I am a bit tired of writing blog posts about an Islamic mega-bank because it has been so many years of talk with very little to show for it (I called it an 'elusive dream' in my annual predictions at the beginning of 2011). Back in 2007, I presented a quote from an article where Sheikh Nizam Yaquby said that an Islamic mega-bank was needed because there was "no collective efforts are seen at the institutional or regulatory levels
to formulate a strategy on developing liquidity management tools. Well, we are still waiting for the IILM to issue the first global liquidity management sukuk it has planned later this year, and there are others out there, including Islamic repo in the UAE, which are attracting limited interest so far. However, this collective effort seems to be the most likely to succeed so far and I have questions about whether another effort would do as well as one backed by a number of central banks.
Even as late as last summer, there were questions about where an Islamic mega-bank would be headquartered. The most likely location is Bahrain because that is where the headquarters of the Albaraka Banking Group reside. Albaraka is headed by Adnan Yousif, who has been the most public face behind the Islamic mega-bank. However, the civil unrest in that country continues and it is unclear whether it is the suitable location for what is supposed to be a global bank that would represent in some ways the Islamic finance industry. There has also been a notable decline in talk of the mega-bank becoming an Islamic Goldman Sachs after that august investment bank ran into a PR buzzsaw, and its sukuk attracted significant controversy. There was even a name for the Islamic Goldman Sachs, Istikhlaf which the Economist noted was "Arabic for “doing God’s work”.
The size of the Islamic mega-bank has also been adjusted over time as expectations for its founding have moderated. As late as last summer, the bank was expected to start with $10 billion in capital, with plans to raise this to $100 billion in the first 10 years. Recently, this has been paired back to $1 billion, with $600 million coming from Arab Islamic banks and the remaining $400 million being publicly raised.
If the bank were successfully incorporated and raised a large amount of capital, how would it fare? Would it be able to contribute to the Islamic finance industry in a way that other large banks like Al Rajhi Bank cannot? Would it be able to compete effectively with global financial institutions that have Islamic windows or engage in Islamic investment banking? Most importantly, if you have a $100 billion or larger Islamic bank with the Islamic finance industry where it is today (with at most $1.1 trillion in assets), does that institution not represent a systemic risk to the industry (something I pondered last August when the idea generated some media buzz?
I hope to avoid the idea of an Islamic mega-bank until one is actually launched (and to be a mega-bank worthy of my attention, it would have to have a serious likelihood of substantially exceeding the roughly $50 billion in assets of Al Rajhi Bank).
Showing posts with label Goldman Sachs. Show all posts
Showing posts with label Goldman Sachs. Show all posts
Wednesday, May 16, 2012
Thursday, March 29, 2012
A few items that slipped through the cracks
There have been a lot of articles sitting in my feed reader and I won't have time to write more in depth on the topics, but here are the links with quick summaries.
Size of Islamic finance industry
The City UK released its latest annual report on the Islamic finance industry showing the industry has $1.3 trillion in assets. I hope to have more detail on this in another post when I have time to read it.
The Malaysian Islamic finance banking industry reached 22.4% of the country's total at the end of 2011. Despite only having 15% of the outstanding USD-denominated sukuk issuance, it has one of the best developed (i.e. liquid) sukuk market, based on a lot of domestic MYR-denominated sukuk, but still showing that size isn't everything.
Shari'ah standards
A conference participant suggests that investors and advisors should do their own Shari'ah research instead of waiting on a Shari'ah board to provide a fatwa. Not much chance of happening, but interesting to see new perspectives.
Goldman Sachs
Reuters gives the latest update on the Goldman Sachs murabaha sukuk which has attracted a lot of criticism, saying that the Shari'ah advisors have signed off and the ball is in Goldman's court. I offered my perspective on the trading issue with a murabaha sukuk in an earlier post.
IIFM-ISDA
The ISDA press release is available here for the new Mubadalatul Arbaah master agreement.
Australia
The National Bank of Australia is considering a $500 million sukuk issuance, the first from the land down under, as Islamic finance begins to develop in the country.
Hong Kong
HK returns to its work on attracting Islamic finance. Despite expressing a desire to become an Islamic finance and sukuk hub, Hong Kong has not progressed far with the only issue coming from RMB500 million ($79 million) sukuk from Khazanah.
Indonesia
The Indonesian government issued its first 4 series of project-based sukuk, although only the 30 year sukuk received bids accepted by the government. Out of a 2.18 trillion rupiah ($237 million) in total bids, only 355 billion rupiah ($38 million) was accepted, all for the PBS0004 issue due 2037.
Microfinance
A microfinance product that offers a deposit product and interest-free loan program rolled into one. When will Islamic finance get behind Islamic microfinance in a big way?
Size of Islamic finance industry
The City UK released its latest annual report on the Islamic finance industry showing the industry has $1.3 trillion in assets. I hope to have more detail on this in another post when I have time to read it.
The Malaysian Islamic finance banking industry reached 22.4% of the country's total at the end of 2011. Despite only having 15% of the outstanding USD-denominated sukuk issuance, it has one of the best developed (i.e. liquid) sukuk market, based on a lot of domestic MYR-denominated sukuk, but still showing that size isn't everything.
Shari'ah standards
A conference participant suggests that investors and advisors should do their own Shari'ah research instead of waiting on a Shari'ah board to provide a fatwa. Not much chance of happening, but interesting to see new perspectives.
Goldman Sachs
Reuters gives the latest update on the Goldman Sachs murabaha sukuk which has attracted a lot of criticism, saying that the Shari'ah advisors have signed off and the ball is in Goldman's court. I offered my perspective on the trading issue with a murabaha sukuk in an earlier post.
IIFM-ISDA
The ISDA press release is available here for the new Mubadalatul Arbaah master agreement.
Australia
The National Bank of Australia is considering a $500 million sukuk issuance, the first from the land down under, as Islamic finance begins to develop in the country.
Hong Kong
HK returns to its work on attracting Islamic finance. Despite expressing a desire to become an Islamic finance and sukuk hub, Hong Kong has not progressed far with the only issue coming from RMB500 million ($79 million) sukuk from Khazanah.
Indonesia
The Indonesian government issued its first 4 series of project-based sukuk, although only the 30 year sukuk received bids accepted by the government. Out of a 2.18 trillion rupiah ($237 million) in total bids, only 355 billion rupiah ($38 million) was accepted, all for the PBS0004 issue due 2037.
Microfinance
A microfinance product that offers a deposit product and interest-free loan program rolled into one. When will Islamic finance get behind Islamic microfinance in a big way?
Monday, March 19, 2012
Trading murabaha (Arcapita and Goldman Sachs)
There are a lot of areas where criticism has been directed at Goldman Sachs' murabaha sukuk, but one area can probably be dismissed: the listing of the sukuk on the Irish Stock Exchange. The concern is that the sukuk will be traded at values other than par, which is not allowed in most cases (outside of Malaysia where bay' al-dayn or debt trading is permitted).
The argument from Goldman Sachs is that the listing on the Irish Stock Exchange is for "tax mechanism purposes", not for trading according to a Shari'ah scholar quoted by EuroWeek. The prospectus states that the sukuk is not tradable except at par, but this is just a statement from the scholars, not a legally binding part of the prospectus. A spokesperson for the Irish Stock Exchange has also said it "would not be appropriate for an exchange to determine price in the market" (also from the EuroWeek article).
This makes sense, and while not desirable from a Shari'ah perspective, will inevitably be a concern whether or not the sukuk is listed. Arcapita's $1.1 billion murabaha (which the company was not able to roll-over leading the firm to file for Chapter 11 bankruptcy protection) would have contained a similar requirement around trading for Shari'ah-compliant investors, yet it traded a year ago at 76 cents on the dollar and other market data suggests it was trading between 50 and 60 cents a few months ago.
I am not making an argument on Shari'ah grounds here (I am utterly unqualified to make a judgement on such an issue), but on the mechanics of how Islamic finance interacts with the conventional financial system. There is no requirement that Islamic debt be subscribed only by Shari'ah-compliant investors, nor would that make sense. The issuer buys a commodity (or other tangible asset) from the investors at the cost plus a markup and agrees to make deferred payment for the asset. The Shari'ah board reviews the transaction to ensure it complies fully.
An Islamic financial institution which subscribes to the murabaha would hold the debt and could--if it chooses--sell it to another institution, but only at par (something its own Shari'ah board would oversee and sign off on). However, the other investors who are not required to be Shari'ah-compliant are freely able to trade that receivable to other conventional investors at whatever price they decide is fair (if they were to sell to an Islamic financial institution, the buyer's Shari'ah board would likely determine that the purchase must take place at par).
The murabaha issued to conventional investors is subject only to the law chosen that governs it (e.g. English or New York law is most common) and the post-sale transactions with non-Islamic investors would be governed by whatever securities laws apply to the buyers and sellers. It would be inappropriate and impossible to have Shari'ah scholars ruling on the transactions between two parties who do not subject themselves to remaining Shari'ah-compliant. Nor would transactions at prices besides par make the rest of the issued murabaha not Shari'ah-compliant.
Returning to the Goldman Sachs sukuk, there are other more pressing issues for potential Islamic investors than the tradability of the sukuk. For example, the use of proceeds and the ability of a non-Shari'ah-compliant institution to fund its non-compliant businesses using Islamic financial products.
The argument from Goldman Sachs is that the listing on the Irish Stock Exchange is for "tax mechanism purposes", not for trading according to a Shari'ah scholar quoted by EuroWeek. The prospectus states that the sukuk is not tradable except at par, but this is just a statement from the scholars, not a legally binding part of the prospectus. A spokesperson for the Irish Stock Exchange has also said it "would not be appropriate for an exchange to determine price in the market" (also from the EuroWeek article).
This makes sense, and while not desirable from a Shari'ah perspective, will inevitably be a concern whether or not the sukuk is listed. Arcapita's $1.1 billion murabaha (which the company was not able to roll-over leading the firm to file for Chapter 11 bankruptcy protection) would have contained a similar requirement around trading for Shari'ah-compliant investors, yet it traded a year ago at 76 cents on the dollar and other market data suggests it was trading between 50 and 60 cents a few months ago.
I am not making an argument on Shari'ah grounds here (I am utterly unqualified to make a judgement on such an issue), but on the mechanics of how Islamic finance interacts with the conventional financial system. There is no requirement that Islamic debt be subscribed only by Shari'ah-compliant investors, nor would that make sense. The issuer buys a commodity (or other tangible asset) from the investors at the cost plus a markup and agrees to make deferred payment for the asset. The Shari'ah board reviews the transaction to ensure it complies fully.
An Islamic financial institution which subscribes to the murabaha would hold the debt and could--if it chooses--sell it to another institution, but only at par (something its own Shari'ah board would oversee and sign off on). However, the other investors who are not required to be Shari'ah-compliant are freely able to trade that receivable to other conventional investors at whatever price they decide is fair (if they were to sell to an Islamic financial institution, the buyer's Shari'ah board would likely determine that the purchase must take place at par).
The murabaha issued to conventional investors is subject only to the law chosen that governs it (e.g. English or New York law is most common) and the post-sale transactions with non-Islamic investors would be governed by whatever securities laws apply to the buyers and sellers. It would be inappropriate and impossible to have Shari'ah scholars ruling on the transactions between two parties who do not subject themselves to remaining Shari'ah-compliant. Nor would transactions at prices besides par make the rest of the issued murabaha not Shari'ah-compliant.
Returning to the Goldman Sachs sukuk, there are other more pressing issues for potential Islamic investors than the tradability of the sukuk. For example, the use of proceeds and the ability of a non-Shari'ah-compliant institution to fund its non-compliant businesses using Islamic financial products.
Saturday, February 25, 2012
Should conventional banks be prohibited from issuing sukuk?
There are two developments in Islamic finance that motivate this post. First, as I discussed on the blog (and in greater depth in my newsletter, which you can sign up for on the right side of the blog), the Qatar Central Bank's directive requiring conventional banks with Islamic windows went into effect, with the added stipulation that conventional banks are prohibited from investing in sukuk in the country. Secondly, the controversy around Goldman Sachs' sukuk program has led to questions about whether sukuk issuance by conventional banks leads to the financing of non-Shari'ah-compliant activities.
A recent article quotes Badlisyah Abdul Ghani, the chief executive of CIMB Islamic, a large Malaysian Islamic bank (an Islamic window at CIMB Bank), who said: "A conventional bank, with the exception of multilateral development banks like the World Bank and the Asian Development Bank, should not be allowed to issue sukuk". I have heard from other people in the industry, contrary explanations that the issuer's activities are not relevant for whether they can issue a sukuk, because investors are not investing in the equity of the company, and therefore they are not generating income from non-Shari'ah-compliant activities. While I accept the premise of the latter argument, I find it a bit too cynical to be convincing to many people not involved in the day-to-day activities of the industry.
But, back to Mr. Ghani's comments, I think that limiting issuance to Islamic banks and other companies (would a company be allowed to issue sukuk if one of its subsidiaries provided conventional financial services) is counterproductive because it limits the potential for growth of the industry. However, that is not the only consideration. The main point of contention with the Goldman sukuk was that there was no separation between the proceeds from the sukuk and the rest of the bank, nor were there specific assets which would be financed by the sukuk proceeds. Had there been a building that was owned by Goldman sold to an SPV and an ijara sukuk were issued (assuming Goldman has buildings it owns that house other businesses that are not conventional banking), there would probably be little in the way of criticism.
However, this comparison raises another issue: how can it be Shari'ah-compliant to finance a conventional bank by buying one of it's buildings and renting that building back and not by selling a commodity to the bank, with repayment of principal plus profit deferred? There is merit to this question because money is fungible (i.e. once the proceeds from the sukuk go into the company, they become indistinguishable from the other money held by the company). However, the whole way that Islamic finance has developed--right or wrong--is by separating investor's money from non-Shari'ah-compliant activities (using an SPV, for example). The criticism that Islamic finance is just adding layers (with added cost) is a criticism of the industry (for example, from Mahmoud El-Gamal).
The discussion at this point does not have a clean conclusion that I can point to and say X is ok, but Y is not. It is, instead, a starting point for further discussion about what Islamic finance is meant to achieve and whether the idea of strict literalism in viewing the construction of sukuk and other Islamic finance products. I think strict literalism is not useful, because it allows people to rely entirely on the form of a product and removes any grounds for intent to be considered by Shari'ah scholars (which, it has been pointed out widely, is an important consideration in terms of whether a product is Shari'ah-compliant or not). Hopefully now, we can get beyond the mechanical arguments about whether a product like Goldman's sukuk is Shari'ah-compliant or not and look deeper into how Islamic finance should be developed.
A recent article quotes Badlisyah Abdul Ghani, the chief executive of CIMB Islamic, a large Malaysian Islamic bank (an Islamic window at CIMB Bank), who said: "A conventional bank, with the exception of multilateral development banks like the World Bank and the Asian Development Bank, should not be allowed to issue sukuk". I have heard from other people in the industry, contrary explanations that the issuer's activities are not relevant for whether they can issue a sukuk, because investors are not investing in the equity of the company, and therefore they are not generating income from non-Shari'ah-compliant activities. While I accept the premise of the latter argument, I find it a bit too cynical to be convincing to many people not involved in the day-to-day activities of the industry.
But, back to Mr. Ghani's comments, I think that limiting issuance to Islamic banks and other companies (would a company be allowed to issue sukuk if one of its subsidiaries provided conventional financial services) is counterproductive because it limits the potential for growth of the industry. However, that is not the only consideration. The main point of contention with the Goldman sukuk was that there was no separation between the proceeds from the sukuk and the rest of the bank, nor were there specific assets which would be financed by the sukuk proceeds. Had there been a building that was owned by Goldman sold to an SPV and an ijara sukuk were issued (assuming Goldman has buildings it owns that house other businesses that are not conventional banking), there would probably be little in the way of criticism.
However, this comparison raises another issue: how can it be Shari'ah-compliant to finance a conventional bank by buying one of it's buildings and renting that building back and not by selling a commodity to the bank, with repayment of principal plus profit deferred? There is merit to this question because money is fungible (i.e. once the proceeds from the sukuk go into the company, they become indistinguishable from the other money held by the company). However, the whole way that Islamic finance has developed--right or wrong--is by separating investor's money from non-Shari'ah-compliant activities (using an SPV, for example). The criticism that Islamic finance is just adding layers (with added cost) is a criticism of the industry (for example, from Mahmoud El-Gamal).
The discussion at this point does not have a clean conclusion that I can point to and say X is ok, but Y is not. It is, instead, a starting point for further discussion about what Islamic finance is meant to achieve and whether the idea of strict literalism in viewing the construction of sukuk and other Islamic finance products. I think strict literalism is not useful, because it allows people to rely entirely on the form of a product and removes any grounds for intent to be considered by Shari'ah scholars (which, it has been pointed out widely, is an important consideration in terms of whether a product is Shari'ah-compliant or not). Hopefully now, we can get beyond the mechanical arguments about whether a product like Goldman's sukuk is Shari'ah-compliant or not and look deeper into how Islamic finance should be developed.
Subscribe to:
Posts (Atom)