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

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

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

Other News

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

Resiliance of Islamic finance to financial crisis

A forum on Islamic finance held in Tokyo. The remarks given by Hamad Saud Al-Sayari, the governor of the Saudi Arabian Monetary Authority (SAMA), the Saudi central bank focused on the growth the industry has experienced in recent years and the regulatory changes needed for the industry to continue growing. The governor of Bank Negara, the Malaysian central bank, Dr. Zeti Akhtar Aziz provided remarks on the stability of the Islamic financial industry despite the global credit crunch. Remarking on her country's Islamic financial industry's stability during the Asian Financial Crisis in 1997-1998, she said “We are pleased to report that the Islamic financial system demonstrated its resilience to the stress that occurred 10 years ago during the financial crisis". Her comments about the robustness of the Islamic financial industry followed comments by the Bank of Japan governor Toshihiko Fukui that the industry has not faced the stresses that will demonstrate its robustness.

Apart from Malaysia, his comment makes sense: the Islamic financial industry has seen the most rapid growth since 2001, a period of relative stability apart from the recent subprime crisis. In my opinion, however, the credit crisis does not pose much of a threat to the industry; not because it is fundamentally insulated from the conventional financial industry but because oil prices are still high. The industry's growth has occurred during a period in which oil prices, the source of additional liquidity, particularly in the Middle East that has fueled the industry's growth, rose from $20-30 in 2000 to $100 per barrel in 2008. The stability of the Islamic financial industry will face its greatest test if oil prices drop significantly, something not particularly likely unless the credit crunch produces a significant fall in demand across the world.

The Gulf Finance House in Bahrain announced the launch of a Shari'ah-compliant "Energy Bank", which will invest in energy production projects. No mention of any renewable/sustainable energy projects, which could benefit the Islamic finance industry due to greater demand for alternative energy.

The U.K. government will go ahead with plans to issue government sukuk, the first sovereign sukuk to come out of the G8. The Times (U.K.) has an article discussing the growth of Islamic finance in London in light of the recent comments of the Archbishop of Canterbury.

The first Islamic bank in Italy will open later this year and could be part of the London-based European Islamic Investment Bank (EIIB).

Moody's has a new report on the differences, from a ratings perspective, between conventional and Shari'ah-compliant finance.