New sukuk issues, Rushi Siddiqui on Islamic development indicators, update on AIG lawsuit

Ahmed Salem Bugshan (ASB) Group is planning a five-year, $100 million ijara sukuk. In addition to this sukuk, a number of other sukuk have been announced. The Bahrain branch of the Kuwait Turkish Participation branch is among the issuers planning a sukuk, with their $100 million sukuk expected to be issued "within the next two or three months". Indonesia is planning on issuing its next sukuk for 1 trillion rupiah ($108 million) on June 15. The sukuk will be sold with maturities of 5, 7, 10 and 20 years, which adds to the small number of sukuk with longer (10+ year) maturities. The issue is a part of what the government expects to be $1.082 billion in sukuk issued this year. About half of that amount has already been issued. The sukuk will make up nearly 5% of Indonesia's sovereign debt issuance this year to fund a deficit targeted at 2.1% of GDP. Indonesia's central bank and Ministry of Finance are working on tax incentives for Islamic financial institutions.

Rushdi Siddiqui contemplates the need for a development indicator to measure the 'pulse' of the Islamic financial industry. Besides his hypothetical BBC World News anchor's statement that the "TR Islamic Business confidence was up 2 per cent", he covers some important issues in the Islamic finance industry. He asks whether the sukuk defaults/restructurings are credit issues or something more. In general, I think that they are primarily credit risk issues, although the Investment Dar court case, which he raises, indicates the presence of Shari'ah risk if institutions in the future attempt to use a secular court like the UK to repudiate contracts based on ex post Shari'ah-non-compliance. He also asks whether the reduction in operations at the Islamic Bank of Asia reflect a point of concern as well as concerns about the lack of integration between the standards-setting bodies AAOIFI and IFSB. HIs article in Gulf News is a wide ranging, questioning piece that very thought-provoking. An article describing a recent conference in Brunei quotes Rushdi Siddiqui as saying that the sukuk market could be an important source of funding for the halal sector. It has been notable to me that there has not been much sukuk activity to finance the halal industry even when there have been sukuk issued to provide financing to conventional financial companies like GE Capital.

The plaintiffs in a lawsuit against the US government about AIG's Islamic finance business have requested a summary judgement. The lawsuit, which legal scholars with expertise in first amendment cases said was unlikely to succeed, challenges the legal right of AIG to engage in Islamic finance after the US government bailed it out taking an 80% equity stake. The press release from the plaintiff's lawyers also repeatedly invokes the bogus claim that Islamic finance is connected with terrorism. Readers could easily find better uses for their time than reading this press release.

Other News

• Amlak and Tamweel are considering alternatives in case the planned government-backed merger does not happen.
  
• Arcapita expects a "sizeable financial loss" for the year ended June 30 and plans to publish its third quarter (ending March 31) results on Friday, a month after the date set by its regulator.
  
• A speaker at a conference in Bahrain raised the important issue of the tension between management goals and the requirements in Islamic financial institutions for Shari'ah-compliance.
  
• The National Bank of Kuwait launched another series of its Thahabi Ijara Fund that will lease equipment primarily to the 1,000 largest companies in the US.
  
• The latest monthly update is available about the Dow Jones Islamic Indices performance. There was one misstatement: "Germany issued a ban on short-selling for certain financial stocks, a move which is coincidentally in line with Islamic Law. Short-selling is haram since Islam, in addition to riba, denies excessive speculation (i. e. gambling) called maysir." The most often cited reason why short-selling is prohibited in Islamic finance is that it involves selling something that the seller does not own. Maysir is often cited as a reason why conventional options and derivatives are prohibited.
  
• Russia is slowly seeing growth in its Islamic finance sector.
  
• Standard Chartered is planning to enter Saudi Arabia to increase its Middle Eastern business.
  
• A fund manager in Malta is trying to enter the GCC.
  
• The Islamic Development Bank launched an online database on Islamic financial institutions, IBIS.
  

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.
  

Dubai World, Islamic hedge funds

Dubai World negotiations continue to be released in bits and pieces to the media, and they may or may not be totally accurate. However, the latest release is that Dubai World will be split into 'good' and 'bad' companies and dealt with in separate ways. Nakheel and Limitless the domestic and international property companies within Dubai World, respectively, will be put into the 'bad' company as their prospects are more bleak with a collapse in real estate markets globally in the past two years. The 'good' company would include DP World, Ports Customs and Free Zones and Dry Docks. Statements in the past have separated these two groups of companies and it appears that that will be formalized in the proposal.

This could help move the restructuring on for the 'good' companies if they are separated and their debts are repaid in time while the 'bad' companies are worked out. However, I would imagine that the many large banks have exposure to both 'good' and 'bad' companies. This could provide more flexibility in the negotiations if they can know ahead of time that the debts of the 'good' companies will not have any haircuts requested. However, it does not address whether there will be a government guarantee on some, but not all, companies. Some proposals being floated in the media involve a delayed repayment (in some cases for the 'bad' companies with a haircut of 20%) with repayment guaranteed by the government of Dubai. This will increase some certainty, but there are still questions about whether Dubai would be able to make good on this guarantee without additional support from Abu Dhabi. The restructuring is proceeding, but is likely to continue for months if not years.

Islamic hedge funds have been slow to develop because there is not agreement on the contract, arbun, used by Shariah Capital to synthesize a short sale. Muddassir Siddiqui, a Shari'ah scholar criticized the use of arbun telling Reuters that "The payment of arbun does not transfer title to the buyer. The principle of the sharia is that you are not allowed to sell something that you don't own". There will be an uncertain for the future of Islamic hedge funds if such important aspects are disagreed on among scholars. However, it is likely that if there is broader approval of the arbun short selling contract, then the first mover advantage could be substantial.

Other News

• Sukuk issuance grew from $14.13 billion in 2008 to $20.15 billion in 2009, with half of the 2009 issuance coming from Malaysia according to the Malaysian ambassador to the UAE.
  
• Kuwait's special circuit court has granted The Investment Dar's request for protection under the financial stability law.
  
• Quarterly changes to the Dow Jones Islamic Market Indexes were released.
  
• The Jordanian government is considering ways to make sukuk issuance possible in the country.
  

Wakala enters Europe, Transparency in Islamic finance, new public fund and other news

EIIB offers Wakala

The European Islamic Investment Bank (EIIB) will offer wakala, a product used in the Middle East, but not yet in Europe, is similar to a money market account where deposits are used in investments and a commission and a share of profits are paid to depositors. Using wakala is one way in which the use of murabaha for financing can be reduced from current levels (estimated at 80 percent of all Islamic financial transactions) and the use of equity instruments encouraged.

Central Bank of Bahrain governor calls for transparency in Islamic finance

In another speech, this one give at the Euromoney Islamic Finance Summit in London, the Central Bank of Bahrain governor Rasheed Al Maraj warned of dire consequences for the future of the Islamic financial industry are not created. Mr. Al Maraj described how:

"Investors must clearly understand the nature of the investment they are entering into, including in particular the potential downside risks to their capital. The allocation of costs and the calculation of profits must also be transparent. Furthermore, these must reflect in a fair manner the relative contributions of shareholders and customers. If these areas are not successfully addressed, then certain parts of the industry risk damage to their credibility, which in turn may discredit the industry as a whole."

This movement to increased transparency, with the goal set higher than minimum regulatory standards will do a great deal to safeguard the industry's reputation and increase its credibility as an ethical industry.

Three Middle Eastern banks eye Indonesian Islamic banking market

Three banks, Al Baraka Islamic Bank, Qatar Islamic Bank and Al Salam Bank, plan to expand their operations into Indonesia. This follows moves by Kuwait Finance House to expand into Asian markets through Malaysia.

Dubai Growth Fund (Enmaa') Class A announced

Asset management and investment banking firm 3i Capital Groupannounced the launch of a $100,000,000 Shari'ah-compliant fund, part of an AED1 billion ($272 million) Dubai Growth Fund. The funds will be invested in high growth equities and pre-IPO firms and will follow the guidelines of the Dow Jones Islamic Market Index

Other News

A description of the offering and listing of Dubai Holdings' $2.46 billion sukuk.

UM Financial, DJIM Titans 100 Index ETF, Sukuk standards

Shari'ah-compliant mortgages in Canada

The Toronto Star has a story on a financing company in Canada, UM Financial, that has been offering diminishing partnership mortgage products (musharaka mutanaqisa). The company has partnered with two companies, first the Credit Union Central of Ontario (CUCO), then recently also the McMaster Savings & Credit Union. The Shari'ah board of UM Financial is made up of local Islamic scholars and community leaders.

Increase appetite for risk in IFIs--Rushdi Siddiqi

Rushdi Siddiqi, Director of the Dow Jones Islamic Market Index Group, believes Islamic financial insitutions need to increase their appetite for risk. Mr. Siddiqi believes that Islamic banks need to increase their size in order to achieve the goal of higher appetite for risk.

Dow Jones Islamic Market Titans 100 Index launched

The first Islamic exchange traded fund (ETF) was licensed to be listed on the Swiss exchange. The ETF is issued by BNP Paribas and based on the Dow Jones Islamic Market Titans 100 Index (pdf), an index of the 100 largest companies that comply with the Shari'ah standards of the Dow Jones Islamic Market Index.

IIFM & ICMA to develop sukuk standards

The International Islamic Financial Markets (IIFM) and International Capital Market Association (ICMA) have agreed to cooperate in developing universal standards for sukuk to increase the appeal of the products.