The bank lending to the sector is important, primarily for Islamic banks that are intended to be facilitators of the ‘real economy’ more so than their conventional competitors. Guarantee funds can provide a compelling way to expand financing to SMEs because small guarantee amounts can lead to a African Guarantee Fund provided $1.2 million to guarantee against losses for SME financing provided by the Gulf African #Bank. With SMEs holding the key for employment growth in many economies, incentivizing disproportionate increase in financing provided to SMEs.
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Showing posts with label guarantee. Show all posts
Showing posts with label guarantee. Show all posts
Thursday, May 02, 2013
Monday, July 26, 2010
How tough is the market for new issues in the GCC?
An article in Bloomberg describes the falling yields on GCC sukuk, Dubai World and the sovereign Dubai bonds and sukuk with some optimism. However, it notes that the spread on Dubai World's debt (it doesn't say what the spread is based on, but one would assume comparable maturity US Treasuries) from 647 basis points after the standstill to 545 basis points (it incorrectly says the spread is 545 percentage points). The yields on sukuk from GCC-based issuers was 7.17 percent on July 23 (compared to 8.76 after the Dubai debt crisis), the Dubai 6.396% soverign sukuk is yielding 7.38% (435 basis points higher than the recently issued Malaysian sovereign sukuk), the Dubai World yield is sitting at 8.4% (for the 6.25% sukuk).
These figures reflect only limited thawing of GCC credit markets in the aftermath of the financial crisis and, in particular, the Dubai debt crisis. It is hardly surprising that other articles written recently describe a move in momentum in sukuk issuance from the GCC to Malaysia. That is in many respects not entirely fair. The Dubai debt crisis was triggered by specific factors--primarily an overvalued real estate market in Dubai that saw significant declients. However, it does suggest a general attitude that sukuk from the GCC are more risky than other emerging market debt (including sukuk) offerings. This will reduce the level of issuance of sukuk in the near term from the GCC, which would hurt the emergence of sukuk secondary markets. If anything, investors need more sukuk issuance to fill the portfolios of long-term, hold-to-maturity investors (like takaful funds) and therefore a reduction in issuance from one of the largest markets (and the regional market for many of the funds investing in sukuk) could reinforce the hold-to-maturity mentality among many investors. Some of those investors are probably sitting on large losses from Dubai-related sukuk that they are unwilling to realize.
Meanwhile, Nakheel is working through its own debt restructuring. Reports suggest that full payment will be made over 5 years for its syndicated banks loans (including Shari'ah-compliant financing) and 7 years for its sukuk. According to Reuters, "Bankers have until the end of August to respond to undisclosed terms of Nakheel's multi-billion dollar restructuring plan, including the rates of interest and repayment schedules for syndicated and bilateral loans. " Reuters is usually pretty good at describing the presence of Shari'ah-compliance in financing facilities, so the description they give (while it may be limited by sources speaking on background) does reflect the lack of a structure for restructuring in Shari'ah-compliant transactions. The restructuring of the loans (many of which are based on ijara) is probably being done in a rather ad hoc manner. The interest rate and payment terms are dealt with first and the Shari'ah-compliant structure are dealt with later. If this is the case, there remain significant gaps in the Islamic finance industry in dealing with distressed situations that should be at the forefront of the agenda before the next crisis comes.
Other News
These figures reflect only limited thawing of GCC credit markets in the aftermath of the financial crisis and, in particular, the Dubai debt crisis. It is hardly surprising that other articles written recently describe a move in momentum in sukuk issuance from the GCC to Malaysia. That is in many respects not entirely fair. The Dubai debt crisis was triggered by specific factors--primarily an overvalued real estate market in Dubai that saw significant declients. However, it does suggest a general attitude that sukuk from the GCC are more risky than other emerging market debt (including sukuk) offerings. This will reduce the level of issuance of sukuk in the near term from the GCC, which would hurt the emergence of sukuk secondary markets. If anything, investors need more sukuk issuance to fill the portfolios of long-term, hold-to-maturity investors (like takaful funds) and therefore a reduction in issuance from one of the largest markets (and the regional market for many of the funds investing in sukuk) could reinforce the hold-to-maturity mentality among many investors. Some of those investors are probably sitting on large losses from Dubai-related sukuk that they are unwilling to realize.
Meanwhile, Nakheel is working through its own debt restructuring. Reports suggest that full payment will be made over 5 years for its syndicated banks loans (including Shari'ah-compliant financing) and 7 years for its sukuk. According to Reuters, "Bankers have until the end of August to respond to undisclosed terms of Nakheel's multi-billion dollar restructuring plan, including the rates of interest and repayment schedules for syndicated and bilateral loans. " Reuters is usually pretty good at describing the presence of Shari'ah-compliance in financing facilities, so the description they give (while it may be limited by sources speaking on background) does reflect the lack of a structure for restructuring in Shari'ah-compliant transactions. The restructuring of the loans (many of which are based on ijara) is probably being done in a rather ad hoc manner. The interest rate and payment terms are dealt with first and the Shari'ah-compliant structure are dealt with later. If this is the case, there remain significant gaps in the Islamic finance industry in dealing with distressed situations that should be at the forefront of the agenda before the next crisis comes.
Other News
- Kuwait-based International Investment Group defaulted for a second timek on a sukuk this year, missing a $152.5 million payment.
- Mushtak Parker offers his thoughts on the Sukuk ALIM being issued by Cagamas working with Al Rajhi Bank to be viewed as Shari'ah-compliant in both the GCC and Malaysia. He also offers his thoughts on the recent entry into the Islamic finance markets by Japanese firms, several years after the country said it wanted to encourage Islamic finance in the country to attract capital.
- A former Supreme Court justice in India, Krishna Iyer, believes that Islamic finance can help in efforts to alleviate poverty.
- Arab News has an interview with the CEO of the Islamic Corporation for Development of the Private Sector, part of the Islamic Development Bank group.
- The state-owned Islamic bank in the Philippines is planning the country's first sukuk to "fund growth in Muslim Minanao".
- A Malaysian firm is providing the first financial guarantee for a sukuk.
- A writer in the Business Recorder in Pakistan, Saqib Masood Chisti, suggests that Islamic microfinance could be expanded in the country while criticizing a program that provides cash payments to poor families as causing inflation and creating dependency (I am not knowledgable enough about the program to comment, but the description given resembles the successful Bolsa Familia program in Brazil).
Saturday, March 07, 2009
University Bank featured in the NYT; Can Islamic finance provide a way forward after the crisis ends?
The New York Times has an article about University Bank in Ann Arbor, Michigan describing the phenomenal growth of its Islamic home finance products since it began offering them earlier this decade. The bank, which owns 80% of its Islamic finance subsidiary, the University Islamic Financial Corp started in 2005, is seeing growth increasing rapidly. The article points out that a week in which 11 "mortgage-alternatives" were signed to finance home purchases was "more than twice the weekly average".
A legal magazine article describes the development of Islamic finance in Singapore, which was recently announced as the site of the Islamic Financial Services Board's (IFSB) annual summit in May. The city-state issued its first sukuk earlier this year and has taken significant steps to change laws and regulations to place Islamic finance on equal regulatory ground with conventional financial institutions.
Dr. Umer Chapra gave a speech in which he said that the current global economic condition was worse than it had ever been and that Islamic finance could provide a solution. He noted that Christianity and Islam both provided rules to limit excessive debt and "As long as those religious values were practiced, the society progressed in every walk of life". While Umer Chapra is a respected figure in Islamic finance and I have heard him speak and found it very enlightening, I have to criticize his focus on blaming a lack of religiosity for the economic crisis. It creates a distraction from the work needed to solidify the Islamic finance industry, which is currently being harmed by the worldwide economic slowdown. Instead of assigning blame for current economic problems, I think it is far more constructive to say that Islamic finance has been fairly resilient but the fall in real estate prices in Dubai (to use one example) shows areas of weakness. In that particular case, an over-concentration of investments in property that back financing instruments carried on Islamic bank's balance sheets has led to problems in those banks with the greatest exposure and those whose liabilities are not supported by large amounts of customer deposits and are instead more reliant on wholesale, shorter-term capital markets. Instead of making arguments about how Islamic finance could have prevented the crisis, I think the focus should be on increasing the stability of the Islamic financial industry through regulatory coordination, increased transparency, the development of inter-bank markets to improve liquidity of Islamic banks and the further growth of secondary markets for sukuk.
Dr. Mahmoud El-Gamal criticized the Islamic finance industry and said it bore responsibility as well for the economic crisis which is impacting the global economy. One of his criticisms was:
The official newspaper of the Vatican printed an article suggesting that financial institutions could learn valuable things from the Islamic finance industry: "The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service". The reference to "bringing banks closer to their clients" is a criticism of banks from moving away from their role as intermediaries connecting depositors and borrowers into complex financial institutions and growth in their proprietary trading activities. Islamic banks, because they are limited in the types of products they can offer, are often more focused into the role of being an intermediary. George Bailey would be proud.
Other News
A legal magazine article describes the development of Islamic finance in Singapore, which was recently announced as the site of the Islamic Financial Services Board's (IFSB) annual summit in May. The city-state issued its first sukuk earlier this year and has taken significant steps to change laws and regulations to place Islamic finance on equal regulatory ground with conventional financial institutions.
Dr. Umer Chapra gave a speech in which he said that the current global economic condition was worse than it had ever been and that Islamic finance could provide a solution. He noted that Christianity and Islam both provided rules to limit excessive debt and "As long as those religious values were practiced, the society progressed in every walk of life". While Umer Chapra is a respected figure in Islamic finance and I have heard him speak and found it very enlightening, I have to criticize his focus on blaming a lack of religiosity for the economic crisis. It creates a distraction from the work needed to solidify the Islamic finance industry, which is currently being harmed by the worldwide economic slowdown. Instead of assigning blame for current economic problems, I think it is far more constructive to say that Islamic finance has been fairly resilient but the fall in real estate prices in Dubai (to use one example) shows areas of weakness. In that particular case, an over-concentration of investments in property that back financing instruments carried on Islamic bank's balance sheets has led to problems in those banks with the greatest exposure and those whose liabilities are not supported by large amounts of customer deposits and are instead more reliant on wholesale, shorter-term capital markets. Instead of making arguments about how Islamic finance could have prevented the crisis, I think the focus should be on increasing the stability of the Islamic financial industry through regulatory coordination, increased transparency, the development of inter-bank markets to improve liquidity of Islamic banks and the further growth of secondary markets for sukuk.
Dr. Mahmoud El-Gamal criticized the Islamic finance industry and said it bore responsibility as well for the economic crisis which is impacting the global economy. One of his criticisms was:
“In the past 30 years of Islamic banking, no ‘authority’ has been established that can inform the international concerned bodies such as the IMF about their financial and investment products. Hence, no one has a clear picture of the activities of the Islamic banks, the number of their institutions and branches”Dr. El-Gamal is a frequent critic of the industry's current practices and in this criticism, I think he hits on a very important area of transparency of the industry's size, scope, product mix and other factors that may have an impact on the global financial system.
The official newspaper of the Vatican printed an article suggesting that financial institutions could learn valuable things from the Islamic finance industry: "The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service". The reference to "bringing banks closer to their clients" is a criticism of banks from moving away from their role as intermediaries connecting depositors and borrowers into complex financial institutions and growth in their proprietary trading activities. Islamic banks, because they are limited in the types of products they can offer, are often more focused into the role of being an intermediary. George Bailey would be proud.
Other News
- Malaysia is launching an exchange for commodity murabaha, a controversial Islamic financial product. AAOIFI says the product is not invalid, but not ideal.
- The Islamic Bank of Asia CEO says that there needs to be a common risk management system across the Islamic financial industry.
- Mohd Daud Bakar, a Shari'ah scholar, says that Islamic banks may charge fees for financial guarantees they provide, although they may not sell the guarantees to third parties.
- Can Islamic finance serve as an example for the financial industry in the future?
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