Sukuk issuer quality, M&A, JAFZ downgraded

One of the areas of the Islamic finance industry that has been noticeable recently is the dearth of sukuk from non-high-quality issuers. This is particularly noteworthy in the GCC where a large supply of sovereign issues has not been followed by a comparable level of corporate issues. This trend was noted at a conference in Malaysia. The reasons commonly cited focus mostly on the pricing of sukuk and many even from sovereign issuers have priced considerably higher than they did prior to the financial crisis. With a pipeline of sukuk estimated to be $45 billion, a real recovery in the sukuk market should not be measured by the aggregate value of all sukuk, but by the ratio of sovereign versus corporate issuers.

Another area where the Islamic finance industry has yet to see much activity is in merger and acquisition activity between Islamic financial institutions. This is due to several factors, described well in the Yasaar Media Islamic Investment Banking 2009 report I summarized recently, but according to most industry participants there are simply too many Islamic banks and a majority of them are small. M&A activity could expand Islamic banks' balance sheets which would enable them to provide financing to more big projects as well as achieve greater diversification. in this light, it is noteworthy that Malaysian-based Bank Islam is reported to be 'actively seeking' a merger partner.

Jebel Ali Free Zone was downgraded by Moody's over concern about what support the Dubai government will provide to government-related entities. Jebel Ali Free Zone is a part of Dubai World. The downgrade puts a new light on the issue of valuation or illiquidity for the JAFZ Sukuk when looking at secondary market prices. Back in early February, I wrote a blog post on my blog at Zawya when the secondary market price was 66 . While the price has rebounded some to 77, that is still well below par and suggests that some price discovery may have been in fact occuring in sukuk secondary markets.

Other News

• Dow Jones Islamic Market Indexes named Tariq Al-Rifai, the founder of Failaka Advisors, to head its Islamic Index family following the departure of Rushdi Siddiqui last year to head Reuters' Islamic finance division.
  
• Gatehouse Bank combined two business units--its asset management and capital markets divisions--in the UK under new management to 'create an even stronger business' according to a company press release.
  
• Mayfair Wealth Management launched a Shari'ah-compliant UAE-focused distressed property fund and hope to raise $50 million.
  
• A UAE-based law firm Agha & Shamshi became likely the first Shari'ah-compliant law firm.
  
• South African fund manager has run into problems launching its planned Islamic equity funds, following the departure of its sole Islamic fund manager who remains as an external manager of their sole Islamic equity fund.
  

Sukuk rising or falling?

Juhaina Kasimali at Zawya provides a comprehensive overview of the sukuk market. Haris Anwar at Bloomberg describes the fallout from the controversy about repurchase agreements in ijara sukuk. There was only $11 billion in sukuk issued through August compared with $21 billion in 2007. Prices have also declined in the secondary market.

London continues to lead Western countries in the size of its Islamic finance industry. The UK is the only Western country on the IFSL global ranking of Sharia-compliant assets by country at 10. The UK also has one of the most robust, although still small, secondary market for sukuk with trading volumes of $2 billion. The time frame for the volume number was not specified but I would assume it is for last year because the total issues of sukuk in 2007 was $38.6 billion worldwide and fewer than ten are listed on the London Stock Exchange.

Many lawyers working on Islamic finance are moving to the GCC.

The most recent Central Bank of Bahrain salam sukuk was again oversubscribed, but by less than previous issues. This issue received subscriptions of BD7 million for the BD6 million issue while last month, BD13 million in subscriptions were received for the same size issue.

Islamic finance & microfinance, law firms see need for Islamic finance expertise

John Foster comments regarding Ramadan touch on the idea that GCC-based Islamic financial institutions could make a huge difference in reducing poverty if they devoted a fraction of their resources to helping provide financial services to the poor in nearby countries in Asia and Africa.

The head of global strategy for Reed Smith L.L.P., a law firm based in Pittsburg, Pennsylvania, responds to a question about why they feel they need to have expertise in Islamic finance.

Q: Do you have an Islamic finance practice?
A: We do have some Islamic finance work out of Dubai and Abu Dhabi. It is increasingly important because that is where the money is. Let's face it: Money is basically pouring into the Middle East and, to the extent that it is going to be invested in debt instruments, it will have to be in instruments that are sharia [the Islamic legal code] compliant, and you have to have expertise to do that.

DIFC Authority CEO Nasser Al Shaali says that Islamic finance is providing one of the driving forces attracting "new, more sophisticated investors".

La Trobe University in Sydney, Australia launched the country's first master's degree in Islamic commerce.

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.