Retakaful for agricultural-based microtakaful funds

The Consultative Group to Assist the Poor, a part of the World Bank, has an interesting post from the EVP & Group Head of Retail and Microfinance at the Bank of Khartoum about the possibilities for Islamic microfinance in agricultural finance.  One of the points that I thought was noteworthy was the potential to offer microinsuance (microtakaful) to the farmers in the region served by the bank. 

There is value to that to provide a community-based way of sharing risks associated with agriculture, but I think that it would be beneficial to broaden the scope of the microtakaful beyond the communities involved in the bank's focus.  The microtakaful would presumably provide assistance if a farm ran into trouble in a given year, but it would surely be insufficient if there was a widespread drought across the entire region.

The takaful industry--not to mention microtakaful--is several years behind the rest of Islamic finance, so there is some catching up to do.  However, a focus on microtakaful would be one area where the takaful segment of Islamic finance could lead if there were a more widespread push to emphasize its development (Islamic finance in general has been behind the curve on microfinancing).  

The agricultural sector in many OIC countries is generally a large part of the overall employment, even if the total contribution to GDP is smaller than the share of employment.  This typically results from farmers who are working with small plots of land and not using as many productivity-generating methods compared to larger-scale agriculture.  Another result is that smaller farms are more susceptible to drought.

Given the high contribution in terms of employment that comes from agriculture in many OIC countries, providing a financial product that makes a contribution to soften the blow of drought (it would be pretty impractical to suggest that the impact could be entirely offset, absent significant progress to reverse the effects of climate change) would do a lot in both monetary and non-monetary terms to supporting development.

The efforts to develop microtakaful for farmers will provide some benefit, but in the absence of micro-retakaful (or remicrotakaful), the terms doesn't roll of the tongue for sure, but the development of a reinsurance program for microtakaful that is based on the deviations in rainfall and temperature in different regions and pays out accordingly would do a lot of good.  It would provide the microtakaful funds with assistance in case of events that would otherwise be catastrophic to the takaful fund (where need would far oustrip the available resources). 

ISRA Shari'ah scholar certification

The plan by ISRA to set up a global certification for Shari'ah scholars is proceeding and the body expects to pick a board of regulators to develop the qualifications by year-end. The goal of the certification is to ensure that all Shari'ah scholars have requisite training and competence not only in Shari'ah, but also finance. I believe the primary beneficiaries of the qualification will be the less well known scholars who may find more demand for their services with the certification providing some confirmation that they are qualified. However, there will remain significant momentum among particularly the global financial institutions to recruit the highest profile scholars to their Shari'ah boards as a way of enhancing their reputation as being Shari'ah-compliant.

Other News

• Moody's Investor Services and Mashreq Capital DIFC believe that the Nakheel trade creditor sukuk will spur secondary market activity in sukuk because many trade creditors will sell them.
  
• Dana gas and Aldar's convertible sukuk performed well in the first two months of the third quarter, with their yield falling from 13.6% to 10.77% (for Dana Gas). The GCC sukuk market has been slow since the financial crisis and the AAOIFI resolution on sukuk.
  
• Padiberas Nasional Bhd issued sukuk as part of a RM750 million ($240 million) sukuk program. While issuance has rebounded in Malaysia, it has remained sluggish in the GCC following the Dubai debt crisis last fall.
  
• The National Bank of Ethiopia is close to approving a directive to allow Islamic banks and Islamic windows at conventional banks. Stanbic Bank in Tanzania, which launched Islamic financial products earlier this year, submitted an application to the country's central bank to widen its product offering.
  
• An article on an Islamic finance conference in Switzerland provides a good summary of the challenges facing Islamic finance if it wants to become more attractive and attract non-Muslim clients.
  
• An article from Trade Arabia discusses one small part of the Islamic financial industry that is Islamic exchange traded funds (ETFs)>
  
• Sudan delayed its planned $300 million sukuk issuance again citing the financial crisis.
  

Islamic wealth management, avoiding future crises, Moody's says Islamic finance could reach $5 trillion

The Islamic wealth management report from Bank Sarasin raises one point which I believe is true across the Islamic finance industry: the diversification of assets is not nearly as expansive as in conventional finance and in many cases leaves investors with too much exposure to real estate. It also is too focused on transaction-based compensation for Islamic bankers. The emphasis is placed on deals and there is too little focus (and compensation based on) the long term needs of Muslim investors. As an asset manager myself, I have watched the Islamic finance industry expand, particularly in the issuance of sukuk, with much of the focus on new financial products that expand the financial structures used in conventional finance. That is not necessarily problematic because good diversification relies on different asset classes from which investors can choose. However, when the focus is on creating a diverse set of structures and not on the types of investments, there will be an unmet need. For example, the equity asset class has been the easy part with Islamic indexes being around for over 10 years now. However, there remains a shortage of fixed income-like products that is only partially filled by sukuk (for example, there is still no fixed income-substitute within the United States). A lot of the other structures being created have still focused on property finance. There can be many different ways created to provide investors with exposure to real estate markets, but that still only addresses one asset class. It may create diversification (e.g. geographical) within that asset class, but a focus on real estate markets as a predominant investment area leaves asset managers struggling to create a diversified portfolio for Muslim clients (whether or not they are exclusively focused on Muslim clients). Perhaps the (nearly) global property bust will will make other areas more attractive, but it may just create a new area where activity is concentrated. That would be a shame and would harm the investors that are the source for the Islamic finance business.

The CEO of Fajr Capital, Iqbal Khan, said that Malaysia can provide an example for reform within the Islamic finance industry, particularly to separate the utilitarian and financial intermediation roles to prevent the problems that arose during the credit crisis. Mr. Khan said that there should be a separation to prevent the need in a future crisis for Islamic investment banks to be bailed out the government to preserve the basic payment systems within the banking system. Those payment systems could then be backstopped if necessary but ""Everything else - Mudharabah-based, asset-based, unit trust and investment fund - goes into separate business. These two, never the twain shall meet, they have to be kept separate". I believe he is absolutely correct. The flaw with the universal banking model and allowing the investment banks and commercial banks to merge (in the U.S., this was through the Gramm-Leach-Bliley Act) forced the government to bail out all or none of the banks and the combination of the two into large financial holding companies meant that in order to keep the payment systems intact, the investment banks had to be bailed out lest their losses endanger the institutions as a whole, which led to the crisis within the 'boring' areas of the credit markets unrelated to the investment banks' operations.

Moody's says that Islamic finance assets could grow to $5 trillion without providing a date by which this could be reached. They said assets were $950 billion in 2009, which is higher than previous estimates from other groups which were in the range of $800-$850 billion. Moody's says that Shari'ah-compliant derivatives, if 'employed with care', could provide a useful purpose for hedging purposes. The recent IIFM master agreement on Islamic derivatives includes a requirement that they only be used for hedging, not speculation. Moody's VP and Senior Credit Officer Anwar Hassoune cautioned that "IFIs aim to utilize derivative instruments to hedge against risk and to improve risk monitoring practices. However they are keen to do so in a Sharia-compliant manner, rather than imitating conventional derivative instruments, in order to avoid losing their special status as Sharia-compliant banks, which makes them very attractive to a large population of Muslims." Moody's warns that IFIs have weak asset-liability, investment, and liquidity risk management. An article published by the Wharton School at the University of Pennsylvania discusses the role of ratings agencies within the Islamic finance industry, specifically within the sukuk market.

Other News

• An article in the Financial Post (Canada) discusses the recent UFANA conference in Toronto (at which I was a speaker).
  
• $4.67 billion in sukuk were issued in the first quarter of 2010 according to Zawya, compared with $0.63 billion in the same period in 2009. Malaysian issuers accounted for 53% of all new issues, Indonesia for 33.5% and Saudi Arabia with 9.6% from the Dar Al Arkan sukuk of $450 million. Malaysia is planning a US dollar-denominated sukuk.
  
• An opinion column in the Kuwait Times asks whether Islamic banking has enough focus on providing a competitive and quality product to ordinary people.
  
• A GCC-based VP at iShares offers an interesting view of the current state of Islamic indices.
  
• Just as private equity has faced significant headwinds over the past 2 years, so has the Islamic private equity industry and things are just starting to get back to doing deals.
  
• The New York City Bar is planning a seminar on Islamic law including a portion of the seminar covering Islamic finance.
  
• Indonesia's efforts to expand the share of its banking system made up by Islamic banks is described in an article from the Oxford Business Group. The government is planning a 5 trillion rupiah sukuk (555 million) issue on April 13.
  
• Standard Chartered's Islamic finance window has avoided Islamic hedge funds based on a concern that the arbun structure used to create short-selling-equivalent has not been widely accepted among Shari'ah scholars.
  
• An article describes what AAOIFI does and what it is working on now.
  
• Sudan, which has been largely cut off from capital markets since US economic sanctions were imposed in 2007 because of the genocide in Darfur, is issuing $300 million in sukuk.
  

Sukuk issues appeal to non-Muslims; KFH interested in RHB

Sukuk issues appeal to non-muslim investors

The Financial Times provides a good overview of the market for sukuk their appeal to non-Muslim investors, as well as the risks which need to be addressed. The article provides short descriptions of a few specific sukuk including Nakheel Group's $3.52 billion issue and an issue by Boyner Holding (a Turkish retailer)

KFH still interested in RHB

Kuwait Finance House, the Kuwaiti-based Islamic bank which operates in Malaysia, is reported to be in talks to acquire a 49% stake in RHB, for which it launched a failed bid earlier this year.

Other News

The Islamic Development Bank (IDB) will launch the International Islamic Trade Finance Corporation (ITFC).

Qatar Islamic Bank plans to explore opening a $1 billion mega Islamic bank in Sudan.

Barclay's Capital has a 23% market share in Islamic bond underwriting.

Malaysian-based International Centre for Education in Islamic Finance (INCEIF) plans to expand into Europe and the Middle East.

GCC Islamic banks, new conferences, Islamic Trade Finance Corporation launch

GCC-area Islamic bank

Al Salam Bank Bahrain announced plans to start a real estate company. The bank also announced plans to expand its operations in Algeria and Sudan. Al Salam Bank has operated in Sudan since 2005.

Deyaar, the real estate subsidiary of Dubai Islamic Bank has increased its capital by 56 percent (to DH1.56 billion [$425 million]).

Islamic finance conferences

The 1st Annual World Islamic Finance & Investment Conference will be held in Kuwait from March 4-5, 2007. The conference, "Capitalising on Emerging International & Regional Growth Opportunities", will focus on the impact of the industry's growth, regionalization and the emergence of larger banks affects the industry.

The 12th Annual International Islamic Finance Forum (IIFF) will be held in Dubai from April 2-5, 2007. It will focus on a recent report released by KPMG and strategies of growth & diversification. The KPMG reports on Islamic finance are available online.

These conferences, as well as a newly announced conference in Geneva, Switzerland in April 2007, are listed on the Institute of Halal Investing's Conference page.

IDB launches ITFC

The Islamic Development Bank (IDB) will launch an Islamic Trade Finance Corporation (ITFC) on February 24. The focus of the ITFC is to encourage trade between members of the Organization of the Islamic Conference

Islamic banking, GIFF, Pakistani government to promote Islamic financial products

Islamic banking

In an interesting opinion piece (with a discussion over at washingtonpost.com), a professor at Durham University in the U.K., Rodney Wilson, contemplates whether Islamic banking should be embraced as a positive development in banking or shunned as a tool for 'financial ghettoization'. Along the way to explaining why he believes it is provides a net benefit to the community, he writes:

Ultimately Islamic banking and finance is about the emergence of a distinctively Islamic form of capitalism that may co-exist and interact with Western, Chinese, Russian or any other capitalism. Such a development should be welcomed and facilitated, and not hindered or suppressed.

While Professor Wilson's argument largely makes sense in terms of injecting a new ethical constraint into mainstream banking, I find one aspect of his argument a bit troubling.

Professor Wilson believes that the effective privatization of Shari'ah boards (i.e. a system where the Shari'ah scholars are employed by Islamic financial institutions individually) contributes to the development of the industry (as opposed to government-controlled Shari'ah boards). I don't believe this is necessarily a net positive. While it is undeniable that countries like Sudan, Iran and, until recently, Pakistan that employed a top-down approach had a less developed Islamic banking system, the appearance of conflicts of interest in the 'privatized' Shari'ah board model harms the appeal of Islamic banks. At the same time, Kuwait has a Shari'ah arbitration group that was created by the government that decides Shari'ah-compliance where the scholars disagree and has around 30 Islamic financial institutions.

Pakistan to promote Islamic finance

The governor of the State Bank of Pakistan, Dr. Shamshad Akhtar (also the Deputy Governor of the Islamic Financial Standards Board (IFSB) for 2007, said the government was ready to promote the further development of Islamic finance in the country. She was speaking at the International Islamic Finance Conference in Karachi. A summary of the conference is available from albawaba.com.

Bank Negara Malaysia to host Global Islamic Finance Forum (GIFF) in March

Bank Negara Malaysia, the Malaysian central bank, announced that it will hold the Global Islamic Finance Forum from March 26 - 29, 2007 in Kuala Lumpur, Malaysia. The forum will be made up of four concurrently occuring forums, the Investors & Issuers Forum (March 27-28), the Financial Regulators Forum in Islamic Finance (March 26-29), the Banking and Financial Law School (March 27) and the IFSB Annual Meetings & Events 2007 (March 24-29).

The conferences will be added shortly to the Institute of Halal Investing's listing of Islamic finance conferences

Japanese Islamic Finance Conference

A summary is available from the IFSB.

Miscellany

AmInvestment received an award from Islamic Finance News for its recent REIT and Mudaraba.