Bloomberg reports that the International Islamic Financial Market (IIFM) is working on a master agreement for derivatives, according to the IIFM CEO Ijlal Ahmed Alvi. The article then goes on to describe Islamic structured products that are having some difficulty meeting international (as opposed to simply local) standards. Structured products combine a debt security with a derivative to provide, for example, returns based on an index performance combined with capital protection. These products are fairly common across the Islamic finance industry and financial institutions like their high fees, while investors may be attracted to the capital protection embodied in them.
However, I think they should be of limited use in the industry because they provide limited benefit to investors (although good returns to the financial institutions offering them in terms of high fees) and are, in my opinion, representative of the worst of financial replication of conventional products in Islamic finance. These products offer the promise of equity-like returns with debt-like risks. The risks of their debt characteristics is understated through claims of "capital protection"; generally these products will only be as safe as the debt offered by the institutions offering these products (or their counterparties in the commodity murabaha products that sit alongside the derivatives that provide the equity returns). It may be that the popularity of these products is due to the lack of debt-like alternatives (e.g. sukuk) for asset managers to diversify across asset classes. Instead of investing in (cheaper) sukuk funds, managers are forced to find quasi-debt investments that also give equity returns.
The reason that I find structured products objectionable is that they hide the risks of debt products with the "capital protection" (I believe they are generally unsecured debt), while generating high fees for the issuer, which can hedge the risks of paying out the upside gains through derivatives. They replicate the most cynical aspects of conventional finance (creating fancy products that generate high fees) with little benefit to investors except providing debt-like protection of capital. In my opinion, the investors would be better off using an equity investment like a mutual fund or managed portfolio of equities balanced with a fixed-income investment through a diversified portfolio of sukuk. However, it is difficult to compose a diversified portfolio of high-grade sukuk. Therefore the appeal of structured products.
Perhaps I am cynical about the rationale for structured products generally in finance. However, they don't seem to serve much purpose except where fixed income markets are lacking. For conservative investors, they would be better suited in lower-fee sukuk funds or deposit accounts at Islamic banks. Non-high net worth investors would be better served by a balance of either Islamic mutual funds or individual equities and sukuk funds. High-net-worth individuals have the resources to invest in diversified portfolios of both equities and sukuk (in addition to some alternative assets). Hiring managers within each asset class is surely a lower cost method of investing than structured products. This even omits the role that Islamic ETFs (if they were prevalent) could serve for investors just wanting to track the benchmarks with some diversification.
The IIFM has done some good work standardizing commodity murabaha contracts (the Master Agreement for Treasury Placements) and with the planned master agreement for asset-backed sukuk. Even the derivatives master agreement (Tahawwut) which has attracted criticism is valuable because Islamic banks, like other conventional financial institutions, need to hedge against currency and interest rate fluctuations (and other companies need to hedge commodity price fluctuations). However, tailoring standardized documents designed for structured products is not going to provide much benefit to the industry as a whole. It may lower costs, but that is unlikely to lower costs to issuers, but these probably will not pass through to investors who are charged high fees in conventional structured products as well.
As much as the sukuk structures are criticized for replicating conventional bonds, they at least serve a primary purpose in most, if not all, portfolios as fixed income replacement. The same cannot be said for structured products, which I suspect are favored by financial institutions for their high fees with little regard for whether they add much to the end client's portfolio.
Showing posts with label mutual fund. Show all posts
Showing posts with label mutual fund. Show all posts
Wednesday, January 19, 2011
Thursday, October 14, 2010
Islamic Finance in the U.S.
Reuters has an article on the "political hurdles" facing Islamic finance in the U.S. I think the title is a little misleading; it is not politics (or regulation) that has pulled Islamic finance into an ugly argument about Islam and America, but politics. I have always hesitated to give any credence to the 'anti-Islamic finance' arguments because they are so disconnected from reality that I feel giving coverage on this blog would elevate them to the discussion on Islamic finance would give them undue credibility. However, at many times, I have thought of a way to cover the 'anti-' side without giving it additional credibility, but I have always come up lacking a good way to address it. However, the Reuters article makes it clear that opposition to Islamic finance as a subtext in an argument over Islam in America is becoming a narrative that needs to be addressed.
The first thought in my discussion is that the rise of opposition to things that are viewed as 'foreign' is a common thread in American history and one that has been expressed in ugly displays. In the 19th century, immigrants from China, Ireland and southern European countries like Italy faced significant discrimination. In general, religion was not the primary reason for this, but it was in some cases. America's history with Catholicism has many rather embarassing episodes. A blogger for the LA Times quotes a professor at the Ohio State University:
Of course, this was unfounded and the positive in American history is that the country does move past this type of fear mongering--no one questioned whether John Kerry's Catholicism would hurt his ability to be president when he ran in 2004. However, it is not a quick process for Americans as a whole to move beyond past their suspicions towards groups of people for which they have no justifiable reason to lump together as a 'threat' to America.
And today, the 'other' that nativist politicians have focused on is Muslims. Every effort of Muslims to express their religiousness is viewed by some as a 'threat' to America's values and American freedom itself (the Economist deals with this issue in a good recent article). However, just as the "Catholic threat" was unjustified as a reason to suspect all Catholics, the "Muslim threat" is equally as unjustifiable. And Islamic finance is being lumped into this broader narrative in an equally unjustifiable way.
Now then, what can be done to counter this suspicion of Islamic finance and help the industry to thrive in America? Can there be a way to demonstrate that Islamic finance is no more foreign than the growing popularity of socially responsible investing, or even other forms of religious-based financial products like the Timothy Plan, a Christian mutual fund.
In some areas, there may not be a need at all. The Amana Funds, a series of three Islamic mutual funds, has already moved well beyond being a 'niche' product for Muslims and has attracted significant investments by non-Muslims who are generally drawn to the fund by its good performance. However, other financial products that are Shari'ah-compliant, from mortgages to insurance, have not attracted as large interest from non-Muslims.
In these areas, it will be imperative for the Islamic finance industry to continue to reach out not only to their mainly Muslim consumers to explain how they work and also highlight that they are not much different from conventional financial products. They have a different structure and follow certain rules that other mortgage providers do not have to, but besides these differences, they are just another flavor of mortgage available to all consumers.
In areas like takaful--which is less well known than even Islamic finance--there are other ways in which they could be marketed to attract non-Muslims. Unlike conventional insurers, the funds of the takaful provider are owned by the members, rather than being run through a corporate structure where the liabilities (claims) are obligations of the corporation. In an era where many insurers have been 'demutualized', this return to a 'mutualization' may attract non-Muslim consumers in a similar way that credit unions have been able to differentiate themselves from the much maligned conventional banks on the difference that their depositors are also their owners (rather than external shareholders).
There are substantive differences in Islamic finance and there will continue to be 'anti-Islamic' sentiment stirred up by opportunistic, nativist politicians. These are the givens. It is up to the industry to decide whether the political sentiment will be a hinderance to the industry or will spur it towards better explaining its competitive advantages to its conventional competitors. For what has become an emotional and reflexive issue, it will be more likely that Islamic finance can break through on its business merits, rather than by appealing to other arguments.
The first thought in my discussion is that the rise of opposition to things that are viewed as 'foreign' is a common thread in American history and one that has been expressed in ugly displays. In the 19th century, immigrants from China, Ireland and southern European countries like Italy faced significant discrimination. In general, religion was not the primary reason for this, but it was in some cases. America's history with Catholicism has many rather embarassing episodes. A blogger for the LA Times quotes a professor at the Ohio State University:
"the popularity of the Ku Klux Klan exploded after it rebranded itself a "patriotic" fraternal organization dedicated to safeguarding America against the threat of Catholics, Jews and the immigrants flooding the country in unprecedented numbers. […] At the time, these men did not consider themselves religious bigots. They believed themselves patriots, upright fathers and sons, husbands and brothers protecting their families, and the nation, against a foreign threat they feared was intent on their destruction."The author was specifically focusing on the anti-Catholicism of the early 20th century, but the sentiment lasted well later in the 20th century: John F. Kennedy was viewed skeptically for his Catholicism and it was feared that he would be an agent of the Pope as president.
Of course, this was unfounded and the positive in American history is that the country does move past this type of fear mongering--no one questioned whether John Kerry's Catholicism would hurt his ability to be president when he ran in 2004. However, it is not a quick process for Americans as a whole to move beyond past their suspicions towards groups of people for which they have no justifiable reason to lump together as a 'threat' to America.
And today, the 'other' that nativist politicians have focused on is Muslims. Every effort of Muslims to express their religiousness is viewed by some as a 'threat' to America's values and American freedom itself (the Economist deals with this issue in a good recent article). However, just as the "Catholic threat" was unjustified as a reason to suspect all Catholics, the "Muslim threat" is equally as unjustifiable. And Islamic finance is being lumped into this broader narrative in an equally unjustifiable way.
Now then, what can be done to counter this suspicion of Islamic finance and help the industry to thrive in America? Can there be a way to demonstrate that Islamic finance is no more foreign than the growing popularity of socially responsible investing, or even other forms of religious-based financial products like the Timothy Plan, a Christian mutual fund.
In some areas, there may not be a need at all. The Amana Funds, a series of three Islamic mutual funds, has already moved well beyond being a 'niche' product for Muslims and has attracted significant investments by non-Muslims who are generally drawn to the fund by its good performance. However, other financial products that are Shari'ah-compliant, from mortgages to insurance, have not attracted as large interest from non-Muslims.
In these areas, it will be imperative for the Islamic finance industry to continue to reach out not only to their mainly Muslim consumers to explain how they work and also highlight that they are not much different from conventional financial products. They have a different structure and follow certain rules that other mortgage providers do not have to, but besides these differences, they are just another flavor of mortgage available to all consumers.
In areas like takaful--which is less well known than even Islamic finance--there are other ways in which they could be marketed to attract non-Muslims. Unlike conventional insurers, the funds of the takaful provider are owned by the members, rather than being run through a corporate structure where the liabilities (claims) are obligations of the corporation. In an era where many insurers have been 'demutualized', this return to a 'mutualization' may attract non-Muslim consumers in a similar way that credit unions have been able to differentiate themselves from the much maligned conventional banks on the difference that their depositors are also their owners (rather than external shareholders).
There are substantive differences in Islamic finance and there will continue to be 'anti-Islamic' sentiment stirred up by opportunistic, nativist politicians. These are the givens. It is up to the industry to decide whether the political sentiment will be a hinderance to the industry or will spur it towards better explaining its competitive advantages to its conventional competitors. For what has become an emotional and reflexive issue, it will be more likely that Islamic finance can break through on its business merits, rather than by appealing to other arguments.
Thursday, August 19, 2010
Thursday bullets
- The first Sukuk ALim was issued by Cagamas for RM1 billion ($317 million) with a yield of 3.48% and a three-year tenor. 43% of the issuance was subscribed by overseas investors including one-third from the Gulf. The structure was jointly created with the Malaysian unit of Al Rajhi Bank to conform to both Malaysian and GCC Shari'ah-compliance standards. It was 2.7 times oversubscribed.
- An article in Reuters discusses the push to close the gap between Malaysia and the GCC in Islamic finance.
- Sukuk yields have continued to fall in the face of uncertainty about the global economy, with yields falling to lower levels in Malaysia versus the GCC.
- Afghanistan is planning to issue Islamic banking licenses for three Islamic banks, the first in the country.
- Gulf Finance House said it had recorded a net loss in the first half of 2010 of $47.7 million compared to $92.1 million in the same period during 2009. Reuters calculated that the second quarter net loss was $39.9 million compared with a loss of $54.4 million in the second quarter of 2009. As part of its restructuring plan it reduced its assets from $2.7 billion at the end of 2009Q2 to $1.4 billion at the end of 2010Q2.
- Barclays Capital began offering Islamic repos during the past couple weeks. The structure was not discussed in the Bloomberg article.
- The Islamic Bank of Britain's shareholders approved the capital injection from Qatar International Islamic Bank of GBP20 million ($31 million).
- Kuveyt Turk issued a $100 million, 3-year sukuk, the first in the country. The government issued "revenue-indexed bonds" that are similar to sukuk in early 2009.
- A fund manager in Guernsey, Argyll Investment Services, launched its World Shariah Funds PCC Ltd.
- Indonesia delayed its sovereign sukuk for up to $650 million until 2011 because of lower budget deficits. The country's central bank is reviewing whether to approve changes to rules that would allow Islamic banks to restructure loans that are current. Current rules restrict restructuring to loans that are non-performing.
- The chairman of the World Islamic Economic Forum Foundation, Musa Hitam, was on a global version of CNBC (video) talking about where Islamic finance stands today.
- A conference on Islamic finance in Jeddah will suggest that there be a database of "permanent fatwas". Presumably, this would include fatawa on the most common Islamic finance structures.
Sunday, August 15, 2010
DIFC Investments, Other News
JP Morgan said the government of Dubai may have to convert its $1 billion loan to DIFC Investments into equity, as well as make an equity investment in the company. The report also upgraded DIFC Investments' $1.2 billion mudaraba sukuk maturing in 2012 from "underweight" to "neutral" based on "improved asset coverage". Other analysts believe the rally--the sukuk rose in price to 79.15 (yielding more than 13%) --has gone to far in DIFC sukuk, as well as other Dubai-related sukuk.
Other News
Other News
- Gulf Finance House was able to roll over $100 million in debts for two years, with an option to extend it by another year.
- Standard Chartered is expanding its Islamic finance business. The bank recently launched a product that will allow for hedging against fluctuations in commodity prices.
- Bloomberg has a list of upcoming sukuk. Many new sukuk are coming from Asia including Hong Kong and Singapore, although regulatory challenges remain.
- The Houston Chronicle interviews Monem Salam on the Amana Funds.
- Moody's placed Dar Al-Arkan's credit rating (and the rating on its sukuk) on review for possible downgrade.
- Islamic finance has become as closely watched as celebrities, according to Lahem Al-Nasser.
Sunday, June 27, 2010
Islamic finance can learn from the credit crisis, Malaysia mandates rebate in mortgage products
The CEO of Capinnova Investment Bank had some interesting comments about Islamic finance in an interview with Emirates Business 24/7. He believes that there should be a unified Islamic banking authority to create more standardization and facilitate cooperation between different entities. He also suggested that it is "worth looking at the current credit crunch in conventional finance to see how easily one problem can spiral out of control. This is something that Islamic finance practitioners need to take on board and make sure that they are prepared to expect the unexpected". I think this is essential because Islamic finance institutions, particularly banks, can be subject to a crisis that could impair the confidence in their ability to survive which could turn into a destabilizing process where depositors 'run' on the banks. If this happened, the bank would have one of two choices: fail or turn to a conventional lender of last resort.
In both cases, the Islamic banking industry would be hurt. If a large Islamic bank failed, it could lead to questions about the solvency of other Islamic banks and make it harder for them to attract and retain deposits. This would force them to turn to other sources of capital which could be either more expensive or shorter-term, or both. The other alternative--an Islamic bank turning to a conventional lender of last resort--would raise questions about the bank's Shari'ah-compliance and also create questions about what other Islamic banks would do in a similar situation (with added confusion from the impact of different country's regulatory systems). For example, banks offering Islamic deposit products in the US are required to have those deposits FDIC insured (for banks) or NCUA insured (for credit unions). If the institution were to be seized by the regulators, would depositors have a choice about whether they wanted to avail of the non-Shari'ah-compliant deposit insurance?
The best time to determine what needs to be done in a future crisis is now, before a crisis starts. Once a crisis is in full swing, there will not be sufficient time to consider these potential pitfalls. This was demonstrated in the recent financial crisis. The cause of the crisis was not addressed; the focus was entirely upon preventing it from spiraling further out of control.
Malaysia's central bank, Bank Negara, has said that Islamic mortgage products offered using bai bithamin ajil (BBA), and murabaha must include language in the contracts that make the rebate (ibrar) mandatory. Previously, in a default followed by an asset sale (or a prepayment), the lender was entitely to the entire loan amount (cost plus profit) for the entire term of the mortgage. Most banks granted the rebate of what in a conventional mortgage would have been future accrued interest. However, when the rebate was not granted, it often led to court cases.
Other News
In both cases, the Islamic banking industry would be hurt. If a large Islamic bank failed, it could lead to questions about the solvency of other Islamic banks and make it harder for them to attract and retain deposits. This would force them to turn to other sources of capital which could be either more expensive or shorter-term, or both. The other alternative--an Islamic bank turning to a conventional lender of last resort--would raise questions about the bank's Shari'ah-compliance and also create questions about what other Islamic banks would do in a similar situation (with added confusion from the impact of different country's regulatory systems). For example, banks offering Islamic deposit products in the US are required to have those deposits FDIC insured (for banks) or NCUA insured (for credit unions). If the institution were to be seized by the regulators, would depositors have a choice about whether they wanted to avail of the non-Shari'ah-compliant deposit insurance?
The best time to determine what needs to be done in a future crisis is now, before a crisis starts. Once a crisis is in full swing, there will not be sufficient time to consider these potential pitfalls. This was demonstrated in the recent financial crisis. The cause of the crisis was not addressed; the focus was entirely upon preventing it from spiraling further out of control.
Malaysia's central bank, Bank Negara, has said that Islamic mortgage products offered using bai bithamin ajil (BBA), and murabaha must include language in the contracts that make the rebate (ibrar) mandatory. Previously, in a default followed by an asset sale (or a prepayment), the lender was entitely to the entire loan amount (cost plus profit) for the entire term of the mortgage. Most banks granted the rebate of what in a conventional mortgage would have been future accrued interest. However, when the rebate was not granted, it often led to court cases.
Other News
- Mushtak Parker criticizes the article about Islamic banking being 'a flop'. He places much of the blame for IBB's loss-making on the bank itself being undercapitalized and without an experienced Islamic banker running it. He also criticizes the product mix that was offered by the bank. In a different article, Mr. Parker describes the progress being made in Australia towards equal regulatory treatment for Islamic and conventional financial products.
- The UAE Ministry of Economy issued a law that regulates the takaful industry. It had been previously regulated under a law for conventional insurance companies.
- Sukuk prices are at their six-month highs following a number of sukuk restructurings, according to the Dow Jones Citigroup Sukuk Index. The yield on the Malaysian sovereign sukuk has fallen to 3.61%, a spread of 175 basis points over similar maturity US Treasuries.
- One of Nakheel's largest trade creditors Arabtec expects the inital payment by Nakheel soon with the remaining amount in a sukuk within a few months.
- Funds continue to flow into US-based socially responsible funds, including faith-based funds like the Amana Funds.
- Jordan is speeding up the issuance of a planned sukuk as its borrowing costs rise.
- Kuwait Finance House (Malaysia) set up an internal department to control non-performing financings, which were 6.72% in September 2009. It also defended its dismissal of one of the firms which rated it, RAM Ratings. KFH Malaysia's parent company is expected to post a higher profit in the second quarter compared to the first, which was 21.4% from the first quarter of 2009.
- Dubai-based Fajr Capital will invest in Bank Islam Brunei Darussalam (BIBD), an Islamic bank in Brunei.
- The Islamic Bank of Britain won a dispute in the World Intellectual Property Organization (WIPO) with a technology service company that had decide to auction the domain name used by the IBB.
Sunday, June 06, 2010
Islamic pricing benchmark, Khazanah sukuk
The International Shariah Research Academy for Islamic Finance (ISRA) in Malaysia is planning to release a study on a proposed Islamic benchmark pricing rate in 2011. The proposal received criticism about the practicality of having two different pricing benchmarks within Malaysia. The criticism has merits and the development of a separate Islamic yield curve would provide limited benefit compared to other areas that the effort required could be directed towards like strengthening Islamic financial institutions' liquidity management. However, if Islamic financial products move beyond replication of conventional financial products and take on different risk characteristics than conventional products, a separate pricing benchmark could be useful for new issuers because the pricing would reflect the balance between supply and demand for Islamic financial products in the secondary markets.
Malaysian state-owned Khazanah Holdings may issue S$500 million ($354 million) in sukuk to finance its purchase of Parkway Holdings, a hospital operator. The sukuk would be the largest issued in Singaporean dollars passing a S$200 million issue from the Islamic Development Bank.
Other News
Malaysian state-owned Khazanah Holdings may issue S$500 million ($354 million) in sukuk to finance its purchase of Parkway Holdings, a hospital operator. The sukuk would be the largest issued in Singaporean dollars passing a S$200 million issue from the Islamic Development Bank.
Other News
- The final decision on Tamweel and Amlak, two troubled Dubai-based Islamic mortgage companies could come this month. It is reported that Dubai Islamic Bank is seeking to increase its share of Tamweel to over 50%. Tamweel's statement on its restructuring did not confirm or deny Dubai Islamic Bank's reported plans.
- Saturna Capital, the fund manager of the Amana Funds received a fund license in Malaysia.
- A credit union in the US is offering Islamic financial services.
- Gulf African Bank, one of the first Islamic banks in Kenya, reported a profit in the first quarter of 2010 and expects its first full-year profit this year.
- Pakistan hopes to double the share of Islamic banks in the country over the next 3 years, to 12% of total assets. For comparison, Malaysia is set to reach the 20% mark this year.
- An article discusses the idea that Dubai World attracted more attention than its overall impact in the financial markets and points out that the reason for the near-default was the financial and economic conditions as well as company-specific factors that were not related to Nakheel using a sukuk rather than a conventional bond to raise financing.
- Nakheel has begun paying contractors and may resume construction on some projects "within weeks".
- A Malaysian bai bithaman ajil (BBA) sukuk was placed on negative ratings watch. The BBA structure is used extensively in Malaysia, but not accepted in most other countries.
- The government of Kazakhstan is supporting Islamic finance in the country with the assistance of Abu Dhabi, whose government owned bank Al Hilal opened an Islamic bank in Kazakhstan.
Friday, February 19, 2010
The importance of sukuk funds
One of the areas that has been picking up in newsflow in Islamic finance is the launch of a number of sukuk funds that are, in part, motivated by distressed situations of several sukuk issuers in the past year. These funds, in part, are aiming on capitalizing on the availability of sukuk at possibly overly distressed prices. The financial crisis led to problems at institutions and companies which either held or issued sukuk and it appears that this has led to greater secondary market activity in sukuk.
However, the formation of sukuk funds should not look exclusively towards just the distressed assets, but can become an integral part of the Islamic finance marketplace by increasing secondary market activity in sukuk now and after the defaults have faded from th e headlines. They can provide a valuable part in the new issuance of sukuk and complement takaful providers and banks, which tend to hold sukuk on their books until maturity. Together, these two groups can be instrumental in restarting the market for new sukuk issuance as economic conditions improve.
The long-term holders (banks and takaful providers) and the shorter-term investors (sukuk funds) can provide a source of reliable demand for both primary and secondary sukuk transactions. At this point, however, the sukuk funds are in a rather nascent stage. If they grow to provide more demand for secondary market trading activity, they can have a significant impact on the primary market for new sukuk. By creating a more liquid secondary market for sukuk, the pricing of new sukuk may come down by reducing the premium demanded by investors for the illiquidity in the secondary markets now.
A reduction in illiqudiity premiums will make it (other things being equal), more likely that issuers consider sukuk instead of conventional bonds for those issuers that are ambivalent between the two forms of debt financing. These issuers, who may not be motivated towards sukuk issue strictly by their need for Shari'ah-compliiant financing. These issuers are likely to be more diverse than the current sukuk issuers, who are often banks and real estate companies, both in industries that have been hit the hardest by the recent credit crisis and economic downturn (and who are therefore least likely to have significant growth into the future).
The GE Capital sukuk was one example of where the diversity can come from. While GE Capital is a financial institution, it is attached to a large, global industrial firm, which may view the GE Capital sukuk as a test case of an alternative source of financing. Many other large, global companies may also look to the GE Capital sukuk as a test case for tapping a new source of capital to diversify their sources of funding. The credit crisis showed, among other things, that they can be hurt significantly if financial markets seize up based on financial conditions in one country.
One of the areas where this financial crunch was most acute was in the commercial paper markets where short maturities meant the debt had to be frequently rolled over and where the primary buyers of this debt were money market funds connected to the very financial institutions facing the most severe pressure. Thus, diversifying their funding sources away from the domestic commercial paper market should be a high priority.
If some of these issuers can be convinced that plain vanilla sukuk products represent a relatively stable source of funding, they may be willing to become regular issuers of sukuk alongside their conventional bond programs. This can bring in much greater volumes of new sukuk that will provide banks and takaful, as well as sukuk funds, with new sukuk in which they can invest.
A growth in new issuance from global companies also benefits the industry and the consumers who look to it for Shari'ah-compliant alternatives to conventional financial products. For example, although the two largest Islamic equity funds (the Amana Income and Growth funds) are based in the United States, there are no funds providing fixed income investment opportunities in the U.S., although a small mutual fund company, the Azzad Funds, has filed documents to start a fixed income Wise Capital Fund. The hold up for that fund, and others like it, is a shortage of investment opportunities. These funds don't necessarily need sukuk, they can invest in murabaha or ijara contracts that are held to maturity, but sukuk are preferable because of their ability to be liquidated if necessary.
The shortage of Islamic fixed income funds makes it extremely difficult for the average Muslim investor within the United States to construct a portfolio that meets their long-term needs. Few investors find portfolios composed entirely of equities to be suitable for their risk tolerance and investment goals. They need to balance the allocation within their portfolios between equities, fixed income and other asset classes and right now, they are unable to do so.
There are a number of areas where sukuk funds can be instrumental in expanding the sukuk market and also in providing for the needs of Muslim investors, whether high-net worth, institutional or the average Muslim retail investor. This should be an important area for the industry to focus on.
However, the formation of sukuk funds should not look exclusively towards just the distressed assets, but can become an integral part of the Islamic finance marketplace by increasing secondary market activity in sukuk now and after the defaults have faded from th e headlines. They can provide a valuable part in the new issuance of sukuk and complement takaful providers and banks, which tend to hold sukuk on their books until maturity. Together, these two groups can be instrumental in restarting the market for new sukuk issuance as economic conditions improve.
The long-term holders (banks and takaful providers) and the shorter-term investors (sukuk funds) can provide a source of reliable demand for both primary and secondary sukuk transactions. At this point, however, the sukuk funds are in a rather nascent stage. If they grow to provide more demand for secondary market trading activity, they can have a significant impact on the primary market for new sukuk. By creating a more liquid secondary market for sukuk, the pricing of new sukuk may come down by reducing the premium demanded by investors for the illiquidity in the secondary markets now.
A reduction in illiqudiity premiums will make it (other things being equal), more likely that issuers consider sukuk instead of conventional bonds for those issuers that are ambivalent between the two forms of debt financing. These issuers, who may not be motivated towards sukuk issue strictly by their need for Shari'ah-compliiant financing. These issuers are likely to be more diverse than the current sukuk issuers, who are often banks and real estate companies, both in industries that have been hit the hardest by the recent credit crisis and economic downturn (and who are therefore least likely to have significant growth into the future).
The GE Capital sukuk was one example of where the diversity can come from. While GE Capital is a financial institution, it is attached to a large, global industrial firm, which may view the GE Capital sukuk as a test case of an alternative source of financing. Many other large, global companies may also look to the GE Capital sukuk as a test case for tapping a new source of capital to diversify their sources of funding. The credit crisis showed, among other things, that they can be hurt significantly if financial markets seize up based on financial conditions in one country.
One of the areas where this financial crunch was most acute was in the commercial paper markets where short maturities meant the debt had to be frequently rolled over and where the primary buyers of this debt were money market funds connected to the very financial institutions facing the most severe pressure. Thus, diversifying their funding sources away from the domestic commercial paper market should be a high priority.
If some of these issuers can be convinced that plain vanilla sukuk products represent a relatively stable source of funding, they may be willing to become regular issuers of sukuk alongside their conventional bond programs. This can bring in much greater volumes of new sukuk that will provide banks and takaful, as well as sukuk funds, with new sukuk in which they can invest.
A growth in new issuance from global companies also benefits the industry and the consumers who look to it for Shari'ah-compliant alternatives to conventional financial products. For example, although the two largest Islamic equity funds (the Amana Income and Growth funds) are based in the United States, there are no funds providing fixed income investment opportunities in the U.S., although a small mutual fund company, the Azzad Funds, has filed documents to start a fixed income Wise Capital Fund. The hold up for that fund, and others like it, is a shortage of investment opportunities. These funds don't necessarily need sukuk, they can invest in murabaha or ijara contracts that are held to maturity, but sukuk are preferable because of their ability to be liquidated if necessary.
The shortage of Islamic fixed income funds makes it extremely difficult for the average Muslim investor within the United States to construct a portfolio that meets their long-term needs. Few investors find portfolios composed entirely of equities to be suitable for their risk tolerance and investment goals. They need to balance the allocation within their portfolios between equities, fixed income and other asset classes and right now, they are unable to do so.
There are a number of areas where sukuk funds can be instrumental in expanding the sukuk market and also in providing for the needs of Muslim investors, whether high-net worth, institutional or the average Muslim retail investor. This should be an important area for the industry to focus on.
Wednesday, October 07, 2009
Nakheel sukuk, Khazanah exchangeable sukuk in 2010, US Islamic mutual fund and ETF launching
Nakheel's $3.52 billion sukuk traded at 107, its highest value since doubts emerged about the ability of Nakheel and Dubai World, which guarantees the sukuk, to repay. The rising price indicates that there is greater certainty that Dubai will ensure the sukuk is redeemed at maturity. The redemption value includes principal plus deferred lease payments, so the redemption value is greater than par. A blog post at The National notes that the sukuk is an unsecured obligation of the company, something that is clear in the prospectus but which had been questioned following the reported transfer of properties from Nakheel to Istithmar.
Khazanah Nasional plans more exchangeable, USD-denominated sukuk next year to reduce its stake in several of its holdings. Khazanah issued an exchangeable sukuk a couple years ago backed by shares of Telekom Malaysia. The sukuk was structured where the common shares were the assets on which the sukuk was based and the profits paid to investors were covered by the dividends paid on the common shares. The investors in the sukuk were able to later exchange their sukuk into shares of Telekom Malaysia.
The United States Islamic investment market is getting a lot deeper as Saturna Capital launched its Amana Developing World Fund and ShariahShares ETF should be launched in Q1 of 2010, managed by California-based Florentez Investment Management. The new Amana Fund will be invested in developed country-based companies with significant revenue from international operations. The ShariahShares ETF will likely include two passively-managed funds, one based on the FTSE Yasaar Shari'ah U.S. Index and the other on FTSE Yasaar Shari'ah Developed World ex-U.S.
In another sign that the sukuk market is still very undeveloped for longer maturity sukuk, even from sovereign issues, the Indonesian regular sukuk will likely have less than 15 years maturity. The Finance Ministry director in charge of Islamic markets told Reuters that "The maturity of the sukuk will likely be shorter [than 15 years because] the sukuk market is still not yet developed".
Other News
Khazanah Nasional plans more exchangeable, USD-denominated sukuk next year to reduce its stake in several of its holdings. Khazanah issued an exchangeable sukuk a couple years ago backed by shares of Telekom Malaysia. The sukuk was structured where the common shares were the assets on which the sukuk was based and the profits paid to investors were covered by the dividends paid on the common shares. The investors in the sukuk were able to later exchange their sukuk into shares of Telekom Malaysia.
The United States Islamic investment market is getting a lot deeper as Saturna Capital launched its Amana Developing World Fund and ShariahShares ETF should be launched in Q1 of 2010, managed by California-based Florentez Investment Management. The new Amana Fund will be invested in developed country-based companies with significant revenue from international operations. The ShariahShares ETF will likely include two passively-managed funds, one based on the FTSE Yasaar Shari'ah U.S. Index and the other on FTSE Yasaar Shari'ah Developed World ex-U.S.
In another sign that the sukuk market is still very undeveloped for longer maturity sukuk, even from sovereign issues, the Indonesian regular sukuk will likely have less than 15 years maturity. The Finance Ministry director in charge of Islamic markets told Reuters that "The maturity of the sukuk will likely be shorter [than 15 years because] the sukuk market is still not yet developed".
Other News
- There is a good summary of the French legal changes to accommodate Islamic finance in the country, specifically the changes relating to murabaha and sukuk.
- A few sovereign sukuk issues will come next year including Indonesia, Pakistan and South Korea. Not to mention the potential for the U.K., Singapore, Hong Kong and the Japan Bank of International Cooperation, which could also come next year.
- An American firm developed a 'longevity-linked investment platform'.
- Rushdi Siddiqui, the global head of Islamic finance for ThomsonReuters, recreated the Palm Jumeirah in his garden.
- A new Islamic investment firm, Fajr Capital, launched with shareholders including Malaysian Khazanah Nasional, Brunei Investment Agency and the Abu Dhabi Investment Council.
- The CEO of Unicorn Investment Bank discusses the investment bank's growth.
- Daimler Financial will offer Shari'ah-compliant financing in the UAE.
- The Kerala government in India will finance infrastructure projects and other investment opportunities through a Shari'ah-compliant investment company.
- Syria is seeing growth in takaful.
- The merger between Amlak and Tamweel, two troubled Islamic mortgage firms will 'take time' according to UAE central bank governor Sultan Nasser al-Suweidi.
- Bahrain Financial Exchange launched two product development working groups, one devoted to developing Shari'ah-compliant products.
- The Managing Director for the MENA region for Boeing says there will be growth in Islamic finance including in aircraft finance.
- The Qatar Investment Authority and Malaysian Khazanah Nasional Bhd are working to set up a joint investment fund.
Friday, February 20, 2009
DIFC economist urges GCC government sukuk; University Bank receives acknowledgement for Islamic home finance activity
The chief economist at the Dubai International Financial Center (DIFC) says that GCC governments should issue sukuk to raise funds instead of drawing down accumulated surpluses from times when oil prices were significantly higher. In addition to retaining these surpluses, it will contribute to increasing liquidity in sukuk secondary markets. As I have noted in a post on my other blog at Zawya, the sukuk market is highly illiquid and the prices at which sukuk are traded in that market are likely not indicative of the underlying performance of the companies which issued them. The head of the DIFC, Dr. Nasser Saidi, agrees: "I think this is a temporary phenomenon. I think the pricing is unrelated to the fundamentals".
The Central Bank of Bahrain (CBB) has expanded the types of collateral it will accept from banks for overnight loans to include ijara sukuk, although no Islamic banks had used the facility. I would imagine that there is considerable debate within the Shari'ah boards of Islamic banks in Bahrain about whether borrowing against sukuk is Shari'ah-compliant. The facility was launched near the end of last year.
University Bank, a bank in Michigan with an Shari'ah-compliant subsidiary, University Islamic Financial Corp, was acknowledged by the American Bankers Association, in part for its innovative Shari'ah-compliant home finance products.
Other News
The Central Bank of Bahrain (CBB) has expanded the types of collateral it will accept from banks for overnight loans to include ijara sukuk, although no Islamic banks had used the facility. I would imagine that there is considerable debate within the Shari'ah boards of Islamic banks in Bahrain about whether borrowing against sukuk is Shari'ah-compliant. The facility was launched near the end of last year.
University Bank, a bank in Michigan with an Shari'ah-compliant subsidiary, University Islamic Financial Corp, was acknowledged by the American Bankers Association, in part for its innovative Shari'ah-compliant home finance products.
"The selection committee lauded University Bank for its innovative programs such as home financings for Muslim customers. Muslims are much less likely to be homeowners on average due to religious prohibitions on the payment or receipt of interest. University Bank designed a program to meet these needs, which has so far resulted in over $50 million of financings for the purchase of homes by Muslim customers of the bank."
Other News
- There are more Shari'ah-compliant funds in Malaysia now than Saudi Arabia, but the funds are still smaller.
- The Dow Jones Islamic Market Indexes are 10 years old.
- Lebanon is considering a sovereign sukuk issue according to a Lebanese newspaper.
- Indonesia, which is planning on instituting a regular issue of sukuk to finance the country's large deficits and the maturity of these sukuk are expected to exceed 5 years.
- The Lord Mayor of London said he expects the UK to issue a sovereign sukuk "sooner rather than later" and this issue will be denominated in UK£;
- The new governor of Saudi Arabia's central bank, the Saudi Arabian Monetary Authority, said that companies should look to the sukuk market to raise funds.
- The IFSB announced new standards for sukuk and REITs.
- Kuwait Finance House (Malaysia) is considering acquisitions across Asia including in Japan and China.
Friday, December 26, 2008
Mutual fund screening and the path to Islamic finance by a Japanese bank
Mutual funds designed to meet the criteria of a faith are not limited just to Muslim investors and some funds are moving beyond the Islamic funds in incorporating more proactive actions that do more than just using exclusionary screening. These including becoming activist shareholders and including 'positive' screens that support companies with the highest ethical conduct. I think it is the next step for Islamic mutual funds to become focused on more than just prohibition-based screens.
The path of Tokyo-Mitsubishi UFJ Bank from initially considering becoming active in Islamic finance becoming active in Malaysia with expansion plans elsewhere are described in a short article.
As usual, the sukuk al-salam issued by the Central Bank of Bahrain was oversubscribed, highlighting a continued need for short term investments for investors including Islamic banks.
A Shari'ah-compliant health insurance plan was introduced in Dubai.
The path of Tokyo-Mitsubishi UFJ Bank from initially considering becoming active in Islamic finance becoming active in Malaysia with expansion plans elsewhere are described in a short article.
As usual, the sukuk al-salam issued by the Central Bank of Bahrain was oversubscribed, highlighting a continued need for short term investments for investors including Islamic banks.
A Shari'ah-compliant health insurance plan was introduced in Dubai.
Friday, December 05, 2008
New website on Islamic finance from Al Arabiya; More doubts about the ability of Islamic finance to insulate itself from the credit crisis
The Middle East TV news channel is launching a website devoted to Islamic finance and economics, which will add another source for news on the Islamic finance industry in addition to the few leaders in the GCC region, Zawya and Sukuk.net. The Times (U.K.) describes Islamic finance and the recent developments, particularly the growing opportunities for people to study Islamic finance at some universities in the U.K.
The Islamic Bank of Britain is looking to the Middle East for additional capital to fund its growth.
A number of practitioners in the Islamic finance industry discuss the industry's development moderated by Dr. Mohamad Nedal Alchaar, the Secretary General of AAOIFI.
In an article that should surprise no one familiar with the Islamic finance industry, future growth depends on increasing the number of Shari'ah scholars according to many including Sheikh Nizam Yaquby.
SEI, a large asset management firm, says that the Islamic finance industry has performed well compared with markets as a whole despite sharp falls in commodities and energy and a rise in the price of financial stocks. By virtue of the Shari'ah screens, Islamic investment funds tend to have very little exposure to financial stocks and more in energy and commodities than most of the indices. Despite doing better than the markets in general, Islamic finance does see repercussions from the credit crisis and global economic slowdown. An article in the Guardian casts doubt on the ability of the Islamic financial industry in the GCC to avoid a crisis similar to the one in conventional markets due to banks' asset-liability maturity mismatches and a falling real estate market accentuated by the illiquidity of credit markets worldwide. The regional head of Citi's Islamic finance in Malaysia discusses the effects of the economic slowdown on Islamic finance.
A Malaysian Shari'ah scholar says that the use of derivatives and options, which are allowed in Malaysia, could create a crisis similar to the one moving through the credit markets in the West.
Singaporean bank OCBC says that non-Muslims are becoming more interested in Islamic banking because it is more conservative than conventional banks which have been struggling because of over-aggressive investment in the real estate market and derivatives relating to mortgage-backed securities.
Malaysia's central bank is going to issue a 37-day sukuk for Ringgit 200 million ($55 million).
The Islamic Bank of Britain is looking to the Middle East for additional capital to fund its growth.
A number of practitioners in the Islamic finance industry discuss the industry's development moderated by Dr. Mohamad Nedal Alchaar, the Secretary General of AAOIFI.
In an article that should surprise no one familiar with the Islamic finance industry, future growth depends on increasing the number of Shari'ah scholars according to many including Sheikh Nizam Yaquby.
SEI, a large asset management firm, says that the Islamic finance industry has performed well compared with markets as a whole despite sharp falls in commodities and energy and a rise in the price of financial stocks. By virtue of the Shari'ah screens, Islamic investment funds tend to have very little exposure to financial stocks and more in energy and commodities than most of the indices. Despite doing better than the markets in general, Islamic finance does see repercussions from the credit crisis and global economic slowdown. An article in the Guardian casts doubt on the ability of the Islamic financial industry in the GCC to avoid a crisis similar to the one in conventional markets due to banks' asset-liability maturity mismatches and a falling real estate market accentuated by the illiquidity of credit markets worldwide. The regional head of Citi's Islamic finance in Malaysia discusses the effects of the economic slowdown on Islamic finance.
A Malaysian Shari'ah scholar says that the use of derivatives and options, which are allowed in Malaysia, could create a crisis similar to the one moving through the credit markets in the West.
Singaporean bank OCBC says that non-Muslims are becoming more interested in Islamic banking because it is more conservative than conventional banks which have been struggling because of over-aggressive investment in the real estate market and derivatives relating to mortgage-backed securities.
Malaysia's central bank is going to issue a 37-day sukuk for Ringgit 200 million ($55 million).
Monday, August 04, 2008
Transparency through publicly available fatawa
Syed Farook, a lecturer in Islamic finance at BIBF in Bahrain, wrote an article on CPIFinancial.net about the prospects for providing greater transparency in the development of fiqh by providing publicly available fatawa that will allow junior Shari'ah scholars to view senior Shari'ah scholars' fatawa and hopefully reduce the number of senior Shari'ah scholars who sit on more than twenty Shari'ah boards (currently six).
Bank Negara Malaysia governor Dr. Zeti Akhtar Aziz, speaking at the launch of a training seminar on Islamic finance commented on the progress Malaysia is making to become a global hub in Islamic finance, "Due to wide ranging liberalisation measures, we have seen the entry of new foreign Islamic financial groups into our financial system and increased foreign interest in domestic Islamic financial institutions". The Malaysian Islamic finance market, although one of the most developed in the world, received some skepticism from foreign Islamic finance institutions, particularly in sukuk, where Shari'ah regulations are viewed as more liberal than those in the GCC.
Des Moines, Iowa-based Principal Global Investors is the latest Western company to enter the Islamic finance market and will do so in Malaysia in partnership with CIMB Islamic.
Takaful House, a Dubai-based takaful company listed on the Dubai Financial Market, the domestic stock exchange for companies in the UAE. The IPO offering price was AED 1 per share.
The Islamic Bank of Thailand (IBT) chairman wants to see non-Muslims use the bank, in addition to Muslims, who make up 6 million (just under 10%) of the population. There may also be plans in the future for the bank to become listed on the Thai Stock Exchange. IBT is one of the smallest state-owned banks in Thailand and has a high level of non-performing loans, at 16%.
The slowdown in Western financial markets coupled with the rise in Middle Eastern finance, including Islamic finance, has led to Western law firms, particularly those with a focus on the financial markets, opening branch offices throughout the GCC in Dubai, Abu Dhabi, Bahrain, Kuwait and Saudi Arabia.
Bank Negara Malaysia governor Dr. Zeti Akhtar Aziz, speaking at the launch of a training seminar on Islamic finance commented on the progress Malaysia is making to become a global hub in Islamic finance, "Due to wide ranging liberalisation measures, we have seen the entry of new foreign Islamic financial groups into our financial system and increased foreign interest in domestic Islamic financial institutions". The Malaysian Islamic finance market, although one of the most developed in the world, received some skepticism from foreign Islamic finance institutions, particularly in sukuk, where Shari'ah regulations are viewed as more liberal than those in the GCC.
Des Moines, Iowa-based Principal Global Investors is the latest Western company to enter the Islamic finance market and will do so in Malaysia in partnership with CIMB Islamic.
Takaful House, a Dubai-based takaful company listed on the Dubai Financial Market, the domestic stock exchange for companies in the UAE. The IPO offering price was AED 1 per share.
The Islamic Bank of Thailand (IBT) chairman wants to see non-Muslims use the bank, in addition to Muslims, who make up 6 million (just under 10%) of the population. There may also be plans in the future for the bank to become listed on the Thai Stock Exchange. IBT is one of the smallest state-owned banks in Thailand and has a high level of non-performing loans, at 16%.
The slowdown in Western financial markets coupled with the rise in Middle Eastern finance, including Islamic finance, has led to Western law firms, particularly those with a focus on the financial markets, opening branch offices throughout the GCC in Dubai, Abu Dhabi, Bahrain, Kuwait and Saudi Arabia.
Saturday, May 10, 2008
Indonesia, Africa have potential for growth in Islamic finance, IIFM standardized commodity murabaha contract near completion
A Bloomberg columnist argues in an editorial piece that the slow development of Islamic finance in Indonesia compared with Malaysia is in part due to the change in control from the British to the Dutch in 1816 which led the country to be governed under civil rather than common law. The impediment caused by civil law is that Special Purpose Vehicles (SPVs), a mainstay of the Islamic finance industry, particularly for sukuk are not recognized under the law. Qatar, also a country governed under civil law, has gotten around this difficulty by establishing the common law Qatar Financial Center (QFC) whereas Indonesia is working towards changing the civil laws to allow the development of Islamic finance, a long process. Three banks in Indonesia are now opening Shari'ah-compliant units.
The Economist discusses the potential for growth in Islamic finance in Africa, particularly in the northern half of the continent where most Muslims live. However, the lack of development of the financial sector in general have hampered the growth of Islamic finance. However, the article does point to the continent's need for infrastructure projects for which it will need to attract foreign capital to finance and Islamic finance could be a vehicle to finance these projects using money from the Middle East where the coffers are filling rapidly as the price of oil rises over $125 per barrel.
The Bahrain-based International Islamic Finance Market (IIFM), a standard-setting body, announced it was in the final stages of Shari'ah review on a standardized contract for Islamic treasury management using commodity murabaha. The February 2008 issue of the Institute of Halal Investing (available as a pdf) discusses some of the controversy surrounding commodity murabaha which involves trading commodities to provide cash in exchange for a liability of cost plus markup.
Malaysia's Security Commission recently released guidelines on Islamic venture capital.
Sukuk could grow up to 20 percent a year according to bankers despite the credit crunch.
Citigroup announced a new head of their Islamic finance division, Citi Islamic Investment Bank, which has operated since 1986 (Citigroup has been involved in Islamic finance since 1981).
Hong Kong continues to work on developing its Islamic financial sector, but PriceWaterhouseCoopers recommends that it follow the model of Malaysia rather than the U.K.
Fitch says that the tightening of Shari'ah standards could hamper the development of asset backed sukuk.
The head of Emirates Islamic Bank answers questions on the regulation of Islamic finance and the difference between Islamic financial institutions aiming to provide Shari'ah-compliant products versus those he describes as "those who have found Islamic financial services a profitable business and are just trying to benefit from this trend for commercial reasons".
US News & World Report published a list of mutual funds in which stimulus checks could be invested because they have low minimum investments which includes the Amana Funds which invest in a Shari'ah-compliant way. FTSE predicts that Islamic equity funds and ETFs will see significant growth over the next few years.
The Economist discusses the potential for growth in Islamic finance in Africa, particularly in the northern half of the continent where most Muslims live. However, the lack of development of the financial sector in general have hampered the growth of Islamic finance. However, the article does point to the continent's need for infrastructure projects for which it will need to attract foreign capital to finance and Islamic finance could be a vehicle to finance these projects using money from the Middle East where the coffers are filling rapidly as the price of oil rises over $125 per barrel.
The Bahrain-based International Islamic Finance Market (IIFM), a standard-setting body, announced it was in the final stages of Shari'ah review on a standardized contract for Islamic treasury management using commodity murabaha. The February 2008 issue of the Institute of Halal Investing (available as a pdf) discusses some of the controversy surrounding commodity murabaha which involves trading commodities to provide cash in exchange for a liability of cost plus markup.
Malaysia's Security Commission recently released guidelines on Islamic venture capital.
Sukuk could grow up to 20 percent a year according to bankers despite the credit crunch.
Citigroup announced a new head of their Islamic finance division, Citi Islamic Investment Bank, which has operated since 1986 (Citigroup has been involved in Islamic finance since 1981).
Hong Kong continues to work on developing its Islamic financial sector, but PriceWaterhouseCoopers recommends that it follow the model of Malaysia rather than the U.K.
Fitch says that the tightening of Shari'ah standards could hamper the development of asset backed sukuk.
The head of Emirates Islamic Bank answers questions on the regulation of Islamic finance and the difference between Islamic financial institutions aiming to provide Shari'ah-compliant products versus those he describes as "those who have found Islamic financial services a profitable business and are just trying to benefit from this trend for commercial reasons".
US News & World Report published a list of mutual funds in which stimulus checks could be invested because they have low minimum investments which includes the Amana Funds which invest in a Shari'ah-compliant way. FTSE predicts that Islamic equity funds and ETFs will see significant growth over the next few years.
Saturday, April 26, 2008
Forbes Special Report, etc.
Forbes released a Special Report on Islamic finance. Although the U.S. has not shown much interest in changing regulations to put Islamic finance on a level playing field with conventional finance, other countries like the U.K., Malaysia, Singapore, Japan, Dubai and Bahrain are vying to be the largest hubs of Islamic finance. The growth in Islamic investing is one area in which ethical investing has begun to grow out of being a niche market within the global financial system, although it is still small compared with the system as a whole. The growth, however, has come with challenges. One of the greatest is the shortage of Shari'ah scholars who know both the Shari'ah, financial services and with enough knowledge of English "to wade through hundreds of pages of a prospectus or legal documents".
Forbes also provides a historical analogy to the development of Islamic finance in the conventional finance market. This was the gradual move away from prohibitions of interest (usuria) in Catholicism. Although there is nothing that suggests that the prohibition of interest in Islamic finance will be circumvented, the historical analogy provides a warning against focusing on the form, rather than the spirit, of the prohibition of riba. The tension between the letter and spirit of Islamic law is the subject of a piece by Haider Ala Hamoudi, a professor at the University of Pittsburgh.
One of the areas in which the U.S. has seen significant growth in Islamic finance is in equity mutual funds, the subject of one article in Forbes.
Islamic banks in Pakistan report the need of short-term liquidity instruments, a need filled using short-term government bonds by conventional banks. The increased cost of products used by Islamic banks in the absence of liquidity management products may slow growth in demand because, as the CEO of Meezan Bank Irfan Siddiqui noted, people's demand for Islamic banking depends on the service and price, in addition to its Shari'ah-compliance. The government of Pakistan announced on April 25th that it has appointed manager of the first rupee-denominated government sukuk, expected to be Rs. 20 billion ($309 million).
The fifth Islamic bank in the U.K., Gatehouse Bank, is now open. The takaful industry, now at $3.5 billion, is expected to grow to $10 billion by 2012. Despite unsolved regulatory and tax issues, Indonesia plans to issue up to $2 billion in sovereign sukuk this year to finance the country's large budget deficit. Islamic finance, while still at an early stage, is growing in Canada. The Kuwaiti exchange will allow the selling of Islamic options on stocks using the controversial arboun structure. Although very little has been done in Islamic finance in France, the government is setting up two round tables to assess the feasibility of Islamic finance in France, in part to attract funds from the Middle East caused by the significant increase in the price of oil.
The requirement of compulsory zakat recently enacted in the UAE has attracted criticism from a notable Shari'ah scholar, Sheikh Hussein Hamed Hassan, who says it is an individual, not institutional requirement.
Forbes also provides a historical analogy to the development of Islamic finance in the conventional finance market. This was the gradual move away from prohibitions of interest (usuria) in Catholicism. Although there is nothing that suggests that the prohibition of interest in Islamic finance will be circumvented, the historical analogy provides a warning against focusing on the form, rather than the spirit, of the prohibition of riba. The tension between the letter and spirit of Islamic law is the subject of a piece by Haider Ala Hamoudi, a professor at the University of Pittsburgh.
One of the areas in which the U.S. has seen significant growth in Islamic finance is in equity mutual funds, the subject of one article in Forbes.
Islamic banks in Pakistan report the need of short-term liquidity instruments, a need filled using short-term government bonds by conventional banks. The increased cost of products used by Islamic banks in the absence of liquidity management products may slow growth in demand because, as the CEO of Meezan Bank Irfan Siddiqui noted, people's demand for Islamic banking depends on the service and price, in addition to its Shari'ah-compliance. The government of Pakistan announced on April 25th that it has appointed manager of the first rupee-denominated government sukuk, expected to be Rs. 20 billion ($309 million).
The fifth Islamic bank in the U.K., Gatehouse Bank, is now open. The takaful industry, now at $3.5 billion, is expected to grow to $10 billion by 2012. Despite unsolved regulatory and tax issues, Indonesia plans to issue up to $2 billion in sovereign sukuk this year to finance the country's large budget deficit. Islamic finance, while still at an early stage, is growing in Canada. The Kuwaiti exchange will allow the selling of Islamic options on stocks using the controversial arboun structure. Although very little has been done in Islamic finance in France, the government is setting up two round tables to assess the feasibility of Islamic finance in France, in part to attract funds from the Middle East caused by the significant increase in the price of oil.
The requirement of compulsory zakat recently enacted in the UAE has attracted criticism from a notable Shari'ah scholar, Sheikh Hussein Hamed Hassan, who says it is an individual, not institutional requirement.
Saturday, April 05, 2008
Social responsibility and Islamic finance, subprime crisis impact on Islamic finance, retakaful
The Islamic equity fund industry is beginning to promote itself based on similarities with socially responsible investing. This is an overdue development because although many people, both Muslims and non-Muslims, understand how socially responsible investing works, many are unaware of how many similarities there are between socially responsible investing and Shari'ah-compliant investing. Both use negative screens to exclude companies operating in unethical industries and both exclude largely the same types of companies. Islamic screens exclude those producing alcohol, tobacco, weapons, pork, gambling and financial services. Socially responsible screens generally exclude alcohol, tobacco, weapons, meat processing , gambling, 'exploitative' financial services like payday lenders, and those companies with poor labor and environmental records. The similarities are so great because both are looking at a double bottom line: creating profits and avoiding social harm. Islamic finance has potential to grow in popularity among non-Muslims who are looking to invest ethically by the ethical underpinnings of Islamic finance, says the head of the Islamic Bank of Britain. Faith-based funds based on many different faiths are also attracting attention.
In the wake of the subprime debt crisis, more attention is paid to the benefits of Islamic finance that could have avoided the problems encountered by investors who weren't aware of what they were actually buying in the CDOs and CDSs they held. The Reuters article highlighted the additional transparency in Islamic financial products, as well as the protections provided by the prohibition of trading debt and speculation inherent in Islamic finance. One area in which protection could be provided is by the asset-backed nature of Islamic financial products. However, this should also provide some protection to many of the securitized products, the value of which have been written down to near zero, which were based on a very tangible asset, real estate.
The subprime crisis and the likely US recession have taken a toll on Islamic finance. Sukuk issuance in the first quarter was only $2.3 billion, less than one-half the level in the first quarter of 2007. However, the sukuk issuance in 2008 is expected to rebound and many of the sukuk have been delayed, not scrapped altogether. One forthcoming sukuk will be issued in Malaysia by the Islamic Development Bank. The controversy over the structure of ijara sukuk will continue when rules are debated at the International Islamic Finance Forum in Dubai.
The growth in the takaful industry is likely to produce growth in Islamic reinsurance, retakaful.
In the wake of the subprime debt crisis, more attention is paid to the benefits of Islamic finance that could have avoided the problems encountered by investors who weren't aware of what they were actually buying in the CDOs and CDSs they held. The Reuters article highlighted the additional transparency in Islamic financial products, as well as the protections provided by the prohibition of trading debt and speculation inherent in Islamic finance. One area in which protection could be provided is by the asset-backed nature of Islamic financial products. However, this should also provide some protection to many of the securitized products, the value of which have been written down to near zero, which were based on a very tangible asset, real estate.
The subprime crisis and the likely US recession have taken a toll on Islamic finance. Sukuk issuance in the first quarter was only $2.3 billion, less than one-half the level in the first quarter of 2007. However, the sukuk issuance in 2008 is expected to rebound and many of the sukuk have been delayed, not scrapped altogether. One forthcoming sukuk will be issued in Malaysia by the Islamic Development Bank. The controversy over the structure of ijara sukuk will continue when rules are debated at the International Islamic Finance Forum in Dubai.
The growth in the takaful industry is likely to produce growth in Islamic reinsurance, retakaful.
Saturday, March 08, 2008
Rising stars of the mutual fund industry
In a recent issue of Institutional Investor News (page 22), Monem Salam, the Director of Islamic Investing at the Amana Funds in Bellingham, Washington was named as one of the top 20 rising stars in the (entire) mutual fund industry. It is a credit both to him and to the Islamic mutual fund industry in the U.S. that the conventional mutual fund industry is beginning to take note of the growth in Islamic investing.
London & Islamic Finance, Shari'ah screens can mitigate risk, Marketplace looks at Islamic finance
The credit crisis has damaged London's reputation as a financial center, but the growth in Islamic finance, particularly sukuk has provided an alternative source of strength as the U.K. is fast becoming the largest hub for Islamic finance in the West. The growth of Islamic finance, aided by flexible regulators at the Financial Services Authority (FSA) who look to create an even playing field for both conventional and Shari'ah-compliant finance, has given the U.K. a significant edge in attracting Islamic finance. Other western countries like the U.S., and other European countries have not been as proactive in attracting Islamic finance and are now being forced to run to catch up with the U.K.
Oops, says the U.K. Treasury when the rules on the stamp tax to accommodate Shari'ah-compliant home financing are used by commercial builders to circumvent taxes. The Treasury says it will fix the problem while still maintaining the equal treatment of conventional and Shari'ah-compliant home financing products.
A freelance piece in Gulfnews posits that the Shari'ah screens, particularly those around debt and interest, remove the riskiest companies from the universe of Shari'ah-compliant investments. This is certainly the case for avoiding the subprime crisis and most of the leveraged private equity problems. A year or two ago, it was very tempting for private equity firms to borrow large amounts of money to purchase companies because the economy was working fine and interest rates were low, so interest payments were low, even for very highly leveraged companies. However, as a Wall Street Journal article (quoted in Seeking Alpha) points out, private equity firms "are pushing companies further out on a limb in the process. In some cases, this gives their newly private companies little breathing room to execute growth plans and stay afloat were economic and market conditions to turn sour." The last six months have seen "economic and market conditions turn sour" and now these highly leveraged firms are running into difficulty. If the investments adhered to the debt and interest limits required for them to be Shari'ah-compliant, some returns may have been sacrificed at the height of the market, but the downturn would not be nearly as harsh.
Sheikh Taqi Usmani's criticisms that 85 percent of GCC-based sukuk created a stir in the Islamic finance industry and the Accounting and Auditing Organization for Islamic financial institutions (AAOIFI) is receiving criticism for its handling of Sheikh Usmani's comments.
Sheikh Ahmed bin Mohammed al-Khalifa, Bahrain's minister of finance has suggested that the Islamic financial industry in the GCC is composed of too many smaller firms and needs larger Islamic banking firms to undertake 'megaprojects'.
The American Public Media show, Marketplace, has a few recent stories on Islamic finance, including an interview with Mahmoud El-Gamal and segments on Shari'ah compliant mortgages, student loans, mutual funds and finally a segment in which American Muslims are asked about what they think about Islamic finance.
Although this story is not specifically about Islamic finance, I thought it should be included because, in the current environment of misunderstandings and near-hysteria about the term 'shari'ah', it is heartening to see a magazine like US News & World Report sit down with an Egyptian mufti to learn about his efforts to educate people about Shari'ah.
Oops, says the U.K. Treasury when the rules on the stamp tax to accommodate Shari'ah-compliant home financing are used by commercial builders to circumvent taxes. The Treasury says it will fix the problem while still maintaining the equal treatment of conventional and Shari'ah-compliant home financing products.
A freelance piece in Gulfnews posits that the Shari'ah screens, particularly those around debt and interest, remove the riskiest companies from the universe of Shari'ah-compliant investments. This is certainly the case for avoiding the subprime crisis and most of the leveraged private equity problems. A year or two ago, it was very tempting for private equity firms to borrow large amounts of money to purchase companies because the economy was working fine and interest rates were low, so interest payments were low, even for very highly leveraged companies. However, as a Wall Street Journal article (quoted in Seeking Alpha) points out, private equity firms "are pushing companies further out on a limb in the process. In some cases, this gives their newly private companies little breathing room to execute growth plans and stay afloat were economic and market conditions to turn sour." The last six months have seen "economic and market conditions turn sour" and now these highly leveraged firms are running into difficulty. If the investments adhered to the debt and interest limits required for them to be Shari'ah-compliant, some returns may have been sacrificed at the height of the market, but the downturn would not be nearly as harsh.
Sheikh Taqi Usmani's criticisms that 85 percent of GCC-based sukuk created a stir in the Islamic finance industry and the Accounting and Auditing Organization for Islamic financial institutions (AAOIFI) is receiving criticism for its handling of Sheikh Usmani's comments.
Sheikh Ahmed bin Mohammed al-Khalifa, Bahrain's minister of finance has suggested that the Islamic financial industry in the GCC is composed of too many smaller firms and needs larger Islamic banking firms to undertake 'megaprojects'.
The American Public Media show, Marketplace, has a few recent stories on Islamic finance, including an interview with Mahmoud El-Gamal and segments on Shari'ah compliant mortgages, student loans, mutual funds and finally a segment in which American Muslims are asked about what they think about Islamic finance.
Although this story is not specifically about Islamic finance, I thought it should be included because, in the current environment of misunderstandings and near-hysteria about the term 'shari'ah', it is heartening to see a magazine like US News & World Report sit down with an Egyptian mufti to learn about his efforts to educate people about Shari'ah.
Monday, January 14, 2008
Faith-based investing grows
The Financial Times, in a front page article, report that the highest-performing religiously-based fund was the Christian Timothy Fund, which reported growth of 17 per cent during the previous year and has averaged 18.6 per cent per year for the previous five years. Shari'ah-compliant fund manager Amana Mutual Funds Trust saw its Income fund come in second with growth of 14.1 per cent for the previous year.
The blog at Christianity Today remarks on recent news that AAOIFI Shari'ah board chairman Sheikh Taqi Usmani believes up to 85 percent of ijara sukuk, those with repurchase agreements, may be Shari'ah-non-compliant. The conclusion of the post by Rob Moll is that "Christians should pay attention to this debate. While the church has long since become comfortable with loaning money with interest, it can be helpful to see another religious group wrestle with modern capitalism. After all, why was it that for centuries Christians forbade usury and then heavily regulated it? Hmm, maybe the mess created by the sub-prime mortgage lenders has something to do with it."
The blog at Christianity Today remarks on recent news that AAOIFI Shari'ah board chairman Sheikh Taqi Usmani believes up to 85 percent of ijara sukuk, those with repurchase agreements, may be Shari'ah-non-compliant. The conclusion of the post by Rob Moll is that "Christians should pay attention to this debate. While the church has long since become comfortable with loaning money with interest, it can be helpful to see another religious group wrestle with modern capitalism. After all, why was it that for centuries Christians forbade usury and then heavily regulated it? Hmm, maybe the mess created by the sub-prime mortgage lenders has something to do with it."
Wednesday, December 26, 2007
Hong Kong enters Islamic finance, new U.S. investment from Bahraini Islamic investment bank, profile of founder of Amana Funds
Hong Kong is beginning to work to enter the Islamic financial markets, despite being several years behind nearby Kuala Lumpur and Singapore in the market. The first move the city is taking is to establish an Islamic bond (sukuk) market to challenge Malaysia, which has been leading the way, particularly within the Asian market.
Sukuk issuance worth $10 billion will likely be relaunched in 2008 including issues by Tamweel and Amlak Finance, two UAE finance companies who delayed their sukuk issuance because of the global credit crisis that began in August 2007.
A Bahraini-based Islamic investment bank Unicorn Investment Bank has purchased a U.S. microchip firm, Open-Silicon, Inc.
The San Jose Mercury News has a good profile of Nicolas Kaiser, the founder of the Amana Funds, the largest Shari'ah-compliant mutual funds in the U.S. by total assets under management.
Sukuk issuance worth $10 billion will likely be relaunched in 2008 including issues by Tamweel and Amlak Finance, two UAE finance companies who delayed their sukuk issuance because of the global credit crisis that began in August 2007.
A Bahraini-based Islamic investment bank Unicorn Investment Bank has purchased a U.S. microchip firm, Open-Silicon, Inc.
The San Jose Mercury News has a good profile of Nicolas Kaiser, the founder of the Amana Funds, the largest Shari'ah-compliant mutual funds in the U.S. by total assets under management.
Wednesday, November 28, 2007
Performance brings non-Muslims
The Amana Funds, a Shari'ah-compliant mutual fund company in the U.S., was profiled today in the Wall Street Journal and one of the most interesting bits of information was that many of the investors in the funds recently are likely non-Muslims drawn in by the funds' good performance compared with mutual funds generally.
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