilal Bank received a license to open the first Islamic bank in Kazakhstan.
  
• Al Rajhi Bank has received approval to offer banking services in Jordan. The Oxford Business Group has an article on building Islamic finance in Jordan.
  
• Turkey's Islamic banks made profits of $470 million. This represents a 9% growth over 2008. Total assets grew 30% to $22.4 billion.
  
• Japan's Tokio Marine may expand its Islamic insurance operations.
  
• The new ETFs allowed by the Saudi Arabian regulators can include sukuk and commodities.
  

Pipeline of sukuk grows, despite uncertainty about bankruptcy laws; GFH buys back sukuk

There has been reports that the pipeline of 'planned sukuk' is quite high with past estimates of $45 billion which has been increased to $50 billion by Standard & Poor's as reported in the DIFC Sukuk Guide. However, as the new issuance seized up again following the Dubai World standstill request, these estimates may not necessarily turn into actual new issues in the foreseeable future. With the myriad of issues about the legal enforceability by investors raised by the Dubai World and Nakheel crisis, many potential issuers may delay or cancel planned issuances. To take an optimistic perspective, the well reported confusion over bankruptcy laws may move some of the new issuance to other countries outside of the Gulf and may also lead to the development of new bankruptcy laws.

Gulf Finance House announced it was going to repurchase $9 million of its $200 million sukuk. This is in contrast to other sukuk issuers which had a chance to repurchase their issued sukuk at distressed levels, some of whom have subsequently defaulted on their sukuk. It is an interesting idea for issuers to take advantage of distressed prices in secondary markets known for its illiquidity. However, in many cases, distressed prices, despite the illiquidity, do reflect the prospects of a default.

Other News

• The DIFC Sukuk Guide (pdf), which was released recently, reports that the total issuance of sukuk in the GCC between 2000 and 2008 was $26.8 billion.
  
• The Investment Dar, the Kuwaiti financial institution which defaulted on $100 million in sukuk, has reached agreement with enough creditors to approve its restructuring plan. Details of the plan have not yet been released. Most reports of the plan say that The Investment Dar will sell most of its assets in order to repay creditors.
  
• The bill to provide tax breaks to put sukuk on a level playing field with conventional bonds in South Korea has been held up in the National Assembly.
  
• Italian insurance company Generali is considering a joint-venture with Qatar Islamic Bank to launch a takaful company in the GCC with possible expansion across Europe in Asia.
  

DIFC report, IsDB considering financing options, working paper on SRI & Islamic finance

• A report from the Dubai International Financial Centre says the industry could have assets of $4 trillion dollars in ten years. That would represent about a four-fold increase from the estimated $750 billion to $1 trillion in assets in the industry today. The report is an update to a similar report released earlier.
  
• The Islamic Development Bank is considering several options to raise money and their sukuk issue, projected at $500 million, may end up being $750 million or $1 billion depending on investor interest. The sukuk issue is a part of the bank's multi-year, $6 billion sukuk program.
  
• A working paper from Novethic, a French socially responsible investing research center, explores the similarities between Islamic finance and socially responsible investing/corporate social responsibility.
  
• The emirate of Ras Al Khaimah's sukuk issue will be rated 'A' by Standard & Poor's and Fitch. The sukuk will be raised through a Cayman Islands-domiciled SPV, RAK Capital. The sukuk will raise $400 million with a 5-year maturity.
  

DIFC economist urges GCC government sukuk; University Bank receives acknowledgement for Islamic home finance activity

The chief economist at the Dubai International Financial Center (DIFC) says that GCC governments should issue sukuk to raise funds instead of drawing down accumulated surpluses from times when oil prices were significantly higher. In addition to retaining these surpluses, it will contribute to increasing liquidity in sukuk secondary markets. As I have noted in a post on my other blog at Zawya, the sukuk market is highly illiquid and the prices at which sukuk are traded in that market are likely not indicative of the underlying performance of the companies which issued them. The head of the DIFC, Dr. Nasser Saidi, agrees: "I think this is a temporary phenomenon. I think the pricing is unrelated to the fundamentals".

The Central Bank of Bahrain (CBB) has expanded the types of collateral it will accept from banks for overnight loans to include ijara sukuk, although no Islamic banks had used the facility. I would imagine that there is considerable debate within the Shari'ah boards of Islamic banks in Bahrain about whether borrowing against sukuk is Shari'ah-compliant. The facility was launched near the end of last year.

University Bank, a bank in Michigan with an Shari'ah-compliant subsidiary, University Islamic Financial Corp, was acknowledged by the American Bankers Association, in part for its innovative Shari'ah-compliant home finance products.

"The selection committee lauded University Bank for its innovative programs such as home financings for Muslim customers. Muslims are much less likely to be homeowners on average due to religious prohibitions on the payment or receipt of interest. University Bank designed a program to meet these needs, which has so far resulted in over $50 million of financings for the purchase of homes by Muslim customers of the bank."

Other News

• There are more Shari'ah-compliant funds in Malaysia now than Saudi Arabia, but the funds are still smaller.
  
• The Dow Jones Islamic Market Indexes are 10 years old.
  
• Lebanon is considering a sovereign sukuk issue according to a Lebanese newspaper.
  
• Indonesia, which is planning on instituting a regular issue of sukuk to finance the country's large deficits and the maturity of these sukuk are expected to exceed 5 years.
  
• The Lord Mayor of London said he expects the UK to issue a sovereign sukuk "sooner rather than later" and this issue will be denominated in UK£;
  
• The new governor of Saudi Arabia's central bank, the Saudi Arabian Monetary Authority, said that companies should look to the sukuk market to raise funds.
  
• The IFSB announced new standards for sukuk and REITs.
  
• Kuwait Finance House (Malaysia) is considering acquisitions across Asia including in Japan and China.
  

Islamic finance 'not immune' to credit crisis--Moody's; Standardization at the DIFC

Reuters came out with an article today (in response to a Moody's report [pdf]issued last week) to pierce the mistaken impression that Islamic finance is 'immune' from the credit crisis. This is something I have tried to emphasize as a note of warning (including in my 'Expert Opinion' column in Business Islamica magazine ('No room for complacency: Islamic finance faces its own risks', December 2008, pp. 24-25). Although there are a number of factors that helped Islamic finance avoid some of the most egregious products in the credit crisis, they are not immune from spillover effects in the property and equity markets, as well as general economic conditions. The Reuters article describes:

"Moody's said Islamic financial institutions in the Gulf showed strong resilience during the global financial turmoil, but that they are not risk-immune due to a shortage of liquid instruments and the lack of an Islamic interbank market. [...] Islamic banks now stand in the same firing line as their non-Islamic counterparts, facing a slump in equities valuations and a slump in Gulf real estate, to which they are heavily exposed. Even though Islamic banks avoided the speculative investments and complex financial instruments that derailed Western banks, their balance sheets still show a mismatch between assets and liabilities, and they depend more on short-term maturity liabilities than conventional banks."

Now that there is more awareness from prominent sources like Moody's and Reuters (and talk of a post-bubble Dubai), I feel a little freed up from trying to be the Cassandra and go back to writing about the aspects of Islamic finance that are the most promising.

A consultancy, Minhaj Shariah Financial Advisory (MSFA), has been named to organize a Shari'ah board for the Dubai International Financial Centre (DIFC). The Shari'ah board will provide Shari'ah rulings for companies at the DIFC and also "approach government entities and encourage the Central Bank to appoint a Shariah board to monitor the country’s banking sector". This is a positive step for the GCC region along the lines of the central Shari'ah Advisory Council in Malaysia. Unlike Malaysia, the central government will not appoint a board which decides on which products are halal and which are not and individual institutions will still be able to appoint their own Shari'ah boards, I think this is a huge step towards providing some standardization in the application of Shari'ah to financial products because it will provide comparability in 'fatwa standards' because the scholars issuing the fatawa will be the same across the companies which approach it.

Dubai-based Noor Islamic Bank is postponing its global expansion plans in the wake of the credit crisis. The Investment Dar, the Kuwaiti investment company which bought Aston Martin in a large Shari'ah-compliant leveraged buy-out in 2007, may sell 10% of the company to a Saudi investor.

As the sukuk market recovers, Turkey plans to issue its first sukuk using the ijara structure. Foreign Policy has an article about Islamic finance that provides a balanced look at proponents and critics of the industry.

Barron's has an article about the Shari'ah-compliant commodity funds being developed. Foreign policy has a balanced article about the Islamic finance industry and, in particular, the role of Shari'ah scholars.

The Islamic Financial Standards Board released a draft of new standards. The IFSB is a standards setting body based in Kuala Lumpur. It will be accepting comments over the next five months. l

New sukuk are smaller than last year; profits hold up for Islamic banks although challenges remain

A blog post at PBS, the U.S. public broadcasting organization, provides a brief description of Islamic banking seen through the prohibition of usury in the three large monotheistic religions: Judaism, Christianity and Islam. The U.K. may be providing the greatest example of how to allow Islamic banking to operate on a level playing field with conventional financial products.

A panel at a conference in the Dubai International Financial Centre (DIFC) tackles difficult subjects like the effect of the credit crisis on Islamic finance and the potential for 'greater good' efforts to expand Islamic financial principles to financial products without the 'Islamic' label (e.g. 'ethical' and 'green').

In another report, data show that the sukuk market has fallen off in 2008 compared with 2007. Issuance in the GCC fell from $14.15 billion in the first nine months of 2007 to $8 billion in the same period in 2008. The number of sukuk issued in the GCC only from 36 to 34 which means that the average size of sukuk has fallen (from $393 million to $235 million). There were some sukuk significantly larger than average issued by real estate companies: eight accounting for $4.85 billion (compared with seven in the same period in 2007 valued at $3.42 billion). This means the remaining 26 sukuk issued this year only averaged $121 million compared with the non-real estate issues in 2007 which averaged $370 million.

Business Week had a story that I missed a few weeks ago about Islamic finance weathering the credit crisis, but which was mentioned in another article on Islamic finance, because of its additional screens which help Shari'ah-compliant investors avoid some of the pitfalls that have been hurt the most in the credit crisis. Some non-Muslim investors may even be attracted to the industry by its relatively simple screens used to exclude companies that, while conforming with the Shari'ah screens, may also perform better in bad markets for several reasons including a lower reliance on debt financing.

Although Islamic finance is less susceptible to the credit crisis, Moody's warns that it is not completely isolated from global economic trends and are overexposed to real estate markets, particularly in the GCC, which have only recently began slowing. Despite this, the profits of Islamic banks remained strong in the last year.

The Islamic Development is planning a sukuk to raise money to assist member countries suffering in the wake of the credit crisis.

Islamic finance at risk from fall in prices in the real estate market; CGAP study on Islamic microfinance released

My fears that the credit crisis in conventional financial markets is spilling over to Islamic finance are becoming to be realized. The primary mechanism I identified in my blog (and in greater detail in a forthcoming opinion piece for Business Islamica magazine) for transmitting a crisis through the Islamic banks was falling property prices in the GCC countries that had mostly escaped the direct fallout from the subprime crisis that began in the United States. Although the prices have not fallen as dramatically as in Western countries, they are beginning to fall and this has an effect on Islamic banking because these assets are the underlying physical property used in many Islamic financing deals. From a Gulf Daily News article: "Falling prices in mainly Muslim countries in the Middle East and Southeast Asia are likely to affect the Islamic finance market due to heavy reliance on such assets to support deals." A senior analyst at Zawya, Alexandra Tohme, adds her opinion on the link between Islamic financial institutions and the global credit crisis.

The Dinar Standard has an interesting article about the potential for Islamic banking in Europe.

The Financial Times has a Q&A on the basics of Islamic finance, as do a number of newspapers in the U.S. and there is also an article on finance based in Christianity.

Islamic finance could still grow by 20-25% a year despite the financial crisis according to Rushdi Siddiqui, the Global Director of the Dow Jones Islamic Market Indexes, but "Islamic banks should diversify their investments to generate revenues from different areas."

Hedge fund managers are targeting Muslim investors in the Middle East by developing Shari'ah-compliant hedge funds, but is it too late for them to attract investors given their often poor returns during the past couple of years.

The DIFC has lent its support to the new Master Agreements for Treasury Placements (MATP), the standardized contract from the International Islamic Finance Market (IIFM) that was recently announced.

Zurich Financial Services Group has launched a joint venture takaful company with the Abu Dhabi National Takaful Company to expand their operations in the GCC region.

The Consultative Group to Assist the Poor (CGAP), a multi-lateral effort to promote microfinance and based at the World Bank, released a study of 125 Islamic microfinancial institutions.

Shari'ah risk, the credit crunch, falls in sukuk issuance

Another article discussing the controversy surrounding the ruling by AAOIFI on the repurchase agreements contained in many sukuk also brings up another as yet unexperienced risk: default. Until now, the focus was on 'Shari'ah risk' of which the AAOIFI ruling was the most striking example. It essentially ruled that a common form of ijara sukuk containing the repurchase of the underlying asset at par which was approved by Shari'ah boards was no longer Shari'ah-compliant.

Different people within the Islamic finance industry have different views on whether the Islamic finance industry has been and can be moving towards standardization. I believe some degree of standardization is necessary, for no other reason than it would help address the shortage of Shari'ah scholars for the time being until there is a less dire shortage of scholars. Khalid Howladar, a senior credit officer at Moody's, believes that Shari'ah-compliance will not necessary become standardized, nor should it, since the most important factor for Shari'ah-compliance is not form, but the intention behind the transaction.

The credit crunch has had a significant impact on the Islamic finance industry and represents part of the cause of the fall in sukuk issuance. Other products, like Amiri Capital's "Shariah fund of hedge funds", are delayed. Amiri's launch is delayed because their prime broker, Lehman Brothers, is now bankrupt and mostly sold off to Barclay's and Nomura.

A Shari'ah scholar, Mohammad Akram Laldin, raised the prospect of new controversy about Shari'ah-compliance by criticizing products that merely mimic conventional finance products. Speaking to Reuters, he remarked, "People tend to, to a certain extent, dilute some of the principles or objectives of certain contracts in order to accommodate conventional features".

The Islamic Bank of Britain released its first half 2008 financial results showing a smaller loss than during the current period caused by the launch of several products.

The G8 countries continue to race towards being the first to issue a sovereign sukuk.

Dubai Group, a conglomerate of companies, wants the Dubai International Financial Centre (DIFC) to become a center of Islamic finance.

The Central Bank of Bahrain sukuk al-ijara was oversubscribed by 120%.

UK Islamic home finance, sukuk; DIFC CEO calls for standardization; Indonesia plans sukuk in August

The Guardian newspaper in the UK describes in detail the different types of Shari'ah-compliant home financing available in the country. There were a few very interesting facts presented. First, a small minority of customers using the Shari'ah-compliant home financing are non-Muslims; currently about 2 percent of the Islamic Bank of Britain's customers are non-Muslims who turn to Islamic home finance for ethical reasons. Second, and this may provide a way for Islamic banks to broaden their interest beyond the Muslim market, is that in some cases, Islamic home finance is cheaper than traditional mortgages.

"If you bought a property for £250,000 using a diminishing Musharaka plan from HSBC Amanah, you would pay around £1,553 a month (made up of £1,246 in rent and £307 in contribution payments to increase your share), based on the bank buying 90 per cent and you putting down a 10 per cent deposit. If you took out a conventional two-year fixed-rate loan with HSBC (at 6.29 per cent and with a £799 fee) on £250,000, you'd pay around £1,655 a month over 25 years."

. There are of course differences in availability and structure that could negate the difference, the development of cost competitive Islamic home financing is a good thing for the industry as it seeks to expand beyond its current niche role.

Nasser Al Shaali, the CEO of the Dubai International Financial Center (DIFC), commented on the difficulty of operating Islamic finance in regulatory environments premised on only conventional banks operating, but also that the lack of standardization (such as standard, widely accepted fatawa) is hampering the industry's growth. While many countries are anathema to developing parallel regulatory systems for Islamic and conventional banking (as Malaysia has already done), there is still a case for assessing whether regulatory requirements designed for conventional banks are adequate for supporting a sound financial system where conventional and Islamic banks operate side-by-side.

The Indonesian government plans to issue its first sukuk in August and will use an ijara structure based on assets from the finance ministry. A cynical observer might question whether the assets of the finance ministry are Shari'ah-compliant since many activities in the finance ministry surely involve interest such as the also announced ORI005, the fifth retail (conventional) bond.

Meanwhile, Islamic banking continues to develop in Bangladesh but faces challenges in Thailand.

The UK government is "dragging its feet" and is unlikely to issue its first sukuk this year according to Mohaimin Chowdhury, head of legal, Shari'ah and compliance at the European Islamic Investment Bank. Although the difficulties for a sovereign sukuk from a tax perspective are real and the uncertain market conditions create challenges, Mr. Chowdhury feels they could "deal with them quicker". Kitty Ussher, the Finance Ministry is quoted as saying "There's no doubt in my mind that if we can find a way that works for the taxpayers to do it, the benefit to the City of London in terms if prosperity, jobs and expertise will be enormous [however] we just felt that since this is the first time we are doing it, it would be simpler and less risky to sell Treasury bills". Dr. Mohammed Ramady speaks to the situation in the U.K. and U.A.E. regarding the Islamic finance market as a whole in an editorial.

DIFC studies standardization, Japanese Diet to allow Islamic finance

The Dubai International Financial Centre (DIFC) is launching a research effort to study the possibility for greater standardization of Islamic finance globally as well as within the UAE and GCC.

A new bill is being proposed in the Japanese Diet to allow banks to begin conducting Islamic finance. While there is very little domestic demand for Islamic finance, Japanese banks see Islamic finance as a way to attract investors from the oil-rich GCC, some of whom often will only participate in investments if they are Shari'ah-compliant.

Islamic banking should continually be aware of its position and competitiveness with conventional banks to ensure that it can continue growing rapidly says Nicholas Brewer. In Malaysia, for example, Islamic banks are used by many non-Muslims because they offer competitive pricing and some aspects of Islamic banking may be viewed as more favorable to the borrower.

An editorial in the Guardian questions whether the literal interpretation of the prohibition of riba as interest may cause some to overlook the greater social requirements of Islam. Overly focusing on 'avoiding interest' but not necessarily having a focus on the underlying reason for the prohibition (and other requirements beyond avoiding interest). It would be possible to create an exploitative payday loan with high cost to the borrower while adhering to a narrow interpretation of the prohibition of riba by using murabaha or ijara (although it would be unlikely to be approved once Shari'ah scholars looked into more than just its form).

Hong Kong, U.K., Dubai all want to become the leaders in Islamic finance

Sheikh Yusuf DeLorenzo, the prominent American Shari'ah scholar recently wrote a paper criticizing the recent approval of financial products which have been approved by Shari'ah boards and pay returns that are linked to non-Shari'ah-compliant products. The editors at Dinar Standard, sat down with Sheikh DeLorenzo who provided further comments about the products, as well as presenting his hope that the products will be rejected in the market by investors. The decision, he argues, follow from a focus on a literalistic interpretation and lose focus of the maqasid (purpose, intent) of the Shari'ah. Sheikh DeLorenzo's paper, "The Total Return Swap and the 'Shari'ah Conversion Technology' Stratagem" is available in pdf form.

The leader of Hong Kong Donald Tsang is on a tour of GCC countries, in part to try to attract funds to Hong Kong as it begins to develop a Shari'ah-compliant finance industry.

Standard and Poor's has launched three new Shari'ah-compliant equity indices, large-cap, small cap and U.K.

The U.K. now has an option for money transfer that is Shari'ah-compliant through Lloyd's TSB.

The DIFC wants to be the center of Islamic finance worldwide, while London is making its own try at that position, being the leading Western country in the industry. The International Financial Services London, an organization promoting London's financial services industry worldwide, issued an 8 page report (pdf)on making London a center for Islamic finance.

Interesting notes from the IFSL report:

• "the customer base [for Islamic finance] in Western countries is not necessarily restricted to Moslems: other customers may be attracted by the ethical and environmental basis of Islamic finance"
• Top 5 sectors where sukuk are used: infrastructure (39%), finance (18%), energy (16%), real estate (11%), manufacturing (9%)
• U.S. is fourth in number of Shari'ah-compliant equity funds, trailing Saudi Arabia, Malaysia and the U.K.
• The U.S. is second in the number of Islamic banks among Western countries with 20, trailing the U.K. with 23

HSBC Amanah argues that Shari'ah-compliant insurance (takaful) needs to become more widely available.

WSJ conference, GCC surpasses Malaysia in sukuk, Islamic finance brain drain

The Wall Street Journal will team up with the Dubai International Financial Centre (DIFC) to have one day of DIFCweek devoted to Islamic finance called "Islamic and Ethical Finance".

The Gulf region has had more Islamic bond (sukuk) issuance this year than Malaysia for the first time according to Moody's with $13.2 billion so far this year.

Malaysia tackles the problem of brain drain to the Gulf states.

Awqaf, Islamic financing of a Chinese energy city, conference on Islamic development finance

The Dubai International Financial Centre (DIFC) and the Dubai Islamic Bank (DIB) are working together to provide Shari'ah-compliant trusts (awqaf).

Gulf Finance House is building a $5 billion residential & industrial city in China. Similar projects are underway in Qatar and India.

A Malaysian government minister encourages Japanese firms to gain exposure to Islamic banking through Malaysian banks.

A conference is planned by the Central Bank of Bahrain (CBB) and the UN Economic & Social Commission for Western Asia (UN-ESCWA) focusing on the role Islamic financial institutions can play in development finance.

DP World, DIFC issue sukuk

DP World, the company which issued the first convertible sukuk with its five year, $3.5 billion issue in early 2006, plans to issue two more sukuk (one 10-year sukuk and one "very long term" sukuk). The purpose of the issue is to 'extend its maturity profile'.

The Dubai International Financial Centre priced its first sukuk issue (al-mudabara sukuk) of $1.25 billion with a "profit participation rate" of 37.5 basis points (0.375%) above the London interbank offered rate (LIBOR).

Brunei's Islamic banking industry has 27 percent market share. The Sultanate plans on adding a longer-term sukuk issue in the future to its 91-day sukuk al-ijara.

Innovation, Integration and Growth of Islamic Finance

Two finance experts from Masraf Al Rayan, the Gulf-based Islamic Investment and Commercial Bank, spoke at the 3rd Annual World Capital Markets and Islamic Funds Conference occuring in Bahrain from May 26-28.

Links between the Gulf Cooperation Council states and Asia have increased the demand for Shari'ah-compliant products. Islamic financial products could also serve as a catalyst to further deepening trade flows between East and west. Intra-Muslim-majority country links to promote education, the growth of human capital and increased availability of capital could increase entrepreneurship and development in majority Muslim countries.

Growth of the Islamic finance industry in Malaysia will be vertical compared to the growth in the number of firms in the Gulf Region, says KFH (Malaysia) Bhd chief economist Baljeet Kaur Grewal.

Greater innovation needed to continue the excitement generated by Islamic finance into the future, says Bahrain Islamic Bank chairman Khalid Abdulla Al Bassam.

The Dubai International Financial Centre (DIFC) plans to issue $1 billion in Islamic bonds (sukuk) according to Bishar Barzawi. No information of what use the funds would be for except 'general corporate purposes' and no details on the structure of the sukuk issuance which are typically backed by assets in most sukuk issues.

The Bank of Nova Scotia and the Toronto-Dominion Bank, the second and third largest banks by market capitalization in Canada plan to reconsider whether to begin offering Shari'ah-compliant financial products to attract business from Muslim customers who belive conventional products violate the prohibition of riba.

Malaysia's state owned holding company Khazanah Nasional Bhd may issue a Shari'ah-compliant exchangeable bond later this year. The company issued one last year convertable into shares of Telekom Malaysia.

U.K. Islamic bonds, Islamic banking in Kazakhstan, Malaysia and the GCC

Financial Times writer Farhan Bokhari editorializes on the benefit of a U.K. government sukuk. He argues:

"Muslim investors could use their newly found presence in a country such as Britain to promote the concept of Islamic finance to a more global audience. In spite of its spectacular growth, the concept remains misunderstood in many circles. Developing partnerships with academic institutions and mainstream professional bodies to promote sukuk and other Islamic finance concepts would help to address this lack of understanding."

This goal of creating understanding of Islamic finance is one of the primary goals of the Institute of Halal Investing.

There are a couple more details about the expansion of Islamic banking into Kazakhstan.

The second finance minister of Malaysia says that Bahrain, Qatar and the U.A.E. want to learn from Malaysia in implementing such a banking system.

Shari'ah Capital, an Islamic hedge fund, received a license to operate on the Dubai International Financial Centre (DIFC).

A conference will be held in Colombo, Sri Lanka on the "Fundamentals of Islamic Banking & Finance".

• This conference has been added to the IHI conference listing page.

U.K. may launch sukuk as early as this year

U.K. may launch sukuk as early as this year

The Financial Times reported this morning that the U.K. Shari'ah-compliant government bonds could be issued as early as this year. The article goes on to suggest that the appeal of sukuk for non-Muslims could be that they are an alternative source of funds to tap. Along these lines, "[John] Sandwick [manager of Sanad] predicts that big corporations such as Ford, the US carmaker, will one day look to sukuk for financing. 'If you're the treasurer of Ford Motor, you want diversified funding sources. You want to absorb the liquidity to finance your liabilities. You don't want to rely on the New York bond market,' he says."

Other news

The UAE Central Bank announced it will not issue more banking licenses at this time. This hurts the prospects for Amlak Finance which was rumored to be continuing to seek a banking license despite being denied several months ago.

The head of the Dubai International Financial Centre (DIFC) Omar bin Suleiman said that the growth of Islamic finance in Asia will complement the developments in the Middle East. The growth of the industry, both within the GCC region and without increases demand for Islamic finance and the competition forces cities & banks to become more efficient and value creating.

The Malaysian central bank, Bank Negara Malaysia may allow foreign banks to set up independent Islamic banks. Currently, foreign banks like HSBC operate their Islamic banking services from a window within the conventional bank.

New firms in the DIFC and QFC and and profile of an American community bank with Islamic financing

Oasis Crescent Capital Partners, the DIFC-based subsidiary of the South African company Oasis Group Holdings, will launch Shari'ah-compliant funds. The funds on which they will focus are fixed income (investing in sukuk) and real estate funds.

Al Rayan Investment, a subsidiary of Masraf Al Rayan, received a license to operate at the Qatar Financial Centre (QFC). It is the first Islamic financial institution to receive a license for the QFC.

An article on community banking in the U.S. describes Islamic banking products available from Devon Bank in Chicago, Illinois.