Takaful opens doors for Islamic finance in new markets across Sub-Saharan Africa

Nigeria and Kenya are not the top markets in the Islamic finance sphere.  Neither has a government handing out incentives to become the next global hub in Islamic finance.  They are each located in different parts of Sub-Saharan Africa where Islamic finance is just beginning to grow.  Recent developments in these countries showing that takaful can appeal to a broader consumer base and can compete directly with conventional insurers on their underlying economics, not just on Sharia-compliance, will make these regions important to watch for signs of continued development

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Dubai update, Islamic finance & foreclosures

Dubai will issue at least $1 billion in bonds in two tranches, one of 5-year tenor and one of 10-year tenor. The (conventional) bonds would be the first issued by Dubai since the debt crisis sparked by the near-default of the Nakheel sukuk. Nakheel, which has received 85% approval from trade creditors, close to its target of 95 percent acceptance, is reported to have applied for listing of $1.6 billion in sukuk with NASDAQ Dubai. The sukuk will be issued to pay 60% of the trade creditors' claims, with the remainder being paid in cash.

In other Dubai-related news, Dubai Islamic Bank took a majority stake in Tamweel, the troubled Islamic mortgage company in Dubai, which led to a sharp rise in the price of Tamweel's sukuk. The move reduces the prospects of a merger between Amlak Finance and Tamweel, which was reported to be likely as a way of dealing with the troubled Islamic mortgage companies. Tamweel has also begun foreclosures on properties owned by people who have left the Emirate and they say in cases where people are still in the Emirate, they are trying to "find a resolution which is satisfactory to both". The issue of default and foreclosure on Islamic mortgages is one that should be balanced between the commercial needs of the mortgage holders and the ethics underlying Shari'ah, which urges lenders to be patient with borrowers who run into financial difficulties.

In general, the commercial logic will outweigh the ethical obligation to work with creditors to avoid causing undue harm for the creditor. However, this is an area where I think Islamic finance can set itself apart from conventional finance. In the post-credit crisis where foreclosures have become commonplace, there have been a number of reported excesses where banks have been overzealous in foreclosures: GMAC Mortgage has come under investigation for problems with the legal documentations and in a bizarre incident, a man in Florida with no mortgage had his home foreclosed on. In many foreclosures, there is no hope for the borrower to become current on the mortgage and foreclosure is nearly inevitable. However, there are many other cases where a negotiated settlement can be reached that is better for the borrower as well as for the lender, who will see a higher recovery value than if they foreclosed on the property and sold it into a depressed market. And one solution that has been proposed (for the conventional market) would seem ideal for an Islamic bank committed to moving towards greater profit-and-loss sharing. Instead of foreclosing on the property, there would be a negotiated refinance into a more affordable mortgage and in exchange for the concession, the lender would have right to a share of any appreciation in the home price when it is sold.

Rushdi Siddiqui focuses his latest column on the need for "reflection, reassessment and reality check" (his 'R-cubed'). He makes some great points including some that I have also highlighted like the problem facing takaful providers (none of which have failed to date): "The link between Takaful operators and Islamic investing is close, as premiums must be deployed in a Sharia-compliant manner. Although there have been no bankruptcies announced in the Takaful industry since beginning of 2009, there have been challenges."

The Lawyer has a great article on the effect of Sheikh Usmani's comments on sukuk, which were followed by a ruling from the AAOIFI Shari'ah Board, as well as the financial crisis. It cited a KFH Research/NCB Capital report on the recovery in sukuk during the past year.

• Efforts to establish an Islamic bank in South Korea have faced significant hurdles.
  
• An article in the National says that Islamic finance can thrive in Dubai. The article notes that Islamic finance is based on an opposition to excess and describes the cause of the financial crisis as "excess risk, excess rewards, excess concern with short term results" without explaining how some companies--most notably Nakheel, which financed many projects with sukuk--became ensnared in the crisis themselves.
  
• Nigeria plans to issue a sovereign sukuk within the next 12 months as it tries to become the Islamic finance hub for Africa.
  
• Indonesia plans to issue 1 trillion rupiah from sukuk in an auction on October 5.
  
• Armen Papazian, a fellow of the Judge Business School at the University of Cambridge, says that Islamic finance should focus on creating an entire financial system based on Shari'ah-compliance, not just individual products.
  
• Standard Chartered is launching a nostra account product in the US for international clients that will be based on commodity murabaha.
  grow significantly and the VP of global wealth management at HSBC Amanah, Shahzad Wairach, estimates its potental of "20 percent growth over the next three to five years".
  
• Bank of London and the Middle East is planning to offer a Shari'ah-compliant Absolute Return Fund that is "in no way a hedge fund". Efforts to create Shari'ah-compliant hedge funds have been criticized for their synthesized short sales.
  
• The Central Bank of Bahrain's latest issue of sukuk al-salam was oversubscribed.
  
• Kuwait's banking system has 35 percent of assets in Islamic banks.
  

Pakistan central bank explores interbank money markets, Indonesia to issue global sukuk in October

Pakistan's central bank is developing Shari'ah-compliant interbank money market products. This follows the announcement that the UAE central bank is also developing inter-bank liquidity management Islamic certificates of deposit. This is a welcome trend to allow Islamic banks to manage their surplus liquidity and will help to provide greater stability to Islamic banks.

Global sukuk issuance is expected to rebound in 2011 as infrastructure projects begin in Asia and the Middle East following a significant slump since the credit crisis affected Islamic finance in 2008 and 2009. Indonesia is planning a global sukuk in October that could be as large as $500 million to $600 million, less than its $650 million sukuk issued in 2009. The government may issue 5-year sukuk, but would prefer 7-10 year sukuk, which would be beneficial as a benchmark for domestic corporate sukuk. This would be complementary to the possible tax holiday for sukuk to boost the domestic Islamic finance industry.

Other News

• Islamic finance is gaining popularity among bankers looking to "change some terms here and there" according to Andrew White, the director of the International Islamic Law and Finance Center in Singapore.
  
• Lahem Al-Nasser of Asharq Al-Awsat believes that an Islamic central bank is needed and that Islamic banks should have their reserves linked to gold. I disagree: bringing the gold standard to Islamic finance would be no more successful than it was in conventional banking and would limit greatly the growth potential of the industry while offering limited benefits as the price of gold fluctuates significantly.
  
• Ithmaar Bank, which recently converted to be an Islamic bank says it is fully Shari'ah-compliant and denied reports about disagreements with its Shari'ah board over conventional assets being converted to be Shari'ah-compliant.
  
• The governor of the Central Bank of Afghanistan is working with Pakistani experts to implement regulations for Islamic banks within the next two months.
  
• Indonesian bank Bank Permata launched an Islamic mortgage product based on ijara mutahiyah bittamlik (lease ending in ownership).
  
• Malaysian Prime Minister wants Bank Islam to expand the Islamic pawnbroking system Ar-Rahnu from urban areas to rural areas.
  
• A Bahraini investment house, Tharawat, plans to launch a $50-$60 million private equity fund investing in Saudi Arabian real estate in the third quarter.
  
• After delaying a planned bond issue, SABIC received $1 billion in Shari'ah-compliant credit from Alinma Bank.
  
• CNBC Europe has an interview with a professor of Islamic finance in Spain, Celia De Anca of IE Business School in Spain.
  
• The Nigerian Deposit Insurance Corporation is introducing Islamic deposit insurance using Malaysia as an example.
  

More sukuk details, Malaysian High Court challenges BBA

The reports that sukuk issuance fell significantly in the first half of 2008 continue to slice and dice the details of changes within the market for sukuk. A recent report from the Islamic Finance Information Service (IFIS) shows that in addition to a fall in issuance by 54% in the first half of 2008 compared with the same period in 2007, the issuance of sukuk are coming more from the GCC, denominated in local currencies, particularly the UAE dirham, and are significantly smaller than older sukuk. Highlights from the report include:

• 61 (valued at $11.55 billion) in H12008 versus 111 ($25.0 billion) in the same period in 2007 and 77 ($13.67 billion) in H12006;
•More sukuk were issued in the GCC than in southeast Asia and the Malaysian Ringgit fell behind the UAE dirham, albeit only slightly, as the currency of choice for issuers;
• In the first half of 2008, only 2 sukuk were issued for more than $1 billion compared with 14 during the full year 2007. Most sukuk in the GCC were greater than $100 million, while Malaysian issues tend to be smaller than $100 million.

The Malaysian High Court ruled that a common product used for home finance, al-bai' bithamen ajil (BBA), is not Shari'ah-compliant and therefore contrary to the country's Islamic banking law passed in 1983. The BBA transaction involves the sale to the bank at par with a resale back to the customer with a deferred repayment. The criticism of the BBA by the High Court was that the sale involved in the transaction was not a 'true sale' but was merely conducted to create a financing activity. There was some disagreement between industry players and academics about whether this ruling would force the restructuring of BBA home finance products. The use of Shari'ah standards that are more liberal than in the GCC has hampered the ability of Malaysia to internationalize its Islamic finance industry as much as other countries. This High Court ruling may be an attempt to force the domestic Islamic finance industry to adopt more conservative standards to better place Malaysia for growth within southeast Asia as countries seem to be adopting more conservative GCC Shari'ah standards.

Diversification of assets and liabilities continues to pose a significant problem for Islamic banks. There are not enough Shari'ah-compliant assets available to diversify to mitigate risk from over-concentration in one asset class and geography.

There is a special feature in MEED on Islamic finance. In the introductory article, MEED writes: "In the first seven months of 2008, $73bn worth of sukuk were issued worldwide" citing a Standard & Poors report. The report showed $14 billion in sukuk through the first eight months of 2008 (through August 31, 2008). The remainder of the article was behind the subscriber wall, so I was not able to see whether there were additional mistakes in the rest of the special report.

The Academy for International Modern Studies, a research & educational body associated with the UK government, will offer its programs in Nigeria.

First takaful institution approved for the U.K.

The first takaful company received approval from the Financial Services authority. The U.K. has 5 Islamic banks already approved by the FSA, making it the country with the most well developed Islamic financial services market in the West. The FSA published a description of its approach to regulating Islamic financial institutions, described as 'no obstacles, no special favors'. I covered the FSA description in the December 2007 issue of the IHI newsletter, available as a PDF.

Reliance Money will begin to offer Shari'ah-compliant portfolio management in India. Despite having a large Muslim population (13.4% according to the CIA World Factbook), Islamic finance has been slow to develop in the country.

Brazil, a country without a significant Muslim population, is interested in beginning to become involved in Islamic finance.

The Nigerian Central Bank is expected to issue a decision about the regulation of Islamic finance & banking in the country.

Ibrahim Warde, an adjunct professor at Tufts University, recently provided an explanation of Islamic finance to the newspaper at Dartmouth University in southern New Hampshire.

Sukuk, UAE to head council on Islamic finance, Islamic finance in Canada & the U.K. and growing interest in Islamic microfinance

The Islamic Development Bank is planning a $150 million sukuk issue in Malaysia that it expects to use within two years to finance projects in Malaysia, mostly relating to education, healthcare and basic infrastructure. The IDB also plans on another sukuk to be issued elsewhere to fund the bank's operations. Moody's expects the global sukuk market will reach $200 billion by 2010 (Moody's also expects to see significant growth in the number of Shari'ah-compliant funds). The GCC sukuk market has focused on larger sukuk issuance (like the $3.5 billion sukuk from DP World used to fund the purchase of UK-based P&O Ports), while small and medium sized companies have more luck issuing in Malaysia.

2008 will see first sovereign sukuk issuance from the U.K., Indonesia and Hong Kong.

The UAE will head a council with representatives of the Islamic financial industry as well as finance ministers, central bankers, the IDB, accounting and audition agencies the Islamic Financial Services Council, the World Bank and the IMF.

Further response to the Archbishop of Canterbury's comments about allowing some Shari'ah courts in the U.K. uses the example of how Islamic finance has incorporated Shari'ah principles into modern finance.

Ethical investing guided by faith is growing rapidly in Canada, with mutual funds that select investment based on religious principles. The most common faith-based funds appeal to Christians or Muslims. A range of additional services are available to Muslims in the U.K. including banking and home finance that have only limited availability in Canada.

Islamic microfinance is succeeding in Afghanistan where non-profits like FINCA offer Shari'ah-compliant microfinance. The success of Islamic microfinance has led to people like Joyce Lehman, a microfinance program officer for the Gates Foundation, to say that there should be greater availability of Shari'ah-compliant products: "Out in the field, MFIs are losing clients to other organisations that provide Shariah loans and it’s that type of market competition that is making MFIs look into providing Shariah products," she says.

Recently, a microfinance institution in Nigeria converted to only offer Shari'ah-compliant microfinance products.