An executive director at Bahrain's central bank, Khalid Hamad, made a surprising statement recently: "The moment it [use of IFSB standards] becomes mandatory then it will serve the purpose better". Currently Islamic financial institutions that are members of the IFSB will ensure they remain in compliance with the prudential and guiding principles to support stability in the Islamic financial industry.
Perhaps the most surprising thing about this support for making IFSB standards mandatory was its source. AAOIFI, another standards setting body focusing on accounting and auditing, is based in Bahrain while IFSB is based in Kuala Lumpur, Malaysia. As a result, GCC central bankers and regulators--particularly within Bahrain--have typically lent their support for AAOIFI standards, although in many cases, there has been a resistance to making the standards mandatory across borders (several countries' regulators require compliance with AAOIFI standards, but others do not).
The endorsement of IFSB standards by an executive director at Bahrain's central bank represents a shift and may mark the failure by AAOIFI to broaden its mandate beyond accounting and auditing standards (primarily adopting the international standards for Islamic financial institutions). Several years ago, AAOIFI was considering expanding its role to include investigating breaches of Shari'ah-compliance by member institutions, but the effort appears to have fizzled out.
On another front, IFSB has been much more savvy about the visibility of its standards. Whereas AAOIFI releases standards in hard copy form only (to generate the organization revenue), IFSB standards are available online, something which is exceedingly important in order to provide transparency for the general public. AAOIFI's business model and historical focus in accounting and auditing standards has hampered its ability to shift into new areas, which may explain the decision by an executive director at Bahrain's central bank to support making IFSB mandatory.
Perhaps the new acceptance of IFSB over AAOIFI will push the latter to make changes to how it works, in particular, releasing its standards more widely. It is all well and good to have standards for Islamic financial institutions and very few people are likely to be interested in sitting down and reading multi-volume books about the intricacies about accounting treatment of ijara. But in other areas--particularly Shari'ah standards--the general public and other people who are interested by don't own the dead tree version of the standards should be able to read the standards. It will promote greater understanding of how the industry works. IFSB realizes this and it appears to have given them a leg up in growth looking towards the future.
Showing posts with label IFSB. Show all posts
Showing posts with label IFSB. Show all posts
Thursday, January 31, 2013
Thursday, November 29, 2012
When Dr. Zeti speaks, you should be listening
A few quotes and thoughts on Dr. Zeti Akhtar Aziz's speech at ISRA.
She then moves on to globalization in Islamic finance:
However, even some GCC markets have showed they are maturing as the prospect of default by Dana Gas on their $1 billion sukuk attracted some media coverage, but not the same level of concern as when Nakheel was seen at risk of defaulting on its sukuk (a key difference of course is that Dana Gas is a private company while Nakheel's first sukuk was backed by Dubai World, a quasi-sovereign entity).
The speech shifts into high gear from here, when Dr. Zeti warns that " Its resilience during the global financial crisis should not result in complacency." This is an important point and mirrors what the IFSB said in response to claims that Islamic finance was immune from financial crisis. There is a consensus now which disputes the optimistic claims that Islamic finance was not touched by the financial crisis because its structure is fundamentally different than the conventional financial industry.
It was not necessarily the complex products (CDO, CDS, etc) that ultimately led to the major bank failures, but was instead a failure in the markets of their assets, and doubts about their value, combined with the inherent leverage of the products themselves which dried the market up and took away the ability to use their assets as collateral in repo markets to meet liabilities as they came due. A dramatic fall in the value of a firm's assets, whether those are complex derivatives or equity-based products, will lead counterparties to question the solvency of any financial institution, Islamic or conventional.
This lack of confidence will spread at a speed in direct proportion to the levels of leverage employed in the balance sheet, and the degree to which the bank is subject to possible liquidity crunches either from depositors with current accounts or other counterparties providing short-term debt. The inability to access liquidity and the inability to roll over maturing short-term debt (a drying up of interbank liquidity) led to the conventional banks' failures during the financial crisis and could lead to a similar failure in the Islamic finance market as well since it was the liquidity, not the toxic assets, that were the ultimate reason for the failure.
Islamic finance remains vulnerable to a liquidity crisis because 1) there is limited inter-bank lending, 2) nearly no interbank repo, and 3) few options for the central bank to act as lender of last resort (except ad hoc means like the wakala deposits the UAE Central Bank placed with Islamic banks during the crisis). The lesson from the financial crisis is that when an asset price falls that triggers a fall in the value of your assets and questions about your solvency, the line between survival and failure is the degree to which the financial institution is leveraged (where the debt acts to magnify losses, just as it does profits) and the degree to which you rely on short-term financing (either deposits or inter-bank financing). Higher leverage and greater liquidity needs lead to a greater likelihood of failure.
Dr. Zeti then goes to highlight the linkage between Islamic finance and socially responsible investing (which I have highlighted before on this blog):
Increased liberalisation and greater foreign participation in the Islamic financial markets are reinforcing this trend and resulting in increased cross border financial flows. This is contributing to increased international financial and economic linkages between nations, particularly among emerging economies.The development of more cross-border financial flows by Islamic financial institutions is a big positive, and makes sense since Islamic finance is supposed to be focused on facilitating economic activity. The European debt crisis, which has led to significant fall-off in import demand (not to mention the continuing slow growth elsewhere in the developed countries, means that developing countries are going to have to both focus on their domestic markets and other trading partners as sources of demand for their products. If Islamic finance can provide financing for the trade flows--which should be a good fit with the products used in the Islamic finance industry, it will be beneficial. The one area where it may be difficult for Islamic finance is where floating currencies are involved, since it is more difficult to hedge against fluctuations of currencies.
These developments [the establishment of AAOIFI and the IFSB] have been particularly important to the recent intensification of the internationalisation of Islamic finance which in turn contributes towards building bridges and forging greater linkages among a wider range of economies.In this respect there is still more progress to make, since there remain concerns about the regulation of Shari'ah scholars, and no similar body to AAOIFI and IFSB to provide international Shari'ah scholar oversight, although it is being discussed. In one respect IFSB is much further along than AAOIFI in providing transparency in the regulatory standards under which Islamic financial institutions must abide, because it publishes its standards online, whereas AAOIFI does not. Dr. Zeti does not mention this explicitly, but does highlight the need for: "greater leverage on technology for the active dissemination of information at real time further facilitates the harmonisation process."
She then moves on to globalization in Islamic finance:
In the recent years, the intermediaries have also gained scale and the financial markets have gained depth and maturity.I would take issue to some degree with Dr. Zeti regarding the depth and maturity of Islamic finance markets, although from her perspective as the central bank governor in Malaysia, she does deserve a pass on this issue. The Islamic finance market in Malaysia has developed considerable depth and maturity, enough so that it is attracting attention from companies in the GCC (mostly banks), who have looked east to tap more liquid markets, even though it exposes them to currency fluctuations (some of the banks are using the Ringgit markets to avoid currency risk where they have subsidiaries operating in the local Malaysian market).
However, even some GCC markets have showed they are maturing as the prospect of default by Dana Gas on their $1 billion sukuk attracted some media coverage, but not the same level of concern as when Nakheel was seen at risk of defaulting on its sukuk (a key difference of course is that Dana Gas is a private company while Nakheel's first sukuk was backed by Dubai World, a quasi-sovereign entity).
The speech shifts into high gear from here, when Dr. Zeti warns that " Its resilience during the global financial crisis should not result in complacency." This is an important point and mirrors what the IFSB said in response to claims that Islamic finance was immune from financial crisis. There is a consensus now which disputes the optimistic claims that Islamic finance was not touched by the financial crisis because its structure is fundamentally different than the conventional financial industry.
It was not necessarily the complex products (CDO, CDS, etc) that ultimately led to the major bank failures, but was instead a failure in the markets of their assets, and doubts about their value, combined with the inherent leverage of the products themselves which dried the market up and took away the ability to use their assets as collateral in repo markets to meet liabilities as they came due. A dramatic fall in the value of a firm's assets, whether those are complex derivatives or equity-based products, will lead counterparties to question the solvency of any financial institution, Islamic or conventional.
This lack of confidence will spread at a speed in direct proportion to the levels of leverage employed in the balance sheet, and the degree to which the bank is subject to possible liquidity crunches either from depositors with current accounts or other counterparties providing short-term debt. The inability to access liquidity and the inability to roll over maturing short-term debt (a drying up of interbank liquidity) led to the conventional banks' failures during the financial crisis and could lead to a similar failure in the Islamic finance market as well since it was the liquidity, not the toxic assets, that were the ultimate reason for the failure.
Islamic finance remains vulnerable to a liquidity crisis because 1) there is limited inter-bank lending, 2) nearly no interbank repo, and 3) few options for the central bank to act as lender of last resort (except ad hoc means like the wakala deposits the UAE Central Bank placed with Islamic banks during the crisis). The lesson from the financial crisis is that when an asset price falls that triggers a fall in the value of your assets and questions about your solvency, the line between survival and failure is the degree to which the financial institution is leveraged (where the debt acts to magnify losses, just as it does profits) and the degree to which you rely on short-term financing (either deposits or inter-bank financing). Higher leverage and greater liquidity needs lead to a greater likelihood of failure.
Dr. Zeti then goes to highlight the linkage between Islamic finance and socially responsible investing (which I have highlighted before on this blog):
First is the need to highlight with greater clarity the value proposition of Islamic finance so as to ensure that it remains a form of financial intermediation that serves the real economy and that it will continue to be a benefit to society. This requires the development of financial products and services that manifests the value propositions of Islamic finance, and that such products are marketed with simplicity so as to facilitate a greater understanding of the main benefits of the products. In relation to this, Islamic finance presents significant appeal to the growing Socially Responsible Investment (SRI), sustainable investments and ethical finance. This is particularly relevant in the context of the recent global financial crisis. It [the financial crisis] has brought to the forefront the need for the financial system to be linked to the economy and for the need for greater and improved levels of transparency, fairness, ethics and social responsibility in modern finance.Then she moves on to another favorite topic of mine, Islamic microfinance and a focus on making Islamic finance inclusive:
Beyond financial returns, SRI also accords primary consideration to the impact on economic activity and on the broader society, thereby incorporating the important dimensions of environmental sustainability, social responsibility and governance. This is in close parallel with the inherent principles of Islamic finance, in which financial transactions must be underpinned by real economic activities, and its operations are guided by the principle that money should also be used to create social good.
The second imperative is for the outreach of Islamic finance to be inclusive and to be accessible to all, particularly the lower income groups and small businesses. An important agenda in the global economy is to achieve a more balanced growth with reduced income disparities. Financial services has a tremendous role in contributing towards a more equitable economic growth and a more sustainable development. In relation to this, Islamic financial institutions need to strive to enhance the access of their financial services to all segments of society. This imperative translates into the need and demand for more Islamic microfinancial products. In emerging as a new market niche, Islamic microfinance would meet the differentiated demands of low income communities and provide support to entrepreneurial activities. Its strong value proposition reinforced by financial inclusion would result in significant potential to uplift the economic performance and development. Furthermore, Islamic microfinance, if supported by microtakaful, has the potential to provide a more comprehensive, sustainable and accessible financing and protection solution for the lower income groups and small businesses.I have said it before and I will say it again, Dr. Zeti's speeches are almost always required reading and she has a knack for making important points rather than repeating the same platitudes that are too frequently repeated. This should be commended, and also serve as a reminder that when Dr. Zeti speaks, you should be listening.
Monday, November 05, 2012
Equity-based sukuk (IFSB proposed rules on capital adequacy)
The last post I wrote on the new IFSB capital adequacy rules was flying a little blind (working just off of an article describing the changes). Now I have had a little time to go through a small part of the proposed rules, and it does in fact look like some forms of sukuk will be treated as capital. Here's a few sections from the rules (see pages 8-9 of this PDF version):
In general, however, I would expect this type of instrument to function similarly to how some of the mudaraba sukuk have been designed post-AAOIFI clarification, with features included that will lead to a greater probability that the anticipated dividends will be paid on schedule. This is typically set up so that the profits generated are allocated between the bank (mudarib) and sukuk holders (rabb ul-mal) in a preagreed split. The dividend amount is based on a benchmark interest rate plus a spread, and is paid out of the investors' share of profits. Any excess is placed in a reserve account to 'top up' future distributions if there is a shortfall in profits below the benchmark plus spread.
It is not clear exactly how the loss-sharing aspect will work within a mudaraba sukuk, except that in general the rabb ul-mal is supposed to bear all losses, and will, with the exception of funds remaining in the reserve account. The key point is that most mudaraba sukuk allow the bank to use the funds alongside its own funds, so there will have to be some breakdown of any losses between the bank's invested capital and the mudaraba between the bank and sukuk holders.
Subject to Sharī`ah approval, an IIFS may issue equity-based Sukūk against the assets owned by the IIFS that are able to absorb the related losses so as to qualify for inclusion in Additional Capital.The types of sukuk this would include are mudaraba and musharaka, where the sukuk investors are taking a quasi-equity investment in the financial institution, albeit at a higher level of priority than common equity. However, the types of sukuk that would qualify under these rules would probably share features with the hybrid Tier 1 sukuk being sold now by ADIB: a perpetual, callable (after >5 years) sukuk where the distributions are dependent upon the underlying performance of the bank, and with the ability to see distribution fall if profits come in below the amount required to fund the anticipated coupon.
[...]
Repayment of principal through repurchase or buyback is allowed subject to supervisory approval without any expectation of repayment being created by the IIFS.
[...]
minimum maturity of the instrument shall be at least five years...must not have step-up features (i.e. periodic increases in the rate of return) and is without any other incentive to the issuer to redeem it...the issuer is permitted to exercise a call option only after five years and subject to certain requirements such as: (i) prior supervisory approval; (ii) no call expectation is created by the IIFS; and (iii) ability to replace the called instruments with the same or better quality of capital, either before or concurrently with the call.
[...]
The contract should provide that non-distribution of profits would not constitute a default event. Distributions should not be linked to the credit rating of the IIFS, either wholly or in part.
[...]
The amount paid at issuance is neither secured nor guaranteed by the IIFS or any related entity. In addition, there should not be any arrangement that legally or economically increases the seniority of the instrument’s claim in the case of liquidation.
In general, however, I would expect this type of instrument to function similarly to how some of the mudaraba sukuk have been designed post-AAOIFI clarification, with features included that will lead to a greater probability that the anticipated dividends will be paid on schedule. This is typically set up so that the profits generated are allocated between the bank (mudarib) and sukuk holders (rabb ul-mal) in a preagreed split. The dividend amount is based on a benchmark interest rate plus a spread, and is paid out of the investors' share of profits. Any excess is placed in a reserve account to 'top up' future distributions if there is a shortfall in profits below the benchmark plus spread.
It is not clear exactly how the loss-sharing aspect will work within a mudaraba sukuk, except that in general the rabb ul-mal is supposed to bear all losses, and will, with the exception of funds remaining in the reserve account. The key point is that most mudaraba sukuk allow the bank to use the funds alongside its own funds, so there will have to be some breakdown of any losses between the bank's invested capital and the mudaraba between the bank and sukuk holders.
Wednesday, October 31, 2012
IFSB considering changes to capital adequacy requirements, ADIB may issue a sukuk which qualifies
The IFSB is considering which sukuk will qualify as capital under the more stringent Basel III requirements, and "'For issuing sukuk as part of bank capital we have proposed different types of sukuk,' [IFSB Spokeswoman Rose] Halim said, adding that sharia advisors where still discussing details." Meanwhile the article mentions a proposed sukuk issuance from Abu Dhabi Islamic Bank which would be a hybrid Tier 1 perpetual USD mudaraba sukuk.
Comments from Arqaam Capital available here suggest that the sukuk will likely be a mudaraba structure, with non-cumulative divedends that are fully discretionary and "We think it probably will qualify as Tier-1 under Basel 3 provided it is classified under equity." This will be a relatively complicated structure to fit within the Basel capital rules, but from a cash flow perspective, it may be relatively more simple with the mudaraba funds combined with the bank's funds, and applied towards the Islamic banking business, with a share of the profits from the mudaraba used to pay the coupons ("Non-cumulative dividends, fully discretionary = Fixed 6 year rate (MS + initial margin), afterwards MS will be reset, not the margin (no step-ups) = No principal loss absorption or non viability absorption (no conversion into shares or write-down of principal).").
This would be different from some of the recent mudaraba sukuk because it would not subject the investor to principal loss based on the bank's capital level, but would probably have excess returns paid into a reserve account that could be used to make up for shortfall in profits below the anticipated coupon. However, in contrast with other mudaraba sukuk, it would not reduce the principal amount if there were a shortfall in profits; the holders of the sukuk would just see a reduced coupon payment.
The exact structure is of course unknown until it is released, but it sounds, from the description by Arqaam Capital, that it will be an innovative mudaraba structure that maintains some simplicity in the relationship between risk and reward, without relying (apart from any call features) on a fixed price purchase undertaking, which featured prominently in some of the pre-AAOIFI ruling sukuk that were deemed to have crossed a line.
Drop your comments here, or over at the new Sharing Risk Facebook page.
Comments from Arqaam Capital available here suggest that the sukuk will likely be a mudaraba structure, with non-cumulative divedends that are fully discretionary and "We think it probably will qualify as Tier-1 under Basel 3 provided it is classified under equity." This will be a relatively complicated structure to fit within the Basel capital rules, but from a cash flow perspective, it may be relatively more simple with the mudaraba funds combined with the bank's funds, and applied towards the Islamic banking business, with a share of the profits from the mudaraba used to pay the coupons ("Non-cumulative dividends, fully discretionary = Fixed 6 year rate (MS + initial margin), afterwards MS will be reset, not the margin (no step-ups) = No principal loss absorption or non viability absorption (no conversion into shares or write-down of principal).").
This would be different from some of the recent mudaraba sukuk because it would not subject the investor to principal loss based on the bank's capital level, but would probably have excess returns paid into a reserve account that could be used to make up for shortfall in profits below the anticipated coupon. However, in contrast with other mudaraba sukuk, it would not reduce the principal amount if there were a shortfall in profits; the holders of the sukuk would just see a reduced coupon payment.
The exact structure is of course unknown until it is released, but it sounds, from the description by Arqaam Capital, that it will be an innovative mudaraba structure that maintains some simplicity in the relationship between risk and reward, without relying (apart from any call features) on a fixed price purchase undertaking, which featured prominently in some of the pre-AAOIFI ruling sukuk that were deemed to have crossed a line.
Drop your comments here, or over at the new Sharing Risk Facebook page.
Tuesday, October 09, 2012
Cooperation between the Asian Development Bank and IFSB may help the growth of Islamic microfinance
I was interested by the Asian Development Bank's decision to work with the Islamic Financial Standards Board over a five-year period to "support member countries in legal and regulatory aspects of meeting the IFSB's standards". The reason cited by the ADB is that the majority of the IFSB's membership is located outside of the three countries with the largest Muslim populations (Indonesia, Pakistan and Bangladesh, which are home to only 7 members).
The development of Islamic finance has naturally occurred in countries that have either decided to extensively promote Islamic finance (like Malaysia) or countries where there is a large number of ultra-high net worth Muslims because that is where the profits are likely to be easier to come by. With more resources to be potentially tapped by Islamic financial institutions, it will attract larger institutions that can provide the scale needed for Islamic finance to become large enough to reach the scale where it becomes profitable.
As I wrote in my newsletter (which you can subscribe to on the right side of the blog), the recent decision by HSBC Amanah to leave many of the markets where it operates is a recognition that the bank is so large that many of the markets where Islamic finance exists are not large enough to support a bank of its size (and also move the needle in terms of its profitability).
HSBC noted that although it is leaving 6 of the 9 markets where it offered Islamic banking services (with most post-restructuring business based in either Saudi Arabia and Malaysia), it expects to retain 83% of the pre-restructuring revenues. Included in the markets it is exiting are Bangladesh (it will remain in Indonesia, although with a limited presence), two of the three largest Muslim-majority countries in the world.
Islamic finance exists already in Pakistan, Indonesia and Bangladesh, although these countries represent a small portion of total Islamic finance assets, with no countries appearing in the 9 largest countries (according to data as of the end of 2010 from The Banker, included in the UK Islamic Finance Secretariat's 2012 report). The assets outside of those 9 countries accounts for just $83 billion, 8% of the total Islamic finance industry, even though 570 million people, most of them Muslim, live in these three countries.
It boils down to a simple point. Islamic finance, like conventional finance, is by and large not focused across the wealth distribution, it is targeted at people of moderate or high net worth. And where microfinance has developed to provide financial services to those without significant wealth, there has been limited development of Islamic finance and it has not received much support from the Islamic finance industry. The ADB helping countries adopt IFSB standards will not change this, but by supporting Islamic finance in countries where it is not well developed, and where there is likely to be demand for it, it may provide the governments with greater familiarity with Islamic finance that is a precondition for adopting regulations that could allow Islamic microfinance to develop.
The development of Islamic finance has naturally occurred in countries that have either decided to extensively promote Islamic finance (like Malaysia) or countries where there is a large number of ultra-high net worth Muslims because that is where the profits are likely to be easier to come by. With more resources to be potentially tapped by Islamic financial institutions, it will attract larger institutions that can provide the scale needed for Islamic finance to become large enough to reach the scale where it becomes profitable.
As I wrote in my newsletter (which you can subscribe to on the right side of the blog), the recent decision by HSBC Amanah to leave many of the markets where it operates is a recognition that the bank is so large that many of the markets where Islamic finance exists are not large enough to support a bank of its size (and also move the needle in terms of its profitability).
HSBC noted that although it is leaving 6 of the 9 markets where it offered Islamic banking services (with most post-restructuring business based in either Saudi Arabia and Malaysia), it expects to retain 83% of the pre-restructuring revenues. Included in the markets it is exiting are Bangladesh (it will remain in Indonesia, although with a limited presence), two of the three largest Muslim-majority countries in the world.
Islamic finance exists already in Pakistan, Indonesia and Bangladesh, although these countries represent a small portion of total Islamic finance assets, with no countries appearing in the 9 largest countries (according to data as of the end of 2010 from The Banker, included in the UK Islamic Finance Secretariat's 2012 report). The assets outside of those 9 countries accounts for just $83 billion, 8% of the total Islamic finance industry, even though 570 million people, most of them Muslim, live in these three countries.
It boils down to a simple point. Islamic finance, like conventional finance, is by and large not focused across the wealth distribution, it is targeted at people of moderate or high net worth. And where microfinance has developed to provide financial services to those without significant wealth, there has been limited development of Islamic finance and it has not received much support from the Islamic finance industry. The ADB helping countries adopt IFSB standards will not change this, but by supporting Islamic finance in countries where it is not well developed, and where there is likely to be demand for it, it may provide the governments with greater familiarity with Islamic finance that is a precondition for adopting regulations that could allow Islamic microfinance to develop.
Friday, January 20, 2012
Islamic finance complexity (Part IIh)
It has been a while since I added to the Islamic finance complexity series of posts, but I was reading an article that I thought would provide a return to the series (and also back to the liabilities side of Islamic banks' balance sheets). The IFSB is beginning work on its standards for capital adequacy to incorporate changes in Basel 3, which prompted me to look at one of their Guidance Notes already out there (IFDB-4 [pdf]), which deals with capital requirements around profit-sharing investment accounts (PSIA), which are a large part of Islamic banks' liabilities (equivalent to deposits).
The standard from IFSB provides guidance to regulators to determine the treatment of liabilities (and the assets they finance) for capital adequacy calculations. What is at issue with the PSIA is whether the assets financed by PSIA should be given a risk-weighting in the capital computation greater than zero (i.e. there should be some capital set aside for the assets they finance).
The theoretical proposition with PSIA is that the assets the bank invests the PSIA funds in should not be treated as assets needing capital set against it. The logic is that since PSIA investment account holders (IAHs) are liable as rabb ul-mal (in a mudaraba) or muwakkil (in a wakala) to bear any loss and the bank only gets a share of profits (if any) or a fee, respectively, that are generated by the assets.
However, since most Islamic banks--either by choice or because they are required to by their regulators--set up profit-equalization reserves and investment risk reserves, and also can "[forego] all or part of its Mudārib share of profits on investing UIAH [unrestricted IAH] funds, or donating to the UIAH part or all of the profit on investments financed by shareholders’ funds, so as to enhance the profit payout to the UIAH".
As a result, the bank is bearing some displaced commercial risk from the investments financed by IAHs because they will--to some degree--bear the risk of loss in the funds invested that were provided by IAHs. As a result, while the contracts in their pure form would not expose the bank to possible losses, in actuality the bank has to set aside some capital to pay for these losses. The IFSB guidance note provides guidance to regulators to determine the calculation of what portion of assets financed by IAH depositors should be considered "at risk" (thus needing a risk weighting based on their own structure).
One of the more interesting discussions in the guidance notes was surrounding the status of IAHs, in terms of how the regulators expect depositors to be treated should the bank become insolvent:
The distinction in regulatory treatment of mudaraba and wakala depositors across jurisdictions provides another example of how it is not necessarily as simple as arguing whether Islamic banks' deposits should be fully pass-through (a pure mudaraba) or not. It also highlights the fact that the regulatory environment facing Islamic banks is not uniform and also not necessarily easily transferable to how Islamic banks work.
UPDATE: I just saw an article which describes some of the different factors that affect whether PSIAs will impact Islamic banks' capital requirements, from the IFSB seminar in Malaysia.
See the index of other posts: http://investhalal.blogspot.com/2011/11/islamic-finance-complexity.html
The standard from IFSB provides guidance to regulators to determine the treatment of liabilities (and the assets they finance) for capital adequacy calculations. What is at issue with the PSIA is whether the assets financed by PSIA should be given a risk-weighting in the capital computation greater than zero (i.e. there should be some capital set aside for the assets they finance).
The theoretical proposition with PSIA is that the assets the bank invests the PSIA funds in should not be treated as assets needing capital set against it. The logic is that since PSIA investment account holders (IAHs) are liable as rabb ul-mal (in a mudaraba) or muwakkil (in a wakala) to bear any loss and the bank only gets a share of profits (if any) or a fee, respectively, that are generated by the assets.
However, since most Islamic banks--either by choice or because they are required to by their regulators--set up profit-equalization reserves and investment risk reserves, and also can "[forego] all or part of its Mudārib share of profits on investing UIAH [unrestricted IAH] funds, or donating to the UIAH part or all of the profit on investments financed by shareholders’ funds, so as to enhance the profit payout to the UIAH".
As a result, the bank is bearing some displaced commercial risk from the investments financed by IAHs because they will--to some degree--bear the risk of loss in the funds invested that were provided by IAHs. As a result, while the contracts in their pure form would not expose the bank to possible losses, in actuality the bank has to set aside some capital to pay for these losses. The IFSB guidance note provides guidance to regulators to determine the calculation of what portion of assets financed by IAH depositors should be considered "at risk" (thus needing a risk weighting based on their own structure).
One of the more interesting discussions in the guidance notes was surrounding the status of IAHs, in terms of how the regulators expect depositors to be treated should the bank become insolvent:
"In practice, there is considerable ambiguity in the nature and characteristics of UPSIA, which vary among IIFS and jurisdictions. At one extreme, IAH are highly protected so that UPSIA tend to be deposit-like products where the returns are 'stabilised'".At the other extreme:
"UIAH have no claim as creditors over the assets of the IIFS (as do conventional depositors). Instead, they have a claim to the assets financed by their funds (including their share of any undistributed profits and less any losses), including their share of assets financed by commingled funds, in respect of which they rank pari passu with the shareholders after taking account of the fact that the latter are liable for amounts deposited by current account holders and other creditors."One note here is that current account holders are depositors under, for example, qard hasan, who have their principal guaranteed, but are not entitled to profit. Between the two extremes, there are any number of possibilities where depositors are neither treated like current account holders or fully liable to lose the full value of their principal. The qualification of UIAH (unrestricted IAH) is done because a restricted IAH would have specific assets financed using their funds and therefore would have their funds at risk of loss based on the performance of the assets they finance.
The distinction in regulatory treatment of mudaraba and wakala depositors across jurisdictions provides another example of how it is not necessarily as simple as arguing whether Islamic banks' deposits should be fully pass-through (a pure mudaraba) or not. It also highlights the fact that the regulatory environment facing Islamic banks is not uniform and also not necessarily easily transferable to how Islamic banks work.
UPDATE: I just saw an article which describes some of the different factors that affect whether PSIAs will impact Islamic banks' capital requirements, from the IFSB seminar in Malaysia.
See the index of other posts: http://investhalal.blogspot.com/2011/11/islamic-finance-complexity.html
Sunday, August 21, 2011
S&P raises some interesting questions about takaful
While Standard & Poor's has taken some heat recently with the downgrade of the US credit rating, it still does provide some interesting insights in other research, specifically in an article on takaful. S&P writes:
The importance for a ratings agency of this structural contradiction is that technically it is rating the ability of the takaful fund to cover anticipated losses or the takaful company's ability to continue operating based on its management fees for managing the takaful fund. It complicates the rating process if the two separate accounts have loans between them because it creates a hidden liability for the takaful company, should the takaful fund go into deficit.
This problem goes side by side with the characterization of the takaful fund as being owned by its members, who should have a right to the surpluses in the takaful fund. S&P writes:
In this case, even though members legally own the surplus, it would not be prudential for the surplus to be paid out each year because there is a chance of a large claim in any given year (from the marine insurance) that would leave the fund in substantial deficit, which would eventually be made up by future surpluses being used to cover the deficit and leaving nothing for several years to pay out to the members at the time. This would amount to a transfer of surpluses to current members from future members (who might not be the same). In my mind, the easiest solution would be to have different funds for different types of insurance so that one set of members could receive surplus payouts each year (if there is a surplus) and other funds could withhold surpluses to cover potential future deficits, although I suspect there are some Shari'ah issues with the takaful fund withholding surpluses from members.
S&P concludes with a sentiment that is often talked about in Islamic finance, but is often lacking in practice: defining the value proposition for Islamic finance compared to its conventional alternative.
We note that the IFSB Standard 11 requires the separate solvency monitoring of takaful funds from shareholder (operator) funds. As takaful funds are the sole responsibility of the members (contributors), we see some regulatory logic in this, although in our view this seems to ignore the role of the shareholder in its active support and management of the takaful fund, as demonstrated through the provision of qard hassan (interest free loans), solvency margin and capital employed.
In its interactive ratings of takaful companies, Standard & Poor's is of the opinion that there is real fungibility from shareholder funds (and the attaching assets) to the takaful fund if the latter is in deficit (unless demonstrated otherwise). At the early stages of a company's development, when takaful fund deficits could be likely, this standard could create an onerous set of operational constraints.The key issue that S&P is highlighting is that legally the shareholder's funds (the takaful provider's equity capital) is separate from the takaful fund, which is owned by the members and invested on their behalf to pay for claims by members. However, if the premiums paid plus gains on the investments minus claims is negative (the fund is in deficit), the shareholder's fund will extend an interest-free loan to cover claims; members will not be called upon to cover the deficit when it occurs.
The importance for a ratings agency of this structural contradiction is that technically it is rating the ability of the takaful fund to cover anticipated losses or the takaful company's ability to continue operating based on its management fees for managing the takaful fund. It complicates the rating process if the two separate accounts have loans between them because it creates a hidden liability for the takaful company, should the takaful fund go into deficit.
This problem goes side by side with the characterization of the takaful fund as being owned by its members, who should have a right to the surpluses in the takaful fund. S&P writes:
Where the risk profile of the takaful fund is homogenous, then we believe the establishment of and distribution of surpluses to members should be uncontroversial. However, as the takaful sector grows in scale, it will increasingly seek to underwrite larger risk values in more commercial sectors, for example, marine and aviation. Although use of retakaful capacity can control loss exposures from high-value covers, we question the feasibility of a single takaful fund comprising such a heterogeneous mix of risks.In a homogenous takaful pool with insured risks that occur more regularly, but have low dollar figure claims when they occur. In this case, there is less likely for the fund's gains over several years to be wiped out by one outsized event. In this case, the takaful fund can pay out surpluses annually to its members (often by reducing the premiums for the next year). However, if this small claim amount with frequent occurrence is combined with larger takaful products like marine insurance, where the insurance is less likely to be claimed each year, but the amount if it were to be claimed is substantial (likely multiple times of a regular year's surplus).
In this case, even though members legally own the surplus, it would not be prudential for the surplus to be paid out each year because there is a chance of a large claim in any given year (from the marine insurance) that would leave the fund in substantial deficit, which would eventually be made up by future surpluses being used to cover the deficit and leaving nothing for several years to pay out to the members at the time. This would amount to a transfer of surpluses to current members from future members (who might not be the same). In my mind, the easiest solution would be to have different funds for different types of insurance so that one set of members could receive surplus payouts each year (if there is a surplus) and other funds could withhold surpluses to cover potential future deficits, although I suspect there are some Shari'ah issues with the takaful fund withholding surpluses from members.
S&P concludes with a sentiment that is often talked about in Islamic finance, but is often lacking in practice: defining the value proposition for Islamic finance compared to its conventional alternative.
In our view, the successful development of the takaful sector depends on the identification and promotion of a real value proposition that is distinctive from that being offered in the conventional insurance sector.This is a challenge for the industry as a whole, but with a shorter track record for takaful, there could be fewer entrenched ideas making it easier to change the way things are done than in the banking or finance industry.
Friday, June 24, 2011
Shari'ah standardization: Inter- or Intra-regional
About a week ago, I called the idea of a GCC-wide Shari'ah board "largely unnecessary". John Foster, the Managing Editor of The Islamic Globe, a newspaper covering Islamic finance (for which I cover the Americas), offered a slightly different commentary in reaction to Dr. Hamad Hassan, the well known Shari'ah scholar, who supported the initiative. John wrote:
However, the problem becomes much more significant when cross-border products are developed. These cross-border products will be limited significantly if large regions--for example the GCC--operate with a different understanding of Shari'ah-compliance. This was in part the case in the oft-mentioned difference in Shari'ah standards between the GCC and Malaysia. Many contracts used widely in Malaysia are not permissible under the standards used in the GCC and so the Islamic finance industry in Malaysia developed with a much stronger domestic focus than the GCC. This may have been fine when Islamic finance began to grow during the 1980s and 1990s, but as Islamic finance becomes more globalized, Malaysia has begun to reduce the use of contracts which are problematic. The best known effort to bridge the gap was the sukuk ALIM, developed jointly by Cagamas, the national housing agency, and Al Rajhi Bank, the Saudi Islamic bank which is one of the largest Islamic banks in the world.
I think this is a good example of the types of Shari'ah convergence which is beneficial--not just GCC/Malaysia convergence, but globally. Institutions and their respective Shari'ah boards working together to develop products that are globally accepted. This--rather than an intra-GCC Shari'ah board--should be the focus. It can, as I suggested in my earlier post, be moved under the banner of a standards setting body like AAOIFI or the IFSB or within the Islamic Development Bank, but the inter-regional differences are likely to be greater than intra-regional differences. These differences will also pose the greatest risk to the continued globalization of Islamic finance.
Whether you believe Shari'ah standardization is a fruitful exercise or not, the focus should be on bringing in regions that are diverse, not focusing on the regions where Shari'ah standards are already mostly the same.
"No one doubts that there is a need for improved regulation and the streamlining of cross-border issuance of, for example, Sukuk. However, what the industry needs more is global standardization, not just standardization across the GCC, which is already very homogenized in its regulatory and Shari'ah regimes. The initiative - which does deserve some applause - does however run the danger of becoming a noisy sideshow, when the real challenge lies in finding a global language for Islamic finance - not creating another regional hub 300 miles away from one of the global centers for the industry. With emerging markets in Africa and Central Asia coming to the Islamic finance party, the industry needs one coherent voice - one leader - not three disparate voices calling from different directions."I am mostly in agreement with his sentiment. The idea of Shari'ah standardization--while tricky--is necessary in some areas of Islamic finance. In the retail world, it is mostly unnecessary because retail banks are focused on their customer's demand and the prevailing Shari'ah standards in the countries where their customers are located. However, even in retail banking, using an interpretation of Shari'ah-compliance that differs in significant ways from the prevailing interpretation elsewhere could hamper the ability of the bank to raise capital needed to sustain and grow its business, unless this comes exclusively from regions that use the same Shari'ah standards.
However, the problem becomes much more significant when cross-border products are developed. These cross-border products will be limited significantly if large regions--for example the GCC--operate with a different understanding of Shari'ah-compliance. This was in part the case in the oft-mentioned difference in Shari'ah standards between the GCC and Malaysia. Many contracts used widely in Malaysia are not permissible under the standards used in the GCC and so the Islamic finance industry in Malaysia developed with a much stronger domestic focus than the GCC. This may have been fine when Islamic finance began to grow during the 1980s and 1990s, but as Islamic finance becomes more globalized, Malaysia has begun to reduce the use of contracts which are problematic. The best known effort to bridge the gap was the sukuk ALIM, developed jointly by Cagamas, the national housing agency, and Al Rajhi Bank, the Saudi Islamic bank which is one of the largest Islamic banks in the world.
I think this is a good example of the types of Shari'ah convergence which is beneficial--not just GCC/Malaysia convergence, but globally. Institutions and their respective Shari'ah boards working together to develop products that are globally accepted. This--rather than an intra-GCC Shari'ah board--should be the focus. It can, as I suggested in my earlier post, be moved under the banner of a standards setting body like AAOIFI or the IFSB or within the Islamic Development Bank, but the inter-regional differences are likely to be greater than intra-regional differences. These differences will also pose the greatest risk to the continued globalization of Islamic finance.
Whether you believe Shari'ah standardization is a fruitful exercise or not, the focus should be on bringing in regions that are diverse, not focusing on the regions where Shari'ah standards are already mostly the same.
Tuesday, October 12, 2010
Liquidity Management in Islamic Finance
Sorry for the lack of posting in the last week. I've had a cold that has put me on the sidelines.
What need does the ILMC fill?
The issue of asset-liability maturity mismatch has been a common one in Islamic finance, just as it is in conventional banking. However, in Islamic banking, the maturity mismatch has been accentuated by the lack of short-term, money market instruments that allow for managing excess liquidity and temporary liquidity needs. The solution until now has been interest-free deposits with central banks and bilateral commodity murabaha and wakala agreements where banks place excess liquidity with other banks in need of that liquidity. However, this setup is insufficient for the industry and the flaws of this method was demonstrated in the conventional banking industry in the latest crisis.
In the last crisis, the failure of Lehman Brothers led to a nearly complete freeze in commercial paper markets. Commercial paper is issued with maturities of less than 270 days (to get an exemption from some securities rules in the US). Commercial paper is issued by many corporations, but banks make up a large share of the total issuance. It is also a large portion of the investments held by money market funds. When Lehman collapsed, the purchasers of these securities pulled out of the market, fearing that another large CP issuer's collapse could impose significant losses on them. The market for CP did not return to vibrancy until the US government stepped in to support the market.
In Islamic finance, the current money market alternatives available resemble the commercial paper market (although being far less liquid than commercial paper). A bank with excess liquidity will find a counterparty with a short-term liquidity need and enter into a short-term commodity murabaha or wakala agreement. It will essentially loan its surplus funds to the other institution for a short period and generate a return on the surplus funds. However, these types of bilateral agreements leave the lending bank with exposure to credit risk that the counterparty will fail before it gets its money (with a return) back. In a liquidity crunch like the one following the failure of Lehman, Islamic banks (like the investors in conventional commercial paper) will be far less likely to lend out their surplus liquidity if they feel there is a chance it will be lost.
Because of the counterparty risk involved in these bilateral agreements, the Islamic finance industry is vulnerable to a crisis that could threaten the solvency of Islamic banks. If some banks with liquidity needs cannot find short-term financing through bilateral agreements, they may have to resort to asset sales, which will occur at fire sale prices, and the liquidity needs of the institution could turn into a solvency crisis. The fire sale of assets will deplete the bank's assets compared to its liabilities (which will remain mostly fixed) and for the balance sheet to 'balance', the difference will come out of the bank's capital.
There has not been much in the way of alternatives available to Islamic banks until recently (except on a country-by-country basis--with many countries having no Islamic short-term instruments issued by the government or central bank). The International Islamic Liquidity Management Corporation (ILMC), which was announced recently and will be launched on October 25 in Kuala Lumpur, Malaysia by the Islamic Financial Services Board members (mostly central banks and regulatory bodies).
What will come from the ILMC specifically is not yet clear, but it will be some form of short-term investment and the Malaysian central bank governor Zeti Akhtar Aziz says they will be "short term, and they will be, we expect, highly rated instruments". The fact that ILMC is being established by the central bank members of the IFSB will probably be the factor that makes them highly-rated. The high rating is important for the capital rules under Basel 2 (and soon Basel 3) for how banks classify their holdings of the securities. It is not clear exactly the degree of support the IFSB members will put behind the securities, but having central banks behind the issuer of these securities will also limit the degree to which a future liquidity crisis could lead to Islamic banks losing confidence in the ability of their counterparty (the ILMC) to make good on the obligation to redeem the short-term securities. I keenly await more details on the structure of the ILMC's products as well as details on the degree of explicit support from the IFSB members, but at this stage, it looks like the Islamic finance industry could take a big step forward with the establishment of the ILMC, which could start issuing bills regularly beginning "early next year".
UAE central bank's Islamic CDs
The news about short-term investments for Islamic banks does not end with the ILMC. The UAE central bank announced plans earlier this year for Islamic certificates of deposits (CDs) and new details are being reported on this front as well. Standard Chartered, which sits on the central bank's liquidity management committee, says the UAE central bank will use murabaha for its Islamic CDs. This is mixed news. It is certainly a positive for another country to offer short-term liquidity management tools for its Islamic banks for the reasons I outlined above. However, the use of murabaha for these does little to find a creative solution that does not entrench the industry in more commodity murabaha transactions.
The use of commodity murabaha transactions is common in Islamic finance and is accepted as legitimate by scholars (with some divergence from the OIC and the head of Shari'ah at the IFSB). In the end, it is a case of whether the perfect should be the enemy of the good. The benefits from the availability of short-term liquidity management tools surely outweighs concerns that commodity murabaha is 'too similar' to interest-based loans in the near term. However, the greatest skepticism about the Islamic finance industry is that its products do nothing but replicate conventional interest-based loans with different structures to receive approval.
As much as this criticism is valid--there are some products that do nothing but apply a 'Shari'ah wrapper' to conventional products--it overlooks the fundamental paradox in the prohibition of riba. To paraphrase, trade is like riba, but trade is permitted but riba is prohibited. I am certainly in no position to argue the theological points of the Qur'anic verse I paraphrased; that is, as they say, well above my pay grade (not to mention my qualifications). However, it is important from the level of consumer perception of the Islamic finance industry. At what point does a product which the scholars agree is Shari'ah-compliant become too close to an interest-based product for a consumer to accept it as preferable to an interest-based product.
I don't have an answer to the question and I don't think anyone in the industry does. However, it is a fundamental point for the industry's growth: if 'purity' in perception is the goal, products will likely be too unfamiliar to attract demand from enough people to be profitable (and the costs of those products will be too much higher to elicit much consumer demand). However, if (when) financial engineering is taken to its limit, the distinction between Shari'ah-compliant and conventional products becomes meaningless for enough consumers that the industry will have to compete almost entirely on price alone, which it will be hard pressed to do. Some middle ground is required and I think that some form of cost-benefit analysis can provide a guide and for the murabaha-based Islamic CDs, I think the benefits outweigh the costs and the product will benefit the industry.
Other Items
Reuters reports that according to the Assistant Secretary General of AAOIFI, a regional mandatory Shari'ah body is "years away". This is not surprising, but it is relatively new to have AAOIFI publicly acknowledge it.
I weighed in on my own views on the potential for Islamic finance to lead conventional finance by increasing the role of women in the industry (both conventional and Islamic finance industries are male-dominated). Rushdi Siddiqui adds his take on the issue.
What need does the ILMC fill?
The issue of asset-liability maturity mismatch has been a common one in Islamic finance, just as it is in conventional banking. However, in Islamic banking, the maturity mismatch has been accentuated by the lack of short-term, money market instruments that allow for managing excess liquidity and temporary liquidity needs. The solution until now has been interest-free deposits with central banks and bilateral commodity murabaha and wakala agreements where banks place excess liquidity with other banks in need of that liquidity. However, this setup is insufficient for the industry and the flaws of this method was demonstrated in the conventional banking industry in the latest crisis.
In the last crisis, the failure of Lehman Brothers led to a nearly complete freeze in commercial paper markets. Commercial paper is issued with maturities of less than 270 days (to get an exemption from some securities rules in the US). Commercial paper is issued by many corporations, but banks make up a large share of the total issuance. It is also a large portion of the investments held by money market funds. When Lehman collapsed, the purchasers of these securities pulled out of the market, fearing that another large CP issuer's collapse could impose significant losses on them. The market for CP did not return to vibrancy until the US government stepped in to support the market.
In Islamic finance, the current money market alternatives available resemble the commercial paper market (although being far less liquid than commercial paper). A bank with excess liquidity will find a counterparty with a short-term liquidity need and enter into a short-term commodity murabaha or wakala agreement. It will essentially loan its surplus funds to the other institution for a short period and generate a return on the surplus funds. However, these types of bilateral agreements leave the lending bank with exposure to credit risk that the counterparty will fail before it gets its money (with a return) back. In a liquidity crunch like the one following the failure of Lehman, Islamic banks (like the investors in conventional commercial paper) will be far less likely to lend out their surplus liquidity if they feel there is a chance it will be lost.
Because of the counterparty risk involved in these bilateral agreements, the Islamic finance industry is vulnerable to a crisis that could threaten the solvency of Islamic banks. If some banks with liquidity needs cannot find short-term financing through bilateral agreements, they may have to resort to asset sales, which will occur at fire sale prices, and the liquidity needs of the institution could turn into a solvency crisis. The fire sale of assets will deplete the bank's assets compared to its liabilities (which will remain mostly fixed) and for the balance sheet to 'balance', the difference will come out of the bank's capital.
There has not been much in the way of alternatives available to Islamic banks until recently (except on a country-by-country basis--with many countries having no Islamic short-term instruments issued by the government or central bank). The International Islamic Liquidity Management Corporation (ILMC), which was announced recently and will be launched on October 25 in Kuala Lumpur, Malaysia by the Islamic Financial Services Board members (mostly central banks and regulatory bodies).
What will come from the ILMC specifically is not yet clear, but it will be some form of short-term investment and the Malaysian central bank governor Zeti Akhtar Aziz says they will be "short term, and they will be, we expect, highly rated instruments". The fact that ILMC is being established by the central bank members of the IFSB will probably be the factor that makes them highly-rated. The high rating is important for the capital rules under Basel 2 (and soon Basel 3) for how banks classify their holdings of the securities. It is not clear exactly the degree of support the IFSB members will put behind the securities, but having central banks behind the issuer of these securities will also limit the degree to which a future liquidity crisis could lead to Islamic banks losing confidence in the ability of their counterparty (the ILMC) to make good on the obligation to redeem the short-term securities. I keenly await more details on the structure of the ILMC's products as well as details on the degree of explicit support from the IFSB members, but at this stage, it looks like the Islamic finance industry could take a big step forward with the establishment of the ILMC, which could start issuing bills regularly beginning "early next year".
UAE central bank's Islamic CDs
The news about short-term investments for Islamic banks does not end with the ILMC. The UAE central bank announced plans earlier this year for Islamic certificates of deposits (CDs) and new details are being reported on this front as well. Standard Chartered, which sits on the central bank's liquidity management committee, says the UAE central bank will use murabaha for its Islamic CDs. This is mixed news. It is certainly a positive for another country to offer short-term liquidity management tools for its Islamic banks for the reasons I outlined above. However, the use of murabaha for these does little to find a creative solution that does not entrench the industry in more commodity murabaha transactions.
The use of commodity murabaha transactions is common in Islamic finance and is accepted as legitimate by scholars (with some divergence from the OIC and the head of Shari'ah at the IFSB). In the end, it is a case of whether the perfect should be the enemy of the good. The benefits from the availability of short-term liquidity management tools surely outweighs concerns that commodity murabaha is 'too similar' to interest-based loans in the near term. However, the greatest skepticism about the Islamic finance industry is that its products do nothing but replicate conventional interest-based loans with different structures to receive approval.
As much as this criticism is valid--there are some products that do nothing but apply a 'Shari'ah wrapper' to conventional products--it overlooks the fundamental paradox in the prohibition of riba. To paraphrase, trade is like riba, but trade is permitted but riba is prohibited. I am certainly in no position to argue the theological points of the Qur'anic verse I paraphrased; that is, as they say, well above my pay grade (not to mention my qualifications). However, it is important from the level of consumer perception of the Islamic finance industry. At what point does a product which the scholars agree is Shari'ah-compliant become too close to an interest-based product for a consumer to accept it as preferable to an interest-based product.
I don't have an answer to the question and I don't think anyone in the industry does. However, it is a fundamental point for the industry's growth: if 'purity' in perception is the goal, products will likely be too unfamiliar to attract demand from enough people to be profitable (and the costs of those products will be too much higher to elicit much consumer demand). However, if (when) financial engineering is taken to its limit, the distinction between Shari'ah-compliant and conventional products becomes meaningless for enough consumers that the industry will have to compete almost entirely on price alone, which it will be hard pressed to do. Some middle ground is required and I think that some form of cost-benefit analysis can provide a guide and for the murabaha-based Islamic CDs, I think the benefits outweigh the costs and the product will benefit the industry.
Other Items
Reuters reports that according to the Assistant Secretary General of AAOIFI, a regional mandatory Shari'ah body is "years away". This is not surprising, but it is relatively new to have AAOIFI publicly acknowledge it.
I weighed in on my own views on the potential for Islamic finance to lead conventional finance by increasing the role of women in the industry (both conventional and Islamic finance industries are male-dominated). Rushdi Siddiqui adds his take on the issue.
Wednesday, September 22, 2010
Tahawwut slow to catch on in the GCC, Nakheel/Dubai World face trade creditors' claims
Lack of familiarity with derivatives products in the GCC has hampered the adoption and use of the Tahawwut Master Agreement for Shari'ah-compliant derivatives. There is also some skepticism that the implementation of the product is Shari'ah-compliant because the Master Agreement is just a template and not a specific product.
Although Nakheel has offered to pay trade creditors 40 percent in cash with the remainder in a tradable sukuk yielding 10%, several of Dubai World's trade creditors have taken their claims to the Dubai World Tribunal set up at the DIFC. Nakheel needs 95% agreement in order to issue the sukuk to pay the deferred portion of the amounts owed to trade creditors. One of Nakheel's trade creditors, Construction Delivery Group filed suit with the tribunal claiming it is owed Dh 50 million (13.6 million) for a construction management contract.
Other News
Although Nakheel has offered to pay trade creditors 40 percent in cash with the remainder in a tradable sukuk yielding 10%, several of Dubai World's trade creditors have taken their claims to the Dubai World Tribunal set up at the DIFC. Nakheel needs 95% agreement in order to issue the sukuk to pay the deferred portion of the amounts owed to trade creditors. One of Nakheel's trade creditors, Construction Delivery Group filed suit with the tribunal claiming it is owed Dh 50 million (13.6 million) for a construction management contract.
Other News
- Mushtak Parker provides a good assessment of an IMF report that found that Islamic banks fared better during the financial crisis.
- A study from Deloitte found that 79% of executives believe Islamic finance is growing. 66% believe the industry is under-regulated.
- Indonesia may issue a global bond or sukuk for $650 million in the first quarter of 2011. Jordan formed a committee to study the changes needed to be able to issue sukuk and a statement from a government official stated that the government is "serious about using Islamic sukuk to provide funds for carrying out vital and top priority projects.
- Citigroup, which co-managed the Kuveyt Turk sukuk says it is in talks for more corporate sukuk issuance in Turkey. AmIslamic Bank in Malaysia issued RM550 million in 7-year sukuk.
- The governor of the Kuwaiti central bank says that with five Islamic banks, the market for Islamic banking is saturated.
- RAM Islamic projects that the sukuk market in Malaysia will continue to grow.
- Qatar First Investment Bank and Gulfmena Alternative Investments are launching an Islamic asset management firm. Allfunds Bank launched an Islamic Services Unit to provide a B2B fund platform of Shari'ah-compliant funds.
- Luxembourg will host the 8th Annual Summit of the Islamic Financial Services Board (IFSB), the first time it has taken place in the EU. Luxembourg is the only EU member country that is a member of the IFSB.
- Zawya and the Ethica Institute of Islamic Finance announced a partnership for Islamic Banking certification and training.
- Pakistan, Afghanistan and Senegal see Islamic banking as a way to bring underbanked people into the financial system. Bloomberg updated its list of planned and expected sukuk.
- The Central Bank of Bahrain's 6-month sukuk al-ijara was heavily oversubscribed with BD62 million (US$164 million) in subscriptions received for the regular BD10 million issue.
Monday, June 14, 2010
Are sukuk prospectuses too complex, other product needs in Islamic finance, possible Dubai sovereign sukuk
The head of the Islamic Financial Services Board, which is based in Malaysia, says that there should be greater investor protection in Dubai and other regional financial centers. Rifaat Abdel Karim, the IFSB's secretary general, pointed specifically to the uncertainty over the ability of investors to have recourse to the underlying asset citing the "200 pages of documents, which most investors don't [read]". While the complexity of sukuk and the dichotomy between asset-based and asset backed structures could provide some confusion, most sukuk prospectuses that I have read clearly delineate whether the investors have recourse on the underlying assets (versus being unsecured creditors in a default). It is incumbent, I believe, that investors use the information presented in the documentation to make an informed decision about whether the risk-reward relationship is acceptable. The head of Islamic finance at Simmons & Simmons, Muneer Khan, said in an interview quoted by Emirates Business 24/7 that the sukuk defaults were "not a Shariah issue" and that the investors had legal and financial advice sufficient to distinguished between secured and non-secured deals adding that "I think some of the claims have been a bit disingenuous".
There are other issues that have more bearing on whether sukuk will work out well in cases of default like the legal environment where the assets are located that are equally as important and less certain than the structure of the sukuk. If there are material misstatements in the prospectuses, that is a different matter, and greater investor protection for this possibility are definitely needed.
The IFSB held a seminar last week on sukuk market prospects in London, on which Mushtak Parker provides an interesting overview. Many of the issues I have raised (and others have as well) were covered in the seminar. CIMB-Principal Islamic Asset Managemenet Bhd recently said that the issuance of sukuk has failed to keep pace with industry growth. Other areas of Islamic finance like money markets and a more diversified asset base for Islamic financial products are needed according to a different article discussing the World Islamic Banking Forum Asia, which quoted the central bank heads of Bahrain and the UAE as well as Islamic financial industry practitioners. The heads of those two central banks called for greater reform within the Islamic finance industry including a "standard formula to calculate profit in an equitable and fair way at all Islamic Banks". At the same WIBC conference, the UAE central bank governor Sultan Bin Nasser Al Suwaidi said that the development of short-term liquidity management tools represent a "challenge". The UAE central bank is expected to finalize an Islamic CD product for Islamic banks in the next week.
Following a non-deal roadshow, Dubai may issue a 7-10 year sukuk in the next few months with "more generous pricing than a conventional bond" according to fund managers quoted by Arabian Business. If the issue were successfully brought to market, it would reflect a vote of confidence in Dubai despite the continued uncertainty about the final approval of the Dubai World restructuring plan. In addition to being a follow-on sukuk to Dubai's sukuk that was issued shortly before the Dubai World crisis began, it would be notable because there are few issues (much less sovereign sukuk) from the GCC longer than five years. One would hope this would lead to other longer-dated sukuk from the GCC and elsewhere if this sukuk issue succeeds.
Other News
There are other issues that have more bearing on whether sukuk will work out well in cases of default like the legal environment where the assets are located that are equally as important and less certain than the structure of the sukuk. If there are material misstatements in the prospectuses, that is a different matter, and greater investor protection for this possibility are definitely needed.
The IFSB held a seminar last week on sukuk market prospects in London, on which Mushtak Parker provides an interesting overview. Many of the issues I have raised (and others have as well) were covered in the seminar. CIMB-Principal Islamic Asset Managemenet Bhd recently said that the issuance of sukuk has failed to keep pace with industry growth. Other areas of Islamic finance like money markets and a more diversified asset base for Islamic financial products are needed according to a different article discussing the World Islamic Banking Forum Asia, which quoted the central bank heads of Bahrain and the UAE as well as Islamic financial industry practitioners. The heads of those two central banks called for greater reform within the Islamic finance industry including a "standard formula to calculate profit in an equitable and fair way at all Islamic Banks". At the same WIBC conference, the UAE central bank governor Sultan Bin Nasser Al Suwaidi said that the development of short-term liquidity management tools represent a "challenge". The UAE central bank is expected to finalize an Islamic CD product for Islamic banks in the next week.
Following a non-deal roadshow, Dubai may issue a 7-10 year sukuk in the next few months with "more generous pricing than a conventional bond" according to fund managers quoted by Arabian Business. If the issue were successfully brought to market, it would reflect a vote of confidence in Dubai despite the continued uncertainty about the final approval of the Dubai World restructuring plan. In addition to being a follow-on sukuk to Dubai's sukuk that was issued shortly before the Dubai World crisis began, it would be notable because there are few issues (much less sovereign sukuk) from the GCC longer than five years. One would hope this would lead to other longer-dated sukuk from the GCC and elsewhere if this sukuk issue succeeds.
Other News
- WealthBriefing has a good article on the lack of diversification options open to ultra-high net worth investors. If these products are not available for ultra-high net worth investors, it is no wonder that there is a lack of options for less wealthy Muslim investors.
- An article in Malaysian newspaper The Star touts the recent Malaysian sovereign sukuk. Maybank Islamic recently complained about the lack of scholars "who are well-versed in banking practices".
- Moody's estimates that Islamic finance will pass the $1 trillion mark this year. However, accurate statistics about the size of the Islamic finance industry are generally not available, so it is likely an educated guess.
- BNP Paribas is expanding its Islamic unit's staffing by 50%, with most of the growth occurring in Asia. The fund management arm of BNP Paribas said it favors sukuk from sovereign issuers in the GCC based on their debt ratings and the oil-generated wealth.
- CIMB Niaga, the Shari'ah-compliant subsidiary in Indonesia is planning to expand its lending.
- The National Bank of Kuwait's latest ijara fund was fully subscribed in a day.
- Ireland wants to capture EUR40 billion in Islamic finance business.
- Singapore wants to expand its existing strength as a financial center to expand its role in Islamic finance, although DBS shrank its Islamic unit in Singapore, which was reported to be based on a slow growth in the industry in the city-state. The deputy chairman of the Monetary Authority of Singapore, Lim Hng Kiang, spoke at the World Islamic Banking Conference, Asia Summit.
- Edcomm Banker's Academy, a training organization in banking has partnered with the Ethica Institute of Islamic Finance, which offers the Certified Islamic Finance Executive certification.
Saturday, April 10, 2010
Islamic finance and financial stability
The Islamic Financial Services Board meeting recently saw the launch of the IFSB-IRTI-IsDB report on financial stability in the Islamic finance industry. I have not had a chance yet to read the report, but my initial impression of their effort is supportive. It recognizes that the global financial crisis did impact the Islamic financial system and can provide lessons as institutions grow larger. There have been many times, most recently a couple weeks ago where I question whether too big to fail is not a problem that could afflict Islamic finance. I argued (and still maintain) that because the industry is concentrated in small countries in the Gulf, a big institution (like the planned Islamic mega bank or institutions like Dubai World, which is not an Islamic financial institution, but has received significant Shari'ah-compliant funding) could endanger the financial stability of the country it is based in. This problem is heightened because there are no Shari'ah-compliant options for 'lender of last resort', the role the US Federal Reserve played to keep healthy banks from being destroyed as global liquidity dried up. The potential problem does not end there. There is inter-bank funding occurring (although not generally overnight funding which caused virtual runs on conventional institutions) and so one bank's trouble spills over to other banks with exposure to the troubled bank. If a few large lslamic banks became insolvent, it is likely that their debt would be held on other banks' balance sheets and the writedown of the insolvent bank's debts held by other banks could put stress on the solvency of the other banks. This could be heightened if this caused retail banking customers to withdraw their money, which could cause a liquidity squeeze that would put the previously healthy banks at risk of insolvency. With that rather gloomy (although relatively unlikely) prospect in mind, I think it is a good thing for the establishment of an Islamic Financial Stability Forum, which was recommended in the report.
Other News
Other News
- Rushdi Siddiqui, the global head of Islamic finance for Thomson Reuters, argues in a column in GulfNews that there should be more linkages between the halal industry and Islamic finance.
- Dar Al-Arkan made a periodic coupon distribution on one of its sukuk.
- To broaden its investments, Kuwait Finance House signed an agreement to invest $450 million in Canadian real estate working with Killiam Properties.
- The first takaful policy for a space satellite was announced recently.
- The Investment Dar is fighting over the buyback option on shares in Boubyan Bank it lost.
- Asharq Alawsat's columnist Lahem al-Nasser says that Shari'ah boards should be treated like external auditors and should be liable for their decisions.
- Pakistan will sell domestic sukuk within the next three months. The central bank is also considering ways to provide short-term sukuk for Islamic banks' liquidity management.
Thursday, February 18, 2010
Reuters Islamic finance summit
I don't have as much time to comment as much on the articles today, so I'll just give a few general comments. Any forum or conference is unlikely to get a full, detailed overview of any of the topics covered, but the Reuters summit, in my opinion, has done a good job at describing some of the issues raised by participants in the articles released about the summit.
The four themes that I took from an article about the Reuters summit before it happened were all covered with differing degree of depth (from my reading of the articles about the summit; I wasn't there). The maturity mismatch was not covered in particular depth, although it was mentioned within the context of the second theme of a reliance on transitory sources of profits like private equity and investment banking. It is becoming more evident that at least some players in the industry are willing to say that there has been too much focus on big real estate projects, private equity and investment banking at the expense of plain vanilla banking. With the higher returns from the transitory sources of profits, there will always be a bias towards those areas in boom times because there is more money to be made there and periods of recession and financial crises will see some of these go away. This is unlikely to change, although one would hope that the most recent crisis will instill some more risk management in the riskier areas of Islamic finance to prevent the next crisis from being even bigger for Islamic finance than this one was.
The issue of size of Islamic financial institutions was barely touched with the exception of a timetable for the launch of a mega Islamic bank. Much more attention was paid to the regulatory challenges facing Islamic finance and there are still major differences among different institutions and people within the industry, which is not out of line with the conventional financial industry's views on regulation. There are some special areas where Islamic finance regulation is different from conventional regulation, but in both segments of financial services, regulation is one of the slower moving areas that cannot be resolved by a 3 or 4 day conference covering so many different topics. In this area, there will be much more work to come and hopefully the need for sensible regulatory standardization (across countries and between Islamic and conventional banks) should be more in the forefront of people's minds.
Reuters Islamic finance summit
The four themes that I took from an article about the Reuters summit before it happened were all covered with differing degree of depth (from my reading of the articles about the summit; I wasn't there). The maturity mismatch was not covered in particular depth, although it was mentioned within the context of the second theme of a reliance on transitory sources of profits like private equity and investment banking. It is becoming more evident that at least some players in the industry are willing to say that there has been too much focus on big real estate projects, private equity and investment banking at the expense of plain vanilla banking. With the higher returns from the transitory sources of profits, there will always be a bias towards those areas in boom times because there is more money to be made there and periods of recession and financial crises will see some of these go away. This is unlikely to change, although one would hope that the most recent crisis will instill some more risk management in the riskier areas of Islamic finance to prevent the next crisis from being even bigger for Islamic finance than this one was.
The issue of size of Islamic financial institutions was barely touched with the exception of a timetable for the launch of a mega Islamic bank. Much more attention was paid to the regulatory challenges facing Islamic finance and there are still major differences among different institutions and people within the industry, which is not out of line with the conventional financial industry's views on regulation. There are some special areas where Islamic finance regulation is different from conventional regulation, but in both segments of financial services, regulation is one of the slower moving areas that cannot be resolved by a 3 or 4 day conference covering so many different topics. In this area, there will be much more work to come and hopefully the need for sensible regulatory standardization (across countries and between Islamic and conventional banks) should be more in the forefront of people's minds.
Reuters Islamic finance summit
- The Islamic mega-bank is expected to launch within six months to a year according to Sheikh Saleh Kamel, one of the founders of the bank. The launch was delayed by the financial crisis, but is expected to have capital of $3 billion to $4 billion when it is launched.
- The head of Islamic finance at Ernst & Young, Sameer Abdi, says that Islamic finance should refocus its efforts on building a retail base, which provides a more stable base than wholesale funding and investment banking and could allow Islamic banks to compete with global financial institutions with Islamic windows. One comment that may explain the lack of push for retail business is particularly accurate: "What you make in one transaction [in investment banking] may take you three years in a retail book, but ... retail is sustainable". Mr. Abdi also spoke about the need for Islamic finance to move away from real estate.
- Not surprisingly, there are differences in opinion between regulators, Shari'ah scholars and practitioners in Islamic finance about the best way to regulate the industry and ensure there is adequate transparency to protect investors in Islamic financial products. One of the interesting things, which I have raised before, but which has not received much attention in articles about Islamic finance is that corporate restructuring involving Islamic finance need to be reviewed for Shari'ah-compliance. This point was raised by Muneer Khan, a partner at Simmons & Simmons. Looking forrward, there will be much more discussion of these topics at the 7th Annual IFSB Summit, which will be held in May in Bahrain.
- France or the UK should move forward on bringing corporate sukuk to market to retain their leadership role in Western Islamic finance, according to several participants in the summit. Several participants expressed skepticism that any European sovereign sukuk will be issued in 2010, although expressing optimism for corporate sukuk from European companies.
- John Sandwick says that Swiss banks should focus on providing Islamic wealth management services. He criticized the focus of the industry on private equity at the expense of other areas that would help asset managers be able to invest in more prudent asset allocations.
- Indonesian banks should focus on providing Shari'ah-compliant financing according to Achmad Riawan Amin, chairman of an association of Islamic banks in Indonesia.
- An executive at Citi Islamic Investment Bank, Samad Sirohey, said that sukuk funds should develop not just to purchase distressed assets, but to draw other players into the Islamic securities market. This would, in my opinion, provide greater liquidity that could spur supply of new sukuk because issuers would have to pay lower liquidity premia to investors who now are limited in their ability to sell sukuk in the secondary markets and find other sukuk to replace it with.
- Dubai World is planning to present its restructuring plan to creditors in march, although the details will not necessarily be released publicly. According to a spokesperson for the Dubai Government, "That's a confidential matter between the company and its lenders". While that may be strictly the case, the uncertainty about the restructuring of the debts, including several Shari'ah-complaint debts, is very important to the regional credit markets and it would be beneficial to investor perception of the creditworthiness of the Dubai government for these details to be made public. Given their importance to sentiment, they may be leaked anyway. A number of participants at the Reuters summit reiterated the valid point that the problems at some of the Dubai government-related entities like Nakheel should not be taken and generalized across the Islamic finance industry. I agree.
- Global sukuk issuance last year (February 2009 to January 2010) was $19 billion, of which $5.6 billion originated from Saudi Arabia and $4 billion was from the UAE.
- An article describes the countries where Islamic finance could expand and the factors that could hamper this growth.
- A Malaysian takaful firm Etiqa Takaful has seen strong growth recently as many Muslims and some non-Muslims in the country choose takaful over conventional insurance. However, the growth could be restrained by a shortage of long-term Islamic instruments for them to invest in and a shortage of retakaful providers. An Indonesian takaful provider said that it is considering investing directly in domestic equities which rose 87% in 2009 in Indonesia (measured by the Jakarta composite index) for investors with high risk profiles. It will be seen whether this investment in the stock markets will be beneficial for the investors after the significant rise last year.
Wednesday, November 25, 2009
Dubai World asks for standstill agreement, including Nakheel sukuk
The big news of the day was the $5 billion that the Dubai Department of Finance raised from two government-owned banks in Abu Dhabi that will be managed by the Dubai Financial Support Fund. Following this announcement, Dubai World saw a chief restructuring officer appointed to manage the sizable debts of the government-related entity. Dubai World, which guarantees the $3.52 billion sukuk issued by Nakheel which matures on December 14th, has asked debtors for a standstill agreement for six months. This would delay repayment of both the Nakheel sukuk as well a sukuk maturing in March from Limitless , another property company. [UPDATE 11/27: The maturing debt from Limitless is not a sukuk, it is a $1.2 billion, 2-year syndicated loan from 18 mostly GCC-based financial institutions. It was priced at LIBOR+125 basis points.]
The move was rather shocking, especially since the market price of the Nakheel sukuk was reflecting a full repayment of the principal and deferred lease payments, plus an additional amount due because no qualified public offering was issued during the sukuk term. The price of the sukuk fell from around 110 to 86 following the announcement and many ratings agencies cut the ratings on other Government Related Entities. If the standstill agreement is not voluntary, it could be a default event, which is reflected in the dramatic rise in the price of insuring Dubai's debt against default, although Dubai World is not formally part of the government and the Dubai World debt is not guaranteed by the government.
UK and Malaysian Islamic banks launched a standardized wakala agreement for inter-bank depositss. The contract is designed to reduce the reliance on commodity murabaha, which has attracted criticism.
The Saudi Arabian Monetary Authority governor Dr. Muhammad Al Jasser discussed the systemic concerns that regulators need to focus on when regulating Islamic financial institutions, especially those that operate across multiple countries. Dr. Zeti Akhtar Aziz, the governor of Bank Negara, also spoke recently on the regulatory focus for Islamic financial institutions being the liquidity management of Islamic financial institutions. The IFSB has established a liquidity management task force earlier this year.
Other News
The move was rather shocking, especially since the market price of the Nakheel sukuk was reflecting a full repayment of the principal and deferred lease payments, plus an additional amount due because no qualified public offering was issued during the sukuk term. The price of the sukuk fell from around 110 to 86 following the announcement and many ratings agencies cut the ratings on other Government Related Entities. If the standstill agreement is not voluntary, it could be a default event, which is reflected in the dramatic rise in the price of insuring Dubai's debt against default, although Dubai World is not formally part of the government and the Dubai World debt is not guaranteed by the government.
UK and Malaysian Islamic banks launched a standardized wakala agreement for inter-bank depositss. The contract is designed to reduce the reliance on commodity murabaha, which has attracted criticism.
The Saudi Arabian Monetary Authority governor Dr. Muhammad Al Jasser discussed the systemic concerns that regulators need to focus on when regulating Islamic financial institutions, especially those that operate across multiple countries. Dr. Zeti Akhtar Aziz, the governor of Bank Negara, also spoke recently on the regulatory focus for Islamic financial institutions being the liquidity management of Islamic financial institutions. The IFSB has established a liquidity management task force earlier this year.
Other News
- KFH-Turkey received an Islamic banking license from the Dubai International Financial Center.
- The Islamic Financial Services Board launched a new guideline for takaful institutions.
- Middle East & Asia Capital Partners will launch a Shari'ah-compliant fund to finance renewable energy next year.
- Tamweel continues to prepare for the merger with Amlak, which is expected to be put before shareholders as early as January.
- Deutshe Bank converted $30 million of its $100 million convertible murabaha from Gulf Finance House.
- Reuters describes a Shari'ah-compliant microfinance effort in Helmand province, Afghanistan. The program is very basic providing goods in kind and charging an 'administration fee' of 2%, presumably to recover costs associated with servicing the loans.
- Islamic banks in Lebanon are small, but have been successful so far.
- Tamweel, the troubled Dubai mortgage lender has refused to take delivery of 200 units due to the lack of completed infrastructure according to Emirates Business 24-7.
- Deloitte appointed Daud Vicary Abdullah to head its Islamic Finance Industry group.
- The deputy finance minister of Malaysia, Awang Adek Hussin confirmed that two foreign banks' Islamic banking license applications have been shortlisted by Bank Negara.
Wednesday, November 04, 2009
Regulation in Islamic finance, Questions remain about Dubai GREs
Malaysia's prime minister Najib Razak said that the Islamic financial industry needs strong regulation to ensure it avoids future crises. This has been an area where the industry has been slow to recognize its susceptibility to a similar financial crisis that occurred beginning in 2007 in the conventional financial industry. For too long, there were many articles talking about how the Islamic financial industry was 'immune' to crisis because of the way it operated. I have been pointing out that there are some aspects of the Islamic financial system (including lack of deposit insurance and a true 'lender of last resort') that could even make Islamic finance more vulnerable to a crisis if there was a serious loss of confidence in one or a few large Islamic banks. It is good to see that there is a greater recognition of the need for regulation to prevent either poor risk management or damaging innovation from creating a situation where there could be a crisis. Now, all that needs to happen is for these regulations to be adopted. That could take a while, although the Islamic FInancial Standards Board has begun discussing liquidity standards that would address one potential area of systemic risks in Islamic finance caused by the difficulties of Islamic banks in managing liquidity and asset and liability maturity mismatches.
Some of the proceeds from the recent Dubai sukuk, which raised $1.93 billion, will be used to pay the maturing $1 billion sukuk from the Dubai Civil Aviation Authority, which matured today. The UAE said that the timing of the issue of a $10 billion bond planned by Dubai that may be used to redeem the Nakheel sukuk maturing next month will "depend on the needs at the time" according to the Minister of Economy. In a contrary development, ratings agency Moody's Investor Service downgraded five government related entities (GREs) because the government after the Dubai finance department relinquished its obligations to cover the entities' debts. Although the GREs are not part of the government and do not have a government guarantee, they are closely tied to the government and any defaults would likely have repercussions on the Emirate's perceived creditworthiness.
Other News
Some of the proceeds from the recent Dubai sukuk, which raised $1.93 billion, will be used to pay the maturing $1 billion sukuk from the Dubai Civil Aviation Authority, which matured today. The UAE said that the timing of the issue of a $10 billion bond planned by Dubai that may be used to redeem the Nakheel sukuk maturing next month will "depend on the needs at the time" according to the Minister of Economy. In a contrary development, ratings agency Moody's Investor Service downgraded five government related entities (GREs) because the government after the Dubai finance department relinquished its obligations to cover the entities' debts. Although the GREs are not part of the government and do not have a government guarantee, they are closely tied to the government and any defaults would likely have repercussions on the Emirate's perceived creditworthiness.
Other News
- Amlak and Tamweel, the two large Dubai-based Islamic mortgage firms will be merged beginning in January with their investors owning one-third of the resulting bank.
- Gulf Finance House is planning on converting into a commercial bank from an investment bank and will issue $100 million in a convertible Islamic instrument. GFH issued Macquarie Bank with a $100 million convertible murabaha earlier this year.
- The ISDA-IIFM template for Shari'ah-compliant derivatives will be released either this year or early next year.
- The IFC listed its $100 million sukuk on the Bahrain Stock Exchange and NASDAQ Dubai.
- The U.S. is selling the building in which its embassy has resided in London to Qatari Diar, which recently began the process of issuing sukuk to fund its European acquisitions. Al Salam Europe, the European unit of the Bahraini firm is also planning on expanding its investments in Europe with real estate and private equity investments planned by January.
- Islamic finance could continue its rapid growth and see total assets of $4 trillion in 8-10 years according to the CEO of Doha Bank in a speech recently.
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