Is the US unfriendly towards Islamic finance?

In general I try to ignore the fringe groups that believe all Islamic finance is terrorist finance, but an editorial in Investors Business Daily (not the first such article in that paper) makes such a specious argument it demonstrates (through hyperbole) why the US (in particular, Wall Street) lags in Islamic finance. The hyperbole comes when the article claims that lobbyists meeting in a Caribou Coffee (owned by Arcapita) are having "tea with terrorists" (as the article's title implies).

The refutation of Islamic finance offering anything more than conventional finance with a different structure to avoid prohibited activities including interest is easy. Zaid Ibrahim & Co covered the misconception that Islamic finance is "terrorist financing" in a short book (available online as a PDF). However, the hostility towards Islamic finance in the US that this type of article demonstrates is hurting the US financial industry's ability to compete in Islamic finance with other countries that are being more supportive: the UK, Singapore, Japan, South Korea, Australia, and France.

The US should be attractive to Islamic finance because of its deep capital markets and Islamic finance should be attractive to the US financial markets because it brings a small but rapidly growing source of capital and investment opportunities that can replace revenue sources lost when the shadow banking system collapsed. One of the differences between the US and other countries listed above is that the governments have come out and indicated their support publicly for attracting Islamic finance by leveling the regulatory playing field (usually with a desire to be a Western 'hub' for the industry).

Despite the hostility towards Islamic finance demonstrated in this article, there are many US financial institutions that are involved in Islamic finance, but they are doing so largely outside of the United States. This is disappointing because the world's financial system is becoming more interconnected and the growing links between countries increases the supply of capital that could be used to finance investment in the US. Ignorant articles that do nothing but make the US seem unfriendly to one source of capital, particularly one which is growing in importance globally is incredibly shortsighted.

Other News

• Indonesia is considering changing the way it issues sukuk, possibly switching from an auction to a book-building structure because of several failed auctions. The auctions failed primarily because investors asked for yields higher than the government was willing to accept to compensate for the illiquidity of the sukuk.
  
• A joint venture between Alcoa and the Saudi Arabian Mining Company are raising financing, in part through Islamic debt, to finance an aluminum smelter.
  
• Bahrain Islamic Bank is raising its capital by 75% following a loss caused by it taking provisions against its investment portfolio.
  
• A bank in Morocco, Attijariwafa Bank, launched an Islamic banking subsidiary, Dar Assafaa.
  

Islamic finance should focus on poverty; Dubai World fallout, updates

The Senegalese president Abdoulaye Wade says that Islamic banks should fight poverty, including in Africa. In related news, Bahrain became the home of a new Shari'ah-compliant microfinance bank, Family Bank of Bahrain. The bank is based on the Grameen Bank model and is majority (63%) owned by the Royal Charity Organization and the Social Development Ministry, with the remainder owned by Kuwait Finance House, Ahli United Bank, Bank of Bahrain and Kuwait and Ithmaar Bank.

These two stories illustrate something important that has been somewhat sidelined in the attention paid to sukuk and other institutional forms of Islamic finance. There is a strong social mandate in Islamic finance and microfinance, both within the Gulf and in other countries, can play a part in fulfilling this mandate. It is also clear that there are many things that microfinance cannot accomplish in terms of poverty reduction, but the Islamic financial industry has largely overlooked the role that microfinance can play in fighting poverty and promoting greater economic equality, which is often cited as one of the fundamental reasons for Islamic finance to exist. I will be interested to see how the microfinance bank develops and if any readers of this blog have information about the products it uses, please email them to me at blake@sharingrisk.org.

An article overviews the impact of Dubai World and Nakheel debt problems on the Islamic finance industries. One of the important conclusions to the article is the claim that "One thing remains certain: Islamic institutions were no different than conventional bankers in ignoring the speculative frenzy that took Dubai by storm and incurred massive losses for many sukuk holders." This is an important point because Islamic banks in the GCC have relatively large exposure to the real estate markets. Regardless of the structure used in the financing, whether conventional or Islamic, a steep decline in real estate values had an impact on the ability of debtors to repay their obligations. There may have been aspects of conventional financing markets that accentuated the decline in these investments, but that does not mean that the crisis avoided having an impact on Islamic financial institutions with large real estate exposures.

The Dubai World debt problems may move into a new phase if reports that a standstill agreement is imminent are accurate. The standstill agreement would protect Dubai World from creditor's claims for six months while a restructuring plan is created and agreed upon. The Nakheel 2 sukuk is scheduled to pay a periodic distribution of $10.3 million on January 19, 2010. Meanwhile, Barclay's Capital recommended that sukukholders sell their sukuk because the current trading value exceeds their projection for recovery values of 40 to 50 percent of par.

Other News

• The National newspaper has a long article about the pending merger between Islamic mortgage firms Amlak and Tamweel.
  
• Bursa Malaysia was the largest location for new listed sukuk with 12 issues totaling $17.6 billion. The first listing occurred in August 2009.
  
• Australia's government said in a report that Islamic finance should be placed on an equal tax footing with conventional financial services.
  
• Morocco, which has lagged in Islamic finance, reduced the value-added tax applicable to Islamic financial products.
  
• Bangladeshi finance company Bank Asia Limited began offering a musharaka financing product. Musharaka is largely underused by many Islamic banks compared to murabaha and ijara.
  
• A report from Alpen Capital, an investment banking firm, says that takaful will grow by 16.1% in the Gulf during 2010, faster than conventional insurance. The growth in takaful has lagged the overall Islamic finance industry and is far smaller. Alpen Capital estimates that it will be $3.5 billion in the Gulf at the end of 2010. One of the interesting differences between takaful companies and conventional insurers highlighted in the report is that takaful providers are reliant upon a smaller investment universe including real estate and equities in addition to mudaraba and wakala placements with Islamic financial institutions. The lack of sukuk products could limit the growth of takaful if there is another decline in equities or real estate values.
  

Is Islamic finance linked with conventional finance?

A few recent articles predict that one of the few winners from the credit crisis will be Islamic finance. This presumption is based on the assumption that the underlying restrictions from the Shari'ah force a more conservative approach to financial services that can restrain the speculative excess that has caused so much harm in the conventional financial system. To a degree, this is true and provide a methodology for a more conservative approach to finance that has greater appeal in a climate of significant deleveraging across the financial markets. However, there remains a link between conventional and Islamic finance that creates some limitations on how much Islamic finance can gain from the problem in the conventional financial industry. To wit, Islamic finance uses LIBOR and other interbank interest rates as a way to price Shari'ah-compliant products and therefore any disruption in the LIBOR market can spill over into the Islamic finance market by raising the cost of Shari'ah-compliant products which are benchmarked to LIBOR or another interest rate. It is unlikely that the Islamic financial market will ever be de-linked from conventional financial markets and it is uncertain whether this is a desirable goal.

The Moroccan government is planning on allowing Islamic banks to operate within the country according to the head of the country's central bank.

Despite a weak credit market globally, Indonesia is still planning the US dollar-denominated sovereign sukuk issue for later this year, followed in the first half of 2009 by a retail sukuk.

The number of Islamic financial institutions in Kuwait surpasses the number of conventional financial institutions, although Islamic financial institutions' total assets is still lower than conventional financial institutions' total assets.

Dubai Bank, an Islamic bank, will issue up to $5 billion in sukuk between now and 2013 starting with an issuance of about $500 million in the next few months to finance its growth. The structure of the bonds will be ijara and musharaka.

State-owned Islamic Bank of Thailand plans to issue sukuk to attract money from the GCC to fund infrastructure projects.

Malaysian Islamic Index, American Public Radio program on U.K. government Islamic bonds, other news

Bursa Malaysia Bhd and the FTSE Group launched a new Shair'ah-compliant index of 30 Malaysian stocks. The index is called by FTSE Bursa Malaysia Hijrah Shariah Index.

Citibank Bhd, the Malaysian subsidiary of the global financial firm has no plans to launch an Islamic banking subsidiary this year.

CORECAP lauched a $150 million CORECAP Islamic Private Equity Fund to invest in "Sharia-compliant Private Equity investments in the Middle East and North Africa region, via equity participation and via a Sharia-compliant mezzanine structure".

The American Public Radio program had a segment on the U.K. featuring a woman from the Lawyers Christian Guild who oppose the bonds for reasons which seem unlikely to be relevant based on previous sukuk issues.

The Phillipine government failed again to privatize majority state-owned Al-Amanah Islamic Bank.

South African-based bank Absa Islamic Bank has plans to expand in Africa.

Moroccan banks will be able to offer Islamic banking but will not be able to call them 'Islamic'.

Islamic banks in Kuwait are not currently able to issue sukuk to fund their activities although conventional banks are able to because there is no regulation in place to allow it.

The S&P Brazil, Russia, India & China (BRIC) Index will add four Indian firms. It is "the first time that an international rating agency has developed an index to help Muslim investors across the globe invest in specific Indian companies in an Islamically compliant way".

Moroccan Islamic finance & other news

Islamic finance in Morocco

Morocco's central bank, Bank Al-Maghrib, will allow ijara, musharaka and murabaha products to be offered by banks in Morocco. A statement released by the Central Bank said Islamic finance will "allow a widening of banking services and contribute to a higher rate of banking in the economy"

Other News

Kuwait Global Investment House launches an Islamic fund. The $350 million fund will invest in "Gulf Arab companies that are compliant with with the Islamic sharia principles".

Dubai Islamic Bank aims to raise $800 million for an Islamic private equity fund to invest in energy & telecom projects.

Islamic finance will continue to rely on the Cayman Islands as a center for sukuk because of its light regulatory environment.