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?

Khazanah's renminbi-denominated sukuk

Malaysian sovereign wealth fund Khazanah is reported to be considering a renminbi-denominated sukuk, the first denominated in renminbi.  According to the FT, the sukuk would be focused on investors looking for RMB-denominated assets, rather than primarily at Islamic investors, which is an interesting strategy given that there are many investors holding RMB as a result of trade with China that they have few places to invest since the RMB is not freely convertible.

One part of the article which I find unconvincing is that "Islamic finance lawyers in Hong Kong and Dubai say that even if the offering by Khazanah is successful, the deal may have limited carry-over to the Gulf market, where bonds, to be compliant with Islamic law, often need to be structured differently from sukuk sold to Malaysian Islamic investors".

While there are differences between the Shari'ah standards used in the GCC and in Malaysia, those differences have been narrowing as Malaysia attracts funds and issuers from the GCC into its sukuk market.  For example, Al Rajhi Bank and Cagamas launched a sukuk program (Sukuk ALIM) that is acceptable both in Malaysia and in the GCC and a number of GCC-based companies have issued Ringgit-denominated sukuk in Malaysia.

The move into RMB-denominated sukuk will likely be slow because of the newness of that market, but it could provide a way for Islamic issuers to find a new market for their sukuk and introduce the concept to investors who are not already familiar with sukuk.  However, this could also be a distraction away from the challenges of developing uniform structures for the basic sukuk structures, which should be the base for growth in the size and liquidity of sukuk secondary markets. 

DIFC Investments, Other News

JP Morgan said the government of Dubai may have to convert its $1 billion loan to DIFC Investments into equity, as well as make an equity investment in the company. The report also upgraded DIFC Investments' $1.2 billion mudaraba sukuk maturing in 2012 from "underweight" to "neutral" based on "improved asset coverage". Other analysts believe the rally--the sukuk rose in price to 79.15 (yielding more than 13%) --has gone to far in DIFC sukuk, as well as other Dubai-related sukuk.

Other News

• Gulf Finance House was able to roll over $100 million in debts for two years, with an option to extend it by another year.
  
• Standard Chartered is expanding its Islamic finance business. The bank recently launched a product that will allow for hedging against fluctuations in commodity prices.
  
• Bloomberg has a list of upcoming sukuk. Many new sukuk are coming from Asia including Hong Kong and Singapore, although regulatory challenges remain.
  
• The Houston Chronicle interviews Monem Salam on the Amana Funds.
  
• Moody's placed Dar Al-Arkan's credit rating (and the rating on its sukuk) on review for possible downgrade.
  
• Islamic finance has become as closely watched as celebrities, according to Lahem Al-Nasser.
  

Islamic retail banking in the West: Can the US provide an example?

There are a number of articles about the challenges facing the Islamic finance industry that caught my eye in the last couple days but none challenge the conventional wisdom as much as an article from Bloomberg that Islamic banks or conventional banks Islamic windows in the UK have been set back substantially by the recession. Further, there may be too many banks (22) chasing too small a market ($19 billion versus $93 billion in Malaysia). Another article in the Independent focuses on the withdrawal or shrinkage of retail Islamic finance at large banks in the UK. One of the areas where the Bloomberg article flies in the face of conventional wisdom is that the UK government has not supported the Islamic financial industry sufficiently. This contradicts the widely held view that the UK is preeminent among non-Muslim-majority regions in both its level of development and the scope of government support. As much as this challenges these ideas, there is a caveat that is not mentioned in the article: it is mostly focused on the domestic market, not the participation of UK-based banks in the global Islamic finance industry. However, it does set back the idea that Islamic banking can become a widely accepted subset of the domestic financial industry in non-Muslim-majority countries with sizeable Muslim minorities.

On the scale that Bloomberg is looking, there probably is not a large enough market that can easily be penetrated by large institutions and the one solely retail focused and Shari'ah-compliant institution, the Islamic Bank of Britain represents too small a sample to generalize about the prospects for smaller institutions. In this regard, the United States may provide an example of how Islamic banking can be feasible without participation from large conventional banks. The US market--for reasons of regulation and geographical concentration of the Muslim population--has no product availability among the large banks, but under the radar exist community banks, credit unions and non-bank financial companies that provide Islamic financial services. This may be the maximum size that is profitable currently in countries without sizable Muslim populations and that should be recognized as a success. Although the headlines are drawn by the largest and the newest products and institutions, having financial institutions that recognize the value of remaining small enough to serve their customers and avoid overexpansion is a virtue in itself. Not all areas in the U.S. have remained under the radar. For example, the Amana mutual funds have grown over the past decade and two of the funds are the largest Islamic equity funds in the world, in large part because they have transcended their natural market and attracted non-Muslims based on their performance.

Areas of the Islamic financial industry that are not yet able to attract significant non-Muslim participation but are able to avoid growth-at-any cost may not make the headlines, but the experience of the Amana Funds shows that this is not necessarily a failure. The Amana Funds remained small for many years before starting their rapid growth at the beginning of the last decade. Their growth was "supply-driven"; it was "demand-driven" based on their ability to provide a service demanded by consumers both Muslim and non-Muslim based on its performance. There cannot be a direct analogy that could work elsewhere in non-Muslim majority countries, but the contrast could provide lessons for other non-Muslim-majority countries with aspirations to develop a domestic Islamic finance market. Maybe the next decade will be the decade for retail banking.

Other News

• Rushdi Siddiqui has two great articles in Gulf News. In one article he suggests: "For Islamic finance, a lack of Muslim inclusion should be a greater concern than lack of standardisation. When we speak of convergence, it may well entail technology (mobile phone) and banking for the non-bankable Muslims. Hello, is Islamic finance listening at the other end?". In the other, he interviews Dr. Mohammad Nedal Al Chaar, the Secretary-General of AAOIFI.
  
• As the Islamic finance industry grows in Canada, the Rotman School of Management at the University of Toronto is the first to offer a course on the subject for MBA students.
  
• Saudi Binladin Group sold a short-term sukuk with a maturity of 9 months for $187 million (SAR700 million). Most sukuk have a tenor between 3 and 7 years.
  
• Sukuk sales in 2010 are expected to be $23-$25 billion according to a poll by Reuters. This was close to the $23.3 billion issued last year and lower than a poll conducted in April which forecasted $28 billion in sukuk sales. Asa Fitch wrote a good article in The National about the growth of the sukuk market and the rapid decline during and after the financial crisis.
  
• Even after a four-month rally, the yields on Nakheel's sukuk are twice as high as 2007. A credit analyst at S&P in Paris, Mohamed Damak who also is co-chair of the Islamic finance working group for S&P points to this as evidence that the market is still hard to access for real-estate-based companies.
  
• Kazakhstan has resumed planning for its first sukuk, which is not expected soon and will likely be an ijara sukuk of roughly $300 million. There are a number of regulatory issues that need to be dealt with.
  
• Russian bank Vneshtorgbank (VTB) has also resumed work on a sukuk issuance and "a range of other Islamic financial products". The Association of Regional Banks of Russia established a task force on Islamic financial institutions.
  
• An article in Arab News describes the backlash facing Islamic banks in South Africa over high fees. However, the criticism of the high fees are not limited to Islamic banks.
  
• A report about Islamic banking in Indonesia was released recently.
  
• The Saudi Electric Company is planning a fourth sukuk. The timing, size and pricing are yet to be determined.
  
• Abu Dhabi Ports Company is considering a bond or sukuk of up to $1 billion in early 2011.
  
• Bermuda is trying to attract the Islamic finance industry following a trip by the CEO of the Bermuda Stock Exchange to Bahrain.
  
• An opinion piece in China Daily by the program director of the University of Hong Kong SPACE on the development of Islamic finance in Hong Kong, including the areas where it is being held back, particularly in human capital.
  

ShariaUMEX, more TID and Nakheel, wadiah-based retakaful, Islamic Repo 105?

A new Islamic exchange will be launched in London in May, the Shariah Ummah Information Exchange (UMEX). The exchange will be open to companies with at least GBP 20 million ($31 million) seeking to raise up to 20% of their market value. It will operate as a Multilateral Trading Facility (MTF) according to the chairman of Halal Industries, which will manage the exchange. MTFs are low-cost electronic trading platforms under the Markets in Financial Instruments Directive (MiFID). The ShariaUMEX expects to have 10 enterprises and 100 securities listed when it launches and hopes there will be 100 IPOs within a year. The exchange will launch Islamic equivalents to American and Global Depository Receipts (ADRs and GDRs). The primary question I have about the exchange is whether it can provide exchange listing at a similar cost to larger exchanges like the London Stock Exchange and related AIM. Presumably, the companies listed on the exchange will be subject to the same standards of reporting and transparency as other exchanges. One of the largest challenges will be whether the exchange can attract sufficient liquidity to allow relative efficiency in pricing which is necessary to attract future listings. There is certainly some minimum level of trading and listing that the exchange has to reach in order to get to a 'critical mass' where it will attract further listings.

The analysis of the TID v. Blom Bank case continues. An article in the National which continues their solid coverage of Islamic finance describes several areas where the decision could impact the Islamic finance industry as a whole. One area is the increasing Shari'ah risk in UK courts allow TID to argue that a product was not Shari'iah-compliant and therefore outside of its corporate power to enter into despite a ruling by its own Shari'ah board approving the product at the time. Generally, the ability of secular courts too enforce decisions based on religious rulings is a negative because they do not have the expertise to make a ruling in this area. The decision of a Shari'ah board that a given product is Shari'ah-compliant should be what determines whether the company can enter into it. If this is changes so that ex post, the bank can argue in a secular court that a contract is not Shari'ah-compliant for nearly any contract it has entered into if it is in financial difficulties. This erodes the role of the Shari'ah board as the arbiters of what is or is not Shari'ah-compliant. Shari'ah boards should be given the exclusive authority to judge Shari'ah-compliance of a given contract and be allowed to force an institution to change its implementation of a Shari'ah-compliant contract if it is doing os outside of the bounds of the original fatwa. The secular courts, on the other hand, should be limited to judging whether the specific aspects of the contract have been followed, not whether it is Shari'ah-compliant or not. The claim by the TID that the contract was not Shari'ah-compliant because it stipulated a fixed rate of return is another separate issue that Shari'ah scholars can discuss and highlights the problematic nature of some contracts which mimic conventional products, but that is a whole other area of discussion.

Reuters weighs in with an article on the Nakheel debt problems saying that the crisis and eventually a resolution could strenghten Islamic finance by forcing the industry to deal with issues raised by the near-deafult. It has also forced investors in the Nakheel sukuk as well as others looking on to consider the limitations that a sukuk may provide in terms of creditor protections compared with a conventional bond.

Another very interesting article in The National discusses whether accounting tricks like Lehman's Repo 105 transactions could come out and bite Gulf-based financial institutions that use similarly misleading transactions. The National reports: "The [anonymous] accountant noted the example of companies issuing sukuk, which may not transfer all of the downside risk attached to an underlying asset to the bondholder. Neither does that risk appear on the balance sheet of the issuer." This is most likely referring to an ijara, mudaraba or musharaka sukuk where the asset underlying the sukuk is transferred to the SPV issuing the sukuk certificates. I am not knowledgeable enough about accounting under IFRS to make a judgement on the accounting treatment of these sukuk, but it would not surprise me if the assets underlying these sukuk were not included on the balance sheet of the issuer (with the beneficial interest transferred to the off-balance-sheet SPV). This would make it appear that there is no asset on the balance sheet that could lose value and cause the issuer a loss. There are only the debts payable to the SPV (which would then pass them on to the certificateholders). However, if the asset loses significant value, then under most sukuk structures, the bank would be forced upon maturity to repay the principal through the purchase undertaking and take a possibly depreciated and depreciating asset back onto its balance sheet. When this event occurred, the outcome would be the bank paying the par value to redeem the sukuk and receiving an asset on its balance sheet that it would probably have to immediately write down to a fair value from the purchase price, which would cause a loss. I would be grateful if any reader more skilled in IFRS accounting could enlighten me on the subject so I could provide a more accurate assessment on the potential pitfalls of sukuk structures that are described by the accountant in the National article.

The International Shari'ah Research Academy (ISRA) has developed, although not yet released, a model for wadiah-based retakaful, which would clarify who owns what in the fund better than the mudaraba or wakala model, according to ISRA. The way it would work is that takaful providers would contribute to a fund that is managed by the retakaful provider. The funds would be invested and the retakaful provider would receive an agency fee and also be liable to pay claims from the participants. In the case that there is a profit on the investments after claims were paid, the profits would be retained by the retakaful provider and any surplus amount in the account (of contributed amounts) would be owned by the participating firms. The retakaful company is able to keep the profits from the investments, so long as the claims are paid to the takaful firms contributing capital, but the difference between contributions paid and claims paid remains owned by the participants, which should reduce the incentive for the retakaful provider to invest too aggressively, because it is forced to return to participants the difference between the contributions made and the claims paid. If it recognizes substantial losses on its portfolio and there is a surplus of contributions, it would be forced to return those funds to the participants, even if its investments lost money.

With all deference to Dr. Hussein Hamed's expertise, I have to disagree strongly with his statement at the Dubai Peace Convention that "Currency value has become interest-based and, therefore, when the crash happened, the only monetary system that was not affected was the interest-free Islamic system." The idea that the Islamic financial system, either in its theoretical form or in how it is actually practiced today is somehow insulated from economic cycles is just not true. The system is operated by people, often with noble intentions, but it is just as susceptible to crisis and recession as any other economic or financial system. The degree to which it can be decimated by poor decisions through over-leveraged financial products like credit default swaps and collateralized debt obligations may be avoided. However, the problem of, for example, overbuilding in Dubai, some of which was financed through Islamic financial products (Nakheel's sukuk, for example) cannot be avoided simply by replacing the conventional financial system with an Islamic one. Human nature being what it is will always create excesses one way or another, although the Islamic restrictions may limit some of the more harmful excesses. If anything, the Islamic financial system should be more, not less, dependent upon the economy cycle because it is supposed to be based on real tangible assets and profit and loss sharing. How many sukuk need to default and financial institutions fail or nearly fail to demonstrate that a severe economic recession can take its toll on the Islamic financial system?

Other News

• Malaysia is considering offering long-term sukuk to provide investment opportunities for takaful firms to reduce their reliance on equity and real estate investments.
  
• Hong Kong will change its laws to allow sukuk issuance. Hong Kong's financial secretary John Tsang also said "We're also enhancing market infrastructure and product development and educating market participants and investors in raising the profile of Hong Kong as an Islamic finance platform".
  
• An announcement on the fate of Amlak Finance and Tamweel is expected soon. The likely outcome will be a merger into an Islamic bank that will receive government support. The reports do not describe whether the new bank will be able to restart lending, or whether it will simply wind down the two companies in the least costly way, although there is no indication that this is the likely outcome.
  
• The United Arab Bank launched its Islamic banking unit on March 17th.
  

Islamic and ethical finance, Nakheel sukuk, sukuk markets

The CEO of Noor Islamic Bank highlighted the opportunity for Islamic banking to compete with conventional banking in the wake of the financial crisis. He suggested that the financial crisis has created additional demand for ethical and more risk averse financial services, which would benefit Islamic finance. I think that Hussain Al Qemzi, the CEO, is making an important point for the Islamic finance industry by recognizing the two selling points for Islamic finance, especially if it is going to be able to attract non-Muslim customers, is the ethical framework (which has many similarities to the ethical/sustainability-focused mindset that goes beyond just Muslims) and the relatively more risk averse structure of Islamic finance. A focus on these areas could assist Islamic financial institutions in expanding outside of the main areas where Islamic finance exists.

The Nakheel sukuk is now trading above the redemption value on maturity, reflecting the additional premium payable to sukuk holders if there is no qualified public offering before the sukuk matures. This also reflects confidence that the sukuk will be redeemed in full upon maturity, which has been a longstanding concern given the property market collapse in Dubai since the sukuk was issued. Nakheel is currently in talks with Dubai World, which has guaranteed the sukuk that mature in December. Bloomberg also has an article on the subject.

The sukuk market has rebounded by about 40% compared to the first ten months of 2008. However, the issuance has been mostly by sovereign or government-related entities (GREs). This means that the credit quality of new issues has improved, which Moody's believes is a positive because it will help develop a "more detailed yield curve" which will benefit corporate issuers in the future. However, the lack of many corporate issuers, besides the most highly rated issuers like Saudi Electric Company (which was forced to pay far more than their sukuk of 2007) is potentially problematic for the market. Without a variety of issuers across the credit ratings scale, there will be few opportunities for companies to enter the market and the continued growth in the market will be limited. Only time will tell whether this persists, but the first signs of a rebound in the corporate sukuk area should come from the secondary markets. If trading of listed corporate sukuk becomes more liquid, it may begin to entice new issuers into the market.

Islamic Finance Resources, another blog, has some great material posted up and one of the recent is a collection of webcasts and podcasts on Islamic finance. This site is definitely recommended as a source of invaluable resources on Islamic finance.

Other News

• Sukuk could be the new alternative investment in the wake of the financial crisis which saw risky investments take large hits because of its more conservative structure.
  
• Indonesia will not pay higher yields on sukuk than conventional bonds. This comes following investor demand for higher yields on several recent sukuk auctions.
  
• SWIFT is working with Path Solutions on a financial messaging system for the Islamic banking industry.
  
• Swiss company Sarasin is launching an Islamic wealth management unit.
  
• QInvest and Fortis Bank are launching a Shari'ah-compliant ship financing fund.
  
• Indonesian company Mitra is issuing a 200 billion rupiah ($21.4 million) sukuk along with a conventional bond.
  
• Pakistan is considering issuing a sovereign sukuk.
  
• Bank Negara Malaysia governor Dr. Zeti Akhtar Aziz gave a speech highlighting the prospects of Islamic finance integrating into the international financial system. She also highlighted in another speech the ability of Islamic finance to deal with the risks to the Islamic financial system.
  
• UBS is planning to expand to offer Islamic derivatives to help clients hedge risks, reports Reuters.
  
• DIFC and bankers in London are discussing partnerships and new opportunities. A conference held by UK Trade & Investment will discuss the effects of the credit crisis on Islamic finance.
  
• France may also look to Malaysia for guidance on developing its Islamic financial industry. Australia may also become a source of sukuk based on its natural resource wealth, according to the deputy governor of the Malaysian central bank.
  
• Hong Kong continues to move forward on its plans to attract Islamic finance with proposed tax changes to level the playing field for sukuk.
  
• The FT discusses the attention paid to Islamic finance following the financial crisis.
  

Tuesday news bullets

• Dubai repays the $1 billion Dubai Civil Aviation Authority sukuk that matured on November 4th with proceeds from the $1.93 billion sukuk issued last week.
  
• A report from Moody's says that sukuk issuance in the first 10 months of 2009 exceeded the same period in 2008 by 40%, although the sukuk market is dominated by government-related entities.
  
• The Investment Dar's Bahrain unit extended its standstill agreement according to a statement by the Investment Dar Sukuk Co on the Bahrain stock exchange. It is unclear whether the Investment Dar's standstill agreement was also extended.
  
• Al Baraka Bank Syria's IPO was heavily oversubscribed
  
• Two applications from foreign banks to receive Islamic banking licenses in Malaysia are being processed according to the Deputy Finance Minister. It is part of a liberalization planned that will expand the opportunities for foreign investors in Islamic financial institutions.
  
• Malaysia's Securities Commission signed an agreement about cooperation with the regulators in Hong Kong and Singapore.
  
• A conference in New Jersey focused on how corporate America can market to the Muslim market in the country.
  
• Uganda's regulators are learning more about Islamic finance in preparation of a review of the country's laws and how Islamic finance could fit into them.
  
• In the wake of a successful $2 billion sukuk issuance, the 'shut-up' heard round the world. The Emirate's leader Sheikh Mohammed Bin Rashid Al-Maktoum expects the second tranche of $10 billion in bonds to be 'well received' and dismissed critics who wonder whether Dubai will be supported by the rest of the UAE, and particularly Abu Dhabi.
  

Investment Dar, zakat fund, SRI and Islamic finance, IBB sees wider loss, France not ready for Islamic banks

The Investment Dar is making progress with its creditors having reached a Standstill Agreement, which will postpone the claims by its creditors as part of its restructuring plan. There is not yet final resolution of the $100 million sukuk which the Investment Dar defaulted on, but the Standstill Agreement is a step on the way to a possible resolution.

A zakat fund managed by BMB Islamic is nearing launch. However, the fund has generated some controversy from Shari'ah scholars who argue that zakat is meant to be distributed to the needy and not invested.

A publication bringing together the contributions of 19 lawyers will explain the legal and Shari'ah aspects of Islamic finance will be published by Chancellor Publications. It was edited by Humayon Dar and Umar Moghul.

The BBC has an article on Islamic finance, one which describes the growth of Islamic finance, particularly in the U.K. following 9/11 when investing in the U.S. became more difficult and was perceived as having additional riskiness.

There is an interesting article from Gulf News about the differences between ethical investing and Islamic investing. While there are similarities in many of the screens used by Islamic and socially responsible investment funds, there are differences that may make some Shari'ah-compliant investments not pass other ethical screens, primarily those around environmental issues because Islamic indices have an overweighting in energy companies which often are not the most green.

Dr. Abbas Mirakhor warns that Islamic finance can face systemic failure and reputation risks because it is not well enough regulated internationally and in some countries. He was speaking at the Malaysian Securities Commission and said that the Malaysian system had the most advanced regulatory system for Islamic financial industry that could serve as a model. He also spoke about the potential for a food and commodity crisis. At an Islamic Financial Services Board seminar, Dr. Zeti Akhtar Aziz, the Bank Negara Malaysia governor said that the Islamic financial industry has been resilient and continues to grow and innovate with new products. However, there remain gaps in the legal framework, Shari'ah standardization and and Islamic financial products face different risks from conventional products. A prominent scholar Mohamed Akram Laldin says that Shari'ah scholars should be held accountable for "clear mistakes in their decisions".

The Islamic Bank of Britain saw its loss widen as the economic conditions and the low benchmark interest rates hurt the profitability of their increased deposits. The bank says it may need to scale back its growth unless it raises additional capital in order to continue its compliance with prudential capital requirements.

The head of France's central bank, Christian Noyer, says that the country is not yet ready to issue an Islamic banking license yet because of concerns over safety and soundness. The French Central Bank, which does not control monetary policy following the foundation of the European Central Bank, has been approached by several institutions looking to establish Islamic banks in the country, but does not yet have the same level of knowledge and familiarity with Islamic banking as the U.K. regulator, the Financial Services Authority.

The lising of sukuk from Petronas and Cagamas could signal the continuing growth in the sukuk markets following the credit crisis. In the wake of the credit crisis as the effects spread globally throughout the financial markets and economies, the issue of new sukuk nearly completely dried up compared to 2007 when a record amount of sukuk were issued.

Other News

• Jamelah Kamaluddin becomes the first woman to head an Islamic bank with her appointment last year as the managing director of RHB Islamic Bank.
  
• South Korea is offering tax incentives to promote the use of sukuk and has changed regulations to ensure that the profits for sukuk holders receives the same tax exemptions as interest payments on conventional bonds.
  
• Kuwait Energy received a $50 million murabaha financing from the World Bank Group's International Finance Corporation.
  
• An article discusses Islamic ETFs, including the recently launched, U.S.-based Javelin ETF, which has not turned interest in it yet into significant trading volume. The ETF market in the U.S. will be broadened with the launch of 2 new funds from ShariahShares, managed by California-based Florentz Investment Management.
  
• Bloomberg will focus on Islamic finance in its expansion in the GCC.
  
• The Muslim Community Cooperative Australia launched another fund, an Income Fund, following its launch of a Mortgage Income Fund.
  
• Bank Negara Malaysia, the Malaysian central bank, has signed an agreement with the Hong Kong Monetary Authority to cooperate on financial issues particularly Islamic finance.
  
• The National Bank of Kuwait launched its third Kuwaiti Dinar-denominated Ijara Fund.
  
• Malaysian firm Sime Darby will issue RM4.5 billion ($1.3 billion) in medium-term Shari'ah-compliant notes
  
• The report I wrote for Yasaar Media is briefly described in a press release available from AMEinfo.
  
• Ernst & Young is organizing a conference on Islamic finance in the Channel Islands. Islamic retail banking executives and Shari'ah scholars will meet for a conference in Dubai on October 12 to discuss the future of the industry.
  

Catch up from a busy week

• The Asian sukuk market has rebounded slightly in 2009 as a few sovereign issuers, including Indonesia and Malaysia's government and the Monetary Authority of Singapore have issued sukuk. There are a few other soverign sukuk issues planned this year that could include Tailand and China as well as additional issues from Singapore, the first issue by a government entity in Hong Kong and regular issuance by Malaysia.
  
• The 2009 budget for the UK includes taxation changes that provide relief for sukuk from stamp duty for the transactions involved in transferring land between the financer and the SPV. The government had considered issuing a sovereign sukuk, but those plans remain on hold but could come at the end of 2009 or beginning of 2010 at the earliest.
  
• A new provider of Islamic home finance was authorized by the FSA in the UK. The newest company is Pink Home Loans.
  
• Al Baraka Banking Group, the Bahraini-based Islamic bank that is spearheading the new mega-Islamic bank is planning to launch an Islamic bank in France. The CEO Adnan Yousif indicated on CNBC Arabiya that French regulators have expressed interest in the bank's plans to start an Islamic bank in France.
  
• The Central Bank of Bahrain issued BD6 million ($15.9 million) more Al-Salam 91 day maturity sukuk for which there were more than BD25m (a bid-to-cover ratio of 4.17).
  
• The Houston Chronicle has an article on Islamic home finance which also provides a criticism of the Islamic home finance from Dr. Mahmoud El-Gamal.
  

Comments from a scholar and legal rulings in Malaysia on Islamic finance products wa'ad and BBA

A Malaysian Shari'ah scholar says that a promise (waad) made in an Islamic financial transaction is not legally enforceable but said that the other party may be entitled to compensation for the unfulfilled promise. Waad are used in the context of several different products like murabaha and istisnaa. The scholar, Abdulazeem Abozaid, also criticised the Malaysian stock exchange plans to allow Shari'ah-compliant short selling. He said, "First of all, you are selling things that you don't own. Secondly, you're borrowing shares and in return for borrowing, you will be charged some money so it's a conventional loan." A Malaysian appeals court also ruled that the controversial financing product bai bithaman ajil (BBA) is valid. The contract is widely used in Malaysia but is viewed as a disguised loan in many other regions.

Badlisyah Abdul Ghani, CEO of CIMB Islamic Bank, continues his call for increased regulation of the Islamic finance industry to protect it against further problems and deal with 'internal contradictions' caused by standards that vary widely across jurisdictions.

Other News

• The Sacramento Bee has an article about Islamic finance that is interesting although some of the claims that Islamic finance could prevent the recession are questionable, as I have described in previous posts.
  
• HSBC Amanah received approval from the Hong Kong Monetary Authority to issue sukuk.
  
• University Bank in Michigan received a cease-and-desist order from the FDIC relating to compliance issues at the bank that the bank says have already been addressed. None specifically mentioned the bank holding company's Islamic banking subsidiary.
  
• The Islamic Bank of Britain is attempting to broaden its client base outside of the group of clients who will be drawn by their faith by describing their product's price competitiveness. The commercial director at the IBB describes: "The bank is open to customers of all faiths, so my call to UK homebuyers and homeowners is to put any misapprehensions to one side and come and find out how a Home Purchase Plan from IBB can really make a difference to your pocket."
  
• Fitch cut its rating on Kuwait Finance House due to its exposure to other GCC investment banks. Other investment banks, including a few Islamic banks, have run into trouble in the economic crisis.
  
• The latest Central Bank of Bahrain al-salam sukuk was significantly oversubscribed.
  

New funds, backlogged sukuk, Hong Kong almost ready with tax changes for Islamic financial products

HSBC Amanah plans to make its equity funds available in the UK. The description of the funds are "active quant" funds. Quant funds typically aim to capitalize of small, short-term arbitrage opportunities using complicated computer models. It is unclear how this type of investment strategy was approved by Shari'ah scholars because it is in some ways highly speculative (probably would raise questions of whether it resembles maysir, or gambling). There are probably ways that this can be explained away, but whether or not they are satisfactory for many investors is unclear.

Other News

• A lecture at Wesleyan University focused on Islamic finance and was given by the Muslim chaplains from Harvard University.
  
• Malaysia and the UAE were the top sources of sukuk issuers in 2008.
  
• Indonesia's retail sukuk raised Rp 5.6 trillion ($467 million).
  
• Hong Kong's government is in the last stages of finalizing tax law changes to encourage Islamic finance by placing it on equal footing with conventional financial products.
  
• Asian Finance Bank, the Malaysian-based Islamic bank sees an opportunity to facilitate South Korean companies' fund raises in the GCC.
  
• There are an estimated 100 sukuk in the pipeline worth up to $38 billion that have not come to market because of the global credit crisis. It is unclear whether the lack of availability of access to capital markets will force some of these companies into bankruptcy or to eliminate expansion plans these sukuk were envisioned to fund.
  

Sukuk volume in 2009: opinions differ

An English online grocery store Ocado received £10 million in financing using Shari'ah-compliant leasing (ijara). Although the transaction is small and uses a relatively simple Islamic finance product, it has significance, I think, because it is the company's first use of Islamic finance and it chose this type of finance because of the "competitive offering" from the Bank of London and the Middle East, a Shari'ah-compliant wholesale bank in the U.K. There are relatively few instances where Western companies chose Islamic finance products based on their price competitiveness (e.g., the $166 million East Cameron Gas Co. sukuk), but there is potential for this to become more common if Shari'ah-compliant banks are able to tap sources of capital and have not been hurt themselves by the credit crisis through the slowing of global growth where health companies find that they can only receive finance from conventional banks at extremely high cost.

According to a poll conducted by Reuters, the amount of sukuk expected to come from Southeast Asia, a region with a large volume of sukuk in recent years, is around $5 billion, far below last year. Most of the issuance is expected to be issued by governments. A previous estimate for Malaysia put the volume from that country at $4 billion for 2009. The GCC region is also expected to see far smaller volume of sukuk with unnamed bankers telling Reuters they expect to see issuance between $4 and $8 billion. Standard & Poor's, however, believes there are $45 billion of sukuk in the pipeline and the number that reach the market in 2009 will depend on whether the market becomes more favorable than it is now.

Other News

• Gatehouse Bank announced a new $1 billion 'Milestone Sukuk' platform and a first issue on the platform that it claims makes the issue of sukuk easier.
  
• Islamic financial institution Arcapita Bank, based in Bahrain and Atlanta, Georgia was downgraded recently, in part because of its 'high leverage'. The high leverage aspect is surprising because Islamic finance is often characterized as putting significant limits on allowable leverage.
  
• Turkey's first sukuk, a revenue-linked bond, was a flop raising only about one-quarter of the planned amount.
  
• Organizers of the 2009 Asia Sukuk Summit, in contrast, believe that countries where Islamic finance is just beginning to become into significance like Jordan, Hong Kong, Singapore and Japan will issue sukuk this year.
  

Discussion on commodity murabaha, MAS sukuk, Yasaar Media and Islamic finance education

A professor of at INCIEF in Malaysia, the Managing Director of Bank Islam and a lawyer in Dubai with Vinson Elkins LLP discusses whether commodity murabaha are overused in an article from Reuters.

Three task forces will study the effect of the global credit crisis on the Islamic financial industry beginning with the Task Force for Islamic Finance & Global Financial Stability headed by Bank Negara Malaysia governor Dr. Zeti Akhtar Aziz. The three task forces were proposed back in October at an Islamic Development Bank meeting.

A media division of Yasaar, Yasaar Media, has been launched. It will be a "dedicated research and media house that produces independent in-depth reports and analysis of market sectors" according to co-founder Paul McNamara (the other co-founder is Majid Dawood, the founder of Yasaar). Paul McNamara is also one of the co-founders of CPI Financial, which publishes Islamic Business & Finance magazine.

The Monetary Authority of Singapore (MAS), the city-state's central bank, completed its first sukuk. It also announced that regulations were loosened allowing banks in Singapore to engage in murabaha and ijara wa iqtina (lease-to-buy). The MAS Managing Director Heng Swee Keat described it as:

"This sukuk is the Shariah-compliant equivalent of Singapore Government Securities (SGS), and is of the highest credit standing. The sukuk will be given equal regulatory treatment as SGS, such as qualifying as an asset in the computation of capital and liquidity requirements, and as eligible collateral for tapping MAS’ liquidity."

In a speech at the Asian Financial Forum, Hong Kong Chief Executive Donald Tsang said that Hong Kong was opening up to Islamic finance. In addition, he commented on the developments already achieved:

"Islamic finance is an exciting area for us and we are making good progress in establishing a platform for Islamic finance in Hong Kong. [...] For example, our regulators have signed Memoranda of Understanding with the Dubai International Financial Centre Authority and the Dubai Financial Services Authority. This will help to foster mutual co-operation in developing Islamic finance between Hong Kong and Dubai.

In addition, we have seen the launch of a variety of Islamic financial products in the market, such as an Islamic banking window and indexes. An exchangeable Islamic bond, or sukuk, has also been listed on the local stock market. We still have much work to do. [...] A review of our tax law is underway to facilitate the launch of more Shariah-compliant products and put in place a level playing field for sukuk vis-a-vis conventional bonds. Islamic finance is a natural extension of our role as a global financial centre."

The University of Reading becomes the latest to add courses on Islamic finance. The new master's degrees will "explore topics such as the Islamic concept of money, so that students will learn the reasoning behind sharia laws, as well as the technical skills to construct sharia-compliant products."

An article in Asharq Alaswat provides a brief history of the beginning of the Islamic financial industry.

Emaar Properties (through Emaar Finance Ltd and Emaar Sukuk Ltd, respectively) listed a Euro Medium Term Note prospectus of $2 billion of sukuk and a Trust Certificate Programme for $2 billion on the London Stock Exchange.I

UK sukuk document; Islamic finance in Japan

The UK's consultation document provides four options for regulating sukuk (full pdf)range from doing nothing to creating an exemption from certain regulatory requirement for sukuk to put them in a similar regulatory environment as corporate bonds. The transparent discussion of how sukuk are viewed from a regulatory perspective put the UK far ahead of other Western financial centers in promoting Islamic finance. The co-head of the London finance and capital markets team at Clifford Chance, Tim Plews says, "There’s confusion in Dubai as to requirements in other jurisdictions like Hong Kong, so with the U.K. setting the standard, it is providing real leadership".

Japan continues to slowly see an Islamic finance industry develop. Its growth is hampered by tax and regulatory hurdles yet to be overcome as well as a nearly nonexistent domestic demand for Islamic financial products.

Sukuk: past and present; UK cancels plans for sovereign sukuk

Andy Jobst, Heiko Hesse and Juan Sole wrote an article looking at both the startlingly high growth rate of sukuk through 2007 and the significant fall off so far this year which is expected to continue well into 2009.

Seera Investment Bank has a white paper (pdf) on Shari'ah-compliant private equity.

News continues to emerge that the Islamic finance industry may not fully escape the global recession caused by the credit crisis because of its dependence on real estate to back sukuk. This creates problems in diversifying against a fall in prices in that sector. There should be several mergers along the lines of Amlak and Tamweel.

Germany lags behind the U.K. in facilitating Islamic finance. The U.S. has flip-flopped in the Treasury Department's public engagement educating its staff about Islamic finance. Meanwhile, the Islamic finance industry has grown across the country. Although it has led the way in placing Islamic finance on a level playing field with conventional finance, it recently cancelled plans to issue a sovereign sukuk, although it still is working with its Islamic Finance Working Group. Hong Kong is still wants to encourage Islamic finance and Singapore continues to plan for a sukuk issuance.

Islamic finance could appeal to investors damaged in the credit crisis; new sovereign sukuk

Continued woes in the conventional financial system may make Islamic finance attractive as the industry has not been significantly affected by the credit crisis. A few issuers have delayed sukuk issues, but there have been no writedowns since Islamic financial institutions do not participate in any of the markets for products that were at the center of the credit crisis. Islamic financial institutions had no exposure to toxic products like CDOs and Auction Rate Securities because they do not pass the relatively conservative Shari'ah screens adopted by the industry. The Reuters article linked to did note one way where Islamic finance may be more risky than conventional finance—Shari'ah screens exclude several asset classes, reducing the possibility for diversification. One asset class that is heavily overweighted in the GCC region is real estate. Mohamed Damak at Standard & Poors comments: "A correction of the real estate sector would impact Islamic banks involved in this business line. Islamic finance is not immune from risk"

The Indonesian sukuk could spur greater development in the Indonesian sukuk market. As of July 31, there were 4.18 trillion Indoonesian Rupiah ($488 million) in sukuk outstanding, comprising about 5% of the total corporate debt market. In Malaysia, by contrast, sukuk account for nearly 1/3rd of total outstanding corporate debt.

Islamic finance practitioners in the UK expect the number of Islamic investment banks based there to double to 10 in the next five years as part of the international growth of Islamic finance, growing by an estimated 15 percent per year.

Malaysian bank Hong Leong is the first to receive a license to offer Islamic banking services in Hong Kong. Two other banks, Standard Chartered Bank and Royal Bank of Scotland, announced plans to begin offering Islamic banking through subsidiaries in Malaysia. Standard Chartered has received a license and RBS plans to apply for a license.

RGE Monitor analyst Rachel Ziemba provides an analysis of the recent Moody's report on Islamic finance, particularly relating to the influence of GCC sovereign wealth funds in the Islamic finance industry.

An Israeli lawyer working in London suggests that cooperation between Israelis and Palestinians could be helped if Israeli banks began offering Islamic finance or even a sukuk.

Pakistan sovereign sukuk

Pakistan is planning its first rupee-denominated sovereign sukuk in September. It joins several other 'firsts' for sovereign sukuk. Indonesia is in the process of launching its first sovereign sukuk for just over $500 million in August and Hong Kong's Airport Authority may launch its first sukuk, the first from a government entity in Hong Kong.

Sovereign sukuk from new places

Employees of Kuwait Finance House recently travelled to Spain to share their knowledge about Islamic banking. There is little Islamic banking in Europe outside of the U.K. although countries like Sweden and France have begun to explore how to develop an Islamic financial industry. The German region of Saxony-Anhalt became the first Western government to issue a sukuk when it issued one for € 100 million in 2004.

Indonesia set the total issue amount of its Rupiah-denominated sukuk at IDR 5 trillion ($538 million). Hong Kong expects to resolve the taxation issues that prevent sukuk in two or three months. Under current tax law, the transfer of assets between the issuer and the SPV would be taxed twice, once when they are purchased by the SPV and again when they are resold to the issuer upon maturity. Initially, the tax changes would be done on a case-by case basis. It could pave the way for the first sukuk, from the Airport Authority, as early as October.

Gulf African Bank, which recently began operating in Kenya, may expand into Uganda and Tanzania, in addition to further expansion within Kenya.

Hong Kong wants to attract Islamic finance; Can hedge funds be Shari'ah complaint?

The CEO of Hong Kong's Securities & Futures Commission, Martin Wheatley, continued the drive to attract Shari'ah-compliant finance to the city-state in a speech today (the speech is available as a pdf). In the speech, Mr. Wheatley noted that the Hong Kong exchange presents a way for investors to "capture the investment opportunities in an emerging market [China], while enjoying the services and investor protection of a developed market". Mainland Chinese firms account for only 19% of the total listings on the Hong Kong exchange, but for 57% of total market capitalization and 70% of total volume. There are already tracking funds for the Dow Jones Islamic Market Hong Kong/China Titans Index as well as a large Malaysian sukuk (one of the Khazanah exchangeable sukuk) and the prospect for a sovereign sukuk from the Airport Authority.

U.K.-based think tank Chatham House released a survey about the GCC's development as a global financial center, including a brief discussion of the Islamic finance industry there. The report (available as a PDF) notes that "the subjective element can also create long delays and uncertainty [so a] number of Islamic investors are not fully tapped into or committed to this market [because they are] unsure what products really are Sharia-compliant". However, "broadly speaking, Sharia scholars are now in agreement on product design and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is taking some steps in the direction of harmonization. This should help create greater trust and clarity among ordinary potential clients, generate more demand and help the industry to expand more widely."

CPI Financial has commentary by Bill Gibbon, a lawyer at Voison, and Trevor Norman of Volaw Trust & Corporate Services, on the Shari'ah-compliance of hedge funds and ways in which some funds have adapted some Islamic finance products to replicate short sales and margin. What is not covered is whether a hedge fund, which they define as ‘a fund that uses derivatives, leverage, shorting, margin trading and option techniques to achieve its absolute return investment goals’ is in its whole, Shari'ah-compliant. Instead, they focus on the component transactions that run into problems with Shari'ah scholars.

Islamic finance in the GCC has a concentration of government ownership larger than would generally be predicted, according to a recent Moody's report on Islamic finance.

Qatar Islamic Bank plans to launch its own takaful provider. A number of takaful companies are sprouting up around the GCC following the success of Islamic finance in the region.

The first publicly-listed Shari'ah-compliant REIT will soon be available in Singapore. The REIT will be converted from a conventional REIT with a large stake in the management company being taken by the National Bank of Australia. The debt currently owed by the REIT, the Cambridge Industrial Trust, will be converted in Shari'ah-compliant financing.

HSBC enters Islamic microfinance market

HSBC Amanah, the Islamic finance part of HSBC, announced that it will launch a pilot project for Islamic microfinance in Rawalpindi, Pakistan with Islamic Relief. There were few details about how the microfinance will be carried out, but HSBC will provide the Shari'ah advisory and product structuring part and Islamic Relief will screen beneficiaries and administer the program. Dinar Standard discussed the opportunities for Islamic finance, particularly Islamic microfinance, to use the rapid growth in mobile phones to expand.

The Principal Financial Group becomes the latest western financial firm to enter Islamic finance, announcing that it will work with CIMB Islamic in Malaysia.

Islamic finance will also soon be available in the Maldives.

A Malaysian paper presents a basic introduction to Islamic finance using the example of how takaful differs from conventional insurance. An Kenyan paper features an article by the CEO of Gulf African Bank, an Islamic bank in the country, about the idea of 'time value of money' in Islamic finance.

Hong Kong will likely not change the tax law before the Airport Authority issues the first sukuk from a government agency in the city-state, although taxes (mostly asset transfer taxes) will be waived to ensure that the sukuk can be competitive with a conventional bond.

Failaka, a company commonly known for its survey of Islamic mutual funds around the world, recently published a guide to Shari'ah scholars with biographical, educational and professional details about the 100 most active Shari'ah scholars in the world.

Islamic financial firm Siraj Capital is launching a web portal on Islamic finance called Sukuk.net to provide information on the rapidly growing area of finance.

CPI Financial has an article on the higher than market returns seen in Shari'ah-compliant indexes in the second quarter of 2008, largely due to their exclusion of financial stocks.

Birmingham, UK is becoming the hub for retail Islamic finance in Europe and business there are encouraged to enter the Islamic finance market.

The Indonesian sukuk will be launched using an ijara structure using Finance Ministry assets. A domestic local currency sukuk will be issued while an international, dollar-denominated one will follow in October. UPDATE: Reuters reports that Indonesia will push back the dollar-denominated international sukuk to November because of lower business activity during the month of Ramadan.

Islamic financial institutions face risks not only from cloning conventional products in Shari'ah-compliant forms, but also from cloning business models of established Islamic financial companies says the governor of the Central Bank of Bahrain.