Islamic finance can learn from the credit crisis, Malaysia mandates rebate in mortgage products

The CEO of Capinnova Investment Bank had some interesting comments about Islamic finance in an interview with Emirates Business 24/7. He believes that there should be a unified Islamic banking authority to create more standardization and facilitate cooperation between different entities. He also suggested that it is "worth looking at the current credit crunch in conventional finance to see how easily one problem can spiral out of control. This is something that Islamic finance practitioners need to take on board and make sure that they are prepared to expect the unexpected". I think this is essential because Islamic finance institutions, particularly banks, can be subject to a crisis that could impair the confidence in their ability to survive which could turn into a destabilizing process where depositors 'run' on the banks. If this happened, the bank would have one of two choices: fail or turn to a conventional lender of last resort.

In both cases, the Islamic banking industry would be hurt. If a large Islamic bank failed, it could lead to questions about the solvency of other Islamic banks and make it harder for them to attract and retain deposits. This would force them to turn to other sources of capital which could be either more expensive or shorter-term, or both. The other alternative--an Islamic bank turning to a conventional lender of last resort--would raise questions about the bank's Shari'ah-compliance and also create questions about what other Islamic banks would do in a similar situation (with added confusion from the impact of different country's regulatory systems). For example, banks offering Islamic deposit products in the US are required to have those deposits FDIC insured (for banks) or NCUA insured (for credit unions). If the institution were to be seized by the regulators, would depositors have a choice about whether they wanted to avail of the non-Shari'ah-compliant deposit insurance?

The best time to determine what needs to be done in a future crisis is now, before a crisis starts. Once a crisis is in full swing, there will not be sufficient time to consider these potential pitfalls. This was demonstrated in the recent financial crisis. The cause of the crisis was not addressed; the focus was entirely upon preventing it from spiraling further out of control.

Malaysia's central bank, Bank Negara, has said that Islamic mortgage products offered using bai bithamin ajil (BBA), and murabaha must include language in the contracts that make the rebate (ibrar) mandatory. Previously, in a default followed by an asset sale (or a prepayment), the lender was entitely to the entire loan amount (cost plus profit) for the entire term of the mortgage. Most banks granted the rebate of what in a conventional mortgage would have been future accrued interest. However, when the rebate was not granted, it often led to court cases.

Other News

• Mushtak Parker criticizes the article about Islamic banking being 'a flop'. He places much of the blame for IBB's loss-making on the bank itself being undercapitalized and without an experienced Islamic banker running it. He also criticizes the product mix that was offered by the bank. In a different article, Mr. Parker describes the progress being made in Australia towards equal regulatory treatment for Islamic and conventional financial products.
  
• The UAE Ministry of Economy issued a law that regulates the takaful industry. It had been previously regulated under a law for conventional insurance companies.
  
• Sukuk prices are at their six-month highs following a number of sukuk restructurings, according to the Dow Jones Citigroup Sukuk Index. The yield on the Malaysian sovereign sukuk has fallen to 3.61%, a spread of 175 basis points over similar maturity US Treasuries.
  
• One of Nakheel's largest trade creditors Arabtec expects the inital payment by Nakheel soon with the remaining amount in a sukuk within a few months.
  
• Funds continue to flow into US-based socially responsible funds, including faith-based funds like the Amana Funds.
  
• Jordan is speeding up the issuance of a planned sukuk as its borrowing costs rise.
  
• Kuwait Finance House (Malaysia) set up an internal department to control non-performing financings, which were 6.72% in September 2009. It also defended its dismissal of one of the firms which rated it, RAM Ratings. KFH Malaysia's parent company is expected to post a higher profit in the second quarter compared to the first, which was 21.4% from the first quarter of 2009.
  
• Dubai-based Fajr Capital will invest in Bank Islam Brunei Darussalam (BIBD), an Islamic bank in Brunei.
  
• The Islamic Bank of Britain won a dispute in the World Intellectual Property Organization (WIPO) with a technology service company that had decide to auction the domain name used by the IBB.
  

Islamic finance 'flops' in the UK? New sukuk and AAOIFI standards

Junaid Bhatti wrote an article saying the Islamic finance industry in the UK has 'flopped' based on its inability to achieve rapid growth and profitability using his experience working at the Islamic Bank of Britain from its founding. The article describes, in addition to IBB's losses notes that:

"Well, the UK’s first 'Halal' insurance firm, Salaam Insurance, spectacularly shut up shop in 2009 after less than 18 months of trading. Lloyds TSB, which made a half-hearted stab at Shariah-compliant products in 2004, doesn’t seem to have promoted its offering for years. alburaq – owned by Arab Banking Corporation – has effectively withdrawn its savings and mortgage products from the mass market and now serves only the wealthiest of customers. Even HSBC Amanah, probably the most credible and efficient provider of Halal banking in the UK, has dramatically reduced its dedicated Islamic banking staff in Britain, and its marketing volume has been turned way down. "

Salaam Takaful was sold in April 2010 to Al Salam Group Holding Company, which is based in Kuwait, following its closure to writing new policies.

Mr. Bhatti's article is rather gloomy, however, he does not cite any significant obstacle to Islamic finance in the UK, but rather focuses on their poor marketing effort as a way to attract the Muslim consumers who may prefer Shari'ah-compliant financial services, but are not willing to sacrifice in cost, customer service and who are attracted by marketing that focuses on their emotional rather than rational side. I don't want to get too much into the marketing side, because it is far ouside my expertise. However, his criticism does mesh with my own concern about the Islamic finance industry's work in the West to attract non-Muslims. Cost competitiveness is one factor but the experience in Malaysia has demonstrated that costs of Shari'ah-complaint products can become competitive.

Beyond the issue of cost, there is a significant portion of people in the West, particularly younger people like myself, who are interested in the ethics of their financial activities. I moved my own bank accounts from one of the big banks to a local credit union recently, in part based on costs, but primarily because my money is more likely to be recirculated in my own community. If I had the option between a conventional credit union and an Islamic or other ethically-based credit union, I would (and I suspect many others like me would also) choose the ethical alternative. That is an area where conventional banks have a distinct disadvantage and an area within the West where Islamic finance could focus on to attract both Muslims and non-Muslims. Islamic finance may be focused on religious criteria important to Muslims, but they are not that different from the religious or ethical criteria of non-Muslims and that remains an untapped market in the West for banking services. The business case has been demonstrated by sustainable/socially responsible investment products, now it is time for banking. With that, I will step off my marketing soapbox.

The Malaysian firm Axiata will issue MYR 4.2 billion (1.32 billion) of sukuk by the end of July to refinance variable rate, 2-year debts. The sukuk will be based on commodity murabaha with maturities of 5, 7 and 10 years. While the prospect for new, longer dated sukuk is encouraging, the use of a commodity murabaha structure is less encouraging. I don't know how the Malaysian Shari'ah standards treat commodity murabaha for secondary market trading, but standards in the GCC, which are applied by most other issuers outside of Malaysia, do not permit trading in murabaha sukuk except at par because they represent a debt rather than ownership of a tradable asset.

AAOIFI adopted three new Shari'ah standards covering disposal of rights, bankruptcy and the management of liquidity, collection and use. These standards cover important subjects. However, it is somewhat disappointing that AAOIFI has not published the standards online like the IFSB. The publication of the standards in printed form only makes it difficult for consumers of Islamic financial products to see the standards under which the products they consume have been issued. Without either the AAOIFI standards or detailed publicly-available fatawa, consumers are hard pressed to understand the basis for the Shari'ah-compliance of the products being offered.

An article in The Star newspaper in Malaysia questions "What's going on in Kuwait Finance House?". The Malaysian subsidiary of the bank has discontinued the ratings services of RAM Ratings. The bank has retained Malaysia Rating Corp Bhd (MARC). The bank says it is part of a cost rationalization move. The questions arise because in November 2009, RAM put a negative outlook on KFH (Malaysia) based on the deterioration in the financial metrics of the bank and its parent institution while MARC said in April that it did not expect a status audit to affect the rating it has for KFH (Malaysia).

Other News

• Islamic mortgage company Tamweel returned to profit based on lower depositors' share of profits and lower expenses while Amlak Finance lowered its losses for the first quarter from AED 68.1 million to AED 2.7 million. The two institutions' futures remain in question with no definitive news on a possible merger of the companies.
  
• NASDAQ OMX launched two Islamic indexes, the NASDAQ-100 Sharia Index and the OMX Stockholm Benchmark Sharia Index with Shari'ah monitoring provided by BMB Islamic.
  
• Brunei issued two ijara sukuk totalling $58 million at the end of April and May. The sukuk mature in 91 days. An Islamic finance expert in Malaysia, Sri Anne Masri, said that Brunei's large firms could issue sukuk to finance their businesses.
  
• Three lawyers from Clifford Chance provide their thoughts on the Islamic finance industry.
  
• Credit default swaps on Dubai's debts have fallen 30% while Nakheel's $750 million sukuk maturing in January 2011 has risen to $106.75 from a low of $35 on December 10, 2009.
  
• The blog Credit Slips asks for input and information on the concept of bankruptcy in Islamic law.
  
• Bloomberg has an update on the future issuance of sukuk.
  
• The National Bank of Abu Dhabi issued a MYR 500 million ($156.9 million) sukuk with a 4.75% coupon, one of a few GCC-based issuers who have issued sukuk in Malaysia. The expected coupon range had been 3.5% to 5.9%. The sukuk was oversubscribed 3.6 times. The bank received a banking license on June 17.
  
• The Islamic Bank of Thailand is still planning to issue its first sukuk, a 5-7 year issue of Baht 5 billion ($155 million) this year, although it said the process had been held up by political unrest.
  
• The Central Bank of Bahrain's latest Sukuk al-Ijara was oversubscribed by 300%.
  
• Maybank Singapore is offering a commercial property financing product for up to 10-years.
  
• Some Dubai-based financial institutions are considering expanding into Ghana according to a senior director at the Dubai Chamber of Commerce. Uganda will make changes to its banking laws to allow financial institutions to offer Shari'ah-compliant financial products.
  
• Irish law and accounting firms need to improve their knowledge of Islamic finance to attract the industry to the country, according to Eamonn Walsh, a professor of accounting at University College Dublin.
  

Sukuk and Dubai World/GFH, innovation in Islamic finance, sukuk investor relations

It is "incredibly unlikely" that the Nakheel sukuk due on May 13th will be repaid according to an anonymous source quoted by Reuters. Dubai World is still negotiating with its creditors to deal with its debts and the Dubai Financial Support Fund, which has lent money to keep Dubai World entities operating has signaled its intention to give up its senior status as a concession to other creditors. Another source speaking to Reuters said that "it is fully expected the banks will say they don't like it" but the source also described the plan as being "very very fair". The problems with Dubai World and other sukuk issuers will lead to the issuance remaining weak this year according to Hussein Hassan. The head of Deloitte's Islamic Finance Knowledge Centre says that the troubles with Gulf Finance House who recently extended part of a sukuk issue that was maturing are "not sign of weakness in Islamic finance".

A Finance professor at the American University of Sharjah described Islamic banks compared to conventional banks' performance and efficiency:

"Islamic banks are less cost efficient and more profitable than conventional banks, but their profit efficiency is slightly lower. The differences in profit efficiency can be attributed to lower cost efficiency. Islamic banks have been more successful than conventional banks in terms of revenue efficiency and accounting profitability, but both Islamic and conventional banks in the region need to become more profit efficient"

The 9th annual Islamic Finance Summit, which was held in London discussed the opportunities that Islamic finance has, as well as some it has missed in the financial crisis. One interesting warning came from Mohamad Nedal Alchaar, secretary general of AAOIFI, who said "mimicking is a dangerous business and would strip our uniqueness". This comment followed another participant who said that Islamic finance needs greater product innovation.

It is a tricky balance between meeting the financial needs of the customers of Islamic financial institutions and remaining distinct from the conventional financial industry. There are benefits to making products, even some derivatives, available in Shari'ah-compliant forms because they can provide valuable opportunities for businesses to hedge some risk not directly connected with their primary business (currency/interest rate/commodity price fluctuations). However, in my opinion, the best way to look at innovation and determine whether it's valuable is not necessarily to determine whether it is 'different' from conventional financial products, but whether it receives approval from a Shari'ah board and which meets a need beyond generating income for the financial institution structuring it. One thing that would be useful for the industry as a whole (although it could be difficult to convince each bank to support) would be for there to be a publicly available, central database of fatwa that describe the thought process of the Shari'ah scholars in reaching their conclusion about the compliance of a given product. This would be difficult to accomplish in practice, especially for new products, because it would allow other institutions to potentially take new structures and copy them without bearing the cost of their development.

Frank Kane wrote an interesting article about the impact of the financial crisis on Islamic finance. He makes an important point: "the tangibility of assets under a Sharia-compliant system did nothing to halt the decline in asset values that spread inexorably from the West to the Gulf". In addition, he quotes a Bank of New York Mellon report on sukuk investor relations (IR): "The adoption of sukuk IR can improve the quality of due diligence, foster an open dialogue between stakeholders and contribute to an ongoing process of disclosure beyond what is nominally contained in a prospectus".

Other News

• Arcapita reported a loss in the quarter ending December 31, 2009 on lower placement fees and asset valuations.
  
• BPA Malaysia signed an agreement to provide information on ringgit-denominated sukuk data to Thomson Reuters' new Islamic Finance Gateway.
  
• Gulf-based investors are expected to approach South African authorities to launch an Islamic investment bank with capital of $1 billion.
  
• The resumption of trading in Tamweel, which the company will request, is separate from its merger with Amlak Finance and there remain many issues that need to be resolved.
  
• The Brunei Times has an interview with Dr. Mohamed Sharif Bashir, the dean of Faculty of Business and Management Science at the Sultan Sharif Ali Islamic University in Brunei.
  

Sukuk markets recovering, IFC sukuk listed in Dubai and London, Islamic asset management faces a 'chicken-or-egg' problem

The sukuk market is expected to recover following signs that Nakheel will avoid default and GE Capital Corporation, which has a joint venture with Abu Dhabi-based Mubadala, was reported to be considering issuing a sukuk. The recovery in Nakheel's sukuk have come following the $10 billion in bonds issued by Dubai and the prospect for the Emirate to issue $6.5 billion in bonds and sukuk. The sukuk-reported to be $2.5 billion of this amount-are reported to be priced near 6%. The funds from the bond and sukuk issuance are expected to be administered by the Dubai Financial Support fund, which has provided some assistance to Nakheel.

With the listing of the World Bank Group's IFC sukuk, NASDAQ Dubai expects the sukuk and bond markets to pick up before the IPO market. The sukuk will be listed on both NASDAQ Dubai and the London Stock Exchange and is rated Aaa by Moody's.

The Islamic asset management industry faces a 'chicken-or-egg' problem as the industry has a shortage of investments to choose from, particularly in the fixed income area, while there are few investments available because of questions about the strength of demand. The increasing involvement by governments is a double-edged sword, notes an article from Reuters. Governments can provide a source of issuers willing and able to issue sukuk, but could crowd out other issuers, particularly lower-rated issuers. So far this year, roughly 80% of sukuk have come from government issuers and many of the others were issued by high-grade corporate issuers.

Emirates Business 24/7 has an interesting article about the debate over standardization in Islamic finance. There are many views on how standardization should happen, whether it should be a goal at all and what aspects of the industry should be standardized.

Other News

• The International Swaps and Derivatives Association (ISDA) is expected to release guidelines on Islamic derivatives, and these could come by December. The standardized agreement, being jointly developed by the ISDA and the International Islamic Finance Market (IIFM), would provide a standardized contract for Shari'ah-compliant hedging products.
  
• The opening of the country's first Islamic bank led German paper Das Spiegel to write a good article that provides an overview of the industry's development.
  
• Tamweel, the troubled Dubai-based Islamic mortgage company, made a periodic payment on its sukuk due in 2013.
  
• The Irish Revenue Service has clarified its rules on the taxation of Islamic finance products and a summary is available from Arab News.
  
• The CIO of CIMB-Principal Islamic Asset Management Dr. Zeid Ayer believes that Brunei should open its sukuk up to international investors to broaden the base of investors. The sultanate issues sukuk despite large oil reserves and little need to raise financing as a way to promote the growth of its Islamic finance industry.
  
• The results of an Islamic Finance Perceptions survey are summarized in an article.
  
• As Malaysia issues RM3 billion ($888 million) in sukuk, it has also extended the tax exemption on Islamic financial products to 2015 that have helped the industry grow rapidly in the country.
  

The Economist on the mega-Islamic bank, regulatory changes to accomodate Islamic finance being abused in the UK, lessons from the crisis

The Economist has an article about the launch of a mega-Islamic bank called Istikhlaf that the founders Sheikh Saleh Kamel and Adnan Yousif envisage to be an "Islamic Goldman Sachs".

The rule introduced to avoid double taxation in Islamic home finance purchases in the UK is being abused by high-net worth (conventional mortgage) clients. This should serve as a reminder that regulations introduced to facilitate Islamic finance should be carefully designed so that they are not abused in other settings to avoid taxation.

Islamic finance: can it provide lessons for conventional finance to avoid future crashes and can Islamic finance learn things from the crisis? The head of Islamic finance proposes a way for central banks to create money (monetization) in a way that is Shari'ah-compliant, in a similar thought process to an article I wrote in 2007 for Clear Profit on GDP-linked bonds ("Debt alternative for Islamic states should be explored," Clear Profit, Issue 44, May 27, 2007, page 5).

In an interview with Emirates Business 24/7, Rushdi Siddiqui, the head of Islamic finance for Thomson Reuters, discusses the lessons that Islamic finance can provide the conventional financial industry as well as the direction it is likely to take in the next decade.

Another Malaysian Shari'ah scholar, Engku Rabiah Adawiah Engku Ali, weighs in on the debate over tawarruq saying they are premissible but "The fact is more on how it's being done rather than what it is. It is more on whether the asset is available, whether it can be delivered".

Other News

• The London Stock Exchange saw its first sukuk listing of 2009 with the listing of the Central Bank of Bahrain sukuk which was increased from $500 million to $750 million after $4 billion in subscriptions were received.
  
• Al Salam Bank-Bahrain which recently bought a property in London's financial district is focused on finding private equity opportunities in Europe.
  
• Brunei issued another short-term sukuk al-ijara, its 32nd, for B$20 million ($13.7 million) with a 91 day maturity and a return of 0.30%.
  
• The FT reports that the new bond and sukuk market in Tadawul has only four sukuk available so far for trading, 3 from the Saudi Arabia Basic Industries Corp (SABIC) and one from the Saudi Electric Corporation.
  
• HSBC Amanah credits the $650 million Indonesian sovereign sukuk for sparing a rally in new issuance of sukuk after the market ground to a halt in March 2009.
  
• Islamic banking continues to develop slowly in India as the Minister for State for Minority & Corporate Affairs met with the head of the National Committee on Islamic Banking. The development of the industry continues at nearly the same slow pace in another BRIC country, Russia.
  

A Malaysian scholar supports tawarruq, NBK Ijara Fund launched

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

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

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

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

Other News

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

Dubai may issue more bonds to support government related entities, Kuwait government may bail out TID

Dubai has handed out nearly half of its first tranche raised in its recent $10 billion to government related entities including DP World and Nakheel. The government of Dubai is also likely to issue another $10 billion tranche of bonds to continue to support GREs including assistance to Nakheel as its $3.52 billion sukuk reaches maturity in December (a sukuk I discussed earlier this month). Troubled Islamic mortgage providers Amlak and Tamweel will not be merged until after they are restructure, plans for which are expected in a "few weeks" according to Sheikh Khalid Bin Zayed Bin Saqer Al Nahyan.

The Kuwaiti government may bail out troubled Islamic investment bank The Investment Dar which recently defaulted on its sukuk, the first such default in the GCC. Critics point to a mismatch between cash flow and liabilities as well as the company's highly leveraged position which included its partial takeover in a leveraged buy-out of Aston Martin. Two interesting paragraphs in the article, which touches on systemic risk in Islamic finance, the topic of my forthcoming opinion piece in Business Islamica magazine:

"Bankers agree that the TID default may be a one-off and would not have a contagion effect even if there were one or two more defaults in the Sukuk or wider Islamic finance market. The financial market generally also prices in default probabilities to a certain extent.

"Another Islamic capital markets expert, however, warned that the main "issue has always been a lack of transparency in the structure and Shariah compliance process. The issuance is also not under a well-regulated jurisdiction familiar with Islamic financial products. Obviously there will be some contagion, as investors will now relook at the structure of the product they are holding. But it is fortunate that there is no secondary market otherwise the mark to market valuations across the board would be in a state of disarray."

Other News

• The Saudi Gazette has an article summarizing the speech given by Enad Al-Menaie, the chairman and managing director of the Liquidity Management House at the 6th IFSB Summit in Singapore recently.
  
• Brunei issued the 30th in its series of short-term ijara sukuk. So far the country has issued over B$1.6 billion ($1.1 billion) in ijara sukuk since April 2006. One of the topics discussed at the AAOIFI conference was the use of arbitration instead of commercial, secular courts in handling disputes about Islamic financial products.
  
• AAOIFI held its annual Shari'ah Conference in Bahrain on May 18-19, 2009. Indonesia will host a meeting of Shari'ah scholars from Southeast Asia later in May.
  
• Indonesia may issue another sukuk, this one for IDR 5 trillion ($485 million), later this year.
  
• UM Financial Group, a Canadian Islamic finance company, and Mint Technology are launching prepaid cards targeting the Muslim community in the country.
  
• An interview with Eric Meyer, CEO of Shari'ah Capital describes their strong balance sheet and the performance of their long-short equity funds which focus on commodities.
  
• The managing director of Korea Investment & Securities Co. Ltd. discusses the country's interest in Islamic finance in an interview.
  
• Bank Islam and MayBank Islamic have both denied reports that they may merge.
  

Sukuk news and Q1 numbers below 2008

Data from Zawya, which is usually comparable to IFIS data, shows that sukuk issuance in the first quarter of 2009 was $1.8 billion compared with $2.84 billion in the same period in 2008. The 37% fall in sukuk issuance was not completely unexpected because the GCC economies ran into some difficulty as the global economic crisis spilled into the GCC and oil prices, the main source of liquidity, were lower. In 2008Q1, Brent crude oil prices were between $90 and $110 compared with $30 to $50 in 2009Q1. About half of all the first quarter sukuk ($900 million) were issued in Malaysia. However, the widening spreads have attracted investors to the sukuk market and oil prices have been near $50 which could bode well for sukuk issuance in the rest of the year. The percent of sukuk issues originating from Malaysia (50%) are lower than in 2006 (55%) and 2007 (58%) according to International Islamic Financial Market (IIFM). This percentage fell to 36% in 2008 according to Saudi Islamic investment company NCB.

"Brunei has sold B$165 million ($109 million) of Islamic leasing bonds, the government said." According to the article, the small sultanate has continued its issuance of sukuk which began back in 2006. Brunei has large oil and gas reserves and does not need to issue debt in order to cover the governments fiscal expenses but does so in order to aid the development of the sukuk market globally. The ijara sukuk were primarily short-maturity (91-day) sukuk, but there were B$11 million ($7.25 million) in one-year notes issued as well. Since the sukuk issuance began in 2006, the total volume of short-term sukuk issued is B$1.5 billion ($1 billion).

Islamic finance in France, Dow Jones Islamic Market Indexes, QIB

An article today expands on the news yesterday about France's efforts to attract Islamic finance. The new facets of the article deal with the size of France's Muslim population in a country without anything comparable to the Islamic Bank of Britain in the UK as well as the potential roadblock for Islamic finance within France's staunch official secularism.

Dow Jones reports the preliminary results in December for the several Islamic market indexes and their conventional benchmarks. Qatar Islamic Bank, quoting Standard & Poor's, says that Islamic finance could become a $4 trillion industry in the next five years. The bank also plans to expand into Europe and Asia, already being licensed to open the European Finance House in the UK. Expansion is planned into France, Germany, Singapore, Indonesia and Brunei. Both were announced in their new in-house magazine Al Masraf.

UK moves forward on sukuk consultation

Moody's predicts that Islamic banks' assets will grow at a slower rate of 10-15% because of the global economic slowdown but will remain resiliant because depositors look at Islamic banks as focusing more on their role as an intermediary between savers and borrowers. Another article describes the UK Islamic finance market and the resiliency of the industry in the face of a severe economic crisis.

The Islamic finance media industry has seen good times recently.

Despite the announcement in the pre-budget report that the UK was not going to announce the imminent issue of its first sukuk, hopes for a sukuk are still alive. The UK Islamic Finance Experts Group (IFEG) met yesterday and HM Treasury is expected to release a consultation report on Islamic finance in January 2009.

The Islamic finance industry in Brunei is pushing the government to begin issuing longer maturity sukuk. While the country does not need to issue debt because of its large oil reserves, it began issuing sukuk in April 2006 with the aim of promoting the Islamic finance industry. New regulations of Islamic finance and takaful are coming into effect in the country.

Islamic finance expanding globally, including Brazil.

Are we all Islamic bankers now? Does the writer understand the difference between Islamic finance and zero interest loans?

Indonesia, France need regulatory/tax changes to see growth in the next couple years in Islamic finance

Badlisyah Abdul Ghani, the CEO of Malaysian bank CIMB Islamic, writes in an opinion piece in the Jakarta Times, "The government's proposed issuing of rupiah and U.S. dollar sukuk are anticipated to provide a good benchmark for the Islamic debt capital market. With this benchmark in place, more corporations will be enticed to issue their own sukuk. To facilitate this, the government needs to develop a corporate sukuk law and the relevant Islamic securities guidelines." In addition he highlights the need to change tax laws to ensure "tax neutrality and transaction cost neutrality vis-a-vis conventional bonds".

Anouar Hassoune of Moody's writes about the future of Islamic finance at CPIfinancial. He discusses Islamic financial institutions and internationalization and consolidation, sukuk and the possibility to see an Islamic bank and a sovereign sukuk issue in France in the next two or three years if developments on the legal and regulatory side continue to progress.

A recent sukuk was issued in Abu Dhabi that securitized the receivables in an installment sale of property. It sounds like this creates a securitized murabaha transaction which appears to me to be difficult since the cash flow from a murabaha transaction does not represent a transfer in ownership of the underlying asset. The transfer of ownership in an asset (i.e. trade) is often the fundamental requirement for a transaction to be Shari'ah-compliant. Instead, from what is being reported, the sukuk will be a mudaraba where the sukuk holders are the rabb ul-mal (provider of capital) and the issuing company is the mudarib responsible for executing the business, in this case by collecting payments on land sales and selling any repossessed land. The profits from this will be shared between the issuer and sukuk holders. A Zawya story describes the methodology of the ratings agencies of the sukuk. IFLR describes the structure as well as why it is preferable to many other types of sukuk.

The continuing financial and economic problems in the West are leading to the growth in interest in Asia including through Shari'ah-compliant funds.

Brunei issued its 18th ijara sukuk of B$45 ($32.25 million) million bringing the total it has issued to B$1.2 billion ($862 million). The oil-rich sultanate does not need to issue any debt, but wants to encourage the growth of Islamic finance.

Islamic finance in the U.K. and the planned sukuk, AAOFI board issues guidance on ijara sukuk

Mixed signals are coming out of the U.K. regarding the potential issue of the first sovereign sukuk from a G8 country. The last year has seen a number of moves to make the U.K.'s regulatory environment more conducive to Islamic finance as the country sees great potential in the industry. However, recent news about the sukuk issue suggest that the government believes there are further regulatory changes needed to make the idea a reality. Although the sukuk issue may be delayed, Shari'ah-compliant home finance is growing rapidly. Other areas of Islamic finance are also growing rapidly in the U.K., which is seen as a gateway into Europe for many Islamic banks.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the standards-setting body based in Bahrain released its much anticipated clarification of guidelines on sukuk (available as a PDF from AAOIFI). Sheikh Taqi Usmani, the chairman of the Shari'ah board at AAOIFI made headlines in November 2007 when he made comments that up to 85% of GCC-based ijara sukuk might not be Shari'ah-compliant because they contained repurchase agreements that set a fixed repurchase price for the assets on which the sukuk were based. The AAOIFI release as expected said that the use of repurchase agreements with fixed repurchase price were not permissible except when the fixed price is set for a lessee who is not an investment partner. Instead of using a fixed price repurchase agreement, the AAOIFI Shari'ah board allowed repurchase agreements where the price was determined by the fair market value of the underlying asset at the time of repurchase. This was largely expected and should not cause too much disruption because most of the ijara structure was upheld. The article on the AAOIFI release from Bloomberg contains reactions from Islamic financial industry participants.

DePaul University, a university in Chicago, Illinois has begun offering classes on Islamic finance making it one of few in the United States where classes are taught on the subject. The NY Times also highlights University Islamic Finance Corporation as one of the banking companies catering to minority needs in the U.S.

Kenya changed its regulations of the banking industry to allow Islamic finance and began granting license to retail and commercial Islamic banks in early 2007, the growth has not yet been realized as the banks are just beginning to open.

Lawyers with experience in Islamic finance are added to the list of professionals in short supply as the Islamic finance industry sees growth in demand outstrip the supply of capable professionals.

The Guardian profiles 'sharia technician', Humayon Dar, currently with BMB Islamic, a Shari'ah advisory firm owned by the BMB Group. There are few details about the BMB Group, although it is thought to be based in Brunei. Another Shari'ah-compliant consulting organization, Yasaar Ltd, based in the U.K., is focusing some of its attention on achieving standardization of Shari'ah standards across the different schools of fiqh.

Islamic finance growing rapidly, other news

Islamic finance continues to grow rapidly.

Thailand hosts conference to attract firms in the halal market to the country. This, and other conferences, are listed on the IHI conference listing page. The International Center for Education in Islamic Finance (INCEIF) signed a memorandum of understanding with a Thai University, Chulalongkorn University, to atract more Thai students.

Malaysia is deciding whether to allow foreign banks to open standalone Islamic banks in Kuala Lumpur. The new Malaysian proposed budget includes many tax breaks to attract Islamic finance companies and experts

Takaful growing rapidly in Brunei.

Islamic Finance Experts Group, Takaful & sukuk

The group meeting to assess the feasibility of the U.K. government issuing a sovereign sukuk had its first meeting and the members of the group were announced.

Takaful Malaysia Bhd is planning to expand into the Middle East working with an unnamed financial firm in Dubai.

The government of Brunei issued new short-term sukuk, something which it began doing in April 2006 to raise its profile in the global Islamic finance industry.

Islamic securitizations, Islamic branding

Islamic finance is moving from asset-based sukuk where noteholders cannot claim underlying assets to asset-backed securitizations where they do. However, as Mahmoud El-Gamal notes, until there is a large sukuk default, we won't know how accurate ratings and sukuk pricing.

One lesson from the sub-prime meltdown: it is unrealistic to assume that pricing can be accurate where there is not a large secondary market actively trading asset being priced.

HSBC Amanah is waiting for a rule change allowing majority foreign ownership of Islamic banks before it enters Brunei's market.

Another article about Islamic branding

The Aga Khan is visiting Africa to check on his foundation's work, including the microbusiness program

Islamic banking growing in Brunei, attracting new money in Malaysia

HSBC sees potential for growth in Brunei, even if returns are lower than conventional investments (although they are sometimes higher).

Malaysia succeeding in attracting Middle Eastern investments.

Takaful and Brunei's first Islamic university

Standard & Poor's released a report on takaful which highlighted the greater development of the legal and regulatory environment in Malaysia than in the Gulf Cooperation Council (GCC) countries.

Brunei's first Islamic university will start classes this month.

Islamic finance may enter the Netherlands, IDB/ICIEC, Brunei issues 1-year sukuk & offshore banking

The Dutch goverment will look into ways to attract Islamic finance to the Netherlands, a country which has seen its Muslim population grow significantly to almost 6% of the total population.

The Islamic Corporation for Investment Guarantees and Export Credit (ICIEC) opened its first office outside of Saudi Arabia in Dubai. The Islamic Development Bank (IDB) approved grants for projects including education and healthcare totaling $833.8 million.

Brunei issued $30 million of one-year Islamic bonds. The issue is the first of one-year bonds; previous Islamic government bonds were 91-day issues.

Current structure of Islamic finance has encouraged competition between offshore hubs for registration of the special purpose vehicles (SPVs) and asset management firms. By allowing dual English-Arabic registration the Cayman Islands has increased the appeal of it over other offshore locations.

Forbes' critique of Islamic finance & the "Dubai of Southeast Asia"

Forbes has an article on Islamic finance in which it presents many of the critiques of Islamic finance. However, the title, "Don't Call It Interest" mirrors the theme of the article which suggests that, because there are many practices in Islamic finance which mirror conventional finance (or even are benchmarked to an interest rate), that the whole industry is a farce. It is a shame that the article focuses on "Islamic hedge funds" and ignores the resemblance between Islamic finance & socially-responsible/ethical finance and the concern for equity and fairness in business transactions. Forbes could have used the article to present a look at the positive and negative attributes of Islamic finance but instead saw a few products which may be considered doubtfully Shari'ah-compliant and used these to condemn the entire industry as an inefficient exercise in financial engineering.

Brunei wants companies to issue sukuk in order to boost its bid to be a hub of Islamic finance. The Brunei Times describes hopes of becoming to the 'Dubai of Southeast Asia'.

GE may enter Islamic financial industry

General Electric may enter the Islamic finance industry with a partner already doing Islamic finance. In a presentation (pdf) on "Growth in Developing Markets" from September 29, 2006, Islamic banking is briefly mentioned under the heading "Developing products to fit markets".

Brunei issued more Shari'ah-compliant government bonds. They issued $46 million in ijara sukuk bringing the total issued by the government since April 2006 to B$800 million (US$521 million). The 91-day sukuk have a yield of 2.275%.

50% of Middle Eastern project financing involves Islamic financing.

Speaking at the "Sukuk Summit" in London, Dr. Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the Malaysian central bank described the need for "greater diversity in the type and maturity of the sukuk in the market for Islamic financial institutions and portfolio managers to manage their funds effectively".

A new report from KPMG describes the barriers remaining to the expansion of Islamic finance.