Central Bank of Qatar directive coming into effect as IBQ sells Islamic banking unit to Barwa Bank

The International Bank of Qatar is the first bank to sell its Islamic banking portfolio to a fully Shari'ah-compliant institution (Barwa Bank) to fulfill the requirements of the Central Bank of Qatar (CBQ).  The sale of its Al Yusr retail banking portfolio and branches (along with the employees at the branches)--although not the private or corporate banking portfolios--provides hints that the CBQ will not ease up on its requirements for conventional banks to dispose of their Islamic portfolios.

However, still uncertain is whether IBQ believes that the it will ultimately be allowed to keep its Islamic private and corporate banking units, or whether Barwa Bank was only interested in the retail portion of the Islamic window.  It is doubtful that the CBQ directive was only focused on retail banking because at issue was the potential for commingling of funds between Islamic and conventional banking segments.  If that is the primary issue, then allowing private and corporate banking, but not retail banking would seem illogical.

The only reason that I can see for why the directive might (and there are no definitive signs yet that this is the case) only include retail banking is if the CBQ wanted to strengthen domestic Islamic retail bank.  However, this is probably unlikely because it would allow conventional (including foreign) banks to retain the areas of banking that are probably more profitable, which does little to help the domestic Islamic banks that are expected to benefit from the directive. 

As the end-of-year deadline for compliance with the CBQ directive approaches, there should be more clarity about the full scope of the directive, as well as if there is any exclusions from the requirement for conventional banks to divest their Islamic banking portfolios.  At this point (as opposed to my initial assumptions), I think it is more likely that full divestment will be required, although the deadline may be extended (given the lack of announced developments so far).  If there is any major change by the CBQ, it will probably be limited to allowing banks to hold onto their existing Islamic banking portfolios until they naturally decay, while prohibiting them from taking any new business.

The fall in sukuk in depth, new Islamic bank planned

The IFIS report on sukuk issuance in 2008 is out and it provides a deeper look in the 66% decline in sukuk issuance (with the fourth quarter seeing the lowest quarterly issuance since 2002). One particularly interesting part relates to the idea that Islamic finance was immune from the global credit crisis, which IFIS describes as the Islamic version of the now discredited decoupling theory:

"As the GCC bond market flourished even after the initial impact of the subprime mortgage crisis in 2007, there were those who thought that Islamic finance can withstand this downturn intact due to the nature and features of Islamic banking and finance, and therefore of the sukuk market. This led to some unreasonable expectations for the industry. Some industry observers thought that Islamic finance had successfully separated from global conventional credit markets, which was an Islamic variation on the now debunked decoupling theory. Others claimed that Islamic markets were now mature, independent markets, not related to the price of oil. A third view that was sometimes expressed was that lower leverage and emphasis on holding and selling real, tangible assets will save the industry from the full impact of the subprime crisis and subsequent credit crunch. Essentially, all of the above emphasises the fundamentally different natures of Islamic finance and conventional finance. But the evidence counters this. Sukuk have not done well in the past year. Total issuance in 2008 dropped by 66% compared to 2007, showing no immunity from the global downturn."

As the sukuk market succumbed to the credit crisis, some of the debt finance provided by sukuk was replaced by syndicated lending, according to IFIS.

Despite evidence to the contrary, there are still claims that the Islamic finance system is 'unscathed' by the credit crisis and a belief that if the financial system was structured along the lines of the Islamic financial system, there would not have been a credit crisis.

An un-named Islamic bank with $11 billion will be launched by June despite the challenging market conditions. I would foresee great difficulty for this launch, especially since $10 billion of the initial capital is expected to come from an IPO. The bank's role is compared with that of the European Bank for Reconstruction and Development, which is a regional development bank for Central and Eastern Europe established after the fall of Communism.

Other News

• Malaysia's sukuk market is expected to be $4 billion in 2009 compared with $5.86 billion in 2008, which was already a steep (78%) drop from 2007.
  
• Turkey's government announced a sukuk expected to be issued by the end of January to raise $1.15 billion, called "Rent Certificates" linked to the income at four state-owned enterprises.
  
• There are no Muslim faith based debt counselors in the U.S. because "there is no need for a debt-counseling service company, because a practicing Muslim doesn't subscribe to debt service products, such as credit cards"
  
• Bahrain Islamic Bank report falling profits in the wake of the global credit and economic crisis
  
• An existing bank in London, BLME, is starting a new private bank in the U.K.
  
• Another university in Europe, this one in France, is starting an Islamic finance degree as Paris Europlace, the Paris Financial Center, tries to attract Islamic finance to France
  
• Indonesia may extend the term of its forthcoming retail sukuk from three years to five

Correction: I mentioned the $4 billion in debt that Emaar listed on the London Stock Exchange. Of this amount, the European MTN were conventional debt and $2 billion were sukuk.

Legal review of Islamic financial products, private banking, Sri Lanka may consider Islamic finance

Malaysia struggles with how to accommodate Islamic finance within a non-Islamic legal system where judges are not familiar with Shari'ah requirements. In other parts of the world, Islamic financial products are structured in ways that legal systems are able to adjudicate without considering the Shari'ah-compliance of the products. This leaves little recourse for users of Islamic financial products who want to challenge the Shari'ah-compliance of products but allows the contracts to be constructed in legal systems where the outcome of challenges can be reasonably predicted from past case law.

The GCC is expected to have Islamic private banks developing in the next few years. An executive at Dubai Islamic Bank says that the Islamic finance industry should provide more alternatives catered to high net worth individuals.

Sri Lanka's government is looking at alternative sources of foreign finance and may be considering exploring Islamic finance (including Islamic microfinance) which is available in parts of the country which has a relatively small Muslim minority.

IIFF Europe to be held in Switzerland, new Islamic funds transfer system

IIFF Europe to be held in Switzerland

The International Islamic Finance Forum (IIFF) Europe will held in Switzerland from November 12-15, 2007. There are two cities, Geneva and Zurich, in one of which the IIFF will be held. The conference will focus on Shari'ah-compliant wealth management and private banking. The conference will be added to the IHI conference listings.

Funds transfer system begins between Saudi Arabia and Malaysia

Saudi-based Al Rajhi Bank which also operates in Malaysia has developed a funds transfer system between Malaysia and Saudi Arabia where a card would be purchased in Malaysia allowing withdrawals from Al Rajhi banks in Saudi Arabia. The system will be rolled out to other countries although Malaysia will remain as a hub.

Other news

Derivative technology is now being used with contracts like mudaraba and arboun to replicate swaps and options.

Maybank issues $300 million sukuk.

Shari'ah Capital, Islamic finance education and the development of the Islamic financial industry

Shair'ah Capital Inc. unveils hedge fund platform

There is an article (sub. rqd.) in the Wall Street Journal (an also a freely available press release from Shari'ah Capital) about the launch. The new products will be based on al-arboon, an advance payment similar to a down payment towards the purchase price that gives the buyer the right to purchase a good at a given price. GRT Capital Partners, an alternative investment manager in Boston, will use the platform. Al-arboon is an alternative to the more controversial salam (forward) method of replicating options and shorts.

Islamic finance lacks depth

While Islamic finance has grown rapidly and continues to grow, it has not developed the depth of conventional financial markets, Reuters reports. Much of the growth has been in sukuk and private equity, as well as other financial services for high net worth individuals yet the secondary market for sukuk is almost non-existent. One of the most interesting parts of the article is the comment from the head of Arcapita, the Bahraini Islamic private equity firm which owns Church's Chicken, Caribou Coffee and Yakima in the U.S., suggesting that Islamic finance has been successfully marketed in the U.S. based on its similarities with ethical investing.

Western educational institutions offer courses in Islamic finance

Educational institutions like Harvard University, Tufts University, the Cass Business School and Rice University offer courses or programs in Islamic finance. Programs mentioned include:

• Harvard Law School's Islamic Finance Project
• Dr. Mahmoud El-Gamal (Rice University)
• Ibrahim Warde (Tufts University)
• Cass Business School Islamic Executive MBA

Cooperation is key to developing new Islamic finance products

The head of International Centre for Education in Islamic Finance (INCEIF), Professor Dr. Malik Muhammad Mahmud Al-Awan believes that countries should cooperate in research on new Islamic financial products. This approach should take a non-confrontational approach to conventional finance, as Malaysia has done, in order to spur the acceptance of Islamic finance. He stressed that "the 21st century is seeing so much political conflict between Islam and the West, yet in the field of Islamic finance, the West has embraced it with open arms".

Other News

The world's oldest Islamic bank, Dubai Islamic Bank issued its first sukuk on the Dubai International Financial Exchange (DIFX).

Minority shareholders of Rashid Hussain Bhd (RHB) want it to remain listed. Employees Provident Fund, the Malaysian state-run pension fund which will control RHB has said it will delist RHB but RHB Capital will remain listed.

ABN Amro Bank Bhd, the Malaysian branch of the Dutch banking group, plans to seek approval from Bank Negara Malaysia, the central bank, to open an Islamic subsidiary in the country.

AmIslamic Bank will offer takaful in Malaysia in partnership with Takaful IKHLAS Sdn Bhd and FWU AG. FWU designed the plan, Takaful IKHLAS will be the trustee and AmIslamic Bank will administer the takaful plan.

Hong Leong Bhd subsidiary Hong Leong Islamic Bank will team up with UBS to offer non-ringgit structured financial products which are Shari'ah compliant.

CIMB Group Bhd will open an Islamic private banking service in Malaysia.

Foreign banks will be able to buy Malaysian Islamic banks, but will not be allowed to operate transactions in ringgit.

Bank Negara Malaysia (BNM) signed a Memorandum of Understanding with Qatar Financial Center Regulatory Authority (QFCRA) and the Dubai Financial Services Authority (DFSA) to cooperate on capacity building and human capital development.

Malaysia will offer commodity-based murabaha as a way for banks to manage liquidity in the Islamic interbank money market (IIMM). The murabaha will be based on palm oil-based contracts.

Indonesia should follow Malaysia's example and reduce double taxation to spur the development of Islamic finance in the world's most populous Muslim country.

KPJ Healthcare Bhd plans to expand its healthcare REIT

Finance professionals applaud tax changes in the U.K. dealing with sukuk.