An OIC head of the IMF

Over the weekend, I wrote my newsletter about the search for a new IMF head and focused on a suggestion I saw from a Bloomberg reporter, William Pesek, for Zeti Akhtar Aziz as a candidate (she is currently the governor of the Malaysian central bank, Bank Negara, and Chairwoman of the International Islamic Liquidity Management Corporation). I thought she was a good choice except for the void it would create in the Islamic finance industry if she were to depart from her current positions.

Rushdi Siddiqui, the global head of Islamic finance and GCC countries at ThomsonReuters, will offer his own suggestion (Mohamed El-Erian) in an opinion piece in Gulf News this weekend and his candidate is someone I think is eminently qualified for the post, although he is currently comfortably employed elsewhere (like Zeti, he happens to be a Muslim).

This week, I reported in The Islamic Globe that the International Finance Corporation (an organization affiliated with the World Bank) is planning another sukuk once they assemble enough Shari'ah-compliance assets to fill a sukuk. They did not say how large they expected the sukuk to be (their last one in 2009 was $500 million), however, they did indicate they planned on issuing one "every few years".

With the growing involvement by the World Bank in Islamic finance, perhaps it is time for the IMF to become more involved as well. While the Fund does not do as much direct lending as the World Bank, it is focused on the macro policies that can either encourage, be neutral to or discourage Islamic finance. It is not necessary for the head of the IMF to be a Muslim to work with countries trying to put conventional and Islamic financial systems on equal footings, putting someone with a familiarity and comfort level with the industry would send a signal that the rapid growth of Islamic finance is not being overlooked.

The benefit to IMF member countries of a greater involvement with Islamic finance would not be limited to Muslim-majority countries. Non-Muslim countries like the UK, France, Japan, Russia and China are all at various stages of creating conditions for Islamic financial institutions to be able to compete on a level playing field. Further, the changes that most countries have to make to enable Islamic finance are well within the scope of the IMF's mandate. Whoever the candidate, it would be an important signal of change in the IMF if the next head of the IMF came from an OIC country with a vibrant Islamic finance market or from a background in Islamic finance, whether or not that individual is Muslim.

Newsletter
William Pesek, a reporter for Bloomberg wrote an opinion piece with a list of potential Asian candidates who he thinks should be considered for the recently vacated position running the International Monetary Fund. One name on his list should be familiar to anyone with interest in the Islamic finance industry, Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the country's central bank. This is what he had to say about her qualifications for the position.

"She is as internationally respected a central banker as any these days. The Bank Negara Malaysia governor played a key role in turning Kuala Lumpur into the global hub of the $1 trillion Islamic finance industry. Zeti also was part of the team that bet against the IMF and won. In the late 1990s, it seemed inevitable that Malaysia would join Thailand, Indonesia and South Korea in accepting multibillion-dollar IMF bailouts and stringent conditions like raising interest rates and cutting spending. Malaysia said no and Zeti helped it weather the turbulence. And then she watched the United States, in the height of hypocrisy, do all the things it told Asian officials not to do. Zeti would bring a different perspective to the IMF, one much-needed."

I think that he makes a good point on installing someone at the IMF who brings her diverse experience from the financial crises in 1998 as well as her role in adapting as things changed to ensure that the Malaysian Islamic finance industry developed as successfully as it has over the past decade in Malaysia. That being said, I think for the Islamic finance industry, it is better if she remains just a candidate for the top job at the IMF.

It will highlight the growth in Malaysia's Islamic finance industry without depriving the industry of one of its best spokespeople. In addition to her role as governor of BNM, she is chairwoman of the new International Islamic Liquidity Management Corporation, which is developing short-term liquidity management tools for the Islamic finance industry, something which will be beneficial. It would not be the end of the effort should she leave her current posts for the IMF, but she is one of the most recognizable central bank governors among the countries with large Islamic finance presences.

It is good to see the growth of Islamic finance recognized even tangentially, but it would probably be a net negative to have someone as involved with the Islamic finance industry as much as Ms. Zeti is depart to run the IMF. And anyway, old habits die hard, so the next IMF head will most likely come from within Europe, just has it always has.

Dubai World, Saad Group

The Dubai World debt negotiations hit another potential snag with the repayment of the Nakheel sukuk maturing in May becoming more likely even without a restructuring deal. This compounds the issues caused by the offer of a 1% interest rate for banks who are owed money by Dubai World at the same time that trade creditors are offered 40% cash payment with the remaining 60% paid through a sukuk yielding 10%. A top official at Al Ghurair, which is described as a 'key trade creditor' by Emirates Business 24/7, said the 10% profit was "very generous".

I have previously questioned whether the restructuring would incorporate Shari'ah-complaince and there still has not been a complete reporting of this aspect of the restructuring. However, the use of a sukuk to repay trade creditors indicates that Dubai World remains interested in Islamic finance. The big potential problem is the differential treatment of different creditors, most of which are unsecured creditors. Banks are offered 1%, trade creditors offered 10% on a portion with the remaining being repaid while sukuk holders of the sukuk maturing next month receive full repayment. This differential treatment does no favors to Islamic finance because it reinforces the uncertainty about the rights of creditors in one of the largest geographical concentrations of sukuk issuers. This will make it more difficult for issuers to bring new sukuk to market because although the problems are largely Dubai-related, the uncertainty is generalized to the UAE, if not the GCC. Although the debt holders would suffer delays and would probably come out worse for it, for the Islamic finance industry, it may have been preferable for the whole Dubai World mess to end up in the tribunal in front of internationally recognized judges under DIFC law, which closely resembles English law.

Sukuk holders of the Saad Group have agreed to dissolve the sukuk trust. According to a Reuters factbox, the Saad Group sukuk was an asset-based sukuk, which would mean that the dissolution of the sukuk trust does not provide investors with an avenue to recover their money except through a bankruptcy proceeding as unsecured creditors of Saad Group, where they would be treated equally (pari passu) with other unsecured debt holders and subordinated to any secured creditors.

Khalil Jarrar has an interesting column in the latest Opalesque Islamic Finance Intelligence.

My latest article on the East Cameron sukuk was published by Islamic Business & Finance in the latest issue.

Other News

• The World Bank and the International Finance Corporation will be in Malaysia to discuss a Shari'ah-compliant fund for green technology investments.
  
• The relative strengths and weaknesses of using equity vs. debt in Islamic finance acording to an executive at Elaf Bank in Bahrain.
  
• Arcapita is planning to build a fund management business to reduce the cyclicality of revenues in the private equity business. I believe this is something that more Islamic investment banks and private equity houses will undertake to smooth their revenues and reduce the prospects of being severely harmed in future downturns and this is good for the industry as a whole.
  
• The Abu Dhabi Stock Exchange may begin to indicate which investments are Shari'ah-compliant and which are not.
  
• The CEO of a Malaysian invesmtent bank, Alliance Investment Bank, says that sukuk have a promising future.
  
• Kencana Petroleum Bhd, a Malaysian oil and gas services company, is planning to issue $78 million (MYR250 million) in sukuk sales. Cagamas issued $156 million (MYR500 million) in 5 year sukuk that were rated AAA by MARC because Cagamas is state-owned.
  
• Indonesia issued $22 million in sukuk, about 20% of its planned offering. Demand was limited, according to reports, because of limited liquidity in the sukuk.
  
• KPMG in India has expressed support for the development of guidance from the central bank for Islamic financial institutions in the country which have been slow to develop.
  
• The latest monthly commentary abou the performance of the Dow Jones Islamic Market Indexes for April is now available.
  
• Dundee University in Scotland will offer a postgraduate degree in Islamic finance.
  
• AsiaOne has a summary of Islamic finance structures that are commonly used.
  
• The company offering Salaam Halal, Principle Insurance Holdings, has been sold to a Kuwaiti buyer who was one of the largest shareholders.
  
• AAOIFI will hold its annual meeting at the end of May.
  
• The new Christian ETFs will not be a competition to Islamic financial products, but will encourage greater uptake of ethical products, according to an article in the Malaysian Insider.
  

World Bank, ThomsonReuters to provide assistance for standardization and improving data in the Islamic finance industry

The World Bank says it is committed to helping the Islamic finance industry turn its voluntary standards into binding standards. I would imagine that this assistance would be focused primarily on accounting and auditing standards that have been issued by AAOIFI and the IFSB, rather than Shari’ah standards. The former is an admirable goal to ensure that Islamic financial institutions incorporate global accounting standards within the guidelines of the Shari’ah. The latter, however, is a mixed bag. There are areas where some standardization of Shari’ah rulings could benefit the growth of the Islamic financial industry, but too much, especially pushed to quickly, could limit beneficial innovation that will eventually reduce the reliance on controversial products like tawarruq/commodity murabaha. It is also a little curious that the World Bank and not the International Monetary Fund would be taking the lead on this standardization. The World Bank is primarily focused on development, while the IMF has a mandate that focuses more on financial market and exchange rate stability.

Thomson Reuters is launching an Islamic finance portal in 2010 that will provide one source of data on the Islamic finance industry. I think this is essential for the Islamic finance industry to grow, particularly to expand into Western markets and attract more interest from the global financial industry. While this could be a mixed blessing if it reinforces the reliance on conventional financial product replication, However, it should also provide some transparency that is necessary for the industry to mature, as well as providing the needed data for debate within the industry.

I would recommend heading over to Opalesque and downloading the latest Islamic Finance Intelligence (registration required). They offer a (free) monthly newsletter that is always of very high quality.

The Islamic Development Bank is planning another $850 million sukuk issue in 2010. This follows a similar size issue in 2009 and could signal a continued dominance of sovereign, multilateral and high-grade corporate (e.g. GE Capital) issuers in the next year. I have been critical recently about the lack of seeming promise for a wider diversity of issuer quality, but there could be a benefit to these types of issuers dominating the market following the Nakheel debacle. The area where these highly rated issuers can contribute most to the market is by testing the longer maturity issues. Most sukuk are now issued with five to ten year maturities, although the number of issues are clumped more towards the five year maturities. If Islamic finance is going to grow sustainably and if there is a chance for the industry to move away from LIBOR as a pricing through the development of a Shari’ah-compliant yield curve, then two things will have to happen. First, the maturity profile of new sukuk issues will need to expand into the longer maturity sukuk and second, we will need to see a return of lower rated issuers.

The Indian state of Kerala is planning to issue sukuk next year, the country’s first.

The Bank of Kuwait and the Middle East will transform itself into an Islamic bank in the second quarter of next year.

Could the bailout of Dubai that started with the bailout of the Nakheel sukuk lead to Abu Dhabi running out of liquidity? I would lean towards doubting it because Abu Dhabi has made it clear that the funds it has already provided to Dubai are not the sign of an open checkbook by requiring a standstill agreement and pressuring Dubai into taking credible steps to achieving a successful restructuring. However, with little transparency about how much of the Abu Dhabi sovereign wealth fund is in illiquid investments, the question should still be asked and it would be foolish to assume that Abu Dhabi has infinite liquidity to support the other emirates. However, even if investors react positively to the new law in Dubai surrounding the restructuring being judged under DIFC law, there is a long road ahead.

Regulation in Islamic finance, Questions remain about Dubai GREs

Malaysia's prime minister Najib Razak said that the Islamic financial industry needs strong regulation to ensure it avoids future crises. This has been an area where the industry has been slow to recognize its susceptibility to a similar financial crisis that occurred beginning in 2007 in the conventional financial industry. For too long, there were many articles talking about how the Islamic financial industry was 'immune' to crisis because of the way it operated. I have been pointing out that there are some aspects of the Islamic financial system (including lack of deposit insurance and a true 'lender of last resort') that could even make Islamic finance more vulnerable to a crisis if there was a serious loss of confidence in one or a few large Islamic banks. It is good to see that there is a greater recognition of the need for regulation to prevent either poor risk management or damaging innovation from creating a situation where there could be a crisis. Now, all that needs to happen is for these regulations to be adopted. That could take a while, although the Islamic FInancial Standards Board has begun discussing liquidity standards that would address one potential area of systemic risks in Islamic finance caused by the difficulties of Islamic banks in managing liquidity and asset and liability maturity mismatches.

Some of the proceeds from the recent Dubai sukuk, which raised $1.93 billion, will be used to pay the maturing $1 billion sukuk from the Dubai Civil Aviation Authority, which matured today. The UAE said that the timing of the issue of a $10 billion bond planned by Dubai that may be used to redeem the Nakheel sukuk maturing next month will "depend on the needs at the time" according to the Minister of Economy. In a contrary development, ratings agency Moody's Investor Service downgraded five government related entities (GREs) because the government after the Dubai finance department relinquished its obligations to cover the entities' debts. Although the GREs are not part of the government and do not have a government guarantee, they are closely tied to the government and any defaults would likely have repercussions on the Emirate's perceived creditworthiness.

Other News

• Amlak and Tamweel, the two large Dubai-based Islamic mortgage firms will be merged beginning in January with their investors owning one-third of the resulting bank.
  
• Gulf Finance House is planning on converting into a commercial bank from an investment bank and will issue $100 million in a convertible Islamic instrument. GFH issued Macquarie Bank with a $100 million convertible murabaha earlier this year.
  
• The ISDA-IIFM template for Shari'ah-compliant derivatives will be released either this year or early next year.
  
• The IFC listed its $100 million sukuk on the Bahrain Stock Exchange and NASDAQ Dubai.
  
• The U.S. is selling the building in which its embassy has resided in London to Qatari Diar, which recently began the process of issuing sukuk to fund its European acquisitions. Al Salam Europe, the European unit of the Bahraini firm is also planning on expanding its investments in Europe with real estate and private equity investments planned by January.
  
• Islamic finance could continue its rapid growth and see total assets of $4 trillion in 8-10 years according to the CEO of Doha Bank in a speech recently.
  

Why are sukuk in the GCC issued with short maturities?

Mubadala, the Abu Dhabi sovereign wealth fund says that there needs to be a better developed secondary bond market for longer-term bonds to come to market. It also pointed to the need for a 'strong local bid'. Given that the GCC is the source of a large share of the sukuk issuance, and most sukuk outside of Malaysia are of maturities of 5 years or less, this poses a question of whether the Islamic financial industry can step in to fill the gap.

The sukuk secondary markets are notoriously illiquid, although there has been an improvement in this area as the number of new issues has declined in the past year or two. With a shortage of new issues, there has been an uptick in the trading of outstanding sukuk in the secondary markets. There has also been the nascent steps towards provide more opportunities for secondary market trading with the launch of bond and sukuk trading on the Saudi exachange Tadawul. However, even with these steps, there are few listed sukuk, with most trading on either NASDAQ Dubai (formerly the Dubai International Financial Exchange) or the Bahrain Stock Exchange.

As I have described before, the secondary market for sukuk has been caught in a chicken-or-egg problem (which came first?). During the boom times, there were a number of new issues, most of which were heavily oversubscribed. A decent proportion of these sukuk were listed on secondary markets theoretically giving investors who were not able to subscribe in the offering the chance to pick them up in the secondary markets. However, there wasn't much activity in the secondary markets.

This can be ascribed to two things. First, the secondary markets weren't active because the secondary markets weren't active. Although a tautological argument, it was true. If you subscribe to a sukuk and receive an allocation, then sell it on the secondary market, you would generally hope to be able to take the proceeds and purchase a new sukuk to replace it. In an illiquid secondary market, for one you could probably not receive what you perceive to be the fair value, but also, you would likely have to overpay for a replacement. Without the benefit of a market maker in the sukuk, the gap between bids and offers in the market perpetuated the illiquidity.

Second, the continuing stream of new issues made it less beneficial to chase the offer in the secondary market if there was a chance of getting in on a newly issued sukuk. Why pay up if there is a chance that another similar sukuk might come along that you might be able to receive an allocation at par?

However, this equation changed after the financial crisis when credit was generally scarce and expensive and there were few companies willing to issue new sukuk. In addition, the outstanding issuers were affected by the growing economic crisis so that their ability to repay came into question (in some cases, they defaulted on their sukuk). The investors in these sukuk, either through concern over the sukuk or their own need for cash, became more willing to participate in the secondary markets.

This created some market turmoil, with many sukuk trading far below par and yielding higher than may have been justified by the fundamentals of the companies and sukuk. However, it also created an opportunity for a few sukuk funds which launched over the past year to step in on the buy side of the market and create additional liquidity by narrowing the spread between the bid and ask of listed sukuk.

No sukuk exemplifies this transformation perhaps more than the Nakheel sukuk which matures in December. In an illiquid market, with concerns about Nakheel's ability to repay, the bond traded down to nearly 60% of its par value even though the payment on maturity, if made, would be nearly 115% of par. Since reaching this point, the sukuk has become more actively traded and has rebounded in the trading price to greater than par. Some of this rebound was due to the fundamental ability of Nakheel to pay, albeit with support from the Dubai government, but some could be chalked up to the greater liquidity and the entrance of bidders for the sukuk.

To be clear, the sukuk market remains illiquid in many listed sukuk names, but there has been a greater level of activity in secondary markets as of late. Returning to the initial point of what is needed for longer-term maturities, it is generally the case (even in US Treasuries, some of the most liquid bonds in the world) that longer maturity products are less liquid and more volatile in price than shorter-dated bonds. Without a liquid secondary market for shorter maturity bonds and sukuk, it is unlikely that investors would purchase longer-dated sukuk.

Mubadala's point is well taken and the sukuk market, largely as a result of external events, has begun to liquify. This is a necessary, but probably not sufficient, precondition for the introduction of longer maturity sukuk. The resolution of sukuk through cases of default will also go a long way towards reassuring investors that they will not be trappen in a 10-year or longer sukuk regardless of what happens. To see a possible future, the experience of Malaysia is instructive. The Malaysian secondary markets are active and there have been numerous resolutions of sukuk defaults. Consequently, there have been several longer-dated sukuk--for example, the Cagamas residential mortgage-backed securities which have maturity dates of over 10-years, something that has not happened in the GCC...yet.

Other News

• The performance of the Dow Jones Islamic Market Indexes for October are now available.
  
• The IFC sukuk was priced at 25 basis points over mid-swaps, which is the tightest pricing yet for a sukuk, although the sukuk received a higher pricing (by 10 basis points) over what conventional debt issued by the IFC would be priced at.
  
• Germany's financial regulator jumps into the mix of European countries wanting to attract Islamic finance shortly after France passed laws defining the rules for Islamic financial products, but far behind the U.K., which has so far led the EU in its accommodation of Islamic finance.
  

Sukuk markets recovering, IFC sukuk listed in Dubai and London, Islamic asset management faces a 'chicken-or-egg' problem

The sukuk market is expected to recover following signs that Nakheel will avoid default and GE Capital Corporation, which has a joint venture with Abu Dhabi-based Mubadala, was reported to be considering issuing a sukuk. The recovery in Nakheel's sukuk have come following the $10 billion in bonds issued by Dubai and the prospect for the Emirate to issue $6.5 billion in bonds and sukuk. The sukuk-reported to be $2.5 billion of this amount-are reported to be priced near 6%. The funds from the bond and sukuk issuance are expected to be administered by the Dubai Financial Support fund, which has provided some assistance to Nakheel.

With the listing of the World Bank Group's IFC sukuk, NASDAQ Dubai expects the sukuk and bond markets to pick up before the IPO market. The sukuk will be listed on both NASDAQ Dubai and the London Stock Exchange and is rated Aaa by Moody's.

The Islamic asset management industry faces a 'chicken-or-egg' problem as the industry has a shortage of investments to choose from, particularly in the fixed income area, while there are few investments available because of questions about the strength of demand. The increasing involvement by governments is a double-edged sword, notes an article from Reuters. Governments can provide a source of issuers willing and able to issue sukuk, but could crowd out other issuers, particularly lower-rated issuers. So far this year, roughly 80% of sukuk have come from government issuers and many of the others were issued by high-grade corporate issuers.

Emirates Business 24/7 has an interesting article about the debate over standardization in Islamic finance. There are many views on how standardization should happen, whether it should be a goal at all and what aspects of the industry should be standardized.

Other News

• The International Swaps and Derivatives Association (ISDA) is expected to release guidelines on Islamic derivatives, and these could come by December. The standardized agreement, being jointly developed by the ISDA and the International Islamic Finance Market (IIFM), would provide a standardized contract for Shari'ah-compliant hedging products.
  
• The opening of the country's first Islamic bank led German paper Das Spiegel to write a good article that provides an overview of the industry's development.
  
• Tamweel, the troubled Dubai-based Islamic mortgage company, made a periodic payment on its sukuk due in 2013.
  
• The Irish Revenue Service has clarified its rules on the taxation of Islamic finance products and a summary is available from Arab News.
  
• The CIO of CIMB-Principal Islamic Asset Management Dr. Zeid Ayer believes that Brunei should open its sukuk up to international investors to broaden the base of investors. The sultanate issues sukuk despite large oil reserves and little need to raise financing as a way to promote the growth of its Islamic finance industry.
  
• The results of an Islamic Finance Perceptions survey are summarized in an article.
  
• As Malaysia issues RM3 billion ($888 million) in sukuk, it has also extended the tax exemption on Islamic financial products to 2015 that have helped the industry grow rapidly in the country.
  

Dubai wades back into international capital markets, sukuk coming back or are defaults too strong a headwind for the next year

Dubai Civil Aviation may issue sukuk and conventional bonds to refinance $1 billion in debt maturing in November, in signs that Dubai may be re-approaching the sukuk and bond markets despite uncertainty about the level of debt in government-related entities like Dubai World and Nakheel, which has a $3.52 billion sukuk maturing in December. The ability of Dubai to tap capital markets has been buoyed by the return of risk appetite among investors as well as the repayment a month early by Nakheel of over $1 billion in bank debt extended earlier this year. However, there is still skepticism about Dubai's ability to restructure its debt and government-related entities.

A senior executive at Nomura believes that there will be a further uptick in the issuance of new sukuk by corporate and sovereign issuers in the next 18 months. The issuance through the end of September was $13.5 billion, primarily out of Saudi Arabia, which accounted for 44% of issuance and included sukuk from Saudi Electric Company and the Islamic Development Bank. Other more recent data shows that $18 billion in sukuk have been issued so far this year.

The sukuk market remains in a state of flux because of the unresolved issues about asset-based and asset-backed sukuk, which is discussed in an article in the Financial Times. The important point brought up in the FT article is that not all sukuk transfer ownership of the underlying asset to the investors. In many cases of asset-based sukuk, the asset is transferred to the SPV that issued the sukuk but with a repurchase agreement that requires the issuer to repurchase the asset in the case of default. This means that the asset ownership transfers back to the company and the sukuk holders are given essentially an IOU that the company will redeem the principal of the sukuk in a default. This is different from an asset-backed sukuk where ownership is transferred to the sukuk holders, who then have legal right to the asset. This was the case in the East Cameron sukuk, which was based on an overriding royalty interest that entitles the sukuk holders to a share of production in the underlying lease. Other sukuk transfer ownership of a tangible asset (the ORRI is legally recognized as real property in Louisiana, but is not a transfer of the underlying properties being drilled, which are leased from the US government).

Other News

• The World Bank's IFC sukuk price guidance is 35-40 basis points over 5-year US Treasuries.
  
• Jordan is considering offering sukuk to cover its growing budget deficit.
  
• A columnist in the Guardian discusses the role of regulation and religion in finance.
  
• Emirates Development Bank, the government funded bank that is anticipated to take over Islamic mortgage lenders Amlak and Tamweel is one step closer to launch, although the fate of Amlak and Tamweel remains uncertain.
  
• Saudi Electric may tap sukuk markets again to finance a new contract the firm signed.
  
• There is a nice article is in a Minnesota paper about local organization African Development Center, which offers Shari'ah-compliant home and business financing.
  
• An English paper has a good article about the growth of Islamic finance.
  
• Korea needs incentives for investments in sukuk, according to the head of Doha Bank's representative office in the country.
  
• Islamic Finance Resources links to a recent paper on the history of Islamic finance in France, a relevant article given the recent French law about Islamic finance that was struck down by the constitutional court on procedural grounds.
  
• Ithmaar is offering a rights issue as well as a 5-year mandatory convertible sukuk.
  
• Gatehouse Bank, based in the UK, joined Paris Europlace, a Paris-based organization that promotes the French financial industry and established an Islamic Finance Commission in December 2007.
  

FSA rules on Islamic finance, France law struck down, 10-20% growth in 3 years in Islamic finance, other news

The Financial Services Authority has released the suggestions received on its regulatory proposal for sukuk (Alternative Finance Investment Bonds) that was initially released late last year. The comments are incorporated into a revised proposed law that is open for comment until November 6, 2009.

France's new law on Islamic finance was struck down by the country's high court on procedural grounds although the opposition Socialists who asked for the review by the Constitutional Council who oppose it as a violation of the secular principles of France.

A study by BDO based on a poll of 173 financial services executives involved in Islamic finance puts the growth prospects for the industry at 10-20% over the next 3 years. A substantial percentage, 23%, said the industry could grow quicker and an equal percentage believed there would be little growth, between 0% and 10%, in the next 3 years. The industry continues to enjoy unsaturated markets and growing recognition by companies not necessarily considering Islamic finance based on a need for Shari'ah-compliant funding sources. However, there has been a severe economic downturn that has hurt the industry, a shortage of experienced practitioners and there are a number of issues remaining to be resolved, particularly how sukuk are treated if the issuer defaults on periodic payments. This is not necessarily going to be a quick process and it could be one of the reasons for the large percentage of sukuk this year coming from high-grade companies and sovereign issuers where the probability of default is far lower than some of the issuers in previous years.

The World Bank's International Finance Corporation is planning a $100 million sukuk to show its commitment to the Middle East and Islamic finance. The Reuters article notes that "they [the IFC] have only a few ijara contracts, that's really the limiting factor". This suggests that the structure they are considering would be similar to the Islamic Development Bank sukuk, which is based on a pool of financing provided to other parties by the Bank which can include murabaha and istisna'a, but must have at least 51% in ijara because they represent an underlying asset and not just a debt receivable.

Indonesia rejected all of the bids in its first monthly sukuk auction because investors were asking for higher yields than the Ministry of Finance was willing to accept. The decision is not seemed to be a significant setback because there is an expectation that the Indonesian central bank may raise interest rates. If the Ministry of Finance accepted higher yielding bids from investors in sukuk, it could increase the cost of raising conventional debt.

Investors in the Golden Belt 1 sukuk issued by the Saad Group do not know whether the next periodic payment will be made according to Citigroup, the sukuk trustee.

There is continues to be controversy about whether there need to be more safeguards for borrowers in Malaysia who default on bai' bithaman ajil (BBA) sales contracts. In some cases, a defaulting borrower can end up owing more than the amount of the financing originally taken. There has been controversy before around the BBA contract. A lower court said that the sale was not genuine and there was no difference between the profit charged and interest, although this was reversed by a higher court.

Other News

• The Dubai Financial Services Authority (DFSA) issued proposals for changes to how it regulates Islamic financial services.
  
• Shariah Capital, based in the US, is considering offering a Shari'ah-compliant ETF in the US and the UK, although no timeline for its launch is provided.
  
• Etisalat plans a bond and sukuk raise that would begin with a $500 million tranche.
  
• Bursa Suq Al-Sila', the Malaysian-based commodity murabaha exchange is expanding into the GCC.
  
• The CIMA Certificate in Islamic Finance was launched recently. SHAPE Financial has launched its own certified Islamic financial analyst program.
  
• Despite a downgrade to the Originator, a Tamweel Residential ABS sukuk did not have its rating changed by Moody's.
  
• Sorooh is planning a Shari'ah-compliant fund to invest in European commercial property. ING is planning its own Shari'ah-compliant real estate fund with Amiri Capital that will invest in UK commercial property.
  
• An opthamologist in Dubai proposes an Islamic economic system that I cannot even comprehend, but there is a $1 million reward to anyone who can prove that it wouldn't work.