An Australian solar company Solar Guys, is installing a 50MW solar facility in Indonesia and it will finance the project using a sukuk. The project is part of a 250MW plan dubbed 'one solar watt per person', and is an area where I think Islamic finance should be used more widely, since it will provide an additional area where Islamic finance can offer value to Muslims and non-Muslims by promoting greater sustainability.
The companies say that solar PV offers the lowest levelized cost of energy in many Southeast Asian nations, compared to alternatives, which may be true if it can be sited near areas that are more distant to the existing generating capacity to lower the electricity loss from transmission. It will certainly be more environmentally friendly, which has become of increasing concern, even in areas like the GCC that are dependent upon oil and gas for most of their export earnings and electricity generation.
For example, Saudi Arabia is planning on investing over $100 billion in solar capacity to try and reach one-third of generating capacity from renewable sources by 2032. Other GCC countries have announced significant (although less ambitious) goals for renewable energy, but Islamic financial institutions have not been actively involved in most of these projects yet. I wrote in my newsletter on May 20th (pdf) and questioned why concern for the environment has not played as much of a part in Islamic finance to date. Hopefully the Indonesian solar facility will act as another step towards changing that.
Showing posts with label Australia. Show all posts
Showing posts with label Australia. Show all posts
Sunday, October 14, 2012
Thursday, March 29, 2012
A few items that slipped through the cracks
There have been a lot of articles sitting in my feed reader and I won't have time to write more in depth on the topics, but here are the links with quick summaries.
Size of Islamic finance industry
The City UK released its latest annual report on the Islamic finance industry showing the industry has $1.3 trillion in assets. I hope to have more detail on this in another post when I have time to read it.
The Malaysian Islamic finance banking industry reached 22.4% of the country's total at the end of 2011. Despite only having 15% of the outstanding USD-denominated sukuk issuance, it has one of the best developed (i.e. liquid) sukuk market, based on a lot of domestic MYR-denominated sukuk, but still showing that size isn't everything.
Shari'ah standards
A conference participant suggests that investors and advisors should do their own Shari'ah research instead of waiting on a Shari'ah board to provide a fatwa. Not much chance of happening, but interesting to see new perspectives.
Goldman Sachs
Reuters gives the latest update on the Goldman Sachs murabaha sukuk which has attracted a lot of criticism, saying that the Shari'ah advisors have signed off and the ball is in Goldman's court. I offered my perspective on the trading issue with a murabaha sukuk in an earlier post.
IIFM-ISDA
The ISDA press release is available here for the new Mubadalatul Arbaah master agreement.
Australia
The National Bank of Australia is considering a $500 million sukuk issuance, the first from the land down under, as Islamic finance begins to develop in the country.
Hong Kong
HK returns to its work on attracting Islamic finance. Despite expressing a desire to become an Islamic finance and sukuk hub, Hong Kong has not progressed far with the only issue coming from RMB500 million ($79 million) sukuk from Khazanah.
Indonesia
The Indonesian government issued its first 4 series of project-based sukuk, although only the 30 year sukuk received bids accepted by the government. Out of a 2.18 trillion rupiah ($237 million) in total bids, only 355 billion rupiah ($38 million) was accepted, all for the PBS0004 issue due 2037.
Microfinance
A microfinance product that offers a deposit product and interest-free loan program rolled into one. When will Islamic finance get behind Islamic microfinance in a big way?
Size of Islamic finance industry
The City UK released its latest annual report on the Islamic finance industry showing the industry has $1.3 trillion in assets. I hope to have more detail on this in another post when I have time to read it.
The Malaysian Islamic finance banking industry reached 22.4% of the country's total at the end of 2011. Despite only having 15% of the outstanding USD-denominated sukuk issuance, it has one of the best developed (i.e. liquid) sukuk market, based on a lot of domestic MYR-denominated sukuk, but still showing that size isn't everything.
Shari'ah standards
A conference participant suggests that investors and advisors should do their own Shari'ah research instead of waiting on a Shari'ah board to provide a fatwa. Not much chance of happening, but interesting to see new perspectives.
Goldman Sachs
Reuters gives the latest update on the Goldman Sachs murabaha sukuk which has attracted a lot of criticism, saying that the Shari'ah advisors have signed off and the ball is in Goldman's court. I offered my perspective on the trading issue with a murabaha sukuk in an earlier post.
IIFM-ISDA
The ISDA press release is available here for the new Mubadalatul Arbaah master agreement.
Australia
The National Bank of Australia is considering a $500 million sukuk issuance, the first from the land down under, as Islamic finance begins to develop in the country.
Hong Kong
HK returns to its work on attracting Islamic finance. Despite expressing a desire to become an Islamic finance and sukuk hub, Hong Kong has not progressed far with the only issue coming from RMB500 million ($79 million) sukuk from Khazanah.
Indonesia
The Indonesian government issued its first 4 series of project-based sukuk, although only the 30 year sukuk received bids accepted by the government. Out of a 2.18 trillion rupiah ($237 million) in total bids, only 355 billion rupiah ($38 million) was accepted, all for the PBS0004 issue due 2037.
Microfinance
A microfinance product that offers a deposit product and interest-free loan program rolled into one. When will Islamic finance get behind Islamic microfinance in a big way?
Wednesday, February 29, 2012
Green sukuk and oil exports
Bloomberg has an article about the prospects for a green sukuk coming out of the GCC (with suppport from Australia's National Australia Bank and Abu Dhabi-based Clean Energy Business Council). One thing I noticed in the article that, while it makes sense if you step back, seems odd at first glance was the statement that: "Building a renewables industry allows more crude to be exported, said Indraj Mangat, a partner at Eversheds LLP".
The idea that renewable energy development would be promoted in order to export more crude oil sounds contradictory, but it is not necessarily so. In 2008, 4 of the top 10 countries in terms of carbon emissions per capita were located in the GCC (Qatar [1], UAE [3], Bahrain [5], Kuwait[7]) with Saudi Arabia [13] and Oman [14] not far behind. Although some destinations for the oil and gas that would otherwise be exported (e.g. US and Canada) are not much better in terms of carbon emissions per capita, many destinations are (e.g. European nations, South Korea, Japan and China).
The per capita carbon emission might not be the ideal measure (carbon emissions per unit of GDP is probably better, and comes up with slightly different results): Qatar [18], Bahrain [20], Kuwait [25], Saudi Arabia [26], UAE [36], Oman [39]. The real change here is whether the export markets are less carbon intensive than the GCC (which would make the shift away from domestic consumption of oil and gas towards renewable): USA [54], UK[115], Germany [92], France [144], Japan [96], South Korea [58], China [10]. Substituting oil that is sent to China will not reduce the overall carbon footprint because it will be used relatively inefficiently for creating GDP, and there will be marginal savings for oil sent to the US. However, South Korea, Japan and European countries will convert the carbon emissions from the barrel of oil more effectively in creating GDP and there will be a net carbon savings relative to the GDP that is created.
The idea that renewable energy development would be promoted in order to export more crude oil sounds contradictory, but it is not necessarily so. In 2008, 4 of the top 10 countries in terms of carbon emissions per capita were located in the GCC (Qatar [1], UAE [3], Bahrain [5], Kuwait[7]) with Saudi Arabia [13] and Oman [14] not far behind. Although some destinations for the oil and gas that would otherwise be exported (e.g. US and Canada) are not much better in terms of carbon emissions per capita, many destinations are (e.g. European nations, South Korea, Japan and China).
The per capita carbon emission might not be the ideal measure (carbon emissions per unit of GDP is probably better, and comes up with slightly different results): Qatar [18], Bahrain [20], Kuwait [25], Saudi Arabia [26], UAE [36], Oman [39]. The real change here is whether the export markets are less carbon intensive than the GCC (which would make the shift away from domestic consumption of oil and gas towards renewable): USA [54], UK[115], Germany [92], France [144], Japan [96], South Korea [58], China [10]. Substituting oil that is sent to China will not reduce the overall carbon footprint because it will be used relatively inefficiently for creating GDP, and there will be marginal savings for oil sent to the US. However, South Korea, Japan and European countries will convert the carbon emissions from the barrel of oil more effectively in creating GDP and there will be a net carbon savings relative to the GDP that is created.
Thursday, June 10, 2010
TID, Islamic CDs, the halal market and sustainability
The Investment Dar
The Investment Dar case became more complex with the Shari'ah board of TID requesting that the bank stop contesting the claim by Blom Bank based on the wakala contract's non-compliance with Shari'ah. In addition, the Shari'ah board asked that a similar defense not be used in the future without first consulting the Shari'ah board to determine the legitimacy of its contracts. An article in Arabian Business comments that "While the sharia board's statement puts a wrench in Investment Dar's ability to move forward with a case against Blom regarding the deal, legal experts say the reputational damage to the industry has already been done".
I disagree with the contention that TID's case has damaged the Islamic financial industry. In contrast, the UK courts held a skeptical view of TID's defense and now the institution's Shari'ah board has come out in support of the wakala product's Shari'ah-compliance. This accomplishes two things for the industry. First, the court's skeptical ruling on TID's defense provides another secular court precedent that a party to an Islamic contract cannot, ex post, argue that the contract is not Shari'ah-compliant to get out of their obligations. I have argued before that the court's ruling provides Shari'ah scholars and boards with more freedom to change their mind on Shari'ah-compliance without worrying about upsetting existing contracts.
Second, I believe it is positive is that TID's Shari'ah board came out against the institution and upheld their initial ruling. There is always a potential conflict of interest between a Shari'ah board and the institutions for whom they work. However, this provides one example of a Shari'ah board publicly demonstrating that their duty to ensure Shari'ah-compliance and preserve the integrity of their ruling is placed above their employment with one institution. The only clear loser in this development is TID, who are stuck between an adverse court ruling in a secular court and their own Shari'ah board's ruling that contradicts their claims in that court.
UAE central bank to offer Islamic CDs to Islamic banks
The UAE central bank is planning to offer Islamic CDs as short-term money market instruments for Islamic financial institutions. The lack of short-term money markets outside of Malaysia (and to a limited extent in Bahrain) hampers the Islamic banking industry because it leads banks to hold excess reserves in cash, which lowers Islamic banks' returns compared to conventional banks because they cannot generally generate returns from this cash. The Islamic CDs received preliminary approval last week from the Shariah Coordination Committee with what Hussain Hamed Hassan, the committee's chairman, described as "minor changes". It may receive final approved next week according to Mr. Hassan. Islamic CDs are offered in the US by one institution, the University Islamic Financial Corp and are used by some of the Islamic mutual funds in the US as a way to generate a return on their cash balances.
The halal market and social responsibility
The Managing Director of Al Islami said that Islamic branding is a "myth" at a halal market conference in Brunei. The point being made was that the halal brand--the certification--was important but without a quality product, it is not likely to succeed. The point was expanded by Shahed Amanullah, the founder of Halal Media, as a way to expand the market to non-Muslims as well either from incorporating organic and socially responsible halal certifications in food and through social responsibility in the broader marketplace so that "non-Muslims can see Muslims promoting halal values which includes social responsibility, stewardship of the earth and economic justice". I think that this is an often understated point. Although Islamic products, particularly in the financial world, were created to cater to Muslims' needs, they do not need to remain constrained to just Muslims. However, to reach out to non-Muslims, incorporating other shared ethical values and leverage the success of sustainable finance to expand the potential market for Islamic financial products.
Other News
The Investment Dar case became more complex with the Shari'ah board of TID requesting that the bank stop contesting the claim by Blom Bank based on the wakala contract's non-compliance with Shari'ah. In addition, the Shari'ah board asked that a similar defense not be used in the future without first consulting the Shari'ah board to determine the legitimacy of its contracts. An article in Arabian Business comments that "While the sharia board's statement puts a wrench in Investment Dar's ability to move forward with a case against Blom regarding the deal, legal experts say the reputational damage to the industry has already been done".
I disagree with the contention that TID's case has damaged the Islamic financial industry. In contrast, the UK courts held a skeptical view of TID's defense and now the institution's Shari'ah board has come out in support of the wakala product's Shari'ah-compliance. This accomplishes two things for the industry. First, the court's skeptical ruling on TID's defense provides another secular court precedent that a party to an Islamic contract cannot, ex post, argue that the contract is not Shari'ah-compliant to get out of their obligations. I have argued before that the court's ruling provides Shari'ah scholars and boards with more freedom to change their mind on Shari'ah-compliance without worrying about upsetting existing contracts.
Second, I believe it is positive is that TID's Shari'ah board came out against the institution and upheld their initial ruling. There is always a potential conflict of interest between a Shari'ah board and the institutions for whom they work. However, this provides one example of a Shari'ah board publicly demonstrating that their duty to ensure Shari'ah-compliance and preserve the integrity of their ruling is placed above their employment with one institution. The only clear loser in this development is TID, who are stuck between an adverse court ruling in a secular court and their own Shari'ah board's ruling that contradicts their claims in that court.
UAE central bank to offer Islamic CDs to Islamic banks
The UAE central bank is planning to offer Islamic CDs as short-term money market instruments for Islamic financial institutions. The lack of short-term money markets outside of Malaysia (and to a limited extent in Bahrain) hampers the Islamic banking industry because it leads banks to hold excess reserves in cash, which lowers Islamic banks' returns compared to conventional banks because they cannot generally generate returns from this cash. The Islamic CDs received preliminary approval last week from the Shariah Coordination Committee with what Hussain Hamed Hassan, the committee's chairman, described as "minor changes". It may receive final approved next week according to Mr. Hassan. Islamic CDs are offered in the US by one institution, the University Islamic Financial Corp and are used by some of the Islamic mutual funds in the US as a way to generate a return on their cash balances.
The halal market and social responsibility
The Managing Director of Al Islami said that Islamic branding is a "myth" at a halal market conference in Brunei. The point being made was that the halal brand--the certification--was important but without a quality product, it is not likely to succeed. The point was expanded by Shahed Amanullah, the founder of Halal Media, as a way to expand the market to non-Muslims as well either from incorporating organic and socially responsible halal certifications in food and through social responsibility in the broader marketplace so that "non-Muslims can see Muslims promoting halal values which includes social responsibility, stewardship of the earth and economic justice". I think that this is an often understated point. Although Islamic products, particularly in the financial world, were created to cater to Muslims' needs, they do not need to remain constrained to just Muslims. However, to reach out to non-Muslims, incorporating other shared ethical values and leverage the success of sustainable finance to expand the potential market for Islamic financial products.
Other News
- Hussain Hamad Hassan said it was "not a far-fetched reality" for a Gulf-wide Shari'ah board to be in place by 2013.
- Gulf Finance House continues to restructure its debts. In May, Mohammed Khnifer, Aatef Baig and Frank Winkler released an article called "The Rise and Fall of Gulf Finance House", which analyzes the pre-crisis years and how they might have led to GFH's current problems.
- Cagamas Bhd, the Malaysian national housing company, may issue up to RM1 billion ($303 million) in sukuk that are designed to be acceptable in Malaysia and the GCC.
- The Shari'ah-compliant non-bank financial company being established in the Indian state of Kerala has received significant interest from GCC- and Indian-based institutions (Doha Bank and Reliance Capital, respectively), although the government has said it will not sell more than 20% of the NBFC to any single investor.
- The Islamic Bank of Thailand became a major shareholder of a Thai leasing company, Nava Leasing Plc, in which it will own 49%.
- A Malaysia law firm has released a booklet in Australia to explain commonly misunderstood aspects of Islamic finance among Muslims as well as non-Muslims. The headline writers, of course, took the most sensationalistic topic titling the article: "Islamic finance not jihad".
Friday, May 28, 2010
Malaysia sovereign sukuk issued for $1.25 billion, Dubai, Islamic repo
Malaysia sovereign sukuk
The big news of the day was Malaysia's latest foray into the sukuk markets, the first by the sovereign since 2002 when it issued $600 million in sukuk. The latest issue was expected to be $1 billion, but with an order book reported to be between $4 billion and $5.5 billion, the issue was increased to $1.25 billion. The pricing, expected to be 180-190 basis points over US Treasuries of similar maturity, came in at 180bps on the low end of the range. This is the largest sukuk issuance since Dubai's $1.25 billion issuance in October 2009 before the Emirate saw its government-related entities like Dubai World run into trouble servicing its debt. Along the trend of the post-AAOIFI ruling market, this was an ijara sukuk which has become the most common form of sukuk issued since the rules on mudaraba and musharaka were strengthened to be more restrictive. In the first day of trading, the yield narrowed as investors bid up the sukuk. The sukuk was issued at 3.93% and finished its first trading day yielding 3.87%, 171bps higher than US Treasuries, a narrowing of the issue spread by 9bps. The state-owned oil company Petronas has seen its 4.25% sukuk issued last year trading with a 2.07% yield, which is in line with the historical spread between the sovereign and state-owned company's yields.
Prior to the issue, I was concerned that there would be too little trading to provide guidance as the economic and interest rate environment in Europe and globally evolved, but it appears that there is already secondary market activity, which should allow this sukuk to serve as a useful benchmark for corporate sukuk issuance (at least within comparable maturity range, denominated in US Dollars and issued by Malaysian issuers). As I mentioned, the issuance of another 5-year sukuk does little if anything to provide a lead for issuers looking to issue longer-dated sukuk, which are an important need for takaful providers and other investors looking for long maturity assets. However, with the difficult financing market globally because of worries about the fate of the Eurozone as well as continuing concerns over sukuk defaults, it is good sign that Malaysia's sukuk offering received such strong interest. We will have to wait another day for a sovereign sukuk with a 10-, 15-, 20- or 30-year tenor.
Dubai
In another hit to Dubai's reputation, cooling company Tabreed missed a periodic payment on its AED1.7 billion ($462.8 million) sukuk. The company is currently working on a recapitalization plan. The restructuring plan includes not just this sukuk, but debts totaling $1 billion. The two largest holders of the sukuk who collectively own more than 50% of the sukuk were consulted before the missed payment and one, Mubadala, provided an AED 1.3 billion facility to Tabreed as part of the recapitalization. The company expects to make a payment due in July on its $200 million floating rate sukuk.
Dubai International Capital, a private equity unit in Dubai Holding, is requesting a three-month delay on repayment of some of its debts. In an article, Noor Islamic Bank CEO Hussain Al Qemzi says the bank continues to expect to achieve profitability by 2012. He also said that Dubai Holdings is not another Dubai World and that Noor Islamic Bank has a small exposure to Dubai Holding, which owns Dubai International Capital.
In a case of "less bad" news, builder Arabtec says Nakheel is not in arrears to the company "as much as some analysts fear". That is hardly a ringing endorsement for efforts by Dubai to bring Nakheel current with many of its trade creditors.
Islamic repo and liquidity management
In what potentially could be a significant development, the UAE central bank is planning to offer daily auctions of commodity murabaha with one week to one year maturity to help Islamic banks manage liquidity. The Islamic certificates of deposit would fill an important gap in the Islamic finance industry where short-term liquidity management tools are rarely offered by central banks. The daily auctions would provide an important datapoint for investors and Islamic bankers. The central bank also anticipates using these CDs to manage liquidity through repurchase (repo) agreements, along the lines of the short-term ijara sukuk issued by the Central Bank of Bahrain. The difference between an ijara sukuk and a commodity murabaha is that one represents ownership of an asset while the other creates a debt stream that may raise Shari'ah issues over its use in a repurchase agreement. However, these issues have probably already been reviewed by Shari'ah scholars. The need for liquidity management tools for Islamic banks and central bankers, however, may be so important that their presence, even where this is viewed with some skepticism, may outweigh the cost associated with a controversial application.
Other News
The big news of the day was Malaysia's latest foray into the sukuk markets, the first by the sovereign since 2002 when it issued $600 million in sukuk. The latest issue was expected to be $1 billion, but with an order book reported to be between $4 billion and $5.5 billion, the issue was increased to $1.25 billion. The pricing, expected to be 180-190 basis points over US Treasuries of similar maturity, came in at 180bps on the low end of the range. This is the largest sukuk issuance since Dubai's $1.25 billion issuance in October 2009 before the Emirate saw its government-related entities like Dubai World run into trouble servicing its debt. Along the trend of the post-AAOIFI ruling market, this was an ijara sukuk which has become the most common form of sukuk issued since the rules on mudaraba and musharaka were strengthened to be more restrictive. In the first day of trading, the yield narrowed as investors bid up the sukuk. The sukuk was issued at 3.93% and finished its first trading day yielding 3.87%, 171bps higher than US Treasuries, a narrowing of the issue spread by 9bps. The state-owned oil company Petronas has seen its 4.25% sukuk issued last year trading with a 2.07% yield, which is in line with the historical spread between the sovereign and state-owned company's yields.
Prior to the issue, I was concerned that there would be too little trading to provide guidance as the economic and interest rate environment in Europe and globally evolved, but it appears that there is already secondary market activity, which should allow this sukuk to serve as a useful benchmark for corporate sukuk issuance (at least within comparable maturity range, denominated in US Dollars and issued by Malaysian issuers). As I mentioned, the issuance of another 5-year sukuk does little if anything to provide a lead for issuers looking to issue longer-dated sukuk, which are an important need for takaful providers and other investors looking for long maturity assets. However, with the difficult financing market globally because of worries about the fate of the Eurozone as well as continuing concerns over sukuk defaults, it is good sign that Malaysia's sukuk offering received such strong interest. We will have to wait another day for a sovereign sukuk with a 10-, 15-, 20- or 30-year tenor.
Dubai
In another hit to Dubai's reputation, cooling company Tabreed missed a periodic payment on its AED1.7 billion ($462.8 million) sukuk. The company is currently working on a recapitalization plan. The restructuring plan includes not just this sukuk, but debts totaling $1 billion. The two largest holders of the sukuk who collectively own more than 50% of the sukuk were consulted before the missed payment and one, Mubadala, provided an AED 1.3 billion facility to Tabreed as part of the recapitalization. The company expects to make a payment due in July on its $200 million floating rate sukuk.
Dubai International Capital, a private equity unit in Dubai Holding, is requesting a three-month delay on repayment of some of its debts. In an article, Noor Islamic Bank CEO Hussain Al Qemzi says the bank continues to expect to achieve profitability by 2012. He also said that Dubai Holdings is not another Dubai World and that Noor Islamic Bank has a small exposure to Dubai Holding, which owns Dubai International Capital.
In a case of "less bad" news, builder Arabtec says Nakheel is not in arrears to the company "as much as some analysts fear". That is hardly a ringing endorsement for efforts by Dubai to bring Nakheel current with many of its trade creditors.
Islamic repo and liquidity management
In what potentially could be a significant development, the UAE central bank is planning to offer daily auctions of commodity murabaha with one week to one year maturity to help Islamic banks manage liquidity. The Islamic certificates of deposit would fill an important gap in the Islamic finance industry where short-term liquidity management tools are rarely offered by central banks. The daily auctions would provide an important datapoint for investors and Islamic bankers. The central bank also anticipates using these CDs to manage liquidity through repurchase (repo) agreements, along the lines of the short-term ijara sukuk issued by the Central Bank of Bahrain. The difference between an ijara sukuk and a commodity murabaha is that one represents ownership of an asset while the other creates a debt stream that may raise Shari'ah issues over its use in a repurchase agreement. However, these issues have probably already been reviewed by Shari'ah scholars. The need for liquidity management tools for Islamic banks and central bankers, however, may be so important that their presence, even where this is viewed with some skepticism, may outweigh the cost associated with a controversial application.
Other News
- Moody's showed up a little late with a report that the Investment Dar case against Blom Bank where TID was allowed to proceed to trial claiming that a wakala agreement should be voided on the basis of non-Shari'ah-compliance presented an "operational risk" to Islamic finance.
- Malaysia's central bank and Securities Commission are working on a plan to make Malaysia a center for non-ringgit-denominated sukuk, as well as other areas within Islamic finance. Previously, there has been a lot of development in sukuk markets denominated in ringgit with fewer non-ringgit issues. This is in contrast to the GCC where issuers have brought both local currency and US Dollar sukuk to market.
- Saudi Electric Company, which has issued several domestic sukuk, plans to tap the international sukuk markets in 2011.
- The Australian government is reviewing its tax laws to put Islamic finance on equal footing with conventional finance and the assistant treasurer Nick Sherry points out that Islamic finance can have a broader appeal besides just Muslims as a form of socially-responsible investment (SRI). If it wants to attract the SRI consumer base, however, I believe Islamic finance will have to move beyond just 'negative' screens and incorporate 'positive' screens for companies that contribute to the social good.
- The latest summary of the Dow Jones Islamic Indexes is available through the end of May.
- Jordan Dubai Islamic Bank began trading on the Amman stock exchange.
- Malta continues to examine how regulations need to be adapted to incorporate Islamic finance.
- S&P put Kuwait Finance House's long-term counterparty credit rating on Credit Watch Negative.
- The first Islamic bank in Tunisia, Azzitouna Bank, was launched on Friday.
- The Gulf Bond and Sukuk Association signed a memorandum of understanding with the Trade Association for the Emerging Markets (EMTA).
- There is a summary of tax legislation on Islamic finance in South Africa.
Thursday, May 20, 2010
Malaysia sovereign sukuk, Dubai World debt settlement, WIEF
Malaysia sovereign sukuk
The basics of the coming Malaysian sovereign sukuk were officially released (although the total size has not been except that it will probably be larger than the $600 million issue in 2002). The proposed sukuk received an initial rating from S&P is A-. The dollar-denominated global sukuk, issued by the government's SPV 1Malaysia Sukuk Global Bhd, will be a 5-year ijara sukuk will involve the sale and leaseback of 12 hospitals according to the CEO of HSBC Amanah, Mukhtar Hussain. The government is meeting with prospective investors and will do so until May 27th and order-taking will begin a few days later.
One of the reasons for the issue, and the primary importance of the issue for Islamic finance, is that there are few sukuk issued (only one other by Malaysia) and they provide an important benchmark for corporate issuers. The five-year maturity is short, but it is in line with the most common maturity of sukuk, so near term it will be relevant to create a pricing benchmark for short-term sukuk. However, it does not establish a sovereign benchmark for longer-term sukuk, which would have been noteworthy. However, with the European debt crisis in full swing with the yield premium for new issues (e.g. Spain today) rising, the fact that the sukuk is likely to be issued blunts some criticism of its 5-year tenor. If Malaysia wanted to continue to help the global Islamic finance industry, it should follow this 5-year sukuk with a 10- or 15-year sukuk to establish a pricing benchmark.
One concern remaining is that the sukuk will be issued in a time of rising yields among sovereign borrowers as a result of the European debt crisis and this could establish a benchmark yield higher than what might have been received six months ago or six months from now. Therefore, the Malaysian government should make an effort to ensure that this sukuk is tradable in a liquid market (Malaysian sukuk secondary markets are less liquid than conventional bond markets but more liquid than most sukuk secondary markets). That would allow secondary market activity to price the changes in a 5-year sukuk sovereign yield that would provide more transparency for pricing future corporate issuers.
Dubai World agreement
The Dubai World debt agreement surrounding $24 billion in debt has been reached in principle. The FT Alphaville blog posts the entire press release with the table describing the terms. The repayment will total $14.4 billion ($0.60 on the dollar), split into two tranches. Each tranche will be allocated pro rata to the debt claims. Tranche A will have a five-year maturity at 1% interest. Tranche B will have three options, the first two will be available for holders of USD denominated debt, while the third will be available for holders of AED denominated debt. Tranche B will have a longer maturity with shortfall guarantee for 1/2 of the $10 billion size. The interest rate will again be 1% except for AED-denominated debts when the 1% will have EIBOR-LIBOR up to 1% added in.
While it is not clear whether the debt covered will include Shari'ah-compliant debt, it does puts some firm numbers on the outcome for these lenders compared with holders of the 2010 and 2011 Nakheel sukuk, who have or will receive full repayment of all principal plus profit. Last weekend, I addressed my concern that this differential treatment could negatively affect the ability and willingness of conventional issuers to also issue sukuk and the numbers, I think, make this concern even more relevant.
World Islamic Economic Forum
Other News
The basics of the coming Malaysian sovereign sukuk were officially released (although the total size has not been except that it will probably be larger than the $600 million issue in 2002). The proposed sukuk received an initial rating from S&P is A-. The dollar-denominated global sukuk, issued by the government's SPV 1Malaysia Sukuk Global Bhd, will be a 5-year ijara sukuk will involve the sale and leaseback of 12 hospitals according to the CEO of HSBC Amanah, Mukhtar Hussain. The government is meeting with prospective investors and will do so until May 27th and order-taking will begin a few days later.
One of the reasons for the issue, and the primary importance of the issue for Islamic finance, is that there are few sukuk issued (only one other by Malaysia) and they provide an important benchmark for corporate issuers. The five-year maturity is short, but it is in line with the most common maturity of sukuk, so near term it will be relevant to create a pricing benchmark for short-term sukuk. However, it does not establish a sovereign benchmark for longer-term sukuk, which would have been noteworthy. However, with the European debt crisis in full swing with the yield premium for new issues (e.g. Spain today) rising, the fact that the sukuk is likely to be issued blunts some criticism of its 5-year tenor. If Malaysia wanted to continue to help the global Islamic finance industry, it should follow this 5-year sukuk with a 10- or 15-year sukuk to establish a pricing benchmark.
One concern remaining is that the sukuk will be issued in a time of rising yields among sovereign borrowers as a result of the European debt crisis and this could establish a benchmark yield higher than what might have been received six months ago or six months from now. Therefore, the Malaysian government should make an effort to ensure that this sukuk is tradable in a liquid market (Malaysian sukuk secondary markets are less liquid than conventional bond markets but more liquid than most sukuk secondary markets). That would allow secondary market activity to price the changes in a 5-year sukuk sovereign yield that would provide more transparency for pricing future corporate issuers.
Dubai World agreement
The Dubai World debt agreement surrounding $24 billion in debt has been reached in principle. The FT Alphaville blog posts the entire press release with the table describing the terms. The repayment will total $14.4 billion ($0.60 on the dollar), split into two tranches. Each tranche will be allocated pro rata to the debt claims. Tranche A will have a five-year maturity at 1% interest. Tranche B will have three options, the first two will be available for holders of USD denominated debt, while the third will be available for holders of AED denominated debt. Tranche B will have a longer maturity with shortfall guarantee for 1/2 of the $10 billion size. The interest rate will again be 1% except for AED-denominated debts when the 1% will have EIBOR-LIBOR up to 1% added in.
While it is not clear whether the debt covered will include Shari'ah-compliant debt, it does puts some firm numbers on the outcome for these lenders compared with holders of the 2010 and 2011 Nakheel sukuk, who have or will receive full repayment of all principal plus profit. Last weekend, I addressed my concern that this differential treatment could negatively affect the ability and willingness of conventional issuers to also issue sukuk and the numbers, I think, make this concern even more relevant.
World Islamic Economic Forum
- Speaking at the WIEF, Prince Andrew said that the UK, and London in particular, will continue to build on its status as the largest Western hub for Islamic finance.
- The new UK government may reconsider a sukuk if the value-for-money can be demonstrated; that is, will the additional source of demand and encouragement for the Islamic finance work within London offset the additional structuring costs. Assuming tax laws are changed, the UK's first corporate sukuk could be issued this year, according to Humphrey Percey, the CEO of BLME.
- The Malaysian central bank, Bank Negara, has established programs to educate other central banks on regulating Islamic finance.
- The executive vice chairman of Ithmaar Bank, Khaled Abdulla-Janahi, said that there is need for greater education among Muslims about Islamic finance and says that the history of Islamic finance in the future may regard Gordon Brown, for his work as finance minister of the UK, and Christine Lagarde, the current French finance minister, as the two biggest drivers of growth in the Islamic finance industry.
- Five memoranda of agreement worth $125.3 million were signed at the WIEF.
- The CEO of Maybank MEACP Pte Ltd, Mumtaz Khan, suggests a G3+3 group to work with the G20 to develop Islamic finance. The parties involved would be the three G20 members with Muslim majorities, Saudi Arabia, Indonesia and Turkey, in addition to Malaysia, the World Islamic Economic Forum and the Islamic Development Bank.
Other News
- Rushdi Siddiqui continues his excellent line of articles in Gulf News with one on the need for a global Islamic sovereign wealth fund.
- The head of the DFSA warns that forcing Islamic financial institutions to operate under the same regulatory rules as conventional financial institutions could hurt its growth prospects.
- The governor of the Reserve Bank of India says that Islamic banking cannot be licenses under current regulation, but it is still exploring whether Shari'ah-compliant non-banking financial institutions are possible.
- Qatar Islamic Bank is planning to sell as much as $750 million in its first sukuk issuance. The sales of sukuk so far have risen year on year at the fastest rate since 2007 (albeit from a low base) as yields have fallen more than emerging market debt.
- Lipper Research describes the performance of Islamic equity funds by investment area and geographical concentration. 45% of all funds are in Southeast Asia while 59% of total assets in Islamic funds are in the GCC.
- Dubai Islamic Bank has launched a new unsecured consumer lending product based on a salam contract with the commodity used being sugar. As I understand it, the bank would provide financing and the customer would be obligated to deliver a given amount of sugar (incorporating a markup) at the maturity. The transaction involves a sugar wholesaler that collects partial payments from the customer and at maturity will deliver the sugar to DIB.
- The Commercial Real Estate Sukuk (Kuwait) for $100 million was paid on its maturity date.
- Ireland hopes to attract Islamic financial institutions and Islamic funds to the International Services Centre in the country.
- The president of CIMA writes in an opinion article in The Australian newspaper that Islamic finance has significant growth potential but is still hampered by a lack of people skilled in understanding the requirements for Islamic financial products.
Tuesday, February 16, 2010
Reuters Islamic finance summit, AAOIFI Shari'ah review
An article in the Kipp Report describes some of the issues facing Islamic finance if it wants to move forward. The areas are primarily focused on regulation and transparency, which are key areas for the Islamic finance to develop to ensure future growth.
AAOIFI provided a timetable for its review of the Shari'ah-compliance of Islamic financial products. They will begin the process in June and begin screening products in the second half of 2010. This is an interesting expansion of AAOIFI's traditional role of setting standards for the Islamic finance industry, but it is important that the industry remain some degree of consistency in the product's adherence to a common set of overarching Shari'ah standards. The one thing that will be vital to ensure that the industry is engaged in a positive way with the Shari'ah review is for AAOIFI to provide a transparent process to evaluate products' Shari'ah-compliant.
Reuters Islamic Finance Summit
Islamic banks in Indonesia have been and expect to produce returns on equity twice that of conventional banks. The additional return on equity is likely due, at least in part, to the rapid growth of the industry in Indonesia. One area which is somewhat concerning is that Beny Witjaksono, president of Bank Mega Syariah Indonesia, who said that the profitability was in part due to the finance fees being about twice that of conventional financial institutions. This is concerning because the Islamic finance industry needs to remain competitive with conventional financial institutions. It should not be financing growth and profitability at the expense of customers above the cost of finance offered by conventional financial institutions.
The ta'hawwut standardized Shari'ah-compliant derivatives contract's launch (being developed by ISDA and the IIFM) is "imminent" according to Simon Eedle, managing director of Islamic banking at Credit Agricole CIB. I wrote a comment on the FT Alphaville blog (who graciously linked to this blog):
Standard Chartered is about to launch an Islamic commodity derivative for clients to be able to hedge against the price of various commodities, something they say they have been working on for 15 months. It will be interesting to see how the new product interacts (particularly in terms of acceptance from clients) if the ISDA-IIFM product is launched shortly. The long development process could be a detriment to Standard Chartered based on the price they are able to offer to clients when competing with standardized derivatives under the ISDA-IIFM master agreement. The new products will each have to incorporate the development cost in their product's cost. Standard Chartered undertook the product development cost on their own and absent a subsidy from other areas of the bank, the cost of their Shari'ah-compliant derivative will incorporate additional cost that financial institutions using the ISDA-IIFM master agreement will not necessarily have to bear. That being said, the availability of a number of different products to accomplish the same goal of hedging against external risks is a positive for the industry by forcing industry participants to determine which is the best product and this will ensure that future development is done in a competitive environment.
Sonya van de Graaff, a partner at Brown Rudnick, offered some good commentary on the Islamic finance industry at the Reuters summit which are summarized in an article. She points to the Nakheel sukuk debacle as providing investors with a reminder that the sukuk structure was complex and overlapped several legal systems. I have discussed the Nakheel sukuk in depth in other posts. The article ends with a quote from Ms. van de Graaff that I think should have been recognized by the industry far earlier than it was
Other News
AAOIFI provided a timetable for its review of the Shari'ah-compliance of Islamic financial products. They will begin the process in June and begin screening products in the second half of 2010. This is an interesting expansion of AAOIFI's traditional role of setting standards for the Islamic finance industry, but it is important that the industry remain some degree of consistency in the product's adherence to a common set of overarching Shari'ah standards. The one thing that will be vital to ensure that the industry is engaged in a positive way with the Shari'ah review is for AAOIFI to provide a transparent process to evaluate products' Shari'ah-compliant.
Reuters Islamic Finance Summit
Islamic banks in Indonesia have been and expect to produce returns on equity twice that of conventional banks. The additional return on equity is likely due, at least in part, to the rapid growth of the industry in Indonesia. One area which is somewhat concerning is that Beny Witjaksono, president of Bank Mega Syariah Indonesia, who said that the profitability was in part due to the finance fees being about twice that of conventional financial institutions. This is concerning because the Islamic finance industry needs to remain competitive with conventional financial institutions. It should not be financing growth and profitability at the expense of customers above the cost of finance offered by conventional financial institutions.
The ta'hawwut standardized Shari'ah-compliant derivatives contract's launch (being developed by ISDA and the IIFM) is "imminent" according to Simon Eedle, managing director of Islamic banking at Credit Agricole CIB. I wrote a comment on the FT Alphaville blog (who graciously linked to this blog):
The idea of a Shari'ah-compliant derivative is not necessarily a contradiction in terms. Islamic finance, just like conventional finance, has a need for hedging against unexpected changes in exchange rates, commodity prices, interest rate (which affects the industry through its use as a benchmark for pricing financial products).Alliance Takaful is in talks on a sukuk issue. In part, the move is described as encouragement for the issue of more high-grade corporate issues that takaful companies need to invest in to fill the asset side of their balance sheet to match the longer-term liabilities. The article does a very good job explaining one of the manifestations of the asset-liability maturity mismatch facing other Islamic financial institutions including takaful providers. In addition, the CEO of Allianz Takaful, Abdul Rahman Tolefat, describes the difficulty in competing with banks for new sukuk issues, particularly in sovereign sukuk. He suggests that issuers allocate a percentage (10-15% was his number) of the new issue to takaful providers to allow them to subscribe to high-grade sukuk that they may not otherwise get access to if the issue is significantly oversubscribed.
However, the tricky part about derivatives from the perspective of Shari'ah-compliance is how to create them so that they can provide the necessary hedging (a transaction that in one way can be thought of as altering the risks and returns between different parties) without providing a way for investors to speculate. For example, the difference between a conventional investor who holds a bond and buys credit default protection on that bond, versus an investor who buys a credit default swap on a bond he does not own.
There is an additional problem from the Shari'ah-compliance perspective (as I understand it, and I am not qualified to give anything more than my opinion on the subject) is that by its very nature, a derivative (whether an option, swap or other product) involves one person gaining at the other's expense, which is viewed as close to gambling and on the face of it, would not be something that Islamic finance should get into. However, creating ways for Islamic investors to hedge risks is something that is useful to the productive running of the economy (why make manufacturers who export goods also be currency market experts?). This could be the reason for the delay.
Standard Chartered is about to launch an Islamic commodity derivative for clients to be able to hedge against the price of various commodities, something they say they have been working on for 15 months. It will be interesting to see how the new product interacts (particularly in terms of acceptance from clients) if the ISDA-IIFM product is launched shortly. The long development process could be a detriment to Standard Chartered based on the price they are able to offer to clients when competing with standardized derivatives under the ISDA-IIFM master agreement. The new products will each have to incorporate the development cost in their product's cost. Standard Chartered undertook the product development cost on their own and absent a subsidy from other areas of the bank, the cost of their Shari'ah-compliant derivative will incorporate additional cost that financial institutions using the ISDA-IIFM master agreement will not necessarily have to bear. That being said, the availability of a number of different products to accomplish the same goal of hedging against external risks is a positive for the industry by forcing industry participants to determine which is the best product and this will ensure that future development is done in a competitive environment.
Sonya van de Graaff, a partner at Brown Rudnick, offered some good commentary on the Islamic finance industry at the Reuters summit which are summarized in an article. She points to the Nakheel sukuk debacle as providing investors with a reminder that the sukuk structure was complex and overlapped several legal systems. I have discussed the Nakheel sukuk in depth in other posts. The article ends with a quote from Ms. van de Graaff that I think should have been recognized by the industry far earlier than it was
"There was sometimes the impression during the crisis that hit western economies from 2007 that the stretched loans-to-value at the root of the problem could never happen in Sharia finance because of restrictions on leverage limits. Well, they did"There were two other articles from the Reuters summit, one on Bank of London and the Middle East and one on the prospect of asset sales by Gulf Finance House.
Other News
- The new product from Australian bank Westpac is described in a little more detail and there is a link to the government study of Islamic finance (pdf).
- The Central Bank of Bahrain's al-ijara sukuk issue was oversubscribed by 200%.
- ThomsonReuters launched their Islamic finance gateway.
- Indonesia cancelled a 1 trillion rupiah ($107 million) in sukuk it was offering, without specifying a reason. An analyst quoted in the article suggested that the investors demanded returns higher than the government was willing to pay.
Friday, February 12, 2010
Dubai, Gulf Finance House, criticism of media descriptions of Islamic finance
Dubai and GFH
The worries over Greece has spilled back into Dubai with the credit default swaps rising to their highest levels since the Thanksgiving crisis over the maturing Nakheel sukuk. The money provided by Abu Dhabi to redeem the Nakheel sukuk will finance payments due until the end of April while Dubai World negotiates a standstill agreements but rumors have been spreading about a request for a standstill on all of Dubai World's debt for six months reported (but not confirmed) in al-Ittihad article.
In the wake of rising CDS premiums and concerns over Dubai World, the price of the Dubai sukuk has fallen significantly raising yields above 10%. It remains unclear about whether the problems with Dubai World will spill over into the Dubai government (which does not explicitly back Dubai World's debt).
The Dubai situation is not the only hotspot in Islamic finance in the Gulf recently. Gulf Finance House rolled over 1/3 of its maturing debt while paying off the remainder, which has brought attention to the offshore banking business (particularly investment banks) in Bahrain. The article above (from Reuters) notes that "most investment houses in Bahrain relied on booking upfront fees on money raised from investors for real estate projects and private equity projects, a market which collapsed following the end to a regional property boom late in 2008."
The terms on which GFH was able to postpone repayment of its entire maturing debt are costly with reports that the $100 million will cost the bank LIBOR+500 basis points plus an extension fee of 100 basis points. An analysis of the market situation for GFH is outside of the scope of what this blog covers, but there are questions about the Shari'ah-compliance of such an agreement.
Little is mentioned about the deal except that the new facility is a murabaha (replacing the old murabaha) and therefore I would imagine Shari'ah scholars signed off on the deal. The transaction itself is relatively unproblematic (if expensive). GFH received a financing facility from a group of investors which happened to be its previous creditors on a murabaha basis with an expensive profit for those investors.
However, the substance of the murabaha may be relatively common as a financing mechanism, the rolling over of debt and inclusion of an 'extension fee' seem problematic in my (untrained) eyes. I don't have the expertise in Shari'ah nor have I seen the documents for the deal, but this deal looks like an increase in the debt load on the $100 million in exchange for additional time for repayment.
However the deal was structured, this particular aspect seems to contradict at least the way that Islamic finance is supposed to operate. As I understand it, the prohibition of interest was at least in part a reaction to the exploitation caused by creditors rolling over debts in exchange for an increase in the amount owed to the creditors. I would hope that someone would come out and publicly explain how the deal was structured to avoid breaching the restrictions imposed by the Shari'ah.
General Islamic finance
The National newspaper has an article on the growth of Islamic finance that has some interesting comments from Michael McMillen, a partner at the U.S. law firm Fulbright & Jaworski. Commenting on the defaults, and the ongoing bankruptcy case of East Cameron Partners, he said "In my view, the impact is likely to be net positive. Thus far, the responses of involved parties provide grounds for optimism."
I think his assessment is correct, except for the impact on the investors in the sukuk. The default resolution process is one of the areas that has been a continuing source of uncertainty. One concern I have with the way Islamic finance is described in the article (not by Mr. McMillen) is the assertion that "Islamic banking is based on five pillars: no interest, no uncertain speculation, no financing of companies involved with goods and services deemed haram, such as weapons, pork and gambling, the sharing of profit and loss and the understanding that all financial transactions must be backed by tangible assets."
There are two points made here that I think are somewhat misleading. Islamic finance does not always involve a sharing of profit and loss. There are several commonly used transactions like murabaha and ijara where profit and loss are not shared.
In a murabaha, the transaction is a sale with a markup. The risk is placed on the debtor who must repay the cost plus profit regardless and if they do not do so, they are generally in default. The way it operates is that the bank operates as a wholesaler and the price they charge includes a markup. The financing feature of the transaction is that the buyer is offered deferred repayments. There is not interest charged on the deferred payments and the buyer must make these payments to remain current on the financing, just as if they were purchasing a good from another wholesaler.
The other statement I think is misleading is that "all financial transactions must be backed by tangible assets". This is also incorrect and does not give a clear picture of how many transactions are structured. To use a generic example, look at an asset-based ijara sukuk. In the standard transaction, the issuer sells the beneficial interest in an asset to an SPV which raises money from investors through a sukuk. The issuer then leases back the asset with a pre-determined rent payment (often benchmarked to an interest rate like LIBOR). At maturity, the issuer repurchases the asset at the sale price to allow the SPV to redeem the sukuk at par.
The transaction involves the sale of the asset, but the transaction is not 'backed' by the asset. If the issuer defaults, the investors can exercise a purchase undertaking granted by the issuer that forces the issuer to repurchase the asset at the par value (often this is the only option provided to the investors). The investors then become unsecured creditors of the issuer on par with all other unsecured creditors of the issuer. There is no additional protection granted by virtue of the asset being involved in the transaction, nor do the investors have recourse to the asset used in the transaction.
The descriptions provided by The National about Islamic finance that I have clarified are not unique to this article. I think that The National provides generally very good coverage of the Islamic finance industry and their articles are mostly very informative. However, this article falls into the 'simple explanation' trap that has most of the coverage of Islamic finance has fallen into.
There are far worse examples of poor description of how Islamic finance works in other news articles, but it is high time that the industry find a different 'simple explanation' that incorporates the essential features of how Islamic finance actually works so that there is not surprise when a situation arises like the Nakheel sukuk where people realize that Islamic finance is not always 'backed' by an asset. In fact, the Nakheel sukuk was different from the traditional ijara structure because investors were provided with recourse against the assets through the granting of a fully perfected mortgage over the assets that the sukuk was based on.
Other News
The worries over Greece has spilled back into Dubai with the credit default swaps rising to their highest levels since the Thanksgiving crisis over the maturing Nakheel sukuk. The money provided by Abu Dhabi to redeem the Nakheel sukuk will finance payments due until the end of April while Dubai World negotiates a standstill agreements but rumors have been spreading about a request for a standstill on all of Dubai World's debt for six months reported (but not confirmed) in al-Ittihad article.
In the wake of rising CDS premiums and concerns over Dubai World, the price of the Dubai sukuk has fallen significantly raising yields above 10%. It remains unclear about whether the problems with Dubai World will spill over into the Dubai government (which does not explicitly back Dubai World's debt).
The Dubai situation is not the only hotspot in Islamic finance in the Gulf recently. Gulf Finance House rolled over 1/3 of its maturing debt while paying off the remainder, which has brought attention to the offshore banking business (particularly investment banks) in Bahrain. The article above (from Reuters) notes that "most investment houses in Bahrain relied on booking upfront fees on money raised from investors for real estate projects and private equity projects, a market which collapsed following the end to a regional property boom late in 2008."
The terms on which GFH was able to postpone repayment of its entire maturing debt are costly with reports that the $100 million will cost the bank LIBOR+500 basis points plus an extension fee of 100 basis points. An analysis of the market situation for GFH is outside of the scope of what this blog covers, but there are questions about the Shari'ah-compliance of such an agreement.
Little is mentioned about the deal except that the new facility is a murabaha (replacing the old murabaha) and therefore I would imagine Shari'ah scholars signed off on the deal. The transaction itself is relatively unproblematic (if expensive). GFH received a financing facility from a group of investors which happened to be its previous creditors on a murabaha basis with an expensive profit for those investors.
However, the substance of the murabaha may be relatively common as a financing mechanism, the rolling over of debt and inclusion of an 'extension fee' seem problematic in my (untrained) eyes. I don't have the expertise in Shari'ah nor have I seen the documents for the deal, but this deal looks like an increase in the debt load on the $100 million in exchange for additional time for repayment.
However the deal was structured, this particular aspect seems to contradict at least the way that Islamic finance is supposed to operate. As I understand it, the prohibition of interest was at least in part a reaction to the exploitation caused by creditors rolling over debts in exchange for an increase in the amount owed to the creditors. I would hope that someone would come out and publicly explain how the deal was structured to avoid breaching the restrictions imposed by the Shari'ah.
General Islamic finance
The National newspaper has an article on the growth of Islamic finance that has some interesting comments from Michael McMillen, a partner at the U.S. law firm Fulbright & Jaworski. Commenting on the defaults, and the ongoing bankruptcy case of East Cameron Partners, he said "In my view, the impact is likely to be net positive. Thus far, the responses of involved parties provide grounds for optimism."
I think his assessment is correct, except for the impact on the investors in the sukuk. The default resolution process is one of the areas that has been a continuing source of uncertainty. One concern I have with the way Islamic finance is described in the article (not by Mr. McMillen) is the assertion that "Islamic banking is based on five pillars: no interest, no uncertain speculation, no financing of companies involved with goods and services deemed haram, such as weapons, pork and gambling, the sharing of profit and loss and the understanding that all financial transactions must be backed by tangible assets."
There are two points made here that I think are somewhat misleading. Islamic finance does not always involve a sharing of profit and loss. There are several commonly used transactions like murabaha and ijara where profit and loss are not shared.
In a murabaha, the transaction is a sale with a markup. The risk is placed on the debtor who must repay the cost plus profit regardless and if they do not do so, they are generally in default. The way it operates is that the bank operates as a wholesaler and the price they charge includes a markup. The financing feature of the transaction is that the buyer is offered deferred repayments. There is not interest charged on the deferred payments and the buyer must make these payments to remain current on the financing, just as if they were purchasing a good from another wholesaler.
The other statement I think is misleading is that "all financial transactions must be backed by tangible assets". This is also incorrect and does not give a clear picture of how many transactions are structured. To use a generic example, look at an asset-based ijara sukuk. In the standard transaction, the issuer sells the beneficial interest in an asset to an SPV which raises money from investors through a sukuk. The issuer then leases back the asset with a pre-determined rent payment (often benchmarked to an interest rate like LIBOR). At maturity, the issuer repurchases the asset at the sale price to allow the SPV to redeem the sukuk at par.
The transaction involves the sale of the asset, but the transaction is not 'backed' by the asset. If the issuer defaults, the investors can exercise a purchase undertaking granted by the issuer that forces the issuer to repurchase the asset at the par value (often this is the only option provided to the investors). The investors then become unsecured creditors of the issuer on par with all other unsecured creditors of the issuer. There is no additional protection granted by virtue of the asset being involved in the transaction, nor do the investors have recourse to the asset used in the transaction.
The descriptions provided by The National about Islamic finance that I have clarified are not unique to this article. I think that The National provides generally very good coverage of the Islamic finance industry and their articles are mostly very informative. However, this article falls into the 'simple explanation' trap that has most of the coverage of Islamic finance has fallen into.
There are far worse examples of poor description of how Islamic finance works in other news articles, but it is high time that the industry find a different 'simple explanation' that incorporates the essential features of how Islamic finance actually works so that there is not surprise when a situation arises like the Nakheel sukuk where people realize that Islamic finance is not always 'backed' by an asset. In fact, the Nakheel sukuk was different from the traditional ijara structure because investors were provided with recourse against the assets through the granting of a fully perfected mortgage over the assets that the sukuk was based on.
Other News
- Westpac Banking Corp, an Australian bank, is planning to announce an interbank product, most likely based on commodity murabaha, according to the Trade Minister Simon Crean.
- Columbia University held a symposium on Islamic finance with Umar Moghul and Taha Abdul-Basser, an Islamic finance lawyer and Shari'ah scholar, respectively.
- A college in Canada became the first in the country to offer an online course in Islamic finance.
- There will be a workshop on Islamic finance held in Libya by the Union of Arab Banks.
Thursday, January 14, 2010
Islamic finance should focus on poverty; Dubai World fallout, updates
The Senegalese president Abdoulaye Wade says that Islamic banks should fight poverty, including in Africa. In related news, Bahrain became the home of a new Shari'ah-compliant microfinance bank, Family Bank of Bahrain. The bank is based on the Grameen Bank model and is majority (63%) owned by the Royal Charity Organization and the Social Development Ministry, with the remainder owned by Kuwait Finance House, Ahli United Bank, Bank of Bahrain and Kuwait and Ithmaar Bank.
These two stories illustrate something important that has been somewhat sidelined in the attention paid to sukuk and other institutional forms of Islamic finance. There is a strong social mandate in Islamic finance and microfinance, both within the Gulf and in other countries, can play a part in fulfilling this mandate. It is also clear that there are many things that microfinance cannot accomplish in terms of poverty reduction, but the Islamic financial industry has largely overlooked the role that microfinance can play in fighting poverty and promoting greater economic equality, which is often cited as one of the fundamental reasons for Islamic finance to exist. I will be interested to see how the microfinance bank develops and if any readers of this blog have information about the products it uses, please email them to me at blake@sharingrisk.org.
An article overviews the impact of Dubai World and Nakheel debt problems on the Islamic finance industries. One of the important conclusions to the article is the claim that "One thing remains certain: Islamic institutions were no different than conventional bankers in ignoring the speculative frenzy that took Dubai by storm and incurred massive losses for many sukuk holders." This is an important point because Islamic banks in the GCC have relatively large exposure to the real estate markets. Regardless of the structure used in the financing, whether conventional or Islamic, a steep decline in real estate values had an impact on the ability of debtors to repay their obligations. There may have been aspects of conventional financing markets that accentuated the decline in these investments, but that does not mean that the crisis avoided having an impact on Islamic financial institutions with large real estate exposures.
The Dubai World debt problems may move into a new phase if reports that a standstill agreement is imminent are accurate. The standstill agreement would protect Dubai World from creditor's claims for six months while a restructuring plan is created and agreed upon. The Nakheel 2 sukuk is scheduled to pay a periodic distribution of $10.3 million on January 19, 2010. Meanwhile, Barclay's Capital recommended that sukukholders sell their sukuk because the current trading value exceeds their projection for recovery values of 40 to 50 percent of par.
Other News
These two stories illustrate something important that has been somewhat sidelined in the attention paid to sukuk and other institutional forms of Islamic finance. There is a strong social mandate in Islamic finance and microfinance, both within the Gulf and in other countries, can play a part in fulfilling this mandate. It is also clear that there are many things that microfinance cannot accomplish in terms of poverty reduction, but the Islamic financial industry has largely overlooked the role that microfinance can play in fighting poverty and promoting greater economic equality, which is often cited as one of the fundamental reasons for Islamic finance to exist. I will be interested to see how the microfinance bank develops and if any readers of this blog have information about the products it uses, please email them to me at blake@sharingrisk.org.
An article overviews the impact of Dubai World and Nakheel debt problems on the Islamic finance industries. One of the important conclusions to the article is the claim that "One thing remains certain: Islamic institutions were no different than conventional bankers in ignoring the speculative frenzy that took Dubai by storm and incurred massive losses for many sukuk holders." This is an important point because Islamic banks in the GCC have relatively large exposure to the real estate markets. Regardless of the structure used in the financing, whether conventional or Islamic, a steep decline in real estate values had an impact on the ability of debtors to repay their obligations. There may have been aspects of conventional financing markets that accentuated the decline in these investments, but that does not mean that the crisis avoided having an impact on Islamic financial institutions with large real estate exposures.
The Dubai World debt problems may move into a new phase if reports that a standstill agreement is imminent are accurate. The standstill agreement would protect Dubai World from creditor's claims for six months while a restructuring plan is created and agreed upon. The Nakheel 2 sukuk is scheduled to pay a periodic distribution of $10.3 million on January 19, 2010. Meanwhile, Barclay's Capital recommended that sukukholders sell their sukuk because the current trading value exceeds their projection for recovery values of 40 to 50 percent of par.
Other News
- The National newspaper has a long article about the pending merger between Islamic mortgage firms Amlak and Tamweel.
- Bursa Malaysia was the largest location for new listed sukuk with 12 issues totaling $17.6 billion. The first listing occurred in August 2009.
- Australia's government said in a report that Islamic finance should be placed on an equal tax footing with conventional financial services.
- Morocco, which has lagged in Islamic finance, reduced the value-added tax applicable to Islamic financial products.
- Bangladeshi finance company Bank Asia Limited began offering a musharaka financing product. Musharaka is largely underused by many Islamic banks compared to murabaha and ijara.
- A report from Alpen Capital, an investment banking firm, says that takaful will grow by 16.1% in the Gulf during 2010, faster than conventional insurance. The growth in takaful has lagged the overall Islamic finance industry and is far smaller. Alpen Capital estimates that it will be $3.5 billion in the Gulf at the end of 2010. One of the interesting differences between takaful companies and conventional insurers highlighted in the report is that takaful providers are reliant upon a smaller investment universe including real estate and equities in addition to mudaraba and wakala placements with Islamic financial institutions. The lack of sukuk products could limit the growth of takaful if there is another decline in equities or real estate values.
Friday, September 11, 2009
Malaysia leading in sukuk, CBK appoints monitor for TID, Nakheel sukuk rises on comments, derivatives framework by year end, Islamic finance in France
Malaysia remains the largest issuer of sukuk representing 45% of total issues followed by Saudi Arabia with 22% in the first 7 months of 2009 according to a report by Standard & Poor's. The largest issuer was Saudi Electric Company which issued a $1.8 billion sukuk. 20% of the sukuk issued were denominated in US$, up from 10% in 2008. 3/4 of all new issues were from sovereign issuers. In another report, the Securities Comission of Malaysia reported that through August 2009, more sukuk had been issued than all of 2008 which amonted to 58.2% of the total issuance of sukuk & bonds in the country through July (p from 57% in 2008).
The Investment Dar, whose sukuk is in default, has not filed its 2008 financial statements yet and will be monitored by a temporary monitor appointed by the Central Bank of Kuwait.
Troubled property firm Nakheel saw its sukuk rise over par in secondary market trading after Shaikh Mohammed bin Rashid Al Maktoum, ruler of Dubai, said he was not worried about either the $1 billion in maturity debt for the Emirate or the $3.52 billion maturing Nakheel sukuk. Speculation has been rising that Dubai will bail out Nakheel using the $20 billion it raised recently with half coming from the UAE Central Bank. I wrote a summary of this sukuk earlier this year when it was trading at a substantial discount to par.
The International Islamic Financial Market (IIFM) will finalize a master agreement for Islamic derivatives by the end of the year. The agreement, called Ta'Hawwut may be based on Arbun, which has been used to replicate call options in a Shari'ah-compliant way. Derivatives like options and swaps have have attracted some significant criticism for simply replicating conventional products. I recently wrote a blog post on whether all innovation is necessarily beneficial within the Islamic financial industry.
France wants to attract Islamic finance, but concerns remain about how well Islamic retail institutions would fit in with the country's strict separation between religion and state. The author of the article in Reuters has a blog post at the website providing additional insight behind the article.
An Australian newspaper has an article on the MCCA co-operative that recently offered a retail Shari'ah-compliant mortgage interest fund. It's an interesting article about a product that is not available in much of the world in Shari'ah-compliant fashion. However, it is available to some extent in the U.S. and Canada also in the co-operative model. However, one of the significant limitations of the co-operative model is that it often faces a shortage of capital to fund the home purchases for the members because it cannot access capital markets by securitizing the mortgages or, in the U.S., by using funding provided by Freddie Mac.
Other News
The Investment Dar, whose sukuk is in default, has not filed its 2008 financial statements yet and will be monitored by a temporary monitor appointed by the Central Bank of Kuwait.
Troubled property firm Nakheel saw its sukuk rise over par in secondary market trading after Shaikh Mohammed bin Rashid Al Maktoum, ruler of Dubai, said he was not worried about either the $1 billion in maturity debt for the Emirate or the $3.52 billion maturing Nakheel sukuk. Speculation has been rising that Dubai will bail out Nakheel using the $20 billion it raised recently with half coming from the UAE Central Bank. I wrote a summary of this sukuk earlier this year when it was trading at a substantial discount to par.
The International Islamic Financial Market (IIFM) will finalize a master agreement for Islamic derivatives by the end of the year. The agreement, called Ta'Hawwut may be based on Arbun, which has been used to replicate call options in a Shari'ah-compliant way. Derivatives like options and swaps have have attracted some significant criticism for simply replicating conventional products. I recently wrote a blog post on whether all innovation is necessarily beneficial within the Islamic financial industry.
France wants to attract Islamic finance, but concerns remain about how well Islamic retail institutions would fit in with the country's strict separation between religion and state. The author of the article in Reuters has a blog post at the website providing additional insight behind the article.
An Australian newspaper has an article on the MCCA co-operative that recently offered a retail Shari'ah-compliant mortgage interest fund. It's an interesting article about a product that is not available in much of the world in Shari'ah-compliant fashion. However, it is available to some extent in the U.S. and Canada also in the co-operative model. However, one of the significant limitations of the co-operative model is that it often faces a shortage of capital to fund the home purchases for the members because it cannot access capital markets by securitizing the mortgages or, in the U.S., by using funding provided by Freddie Mac.
Other News
- The government of the Indian state of Kerala plans to set up an Islamic bank according to the region's finance minister.
- Two Bahrain-based Islamic investment firms, Inovest and Tharawat, are investing $32 million in a water filter production company.
- An article on the recovery includes what I think is an important reminder that "'Islamic Finance's immunity is a myth which is brought up persistently', says Fares Mourad, Managing Director and Head of Islamic Finance at Swiss private bank Sarasin."
- Does Islamic finance need more supervision?
- Malaysia's state-owned body which owns transit assets priced RM2 billion ($573m) in 15- and 20-year sukuk.
- Kuwait Turkish Participation Bank, majority owned by Kuwaiti firm Kuwait Finance House, received approval to conert its commercial office in Mannheim into an Islamic banking institution by the end of 2009 or early in 2010.
- Abu Dhabi's Tourism Development & Investment Company may raise $1 billion in sukuk.
- A $125 million syndicated secured ijara facility from a Kuwaiti issuer may have helped the market for other syndicated ijara facilities.
- Qatari Diar is raising $962 million through a syndicated Islamic facility to fund investments in Europe.
Tuesday, July 14, 2009
Yasaar Media report, Canadian sukuk, corporate sukuk market in the GCC
Yasaar Media released a report on Islamic investment banks recently. I am still reading the report and hope to have a post dedicated to it here and on my blog at Zawya.com. The report is available from Yasaar Media's website (pdf)
The second North American sukuk is expected to come from of Canadian company, Bear Mountain Resorts, by October. The sukuk will fund part of a resort community near Victoria, British Columbia and is expected to be about $380 million. The sukuk is being launched with the assistance of Siraj Capital whose CEO Ibrahim Mardam-Bey worked on the East Cameron sukuk which is now in bankruptcy while he was at Lebanese firm BSEC.
A new fund being offered by Dubai Islamic Bank provides investors with capital-protected returns based on a long-short strategy tracking the Rogers International Commodity Index Enhanced ex-Lean Hog, a commodity index. The structure of the transaction is not specified but seems like it is similar to a controversial product that used a total-return swap on an index and is likely to restart arguments about the products' desirability from a Shari'ah perspective that were raised by Sheikh Yusuf DeLorenzo.
Despite the many sovereign sukuk being issued by GCC governments, the corporate sukuk issuance market may remain largely frozen until 2010 according to Arab Banking Corporation managing director Naveed Khan. The delay between new sovereign issues and new corporate issues is expected to be caused by the higher pricing of the sovereign sukuk compared to where they were before the credit crisis.
Other News
The second North American sukuk is expected to come from of Canadian company, Bear Mountain Resorts, by October. The sukuk will fund part of a resort community near Victoria, British Columbia and is expected to be about $380 million. The sukuk is being launched with the assistance of Siraj Capital whose CEO Ibrahim Mardam-Bey worked on the East Cameron sukuk which is now in bankruptcy while he was at Lebanese firm BSEC.
A new fund being offered by Dubai Islamic Bank provides investors with capital-protected returns based on a long-short strategy tracking the Rogers International Commodity Index Enhanced ex-Lean Hog, a commodity index. The structure of the transaction is not specified but seems like it is similar to a controversial product that used a total-return swap on an index and is likely to restart arguments about the products' desirability from a Shari'ah perspective that were raised by Sheikh Yusuf DeLorenzo.
Despite the many sovereign sukuk being issued by GCC governments, the corporate sukuk issuance market may remain largely frozen until 2010 according to Arab Banking Corporation managing director Naveed Khan. The delay between new sovereign issues and new corporate issues is expected to be caused by the higher pricing of the sovereign sukuk compared to where they were before the credit crisis.
Other News
- HBG Holdings will invest in companies listed on London's Alternative Investment Market (AIM) through a Cayman Islands-domiciled Shari'ah-compliant private equity fund. HBG Holdings' shareholders are primarily institutional and private investors from the Gulf region.
- One of the sukuk funds launched recently, Emirates Investment Services' Emirates Sukuk Fund No. 1, announced it had gained 8.5% in the first 3 months since inception.
- Investors in Saad Group's Golden Belt 1 Sukuk are forming a committee to represent them, according to Reuters.
- Malaysia is 'well positioned' to help Islamic finance in Europe according to Malaysia's ambassador to Brussels, Hussein Hanif.
- An article about Abu Dhabi National Energy (Taqa) includes the note that the planned sukuk from Ras al Khaimah may offer a coupon between 8% and 8.5%.
- In the Islamic finance industry, aggregate size numbers are always rather suspect because there is no centralized methodology on how it is calculated, but according to one article, the industry now has more than $1 trillion in assets.
- Despite attempts by the Japanese government to attract Islamic finance, it is having difficulties gaining steam and the Japan Bank for International Cooperation (JBIC) sukuk that has been planned for a while may be further delayed.
- Australian investment bank Macquarie is in Malaysia and may be considering issuing a sukuk.
- Islamic finance may provide benefits to Muslim and non-Muslim homeowners in Scotland, according to an article.
Thursday, July 09, 2009
Islamic finance in Australia, U.K.; sukuk issuance in the GCC; the problems of default in sukuk markets
The Assistant Treasurer of Australia gave a speech (text of speech) at the opening of an Islamic banking & finance seminar at Latrobe University. The text of the speech, which includes a review of the industry in Australia. The Muslim Community Co-operative (Australia) Ltd. (MCCA) hopes to receive a banking license to convert to become the first Islamic bank in the country within the next three years. It is currently licensed as a non-bank financial institution. Regardless, the Assistant Treasurer beliees that there will be an Islamic bank in Australia within five years.
The UK treasury minister responsible for Islamic finance policy, Sarah McCarthy-Fry, said in a speech at the Sukuk Summit that the UK Treasury's decision not to issue a sukuk "in no way reflects a diminished government commitment to Islamic finance in the UK. I hope that other progress, including the measures announced in the recent Finance Bill (2009), will pave the way for the Islamic finance industry to grow".
The Emirate of Ras Al Khaimah is marketing the second part of its $2 billion sukuk. The Islamic Development Bank could increase its $500 million bond which is part of a five-year plan to issue $6 billion in sukuk.
Up to 5-8% of all sukuk could be at risk of default, according to industry experts, particularly those financing real estate projects and which are not backed by any sovereign or quasi-sovereign company. Also, Malaysian Central Bank governor Zeti Akhtar Aziz does not see any systemic implications of the default of the Saad Group sukuk.
In addition to GCC-based Istikhlaf, there are several groups considering launching a mega-Islamic financial institution with more than $1 billion in paid up capital in Malaysia according to Bank Negara, the Malaysian Central Bank.
There is an interesting article from Reuters that describes the tension between the Shari'ah restrictions and pressure from institutions seeking the highest return for their investors. The article also notes that this desire for profits as well as some compensation from company management is paid to scholars as 'incentive' payments stoking fears of conflict of interest, particularly for scholars who sit on many institutions' Shari'ah boards.
Other News
The UK treasury minister responsible for Islamic finance policy, Sarah McCarthy-Fry, said in a speech at the Sukuk Summit that the UK Treasury's decision not to issue a sukuk "in no way reflects a diminished government commitment to Islamic finance in the UK. I hope that other progress, including the measures announced in the recent Finance Bill (2009), will pave the way for the Islamic finance industry to grow".
The Emirate of Ras Al Khaimah is marketing the second part of its $2 billion sukuk. The Islamic Development Bank could increase its $500 million bond which is part of a five-year plan to issue $6 billion in sukuk.
Up to 5-8% of all sukuk could be at risk of default, according to industry experts, particularly those financing real estate projects and which are not backed by any sovereign or quasi-sovereign company. Also, Malaysian Central Bank governor Zeti Akhtar Aziz does not see any systemic implications of the default of the Saad Group sukuk.
In addition to GCC-based Istikhlaf, there are several groups considering launching a mega-Islamic financial institution with more than $1 billion in paid up capital in Malaysia according to Bank Negara, the Malaysian Central Bank.
There is an interesting article from Reuters that describes the tension between the Shari'ah restrictions and pressure from institutions seeking the highest return for their investors. The article also notes that this desire for profits as well as some compensation from company management is paid to scholars as 'incentive' payments stoking fears of conflict of interest, particularly for scholars who sit on many institutions' Shari'ah boards.
Other News
- The National has a good article on the development of takaful, and in particular the recent growth in re-takaful.
- Moody's revises its JAFZ sukuk rating to reflect a greater degree of inter-dependence with Dubai world than originally indicated in the original assumptions.
- HSBC Holdings head of capital markets for the MENA region, Rajiv Shukla, says that the Saudi Electric Company sukuk could mark a turning point in the sukuk market because "There is a solid pipeline of potential issues, and we should see more in the second half of this year".
- There is a summary of the sukuk market and its potential that is fairly comprehensive.
- Another Islamic fixed income fund is launced, this one by Badr Al-Islami and Mashreqbank.
- Noor Islamic Bank converted the UAE government deposit into Tier II capital to improve its balance sheet and raise its capital adequacy ratio.
Monday, June 22, 2009
Tawarruq, commodity murabaha, corporate governance, Shari'ah scholar licensing
Zawya has a good article describing the potential impact of the International Council of Fiqh Academy of the OIC on organized and reverse tawarruq which condemns the practice as a 'deception'. I discussed the rationale for the decision on my Zawya blog back in early May. The primary issue that is raised in the new article is whether the condemnation of organized tawarruq applies to commodity murabaha, which is akin to the permissible classical tawarruq. If commodity murabaha were prohibited as well, there would be a significant impact on the industry because, at least in the short run, commodity murabaha can fairly easily replace tawarruq. If commodity murabaha is also prohibited, there could be signficant turnmoil in the industry despite the non-binding nature of the OIC Fiqh Academy ruling. One interesting note from the article was a quote indirectly attributed to Sh. Mohamed Elgari. "In Bahrain in May 2009, the senior Saudi Shariah advisory, Mohamed Elgari, appealed for a more scientific approach to issuing resolutions by Shariah scholars and organizations relating to Fiqh Al-Muamalat and suggested a rigorous peer review process and market consultation before any resolution is adopted."
Another positive development in the Islamic finance industry besides Sh. Elgari's suggestion for peer review and market consultation of significant fatawa like the one on tawarruq is on corporate governance issues. Specifically, the suggestion by several scholars that the central bank (or another institution independent of the Islamic financial institutions) should be responsible for paying scholars instead of their being compensated by the companies whose products they are supposed to regulate.
Dubai World has hired AlixPartners, a restructuring firm based in New York that recently helped General Motors with its bankruptcy filing. One of the most important issues to deal with is how to pay the $3.52 billion Nakheel sukuk that matures in December. I wrote a summary of the Nakheel sukuk on my Zawya blog.
Although much of the talk about the shortage of Shari'ah scholars abated as the market for Islamic finance and especially sukuk slowed during the last year, there is still a shortage. There is also talk in the article of imposing licensing standards to ensure that all members of any Shari'ah boards are adequately qualified which should paradoxically increase the number of Shari'ah scholars because it will provide a way for lesser known but equally qualified Shari'ah scholars to take seats on boards that would otherwise be reserved for the best known scholars who sit on dozens of Shari'ah boards each.
Other News
Another positive development in the Islamic finance industry besides Sh. Elgari's suggestion for peer review and market consultation of significant fatawa like the one on tawarruq is on corporate governance issues. Specifically, the suggestion by several scholars that the central bank (or another institution independent of the Islamic financial institutions) should be responsible for paying scholars instead of their being compensated by the companies whose products they are supposed to regulate.
Dubai World has hired AlixPartners, a restructuring firm based in New York that recently helped General Motors with its bankruptcy filing. One of the most important issues to deal with is how to pay the $3.52 billion Nakheel sukuk that matures in December. I wrote a summary of the Nakheel sukuk on my Zawya blog.
Although much of the talk about the shortage of Shari'ah scholars abated as the market for Islamic finance and especially sukuk slowed during the last year, there is still a shortage. There is also talk in the article of imposing licensing standards to ensure that all members of any Shari'ah boards are adequately qualified which should paradoxically increase the number of Shari'ah scholars because it will provide a way for lesser known but equally qualified Shari'ah scholars to take seats on boards that would otherwise be reserved for the best known scholars who sit on dozens of Shari'ah boards each.
Other News
- Saudi Arabia continues to study how to create a Shari'ah-compliant version of Fannie Mae to improve liquidity in the country's mortgage and property markets to increase home ownership.
- Arcapita, the Bahrain- and Atlanta-based Islamic private equity firm is selling Church's Chicken to another private equity group.
- Dar al-Istithmar and the Dinar Standard are starting a social responsibility surv ey of Islamic financial companies.
- The new sukuk markets in the Saudi Arabian Tadawul exchange may have attracted another new issuer following shareholder approval for a sukuk issue by Saudi developer firm Jabal Omar.
- Russian firm VTB Capital is opening a Dubai office and working with Kuwait Finnance House to issue sukuk on behalf of three Russian companies worth between $100 and $300 million each.
- Australia's state of Victoria is working on a fact finding mission to learn more about Islamic finance.
- There is an article describing the Islamic financial industry in MENAfn.
- GCC Islamic funds are outperforming their benchmarks according to research by Emirates Business 24/7.
Sunday, June 14, 2009
Weekend Update
- Islamic bank PT Bank Rakyat Indonesia Syariah (BRI Syariah) expects its assets to double to 3 trillion rupiah ($297.6 million). In 2008, the share of assets held by Islamic banks was 2% of total assets which is expected to increase to 3 percent in 2009.
- Following legal changes earlier this year, Kazakhstan expects to see three or four Islamic banks open this year according to central bank head Grigory Marchenko.
- Bahrain-based Gulf Finance House plans to continue its planned investments in North Africa despite the economic crisis.
- Following supportive comments from the Australian government, National Australian Bank plans to offer Islamic financial products on a trial basis.
- Al Salam Bank-Bahrain is investing in a building in London's financial district.
Tuesday, June 09, 2009
Bahrain sukuk increased to $750 million, pricing at 350 bps over 5-year Treasuries; other news
Bahrain increased the size of its dollar-denominated $500 million sukuk to $750 million and it is expected to be priced at 350 basis points above US Treasuries of similar five-year maturities. The managing director of Dubai-based Algebra Capital which invested in the sukuk was disappointed at the pricing of the sukuk commenting that "It would have been better had they left some juice in there to attract a wider audience". An article describes the impact of the sukuk and also provides a summary of the other developments in the sukuk market including sukuk funds and the CBB recurring sukuk al-salam and al-ijara issuances, which have seen greater oversubscription recently.
Other News
Other News
- Australia is considering attracting more Islamic finance to Sydney to recover from the global recession. LM Australia Alif Fund was recently launched. It is an on-shore Islamic real estate fund.
- There is an interesting interview with the managing director of State Street's Doha office, Rod Ringrow.
- An Indonesia oil company cancelled a (small) planned sukuk issuance in favor of an expanded conventional bond issuance. No reason was provided.
- The Saudi exchange Tadawul, is launching a bond and sukuk market.
- A study by the Islamic International Ratings Agency (IIRA) found that Islamic banks "face challenges in managing their liquidity in adverse markets" mostly due to holding less liquid assets although most Islamic banks have "adequate liquidity".
- Islamic mortgage companies Amlak and Tamweel need a total of AED 18.7 billion including AED 5.7 billion by June 30 to meet their commitments according to an article in Emirates Business 24/7. The problems facing the two institutions are largely caused by a severe asset/liability mismatch following the drying up of liquidity particularly securitizations.
- The CBB sukuk al-ijara received a preliminary A rating from Standard & Poor's in line with the country's sovereign rating.
- An Islamic finance training program was launched in Wales at the Cardiff University Business School.
Saturday, October 25, 2008
Can Islamic finance have a crisis?
Umer Chapra, an Islamic economist, recently discussed the reasons he saw for the credit crisis and the reasons that Islamic banks would not create a similar crisis. While I agree that the Shari'ah restrictions on Islamic banks would limit the scope for excessive bad lending, I don't think that on its own Shari'ah-compliant banks would be completely immune from a similar crises caused by the growth of a bubble in real estate (or any other Shari'ah-compliant asset). The additional scrutiny that Shari'ah-compliant financial products face in the Shari'ah review process can potentially reign in excessive speculation and prevent some of the worst excesses that characterized the recent crisis in conventional finance. A lecturer at Al Azhar University, Shiob-bin-Mukhtar, goes further saying that there would be no financial crises if Islamic finance was exclusively used. The head of Global Council of Islamic Banks, Saleh Kamel, announces the failure of capitalism and suggests an Islamic financial system as a replacement.
An article discusses the possible regulatory and market changes in the GCC which are likely following the credit crisis.
An investment company in the UK, cru Investment Management, is creating an asset-backed investment fund that will invest in commercial agriculture in Africa. The investment is seen as good from both an investment perspective (the fund management expect a return of between 15-20 percent) and an ethical perspective: one of the stated goals of the investment fund is to "help to create jobs and give rural Africans the chance to help themselves out of poverty".
Islamic finance in Europe is set to grow, according to speakers at a conference in Paris. It is also starting to emerge and grow in Australia.
An article discusses the possible regulatory and market changes in the GCC which are likely following the credit crisis.
An investment company in the UK, cru Investment Management, is creating an asset-backed investment fund that will invest in commercial agriculture in Africa. The investment is seen as good from both an investment perspective (the fund management expect a return of between 15-20 percent) and an ethical perspective: one of the stated goals of the investment fund is to "help to create jobs and give rural Africans the chance to help themselves out of poverty".
Islamic finance in Europe is set to grow, according to speakers at a conference in Paris. It is also starting to emerge and grow in Australia.
Monday, September 01, 2008
Islamic finance & microfinance, law firms see need for Islamic finance expertise
John Foster comments regarding Ramadan touch on the idea that GCC-based Islamic financial institutions could make a huge difference in reducing poverty if they devoted a fraction of their resources to helping provide financial services to the poor in nearby countries in Asia and Africa.
The head of global strategy for Reed Smith L.L.P., a law firm based in Pittsburg, Pennsylvania, responds to a question about why they feel they need to have expertise in Islamic finance.
La Trobe University in Sydney, Australia launched the country's first master's degree in Islamic commerce.
The head of global strategy for Reed Smith L.L.P., a law firm based in Pittsburg, Pennsylvania, responds to a question about why they feel they need to have expertise in Islamic finance.
Q: Do you have an Islamic finance practice?DIFC Authority CEO Nasser Al Shaali says that Islamic finance is providing one of the driving forces attracting "new, more sophisticated investors".
A: We do have some Islamic finance work out of Dubai and Abu Dhabi. It is increasingly important because that is where the money is. Let's face it: Money is basically pouring into the Middle East and, to the extent that it is going to be invested in debt instruments, it will have to be in instruments that are sharia [the Islamic legal code] compliant, and you have to have expertise to do that.
La Trobe University in Sydney, Australia launched the country's first master's degree in Islamic commerce.
Tuesday, August 12, 2008
Hong Kong wants to attract Islamic finance; Can hedge funds be Shari'ah complaint?
The CEO of Hong Kong's Securities & Futures Commission, Martin Wheatley, continued the drive to attract Shari'ah-compliant finance to the city-state in a speech today (the speech is available as a pdf). In the speech, Mr. Wheatley noted that the Hong Kong exchange presents a way for investors to "capture the investment opportunities in an emerging market [China], while enjoying the services and investor protection of a developed market". Mainland Chinese firms account for only 19% of the total listings on the Hong Kong exchange, but for 57% of total market capitalization and 70% of total volume. There are already tracking funds for the Dow Jones Islamic Market Hong Kong/China Titans Index as well as a large Malaysian sukuk (one of the Khazanah exchangeable sukuk) and the prospect for a sovereign sukuk from the Airport Authority.
U.K.-based think tank Chatham House released a survey about the GCC's development as a global financial center, including a brief discussion of the Islamic finance industry there. The report (available as a PDF) notes that "the subjective element can also create long delays and uncertainty [so a] number of Islamic investors are not fully tapped into or committed to this market [because they are] unsure what products really are Sharia-compliant". However, "broadly speaking, Sharia scholars are now in agreement on product design and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is taking some steps in the direction of harmonization. This should help create greater trust and clarity among ordinary potential clients, generate more demand and help the industry to expand more widely."
CPI Financial has commentary by Bill Gibbon, a lawyer at Voison, and Trevor Norman of Volaw Trust & Corporate Services, on the Shari'ah-compliance of hedge funds and ways in which some funds have adapted some Islamic finance products to replicate short sales and margin. What is not covered is whether a hedge fund, which they define as ‘a fund that uses derivatives, leverage, shorting, margin trading and option techniques to achieve its absolute return investment goals’ is in its whole, Shari'ah-compliant. Instead, they focus on the component transactions that run into problems with Shari'ah scholars.
Islamic finance in the GCC has a concentration of government ownership larger than would generally be predicted, according to a recent Moody's report on Islamic finance.
Qatar Islamic Bank plans to launch its own takaful provider. A number of takaful companies are sprouting up around the GCC following the success of Islamic finance in the region.
The first publicly-listed Shari'ah-compliant REIT will soon be available in Singapore. The REIT will be converted from a conventional REIT with a large stake in the management company being taken by the National Bank of Australia. The debt currently owed by the REIT, the Cambridge Industrial Trust, will be converted in Shari'ah-compliant financing.
U.K.-based think tank Chatham House released a survey about the GCC's development as a global financial center, including a brief discussion of the Islamic finance industry there. The report (available as a PDF) notes that "the subjective element can also create long delays and uncertainty [so a] number of Islamic investors are not fully tapped into or committed to this market [because they are] unsure what products really are Sharia-compliant". However, "broadly speaking, Sharia scholars are now in agreement on product design and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is taking some steps in the direction of harmonization. This should help create greater trust and clarity among ordinary potential clients, generate more demand and help the industry to expand more widely."
CPI Financial has commentary by Bill Gibbon, a lawyer at Voison, and Trevor Norman of Volaw Trust & Corporate Services, on the Shari'ah-compliance of hedge funds and ways in which some funds have adapted some Islamic finance products to replicate short sales and margin. What is not covered is whether a hedge fund, which they define as ‘a fund that uses derivatives, leverage, shorting, margin trading and option techniques to achieve its absolute return investment goals’ is in its whole, Shari'ah-compliant. Instead, they focus on the component transactions that run into problems with Shari'ah scholars.
Islamic finance in the GCC has a concentration of government ownership larger than would generally be predicted, according to a recent Moody's report on Islamic finance.
Qatar Islamic Bank plans to launch its own takaful provider. A number of takaful companies are sprouting up around the GCC following the success of Islamic finance in the region.
The first publicly-listed Shari'ah-compliant REIT will soon be available in Singapore. The REIT will be converted from a conventional REIT with a large stake in the management company being taken by the National Bank of Australia. The debt currently owed by the REIT, the Cambridge Industrial Trust, will be converted in Shari'ah-compliant financing.
Saturday, December 08, 2007
Weekly update, December 8th
Australia may be one of the winners from the rapid growth of Islamic finance.
The Financial Times released a story last week on the global race to offer Shari'ah-compliant products with competitive returns to conventional products.
Malaysian-based Islamic bank, Asian Finance Bank has received a license to enter the Indonesian market. Indonesia is home to the largest number of Muslims of any country in the world, but the growth of Islamic finance in the country has been low while countries in the Middle East and Malaysia have seen rapid growth.
A delay in legislative changes in Indonesia has delayed the issuance of government sukuk until next year.
New risk management techniques designed specifically for Islamic financial institutions are being developed.
Islamic real estate financing is growing rapidly and many customers are using Shari'ah-compliant alternatives because they feel there is a financial benefit of doing so.
The Shari'ah Supervisory Board of Pakistani Islamic bank Meezan Bank approved products to allow the company to enter into Islamic microfinance.
The Financial Times released a story last week on the global race to offer Shari'ah-compliant products with competitive returns to conventional products.
Malaysian-based Islamic bank, Asian Finance Bank has received a license to enter the Indonesian market. Indonesia is home to the largest number of Muslims of any country in the world, but the growth of Islamic finance in the country has been low while countries in the Middle East and Malaysia have seen rapid growth.
A delay in legislative changes in Indonesia has delayed the issuance of government sukuk until next year.
New risk management techniques designed specifically for Islamic financial institutions are being developed.
Islamic real estate financing is growing rapidly and many customers are using Shari'ah-compliant alternatives because they feel there is a financial benefit of doing so.
The Shari'ah Supervisory Board of Pakistani Islamic bank Meezan Bank approved products to allow the company to enter into Islamic microfinance.
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