Tahawwut slow to catch on in the GCC, Nakheel/Dubai World face trade creditors' claims

Lack of familiarity with derivatives products in the GCC has hampered the adoption and use of the Tahawwut Master Agreement for Shari'ah-compliant derivatives. There is also some skepticism that the implementation of the product is Shari'ah-compliant because the Master Agreement is just a template and not a specific product.

Although Nakheel has offered to pay trade creditors 40 percent in cash with the remainder in a tradable sukuk yielding 10%, several of Dubai World's trade creditors have taken their claims to the Dubai World Tribunal set up at the DIFC. Nakheel needs 95% agreement in order to issue the sukuk to pay the deferred portion of the amounts owed to trade creditors. One of Nakheel's trade creditors, Construction Delivery Group filed suit with the tribunal claiming it is owed Dh 50 million (13.6 million) for a construction management contract.

Other News

• Mushtak Parker provides a good assessment of an IMF report that found that Islamic banks fared better during the financial crisis.
  
• A study from Deloitte found that 79% of executives believe Islamic finance is growing. 66% believe the industry is under-regulated.
  
• Indonesia may issue a global bond or sukuk for $650 million in the first quarter of 2011. Jordan formed a committee to study the changes needed to be able to issue sukuk and a statement from a government official stated that the government is "serious about using Islamic sukuk to provide funds for carrying out vital and top priority projects.
  
• Citigroup, which co-managed the Kuveyt Turk sukuk says it is in talks for more corporate sukuk issuance in Turkey. AmIslamic Bank in Malaysia issued RM550 million in 7-year sukuk.
  
• The governor of the Kuwaiti central bank says that with five Islamic banks, the market for Islamic banking is saturated.
  
• RAM Islamic projects that the sukuk market in Malaysia will continue to grow.
  
• Qatar First Investment Bank and Gulfmena Alternative Investments are launching an Islamic asset management firm. Allfunds Bank launched an Islamic Services Unit to provide a B2B fund platform of Shari'ah-compliant funds.
  
• Luxembourg will host the 8th Annual Summit of the Islamic Financial Services Board (IFSB), the first time it has taken place in the EU. Luxembourg is the only EU member country that is a member of the IFSB.
  
• Zawya and the Ethica Institute of Islamic Finance announced a partnership for Islamic Banking certification and training.
  
• Pakistan, Afghanistan and Senegal see Islamic banking as a way to bring underbanked people into the financial system. Bloomberg updated its list of planned and expected sukuk.
  
• The Central Bank of Bahrain's 6-month sukuk al-ijara was heavily oversubscribed with BD62 million (US$164 million) in subscriptions received for the regular BD10 million issue.
  

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.