There have been a lot of articles sitting in my feed reader and I won't have time to write more in depth on the topics, but here are the links with quick summaries.
Size of Islamic finance industry
The City UK released its latest annual report on the Islamic finance industry showing the industry has $1.3 trillion in assets. I hope to have more detail on this in another post when I have time to read it.
The Malaysian Islamic finance banking industry reached 22.4% of the country's total at the end of 2011. Despite only having 15% of the outstanding USD-denominated sukuk issuance, it has one of the best developed (i.e. liquid) sukuk market, based on a lot of domestic MYR-denominated sukuk, but still showing that size isn't everything.
Shari'ah standards
A conference participant suggests that investors and advisors should do their own Shari'ah research instead of waiting on a Shari'ah board to provide a fatwa. Not much chance of happening, but interesting to see new perspectives.
Goldman Sachs
Reuters gives the latest update on the Goldman Sachs murabaha sukuk which has attracted a lot of criticism, saying that the Shari'ah advisors have signed off and the ball is in Goldman's court. I offered my perspective on the trading issue with a murabaha sukuk in an earlier post.
IIFM-ISDA
The ISDA press release is available here for the new Mubadalatul Arbaah master agreement.
Australia
The National Bank of Australia is considering a $500 million sukuk issuance, the first from the land down under, as Islamic finance begins to develop in the country.
Hong Kong
HK returns to its work on attracting Islamic finance. Despite expressing a desire to become an Islamic finance and sukuk hub, Hong Kong has not progressed far with the only issue coming from RMB500 million ($79 million) sukuk from Khazanah.
Indonesia
The Indonesian government issued its first 4 series of project-based sukuk, although only the 30 year sukuk received bids accepted by the government. Out of a 2.18 trillion rupiah ($237 million) in total bids, only 355 billion rupiah ($38 million) was accepted, all for the PBS0004 issue due 2037.
Microfinance
A microfinance product that offers a deposit product and interest-free loan program rolled into one. When will Islamic finance get behind Islamic microfinance in a big way?
Showing posts with label ISDA. Show all posts
Showing posts with label ISDA. Show all posts
Thursday, March 29, 2012
Tuesday, March 27, 2012
Profit rate swap master agreement
The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) announced their newest master agreement for a profit rate swap (mubadalatul arbaah). This is a good development in my opinion because it provides a lower cost way for Islamic financial participants to hedge against fluctuations in the interest rates that are used to determine the cost of Islamic financial products.
The idea of Islamic derivatives have been controversial because they are often viewed as instruments for speculation, which is viewed as not being in the spirit of Islamic finance. Speculation financed by Islamic financial products (e.g. in the Dubai real estate market before the crisis) somehow escapes the same level of scrutiny as derivatives. Other objections have focused on the synthetic nature of Islamic derivatives as being just copies of conventional products done in a way that is Shari'ah-compliant, and is somewhat condescendingly described as not being used to finance 'real economic activity'.
However, profit rate swaps are quite easily used for legitimate hedging transactions that doesn't necessarily shift risk from one party to another at least entirely (a criticism that could be more aptly pointed at talk of developing Islamic credit default swaps). Hedging is viewed as permissible, where speculation is viewed in a negative light (again with a somewhat double standard).
Take, for example, a situation where an Islamic bank financing a widget factory through a murabaha. The bank only offers the company a floating rate loan. However, the managers of the widget factory don't want to be exposed to the risk that the financing costs increase over the term of the murabaha because it could lead to additional cost that complicates their planning for the business.
The manager of the company may then approach an investment company to lock in the financing costs, to make its finance costs predictable over the life of the murabaha. A fund approaches the company with the offer of a profit-rate swap that locks in the financing costs for the widget company through a profit-rate swap. The fund receives a stream of fixed rate payments in exchange for paying a floating rate, which it expects to benefit its investors.
The master agreement facilitates this process by lowering the costs compared to the participants having to custom build a profit-rate swap. Without the master agreement, there would be fewer transactions, which would make an impact on the 'real economy' because fewer companies would have the opportunity to fix their financing, and effectively shift the management of interest rate fluctuations to institutions that have a focus on managing those changes.
The one criticism I have of the profit rate swap is that it is an over the counter (OTC) swap. The benefits of the profit-rate swap come with the cost of counterparty risk by adding a third party into the original murabaha, which exposes the widget to the company that it will lose its fixed rate protection if the counterparty in the swap cannot fulfill the terms of the contract. However, creating an exchange for swaps is a whole different challenge that can (and probably will) wait for another day (likely well into the future).
The idea of Islamic derivatives have been controversial because they are often viewed as instruments for speculation, which is viewed as not being in the spirit of Islamic finance. Speculation financed by Islamic financial products (e.g. in the Dubai real estate market before the crisis) somehow escapes the same level of scrutiny as derivatives. Other objections have focused on the synthetic nature of Islamic derivatives as being just copies of conventional products done in a way that is Shari'ah-compliant, and is somewhat condescendingly described as not being used to finance 'real economic activity'.
However, profit rate swaps are quite easily used for legitimate hedging transactions that doesn't necessarily shift risk from one party to another at least entirely (a criticism that could be more aptly pointed at talk of developing Islamic credit default swaps). Hedging is viewed as permissible, where speculation is viewed in a negative light (again with a somewhat double standard).
Take, for example, a situation where an Islamic bank financing a widget factory through a murabaha. The bank only offers the company a floating rate loan. However, the managers of the widget factory don't want to be exposed to the risk that the financing costs increase over the term of the murabaha because it could lead to additional cost that complicates their planning for the business.
The manager of the company may then approach an investment company to lock in the financing costs, to make its finance costs predictable over the life of the murabaha. A fund approaches the company with the offer of a profit-rate swap that locks in the financing costs for the widget company through a profit-rate swap. The fund receives a stream of fixed rate payments in exchange for paying a floating rate, which it expects to benefit its investors.
The master agreement facilitates this process by lowering the costs compared to the participants having to custom build a profit-rate swap. Without the master agreement, there would be fewer transactions, which would make an impact on the 'real economy' because fewer companies would have the opportunity to fix their financing, and effectively shift the management of interest rate fluctuations to institutions that have a focus on managing those changes.
The one criticism I have of the profit rate swap is that it is an over the counter (OTC) swap. The benefits of the profit-rate swap come with the cost of counterparty risk by adding a third party into the original murabaha, which exposes the widget to the company that it will lose its fixed rate protection if the counterparty in the swap cannot fulfill the terms of the contract. However, creating an exchange for swaps is a whole different challenge that can (and probably will) wait for another day (likely well into the future).
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