Tax incentives can help Islamic finance, but may also attract rent-seekers

In a recent speech, the Assistant MD of the Monetary Authority of Singapore explained that tax incentives should not form the basis for Singapore’s appeal in Islamic finance.  The tax incentives in developed markets should focus on encouraging early adopters and should have fixed expiration dates to avoid companies focusing on continuing the incentives rather than growing their business.  Less developed domestic markets, in contrast, may benefit more from longer-lasting incentives, but these incentives will also have to be phased out eventually.  The easy part is putting the incentives in.  It is much more challenging to determine when to end them.  

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Could trade finance provide a place for murabaha in "authentic" Islamic finance?

The executive director of the Monetary Authority of Singapore, Tai Boon Leong, gave a speech at the Islamic Finance News Roadshow Singapore in which he suggested that Islamic banks become more involved in trade finance, noting the withdrawal of European banks due to the debt crisis.  He said:

"Islamic finance players should however explore new growth areas which adhere to Shariah principles. One such possibility is trade finance. Globally, trade finance is facing funding pressures as European banks, who have been traditionally strong in this sector, continue to deleverage and adjust to the requirements of Basel III. Given Islamic finance’s emphasis on supporting tangible, real economic activities, trade finance is a business segment which fits well with Shariah principles and business model."

I am not extremely knowledgeable about trade finance (I am not a banker), but from what a few minutes of informal research, the forms of trade finance mostly revolve around factoring trade receivables (i.e. extending credit based on goods being transported internationally) and trade credit insurance.  The roots of Islamic finance are based in trading, since many of the countries in the Middle East where Islam began were based on trading and much of the spread of Islam occurred along trade routes. 

Murabaha has attracted a lot of criticism because of its similarity with conventional finance and also because it is being used to synthesize loans that mimic conventional loans.  However, where applied to trade finance, the main points of criticism fall away.  In a trade finance loan, the buyer in one country wants to sell goods to a seller in another but wants to get paid now and not bear the risk associated with dealing with a buyer in another country, as well as the time it will take to get paid.  The seller does not want to pay in advance because it would be difficult to recover funds paid if the goods aren't delivered.  A bank can serve as a trusted intermediary that takes the credit risk from the seller and facilitates the desire by the buyer to make payment on delivery.  

The trade finance company can buy the good from the seller and take legal ownership of the good and then, at the same time, sell the asset to the buyer and transfer legal ownership of the good to the buyer, but with payment due in the future with a markup on the anticipated delivery date.  The transfer of ownership shifts the risk of loss to the buyer, but removes the risk of fraud by the seller, and in return, the bank remains focused on the credit risk where banks are specialists. 

The transaction offers value to both buyer and seller, and facilitates the exchange of a real asset that is in demand (in contrast to many murabaha which use an asset only to facilitate the extension of credit).  Perhaps it is too boring of a transaction to attract much attention and it already occurs with regularity, but with the controversies around some murabaha transactions like the Goldman Sachs sukuk, it would be to the industry's benefit if transactions like this were mentioned as demonstrating the usefulness of murabaha to counter the widely held idea that most murabaha transactions are done as a way of replicating a conventional financial institution, and do not involve buying and selling an asset that is actually demanded.  It is, instead, a transaction that would facilitate the economic activity between a buyer and seller that they would not (unless they turned to conventional finance) be willing to undertake without the Islamic bank. 

DIFC Investments, Other News

JP Morgan said the government of Dubai may have to convert its $1 billion loan to DIFC Investments into equity, as well as make an equity investment in the company. The report also upgraded DIFC Investments' $1.2 billion mudaraba sukuk maturing in 2012 from "underweight" to "neutral" based on "improved asset coverage". Other analysts believe the rally--the sukuk rose in price to 79.15 (yielding more than 13%) --has gone to far in DIFC sukuk, as well as other Dubai-related sukuk.

Other News

• Gulf Finance House was able to roll over $100 million in debts for two years, with an option to extend it by another year.
  
• Standard Chartered is expanding its Islamic finance business. The bank recently launched a product that will allow for hedging against fluctuations in commodity prices.
  
• Bloomberg has a list of upcoming sukuk. Many new sukuk are coming from Asia including Hong Kong and Singapore, although regulatory challenges remain.
  
• The Houston Chronicle interviews Monem Salam on the Amana Funds.
  
• Moody's placed Dar Al-Arkan's credit rating (and the rating on its sukuk) on review for possible downgrade.
  
• Islamic finance has become as closely watched as celebrities, according to Lahem Al-Nasser.
  

Late payment penalties, liquidity management, creating secondary markets in sukuk

An article in Arab News discusses the issue of a fee charged by an Islamic financial institution for late payments. In May, Bank Negara Malaysia's Shari'ah Advisory Council said that charging a fee in case of late payment is allowable and separated out the cases where the bank can and cannot keep it and recognize it as income. In the case where the fee is charged as a fine or penalty (gharamah), it must be donated to charity and not recognized as income. Where the fee is for compensation (ta'widh) for actual loss by the Islamic bank, it can be kept and recognized as income. While the distinction is clear between the two concepts, it seems likely to be difficult to distinguish in practice. Perhaps it might be a better practice for Islamic banks that use this to treat everything as ta'widh until the actual costs of collections are met and only then be able to treat any fees as allowable income. However, it is unlikely that such a solution could be approved because it would not be possible to provide ex ante certainty in the contracts between the bank and its customers. Whether this is used or not, it could allow Islamic banks to increase the total fees to Islamic banking customers, which would make the products less competitive and probably result in a slower growth rate for Islamic banking. It would also complicate the Shari'ah audits because it would require that the fees be reviewed to determine whether the bank has basis for compensation if it used the principle of ta'widh.

A fantasstic article from Islamic Business & Finance discusses the challenges facing Islamic finance in developing short-term liquidity management products, despite their importance. The article specifically looks at the UAE commodity murbaha Islamic CDs, the idea of Shari'ah-compliant repo transactions and an electronic wakala/murabaha platform.

Rushdi Siddiqui has another interesting article in Gulf News, this one covering the issue of where is the hub of Shari'ah transactions, which quickly morphs into the discussion of the lack of a hub. One point that he makes, which I agree with and have made before on this blog, is the lack of secondary markets for sukuk. He takes it one step further adding that even where there are secondary markets for sukuk, they are not deep enough or liquid enough to provide much information. He suggests that the Islamic finance industry needs to 'institutionalize' and 'internationalize' itself, primarily by moving from bilateral price discovery through over the counter (OTC) trading to "multiple price discovery". As much as the effort towards creating secondary market platforms for sukuk will help lay the groundwork for this in the future, it is impossible until there is enough supply to sate the demands of hold-to-maturity investors and leave enough exchange-listed sukuk that can be traded in secondary markets to develop meaningful liquidity that provides more information than bilateral trades in illiquid markets can.

Other News

• Sorouh raised $640 million in conventional and Islamic debt, of which $400 million (AED1.47 billion) will be used to redeem the remainder of the sukuk issued in 2008 which I described about a month ago in a blog post. At the time, there was AED1.5 billion remaining of the AED4 billion securitization sukuk.
  
• Malaysia's central bank, Bank Negara, issued its fourth Shari'ah Parameter Reference which covers musharaka. The previous SPRs covered ijara, murabaha, and mudaraba. The bank also issued a concept paper on takaful.
  
• Bloomberg compares the performance of Shari'ah-compliant equity indices with sukuk indices. Equities have lagged sukuk in the past 2 quarters due to an agreement to restructure $23.5 billion of debt by Dubai World and its creditors.
  
• Japanese firm Nomura Holdings plans to issue a $100 million sukuk in Malaysia, the first Japanese company to do so.
  
• The proposed Islamic Bank of Thailand THB5 billion ($154.5 million) is likely to be issued in the second half of 2010 depending on market conditions. The sukuk will have a 5 to 7 year maturity.
  
• Deutsche Bank's Shari'ah-compliant platform is investing in a foreign exchange strategy, based on "investor demand" according to the managing partner of the advisory firm which will create the strategy using a structured note. Deutsche Bank previously created the controversial Total Return Swap structure that allowed investors to receive a return benchmarked to a group of conventional hedge funds.
  
• Singaporean REIT company Mapletree Investments is launching an Islamic REIT whose IPO may be up to $713 million (S$1 billion). The REIT will be marketed in the GCC by Arcapita.
  

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

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

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

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

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

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

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

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

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

Other News

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

Pakistan central bank explores interbank money markets, Indonesia to issue global sukuk in October

Pakistan's central bank is developing Shari'ah-compliant interbank money market products. This follows the announcement that the UAE central bank is also developing inter-bank liquidity management Islamic certificates of deposit. This is a welcome trend to allow Islamic banks to manage their surplus liquidity and will help to provide greater stability to Islamic banks.

Global sukuk issuance is expected to rebound in 2011 as infrastructure projects begin in Asia and the Middle East following a significant slump since the credit crisis affected Islamic finance in 2008 and 2009. Indonesia is planning a global sukuk in October that could be as large as $500 million to $600 million, less than its $650 million sukuk issued in 2009. The government may issue 5-year sukuk, but would prefer 7-10 year sukuk, which would be beneficial as a benchmark for domestic corporate sukuk. This would be complementary to the possible tax holiday for sukuk to boost the domestic Islamic finance industry.

Other News

• Islamic finance is gaining popularity among bankers looking to "change some terms here and there" according to Andrew White, the director of the International Islamic Law and Finance Center in Singapore.
  
• Lahem Al-Nasser of Asharq Al-Awsat believes that an Islamic central bank is needed and that Islamic banks should have their reserves linked to gold. I disagree: bringing the gold standard to Islamic finance would be no more successful than it was in conventional banking and would limit greatly the growth potential of the industry while offering limited benefits as the price of gold fluctuates significantly.
  
• Ithmaar Bank, which recently converted to be an Islamic bank says it is fully Shari'ah-compliant and denied reports about disagreements with its Shari'ah board over conventional assets being converted to be Shari'ah-compliant.
  
• The governor of the Central Bank of Afghanistan is working with Pakistani experts to implement regulations for Islamic banks within the next two months.
  
• Indonesian bank Bank Permata launched an Islamic mortgage product based on ijara mutahiyah bittamlik (lease ending in ownership).
  
• Malaysian Prime Minister wants Bank Islam to expand the Islamic pawnbroking system Ar-Rahnu from urban areas to rural areas.
  
• A Bahraini investment house, Tharawat, plans to launch a $50-$60 million private equity fund investing in Saudi Arabian real estate in the third quarter.
  
• After delaying a planned bond issue, SABIC received $1 billion in Shari'ah-compliant credit from Alinma Bank.
  
• CNBC Europe has an interview with a professor of Islamic finance in Spain, Celia De Anca of IE Business School in Spain.
  
• The Nigerian Deposit Insurance Corporation is introducing Islamic deposit insurance using Malaysia as an example.
  

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

• 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.
  

Islamic pricing benchmark, Khazanah sukuk

The International Shariah Research Academy for Islamic Finance (ISRA) in Malaysia is planning to release a study on a proposed Islamic benchmark pricing rate in 2011. The proposal received criticism about the practicality of having two different pricing benchmarks within Malaysia. The criticism has merits and the development of a separate Islamic yield curve would provide limited benefit compared to other areas that the effort required could be directed towards like strengthening Islamic financial institutions' liquidity management. However, if Islamic financial products move beyond replication of conventional financial products and take on different risk characteristics than conventional products, a separate pricing benchmark could be useful for new issuers because the pricing would reflect the balance between supply and demand for Islamic financial products in the secondary markets.

Malaysian state-owned Khazanah Holdings may issue S$500 million ($354 million) in sukuk to finance its purchase of Parkway Holdings, a hospital operator. The sukuk would be the largest issued in Singaporean dollars passing a S$200 million issue from the Islamic Development Bank.

Other News

• The final decision on Tamweel and Amlak, two troubled Dubai-based Islamic mortgage companies could come this month. It is reported that Dubai Islamic Bank is seeking to increase its share of Tamweel to over 50%. Tamweel's statement on its restructuring did not confirm or deny Dubai Islamic Bank's reported plans.
  
• Saturna Capital, the fund manager of the Amana Funds received a fund license in Malaysia.
  
• A credit union in the US is offering Islamic financial services.
  
• Gulf African Bank, one of the first Islamic banks in Kenya, reported a profit in the first quarter of 2010 and expects its first full-year profit this year.
  
• Pakistan hopes to double the share of Islamic banks in the country over the next 3 years, to 12% of total assets. For comparison, Malaysia is set to reach the 20% mark this year.
  
• An article discusses the idea that Dubai World attracted more attention than its overall impact in the financial markets and points out that the reason for the near-default was the financial and economic conditions as well as company-specific factors that were not related to Nakheel using a sukuk rather than a conventional bond to raise financing.
  
• Nakheel has begun paying contractors and may resume construction on some projects "within weeks".
  
• A Malaysian bai bithaman ajil (BBA) sukuk was placed on negative ratings watch. The BBA structure is used extensively in Malaysia, but not accepted in most other countries.
  
• The government of Kazakhstan is supporting Islamic finance in the country with the assistance of Abu Dhabi, whose government owned bank Al Hilal opened an Islamic bank in Kazakhstan.
  

Takaful shortfalls, Islamic money markets, Shari'ah scholars

Takaful
Reuters has a fascinating article about takaful and specifically what happens if the policy holders' pool is in deficit. The article highlights a discrepancy between the regulatory view and the Shari'ah view. The regulatory view says that the shareholders of the takaful provider should be responsible for shortfalls (through a letter of guarantee for any shortfall) and the policyholders should benefit from the gain on any investments financed by the shareholders' funds. However, the Shari'ah view, as articulated in the article, says that policy holders should contribute to finance any shortfall and if there is a letter of guarantee but no cash drawn, the shareholders should receive the benefit. This is an issue that I had not spent much time thinking about, although I have acknowledged that the lack of sukuk and other fixed income products have made a shortfall more likely because the funds contributed by policy holders are invested in riskier assets than the premiums paid into conventional insurers (which are typically invested in bonds). There are no specific examples mentioned, which increases the risk to takaful companies and policy holders without significant experience where shortfalls are actually experienced and managed. However, based on the general trend for Islamic financial products to mirror conventional products, I think it is extremely unlikely that policy holders would be forced to make additional contributions to cover a shortfall.

Islamic finance needs money market to grow
Bloomberg has an article with several interesting comments from Mohamad Nedal Alchaar, secretary-general of AAOIFI. In addition to his comments about the need for more Shari'ah-compliant money market products to facilitate better liquidity management, he warned about "overexposure" to a single industry by Islamic financial institutions. His call is welcome given the fallout from the global financial crisis and property boom and bust in parts of the GCC, and it adds to the recognition that Islamic finance was hurt by the global financial crisis but this damage was accentuated by a concentration of investments in a few industries. He also warned that if there is not more done to create a more transparent forum for Shari'ah scholars to reach consensus from an industry body on products where there are no existing fatawa, the industry would remain dependent on a "fatwa-by-fatwa basis". While it is not surprising to hear the head of a standard setting body call for Shari'ah standards to involve an industry body, his point could strike a healthy balance between individual institutions being able to develop new products if their Shari'ah boards approve and the need for greater consensus among scholars through a central forum without requiring what could become rigid standardized fatawa.

Shari'ah scholars
Another article on the development of a younger group of Shari'ah scholars includes a profile of Taha Abdul-Basser, a scholar and the Muslim chaplain at Harvard University. Congratulations to him for being recognized and profiled as one of the prominent younger Shari'ah scholars who will be responsible for continuing the growth in Islamic finance that the senior scholars helped create during the past 35 years.

Other News

• Qatar issued its first local-currency bond of the year yielding 6.5% and sukuk of the year with a $2.75 billion issue split evenly between a conventional bond subscribed by five conventional banks and sukuk, which was purchased by four Islamic banks.
  
• A firm with links in the Middle East is planning to launch an Islamic REIT in Singapore. There is currently one Islamic REIT in Singapore and plans for another later this year.
  
• Four mostly state-owned companies in Abu Dhabi are cooperating to launch a takaful company in the Emirate.
  
• Tabreed, the National Cooling Company in Dubai which missed a payment on its sukuk, may sell conventional or Islamic debt as a part of its recapitalization program.
  
• A Malaysian firm is planning an Islamic gold ETF in the country. There is currently only one Islamic gold ETF, the Dubai Gold Securities. In addition, companies like Bullion Management Group in Canada offer a gold bullion fund that is Shari'ah-compliant.
  
• The CIS has potential for Islamic finance, but there is little legislation in place that enables Islamic finance, according to a summary of a conference in Moscow written by Mushtak Parker in Arab News.
  
• Indonesian sukuk issuance is expected to rise 10-20% compared to last year according to the CEO of HSBC Amanah, Mukhtar Hussain. He said that the Asian economies have had a limited impact from the European debt crisis. Sukuk issuance was $23.3 billion in 2009, which was lower than the peak of $34.3 billion issued in 2007 according to Standard & Poor's.
  
• The Central Bank of Bahrain short-term sukuk al-salam issue was oversubscribed by over 400 percent. The sukuk matures in 91 days and has an expected return of 0.85%.
  
• Khaleej Times has an article on Islamic finance business education.
  

Tuesday news bullets

• Rushdi Siddiqui opines on the possibility for a World Cup or Olympics sukuk in the future as a few countries in the GCC are considering bids to host the competitions.
  
• DBS Group is shrinking its Singapore-based Islamic unit which Reuters attributes to a struggling effort by Singapore to attract Islamic finance.
  
• A report from Ernst & Young about Islamic funds found that the segment of the industry stagnated. There were four articles with slightly different takes on the report including the press release from E&Y. The other articles were from Emirates Business 24/7, Reuters and Gulf Times.
  
• There are fresh concerns that Islamic finance has too few well-known Shari'ah scholars.
  
• The Global Head of Islamic Markets at Bursa Malaysia recently said at a conference that Islamic finance needs to develop a more diverse set of investment products to cater to investors with different investment needs.
  
• Kenya's central bank may allow Islamic financial products in the country two years after the first Islamic bank in the country was licensed.
  
• The Cagamas sukuk being developed with Al Rajhi Bank will be for $3.02 billion and will be structured to be acceptable in the Middle East as well as in Malaysia.
  
• Indonesia's latest auction of sukuk had no winning bidders as the finance ministry rejected the 1.2 trillion rupiah ($130 million) in bids.
  
• Bahrain's Islamic finance industry is recovering in spite of the worries around the Greek debt crisis, although it could affect sukuk issuance through the first three quarters of 2010, according to Nida Raza of Unicorn Invesment Bank. Another article describes the Islamic banking market in the UAE including their use of e-banking.
  
• It appears that the structured product market in Islamic finance is returning with another, offered by Dubai Islamic Bank, that returns 88% of capital after two months but pays profits on the full amount invested based on the performance of the Middle Eastern markets.
  
• The Association of Islamic Banking Institutions Malaysia believes that the country has exceeded the 20% target for the market share of Islamic finance this year. The new banking licenses for foreign banks are expected to be announced although the two new Islamic banking licenses may be delayed.
  
• The GCC represents 70.4% of the global takaful market.
  
• An article in Arab News expresses hope that the growth in the number of conferences on Islamic finance in the Commonwealth of Independent States (CIS) reveals a potential growth area for the industry.
  
• Islamic finance in the UK will not be negatively affected by the change in government according to a delegation from the Muslim Council of Britain to the World Islamic Economic Forum in Malaysia. The Bank of London & the Middle East is planning an absolute return fund that "it is in no way a hedge fund". The BLME launched a money market fund last year that has returned 0.30% compared to an expectation of 1.00% which it expects to reeturn once yields 'normalize'.
  
• The Malaysian retail 1Malaysia sukuk has received a 'lukewarm' response.
  

Dubai World restructuring talks to begin on Monday

The first talks in the Dubai World restructuring will occur on Monday with 90 banks and other creditors sitting down with representatives of Dubai World including its chief restructuring officer Aiden Birkett. According to reporting from Bloomberg, it is unlikely that Dubai World will present a formal standstill request and proposal at this meeting due to the complexity of the restructuring. As The National reports in an article, the restructuring process is likely to take a long time and be expensive to all parties involved.

From the perspective of the Islamic finance industry, the most interesting aspects of the restructuring negotiations--the impact of the Shari'ah-compliance of any restructuring of the sukuk owed by Nakheel and the bank debt owed by Limitless--is unlikely to be discussed immediately. The sukuk are governed by English law, which has in the past dismissed requests for Shari'ah-compliance concerns to be used to challenge enforcement actions by debtors. However, given the attention placed on Islamic finance due to the Nakheel sukuk repayment and the entire Dubai World debt crisis, it will be imperative that this issue be addressed publicly. On the one hand, it will likely be impossible for Dubai World to treat creditors through conventional debt differently from those who invested in sukuk. On the other hand, there could be fallout from any restructuring that is not accepted as Shari'ah-compliant by the Shari'ah boards of any Islamic banks or other Shari'ah-sensitive investors.

This could hurt those institutions relative to conventional financial institutions that invested in the same sukuk. If the restructuring that is approved by the creditors committee were viewed as non-Shari'ah-compliant, it could force Islamic banks holding the sukuk to liquidate their holdings, which would probably be done at a price less than they would get if they held them until a complete resolution of the sukuk. This could create a transmission mechanism for the problems of Dubai World to affect unrelated Islamic banks through the losses they recognize on selling the sukuk holdings. It will indeed be interesting to watch as the negotiations continue and see the impact of some debt being Shari'ah-compliant.

Other News

• Singapore will see its first listed Shari'ah-compliant REIT in the second half of 2010.
  
• With all the negative attention in the news about Dubai, I found it very interesting to see a travel article about the rest of the UAE that was published by the Guardian.
  
• Gulf Finance House appointed a new deputy CEO for investment banking, Ted Petty. The new group CEO was formerly an Executive Director at Macquarie Capital. Marquarie recently purchased a $100 million convertible murabaha from Gulf Finance House.
  
• Iran is issuing sovereign, euro-denominated Islamic bonds and the "government of Iran guarantees the bonds' interest". Not to be a bit flippant about it, but it is not a typical practice to describe the periodic payments on Islamic bonds as 'interest'.
  
• An article on Islamic finance provides a brief overview with all of the misstatements that have been common in much of the reporting on Islamic finance. The article describes that Islamic finance does not allow leveraged investments. In reality, there are many ways for leverage to be used within Islamic finance either through the natural leverage that accompanies Islamic banks' use of debt financing through sukuk and increasing the size of their balance sheet through customer deposits (which provides leverage over the banks' capital). There is also frequent use of leverage in real estate development where equity investments are made into a development company that builds a property with additional Shari'ah-compliant debt financing but separates the equity and debt components through a lease.
  
  The article also provides a description of the prohibition of riba: "Following the Quranic verse: 'Allah made legal commerce, and illegal interest,' Islamic law prohibits usury, known as riba." This description, while common in many articles about Islamic finance, does a poor job of explaining the implications of the prohibition. I have read countless articles that provide a similarly unhelpful overview, so I do not want to place too much of this criticism on this specific article. However, it does perpetuate a misunderstanding that Islamic finance is solely concerned with 'interest-free' financing, without explaining how Islamic finance actually works in practice. Perhaps it is too much to expect that a short, introductory article could provide the nuances and actual workings of the industry.
  

Tuesday news bullets

• Dubai repays the $1 billion Dubai Civil Aviation Authority sukuk that matured on November 4th with proceeds from the $1.93 billion sukuk issued last week.
  
• A report from Moody's says that sukuk issuance in the first 10 months of 2009 exceeded the same period in 2008 by 40%, although the sukuk market is dominated by government-related entities.
  
• The Investment Dar's Bahrain unit extended its standstill agreement according to a statement by the Investment Dar Sukuk Co on the Bahrain stock exchange. It is unclear whether the Investment Dar's standstill agreement was also extended.
  
• Al Baraka Bank Syria's IPO was heavily oversubscribed
  
• Two applications from foreign banks to receive Islamic banking licenses in Malaysia are being processed according to the Deputy Finance Minister. It is part of a liberalization planned that will expand the opportunities for foreign investors in Islamic financial institutions.
  
• Malaysia's Securities Commission signed an agreement about cooperation with the regulators in Hong Kong and Singapore.
  
• A conference in New Jersey focused on how corporate America can market to the Muslim market in the country.
  
• Uganda's regulators are learning more about Islamic finance in preparation of a review of the country's laws and how Islamic finance could fit into them.
  
• In the wake of a successful $2 billion sukuk issuance, the 'shut-up' heard round the world. The Emirate's leader Sheikh Mohammed Bin Rashid Al-Maktoum expects the second tranche of $10 billion in bonds to be 'well received' and dismissed critics who wonder whether Dubai will be supported by the rest of the UAE, and particularly Abu Dhabi.
  

Canadian company sukuk, Islamic finance in China, faith-based ETFs in the U.S.

The wave of sukuk defaults will test the industry as well as the prospect for investors to receive judgements in English courts that govern the sukuk SPVs. The next step will be to try and enforce these judgements in the GCC, according to an article in Euromoney.

Bear Market Resorts is planning a $380 million sukuk that will be issued in August. It would be the first sukuk in Canada and one of few by North American issuers. Siraj Capital is working with the company on the sukuk having previously worked on the East Cameron sukuk which is currently being affected by the issuer's bankruptcy. Following the East Cameron sukuk issue, Siraj Capital announced it was nearing a commitment to work on a sukuk for a NYSE-listed oil and gas company that was never issued.

A research economist at the Qatar Central Bank, Syed A. Basher, writes in an article published in Gulf News that despite the growth of Islamic finance throughout the GCC, the level of government support for the industry has varied widely with Bahrain and Kuwait being the most supportive and Oman and Saudi Arabia lagging behind.

Following the launch of the first U.S.-based Islamic ETF, The Dow Jones Islamic Market International Index Fund (NYSE: JVS), another companies, FaithShares, there is an article about FaithShares which requested approval in April to launch its own ETFs to meet screening criteria of other faith groups including Baptist, Catholic, Christian, Lutheran and Methodist.

The Bank of Ningxia plans a pilot project to test the offering of Islamic financial products in the region which would be the first within China.

Other News

• Islamic microfinance industry is being encouraged in Pakistan by a group, the Alhuda Centre of Islamic Banking and Economics which has launched a helpdesk to help microfinance institutions that want to shift form coonventional to Islamic finance.
  
• Moody's says that Islamic banks in the GCC should 'change their business model' to adapt to the post-financial crisis world.
  
• The joint-Islamic Development Bank/Asian Development Bank Islamic Infrastructure Fund announced that it had raised $266 million towards the $500 million it expects to begin with, most of which came from the Islamic Development Bank and the Asian Development Bank.
  
• As part of its regulatory reforms, France plans on changing laws to ensure that Islamic financial products can be offered in the country which has one of the largest Muslim population in Europe.
  
• The Central Bank of Bahrain redeemed its $250 million ijara sukuk that was issued in 2004 following its maturity.
  
• Islamic banking could grow in Africa following Al Baraka's listing on the Johannesburg Stock Exchange according to an article in African Banker.
  
• Malaysia and Singapore have both been making regulatory changes to encourage inflows of capital from the Middle East, including through Islamic finance.
  

Islamic finance regulatory risk, US Islamic mortgages, Islamic financial practices and the crisis, IsDB/ADB Infrastructure Fund announced

The Islamic finance industry is at risk from an over exposure to equities and real estate and a lack of regulatory oversight in some jurisdictions may leave Isalmic financial institutions less able to withstand further deterioration in the real estate or equity markets. Reuters quotes Raj Madha an EFG-Hermes banking analyst describing the quasi-debt products used by Islamic finance institutions:

"Quite often you have a lot of mezzanine products so banks have a lot of latitude on whether to report those things under one or the other category [...] It allows for opacity which certainly some banks are able to take advantage of, and at least in principle, it creates the opportunity for not disclosing some losses"

An article in a UAE-based newspaper, The National, provides as good an article about the Islamic home finance market in the US as I have seen recently. The article focuses on Guidance Residential, one of the Islamic finance companies in the US which has financed 6,000 customers home purchases for a combined value of $1.5 billion. Although a tiny slice compared to the overall housing market in the US, the Islamic mortgages have experienced far lower rates of delinquincy, approximately half of the nationwide rate of 7.8%, and the company has only served five foreclosure notices.

The Islamic Development Bank and the Asian Development Bank agreed to set up the first Asian multi-country Islamic infrastructure fund. It is the Asian Development Bank's first foray into the Islamic finance market. Providing for infrastructure is a challenge globally and Asia is no exception and this could provide a model for other Islamic infrastructure projects to meet the needs of many countries not only just in Asia.

Khurshid Khan is interviewed in an article about the lessons that can be learned from looking at Islamic financial principles in the context of the recent crisis.

Other News

• Dawood Ahmedji, head of Deloitte's European Islamic finance unit, believes that Islamic finance would be able to fund some projects derailed by the onset of the credit market crisis by attracting funds from the GCC.
  
• The Monetary Authority of Singapore revised its regulations to put Islamic financial products on a level playing field with conventional products but decided against instituting a separate regulatory regime for Islamic financial institutions.
  
• Islamic Finance Info Inc, an online company providing information on the Islamic finance industry, has launched a website with information about Islamic financial institutions, Shari'ah scholars and Islamic financial products, IslamicFinanceInfo.com
  
• Qatar's planned bond issuance may include some sukuk as a way of diversifying the government's financing needs.
  
• An interview with the head of Kauthar Bank, an Islamic bank in Azerbaijan, describes how the bank uses mudaraba, musharaka and ijara on both sides of its balance sheet. While most Islamic banks have a heavy reliance on murabaha, Kauthar is restricted by banking laws from using this product. The success of a bank that does not use murabaha could provide an indication about the direction that Islamic banking is heading as there is some criticism of murabaha because of its similarity with conventional interest-bearing loans.
  
• An article summarizes some of the recent developments in the Islamic finance market including planned issuance of sukuk by the Islamic Development Bank and a sovereign issue from Bahrain as well as improved sukuk prices in the secondary markets and developments in the UK.
  

Wednesday update

• A business management student at Singapore Management University shares some thoughts about a 15 week course on Islamic finance in the Straits Times.
  
• The AAOIFI Shari'ah conference held in Bahrain this past Monday and Tuesday discussed a number of topics including tawarruq and reverse tawarruq, two products that were recently condemned as a 'deception' by the OIC Fiqh Academy.
  
• Calyx Financial spins out an Islamic investment firm called Codexa Capital that, although based in the US, focuses primarily outside of the US.
  
• Islamic Finance News will begin an 'ask a scholar' column featuring the Shari'ah scholars on the ISRA Council of Scholars including Dr Mohd Daud Bakar, Dr Mohamed Ali Elgari,
  Dr Abdul Shukor, Dr Abdul Sattar Abdul Kareem Abu Ghuddah and Dr Yusuf Talal Delorenzo.
  
• The most recent Central Bank of Bahrain short-term ijara sukuk (which have a maturity of 182 days) was oversubscribed by 200% with a return of 1.30%, compared with the interest rate on identical maturity conventional debt issued today of 1.09%.
  
• Dubai Islamic Bank is buying back $50.6 million of its own sukuk maturing in 2012 at 88 cents on the dollar.
  
• The sovereign wealth fund of Malaysian region Kuala Terengganu, Terengganu Investment Authority, will sell 30 year oil revenue backed sukuk to raise up to $3.1 billion.
  
• Humayon Dar, cEO of BMB Islamic, does not believe the UK will issue a sukuk within the next 12 months. While in Malaysia he said "I wouldn’t think that in the near future, and the near future means in the next 12 months or so, there will be any Islamic sovereign bond issued by the government of Britain."
  
• Malaysia is putting aside $1.72 billion to promote Islamic venture capital. Deputy Minister of Finance Dr. Awang Adek Hussin said "By providing funds to budding entrepreneurs with sound ideas, Islamic venture capital can help to promote innovation, job creation and the development of high growth industries".
  
• There is an interview with Malik S. Sarwar, CEO of New York-based Sarwar Wealth Advisors which is interesting except for the title which focuses on Islamic finance as a 'panacea'.
  
• Kenyan Islamic bank First Community Bank is planning expansion beginning with entry into neighboring Uganda and Tanzania within the next year and a half.
  

Catch up from a busy week

• The Asian sukuk market has rebounded slightly in 2009 as a few sovereign issuers, including Indonesia and Malaysia's government and the Monetary Authority of Singapore have issued sukuk. There are a few other soverign sukuk issues planned this year that could include Tailand and China as well as additional issues from Singapore, the first issue by a government entity in Hong Kong and regular issuance by Malaysia.
  
• The 2009 budget for the UK includes taxation changes that provide relief for sukuk from stamp duty for the transactions involved in transferring land between the financer and the SPV. The government had considered issuing a sovereign sukuk, but those plans remain on hold but could come at the end of 2009 or beginning of 2010 at the earliest.
  
• A new provider of Islamic home finance was authorized by the FSA in the UK. The newest company is Pink Home Loans.
  
• Al Baraka Banking Group, the Bahraini-based Islamic bank that is spearheading the new mega-Islamic bank is planning to launch an Islamic bank in France. The CEO Adnan Yousif indicated on CNBC Arabiya that French regulators have expressed interest in the bank's plans to start an Islamic bank in France.
  
• The Central Bank of Bahrain issued BD6 million ($15.9 million) more Al-Salam 91 day maturity sukuk for which there were more than BD25m (a bid-to-cover ratio of 4.17).
  
• The Houston Chronicle has an article on Islamic home finance which also provides a criticism of the Islamic home finance from Dr. Mahmoud El-Gamal.
  

University Bank featured in the NYT; Can Islamic finance provide a way forward after the crisis ends?

The New York Times has an article about University Bank in Ann Arbor, Michigan describing the phenomenal growth of its Islamic home finance products since it began offering them earlier this decade. The bank, which owns 80% of its Islamic finance subsidiary, the University Islamic Financial Corp started in 2005, is seeing growth increasing rapidly. The article points out that a week in which 11 "mortgage-alternatives" were signed to finance home purchases was "more than twice the weekly average".

A legal magazine article describes the development of Islamic finance in Singapore, which was recently announced as the site of the Islamic Financial Services Board's (IFSB) annual summit in May. The city-state issued its first sukuk earlier this year and has taken significant steps to change laws and regulations to place Islamic finance on equal regulatory ground with conventional financial institutions.

Dr. Umer Chapra gave a speech in which he said that the current global economic condition was worse than it had ever been and that Islamic finance could provide a solution. He noted that Christianity and Islam both provided rules to limit excessive debt and "As long as those religious values were practiced, the society progressed in every walk of life". While Umer Chapra is a respected figure in Islamic finance and I have heard him speak and found it very enlightening, I have to criticize his focus on blaming a lack of religiosity for the economic crisis. It creates a distraction from the work needed to solidify the Islamic finance industry, which is currently being harmed by the worldwide economic slowdown. Instead of assigning blame for current economic problems, I think it is far more constructive to say that Islamic finance has been fairly resilient but the fall in real estate prices in Dubai (to use one example) shows areas of weakness. In that particular case, an over-concentration of investments in property that back financing instruments carried on Islamic bank's balance sheets has led to problems in those banks with the greatest exposure and those whose liabilities are not supported by large amounts of customer deposits and are instead more reliant on wholesale, shorter-term capital markets. Instead of making arguments about how Islamic finance could have prevented the crisis, I think the focus should be on increasing the stability of the Islamic financial industry through regulatory coordination, increased transparency, the development of inter-bank markets to improve liquidity of Islamic banks and the further growth of secondary markets for sukuk.

Dr. Mahmoud El-Gamal criticized the Islamic finance industry and said it bore responsibility as well for the economic crisis which is impacting the global economy. One of his criticisms was:

“In the past 30 years of Islamic banking, no ‘authority’ has been established that can inform the international concerned bodies such as the IMF about their financial and investment products. Hence, no one has a clear picture of the activities of the Islamic banks, the number of their institutions and branches”

Dr. El-Gamal is a frequent critic of the industry's current practices and in this criticism, I think he hits on a very important area of transparency of the industry's size, scope, product mix and other factors that may have an impact on the global financial system.

The official newspaper of the Vatican printed an article suggesting that financial institutions could learn valuable things from the Islamic finance industry: "The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service". The reference to "bringing banks closer to their clients" is a criticism of banks from moving away from their role as intermediaries connecting depositors and borrowers into complex financial institutions and growth in their proprietary trading activities. Islamic banks, because they are limited in the types of products they can offer, are often more focused into the role of being an intermediary. George Bailey would be proud.

Other News

• Malaysia is launching an exchange for commodity murabaha, a controversial Islamic financial product. AAOIFI says the product is not invalid, but not ideal.
  
• The Islamic Bank of Asia CEO says that there needs to be a common risk management system across the Islamic financial industry.
  
• Mohd Daud Bakar, a Shari'ah scholar, says that Islamic banks may charge fees for financial guarantees they provide, although they may not sell the guarantees to third parties.
  
• Can Islamic finance serve as an example for the financial industry in the future?
  

Sukuk volume in 2009: opinions differ

An English online grocery store Ocado received £10 million in financing using Shari'ah-compliant leasing (ijara). Although the transaction is small and uses a relatively simple Islamic finance product, it has significance, I think, because it is the company's first use of Islamic finance and it chose this type of finance because of the "competitive offering" from the Bank of London and the Middle East, a Shari'ah-compliant wholesale bank in the U.K. There are relatively few instances where Western companies chose Islamic finance products based on their price competitiveness (e.g., the $166 million East Cameron Gas Co. sukuk), but there is potential for this to become more common if Shari'ah-compliant banks are able to tap sources of capital and have not been hurt themselves by the credit crisis through the slowing of global growth where health companies find that they can only receive finance from conventional banks at extremely high cost.

According to a poll conducted by Reuters, the amount of sukuk expected to come from Southeast Asia, a region with a large volume of sukuk in recent years, is around $5 billion, far below last year. Most of the issuance is expected to be issued by governments. A previous estimate for Malaysia put the volume from that country at $4 billion for 2009. The GCC region is also expected to see far smaller volume of sukuk with unnamed bankers telling Reuters they expect to see issuance between $4 and $8 billion. Standard & Poor's, however, believes there are $45 billion of sukuk in the pipeline and the number that reach the market in 2009 will depend on whether the market becomes more favorable than it is now.

Other News

• Gatehouse Bank announced a new $1 billion 'Milestone Sukuk' platform and a first issue on the platform that it claims makes the issue of sukuk easier.
  
• Islamic financial institution Arcapita Bank, based in Bahrain and Atlanta, Georgia was downgraded recently, in part because of its 'high leverage'. The high leverage aspect is surprising because Islamic finance is often characterized as putting significant limits on allowable leverage.
  
• Turkey's first sukuk, a revenue-linked bond, was a flop raising only about one-quarter of the planned amount.
  
• Organizers of the 2009 Asia Sukuk Summit, in contrast, believe that countries where Islamic finance is just beginning to become into significance like Jordan, Hong Kong, Singapore and Japan will issue sukuk this year.
  

Discussion on commodity murabaha, MAS sukuk, Yasaar Media and Islamic finance education

A professor of at INCIEF in Malaysia, the Managing Director of Bank Islam and a lawyer in Dubai with Vinson Elkins LLP discusses whether commodity murabaha are overused in an article from Reuters.

Three task forces will study the effect of the global credit crisis on the Islamic financial industry beginning with the Task Force for Islamic Finance & Global Financial Stability headed by Bank Negara Malaysia governor Dr. Zeti Akhtar Aziz. The three task forces were proposed back in October at an Islamic Development Bank meeting.

A media division of Yasaar, Yasaar Media, has been launched. It will be a "dedicated research and media house that produces independent in-depth reports and analysis of market sectors" according to co-founder Paul McNamara (the other co-founder is Majid Dawood, the founder of Yasaar). Paul McNamara is also one of the co-founders of CPI Financial, which publishes Islamic Business & Finance magazine.

The Monetary Authority of Singapore (MAS), the city-state's central bank, completed its first sukuk. It also announced that regulations were loosened allowing banks in Singapore to engage in murabaha and ijara wa iqtina (lease-to-buy). The MAS Managing Director Heng Swee Keat described it as:

"This sukuk is the Shariah-compliant equivalent of Singapore Government Securities (SGS), and is of the highest credit standing. The sukuk will be given equal regulatory treatment as SGS, such as qualifying as an asset in the computation of capital and liquidity requirements, and as eligible collateral for tapping MAS’ liquidity."

In a speech at the Asian Financial Forum, Hong Kong Chief Executive Donald Tsang said that Hong Kong was opening up to Islamic finance. In addition, he commented on the developments already achieved:

"Islamic finance is an exciting area for us and we are making good progress in establishing a platform for Islamic finance in Hong Kong. [...] For example, our regulators have signed Memoranda of Understanding with the Dubai International Financial Centre Authority and the Dubai Financial Services Authority. This will help to foster mutual co-operation in developing Islamic finance between Hong Kong and Dubai.

In addition, we have seen the launch of a variety of Islamic financial products in the market, such as an Islamic banking window and indexes. An exchangeable Islamic bond, or sukuk, has also been listed on the local stock market. We still have much work to do. [...] A review of our tax law is underway to facilitate the launch of more Shariah-compliant products and put in place a level playing field for sukuk vis-a-vis conventional bonds. Islamic finance is a natural extension of our role as a global financial centre."

The University of Reading becomes the latest to add courses on Islamic finance. The new master's degrees will "explore topics such as the Islamic concept of money, so that students will learn the reasoning behind sharia laws, as well as the technical skills to construct sharia-compliant products."

An article in Asharq Alaswat provides a brief history of the beginning of the Islamic financial industry.

Emaar Properties (through Emaar Finance Ltd and Emaar Sukuk Ltd, respectively) listed a Euro Medium Term Note prospectus of $2 billion of sukuk and a Trust Certificate Programme for $2 billion on the London Stock Exchange.I

Renewable energy sukuk, expectations for 2009, new Zawya.com blog

Singaporean renewable energy company Agni Inc plans on issuing a ringgit-denominated ijara sukuk to test the sukuk market.

South Korea Financial Supervisory Service governor says the country should explore using Islamic finance to attract capital.

Although 2008 was an extremely rough year in the financial markets, including Islamic finance, 2009 should see some recovery although other reports, like the one from Standard & Poor's, predicts the sukuk market will only recover towards the end of 2009.

The Associated Press has an article about the University Islamic Financial Corp. in Ann Arbor, Michigan, which is one of a few Islamic financial institutions in the U.S., and the only one with a Shari'ah-compliant deposit product. An interesting part of the article is that two banks have communicated with the UIFC about helping expand its availability across the U.S. Only one bank, Comerica, is named.

Deutsche Bank launched a new platform they claim will enable Shari'ah-compliant money markets, as well as other securitized products. I have not done enough review of the product, but I would hope to be able to study it a little more and post on my new blog at Zawya.com. This will still be a more frequently updated blog, but topics I think deserve more substance will appear there.