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.
  

Malaysia sovereign sukuk issued for $1.25 billion, Dubai, Islamic repo

Malaysia sovereign sukuk
The big news of the day was Malaysia's latest foray into the sukuk markets, the first by the sovereign since 2002 when it issued $600 million in sukuk. The latest issue was expected to be $1 billion, but with an order book reported to be between $4 billion and $5.5 billion, the issue was increased to $1.25 billion. The pricing, expected to be 180-190 basis points over US Treasuries of similar maturity, came in at 180bps on the low end of the range. This is the largest sukuk issuance since Dubai's $1.25 billion issuance in October 2009 before the Emirate saw its government-related entities like Dubai World run into trouble servicing its debt. Along the trend of the post-AAOIFI ruling market, this was an ijara sukuk which has become the most common form of sukuk issued since the rules on mudaraba and musharaka were strengthened to be more restrictive. In the first day of trading, the yield narrowed as investors bid up the sukuk. The sukuk was issued at 3.93% and finished its first trading day yielding 3.87%, 171bps higher than US Treasuries, a narrowing of the issue spread by 9bps. The state-owned oil company Petronas has seen its 4.25% sukuk issued last year trading with a 2.07% yield, which is in line with the historical spread between the sovereign and state-owned company's yields.

Prior to the issue, I was concerned that there would be too little trading to provide guidance as the economic and interest rate environment in Europe and globally evolved, but it appears that there is already secondary market activity, which should allow this sukuk to serve as a useful benchmark for corporate sukuk issuance (at least within comparable maturity range, denominated in US Dollars and issued by Malaysian issuers). As I mentioned, the issuance of another 5-year sukuk does little if anything to provide a lead for issuers looking to issue longer-dated sukuk, which are an important need for takaful providers and other investors looking for long maturity assets. However, with the difficult financing market globally because of worries about the fate of the Eurozone as well as continuing concerns over sukuk defaults, it is good sign that Malaysia's sukuk offering received such strong interest. We will have to wait another day for a sovereign sukuk with a 10-, 15-, 20- or 30-year tenor.

Dubai
In another hit to Dubai's reputation, cooling company Tabreed missed a periodic payment on its AED1.7 billion ($462.8 million) sukuk. The company is currently working on a recapitalization plan. The restructuring plan includes not just this sukuk, but debts totaling $1 billion. The two largest holders of the sukuk who collectively own more than 50% of the sukuk were consulted before the missed payment and one, Mubadala, provided an AED 1.3 billion facility to Tabreed as part of the recapitalization. The company expects to make a payment due in July on its $200 million floating rate sukuk.

Dubai International Capital, a private equity unit in Dubai Holding, is requesting a three-month delay on repayment of some of its debts. In an article, Noor Islamic Bank CEO Hussain Al Qemzi says the bank continues to expect to achieve profitability by 2012. He also said that Dubai Holdings is not another Dubai World and that Noor Islamic Bank has a small exposure to Dubai Holding, which owns Dubai International Capital.

In a case of "less bad" news, builder Arabtec says Nakheel is not in arrears to the company "as much as some analysts fear". That is hardly a ringing endorsement for efforts by Dubai to bring Nakheel current with many of its trade creditors.

Islamic repo and liquidity management
In what potentially could be a significant development, the UAE central bank is planning to offer daily auctions of commodity murabaha with one week to one year maturity to help Islamic banks manage liquidity. The Islamic certificates of deposit would fill an important gap in the Islamic finance industry where short-term liquidity management tools are rarely offered by central banks. The daily auctions would provide an important datapoint for investors and Islamic bankers. The central bank also anticipates using these CDs to manage liquidity through repurchase (repo) agreements, along the lines of the short-term ijara sukuk issued by the Central Bank of Bahrain. The difference between an ijara sukuk and a commodity murabaha is that one represents ownership of an asset while the other creates a debt stream that may raise Shari'ah issues over its use in a repurchase agreement. However, these issues have probably already been reviewed by Shari'ah scholars. The need for liquidity management tools for Islamic banks and central bankers, however, may be so important that their presence, even where this is viewed with some skepticism, may outweigh the cost associated with a controversial application.

Other News

• Moody's showed up a little late with a report that the Investment Dar case against Blom Bank where TID was allowed to proceed to trial claiming that a wakala agreement should be voided on the basis of non-Shari'ah-compliance presented an "operational risk" to Islamic finance.
  
• Malaysia's central bank and Securities Commission are working on a plan to make Malaysia a center for non-ringgit-denominated sukuk, as well as other areas within Islamic finance. Previously, there has been a lot of development in sukuk markets denominated in ringgit with fewer non-ringgit issues. This is in contrast to the GCC where issuers have brought both local currency and US Dollar sukuk to market.
  
• Saudi Electric Company, which has issued several domestic sukuk, plans to tap the international sukuk markets in 2011.
  
• The Australian government is reviewing its tax laws to put Islamic finance on equal footing with conventional finance and the assistant treasurer Nick Sherry points out that Islamic finance can have a broader appeal besides just Muslims as a form of socially-responsible investment (SRI). If it wants to attract the SRI consumer base, however, I believe Islamic finance will have to move beyond just 'negative' screens and incorporate 'positive' screens for companies that contribute to the social good.
  
• The latest summary of the Dow Jones Islamic Indexes is available through the end of May.
  
• Jordan Dubai Islamic Bank began trading on the Amman stock exchange.
  
• Malta continues to examine how regulations need to be adapted to incorporate Islamic finance.
  
• S&P put Kuwait Finance House's long-term counterparty credit rating on Credit Watch Negative.
  
• The first Islamic bank in Tunisia, Azzitouna Bank, was launched on Friday.
  
• The Gulf Bond and Sukuk Association signed a memorandum of understanding with the Trade Association for the Emerging Markets (EMTA).
  
• There is a summary of tax legislation on Islamic finance in South Africa.
  

AAOIFI to investigate breaches of Shari'ah-compliance, S&P predicts $20bn in sukuk pipeline in 2010

Arabian Business is reporting that AAOIFI will begin to investigate breaches of Shari'ah-compliance by Islamic financial institutions. They will work with companies with violations and only will approach authorities if the institutions refuse to comply. The secretary general of AAOIFI, Dr. Mohamad Nedal Alchaar, says that "It will be amicable, as we are the gatekeepers of this industry and we want to work through negotiation" adding that "Only if that does not work, will we go through the authorities". One important thing that is not clear from this article is what specifically will be reviewed. Will AAOIFI review the transaction documents of any institution that claims to be Shari'ah-compliance and pass judgement on the compliance of each product or will it instead focus on ensuring that Islamic financial institutions have the necessary safeguards in place (e.g. a Shari'ah board that reviews the products and audits the activities of the bank on a regular basis)? The AAOIFI guidelines are not universally required and there could be disagreement about whether they apply to Islamic financial institutions in jurisdictions where they are not mandatory.

In general, this is useful to prevent institutions from offering products that are described as Shari'ah-compliant without actually ensuring that they are approved as Shari'ah-compliant. However, if it is done poorly, it could hamper the growth of Islamic finance by restricting Islamic financial institutions from offering new products which may receive approval by the institution's Shari'ah board, but not be approved yet by AAOIFI. I will provide more comments when the scope of the AAOIFI committee is released with more specifics.

Standard & Poor's says that the pipeline for sukuk in 2010 is $20 billion, which would be roughly equal to the total issuance in 2009 ($23.3 billion). This estimate is calculated using those sukuk "publicly announced that is likely to come to market if conditions permit", according to analyst Mohamed Damak. In January 2010, $1.1 billion of sukuk have been issued according to Dealogic, which is up significantly from one year ago when only $77 million were issued as the global financial crisis was still limiting access to capital.

An article describe the CMHC report on Islamic home finance in Canada which I wrote about earlier this week. The public/private initiative Toronto Financial Services Alliance welcomed the CMHC report and said it had established a working group to look at the challenges and opportunities for Toronto in the Islamic finance industry.

The UK-based International Financial Services London released their latest annual report on the Islamic finance industry. The UK remains the largest Western center for Islamic finance with 22 Islamic financial institutions. The U.S. has 9 and this includes the two largest Islamic mutual funds in the world, the Amana Income and Growth funds.

Without going into too much detail, I agree with the Chief Executive of Qatar Financial Centre Regulatory Authority who said it was a "myth" that Islamic financial products are safer than conventional products. Islamic finance can alter the relationship between parties in a financial contract and can encourage equitable dealing and transparency, but it cannot remove risk from investments when they are structured to mirror conventional debt products. The close look that Nakheel's sukuk received when it was at risk of defaulting highlighted some of the areas where the idea that it was asset-based (and thus more secure than conventional debt) were exposed as false because the structure meant that in case of default, it would be treated as an unsecured obligation of Nakheel.

Other News

• The lord mayor of London said that oil companies could turn to the U.K. for Shari'ah-compliant loans.
  
• India is planning to change its regulations to allow non-banking Islamic financial institutions to attract investments from the Gulf and encourage the underbanked Muslim majoirty to participate in the financial system.
  
• Tamweel's chairman said it may still be merged with Amlak in the first quarter of 2010.
  
• DSAM Kauthar commodity funds released its performance results for 2009.
  
• The Central Bank of Bahrain's short-term Sukuk Al-Salam securities were oversubscribed and provide a return of 1.05%.
  
• The Islamic Corporation for the Development of the Private Sector, a part of the Islamic Development Bank said it would work with the government of the Maldives to establish an Islamic bank in the island country.
  
• Bank Islam, a Malaysian Islamic bank, is looking to acquire Islamic banks in Southeast Asia, including in Indonesia.
  
• The Malta regulators are close to being able to publish guidelines on an Islamic securities market, which could be released during the first half of 2010. There are still some legal and technical problems according to the Finance Minister.
  
• Dar Al-Arkan, the Saudi real estate developer is on an international roadshow for a sukuk that could be up to $1 billion.
  

IBB moves into continental Europe, Islamic wealth management

The Islamic Bank of Britain plans to open branches in Sweden and Germany. The branch in Sweden would be the country's first Islamic bank, although not the first 'interest-free' one. JAK Members Bank, a co-operative that began operating in 1970 and received a banking license in 1997, provides interest-free credit to its members with administrative costs paid for by annual membership fees. Currently the bank has 53,000 members and the total savings of € 97 million and borrowings of € 86 million as of 2008.

Douglas Johnson, CEO of Calyx Financial, discussed the need for more strategic work, particularly involving research into new products and approaches for Islamic wealth management to become more widely available. An edited version of his speech, given at the World Islamic Funds Conference in Dubai, is available online.

The Financial Times describes Islamic bank Gulf Finance House.

A story on the first Shari'ah-compliant car insurance company in the U.K., Salaam Insurance, includes a concise description of how takaful works.

The Islamic Development Bank has begun a sukuk issuance in Malaysia to fund the IsDB's work in the country.

India could emerge as a large market for Islamic finance if regulations are changed to allow Islamic banking. The Muslim population of India is estimated at 150 million. Islamic banking has been successful in Thailand, particularly in the southern region, which has a significant Muslim population. The Islamic Bank of Thailand is the country's main bank.

Malta's Financial Services Authority ended its consultation period on Islamic financial products and plans to issue guidelines for sukuk by the end of 2008 and for takaful in early 2009.

Malta issues guidelines on Islamic finance; data collection shortfalls hamper industry; Indonesian parliament to pass laws on Islamic banking

The Malta Financial Services Authority (MFSA) is working on a regulatory framework for sukuk and takaful. Recently, the MFSA released a framework for how Islamic banks would be regulated. This document provides descriptions of the regulatory treatment of many common Shari'ah-compliant transactions.

Indonesia's parliament is expected to soon pass legislation that will make it easier for banks to begin offering Shari'ah-compliant products. Despite the large Muslim population, Indonesia has lagged behind many Southeast Asian countries in changing laws to make Islamic finance easier and, as a result, has one of the less developed Islamic finance markets in the region.

A writer at Asharq Alawsat complains about the lack of publicly-available and accurate information on the Islamic finance industry noting that many different and contradictory figures are cited about even the industry's size and growth rate. Although there is some information available from sources like the Islamic Finance Information Service (IFIS) and Zawya, these tend to be constrained to very narrow pieces of information. With an industry that is estimated to be between $250 and $800 billion and growing between 15% and 30% per year, there should be greater resources dedicated to cataloguing and collecting basic data on the industry's size, growth rate, distribution of funds in types of financial products.

As Islamic finance moves from a niche to a mainstream financial industry, it will need to develop new products to compete with conventional financial institutions and also develop regulation to prevent excessive risk-taking by Islamic financial institutions that could put depositors money at significant risk. The latter point was the subject of a recent IMF paper, "Islamic Banks and Financial Stability: An Empirical Analysis" (full paper in PDF). Other challenges include bringing in new Shari'ah scholars to keep up with the growth in the industry.

Islamic finance research fuelling growth, sukuk & a seminar on Islamic banking in Malta

Dr. Nazim Ali, director of the Islamic Finance Project at Harvard University, discusses the growth of the Islamic finance industry, in particular the role that researchers play in its development.

Expect details later this year on the developments which may lead to a U.K. sovereign sukuk.

The Malta Institute of Management will hold the first seminar in Malta on Islamic banking later this month.

Kuwait Finance House Malaysia Bhd, the Malaysian arm of the Middle Eastern Islamic bank may be interested in purchasing conventional assets of RHB Bank in addition to the bank's Islamic banking assets. The bank will then convert these branches, which it believes are in better strategic locations, to Islamic banks.

Sukuk issuance in Pakistan is growing strongly despite only being five years past the first locally issued sukuk.