Shari'ah scholar licensing, IIT sukuk, Islamic indices

Bloomberg has a more detailed article about the planned Shari'ah scholar certification body, although the details are not yet fully described. I think this is a positive development because it will provide a way for newer or less recognized scholars to build credibility and become selected to be members of Shari'ah boards. This will increase the number of qualified scholars with experience that could be the biggest development to get around the well publicized lack of scholars that are selected to serve on Shari'ah boards. Currently, most Islamic financial institutions select the most recognizable Shari'ah scholars to gain credibility about the Shari'ah-compliance of their offerings. This has led to the top scholars being on many, many Shari'ah boards, which limits the amount of time they can devote to each. This could lead to less thorough review of each product than if the workload were spread across a larger number of scholars. Hopefully the ISRA proposal will move beyond the planning stage and on to become an organization that carries as much weight and recognition as AAOIFI or the IFSB.

There is an article in The Banker about Islamic indices, which have only been around since 1999 when Dow Jones launched their Islamic Finance World index. The article is interesting and notable because it mentions the absence of ETFs (not total absence; there are a few, but not many and most are very small). The Islamic funds industry has grown significantly in the past 10 years, so it seems that the ETF sector would be a natural area for growth as an alternative to actively-managed mutual funds.

The small sukuk ($10 million) from the International Innovative Technologies, which is the first UK-based company to issue a sukuk, is being heralded as the first of many from the UK and Europe. However, I think it is unlikely that this small sukuk, which was subscribed by one entity, Millenium Private Equity, will have that effect. The sukuk--a sukuk al-musharaka--came obout when an investor in IIT suggested Islamic finance as a way to finance the business. This (along its small size and status as a 'first') reminds me of the East Cameron sukuk, which was issued by the US-based wildcatter oil & gas firm with properties offshore Louisiana. While I am not predicting that the sukuk will end up the same way the East Cameron sukuk did (with the bankruptcy of the issuer), I do think that the idea that a small sukuk from a relatively unknown issuer can spark further issuance is overstated. It will take a larger, more well-known issuer to demonstrate that sukuk are the "real thing" to other potential issuers in the UK and Europe. That may happen in the near-term, but it will not make IIT the one that broke the market open. However, it is a start--albeit a small one--that will generate plenty of media attention that could make a sukuk from a better known issuer less surprising. It will be interesting to see what happens from here.

The secretary-general of AAOIFI, Dr. Mohamad Nedal Alchaar, has an opinion article in The National about the potential for France to develop its Islamic finance industry.

Other News

• The current issue of Opalesque's Islamic Finance Intelligence has several interesting articles. One by Shahzad Siddiqui and Toby Birch discusses gold bullion and Islamic private equity. Mohammed Khnifer discusses what happens when sukuk default.  Nikan Firoozye discusses the structure of the consecutive or rolled murabaha. The full issue can be downloaded by clicking through to any of the articles.
  
• South Korea may revive the bill to put sukuk on par with conventional bonds, after it was scuttled earlier this year.
  
• According to an IMF report, the driving force behind the growth in the industry after 2000 was the rise in oil prices, not 9/11. I hope to post something on the report when I have a chance to read it.
  
• The Thai Securities & Exchange Commission will issue rules for sukuk in October, according to the body's Secretary-General.
  
• Kuwait Finance House-Turkey may issue $100 million more in five-year sukuk, after its first issue in August, which was also the first sukuk issued in Turkey. The government of Turkey may consider issuing sukuk "in the future" according to the Finance Minister Mehmet Simsek.
  
• The Central Bank of Bahrain's Sukuk al-Salam was oversubscribed with BD73.5 million ($195 million) in subscriptions for the BD12 million ($31.5 million) issue. The return on the three month securities will be 0.69%.
  
• DIFC Investments will make a scheduled $2.88 million periodic payment on its $1.25 billion sukuk on time, according to a statement posted on NASDAQ Dubai.
  
• A paper in South Africa discusses the basics of Islamic banking.
  
• Malaysia issued four takaful licenses, primarily to foreign companies as it liberalizes its financial sector in a bid to attract more Islamic finance.
  
• Islamic finance could exceed $2 trillion in the next three-to-five years.
  

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.
  

Dar al-Arkan swap, sukuk fund diversification

Dar al-Arkan, which issued a 10.5% sukuk in February to refinance its debts, has entered into a Shari'ah-compliant swap agreement to lower its financing costs. The arrangement swaps the current financing cost of 10.75% with a floating rate of 7.95% over 3-month SAIBOR (I would appreciate if someone could email me a source of SAIBOR rate data) for half of the sukuk, $225 million. The article discusses that the swap lowers the cost of financing, however, it should be remembered that if Dar Al Arkan is now exposed to interest-rate risk on this portion of the sukuk. If interest rates rise, the costs of the floating rate side of the swap to which Dar al-Arkan is exposed will rise. The sukuk matures in 2015 (the length of the swap was not included in the article) and interest rates are currently very low so if the swap covers the entire period of the sukuk, it could expose Dar al-Arkan to substantial additional financing costs.

European Finance House, an affiliate of Qatar Islamic Bank, released the performance of its EFH Global Sukuk Plus Fund. The performance was higher than its benchmark (3m USD LIBOR + 2%) by 780 basis points and the fund says it has experienced lower volatility than the sukuk markets as a whole in its first year. The article describes the diversification the fund was able to achieve across 13 sukuk in nine jurisdictions. This is not surprising, but it is also not very diversified. This is not a problem specific to this one fund; there are far too few sukuk that are available for sukuk funds. Until the growth in sukuk issuance increases--and it has rebounded this year--it will be difficult for sukuk funds to achieve diversification anywhere comparable to conventional bond funds. For comparison, one of the world's largest bond funds, the PIMCO Total Return Fund, has 11,619 holdings according to Morningstar.

Other News

• The Dubai bailout has increased demand in secondary markets for GCC-based sukuk.
  
• Gas pipeline company Trans Thai Malaysia, a joint venture of Petronas and PTT pcl, is likely to issue a sukuk.
  
• Bank Negara Malaysia, on behalf of the government, issued MYR2.4 billion ($743 million) of three-year Sukuk 1Malaysia notes with a 5% coupon. The transaction was facilitated through Bursa Suq Al-Sila', the commodity murabaha platform.
  
• Pakistan's government plans to issue $410 million in short-term (1-, 2- and 3-year) sukuk shortly once it receives government approval from the Sindh government and the Ministry of Defense. The sukuk will be based on land at a terminal at the Karachi airport.
  
• An article in a Turkish newspaper describes sukuk. The description included: "Sukuk are not debts of the issuer". This is technically correct because even asset-based sukuk involve the transfer of beneficial ownership, however, they are structured to be treated pari passu with the unsecured debts of the issuer and often provide recourse to the issuer through a purchase undertaking.
  

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.
  

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".
  

Islamic finance & SRI, Islamic banking in Indonesia

Islamic Finance & SRI - A new report

Dinar Standard and Dar Al Istithmar released the results of a survey on Islamic finance and SRI where they surveyed 29 Islamic financial institutions (including Islamic windows and non-bank financial companies). The results of the study are well documented and, although the sample size is rather small (not something to fault the organizers for), they describe quite clearly the goals, insights and limitations of the data they present.

The final summary of the study is:

Within its limited sample, it is evident that the majority of IFIs have yet to embrace the concept of financial institution utility to enhance their social responsibility. Financial institutions have the ability to redirect funds from the capital rich to the capital deficient to ensure the redistribution of wealth in the long term.
As an example, one method to efficiently utilize an Institutions infrastructure is by maintaining policy targets for financing to SMEs and micro-finance entrepreneurs in the developing world. Micro-finance and SME finance has continuously proven to be a sustainable revenue stream, subject to appropriate risk management strategies, including portfolio diversification, low concentration risk and stringent credit and social collateral requirements.

[...]

At the same token, IFIs can also invest in particular industry sectors that demonstrate social and/ or environmental impact while providing profitable revenue streams, such as education, healthcare addressing the needy water desalination, waste management etc.

I would encourage everyone to take a look through the individual responses (available from the above link as a PDF).

On the conclusions about microfinance, I address my thoughts on Islamic banks and microfinance just below. With regards to the environmental/social/development investments of Islamic financial institutions, it is heartening to see that there are a majority who have investment quotas on these areas, but there remains limited exposure of these activities which may be a question of these quotas being too low. The current environment for business provides benefits for companies that promote their sustainability-related work (whether it is significant or 'greenwashing') and from the preparation of this blog, I read a lot of the press releases and articles about what the Islamic finance industry is doing and there remains limited visibility about sustainability-related business from Islamic banks. So either they are doing very little or they are not promoting what they are doing.

In either case, there is a lot Islamic finance could gain by grasping the sustainability agenda and promoting their involvement in it, especially in the West. I would be hard pressed to come up with a specific reason to switch to a Shari'ah-compliant financial product and many other non-Muslims (with less understanding of how Islamic finance works) may feel similarly. If Islamic financial institutions demonstrated their concern with sustainability, whether environmental, social or developmental, it would surely attract my interest as a non-Muslim consumer with concern for sustainability (for example, I just moved my banking relationship from a major bank to a local credit union). I think there are plenty of other people who share my views and this creates an opportunity for Islamic finance to expand outside of its natural constituency of Muslim consumers (particularly in the West).

I commend Sayd Farook and Rafi-uddin Shikoh (and all others involved in the report) on a job well done creating a thought-proviking and interesting report.

Islamic banking in Indonesia

I thought this article about Islamic banking in Indonesia was interesting. It describes the limited inflows of money into Islamic banking because of unclear regulations and pervasive corruption, but then points out the Islamic banking industry in Indonesia is more focused on small- and medium-sized businesses and microfinance than Islamic banks in other countries.

Although it is clearly sub-optimal for the Islamic banking system to be constrained by regulatory uncertainty and corruption, the Indonesian example shows that Islamic microfinance and banking focused on small and mid-sized businesses can work. I remember seeing Hans Dieter Seibel present a paper (available as a PDF) on institutional diversity in Islamic microfinance in Indonesia and the challenges in terms of capital adequacy and solvency between different types of Islamic microfinance institutions.

One thing I think is certain is that there is too little focus on Islamic microfinance and its impact as one component in poverty alleviation alongside other forms of aid including zakat and waqf. There is certainly enough smarts in the Islamic finance industry to be able to develop cost-effective Islamic microfinancial products and it would be a natural fit for the industry if some of this knowledge and experience were donated to develop Islamic microfinance without having to have the costs of development incorporated into the financial products and passed along to the end-consumers.

Capitas Group

The Islamic Corporation for the Development of the Private Sector signed a deal with Capitas Group, a U.S.-based company that develops Shari'ah-compliant finance companies. Other companies within their portfolio are the U.S.-based Zayan Finance and Zayan Takaful which provide commercial real estate financing and takaful, respectively. The new company will be based in Jeddah, Saudi Arabia and according to Capitas Group CEO Naveed Siddiqui, "there is a huge demand for mortgage finance in Saudi Arabia and the broader region". With a new mortgage law expected soon in Saudi Arabia, this will probably be the focus of the new company.

Other News

• Tamweel is considering its options in case the merger with Amlak falls through. The merger has been in the works since 2008 and is expected in the first quarter of this year, but there appears some doubt on the part of Tamweel officials that it is a sure thing.
  
• Officials at the Philippines' only Islamic Bank, Al-Amanah Islamic Bank, expect the country to miss the growth in Islamic finance in Asia as it continues to 'refurbish' and 'rebrand' the bank after a capital infusion from the Development Bank of the Philippines. S&P released another report on the future growth of Islamic finance today.
  
• The state-owned Islamic Bank of Thailand is planning 55 billion baht ($1.66 billion) sukuk issuance. 5 billion baht would be raised as a local Islamic bond with the remaining 50 billion baht as a sovereign sukuk.
  
• During the last year, the "brand value" of Islamic banks grew rapidly. The article about the study from Brand Finance plc did not define how this was measured.
  
• In a long overdue change, Kuwait Finance House upgraded its website.
  

Tuesday bullets

• DP World made a periodic payment on its sukuk yesterday, signifying that it may escape much of the crisis in Dubai that centers around real estate.
  
• Thailand may see the first sukuk issued in the first quarter of 2010.
  
• Islamic finance may find opportunities in financing shipping and the deterioration in the global economy may present opportunities for the industry to acquire assets at a discount.
  
• Gatehouse Bank is launching its trade finance fund, which it will offer with DDCAP Limited.
  
• Cyprus may try to attract Islamic finance with regulatory changes and the 'establishment of a framework to attract Islamic finance'.
  
• Gulf Finance House wrote down its exposure to Dubai through the Legends Project, which it said accounted for all of its material exposure to Dubai.
  
• The high court in the Indian state of Kerala blocked the formation of an Islamic venture capital bank partially financed by a state-owned company.
  

Sukuk: debt vs. equity, Islamic finance assets grew 2008 to 2009

Reuters has a good article on the debate around sukuk and whether they should be more akin to equity or debt. The article includes an update on the progress of the East Cameron bankruptcy. Sukuk holders may propose a reorganization that would give them an equity interest in the underlying company and their counsel expects that East Cameron will emerge from Chapter 11 bankruptcy early next year. The debate over sukuk is one that has been particularly in the forefront over the past two years following the AAOIFI ruling that prohibited mudaraba and musharaka sukuk from including repurchase agreements to redeem them, as well as by several high profile sukuk defaults.

The debate will continue, but the likely end result will probably be a compromise between the sukuk being debt or equity. They will likely continue to be arranged with fixed or variable payments based on an underlying interest rate, making them more like debt. However, they will also probably include more equity-like features that have been included in some recent sukuk. They will also probably move away from the asset-based structure that transform them into unsecured obligations of the issuer. This means that the asset used in the structuring is transferred to the SPV issuing sukuk with a purchase obligation clause at the maturity or in cases of default that gives investors no claim to the asset, only a claim on the issuer.

In contrast to asset-based sukuk, asset-backed sukuk effect a transfer of the asset to the SPV that gives the sukuk holders legal claim to the asset if there is a bankruptcy of the issuer or default on the sukuk. This was the structure of the East Cameron sukuk and one of the issues tackled by the bankruptcy court was whether the sale of the overriding royalty interest to the SPV was a 'true sale' or whether it was only done to create a financing transaction. The court documents suggest that it is the former, which if finalized would create a significant precedent for future sukuk issues in the U.S. A Reuters Q&A provides a similar overview of sukuk and the East Cameron sukuk in particular. A Factbox shows a few examples of asset-based and asset-backed sukuk. Reuters also provides a brief timeline of developments in the sukuk market.

Reuters also presents the views of two experts, an Islamic finance lawyer Megat Hizaini Hassan and the CEO of a Malaysian ratings firm.

A report by The Banker magazine finds that there are assets of $822 billion in Islamic banks and Islamic windows at conventional banks, up 28.6% from the $639 billion estimated as of 2008. The industry, however, continues to miss growth opportunities because Shari'ah-compliant products are more expensive. At a conference in France, the CEO of Renault Nissan Carlos Ghosn said that company would raise money from Islamic investments if it were more cost competitive.

Other News

• The IFC sukuk could prove to be a significant issue despite its small size because it was listed exclusively in the Gulf and the arranging syndicate included mostly Gulf-based firms.
  
• Thailand continues to consider a sovereign sukuk, although it remains at least two years out because of a lack of regulatory changes needed to facilitate the issue.
  
• The Wall Street Journal wrote an article about the need for more trained professionals in Islamic finance and the growth in the number of business schools which offer programs in Islamic finance.
  
• The Irish newspaper The Independent has two articles about Islamic finance including one about how Ireland is considering changes to laws to attract Islamic finance.
  

Sukuk markets 'recover'? DIB buyback, FTSE Yasaar index in Thailand, TID denies bailout.

Trowers and Hamlin, a law firm involved in the Islamic finance industry compiled a number of interesting statistics about the sukuk market, which has rallied 29% since February:

"Since the market's darkest day on February 11 the average yield on corporate GCC sukuk has fallen from 17.2% to 10.1% and the average credit spread over LIBOR has narrowed from 1,414 to 763 basis points."

Although the improvement in prices and drop in yields is a positive for sukuk issuance later this year, the explanation that the rally was due to optimism in caoital markets and governments in the GCC providing support to the issuers is only part of the picture. As I have tried to demonstrate by looking at two individual sukuk, Jebel Ali Free Zone (JAFZ) and Nakheel (which should be followed soon by a third on The Investment Dar sukuk on which the company defaulted). The two pieces highlight differences between sukuk, but focus on the lack of liquidity in sukuk secondary markets which makes them very volatile. One of the primary causes of this illiquidity is the shortage of sukuk which leads buyers to adopt a 'hold-to-maturity' position at greater levels than in conventional bond markets because there is unlikely to be another new sukuk to reinvest the proceeds from any sale. This is particularly true when new issuance has plunged, as it did during 2008 and the first quarter of 2009.

The Dubai Islamic Bank finished the first sukuk 'buy back' of $50.62 million at 88% of par value.

In response to earlier media reports that the Kuwaiti government was planning a bail out of The Investment Dar, the company released a short simple statement: "The Investment Dar Co. K.S.C.C. confirms that no negotiations are being held regarding a bail out by or other funding from the Central Bank of KuwaitCentral Bank of Kuwait, contrary to recent media speculation."

FTSE Yasaar launched its newest Islamic index, this one providing an index benchmark for the SET in Thailand.

Islamic Development Bank wants G-20 to look at Islamic finance and inclusion in the IMF's Financial Stability Forum

The Islamic Development Bank says that the G-20 meeting in London should include a discussion on the opportunities offered by the Islamic finance industry. Ahmed Mohamed Ali also said that Islamic financial institutions should have representation within the G-20 and the Financial Stability Forum of the IMF. The article describes his comments:

"The major selling proposition of Islamic finance is its strong ethical foundation. Financial stability also requires to go back to basics under a new leadership, a special moral fiber and a character-and-integrity-based governance," he said.

However, it also entails recourse to "people values" and to "principles-oriented governance" and a strong linkage between financial services and real economic activities and transactions. It also requires a sense of responsibility and accountability. Islamic finance of course has an extra tier of compliance in the form of Shariah governance.

One of the important things discussed in the article is that the President of the IsDB remains confident about the Islamic financial industrty's resiliency but remains concerned about the effect of a slowdown in economic growth on the industry.

Bahrain based Al-Salam Bank and Bahrain Saudi Bank are planning to merge. Mergers between Islamic banks should continue through the next few years to reduce the number of Islamic banks and increase their average size. Regulators should be concerned about allowing Islamic banks to become 'too big to fail' especially without interbank lending markets and no lender of last resort. However, the risk of too big to fail is offset by the need for Islamic banks to be better diversified on the asset side of their balance sheets.
Other News

• There is an article about the Shari'ah screening process that includes a description of one of the most important developments the industry will need to make: the inclusion of positive (not just negative) screens.
  
• The sukuk market is expected to recover in 2009, although local currency sukuk will be more prevalent according to Islamic bankers like Badlishah Abdul Ghani, CEO of CIMB Islamic bank and Salman Younis of KFH Malaysia. The Islamic Development Bank is planning to issue local currency sukuk in Singapore, Indonesia, Kazakhstan and possibly Hong Kong.
  
• Bahrain's central bank is planning a $500 million sukuk to rollover a maturing $250 million sukuk as well as $250 million for a new issue.
  
• The Islamic Bank of Thailand is planning to issue its first sukuk this year.
  
• Indonesia plans to sell up to Rp 7.5 trillion ($650 million) in sukuk before June. The treasury director said that depending on changing valuations of the underlying asset could cause the issuance to change.
  
• Amana Bank Ltd will become the first Islamic bank in Sri Lanka when it opens. It recently received provisional approval from the country's central bank.
  

Islamic finance affected by credit crisis, should improve resiliency, takaful asset management problems, BBA on the way out, WIEF concludes

Shari'ah scholars say that the bai bithaman ajil (BBA) type of sale with deferred repayment that synthesizes an interest-bearing loan is losing favor and will eventually disappear. The contract is widely used in Malaysia, but is considered to not be Shari'ah-compliant in the GCC. Several courts in Malaysia have criticized the contract's validity. This demonstrates the growing maturity of the industry and its ability to gradually move away from contracts that were developed out of necessity, but which are not substantively different from interest-based financing. As the industry develops, there should be further movement away from the replication of conventional financial products in favor of financial products which are distinct from interest-based products.

An article in Asian Investor magazine discusses another consequence of the shortage of sukuk: takaful asset management. Most takaful companies face significant problem in investing the premiums they receive in Shari'ah compliant ways and in many cases end up overexposed to equities compared with sukuk, in stark contrast with the investment profiles of conventional insurers. This creates an additional risk for takaful companies because equity values are more volatile than traditional fixed income products that comprise the bulk of conventional insurers' investment portfolios.

Zeti Akhtar Aziz, the governor of Bank Negara, Malaysia's central bank, describes the risks facing the Islamic financial system with greater clarity than I have seen elsewhere:

"the global financial crisis has highlighted several structural weaknesses and imbalances in the international financial system. Whilst Islamic finance is not insulated from the effects of the current environment, the Shariah principles and values that underlie Islamic finance provide an important underlying foundation. [...] As it becomes part of the financial globalization process, Islamic finance has however become increasingly exposed to the systemic implications of external developments...its potential for sustaining financial stability and... how robust is the industry to external shocks."

The solutions she proposes are very straightforward to describe, but far more difficult to implement: global regulatory coordination, the development of an international interbank liquidity management market (a 'lender of last resort'). Finally, she describes the strengths of Islamic finance in a way that eschews the simplistic "Islamic finance is based on real economic activity" explanation that abounds from other sources. She elaborates that Islamic finance is seen as a facilitator of the real economy and the links between financial and productive flows acts as a check that limits excessive leverage, imprudent risk taking and speculative activities.

However, even Islamic finance is not immune from global economic shocks nor dumb lending decisions, although the risk profile of many Islamic financial products like mudaraba, musharaka and ijara, provide banks with greater incentive to do more extensive due diligence into the use of funds they provide. They will bear a greater risk of loss in many of these financing structures than they would as a conventional senior secured creditor. Her explanation should provide the beginning of a discussion that should not degenerate back into unsupported declarations that 'Islamic finance is immune from crisis' or 'Islamic finance is inherently more stable than conventional finance'. Even if they were true, they would be unhelpful in progressing the discourse into areas where improvements in the Islamic financial industry could benefit practitioners, regulators and consumers.

Another article talks with a few people about the exposure of Islamic finance to the credit crisis. A Netherlands-based author, Abdul Gafoor, describes something that I have been saying as well: "Islamic banks] go mostly for real estate and that kind of thing. And when real estate prices go down, [their portfolios] also go down. It depends on whether they invested directly in real estate or through securities. Here, you cannot make a general claim [about the strength of Islamic banking]. It depends on each individual bank -- how they behaved." Neil Miller, a lawyer with Norton Rose also observes that "The thing about Islamic banking, at the end of the day, in some respects, it is going back to banking the way it used to be done. So it is very much based on relationships, on analyzing risks, and understanding the risk and the relationships in the specific projects or company that you are looking to finance and getting comfortable with that." It is another example of what I think should be the focus in journalism about Islamic finance: avoid denials of problems and work to improve the resiliency of the Islamic finance industry in the future.

Although this is not a new announcement, the Financial Times reports on the possibility that The Investment Dar, the troubled Islamic investment bank in Kuwait, will sell at least part of its stake in Aston Martin which it acquired in a Shari'ah-compliant leveraged buyout in 2007.

The lack of secondary market liquidity in sukuk markets may affect or delay the issue of new sukuk. If pricing in the secondary markets are distorted by illiquidity, new issues may be priced less favorably for issuers.

World Islamic Economic Forum

The WIEF concluded with the issuing of the Jakarta declaration which includes a section on Islamic finance:

OVERCOMING GLOBAL FINANCIAL CRISIS:

• Support the efforts of the OIC to accelerate greater regional economic cooperation through the effective implementation of its 10 year Plan of Action.
  
• Support the Islamic Development Bank (IDB) Task Force for Islamic Finance and Global Financial Stability to promote Islamic Finance and Banking as a viable alternative to the conventional financial system.
  
• Call upon Governments and Islamic banks to expand Shariah compliant micro-credits.
  
• Support the call for effective regulations in the global financial industry to mitigate risk and failure.
  
• Support the establishment of Islamic Banking Training centres with harmonised standards.

An editorial in the Jakarta Post says the country could benefit from Islamic finance through attracting funds from the oil-rich GCC, although the same conditions apply as with attracting conventional funds: Legal certainty and reasonable returns The Philippines Stock Exchange may launch a Shari'ah-compliant equity index while Thailand is planning the launch of its own next month.

First U.S. state agency to offer Islamic finance, Gold ETC, harmonization in Shari'ah-compliance

Minnesota Housing, a state agency, becomes the first in the U.S. to offer Muslims home finance that is Shari'ah-compliant (using murabaha) through Devon Bank, a bank in Chicago, Illinois which offers Islamic home finance nationwide. The first borrowers closed on the purchase of their first home and there are reportedly up to 10 more clients in the pipeline. The offering of home finance products to Muslims structured to be similar to conventional mortgages, but done in a Shari'ah-compliant way were pushed by Hussein Samatar, the director of the African Development Center (ADC) in Minneapolis.

Dubai Multi-Commodity Centre (DMCC), a Dubai-based commodity exchange, launched the first Shari'ah-compliant Exchange Traded Commodity (ETC). The ETCs are fully backed by physical gold stored at HSBC and each certificate is equivalent to 1/10th of 1 troy ounce of gold. The ETC website provides information about the security and the NASDAQ Dubai website has additional information.

The President of the Islamic Bank of Thailand says that while Shari'ah standard harmonization is likely in the long-term, it is neither possible nor desirable in the near term. The bank's president uses the example that it uses bay al-inah (a similar transaction to murabaha but involving a repurchase of a good by the financial institution). The rationale for the use of the product, which is not viewed as Shari'ah-compliant in the GCC region, is that it is used in transactions to provide microfinance and "the poorer people, what kind of asset could they sell to us?" for use in a sale and lease-back (ijara) financing. I think that, although it will lead to some inefficiencies particularly on products that are attempting to bridge the Asia-GCC divide, in general, it is better to have products available that meet the needs of consumers in the short-run and over the longer-term, as the industry matures, there will be more harmonization of Shari'ah standards and the process of moving this direction will be driven by both consumer demand and the requirements of Shari'ah scholars to ensure that products are moving towards convergence near the (high) optimal level of Shari'ah-compliance and not the sub-optimal race to the bottom level.

Total banking assets in the Shari'ah-compliant banking system of Malaysia grew by 23% in 2008, a year that saw significant trouble in the global banking market. In addition, the risk rated capital of Islamic financial institutions was 15.2% and non-performing loans declined to 2.4%.

Despite having a small relative share of the financial system being Shari'ah-compliant institutions, the Indonesian Vice President believes that the laws passed to facilitate the industry's growth will spur it over the next few years. However, the Vice President who was being quoted also declared that "We all know that Muslim countries with Islamic economic systems during this current [crisis] situation are relatively unaffected by serious problems". Although I do believe that there are benefits from development of Islamic financial institutions, it is extremely myopic to declare that Islamic finance has and will always be immune to crisis. Dubai has one of the most developed Islamic financial systems, but the over-dependence on property as a physical asset (which now backs about 20% of all Islamic bank assets) made the Emirate extremely vulnerable to global economic and credit conditions.

I found this interview transcript quite interesting. It is with K.K. Ali, the CEO of a musharaka-based finance company (Alternative Investments and Credits Limited) in Kerala, India affiliated with Jamaat-e-Islami Hind, a Muslim organization in the country. It provides, I think, a more ground-level view of the difficulties associated with using musharaka finance.

Scotland believes its tradition of having faith-based and ethical finance makes it a logical step to try and attract Islamic finance. A Scottish organization is holding a conference on Islamic finance in Edinburgh at the beginning of April.

Is Islamic finance linked with conventional finance?

A few recent articles predict that one of the few winners from the credit crisis will be Islamic finance. This presumption is based on the assumption that the underlying restrictions from the Shari'ah force a more conservative approach to financial services that can restrain the speculative excess that has caused so much harm in the conventional financial system. To a degree, this is true and provide a methodology for a more conservative approach to finance that has greater appeal in a climate of significant deleveraging across the financial markets. However, there remains a link between conventional and Islamic finance that creates some limitations on how much Islamic finance can gain from the problem in the conventional financial industry. To wit, Islamic finance uses LIBOR and other interbank interest rates as a way to price Shari'ah-compliant products and therefore any disruption in the LIBOR market can spill over into the Islamic finance market by raising the cost of Shari'ah-compliant products which are benchmarked to LIBOR or another interest rate. It is unlikely that the Islamic financial market will ever be de-linked from conventional financial markets and it is uncertain whether this is a desirable goal.

The Moroccan government is planning on allowing Islamic banks to operate within the country according to the head of the country's central bank.

Despite a weak credit market globally, Indonesia is still planning the US dollar-denominated sovereign sukuk issue for later this year, followed in the first half of 2009 by a retail sukuk.

The number of Islamic financial institutions in Kuwait surpasses the number of conventional financial institutions, although Islamic financial institutions' total assets is still lower than conventional financial institutions' total assets.

Dubai Bank, an Islamic bank, will issue up to $5 billion in sukuk between now and 2013 starting with an issuance of about $500 million in the next few months to finance its growth. The structure of the bonds will be ijara and musharaka.

State-owned Islamic Bank of Thailand plans to issue sukuk to attract money from the GCC to fund infrastructure projects.

Transparency through publicly available fatawa

Syed Farook, a lecturer in Islamic finance at BIBF in Bahrain, wrote an article on CPIFinancial.net about the prospects for providing greater transparency in the development of fiqh by providing publicly available fatawa that will allow junior Shari'ah scholars to view senior Shari'ah scholars' fatawa and hopefully reduce the number of senior Shari'ah scholars who sit on more than twenty Shari'ah boards (currently six).

Bank Negara Malaysia governor Dr. Zeti Akhtar Aziz, speaking at the launch of a training seminar on Islamic finance commented on the progress Malaysia is making to become a global hub in Islamic finance, "Due to wide ranging liberalisation measures, we have seen the entry of new foreign Islamic financial groups into our financial system and increased foreign interest in domestic Islamic financial institutions". The Malaysian Islamic finance market, although one of the most developed in the world, received some skepticism from foreign Islamic finance institutions, particularly in sukuk, where Shari'ah regulations are viewed as more liberal than those in the GCC.

Des Moines, Iowa-based Principal Global Investors is the latest Western company to enter the Islamic finance market and will do so in Malaysia in partnership with CIMB Islamic.

Takaful House, a Dubai-based takaful company listed on the Dubai Financial Market, the domestic stock exchange for companies in the UAE. The IPO offering price was AED 1 per share.

The Islamic Bank of Thailand (IBT) chairman wants to see non-Muslims use the bank, in addition to Muslims, who make up 6 million (just under 10%) of the population. There may also be plans in the future for the bank to become listed on the Thai Stock Exchange. IBT is one of the smallest state-owned banks in Thailand and has a high level of non-performing loans, at 16%.

The slowdown in Western financial markets coupled with the rise in Middle Eastern finance, including Islamic finance, has led to Western law firms, particularly those with a focus on the financial markets, opening branch offices throughout the GCC in Dubai, Abu Dhabi, Bahrain, Kuwait and Saudi Arabia.

IBB moves into continental Europe, Islamic wealth management

The Islamic Bank of Britain plans to open branches in Sweden and Germany. The branch in Sweden would be the country's first Islamic bank, although not the first 'interest-free' one. JAK Members Bank, a co-operative that began operating in 1970 and received a banking license in 1997, provides interest-free credit to its members with administrative costs paid for by annual membership fees. Currently the bank has 53,000 members and the total savings of € 97 million and borrowings of € 86 million as of 2008.

Douglas Johnson, CEO of Calyx Financial, discussed the need for more strategic work, particularly involving research into new products and approaches for Islamic wealth management to become more widely available. An edited version of his speech, given at the World Islamic Funds Conference in Dubai, is available online.

The Financial Times describes Islamic bank Gulf Finance House.

A story on the first Shari'ah-compliant car insurance company in the U.K., Salaam Insurance, includes a concise description of how takaful works.

The Islamic Development Bank has begun a sukuk issuance in Malaysia to fund the IsDB's work in the country.

India could emerge as a large market for Islamic finance if regulations are changed to allow Islamic banking. The Muslim population of India is estimated at 150 million. Islamic banking has been successful in Thailand, particularly in the southern region, which has a significant Muslim population. The Islamic Bank of Thailand is the country's main bank.

Malta's Financial Services Authority ended its consultation period on Islamic financial products and plans to issue guidelines for sukuk by the end of 2008 and for takaful in early 2009.

Islamic finance growing globally, particularly in the GCC and U.K., although the industry is not completely immune from the credit crisis

The rapid growth in Islamic finance has begun to receive interest from Western financial institutions and others like rating agencies (e.g. Moody's and Standard & Poors), consulting companies (McKinsey) and news organizations (Financial Times and Bloomberg). This is a credit to the industry's rapid growth and potential to emerge from being a niche industry to one that could become significant in the global financial system. The Islamic financial industry is also expanding into Europe, particularly the U.K. (although there are many other cities vying to become a hub in the global Islamic financial industry) The Independent newspaper in the U.K. has an interesting article on the different Islamic financial products available in the U.K. A recent event called 'Microfinance in the Islamic world' was held at the House of Commons and featured a presentation by Muslim Aid, a charitable organization which has done a significant amount of Shari'ah-compliant microfinance. The conservative nature of Islamic financial products has increased their attractiveness as more risky products have run into problems recently.

The first multi-asset class investment fund was launched on the AIM in London last Friday trading under the ticker FSF.

France is continuing the process of figuring out legislative, tax and regulatory changes needed to rival London for the center of Islamic finance in Europe. Despite having a Muslim share of the population many times that of the U.K., Islamic finance is still nearly nonexistent in France. Switzerland, although prominent in international finance, has lagged behind on Islamic finance.

AAOIFI is developing a governance standard for corporate social responsibility. This is a very important step because it will provide a way to monitor whether Islamic financial institutions are meeting their ethical responsibilities that are the core of their differentiation from most conventional financial institutions.

The Indonesian rupiah-denominated sukuk will be placed in mid-August with a listing expected on August 27th. Doha Bank has delayed their planned $1 billion sukuk to develop an exchange for carbon emissions trading in the Middle East because of poor market conditions. Thai property developers should finance their businesses using sukuk, according to the former head of the Islamic Bank of Thailand Dheerasak Suwannayos. Since 2006, the growth in sukuk has outstripped the growth in conventional bond issues in the GCC, and almost half of this has financed real estate projects.

The Netherland Antilles are exploring legal and regulatory changes needed to attract Islamic finance.

Islamic economist Humayon Dar is working with a group called Charity Bank to develop Shari'ah-compliant financing for non-profit organizations in the U.K.

Dubai Islamic Bank recently launched a Shari'ah consulting group, Dar Al Sharia, to provide research and development and consulting services in Islamic finance transactions.

Islamic banks in the GCC are planning expansion into North Africa and Asia to find new opportunities to grow.

NPR has an article on Islamic home finance in the United States.

IBF Net is launching an institute studying Islamic microfinance in the state of Orissa in India. I have had the pleasure of speaking with one of the founders of the Institute of Microfinance and Development, Dr. Mohammad Obaidullah who is also a Senior Economist at the Islamic Development Bank, and I anticipate that they will make a very positive impact.

Islamic credit cards are becoming more available, although they differ little from conventional credit cards. Usually, the either offer a line of credit with a fee based on the amount used, a murabaha structure where the card issuer 'owns' the goods purchased for an instant when they are purchased and charge a markup, or a lease-buyback where they own the goods until they are paid for and 'lease' usage. They seem to be virtually indistinguishable from conventional credit cards in impact, more so than other Islamic finance transactions where there is a chance for the Islamic finance company to take ownership.

UK Islamic home finance, sukuk; DIFC CEO calls for standardization; Indonesia plans sukuk in August

The Guardian newspaper in the UK describes in detail the different types of Shari'ah-compliant home financing available in the country. There were a few very interesting facts presented. First, a small minority of customers using the Shari'ah-compliant home financing are non-Muslims; currently about 2 percent of the Islamic Bank of Britain's customers are non-Muslims who turn to Islamic home finance for ethical reasons. Second, and this may provide a way for Islamic banks to broaden their interest beyond the Muslim market, is that in some cases, Islamic home finance is cheaper than traditional mortgages.

"If you bought a property for £250,000 using a diminishing Musharaka plan from HSBC Amanah, you would pay around £1,553 a month (made up of £1,246 in rent and £307 in contribution payments to increase your share), based on the bank buying 90 per cent and you putting down a 10 per cent deposit. If you took out a conventional two-year fixed-rate loan with HSBC (at 6.29 per cent and with a £799 fee) on £250,000, you'd pay around £1,655 a month over 25 years."

. There are of course differences in availability and structure that could negate the difference, the development of cost competitive Islamic home financing is a good thing for the industry as it seeks to expand beyond its current niche role.

Nasser Al Shaali, the CEO of the Dubai International Financial Center (DIFC), commented on the difficulty of operating Islamic finance in regulatory environments premised on only conventional banks operating, but also that the lack of standardization (such as standard, widely accepted fatawa) is hampering the industry's growth. While many countries are anathema to developing parallel regulatory systems for Islamic and conventional banking (as Malaysia has already done), there is still a case for assessing whether regulatory requirements designed for conventional banks are adequate for supporting a sound financial system where conventional and Islamic banks operate side-by-side.

The Indonesian government plans to issue its first sukuk in August and will use an ijara structure based on assets from the finance ministry. A cynical observer might question whether the assets of the finance ministry are Shari'ah-compliant since many activities in the finance ministry surely involve interest such as the also announced ORI005, the fifth retail (conventional) bond.

Meanwhile, Islamic banking continues to develop in Bangladesh but faces challenges in Thailand.

The UK government is "dragging its feet" and is unlikely to issue its first sukuk this year according to Mohaimin Chowdhury, head of legal, Shari'ah and compliance at the European Islamic Investment Bank. Although the difficulties for a sovereign sukuk from a tax perspective are real and the uncertain market conditions create challenges, Mr. Chowdhury feels they could "deal with them quicker". Kitty Ussher, the Finance Ministry is quoted as saying "There's no doubt in my mind that if we can find a way that works for the taxpayers to do it, the benefit to the City of London in terms if prosperity, jobs and expertise will be enormous [however] we just felt that since this is the first time we are doing it, it would be simpler and less risky to sell Treasury bills". Dr. Mohammed Ramady speaks to the situation in the U.K. and U.A.E. regarding the Islamic finance market as a whole in an editorial.

Thailand sovereign sukuk, GCC financial centers and Islamic hedge funds

Thailand could issue its first sovereign sukuk in 2008.

The Economist has a description of the growth of the GCC region financial centers in Bahrain, UAE and Qatar.

Shari'ah Capital, a New Canaan, Connecticut-based firm is working with Barclay's to offer the first Islamic hedge fund. The fund uses Shari'ah-compliant alternatives to options and short selling and will allow investors to choose from several different hedge fund managers and investment strategies.

Islamic finance growing rapidly, other news

Islamic finance continues to grow rapidly.

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

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

Takaful growing rapidly in Brunei.

Thailand and Islamic microfinance in Sri Lanka

Islamic finance receiving attention in Thailand and the Islamic Bank of Thailand wants to lead the way in financing the halal food industry.

Muslim Aid and Amana Investments launched their Islamic microfinance program today in Colombo financing 10 microbusinesses with between 10,000 and 60,000 Sri Lankan Rupees (between $88 and $531).

The Institute of Halal Investing is also working on a Shari'ah-based microfinance program, which we are preparing to launch in a pilot study later this year. The website for this project is http://www.halalmicrofinance.org/