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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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.
  

DIFC template for sukuk, Islamic banks in Africa

I am disappointed that it has taken this long, but the DIFC seems poised to provide a standardized template for sukuk based on the recent IFC sukuk. The work has been labeled the "Dubai docs" in reference to the role that the DIFC is playing in providing a standardized set of sukuk documents. Until now, each sukuk has been structured individually and there is no set of documents that creates a standardized offering document so the costs, estimated at $250,000, is borne by each issuer having to build an offering document without a standard reference contract. In other countries like Pakistan, the Central Bank offers standardized contracts for basic products like murabaha and the IIFM has issued a standardized murabaha contract, as well as one for derivatives (tahawwut) with the International Swaps and Derivatives Association (ISDA). I think this will be something that spurs similar documents elsewhere in the world that will reduce the cost of sukuk issuance and encourage new issuers who would have otherwise been deterred by the cost to enter the market. This will, in particular, bring smaller issuers into the market to provide a source for a sukuk yield curve that does not just include sovereign issuers nad high-grade corporate issuers. The more the sukuk market can develop and provide a separate yield curve for sukuk issuers, the more ti will open the market up to other new issuers. The more sukuk that are issued (and especially the diversity in issuer characteristics) will provide alternative investment opportunities to holders of sukuk, which will help the secondary market develop further.

Islamic banks starting in Sub-Saharan Africa face an image problem that they are only catering to Muslims. The Central Bank of Kenya is working on a framework to issue sukuk to attract capital from the Gulf states. The Central Bank governor gave a speech recently at a conference in Nairobi, Kenya along with other representatives of Islamic banks in Kenya and other parts of Africa. The Standard Bank Group is starting to provide Islamic banking products in Tanzania. In addition, recently National Bank of Commerce launched an Islamic banking service.

Other News

• Sukuk is still a niche market and the Nakheel sukuk resolution will not revive the market. Nakheel's 2010 sukuk maturing next week will not revive the market on its own. This is expected to occur even without a restructuring agreement for Dubai World's debts, which HSBC describes as "very fair".
  
• Standard & Poor's rated an Islamic fund, its first such rating. The fund is offered by European Finance House.
  
• Lebanon is not planning to offer a sovereign sukuk. Luxembourg, however, is considering offering a sovereign sukuk.
  
• Another article presents comments on the need for a systemic stability regulator for the Islamic financial industry.
  
• Al Baraka expects to complete the purchase of a stake in Bank Muamalat by the end of the year.
  
• Hawkamah and the American Bar Association organized a conference in Dubai on Islamic finance at the DIFC.
  
• Indonesia's ministry of finance plans to raise 1 trillion rupiah ($110.8 million) in sukuk on May 11. Several recent sukuk auctions have failed recently with investors demanding a higher yield than the ministry of finance is willing to pay.
  
• Several sukuk, including two Nakheel sukuk, have been suspended from NASDAQ Dubai for failure to file financial statements and annual reports.
  
• Cagamas and Al-Rajhi bank are cooperating to issue a sukuk recognized as being in compliance with Shari'ah globally.
  
• Malaysian firm MTD InfraPerdana issued a MYR100 million ($31.2 million sukuk).
  

Wednesday update

• A business management student at Singapore Management University shares some thoughts about a 15 week course on Islamic finance in the Straits Times.
  
• The AAOIFI Shari'ah conference held in Bahrain this past Monday and Tuesday discussed a number of topics including tawarruq and reverse tawarruq, two products that were recently condemned as a 'deception' by the OIC Fiqh Academy.
  
• Calyx Financial spins out an Islamic investment firm called Codexa Capital that, although based in the US, focuses primarily outside of the US.
  
• Islamic Finance News will begin an 'ask a scholar' column featuring the Shari'ah scholars on the ISRA Council of Scholars including Dr Mohd Daud Bakar, Dr Mohamed Ali Elgari,
  Dr Abdul Shukor, Dr Abdul Sattar Abdul Kareem Abu Ghuddah and Dr Yusuf Talal Delorenzo.
  
• The most recent Central Bank of Bahrain short-term ijara sukuk (which have a maturity of 182 days) was oversubscribed by 200% with a return of 1.30%, compared with the interest rate on identical maturity conventional debt issued today of 1.09%.
  
• Dubai Islamic Bank is buying back $50.6 million of its own sukuk maturing in 2012 at 88 cents on the dollar.
  
• The sovereign wealth fund of Malaysian region Kuala Terengganu, Terengganu Investment Authority, will sell 30 year oil revenue backed sukuk to raise up to $3.1 billion.
  
• Humayon Dar, cEO of BMB Islamic, does not believe the UK will issue a sukuk within the next 12 months. While in Malaysia he said "I wouldn’t think that in the near future, and the near future means in the next 12 months or so, there will be any Islamic sovereign bond issued by the government of Britain."
  
• Malaysia is putting aside $1.72 billion to promote Islamic venture capital. Deputy Minister of Finance Dr. Awang Adek Hussin said "By providing funds to budding entrepreneurs with sound ideas, Islamic venture capital can help to promote innovation, job creation and the development of high growth industries".
  
• There is an interview with Malik S. Sarwar, CEO of New York-based Sarwar Wealth Advisors which is interesting except for the title which focuses on Islamic finance as a 'panacea'.
  
• Kenyan Islamic bank First Community Bank is planning expansion beginning with entry into neighboring Uganda and Tanzania within the next year and a half.
  

Sovereign sukuk from new places

Employees of Kuwait Finance House recently travelled to Spain to share their knowledge about Islamic banking. There is little Islamic banking in Europe outside of the U.K. although countries like Sweden and France have begun to explore how to develop an Islamic financial industry. The German region of Saxony-Anhalt became the first Western government to issue a sukuk when it issued one for € 100 million in 2004.

Indonesia set the total issue amount of its Rupiah-denominated sukuk at IDR 5 trillion ($538 million). Hong Kong expects to resolve the taxation issues that prevent sukuk in two or three months. Under current tax law, the transfer of assets between the issuer and the SPV would be taxed twice, once when they are purchased by the SPV and again when they are resold to the issuer upon maturity. Initially, the tax changes would be done on a case-by case basis. It could pave the way for the first sukuk, from the Airport Authority, as early as October.

Gulf African Bank, which recently began operating in Kenya, may expand into Uganda and Tanzania, in addition to further expansion within Kenya.