When Dr. Zeti speaks, you should be listening

A few quotes and thoughts on Dr. Zeti Akhtar Aziz's speech at ISRA. 

Increased liberalisation and greater foreign participation in the Islamic financial markets are reinforcing this trend and resulting in increased cross border financial flows. This is contributing to increased international financial and economic linkages between nations, particularly among emerging economies.

The development of more cross-border financial flows by Islamic financial institutions is a big positive, and makes sense since Islamic finance is supposed to be focused on facilitating economic activity.  The European debt crisis, which has led to significant fall-off in import demand (not to mention the continuing slow growth elsewhere in the developed countries, means that developing countries are going to have to both focus on their domestic markets and other trading partners as sources of demand for their products.  If Islamic finance can provide financing for the trade flows--which should be a good fit with the products used in the Islamic finance industry, it will be beneficial.  The one area where it may be difficult for Islamic finance is where floating currencies are involved, since it is more difficult to hedge against fluctuations of currencies. 

These developments [the establishment of AAOIFI and the IFSB] have been particularly important to the recent intensification of the internationalisation of Islamic finance which in turn contributes towards building bridges and forging greater linkages among a wider range of economies.

 In this respect there is still more progress to make, since there remain concerns about the regulation of Shari'ah scholars, and no similar body to AAOIFI and IFSB to provide international Shari'ah scholar oversight, although it is being discussed. In one respect IFSB is much further along than AAOIFI in providing transparency in the regulatory standards under which Islamic financial institutions must abide, because it publishes its standards online, whereas AAOIFI does not.  Dr. Zeti does not mention this explicitly, but does highlight the need for: "greater leverage on technology for the active dissemination of information at real time further facilitates the harmonisation process."

She then moves on to globalization in Islamic finance:

In the recent years, the intermediaries have also gained scale and the financial markets have gained depth and maturity.

I would take issue to some degree with Dr. Zeti regarding the depth and maturity of Islamic finance markets, although from her perspective as the central bank governor in Malaysia, she does deserve a pass on this issue.  The Islamic finance market in Malaysia has developed considerable depth and maturity, enough so that it is attracting attention from companies in the GCC (mostly banks), who have looked east to tap more liquid markets, even though it exposes them to currency fluctuations (some of the banks are using the Ringgit markets to avoid currency risk where they have subsidiaries operating in the local Malaysian market). 

However, even some GCC markets have showed they are maturing as the prospect of default by Dana Gas on their $1 billion sukuk attracted some media coverage, but not the same level of concern as when Nakheel was seen at risk of defaulting on its sukuk (a key difference of course is that Dana Gas is a private company while Nakheel's first sukuk was backed by Dubai World, a quasi-sovereign entity). 

The speech shifts into high gear from here, when Dr. Zeti warns that " Its resilience during the global financial crisis should not result in complacency."  This is an important point and mirrors what the IFSB said in response to claims that Islamic finance was immune from financial crisis.  There is a consensus now which disputes the optimistic claims that Islamic finance was not touched by the financial crisis because its structure is fundamentally different than the conventional financial industry. 

It was not necessarily the complex products (CDO, CDS, etc) that ultimately led to the major bank failures, but was instead a failure in the markets of their assets, and doubts about their value, combined with the inherent leverage of the products themselves which dried the market up and took away the ability to use their assets as collateral in repo markets to meet liabilities as they came due.  A dramatic fall in the value of a firm's assets, whether those are complex derivatives or equity-based products, will lead counterparties to question the solvency of any financial institution, Islamic or conventional.

This lack of confidence will spread at a speed in direct proportion to the levels of leverage employed in the balance sheet, and the degree to which the bank is subject to possible liquidity crunches either from depositors with current accounts or other counterparties providing short-term debt.  The inability to access liquidity and the inability to roll over maturing short-term debt (a drying up of interbank liquidity) led to the conventional banks' failures during the financial crisis and could lead to a similar failure in the Islamic finance market as well since it was the liquidity, not the toxic assets, that were the ultimate reason for the failure.

Islamic finance remains vulnerable to a liquidity crisis because 1) there is limited inter-bank lending, 2) nearly no interbank repo, and 3) few options for the central bank to act as lender of last resort (except ad hoc means like the wakala deposits the UAE Central Bank placed with Islamic banks during the crisis).  The lesson from the financial crisis is that when an asset price falls that triggers a fall in the value of your assets and questions about your solvency, the line between survival and failure is the degree to which the financial institution is leveraged (where the debt acts to magnify losses, just as it does profits) and the degree to which you rely on short-term financing (either deposits or inter-bank financing).  Higher leverage and greater liquidity needs lead to a greater likelihood of failure.

Dr. Zeti then goes to highlight the linkage between Islamic finance and socially responsible investing (which I have highlighted before on this blog):

First is the need to highlight with greater clarity the value proposition of Islamic finance so as to ensure that it remains a form of financial intermediation that serves the real economy and that it will continue to be a benefit to society. This requires the development of financial products and services that manifests the value propositions of Islamic finance, and that such products are marketed with simplicity so as to facilitate a greater understanding of the main benefits of the products. In relation to this, Islamic finance presents significant appeal to the growing Socially Responsible Investment (SRI), sustainable investments and ethical finance. This is particularly relevant in the context of the recent global financial crisis. It [the financial crisis] has brought to the forefront the need for the financial system to be linked to the economy and for the need for greater and improved levels of transparency, fairness, ethics and social responsibility in modern finance.

Beyond financial returns, SRI also accords primary consideration to the impact on economic activity and on the broader society, thereby incorporating the important dimensions of environmental sustainability, social responsibility and governance. This is in close parallel with the inherent principles of Islamic finance, in which financial transactions must be underpinned by real economic activities, and its operations are guided by the principle that money should also be used to create social good.

Then she moves on to another favorite topic of mine, Islamic microfinance and a focus on making Islamic finance inclusive:

The second imperative is for the outreach of Islamic finance to be inclusive and to be accessible to all, particularly the lower income groups and small businesses. An important agenda in the global economy is to achieve a more balanced growth with reduced income disparities. Financial services has a tremendous role in contributing towards a more equitable economic growth and a more sustainable development. In relation to this, Islamic financial institutions need to strive to enhance the access of their financial services to all segments of society. This imperative translates into the need and demand for more Islamic microfinancial products. In emerging as a new market niche, Islamic microfinance would meet the differentiated demands of low income communities and provide support to entrepreneurial activities. Its strong value proposition reinforced by financial inclusion would result in significant potential to uplift the economic performance and development. Furthermore, Islamic microfinance, if supported by microtakaful, has the potential to provide a more comprehensive, sustainable and accessible financing and protection solution for the lower income groups and small businesses.

I have said it before and I will say it again, Dr. Zeti's speeches are almost always required reading and she has a knack for making important points rather than repeating the same platitudes that are too frequently repeated.  This should be commended, and also serve as a reminder that when Dr. Zeti speaks, you should be listening.

Green sukuk and oil exports

Bloomberg has an article about the prospects for a green sukuk coming out of the GCC (with suppport from Australia's National Australia Bank and Abu Dhabi-based Clean Energy Business Council).  One thing I noticed in the article that, while it makes sense if you step back, seems odd at first glance was the statement that: "Building a renewables industry allows more crude to be exported, said Indraj Mangat, a partner at Eversheds LLP". 

The idea that renewable energy development would be promoted in order to export more crude oil sounds contradictory, but it is not necessarily so.  In 2008, 4 of the top 10 countries in terms of carbon emissions per capita were located in the GCC (Qatar [1], UAE [3], Bahrain [5], Kuwait[7]) with Saudi Arabia [13] and Oman [14] not far behind.  Although some destinations for the oil and gas that would otherwise be exported (e.g. US and Canada) are not much better in terms of carbon emissions per capita, many destinations are (e.g. European nations, South Korea, Japan and China). 

The per capita carbon emission might not be the ideal measure (carbon emissions per unit of GDP is probably better, and comes up with slightly different results): Qatar [18], Bahrain [20], Kuwait [25], Saudi Arabia [26], UAE [36], Oman [39].  The real change here is whether the export markets are less carbon intensive than the GCC (which would make the shift away from domestic consumption of oil and gas towards renewable): USA [54], UK[115], Germany [92], France [144], Japan [96], South Korea [58], China [10].  Substituting oil that is sent to China will not reduce the overall carbon footprint because it will be used relatively inefficiently for creating GDP, and there will be marginal savings for oil sent to the US.  However, South Korea, Japan and European countries will convert the carbon emissions from the barrel of oil more effectively in creating GDP and there will be a net carbon savings relative to the GDP that is created. 

Combining Islamic finance and sustainable finance

I've been going through the Malaysian Financial Services Blueprint (2011-2020) and there are a number of interesting ideas in there about Islamic finance.  Hopefully, I'll get to some of the others in later posts; the first one is on the connection between the Socially Responsible Investing industry and the Islamic finance industry.  The report writes:

The demand for Islamic finance is expected to emanate not only from the Muslim population but also from those with affinity for socially responsible objectives and those seeking ethical financial solutions where the central theme is a more equitable model that would foster sustainable growth, whilst preserving the environment and improving the overall socio-economic landscape. This is spurred by the growing significance of global ethical consumer movement where Socially Responsible Investment (SRI) is expected to be an important mainstream asset class by 2015. With this development, Islamic finance has an enhanced growth prospect given its close synergy with ethical finance.

The idea here is worthy and there is definitely a possibility for Islamic finance to attract non-Muslim consumers based on the ethical ideas that underpin Islamic finance.  Malaysia is noteworthy in this respect and estimates place the share of Islamic bank accounts held by non-Muslims at around 25%. 

The often attributed reason for the take-up of Islamic finance by non-Muslims in Malaysia is that the products are cost-effective or even cost-advantageous, in part due to the government's efforts to promote Islamic finance.  This is something which could work in some other regions, but in many countries--particularly those with small Muslim minorities--the idea of favoring Islamic finance over conventional finance is going to be a non-starter. 

Without a government-aided cost advantage, Islamic finance will have to offer something new that conventional finance ignores.  The most frequently offered suggestion is to move Islamic finance more towards profit-sharing contracts (e.g. mudaraba and musharaka).  While this may make Islamic finance more attractive (it is not necessarily certain that this is the case), it is unlikely that, outside of some areas of finance like stock markets, this will be possible in current regulatory environments. 

Therefore the suggestion from the report to focus more on activities that "foster sustainable growth, whilst preserving the environment and improving the overall socio-economic landscape" makes sense.  This is probably most likely way to tap the "enhanced growth prospect given its close synergy with ethical finance".  So far, Islamic finance has concentrated much effort in laying the groundwork and setting up Islamic finance to meet the financial needs in a way that is Shari'ah-compliant.  

Now, it should take the next step from expanding the breadth of product offering and focus on differentiation.  This need not be an industry-wide shift.  There are likely to be plenty of people who just want a Shari'ah-compliant alternative to conventional banking, so not adding complexity will make these services more competitive with conventional financial institutions.  

However, there is likely a market opportunity--among both Muslims and non-Mulims--by offering Islamic financial products with a focus on low-income communities, avoiding investments that are not environmentally sustainable, and to add other so-called ESG (environmental, social, governance) criteria to the investment decisions.  These may or may not be required to be Shari'ah-compliant, but there is nothing stopping Islamic financial institutions from adding more ethical criteria to their decision-making process. 

Is Islamic Finance Ethical?

Islamic finance is ethical in the sense that it conforms with the commonly accepted understanding among Shari'ah scholars of what is ethical.  However, the industry markets itself in a different idea of what is ethical.  Islamic finance is supposed to be a superior alternative to the current financial system, one which appeals to Muslims as well as non-Muslims and one which takes as a minimum a standard that is more stringent than the 'industry average'. 

On this metric, I think Islamic finance has much more work to do.  If one thinks that Islamic finance is supposed to meet the baseline standards of financial ethics with an additional set of constraints specific to the dictates of the Shari'ah, than Islamic finance meets the definition of 'ethical'.  However, the way Islamic finance is presented, and I would argue also how it views itself, this standard is not sufficient to be 'ethical'. 

For example, take socially responsibly investing.  It is an 'ethical' framework for investing and it has broad appeal (although there is nothing 'unethical' about disagreeing with the standards under which it operates).  However, it operates in an environment with conventional finance is a competitor and where it has to offer something valuable to consumers.  Islamic finance, on the other hand, is largely concerned with serving a market where it is not in direct competition with conventional finance. 

For Islamic finance to gain consumers--at least until that market is saturated--all it has to offer is the same types of products that conventional finance, but in a way that passes muster of a Shari'ah board.  This type of Islamic finance industry does not directly compete with conventional finance because it is targeted towards a consumer who is not deciding between Islamic and conventional financing, but instead is deciding between working with an Islamic bank or keeping his or her money under the mattress.  This market is almost entirely Muslim, although not all Muslims use Islamic finance. 

There has been a trend in recent years for non-Muslims to use Islamic finance, whether this is Islamic banks in Malaysia or Islamic mutual funds in the United States.  This decision is primarily financial: if an Islamic bank or mutual fund offers a better deal than conventional financial institutions, then non-Muslims will use it regardless of the "ethical-ness" of the product.  However, being price competitive alone does not make the product "ethical", even if it happens to be designed to fit within an ethical system like the one derived from Islam. 

Islamic finance talks a lot about being superior to conventional finance and being an alternative that is attractive to conventional finance to non-Muslims as well as Muslims.  While this is admirable, there still remains a disconnect between creating an "ethical" alternative based on the precepts of Islam.  Returning to the socially responsible investing example, that industry started (like Islamic finance) by avoiding things that were viewed as "unethical", whether that was weapons or tobacco makers or producers of alcohol or companies that produced other harmful or toxic products.  But, the evolution of socially responsible investing did not become an "ethical" alternative until it started offering a product that was defined by what it did, not by what it did not do. 

Today, Islamic finance is approaching the point where it too will have to define what it is, not what it is not.  This ties back into my earlier post on the debate between the idealists and pragmatists in Islamic finance with the former saying that creating financial products that Shari'ah scholars approve using financial engineering in some cases which fit into the current regulatory environment is sufficient.  The latter say, "no", and argue that only profit-and-loss sharing (PLS) products are true to the roots of Islamic finance. 

When viewed through the ethical lens, the idealists have the edge because they are offering an idea about what they want, not how they have not done X, Y or Z.  However, they promote an idea that I think is incompatible with financial services today because of regulatory barriers, as well as consumer preference.  Not every financial consumer's needs can be met with a PLS-based financial product.  For example, how would one structure a student loan to pay for college using PLS?

But, I do think their focus on what Islamic finance does that other types of finance do not is useful for the Islamic finance industry.  To create an ethical product in Islamic finance, financial institutions should consider not only avoiding what is haram, but also on incorporating ideas of what is encouraged within Islam into financial products.  This will make it easier to explain to non-Muslims why they should consider Islamic finance, without either resorting to platitudes about fairness and justice or hoping that the economics of the transaction are more beneficial than a conventional financial product.

Until Islamic finance moves towards this idea, it will be stuck selling its products to the segment of Muslims who will not deal with conventional banks, or those who prefer to deal with Islamic banks, if the cost is similar.  There will remain examples that can be tossed out to refute my argment based on the large non-Muslim customer base, but in large part, those will be isolated examples where the economics work out better for the consumer.  There will be little progress in making inroads on the non-Muslim market (and also among many Muslims) if there is not something being offered that is not solely based on superior performance. 

Islamic investing 2.0

Writing in Gulf News, Rusdhi Siddiqui runs through the equity screening criteria for Islamic stock indices and concludes that there is nothing exclusively "Islamic" about the process of "doing good by avoiding the bad". He concludes: "Islamic investing does not have a monopoly on doing good, by avoiding the bad, its common shared values with all investors of conscience".

I would go one step further and say that for equity investing in public companies--which as he notes includes companies like ExxonMobil, Nestle, Microsoft, Johnson & Johnson and Novartis--Islamic investing is far behind the curve in terms of ethical investing.

For example, consider the Calvert Funds, a well known socially responsible investing fund. Their screening criteria is similar in terms of what is excluded: firms engaged in tobacco, weapons, alcohol, gambling, human rights issues and nuclear. These have significant overlap with the Islamic screens used across the industry (with the additional exclusion of companies with poor human rights track records and those engaged in the nuclear industry). From this "doing good by avoiding the bad" strategy, Calvert adds another set of criteria: governance and ethics, environment, workplace safety, product safety, human rights, indigenous peoples' rights and community relations.

These criteria add another level of screening. Calvert not only avoids the companies engaged in socially detrimental industries, it also screens the companies that pass its 'negative' screens to ensure their businesses are conducted in an ethical way. This is something missing today in Islamic finance. All the focus is placed on avoiding companies that generate significant revenue from 'bad' industries, but doesn't ask how the companies generate revenue from the acceptable industries to determine whether they conduct business in an ethical way.

This should be an area where Islamic investing focuses because of the often-stated idea that Islamic finance supports a more ethical economy. How is this verifiable if there is no screening of companies in acceptable industries to see whether they make products that harm people, whether they deal fairly in their employment practices, have adequate corporate governance to ensure shareholders' rights are protected and there are no 'ticking timebombs' of unethical behavior (e.g. the failures of management at News Corp to stop the hacking of individuals' voicemails and bribery of police).

That leads to the final area where firms like Calvert go beyond the Islamic investing standards. When there are problems at firms in the additional criteria, investors' voices should be used to force changes through shareholder advocacy. As far as I know, most Islamic investing companies take passive positions where they could be more active and try to advocate for changes that make the companies they invest in make positive changes like avoiding certain areas of business, avoiding taking on additional debt, improving corporate governance and disclosures.

Yet, they do not. Most Islamic investors are concerned with 'avoiding the bad' but do not widen their screens to favor companies that are leaders in their industry in corporate governance, human rights, or more generally in conducting an ethical business. If Islamic investing does not adopt the 'best practices' for sustainable investing, then it is unlikely that the companies in which they invest will adopt 'best practices' in terms of sustainability.

Making Islamic financial institutions "most admired companies"

In a recent column, Rushdi Siddiqui discusses his talk at the Bold Talks 2011 and focuses on an area that is overlooked too often within Islamic finance: corporate social responsibility and environmental impact analysis of projects financed by Islamic financial institutions. He notes that "not one Islamic bank is a member of the Equator, Carbon and/or Climate Principals, yet, the GCC has one of the largest carbon footprints".

I lamented this fact a little over 2 years ago and it is somewhat disheartening to see so little (read: nothing) be done to move Islamic finance into an area where it can claim to be taking the lead on something. While there are a number of financial institutions that do pay attention to their environmental responsibility, Islamic finance could be unique if they incorporated environmental stewardship within its core values.

I cannot offer a definitive opinion either way about whether incorporating environmental responsibility into the Shari'ah standards could be an option. However, one of the ways to approach it would be to treat environmental stewardship as a form of fulfilling our responsibility to protect the source of everything we have (which we are not allowed to destroy without destroying ourselves).

The reason why this would be an important step forward is that it would allow the Islamic financial industry to say with confidence that its values are inherently different from other industries. Not only is environmental responsibility important for the financial impact it can play in the industry's growth, it is one of the core values underpinning the industry and Islamic finance does not just promote environmental conservation because it makes good PR.

Environmental considerations are not the only area where this could be incorporated into the industry, but it is probably one of the easiest to explain. Ease of explanation of why Islamic finance differs from other financial sectors is key if we are to make Islamic financial institutions into "'most admired companies' that young people want to work for". Let's hope I'm not writing the same blog post 2 years from now!

Islamic finance as ethical finance?

 An issue that comes up periodically with Islamic finance is that the Arabic terms used to describe the products and the underlying prohibitions driving the industry (e.g. riba, gharar or Shari'ah-compliant).  There are many areas where Islamic finance overlaps with ethical finance and, therefore, Moinuddin Malim, the CEO of Mashreq al Islami Bank said that the industry should 'Westernize' the labels: "Why is it Islamic banking? It is ethical banking.  A lot of people think that it is only for Muslims, and it is not - it is for everyone. [...] But the problem is that it doesn't appeal to non-Muslim investors in Europe, primarily because they do not understand the various Arabic phrases".

There are many reasons why the industry should use more 'familiar' terms for the products being used and some of the resistance might due to fears that it will move the industry outside of its niche.  Not all Muslims are native Arabic speakers so the use of Arabic terms may create a need for more explaining of products than is necessary if they were called by a different name.  However, there are differences between the products used and the products they might be called (e.g. ijara versus a lease).  If a product is substantively different (for example, in the rights and responsibilities of the two parties as in an ijara compared with a lease), the use of 'lease' instead of ijara could be misleading.

There is a more fundamental reason, I think, that Islamic finance should retain the use of the Arabic terms for products: the industry is created to cater to the specific prohibitions within Islam.  It is not in and of itself ethical finance.  The industry does not universally adopt an ethical stance that would be expected by many investors, even some Muslims.  For example, even within Islam, man is placed as caretaker of the earth, yet many Islamic financial products finance activities that are destructive to the environment.  There is not even a delineation between whether the financed companies use industry best practices or are egregiously destructive to the natural environment.

The industry was created and is designed to serve investors who want to avoid that which is prohibited in Islam according to the scholars who advise the financial institutions offering the Islamic financial products.  It is not necessarily even created for the needs of all Muslims; there are some Muslims holding a different view of what is permissible in financial services and if those views are outside of the consensus within the Islamic finance Shari'ah scholar community, then the Islamic financial industry may not be suitable for them.

This is not meant to be a critique of Islamic finance.  It serves a valuable place in the financial services industry globally by providing an alternative to a significant proportion of Muslims who believe that the way the rules on finance are applied by contemporary Shari'ah scholars is correct.  It does a good job at catering to those individuals' needs, even if there remain significant gaps in product offering to actually meet all consumers' needs.  However, it would dilute the purpose of Islamic finance and confuse it's methodologies if it were marketed as 'ethical finance'.

There are two things that should happen if my description is accurate.  First, the Islamic finance industry would reach out to non-Muslims who can see the ethical features of Islamic finance.  For example, using non-Muslims' frustrations with large international banks who are using their deposits to finance either unethical or overly risky products and who present a systemic risk to the financial system (and therefore to the economy as well).  An approach to this group of potential consumers would b to explain the terms used in Islamic finance, but emphasize the fact that Islamic commercial banks by and large are much more pure intermediaries.  They take in deposits and make loans.  Depositors are paid based on the profitability of the financing.  This is an approach that has been successfully applied by credit unions (at least, I switched from Wells Fargo to a credit union for a similar reason, but I think others did too).

Another example would be to appeal to other consumers with an Abrahamic background who are looking for the 'basics' in terms of screening.  They want to avoid pork, gambling, alcohol and tobacco companies and those producing weapons or distributing pornography.  These are areas where Islamic finance has a well developed methodology for more than just investment: from banking to private equity.  With a proper understanding that the economic outcome of most Islamic banking products is the same, just with different labels, they could be convinced that an Islamic financial institution would be able to meet their needs.  The one area where a change of terminology might be helpful to appeal to new consumers would be by finding an alternative to the 'Islamic' label.  Even with Arabic terms, the gap can be bridged by explaining how an ijara works, but some consumers may not even ask the question if they think that the financial institution is working only for Muslims based on its 'Islamic' label.  This has been done before: Turkish Islamic banks are called participation banks, for example.

Moving to the second way that Islamic finance could attract more non-Muslims without changing its use of Arabic terms: if the industry wants to take on the broad 'ethical' name, it should widen its restrictions beyond the prohibitions it uses now.  Of course the expansion of mandate should be vetted by scholars to ensure that they are Shari'ah-compliant, but with few exceptions, that should be an easy test to pass (for example, the mitigation of excessive environmental damage financed by Islamic financial institutions).  This would provide a better base for Islamic financial institutions to credibly claim that they are concerned with the wider 'ethical' ideas, beyond those that are prohibited explicitly within Islam.

There are ways that Islamic finance can be opened to non-Muslims more than it has so far, but just changing the terms used or adopting new marketing approaches that use a broad 'ethical' label are unlikely to be successful.  Islamic finance can be ethical finance (in fact, for many people it already is), but it depends on the consumer's view of what is ethical and many people's understandings would find gaps in the screens used by Islamic financial institutions today.  Reaching out to non-Muslims is important--in many countries it is essential for Islamic financial institutions to grow.  However, just changing the names and hoping people understand the industry better and thus choose to use it is not going to be sufficient. 

Islamic finance and the credit crisis, Muslim group in Chicago helps Muslim convenience store owners

The President of the Islamic Development bank said that the global financial crisis has no influence on Islamic banks "because it was linked to debt operations [and] Islamic banks do not hold such [debt] obligations". While it is true that Islamic banks don't (can't) hold the debt products that led to the financial crisis, it is short-sighted to say that Islamic banks do not have exposure to the global financial crisis. One significant example of how it does have exposure was the Dubai World debt crisis which began with problems at Nakheel around the maturity of its sukuk. Sukuk are debt instruments (for the most part) and Islamic banks had exposure to this sukuk and also were faced with difficulty in raising capital during the financial crisis, despite not having any direct exposure to the subprime-based debt products. The Islamic Development Bank is staring a fund to finance affordable housing.

A Muslim group in Chicago is helping Muslim owners of convenience stores to move their businesses away from selling liquor and pork, among other products, by providing a source for fresh foods instead. The article describes the difficult choice that many Muslims who own convenience stores face: to remain in business, they must sell liquor and pork although they are generally uncomfortable about selling haram items. Instead, the grants will provide them with access to fresh foods that could allow them to remove liquor and pork products from their shelves without jeopardizing their businesses and also helping their communities. One of the well documented problems in low-income urban areas is the lack of grocery stores, which is blamed for causing health problems including obesity. The approach taken by the Council of Islamic Organizations of Greater Chicago is beneficial because it not only helps the business owners avoid selling haram products, but will provide their neighborhoods with fresh foods, which are sorely lacking. This seems like an area where Islamic finance could be able to contribute by providing the financing, which could be a good business opportunity as well as a way to educate Americans about Islamic finance.

Other News

• Rushdi Siddiqui discusses the difficulty (and importance) of finding alternatives to LIBOR for pricing Islamic finance products.
  
• A Jewish fund in the US provides another example of the growth in ethical-based finance.
  
• An Islamic fund in India has done surprisingly well at attracting non-Muslims as well as Muslims based on its performance. This is not a new trend. In the US, the Amana funds received significant investor interest from non-Muslims based on its strong performance.
  
• A court in the DIFC ordered the liquidation of Tabarak, the first Islamic financial firm to be liquidated by the DIFC.
  

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.
  

What does Islamic finance provide and how can it be improved?

With some of the criticism of Islamic finance as nothing more than a replication of conventional finance, I took a chance to think over what the goals of Islamic finance should be and where the current state of the industry fits within the larger idea.

First, the criticism of Islamic finance as a replication of conventional finance does have merits. The way Islamic finance works today is not one that is seeking to completely overhaul the conventional financial industry. Instead, it seeks to provide the basic financial products like bonds and banking services to Muslim consumers who don't want to work within an interest-based financial system. For the most part, these consumers want to have the same opportunities as those who are comfortable working with the interest-based financial system.

The basic products are replications of conventional financial products and in most cases, that is not a bad thing. Using modified contracts to achieve the same ends as conventional finance will make it more likely that the products are comparably priced with conventional financial services, which is important. That these products are priced accordingly with conventional financial products is a benefit not a cost. There should be a goal within the industry to make the plain-vanilla products equally priced so there is no premium paid for using Islamic versus conventional financial products. The important thing is that the means and the intent by which these products are delivered is that they should be put together in a way that is broadly accepted by scholars as Shari'ah-compliant.

There are limits to how far this replication can proceed. There are financial innovations that are detrimental to society at large and if these are replicated in Shari'ah-compliant forms, then there is clearly a problem. The main deficiency with the Shari'ah review process as I understand it is that there is a focus on the specific contractual form, not necessarily as thorough a review of the social implications of a given product. If a product is created (e.g. in the conventional space, the negative amortization mortgage) which relies upon a continually rising house price to benefit the consumer and in any other case will harm him on average, then it would not be appropriate to create a Shari'ah-compliant version of the product.

It is not certain that the use of murabaha or tawarruq financing necessarily produces this social harm because in its absence, there will be a voluntary decision by many consumers to not receive financing at all. This will avoid some of those consumers from entering into a situation where they endanger their financial health, but it will also create hardship for some consumers who could benefit from receiving credit to finance education, healthcare, or a new business. On balance, there is not enough evidence that the use of murabaha or tawarruq creates net social harm.

Similarly, the use of asset-based sukuk which replicate an unsecured bond may not create anything different from a conventional product, but it provides an investment opportunity, for example, for an investment portfolio managed in a Shari'ah-compliant way for a pension fund or takaful provider that can introduce diversification in the way that a profit-and-loss sharing equity investment cannot. The product will not necessarily create a new type of financial system, but it will provide benefits to the investors who are not able to diversify using a conventional bond allocation. In its absence, there will be overallocation to real estate or equities, which are much more volatile and can lead to significant harm if (read: when) there is another significant market downturn.

That is the 'good' type of replication that I see. There is also some that is negative. The creation of products (particularly some of the structured products) that come with high fees for investors and these fees may leave them worse off than if the products had never existed in the first place (although providing significant income to the financial institutions and law firms which created them). As the real estate boom in some areas of the Gulf turned into a bubble which eventually burst, there were plenty of Islamic financial products which fall into the category of what I described. This distinction should be made clear between the over-structured products that are accompanied high fees from the basic banking products which promote inclusion within the financial systems for Muslim consumers that choose to avoid the interest-based conventional financial system.

However, that perspective alone feels a bit empty in terms of what the Islamic financial system is supposed to provide and the similarities it shares with socially responsible and ethical finance. There is one aspect that is omitted from the above discussion that is key for the Islamic finance industry to live up to its billing as another form of ethical finance. There should be a proactive and positive approach to financing ethical businesses and doing good for the world through its operations. Right now, it is too focused on avoiding that which is prohibited while ignoring doing what is encouraged. There are two areas where I think a start should be made: 1) make an extra effort to finance businesses that are environmentally responsible and those that are focused on making businesses more environmentally friendly (companies that provide products that make more efficient use of energy and those that can help develop and integrate renewable energy); 2) use some of the profits and expertise from creating Islamic financial products to help those who are less well off, through focusing on providing financing to small and micro-businesses.

These two areas are important for Islamic financial institutions because they promote beneficial activities for the world and people in need while not forcing the industry from leaving its core area of expertise, which is in financing businesses and individuals. There are many charitable organizations that can provide other services where they have better skills at how to do this efficiently. In the financial area, Islamic financial institutions can work more closely to use their role as a financial intermediary to improve the state of the world. If they choose not to do this, then it would be fair to accuse them of being little more than a re-structured version of conventional banks without a special feeling of obligation to pursue a more ethically focused form of business.

Islamic finance & SRI, Islamic banking in Indonesia

Islamic Finance & SRI - A new report

Dinar Standard and Dar Al Istithmar released the results of a survey on Islamic finance and SRI where they surveyed 29 Islamic financial institutions (including Islamic windows and non-bank financial companies). The results of the study are well documented and, although the sample size is rather small (not something to fault the organizers for), they describe quite clearly the goals, insights and limitations of the data they present.

The final summary of the study is:

Within its limited sample, it is evident that the majority of IFIs have yet to embrace the concept of financial institution utility to enhance their social responsibility. Financial institutions have the ability to redirect funds from the capital rich to the capital deficient to ensure the redistribution of wealth in the long term.
As an example, one method to efficiently utilize an Institutions infrastructure is by maintaining policy targets for financing to SMEs and micro-finance entrepreneurs in the developing world. Micro-finance and SME finance has continuously proven to be a sustainable revenue stream, subject to appropriate risk management strategies, including portfolio diversification, low concentration risk and stringent credit and social collateral requirements.

[...]

At the same token, IFIs can also invest in particular industry sectors that demonstrate social and/ or environmental impact while providing profitable revenue streams, such as education, healthcare addressing the needy water desalination, waste management etc.

I would encourage everyone to take a look through the individual responses (available from the above link as a PDF).

On the conclusions about microfinance, I address my thoughts on Islamic banks and microfinance just below. With regards to the environmental/social/development investments of Islamic financial institutions, it is heartening to see that there are a majority who have investment quotas on these areas, but there remains limited exposure of these activities which may be a question of these quotas being too low. The current environment for business provides benefits for companies that promote their sustainability-related work (whether it is significant or 'greenwashing') and from the preparation of this blog, I read a lot of the press releases and articles about what the Islamic finance industry is doing and there remains limited visibility about sustainability-related business from Islamic banks. So either they are doing very little or they are not promoting what they are doing.

In either case, there is a lot Islamic finance could gain by grasping the sustainability agenda and promoting their involvement in it, especially in the West. I would be hard pressed to come up with a specific reason to switch to a Shari'ah-compliant financial product and many other non-Muslims (with less understanding of how Islamic finance works) may feel similarly. If Islamic financial institutions demonstrated their concern with sustainability, whether environmental, social or developmental, it would surely attract my interest as a non-Muslim consumer with concern for sustainability (for example, I just moved my banking relationship from a major bank to a local credit union). I think there are plenty of other people who share my views and this creates an opportunity for Islamic finance to expand outside of its natural constituency of Muslim consumers (particularly in the West).

I commend Sayd Farook and Rafi-uddin Shikoh (and all others involved in the report) on a job well done creating a thought-proviking and interesting report.

Islamic banking in Indonesia

I thought this article about Islamic banking in Indonesia was interesting. It describes the limited inflows of money into Islamic banking because of unclear regulations and pervasive corruption, but then points out the Islamic banking industry in Indonesia is more focused on small- and medium-sized businesses and microfinance than Islamic banks in other countries.

Although it is clearly sub-optimal for the Islamic banking system to be constrained by regulatory uncertainty and corruption, the Indonesian example shows that Islamic microfinance and banking focused on small and mid-sized businesses can work. I remember seeing Hans Dieter Seibel present a paper (available as a PDF) on institutional diversity in Islamic microfinance in Indonesia and the challenges in terms of capital adequacy and solvency between different types of Islamic microfinance institutions.

One thing I think is certain is that there is too little focus on Islamic microfinance and its impact as one component in poverty alleviation alongside other forms of aid including zakat and waqf. There is certainly enough smarts in the Islamic finance industry to be able to develop cost-effective Islamic microfinancial products and it would be a natural fit for the industry if some of this knowledge and experience were donated to develop Islamic microfinance without having to have the costs of development incorporated into the financial products and passed along to the end-consumers.

Capitas Group

The Islamic Corporation for the Development of the Private Sector signed a deal with Capitas Group, a U.S.-based company that develops Shari'ah-compliant finance companies. Other companies within their portfolio are the U.S.-based Zayan Finance and Zayan Takaful which provide commercial real estate financing and takaful, respectively. The new company will be based in Jeddah, Saudi Arabia and according to Capitas Group CEO Naveed Siddiqui, "there is a huge demand for mortgage finance in Saudi Arabia and the broader region". With a new mortgage law expected soon in Saudi Arabia, this will probably be the focus of the new company.

Other News

• Tamweel is considering its options in case the merger with Amlak falls through. The merger has been in the works since 2008 and is expected in the first quarter of this year, but there appears some doubt on the part of Tamweel officials that it is a sure thing.
  
• Officials at the Philippines' only Islamic Bank, Al-Amanah Islamic Bank, expect the country to miss the growth in Islamic finance in Asia as it continues to 'refurbish' and 'rebrand' the bank after a capital infusion from the Development Bank of the Philippines. S&P released another report on the future growth of Islamic finance today.
  
• The state-owned Islamic Bank of Thailand is planning 55 billion baht ($1.66 billion) sukuk issuance. 5 billion baht would be raised as a local Islamic bond with the remaining 50 billion baht as a sovereign sukuk.
  
• During the last year, the "brand value" of Islamic banks grew rapidly. The article about the study from Brand Finance plc did not define how this was measured.
  
• In a long overdue change, Kuwait Finance House upgraded its website.
  

Islamic financial institutions should become UNEPFI signatories

Michael Gassner, an expert on Islamic finance based in Europe, recently called on Islamic financial institutions to become members of the United Nations Environment Programme’s (UNEP) Financial Initiative. His call was seconded by Dr. Mahmoud El-Gamal, who added that “This is consistent with my earlier call in my book on Islamic Finance that those engaged in Islamic finance should support the earlier UN initiative for financial markets knows as ‘who cares wins’.”

I would like to add my support for this because of the similarities—in theory more so than practice—Islamic finance provides an ethically-based financial model. The gap between rhetoric and reality was described by Dr. El-Gamal: “I have long been a critic of the Islamic finance industry focusing mainly on avoiding prohibitions, but not recognizing that prohibitions are secondary to positive injunctions”. My hope is that Islamic financial institutions become signatories to the UNEPFI as the first step in broadening their focus from avoiding Shari'ah non-compliant activities and adding a focus on promoting sustainable business practices.

The UNEP Financial Initiative is a voluntary initiative that requires signatory financial institutions to incorporate sustainability (the environmental, social and governance impacts of their business) into their business practices. Institutions joining must sign one of two statements (one for financial institutions, one for insurance companies).

Islamic banks v. conventional banks, Islamic finance & SRI, GE Capital sukuk

A study by two professors at Ajman University of Science and Technology found that Islamic banks outdid conventional banks. However, the study, as reported, only looked at four years of data for three Islamic and three conventional banks. Although it is useful to know that Islamic banks have outperformed conventional banks in the past four years (at least among a 6 bank sample), it is not really a useful finding for the industry as a whole.

The dangers of extrapolating using data on just a few institutions over a few years are well known, there is an additional hiccup that could reduce the value of the findings further. The sample period, 2006-2009, was one in which the conventional financial industry saw the most challenging events worldwide as global credit markets froze up and economic growth slowed. And this period was also accompanied by the impacts of these events on Islamic banks (I have long argued that they were susceptible to the financial crisis and economic downturn). However, the financial complexity of conventional banks versus Islamic banks is divergent and not just because of the requirements for Shari'ah-compliance.

Islamic banks are generally operating using primarily basic contracts like murabaha and ijara and have very little use of mudaraba and musharaka. They also have nearly no exposure to any derivatives products which have been particularly volatile. This volatility extends beyond the so-called toxic derivatives. For example, the volatility index, which is based on options on index components of the Standard & Poor's 500 Index, reached record highs in 2008 and have been elevated for much of 2008 and 2009.

Islamic banks, therefore, are involved in lower risk investments compared to their conventional competitors. They also do not have significant exposure to the products which are widely held up as the 'preferred' Islamic products with profit-and-loss sharing. I offer this criticism only to put what I am reading about the study in context of where there might be questions remaining that cannot be answered based on the current experience in Islamic banking. I also should note that I have not read the study. I would appreciate if it were emailed to me so that I could give a more complete analysis.

An article about sustainable finance which criticizes the 'value-neutral' approach to finance points to Islamic finance as potentially providing an example and starting point for a sustainable financial industry that incorporates social welfare in the financial industry. While it acknowledges the limitations of Islamic finance as it currently is practiced (particularly the focus on negative screens and an absence of positive screens), it does demonstrate the benefits of Islamic finance as one method of implementing social responsibility in finance. In a related development, Islamic investment bank First Energy Bank is investing $1 billion in a Saudi solar plant.

GE Capital is planning its first sukuk, which is expected to be a 5-year sukuk of more than $500 million.

The Atlanta-based unit of Arcapita, the Bahraini private equity group is profiled in an Atlanta business newspaper, including a description of the group's investment strategy which differs from the stereotypical idea of private equity, "Arcapita, unlike some private equity firms, doesn’t have an exit requirement for its investments. Still, 'we don’t hold anything forever'" according to Charles Ogburn, the executive director and head of corporate investment.

Other News

• Saad Trading, Contracting & Financial Services announced that the Golden Belt 1 Sukuk Company, the issuer SPV for Saad's $650 million sukuk due in 2012, would be unable to make a periodic payment because the company's assets were frozen.
  
• The Investment Dar is planning to present its $3.5 billion restructuring plan to creditors soon.
  
• Gulf Finance House received a $100 million convertible murabaha facility from Deutsche Bank, which follows its $100 million convertible murabaha from Macquarie Bank. This is a part of the firm's efforts to "redesign" their business model.
  
• Luxembourg would 'welcome' the establishment of an Islamic bank. The President of the Central Bank, Yves Mersch, says that "We had Islamic banking institutions in the seventies which discontinued its services and as for now there is no Islamic bank that operates in Luxembourg, but there is no prohibition to have a setup of such an institution".
  
• Sarasin, the Swiss firm offering a Shari'ah-compliant wealth management offering will start with the Gulf but also include Southeast Asia next.
  
• Malaysia continues to see growth in its domestic Islamic finance industry.
  
• The Islamic Development Bank is going to offer financing of $1 billion to agricultural projects with the UN Food and Agriculture Organization (FAO).
  

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.