Do Islamic financial institutions care about Islamic microfinance?

The CGAP microfinance blog highlights the lack of progress in developing laws to facilitate microfinance since the Arab Spring. One point the post makes is that "The irony in all this is that only in Syria and Yemen, two countries still heavily affected by the uprisings, did the governments sanction savings mobilization by MFIs meeting minimum standards." 

It is interesting to me that in both these countries where microfinance was sanctioned by the governments there have been Islamic microfinance institutions, in Jabal al-Hoss in Syria and Hodeidah in Yemen.  There is still much to do in both countries, and in both countries there are more pressing needs with the departure of Ali Abdallah Saleh from Yemen and the continued fighting in Syria against Bashar al-Assad. 

However, despite the continued unrest in both countries, there have been examples of demand for Islamic microfinance which suggests that there is probably demand in other countries where the Arab Spring has run its course.  These countries should move forward on both conventional and Islamic microfinance development as a top priority.  Some may point out that there are more weighty concerns in the forefront today, but I would argue that the development of programs to provide economic opportunities should be at the forefront because the Arab Spring largely arose out of one man, Mohammed Bouazizi, very publicly died after setting himself on fire due to having his livelihood snuffed out by the police when they confiscated his fruit crates and electronic scale. 

It is fair to question whether Islamic microfinance is well developed enough to be moved to the top of the agenda alongside conventional microfinance.  However, with so many resources being devoted to developing the (macro) Islamic finance industry, there should be an equivalent commitment to developing Islamic microfinance.  Today, two of the biggest Islamic microfinance programs are being facilitated with funding for technical support from the US international aid agency USAID in Afghanistan and Iraq.  Where are the Islamic finance institutions who claim to embrace corporate social responsibility, ethical finance and a concern for the poor in laying the groundwork for Islamic microfinance to develop across the MENA region after the Arab Spring? 

Friday bullets

• An executive of Kuwait Finance House told Al Arabiya that the bank will launch a $250 million investment fund focusing on Canada.
  
• An article, not focused on Islamic finance, describes the pitfalls facing Dubai in the coming months after the recent debt crisis.
  
• Islamic banks in Yemen are mismanaged, according to an economist. The economist, Ali Al-Wafi, described, "Unfortunately, in spite of attracting capital, the Islamic banks in Yemen could not manage the capital collected efficiently [...] the main problem of capital management, restricting the performance of Islamic banks in Yemen, is that administrations of these banks monopolize the use of the capital and divert it for investing only in the businesses of certain privileged segments of the society."
  

A Malaysian scholar supports tawarruq, NBK Ijara Fund launched

A Malaysian Shari'ah scholar, Mohammad Akram Laldin, says that tawarruq is permissible, although there "might be an issue when debt creation is very much emphasised rather than the real economic activity". The organized tawarruq, in which a bank organizes a three way transaction where (usually) metals are exchanged to synthesize a loan with deferred repayment including a markup, was recently criticized as a 'deception' in a fatwa from the OIC Fiqh Academy. Malaysia's stock exchange will launch a tawarruq-based program in June based on commodity murabaha. I commented about the OIC Fiqh Academy ruling on my Zawya blog recently.

The National Bank of Kuwait launched a KD40 million ($139 million) ijara fund. Normally this would just receive a cursory mention, but it shows an interesting dynamic in how the Islamic finance industry may be adapting in the wake of the global economic slowdown. NBK's Managing Director of Asset Management, Nabil Maroof descibes what the fund is capitalizing on:

"Ijara transactions have shown that they typically outperform during economic recessions as companies substantially decrease their capital expenditure, preferring to lease their mission critical equipment instead. Lessees also tend to retain equipment for longer periods, offsetting the increased credit losses that result from a typical recession"

If NBK is correct, then the return on this type of asset (a stream of lease payment plus the liquidation value of the assets when the leases expire) are greater during a recession. The initial price of assets may be lower if suppliers are cutting prices to sell their production and the 5 year maturity gives plenty of time for economic markets to require, which would be expected to increase the liquiditation value of the assets. If this occurs it could signal a way that Islamic banks can adapt in future recessions by changing the focus of their investment activity. However, the credit market crisis make it more difficult for Islamic financial institutions to manage these assets. An advisory company that focuses on the secondary leasing market was launched recently.

Other News

• The Financial Times notes that the recent flurry of bond and sukuk issuance in the Gulf could lead to some 'indigestion'.
  
• A blog at The National provides a very concise explanation of mudaraba.
  
• Yemen has changed its banking laws to encourage more Islamic financial institutions to open.
  
• Brunei issued another of its recurring sukuk al-ijara, its 31st.
  
• Malaysian rating agency MARC expects "a subdued outlook for sukuk issuance owing to weaker demand and supply fundamentals".
  
• A speaker at an Islamic finance conference in Turkey says that the country needs to adapt laws to facilitate the country's Islamic financial industry.
  
• An INSEAD report on the Middle East includes a brief discussion of the region's Islamic finance industry.
  
• Emirates Islamic Bank is planning a $300 million rights issue.
  

Islamic finance liquidity, hedge funds and virtual banking

• Many Islamic finance practitioners believe that hedge funds are 'unsuitable' for Islamic finance because the costs would make them uncompetitive compared with conventional hedge funds. There is also significant disagreement about the Shari'ah-compliance of many products used in hedge funds such as leverage, swaps and derivatives. The head of Malaysia's Securities Commission, the country's capital markets regulator, believes that hedge funds could help add to market liquidity and they would "assess and consider whether they meet licensing criteria" if an application were submitted.
  
• Islamic banks are hurting their resilience and ability to manage liquidity, market and credit risk by relying too heavily on debt-based products like murabaha because they cannot be securitized to meet liquidity needs of banks according to an article in Asharq Alaswat. The article cites the role of Fannie Mae and Freddie Mac in the United States as a model of how securitization can help banks expand and increase the liquidity of their assets.
  
• Although only four of Yemen's 18 banks are Islamic banks, they have been gaining market share according to the Central Bank of Yemen and now account for 31 percent of the total assets held by banks in the country. The growth rate of 22 percent in Islamic banks' assets represent 40 percent of the total growth during 2008, a greater than proportional increase.
  
• Indonesia's growing deficits are providing a source of supply of sukuk that could increase the country's involvement in the Islamic finance industry. The country just sold $650 million in its first dollar-denominated sukuk and the issue was seven times oversubscribed. The five-year ijara sukuk was sold to a geographically diverse set of investors including 30% from the GCC, 19% from the US and 11% from Europe. The junk-rated (BB-) issue offering a return of 8.8% is rated on par with other external debt issued by the country by Standard & Poor's.
  
• Neil Miller, a lawyer with Norton Rose, says that Islamic firms in the GCC are eyeing acquisitions in the West in the wake of the credit crisis and economic recession and could act in the second or third quarters of 2009. He cautioned that the merger process within a Shari'ah-compliant framework is still not well developed.
  
• With many investment banks reducing headcount there is a growing pool of experienced bankers looking to enter the Islamic finance industry. The managing director of Global Islamic Banking at Calyon Simon Eedle says that this means "the days of a shortage of Islamic bankers and the outrageous compensation that some were being paid are finished". However, Hidayathullah Baig, the head of Islamic finance at Islamic bank, the First Energy Bank, warns that "there is a danger of these conventional investment bankers trying to impose their ideas onto Islamic structures" that he believes is "very dangerous".
  
• Malaysia is continuing to increase the centralization of the country's Islamic finance industry under proposed legislation that would force civil courts to look to Shari'ah advisory board at either the Central Bank, Bank Negara, or the capital markets regulator. The move which comes following several contentious cases looking at the Shari'ah-compliance of the bai bithaman ajil (BBA) contract. BBA is a form of financing similar to murbaha but it is viewed as non-Shari'ah-compliant outside of Malaysia because of its similarities with conventional interest-bearing loans. Judges currently have discretion about whether to seek the advise of the national Shari'ah advisory boards.
  
• Islamic banks in the GCC could expand into the West by setting up virtual banks or an online Islamic bank in the UK, Canada or the US according to Mohammed Badi, Principal at the Boston Consulting Group.
  
• While there is not universal consensus among Shari'ah scholars of the compliance of several products including BBA and bai al inah, the products in common use are converging towards similar forms. Some of the controversial products like BBA are being phased out in order to attract more clients.
  
• The uncertain regulatory environment around Islamic finance, particularly relating to Shari'ah-compliance could hamper the industry's growth. In addition, the economic crisis has led to a near halt in the issuance of sukuk during 2008 and the first quarter of 2009 and, although there is a significant amount of sukuk in the pipeline, if liquidity is not restored to the industry, "there is a real threat to the business of Islamic banking" and "we may not be able to continue doing our business" according to the CEO of Dar al-Shari'ah, Sohail Zubairi. A recovery in the global economy, however, could help the industry recover, as could mergers between institutions.
  

Islamic banking, durra and IFC investment in Islamic finance

The International Centre for Education in Islamic Finance (INCEIF) held a conference in Yemen about the challenges facing Islamic banks. Another conference in Bahrain discussed the growing prominence of Islamic banking. In Kenya, the lack of a Shari'ah-compliant interbank money market raises questions about the viability of Islamic banks in the market, particularly the recently opened First Community Bank.

Women in the UAE's Islamic finance industry are pushing for a greater number of female senior executives.

The International Finance Corporation (IFC), the private sector arm of the World Bank, will invest in Islamic mezzanine notes issued by Tamweel. The issue will be the first Shari'ah-compliant multitranche mortgage-backed security in the UAE. IFC hopes its investment will help "develop long-term capital markets in the GCC and expand availability of Islamic finance products" according to Lee Meddin, the IFC Deputy Treasurer and Global Head of Structured Finance.

The Waqf Fund established by the Central Bank of Bahrain in 2006 will have a special fund to support Islamic finance education & training.

Gulf Finance House GDR priced at $2.5 per share.