Opening India to Islamic banking

India is a potentially large market for Islamic finance where regulatory opposition (driven by political opposition) to Islamic finance has kept the industry from developing.  The latest change in the Reserve Bank of India’s (RBI) statement about Islamic banking is virtually indistinguishable from past statements, but other developments behind the scenes indicate changes afoot.  

The approval in 2012 of a branch of Turkey’s Asya Bank and the indication of interest in opening a branch in India from Meezan Bank suggest these institutions are becoming more confident in the possibility of Islamic banking activities being allowed in India in the future.  One way forward for the RBI would be to use a substance over form approach to interpret the compliance of Islamic banks with India’s banking laws.

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Amidst economic challenges in Pakistan, Meezan Bank eyes overseas expansion

Meezan Bank, based in Pakistan, is eyeing overseas expansion starting with a potential entrance into Indonesia to capitalize on the growing Islamic banking market in that country while limiting the growth domestically due to economic difficulties arising from dwindling foreign exchange reserves, high inflation and currency devaluation.  Pakistan’s Islamic finance industry also faces a potential reputational risk should a significant number of the growing ranks of unregistered investment schemes offering high rates of return swells turn out to be fraudulent.  In spite of a difficult economic backdrop, Meezan continues to expand its Islamic financing at a healthy rate as deposits flow in and overseas expansion could be a foresighted plan to diversify the sources of the bank’s future income. 

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Priorities in Islamic finance

Rushdi Siddiqui asks a question he has asked before (and which I have written about before) about whether Islamic finance is missing a focus on microfinance and making institutions whose focuses include social responsibility (a focus on environmental, social and governance, or ESG, metrics, in addition to profits).  When I talk to people about Islamic finance, one of the areas that sparks the most enthusiasm is Islamic microfinance, and using Islamic finance as a way to broaden financial inclusion.

Yet, there is too little attention paid to these issues by Islamic financial institutions, where the focus is more on creating new alternatives to conventional products like allowing brokerages to offer 'Islamic margin accounts'. There is a demand for these products, I'm sure, and they help Islamic financial institutions compete with conventional brokerages for business, but is that the best use of resources for broadening Islamic finance?

Why not help new initiatives to reach the broad majority of Muslims who are not thinking "well, can an Islamic brokerage allow me to make leveraged bets on stocks?" but are instead thinking "I want to use microfinance to start a business, but I don't want to be involved with an interest-based microfinance institution".

There are new Islamic microfinance institutions starting up, including one, the Zayd Chit Fund in Bangalore, India (a form of rotating savings and credit association, or ROSCA), which launched last weekend, in a market that has huge potential for Islamic finance, but where political constraints have limited the ability of large Islamic financial institutions to enter.  What better way to enter the market than to go support (financially and with technical knowledge) the development of Islamic microfinance institutions, including Shari'ah-compliant chit funds.  It provides a way to enter a large, untapped market, and a way to show that the Islamic bank is focused on more than just the next quarterly earnings report. 

The Islamic finance industry is vast and rich with resources and talent (although, as many have noted, not as successful in finding jobs for the recent graduates).  It is also by its nature supposed to be concerned with providing ethically-based financial services that do not just preserve wealth for those who have it, but also in providing opportunities for people who, with an oppportunity, can create wealth, and jobs. In addition to providing banking products for higher-income people and those with significant wealth, it should also support financial institutions that provide for people with lower incomes or with no access to Islamic finance.  Not just because it makes nice PR material, but because it will help attract and retain talented employees, and will create a market of people familiar with Islamic finance who will then look to Islamic banks for services into the future.

India to consider allowing Islamic banking...maybe

Reports are out that India is considering allowing Islamic banking, which would be a groundbreaking change for Islamic finance, but before getting too excited it is worth remembering that India has made moves, like forming a committee at the Reserve Bank of India, that have so far led to nothing but more discussion (and no Islamic banking). 

The current report, in the span of two paragraphs, gives two very different reasons for Islamic banking to be attractive to India:

Experts believe that in order to tap the immense investment potential of the oil-rich Middle East, it was in India's interest to introduce Islamic banking.

An official of the National Committee on Islamic Banking told Gulf News: "It will provide the opportunity to bring a large section of the Muslim population into the mainstream. It is a sophisticated banking and finance structure based on moral and social values and is compatible with modern-day financing needs."

These are two very different areas for any potential Islamic bank to focus on.  I think that the latter is a more important reason for India to allow Islamic banking, although the latter is probably a more compelling reason to spur the decision-makers to action. 

The problem with the argument that Islamic banking is necessary to attract funds from the Middle East is that there are already flows from the Middle East, including using Islamic finance.  For example, (admittedly not the best example given its current financial state) Arcapita set up a joint-venture with CapitaLand, a Singaporean developer to build an office park in Navi Mumbai.  The companies' websites say the development is in planning stage, although it is likely at a standstill as Arcapita sits in Chapter 11 Bankruptcy.

Now, allowing Islamic banking in India would likely help along the cross-border flows, but the biggest beneficiary would be (or should be) Indian Muslims who want to use Islamic banks.  That does not contradict the idea that Islamic banking is for non-Muslims as well, but the biggest source of early demand would be from Muslims who otherwise would be outside of the financial system to avoid paying or receiving interest. 

There is a clear reason for both the benefits from encouraging in-flows of capital from the Middle East and the demand locally to be cited (the former may nudge other financial institutions into playing a supportive, or at least not acting in opposition to the change) but the main reason to open India to Islamic banking should be to increase financial inclusion among the large Muslim minority. 

Don't prohibit Islamic banking!

An article describes the failure of the proposed Islamic bank ZamZam from opening in Ethiopia.  I don't know the situation, so I can only offer limited comment on it, but from how this article describes the situation, the National Bank of Ethiopia issued a directive which prohibits the licensing of a wholly Islamic bank, but allows Islamic windows to operate (although I could be mis-reading the analysis of the directive, and it could be only permitting non-banking financial activities by an Islamic financial institution). 

The situation resembles the difficulty so far faced in India, where Islamic banking is not allowed under the existing regulatory rules, although recently the National Commission on Minorities weighed in supporting a fresh look at changes which has led the finance ministry requesting the country's central bank, the Reserve Bank of India to reconsider. 

The two cases, if I am understanding correctly (and I am not familiar enough with either country's banking laws to say definitively) relate to political questions about whether Islamic banking could fit within the country's banking laws, and potentially other objections to Islamic banking, which highlight the dilemma facing Islamic banking in several countries. 

It places on opposite sides of the issue those who say that Islamic banking and finance are fundamentally different from conventional finance with those more pragmatically minded who point to the similarities between conventional and Islamic banking.  The former are generally coming from the perspective of Islamic economics, which views Islamic banks as unique entities that are not really 'banks' the way a bank is commonly understood.  The latter, are the Islamic finance professionals who view Islamic banking (and finance) as just banking using different products to avoid violating the ban on riba by structuring products to make profit from leasing, or cost-plus sales. 

On the issue of where Islamic banks fit into the regulatory framework, I side with the latter camp and think that it is possible to offer banking services in a Shari'ah-compliant way, where the economic outcome is largely the same.  That does not mean that this way of doing business is optimal; it may offer the same service at higher cost.  But it is taking the regulatory system at its face value and finding a way to work within it to offer products that appeal to consumers who would otherwise be unbanked.  That, I think is a positive, as long as the products are not exploitative and the current state of Islamic banking is not viewed as the goal (that is, as long as it is accepted that there is significant room for improvement). 

But, Islamic banking should not be quashed just because it is 'Islamic'.  I know quite a bit about that living in the US where a substantial portion of the political rhetoric about Islam (representing still a small minority of the population) agitates against Islamic banking and finance on the grounds that it either finances terrorism or is a step on the road to 'imposing Shari'ah'.  Those arguments are nonsense, but can hold sway in political circles and can make Islamic banking and finance more difficult to offer by limiting the regulatory flexibility needed to deal with Islamic banking and finance as what it is: an alternative structure for conventional banking services, designed to avoid riba, gharar and the other prohibitions. 

While I think Islamic finance offers a compelling promise, I lack the demand for the product as it exists today simply because it is 'Islamic'.  But I am not a Muslim, and quite a few million Muslims disagree with me and will choose a product because it is approved as Shari'ah-compliant, and I think they should have that right.  If it offers a competitive economic proposition to what I get today from conventional banking (I bank with a credit union), then I will reconsider. However, so long as a banking institution can operate within the rules governing capital adequacy and soundness, I think it should be permitted, and there should be flexibility to regulations to allow for different product structures that accomplish the fundamental business of banking.  Prohibiting something just because it is 'Islamic' is a pointlessly retributive exercise. 

A step forward for Islamic finance in India

Recently I wrote a post on the potential benefit for Islamic finance in the US (and potentially also the possibility of US municipal sukuk) caused by a courts dismissal of a lawsuit filed against the US government. In that case, the court found that the US government's bailout of AIG which left it with majority ownership of the company, which offers takaful, did not represent the government's encouragement of religion. That would be prohibited under the First Amendment's Establishment Clause.

It appears that a similar court ruling could have the same effect in India. Today, the high court in Kerala dismissed a petition that would have prohibited the state government from participating in promoting an Islamic bank. The court found that "although the institution was based on the principals of a religion, its motive was not to propagate the religion and the state's participation in it was purely based on commercial prospects" according to the Times of India.

This could open up the Indian market somewhat for Islamic finance, which has been slow to develop. There are differences between the US and India. The largest difference is that in the US, the government has been open to allowing Islamic financial institutions to operate under existing financial laws, which are broad enough to accommodate Islamic finance. In India, in contrast, the regulatory climate is much less certain and the Reserve Bank of India, the country's central bank, determined that Islamic banking is not possible under India's existing regulation in an unpublished report.

There are still many things that will need to be worked out before India's Islamic finance industry can really begin to grow to serve the large Muslim population (and hopefully non-Muslims as well), but this is a step in the right direction. There have been many setbacks in non-Muslim-majority countries, from the failure of sukuk legislation in South Korea to the decision by the UK government not to issue a sukuk, so it is encouraging to see signs of progress. This is particularly true in countries that have for many years been viewed as being hostile towards Islamic finance.

The tragedy of microfinance

An article in the New York Times describes the crisis facing microfinance institutions in the state of Andhra Pradesh, India where up to 80% of microfinance clients have stopped repaying their loans. The story compares the situation to the subprime crisis in the US: "Initially the work of nonprofit groups, the tiny loans to the poor known as microcredit once seemed a promising path out of poverty for millions [but now] some Indian officials fear that microfinance could become India’s version of the United States’ subprime mortgage debacle, in which the seemingly noble idea of extending home ownership to low-income households threatened to collapse the global banking system because of a reckless, grow-at-any-cost strategy."

Similarities with subprime

I think there are definite similarities between the subprime crisis and the microfinance crisis as it is described in the Times article. However, I think the article glosses over the underlying cause of both crises. With the exception of some banking laws in the US which prevented banks from 'red-lining' certain (poor) areas where they would not make loans, a lot of non-profit efforts to increase homeownership among low income Americans were community-based efforts that focused on providing education and other non-financial assistance to borrowers to help them qualify for mortgages. In a similar way, most of the early non-profit microfinance institutions were lending, but their lending was accompanied by a lot of other assistance to help the borrowers understand how to run a business and provide other non-financial assistance.

The subprime crisis was fueled both by aggressive sales efforts, which concealed more about the loans they were offering than provided education that is so vital to incorporating previously under-served portions of the population into the mainstream financial services industry. When the volume of loans (and the profits of the originators) became more important than the outcome (increased low-income home ownership) and the regulation of the activities of originators was lacking, it was a set-up for failure. In the subprime area, however, there was another factor: it was "conventional wisdom" that home prices did not fall either at all or to a degree that would be significant enough to put borrowers underwater on their homes.

The microfinance industry shared some characteristic and the role of education was even more important to finance a microbusiness in order to achieve the repayment rates that are now expected in microfinance. However, what appears to have happened in many cases was that the costs of providing that education became an impediment to increasing loan volumes. The NY Times article mostly describes situations of borrowers who were provided with financing for improving their homes or buying consumption items.

Consumer spending

There is certainly a role for microfinance institutions to finance consumer spending (some of the problems of a micro-debt spiral were due to microfinance institutions financing repayment of other debts, whether they were aware of it or now). However, the primary focus of microfinance should be to create a sustainable income for the borrowers. If that limits the industry's size to a level smaller than what has been achieved in areas of high penetration like Andhra Pradesh, that should be accepted as a reality of the market, not an opportunity to become more reckless with the lending process.

Islamic finance and the Indian microfinance crisis

Now, what does this all have to do with Islamic finance? The point of the twin stories of the subprime crisis and the current microfinance crisis in India demonstrate areas where conventional finance has failed, and has failed in a headline grabbing and significant way. In the case of the subprime crisis, the Islamic finance industry did not take the opportunity to highlight the ethical foundations of Islamic finance that should limit the type of abuses that contributed to the subprime crisis. Instead, a lot of the analysis and commentary (embodied in quotes in widely distributed articles) was that Islamic finance was 'immune' to the subprime crisis, despite the nearly universal absence of facts or theories to support that proposition. In fact, the industry had developed its own risks that would become apparent as the subprime crisis led to a deep global recession (for example, the problems of Gulf Finance House, as described by Mohammed Khnifer, Aatef Baig and Frank Winkler [PDF].

If the industry had been more up front about the vulnerabilities of Islamic finance to crisis (i.e. that it is not 'immune'), it could have spent more time discussing some of the features of Islamic finance that differentiate it from conventional finance, particularly in the sense of risk. There were many bad investments made by Islamic financial institutions in the run-up to the crisis, particularly in areas where the real estate boom rose the highest. However, the differentiating factor in most cases was that if one held an investment in a piece of property, it was unlikely to lose its entire value (although it is possible). In a collateralized debt obligation made up of lower tranches of subprime securitizations, it was easily possible that enough damage was done to the underlying securitizations in a recession that the entire value would be wiped out (for example, staff from the NPR show Marketplace bought a piece of a 'toxic asset' and reported extensively on in while they watched it die). However, at that time, the Islamic finance industry didn't take the opportunity to use the crisis to explain itself. Opportunity missed.

It may already be too late for Islamic finance to seize the opportunity to explain itself and explain how Islamic microfinance would be less likely to lead to the situation of microfinance in Andhra Pradesh. That the opportunity may be lost is due more than anything to the lack of attention that Islamic banks have paid to Islamic microfinance. However, should Islamic finance want to use this crisis as a way to demonstrate its differences from conventional finance (and in particular, microfinance), I think there are a few things that it should emphasize. First, it is useful to catalogue the problems in Indian microfinance are driven by several factors: i) large use of consumption loans; ii) rapid growth focused on boosting loan volumes; iii) lack of verification of customer financial situation and means for repayment; iv) lack of education of clients; and, v) focus on reducing interest rates by boosting loan volumes.

What should Islamic finance learn and how can it use this crisis?

The Islamic microfinance industry is still nascent and has not yet gotten to a point where it is common, let alone to the point of rapid growth, so there are a lot of things that can be used as cautionary tales for Islamic microfinance, as well as to highlight as differences between conventional microfinance and Islamic microfinance.

The over-riding lesson that the Islamic microfinance industry should take is that it needs to focus primarily on the development of business financing. That is where microfinance began and that is where it had the greatest impact and the fewest problems. The initial impetus for microfinance was to develop a way to help the poor create sustainable income sources in lieu of (or in addition to) charitable assistance. This should be the focus of Islamic microfinance as well and any move away from that purpose need to be considered very carefully to ensure that it cannot lead to the incentives for microfinance institutions (MFIs) to focus on their growth and profitability over the benefit of their customers.

Along this line of thought, there are plenty of products used in Islamic microfinance that can shift the incentives towards a more sustainable growth path. For example, while murabaha makes up the bulk of financing in Islamic finance (and may also become the case in Islamic microfinance), the use of mudaraba and musharaka rather than murabaha (or ijara/salam or other financing products) may make better systemic sense for the Islamic microfinance industry as a whole. The systemic benefit comes not from the greater stability of relying on these contracts (it will likely be more unstable than if murabaha is used), but it will focus Islamic microfinance on business financing and will also place the burden of failure more onto the microfinance institution, which should limit the incentives towards "growth at all costs". It will also to some degree limit the negative potential impact of reckless financing on the clients (which of course has important implications for the incentives of the client to act in both parties' mutual interest). However, for the Islamic microfinance industry, using mudaraba/musharaka should ensure that Islamic microfinance institutions continue to recognize the value (to them as well as customers) of providing education and technical assistance, along with financing.

There are still ways that non-business (e.g. for the purchase of an asset) microfinance can be effective in an Islamic context and there are even aspects to many of the contracts used that would prevent some of the abuses in Indian microfinance where loans were extended to repay other microfinance loans that led to customers becoming over-leveraged. Unless the Islamic microfinance industry develops and begins offering tawarruq/commodity murabaha-based financing (which it may still do), there will have to be some asset underpinning the financing. This can limit the excessive growth of debt without a corresponding growth in ability to pay.

There remain significant challenges for Islamic microfinance to develop when there are questions raised about the value of microfinance for customers, but also for the institutions funding the MFIs. However, there are specific areas where Islamic microfinance can focus that build in some safeguards (or incentivize Islamic MFIs to develop their own safeguards) to avoid the pitfalls being realized in Andhra Pradesh. It all adds to the issues that Islamic microfinance industry must grapple with as it develops strategies to attain the growth that the rest of the Islamic finance industry has seen in the past decade (even with the effects of the financial crisis).

IMF report, UAE Islamic banks, tawarruq attracts criticism, effects of the Dubai World debt agreement

The IMF released a study in August 2010 that provided an interesting analysis of what drove growth in Islamic banking from 1992 to 2006. The main finding of the study was that oil prices (which created a significant inflow of liquidity into the GCC, which is a major region for Islamic banking) had the largest effect. One interesting specification they used included both the price of oil and a dummy variable to measure the effect of 9/11 (to see whether growth was higher after 9/11, all other things being equal) and found that it did on its own, but when the effects of the oil price were included, the impact of 9/11 became insignificant. This suggests that the rise in oil prices in the 2000s was much more impactful on the growth of Islamic banking than 9/11. The argument for the impact of 9/11 was that following the attacks, many funds that were invested in the West were repatriated to (mostly) the GCC.

The head of Shari'ah at the Islamic Development Bank, Sheikh Mohammed Mukhtar Al Salami, says that tawarruq is 'usury' and therefore is 'haram'. His argument is that the transaction is "being carried out by Islamic banks as mere concealed usury operations as they are done not only at one place but at two place", reiterating an argument made by the Fiqh Council of the OIC. The OIC Fiqh Council's argument differentiated between classical tawarruq and organized tawarruq. In a tawarruq transaction a bank sells a metal of a client with deferred repayment (cost-plus-profit) and then the client sells the metal to get cash. In an organized tawarruq (also called reverse murabaha), the bank facilitates the sale of the the metal in the spot market (although the metal brokers used on each side of the transaction are different). Tawarruq is a commonly used product by Islamic financial institutions and greater Shari'ah risk around the product highlights the need for short-term liquidity management tools for institutions and new products for consumers, as tawarruq attracts more criticism.

Several articles describe the effect of the Dubai World debt agreement on other sukuk. Bloomberg reports that it is unlikely to lead to a 'massive' rally according to the CEO of Mashreq Capital in Dubai. Another Bloomberg article notes that the Dubai World agreement has failed to benefit Tamweel sukuk. Tamweel is a troubled Islamic mortgage company in Dubai that may be merged with Amlak Finance, another Islamic mortgage company, with assistance from the Dubai government. The Dubai World agreement could move the spotlight onto Nakheel, which has paid its trade creditors in cash and sukuk and has also repaid 2 of its 3 sukuk with assistance from the Dubai Financial Stability Fund. The Dubai World deal does raise an issue with Nakheel: the first two sukuk were repaid at par whereas Dubai World creditors accepted a writedown of principal and an extended maturity. The next key date for Nakheel is January 16, 2011 when the Nakheel Development 2 sukuk (the final one) is scheduled to mature. Will investors be forced to take a haircut or will the DFSF step in again to ensure repayment at par? It is too early to tell.

Profits in UAE-based Islamic banks fell 17% in the first half of 2010 compared with the same period in 2009. This is somewhat expected as the impacts of the financial crisis hit this region slightly later than in other parts of the world. However, despite the fall in profits, analysts believe the banks have not provisioned enough for non-performing loans, particularly in real estate in construction, the two sectors hit hardest.

Takaful continues to grow, but it is several years behind the growth in Islamic finance. Prudential BSN Takaful, a joint venture between Prudential PLC and Bank Simpanan Nasional Bhd in Malaysia, is launching three new takaful plans. An African Reinsurance company African Re, is launching a retakaful subsidiary with a wide focus on Africa, the Middle East and Asia. The Bahraini takaful compay t'azur recently announced a retakaful agreement with Hannover Re, a large conventional reinsurance company. Retakfaul is the Shari'ah-compliant version of reinsurance and has been very limited in availability. The Sri Lankan takaful firm Amana Takaful says that its operations are hampered by a lack of enough Shari'ah-compliant investments. If the takaful plan were managed like a conventional insurance pool, it would invest most of its assets into sukuk. However, the sukuk market has not been large enough to support the needs of takaful companies as well as other Islamic investors and unless there is significant growth in sukuk, takaful companies will have difficulties. They could invest in other assets: real estate, equities, commodities. However, all of these are more volatile than fixed income and it will probably not end well if a significant proportion of takaful fund assets were invested in these asset classes if there were a repeat of the financial crisis or even a less severe recession. It also makes it more difficult for the managers of the takaful funds to project its long term assets and ensure they match with expectations about its long term liabilities.

Other News

• The Javelin JETS Dow Jones Islamic International Index Fund, the first US-based Islamic ETF, will close. The company cites limited investor interest "through the marketing channels typically used by ETFs" according to Javelin's president Brint Firth.
  
• Mapletree Industrial Trust, a Shari'ah-compliant REIT, is raising $800 million in an IPO in Singapore.
  
• Indonesia plans to issue sukuk and global bonds in the first half of 2011. The government reduced its sukuk issuance in 2010 when deficits came in lower than expected. Several of the sukuk auctions failed during 2010 because investors demanded a higher yield than conventional bonds to account for the lower liquidity of sukuk compared to bonds.
  
• The development of Islamic banking in India is still not possible and the Indian Centre for Islamic Finance has approached the Reseve Bank of India, the central bank, and asked it to allow a few banks in Mumbai to open Islamic windows on a pilot basis before it considers any regulatory changes.
  

How tough is the market for new issues in the GCC?

An article in Bloomberg describes the falling yields on GCC sukuk, Dubai World and the sovereign Dubai bonds and sukuk with some optimism. However, it notes that the spread on Dubai World's debt (it doesn't say what the spread is based on, but one would assume comparable maturity US Treasuries) from 647 basis points after the standstill to 545 basis points (it incorrectly says the spread is 545 percentage points). The yields on sukuk from GCC-based issuers was 7.17 percent on July 23 (compared to 8.76 after the Dubai debt crisis), the Dubai 6.396% soverign sukuk is yielding 7.38% (435 basis points higher than the recently issued Malaysian sovereign sukuk), the Dubai World yield is sitting at 8.4% (for the 6.25% sukuk).

These figures reflect only limited thawing of GCC credit markets in the aftermath of the financial crisis and, in particular, the Dubai debt crisis. It is hardly surprising that other articles written recently describe a move in momentum in sukuk issuance from the GCC to Malaysia. That is in many respects not entirely fair. The Dubai debt crisis was triggered by specific factors--primarily an overvalued real estate market in Dubai that saw significant declients. However, it does suggest a general attitude that sukuk from the GCC are more risky than other emerging market debt (including sukuk) offerings. This will reduce the level of issuance of sukuk in the near term from the GCC, which would hurt the emergence of sukuk secondary markets. If anything, investors need more sukuk issuance to fill the portfolios of long-term, hold-to-maturity investors (like takaful funds) and therefore a reduction in issuance from one of the largest markets (and the regional market for many of the funds investing in sukuk) could reinforce the hold-to-maturity mentality among many investors. Some of those investors are probably sitting on large losses from Dubai-related sukuk that they are unwilling to realize.

Meanwhile, Nakheel is working through its own debt restructuring. Reports suggest that full payment will be made over 5 years for its syndicated banks loans (including Shari'ah-compliant financing) and 7 years for its sukuk. According to Reuters, "Bankers have until the end of August to respond to undisclosed terms of Nakheel's multi-billion dollar restructuring plan, including the rates of interest and repayment schedules for syndicated and bilateral loans. " Reuters is usually pretty good at describing the presence of Shari'ah-compliance in financing facilities, so the description they give (while it may be limited by sources speaking on background) does reflect the lack of a structure for restructuring in Shari'ah-compliant transactions. The restructuring of the loans (many of which are based on ijara) is probably being done in a rather ad hoc manner. The interest rate and payment terms are dealt with first and the Shari'ah-compliant structure are dealt with later. If this is the case, there remain significant gaps in the Islamic finance industry in dealing with distressed situations that should be at the forefront of the agenda before the next crisis comes.

Other News

• Kuwait-based International Investment Group defaulted for a second timek on a sukuk this year, missing a $152.5 million payment.
  
• Mushtak Parker offers his thoughts on the Sukuk ALIM being issued by Cagamas working with Al Rajhi Bank to be viewed as Shari'ah-compliant in both the GCC and Malaysia. He also offers his thoughts on the recent entry into the Islamic finance markets by Japanese firms, several years after the country said it wanted to encourage Islamic finance in the country to attract capital.
  
• A former Supreme Court justice in India, Krishna Iyer, believes that Islamic finance can help in efforts to alleviate poverty.
  
• Arab News has an interview with the CEO of the Islamic Corporation for Development of the Private Sector, part of the Islamic Development Bank group.
  
• The state-owned Islamic bank in the Philippines is planning the country's first sukuk to "fund growth in Muslim Minanao".
  
• A Malaysian firm is providing the first financial guarantee for a sukuk.
  
• A writer in the Business Recorder in Pakistan, Saqib Masood Chisti, suggests that Islamic microfinance could be expanded in the country while criticizing a program that provides cash payments to poor families as causing inflation and creating dependency (I am not knowledgable enough about the program to comment, but the description given resembles the successful Bolsa Familia program in Brazil).
  

UFANA, Rusdhi Siddiqui on UK Islamic banking, inter-bank money markets, Indonesia sukuk

The Usury Free Association of North America (UFANA) held an event concurrent with the G-20 meetings in Toronto which was well covered in the local media. Investment Executive has an article. In addition, several speakers were interviewed by BNN: Shahzad Siddiqui (UFANA Executive Director), Guy David (Partner, Gowling Lafleur Henderson) and Stephen Ranzini (President & CEO, University Bank)

Rushdi Siddiqui provides what I think is the best analysis of the article that called Islamic banking in the UK a flop (although an article by Mushtak Parker in Arab News does also make some good points). I provided my analysis of the article in earlier blog posts and offered my oown suggestions in my latest newsletter (subscribe on the blog or email me at blake@sharingrisk.org). Rushdi Siddiqui, with his long and prominent experience in the Islamic finance industry, provides his usual clarity to the issue.

The need for interbank money markets for Islamic banks is put into context with a news story that almost one-third of all the UAE's central bank certificates of deposits are held by Islamic banks which cannot accept any return on the CDs because they pay interest. The central bank has been developing an Islamic CD to offer to Islamic banks. Out of the central bank's total outstanding CDs, AED20 billion (of AED68.5 billion) are held by Islamic banks. With such a substantial holding of non-interest bearing CDs, Islamic banks are missing an opportunity to generate a return on its capital, which is in part so large because they are not able to avail themselves of the liquidity facilities of the central bank because those are interest-based. The planned Islamic CDs would be based on murabaha (likely commodity murabaha) and, although an imperfect solution, would at least make an impact towards helping Islamic banks compete with conventional banks on price. In contrast to Islamic banks, the conventional banks holding CDs with the central bank earn interest (however meagre currently) on their capital. A great article in Arabian Business describes the situation, although it lists the deposits of Islamic banks at the UAE central bank at 19% (in contrast to the one-third in the previous article). It also points out the alternative to the additional capital held by many Islamic banks: hoping for the best. Instead of holding excess cash on the balance sheet, many Islamic banks may be maximizing their profitability at the expense of their stability by relying on short-term deposits to fund themselves while investing in longer-dated sukuk and other assets. Those institutions risk either a conventional run by depositors or a Lehman-style run by short-term investors who lose confidence in an institution.

A similar issue to the inter-bank money market is whether LIBOR should be replaced by an 'Islamic' metric. An article by Joseph DiVanna provides a good overview of the problem and some interesting potential solutions. However, in my opinion it is a waste of time. The Malaysian experience, where there is an Islamic and conventional yield curve determined by market forces from secondary market trading in debt instruments is largely similar. The difference in yields can be ascribed to the tax incentives provided by the Malaysian government for Islamic instruments. Pricing using LIBOR may be one more similarity to conventional finance that needs to be explained when it arises, but the cost of capital has much more to do with a specific company or market than it does with an Islamic versus conventional structure. When there are sukuk or other Islamic finance debt products that do not behave identically to debt, then the issue may need to be revisted. However, until then, there are more pressing problems like Islamic inter-bank money markets to be dealt with.

Indonesia's problems attracting investors to its sovereign sukuk continue as it rejected all bids for its latest $111 million sukuk offering. The total bids were only 474 billion rupiah compared with the target for 1 trillion rupiah in sukuk. The Reuters article that describes the failed auction correctly points out that previous failed auctions have been the result of investors demanding higher yields than for comparable maturity conventional bonds due to the lack of liquidity in the secondary market for sukuk compared to conventional debt. There is now 24.5 trillion rupiah in sukuk outstanding compared to 590 trillion rupiah in conventional bonds. The most recent failed auction may be somewhat disturbing because it failed to attract the planned issuance (although only one data point). This may suggest that investors are concerned that a viable secondary market may not develop in the sukuk where in the past investors only wanted a higher yield to offset this possibility. However, in the case of Indonesia, which has had success issuing conventional bonds, this should just serve as added impetus to develop its domestic sukuk secondary markets further, which a stronger Islamic banking sector could provide.

Other news

• Nakheel began to pay the cash portion due to trade creditors with the sukuk for the remaining balance coming later.
  
• Political concerns in Egypt, along with many fradulent companies in the 1980s that operated under the 'Islamic' label has slowed the growth in the country. Despite the headwinds, many GCC Islamic banks are eyeing Egypt as a possible growth area.
  
• Malaysia's banking system is now 19.6% Islamic with MYR303 billion ($93.6 billion) in assets.
  
• Gulf Finance House continues to work to extend the maturities of its debts after it ran into trouble following the financial crisis. The latest is a $100 million murabaha due in August.
  
• Malaysia may see a number of its cooperative banks convert to be Shari'ah-compliant.
  
• There was an article about the Northern New Jersey credit union that became the first credit union that I know of to to offer Islamic finance products.
  
• Kuwait Finance House was removed from CreditWatch Negative by S&P but with a negative outlook that reflects its "weakening asset quality" but with greater likelyhood of "extraordinary support" from the Kuwait government. A greater likelihood of government support amid weakening asset quality is not great news following the dismissal of a ratings agency that considered downgrading KFH Malaysia.
  
• Dow Jones offers its latest monthly commentary on the Dow Jones Islamic Market Indexes.
  
• The latest updated list from Bloomberg of upcoming sukuk issues.
  
• Some estimates target growth in the Islamic finance industry to $2 trillion in the next 3-5 years. By the most optimistic estimates, Islamic finance is currently nearing the $1 trillion mark.
  
• CIMB Islamic head Badlisyah Abdul Ghani says that Malaysia has developed Islamic alternatives to more products because of its' "effective product-development approval process". There has also been more government support for Islamic finance, a greater take-up by the non-Muslim population and also the benefit of a centralized Shari'ah board, which also has its own costs. CIMB recently lost its top spot as top underwriter of sukuk to HSBC, which either reflects a growing share taken by the banking giants or further globalization of Islamic finance based on HSBC's greater geographical reach.
  
• Among other things, the Islamic Development Bank expanded its capital from ID16 billion to ID18 billion. 1ID (Islamic Dinar) is equal to one Special Drawing Right (SDR) of the IMF.
  
• Reliance Capital is launching two Islamic funds in Malaysia by July and unveil other products at a later date. It is a sign of the underdevelopment of the Islamic finance market in India that the company has avoided its home market for Malaysia.
  
• Kenyan firm ApexAfrica Capital is considering expansion into Islamic investments.
  
• OSK-UOB Islamic Fund Management Bhd plans to launch equity-based ASEAN-centril Islamic financial products.
  
• Sri Lankan firm LB Finance is launching an Islamic unit.
  

Islamic finance and the credit crisis, Muslim group in Chicago helps Muslim convenience store owners

The President of the Islamic Development bank said that the global financial crisis has no influence on Islamic banks "because it was linked to debt operations [and] Islamic banks do not hold such [debt] obligations". While it is true that Islamic banks don't (can't) hold the debt products that led to the financial crisis, it is short-sighted to say that Islamic banks do not have exposure to the global financial crisis. One significant example of how it does have exposure was the Dubai World debt crisis which began with problems at Nakheel around the maturity of its sukuk. Sukuk are debt instruments (for the most part) and Islamic banks had exposure to this sukuk and also were faced with difficulty in raising capital during the financial crisis, despite not having any direct exposure to the subprime-based debt products. The Islamic Development Bank is staring a fund to finance affordable housing.

A Muslim group in Chicago is helping Muslim owners of convenience stores to move their businesses away from selling liquor and pork, among other products, by providing a source for fresh foods instead. The article describes the difficult choice that many Muslims who own convenience stores face: to remain in business, they must sell liquor and pork although they are generally uncomfortable about selling haram items. Instead, the grants will provide them with access to fresh foods that could allow them to remove liquor and pork products from their shelves without jeopardizing their businesses and also helping their communities. One of the well documented problems in low-income urban areas is the lack of grocery stores, which is blamed for causing health problems including obesity. The approach taken by the Council of Islamic Organizations of Greater Chicago is beneficial because it not only helps the business owners avoid selling haram products, but will provide their neighborhoods with fresh foods, which are sorely lacking. This seems like an area where Islamic finance could be able to contribute by providing the financing, which could be a good business opportunity as well as a way to educate Americans about Islamic finance.

Other News

• Rushdi Siddiqui discusses the difficulty (and importance) of finding alternatives to LIBOR for pricing Islamic finance products.
  
• A Jewish fund in the US provides another example of the growth in ethical-based finance.
  
• An Islamic fund in India has done surprisingly well at attracting non-Muslims as well as Muslims based on its performance. This is not a new trend. In the US, the Amana funds received significant investor interest from non-Muslims based on its strong performance.
  
• A court in the DIFC ordered the liquidation of Tabarak, the first Islamic financial firm to be liquidated by the DIFC.
  

TID, Islamic CDs, the halal market and sustainability

The Investment Dar
The Investment Dar case became more complex with the Shari'ah board of TID requesting that the bank stop contesting the claim by Blom Bank based on the wakala contract's non-compliance with Shari'ah. In addition, the Shari'ah board asked that a similar defense not be used in the future without first consulting the Shari'ah board to determine the legitimacy of its contracts. An article in Arabian Business comments that "While the sharia board's statement puts a wrench in Investment Dar's ability to move forward with a case against Blom regarding the deal, legal experts say the reputational damage to the industry has already been done".

I disagree with the contention that TID's case has damaged the Islamic financial industry. In contrast, the UK courts held a skeptical view of TID's defense and now the institution's Shari'ah board has come out in support of the wakala product's Shari'ah-compliance. This accomplishes two things for the industry. First, the court's skeptical ruling on TID's defense provides another secular court precedent that a party to an Islamic contract cannot, ex post, argue that the contract is not Shari'ah-compliant to get out of their obligations. I have argued before that the court's ruling provides Shari'ah scholars and boards with more freedom to change their mind on Shari'ah-compliance without worrying about upsetting existing contracts.

Second, I believe it is positive is that TID's Shari'ah board came out against the institution and upheld their initial ruling. There is always a potential conflict of interest between a Shari'ah board and the institutions for whom they work. However, this provides one example of a Shari'ah board publicly demonstrating that their duty to ensure Shari'ah-compliance and preserve the integrity of their ruling is placed above their employment with one institution. The only clear loser in this development is TID, who are stuck between an adverse court ruling in a secular court and their own Shari'ah board's ruling that contradicts their claims in that court.

UAE central bank to offer Islamic CDs to Islamic banks
The UAE central bank is planning to offer Islamic CDs as short-term money market instruments for Islamic financial institutions. The lack of short-term money markets outside of Malaysia (and to a limited extent in Bahrain) hampers the Islamic banking industry because it leads banks to hold excess reserves in cash, which lowers Islamic banks' returns compared to conventional banks because they cannot generally generate returns from this cash. The Islamic CDs received preliminary approval last week from the Shariah Coordination Committee with what Hussain Hamed Hassan, the committee's chairman, described as "minor changes". It may receive final approved next week according to Mr. Hassan. Islamic CDs are offered in the US by one institution, the University Islamic Financial Corp and are used by some of the Islamic mutual funds in the US as a way to generate a return on their cash balances.

The halal market and social responsibility
The Managing Director of Al Islami said that Islamic branding is a "myth" at a halal market conference in Brunei. The point being made was that the halal brand--the certification--was important but without a quality product, it is not likely to succeed. The point was expanded by Shahed Amanullah, the founder of Halal Media, as a way to expand the market to non-Muslims as well either from incorporating organic and socially responsible halal certifications in food and through social responsibility in the broader marketplace so that "non-Muslims can see Muslims promoting halal values which includes social responsibility, stewardship of the earth and economic justice". I think that this is an often understated point. Although Islamic products, particularly in the financial world, were created to cater to Muslims' needs, they do not need to remain constrained to just Muslims. However, to reach out to non-Muslims, incorporating other shared ethical values and leverage the success of sustainable finance to expand the potential market for Islamic financial products.

Other News

• Hussain Hamad Hassan said it was "not a far-fetched reality" for a Gulf-wide Shari'ah board to be in place by 2013.
  
• Gulf Finance House continues to restructure its debts. In May, Mohammed Khnifer, Aatef Baig and Frank Winkler released an article called "The Rise and Fall of Gulf Finance House", which analyzes the pre-crisis years and how they might have led to GFH's current problems.
  
• Cagamas Bhd, the Malaysian national housing company, may issue up to RM1 billion ($303 million) in sukuk that are designed to be acceptable in Malaysia and the GCC.
  
• The Shari'ah-compliant non-bank financial company being established in the Indian state of Kerala has received significant interest from GCC- and Indian-based institutions (Doha Bank and Reliance Capital, respectively), although the government has said it will not sell more than 20% of the NBFC to any single investor.
  
• The Islamic Bank of Thailand became a major shareholder of a Thai leasing company, Nava Leasing Plc, in which it will own 49%.
  
• A Malaysia law firm has released a booklet in Australia to explain commonly misunderstood aspects of Islamic finance among Muslims as well as non-Muslims. The headline writers, of course, took the most sensationalistic topic titling the article: "Islamic finance not jihad".
  

Malaysia sovereign sukuk, Dubai World debt settlement, WIEF

Malaysia sovereign sukuk
The basics of the coming Malaysian sovereign sukuk were officially released (although the total size has not been except that it will probably be larger than the $600 million issue in 2002). The proposed sukuk received an initial rating from S&P is A-. The dollar-denominated global sukuk, issued by the government's SPV 1Malaysia Sukuk Global Bhd, will be a 5-year ijara sukuk will involve the sale and leaseback of 12 hospitals according to the CEO of HSBC Amanah, Mukhtar Hussain. The government is meeting with prospective investors and will do so until May 27th and order-taking will begin a few days later.

One of the reasons for the issue, and the primary importance of the issue for Islamic finance, is that there are few sukuk issued (only one other by Malaysia) and they provide an important benchmark for corporate issuers. The five-year maturity is short, but it is in line with the most common maturity of sukuk, so near term it will be relevant to create a pricing benchmark for short-term sukuk. However, it does not establish a sovereign benchmark for longer-term sukuk, which would have been noteworthy. However, with the European debt crisis in full swing with the yield premium for new issues (e.g. Spain today) rising, the fact that the sukuk is likely to be issued blunts some criticism of its 5-year tenor. If Malaysia wanted to continue to help the global Islamic finance industry, it should follow this 5-year sukuk with a 10- or 15-year sukuk to establish a pricing benchmark.

One concern remaining is that the sukuk will be issued in a time of rising yields among sovereign borrowers as a result of the European debt crisis and this could establish a benchmark yield higher than what might have been received six months ago or six months from now. Therefore, the Malaysian government should make an effort to ensure that this sukuk is tradable in a liquid market (Malaysian sukuk secondary markets are less liquid than conventional bond markets but more liquid than most sukuk secondary markets). That would allow secondary market activity to price the changes in a 5-year sukuk sovereign yield that would provide more transparency for pricing future corporate issuers.

Dubai World agreement
The Dubai World debt agreement surrounding $24 billion in debt has been reached in principle. The FT Alphaville blog posts the entire press release with the table describing the terms. The repayment will total $14.4 billion ($0.60 on the dollar), split into two tranches. Each tranche will be allocated pro rata to the debt claims. Tranche A will have a five-year maturity at 1% interest. Tranche B will have three options, the first two will be available for holders of USD denominated debt, while the third will be available for holders of AED denominated debt. Tranche B will have a longer maturity with shortfall guarantee for 1/2 of the $10 billion size. The interest rate will again be 1% except for AED-denominated debts when the 1% will have EIBOR-LIBOR up to 1% added in.

While it is not clear whether the debt covered will include Shari'ah-compliant debt, it does puts some firm numbers on the outcome for these lenders compared with holders of the 2010 and 2011 Nakheel sukuk, who have or will receive full repayment of all principal plus profit. Last weekend, I addressed my concern that this differential treatment could negatively affect the ability and willingness of conventional issuers to also issue sukuk and the numbers, I think, make this concern even more relevant.

World Islamic Economic Forum

• Speaking at the WIEF, Prince Andrew said that the UK, and London in particular, will continue to build on its status as the largest Western hub for Islamic finance.
  
• The new UK government may reconsider a sukuk if the value-for-money can be demonstrated; that is, will the additional source of demand and encouragement for the Islamic finance work within London offset the additional structuring costs. Assuming tax laws are changed, the UK's first corporate sukuk could be issued this year, according to Humphrey Percey, the CEO of BLME.
  
• The Malaysian central bank, Bank Negara, has established programs to educate other central banks on regulating Islamic finance.
  
• The executive vice chairman of Ithmaar Bank, Khaled Abdulla-Janahi, said that there is need for greater education among Muslims about Islamic finance and says that the history of Islamic finance in the future may regard Gordon Brown, for his work as finance minister of the UK, and Christine Lagarde, the current French finance minister, as the two biggest drivers of growth in the Islamic finance industry.
  
• Five memoranda of agreement worth $125.3 million were signed at the WIEF.
  
• The CEO of Maybank MEACP Pte Ltd, Mumtaz Khan, suggests a G3+3 group to work with the G20 to develop Islamic finance. The parties involved would be the three G20 members with Muslim majorities, Saudi Arabia, Indonesia and Turkey, in addition to Malaysia, the World Islamic Economic Forum and the Islamic Development Bank.
  

Other News

• Rushdi Siddiqui continues his excellent line of articles in Gulf News with one on the need for a global Islamic sovereign wealth fund.
  
• The head of the DFSA warns that forcing Islamic financial institutions to operate under the same regulatory rules as conventional financial institutions could hurt its growth prospects.
  
• The governor of the Reserve Bank of India says that Islamic banking cannot be licenses under current regulation, but it is still exploring whether Shari'ah-compliant non-banking financial institutions are possible.
  
• Qatar Islamic Bank is planning to sell as much as $750 million in its first sukuk issuance. The sales of sukuk so far have risen year on year at the fastest rate since 2007 (albeit from a low base) as yields have fallen more than emerging market debt.
  
• Lipper Research describes the performance of Islamic equity funds by investment area and geographical concentration. 45% of all funds are in Southeast Asia while 59% of total assets in Islamic funds are in the GCC.
  
• Dubai Islamic Bank has launched a new unsecured consumer lending product based on a salam contract with the commodity used being sugar. As I understand it, the bank would provide financing and the customer would be obligated to deliver a given amount of sugar (incorporating a markup) at the maturity. The transaction involves a sugar wholesaler that collects partial payments from the customer and at maturity will deliver the sugar to DIB.
  
• The Commercial Real Estate Sukuk (Kuwait) for $100 million was paid on its maturity date.
  
• Ireland hopes to attract Islamic financial institutions and Islamic funds to the International Services Centre in the country.
  
• The president of CIMA writes in an opinion article in The Australian newspaper that Islamic finance has significant growth potential but is still hampered by a lack of people skilled in understanding the requirements for Islamic financial products.
  

Should this blog include a newsletter? Islamic venture capital

I received a suggestion from a reader this weekend for a regular email newsletter of this blog, to complement the blog itself and the ability to receive the blog posts via RSS feed. I have thought some about providing a newsletter either weekly (with the week's posts and a teaser) or an email newsletter sent out when I post a new post. However, I would appreciate reader's feedback on whether this would be useful and what the most useful frequency of email newsletter updates would be. Please comment either on this post or by emailing me at blake@sharingrisk.org

Rushdi Siddiqui's latest article in Gulf News deals with Venture Capital, specifically the lack of it within Islamic fiannce. I wholeheartedly agree with him on that point.

Lahem al-Nasser of Asharq Al-Awsat has a dream for Islamic finance:

"I have a dream that one day Islamic financial institutions will operate based on the principle of partnership rather than debt in the sense that all parties would share both risk and profit. I have a dream that Islamic financial institutions will not base profit on usury that will cause them to be weak and fragile.

"I have a dream that one day Islamic financial institutions will have clear strategies to set up important development projects in their societies in a way that contributes to reducing unemployment, increasing productivity in society, improving technology and adopting and strengthening creative ideas. I have a dream that Islamic financial institutions will create genuine products rather than alternative ones through which they could change the conventional view of the financial institution. I have a dream that the joint Islamic financial market will be based on relying on its own tools away from imitating derivatives, bonds or other tools of Islamic banking.
[...]
"I have a dream that Islamic financial corporations will be able to convey Islam's civilized message to the world just as our merchant Muslim ancestors did. I have a dream that one day Muslim businessmen will make this dream come true.

Other News

• The government of Dubai formed a committee of creditors as we enter a week that will see the maturity of one of Nakheel's sukuk (Thursday).
  
• Malaysia may sell 10-year dollar-denominated bonds in June, although it was not specified whether these would be conventional bonds or sukuk.
  
• Emirates Steel is close to receiving $2 billion in loans, of which $1.5 billion is expected to come in the form of Islamic finance facilities. The closing is expected in June.
  
• An article describes the limited clarity in takaful that has hampered the industry's growth.
  
• Nomura International plc entered into a $50 million commodity murabaha transaction as its debut transaction in Islamic finance.
  
• The Islamic Development Bank is planning to boost cooperation with India, which is not an OIC member.
  

Dubai World, Saad Group

The Dubai World debt negotiations hit another potential snag with the repayment of the Nakheel sukuk maturing in May becoming more likely even without a restructuring deal. This compounds the issues caused by the offer of a 1% interest rate for banks who are owed money by Dubai World at the same time that trade creditors are offered 40% cash payment with the remaining 60% paid through a sukuk yielding 10%. A top official at Al Ghurair, which is described as a 'key trade creditor' by Emirates Business 24/7, said the 10% profit was "very generous".

I have previously questioned whether the restructuring would incorporate Shari'ah-complaince and there still has not been a complete reporting of this aspect of the restructuring. However, the use of a sukuk to repay trade creditors indicates that Dubai World remains interested in Islamic finance. The big potential problem is the differential treatment of different creditors, most of which are unsecured creditors. Banks are offered 1%, trade creditors offered 10% on a portion with the remaining being repaid while sukuk holders of the sukuk maturing next month receive full repayment. This differential treatment does no favors to Islamic finance because it reinforces the uncertainty about the rights of creditors in one of the largest geographical concentrations of sukuk issuers. This will make it more difficult for issuers to bring new sukuk to market because although the problems are largely Dubai-related, the uncertainty is generalized to the UAE, if not the GCC. Although the debt holders would suffer delays and would probably come out worse for it, for the Islamic finance industry, it may have been preferable for the whole Dubai World mess to end up in the tribunal in front of internationally recognized judges under DIFC law, which closely resembles English law.

Sukuk holders of the Saad Group have agreed to dissolve the sukuk trust. According to a Reuters factbox, the Saad Group sukuk was an asset-based sukuk, which would mean that the dissolution of the sukuk trust does not provide investors with an avenue to recover their money except through a bankruptcy proceeding as unsecured creditors of Saad Group, where they would be treated equally (pari passu) with other unsecured debt holders and subordinated to any secured creditors.

Khalil Jarrar has an interesting column in the latest Opalesque Islamic Finance Intelligence.

My latest article on the East Cameron sukuk was published by Islamic Business & Finance in the latest issue.

Other News

• The World Bank and the International Finance Corporation will be in Malaysia to discuss a Shari'ah-compliant fund for green technology investments.
  
• The relative strengths and weaknesses of using equity vs. debt in Islamic finance acording to an executive at Elaf Bank in Bahrain.
  
• Arcapita is planning to build a fund management business to reduce the cyclicality of revenues in the private equity business. I believe this is something that more Islamic investment banks and private equity houses will undertake to smooth their revenues and reduce the prospects of being severely harmed in future downturns and this is good for the industry as a whole.
  
• The Abu Dhabi Stock Exchange may begin to indicate which investments are Shari'ah-compliant and which are not.
  
• The CEO of a Malaysian invesmtent bank, Alliance Investment Bank, says that sukuk have a promising future.
  
• Kencana Petroleum Bhd, a Malaysian oil and gas services company, is planning to issue $78 million (MYR250 million) in sukuk sales. Cagamas issued $156 million (MYR500 million) in 5 year sukuk that were rated AAA by MARC because Cagamas is state-owned.
  
• Indonesia issued $22 million in sukuk, about 20% of its planned offering. Demand was limited, according to reports, because of limited liquidity in the sukuk.
  
• KPMG in India has expressed support for the development of guidance from the central bank for Islamic financial institutions in the country which have been slow to develop.
  
• The latest monthly commentary abou the performance of the Dow Jones Islamic Market Indexes for April is now available.
  
• Dundee University in Scotland will offer a postgraduate degree in Islamic finance.
  
• AsiaOne has a summary of Islamic finance structures that are commonly used.
  
• The company offering Salaam Halal, Principle Insurance Holdings, has been sold to a Kuwaiti buyer who was one of the largest shareholders.
  
• AAOIFI will hold its annual meeting at the end of May.
  
• The new Christian ETFs will not be a competition to Islamic financial products, but will encourage greater uptake of ethical products, according to an article in the Malaysian Insider.