Malaysia's oldest Islamic REIT may be looking to Indonesia for growth, which makes sense, although real estate prices have risen quickly recently and regulatory impediments remain relating to the tax treatment of REITs and rules about foreign ownership of land. Islamic REITs may offer similar returns (i.e. regular dividends) to sukuk, and should provide an investment that pass through the risks and rewards from the underlying assets directly to investors (which most sukuk are structured to avoid).
One area of caution around comparing REITs to sukuk is that many REITs invest in buildings using debt (presumably Shari'ah-compliant debt in an Islamic REIT) to generate leverage, which in the case of a market that has risen substantially ("The average value of industrial land in greater Jakarta surged 76 percent last year, while the cost of apartments increased 11 percent, according to a Bank Indonesia survey. "), poses greater risk than an asset-based sukuk where the return is not primarily dependent on the value of that underlying asset (and where leverage is absent for the investor, and more explicitly reported for the company issuing the sukuk in their financials).
Another potential area to keep an eye on with Islamic REITs is whether they are being used by investors as an explicit substitute for sukuk (e.g. by takaful or pension funds) given the shortage of the latter. The fall-out from the global financial crisis was that it led to a subsequent debt crisis in Dubai, which also had a highly leveraged real estate sector that had moved into bubble terms. The financial institutions which fared the worst in this crisis were those with too much exposure to real estate and those that were most leveraged. Islamic financial institutions are in particular susceptible to this bias towards real estate since it provides a tangible asset that is the easiest to incorporate into a Shari'ah-compliant structure.
Showing posts with label real estate. Show all posts
Showing posts with label real estate. Show all posts
Thursday, May 03, 2012
Wednesday, January 18, 2012
New country, same story?
The boom in Islamic finance in Dubai from 2005-2008 was built on the back of the real estate sector and when real estate faltered, it brought down several Islamic finance institutions. So it should bring a bit of caution to see that the Participation Banks in Turkey are concentrated in real estate construction as well. An article in Today's Zaman (ht Islamic Finance Turkey) breaks down the loans from Participation Banks into the uses of these funds:
Business Loans
Construction loans: $8.01 billion
Trade: $3.52 billion
Textile: $2.05 billion
Food: $1.35 billion
Consumer Loans
Total: $3.46 billion
Of which housing loans: $2.03 billion
Adding the construction loans and housing loans gives just over $10 billion (out of $20.6 billion in total loans). Is this too much? Only time will tell if this is sustainable. An IMF paper looking at the exposure of US banks before the credit crisis found that they had a higher level of exposure to real estate (62.4%), although the exposure to commercial and residential real estate combined for just over 50%.
So far Turkey's economy has been growing rapidly--as has its banking system (Participation Banks included)--and hopefully there will not be surprises down the road. But it is never too early to consider whether there might be warning signs, though more analysis than just looking at the share of real estate financing in Participation Banks' loan books is needed.
Business Loans
Construction loans: $8.01 billion
Trade: $3.52 billion
Textile: $2.05 billion
Food: $1.35 billion
Consumer Loans
Total: $3.46 billion
Of which housing loans: $2.03 billion
Adding the construction loans and housing loans gives just over $10 billion (out of $20.6 billion in total loans). Is this too much? Only time will tell if this is sustainable. An IMF paper looking at the exposure of US banks before the credit crisis found that they had a higher level of exposure to real estate (62.4%), although the exposure to commercial and residential real estate combined for just over 50%.
So far Turkey's economy has been growing rapidly--as has its banking system (Participation Banks included)--and hopefully there will not be surprises down the road. But it is never too early to consider whether there might be warning signs, though more analysis than just looking at the share of real estate financing in Participation Banks' loan books is needed.
Wednesday, September 14, 2011
UAE sukuk market evolution
An article from the Business & Banking Review (via Zawya) describes the evolution of the UAE sukuk market. One of the most interesting parts of the article (the whole thing is well worth a read) comes at the beginning:
Many of these sukuk were for real estate-related projects, or for financial institutions which financed real estate investment. While it is not unusual to see a large volume of sukuk (and conventional bonds) come from financial institutions and real estate companies, the large size of the projects in the UAE (particularly Dubai) were financing a real estate bubble, in many cases supported by the government (the issuers were often partly state-owned or quasi-government companies).
During the boom, these sukuk were snapped up quickly, as demand for nearly any sukuk overwhelming the supply, even in the mega sukuk (a significant amount came from the three Nakheel sukuk, $2.5 billion issued in 2006, $750 million in 2007 and $3.6 billion in 2008). Now that the sukuk markets are recovering to some degree, the demand is still there, but it is not being met by mega-sukuk. In many cases (for example, when GCC-based institutions have traveled to Malaysia to issue sukuk), the average size has shrunk significantly, although there are still a good share of "benchmark" sized sukuk.
This is not a bad thing for the market overall. While a smaller issue may not generate the same secondary market liquidity (given the proclivity of many buyers to hold-to-maturity), they provide more diversity in issuers, currency, ratings, industry, etc. This is positive because it provides more opportunities for sukuk investors to diversify, so long as they can get an allocation of new sukuk or find them in the secondary market, which is never a given.
Overall, however, I think the current situation is preferable because 1) there was little secondary market activity in the sukuk pre-crisis; 2) there were far too few diversification possibilities for investors away from real estate and related financial institutions; and, 3) the real estate on which the sukuk were based turned out to have been overvalued, leading to a near collapse of the primary market for sukuk. Risks remain from a global economic slowdown and geographical diversification is still nearly impossible. However, the market is on the right track. Again, I would suggest reading the whole article because there is a lot more there.
What is interesting to me is not the growth (827% over four years), but the average size of the sukuk issued in the UAE, which grew from about $385 million in 2004 to $1.25 billion in 2006 and nearly $1 billion in 2007. This size is significantly larger than many of the sukuk issued since the financial crisis (excluding some of the sovereign issues from Malaysia).In 2004, only three sukuks were issued in the UAE with an aggregate value of $1.165 billion. Two years later, the number of sukuk issues had increased to seven and the value grew eight-fold to $8.755 billion. The height of the sukuk market was certainly 2007 with eleven issues with a value of $10.8 billion.
Many of these sukuk were for real estate-related projects, or for financial institutions which financed real estate investment. While it is not unusual to see a large volume of sukuk (and conventional bonds) come from financial institutions and real estate companies, the large size of the projects in the UAE (particularly Dubai) were financing a real estate bubble, in many cases supported by the government (the issuers were often partly state-owned or quasi-government companies).
During the boom, these sukuk were snapped up quickly, as demand for nearly any sukuk overwhelming the supply, even in the mega sukuk (a significant amount came from the three Nakheel sukuk, $2.5 billion issued in 2006, $750 million in 2007 and $3.6 billion in 2008). Now that the sukuk markets are recovering to some degree, the demand is still there, but it is not being met by mega-sukuk. In many cases (for example, when GCC-based institutions have traveled to Malaysia to issue sukuk), the average size has shrunk significantly, although there are still a good share of "benchmark" sized sukuk.
This is not a bad thing for the market overall. While a smaller issue may not generate the same secondary market liquidity (given the proclivity of many buyers to hold-to-maturity), they provide more diversity in issuers, currency, ratings, industry, etc. This is positive because it provides more opportunities for sukuk investors to diversify, so long as they can get an allocation of new sukuk or find them in the secondary market, which is never a given.
Overall, however, I think the current situation is preferable because 1) there was little secondary market activity in the sukuk pre-crisis; 2) there were far too few diversification possibilities for investors away from real estate and related financial institutions; and, 3) the real estate on which the sukuk were based turned out to have been overvalued, leading to a near collapse of the primary market for sukuk. Risks remain from a global economic slowdown and geographical diversification is still nearly impossible. However, the market is on the right track. Again, I would suggest reading the whole article because there is a lot more there.
Sunday, June 05, 2011
What will replace the property bubble in the GCC?
One of the trends in Islamic finance outside of the GCC (and excluding Malaysia, which has a thriving local Islamic finance industry) is that countries, fund managers and companies are eager to tap the financial resources of the GCC countries, particularly when oil prices are high and funds are entering the GCC seemingly faster than they can be deployed. Another factor in the flow of funds from the GCC to the rest of the world is the need to diversify (both geographically, but also the relative scarcity of investment opportunities locally. There is also some movement of funds internationally to take advantage of non-real estate based private equity and venture capital (look for an article in this coming week's Islamic Globe on a development in the U.S.).
This theme of funds flowing out from the GCC and being sought out by countries, companies and fund managers internationally is not solely the domain for Shari'ah-compliant investments; it is probably larger on the conventional side. On the Islamic side, two recent countries vying for a piece of the GCC investment pie were Indonesia, which is trying to attract both money and expertise in Islamic finance, and Russia, whose region Tatarstan is considering issuing a sukuk focused on attracting foreign capital from the GCC.
With the sheer amount of capital flowing into the GCC (and mostly into the hands of a few wealthy individuals and sovereign wealth funds), there are probably good reasons why international investments are likely to be able to attract this capital (and benefits for the GCC from this occuring). However, the more that international investment opportunities are able to attract GCC capital, the slower the region will be to developing a domestic financial sector as well as capturing the spillover in other areas from regionally-focused investment firms.
The main impediment to the deployment of capital in the region is that there is still too much dependence on oil for a big chunk of the GDP in many of the GCC countries. Because of the large oil wealth (and relatively under-developed public goods like a proven legal system), there has not been as much progress on creating a private sector outside of the energy sector. Even within the energy industry, there has been a significant reliance on expatriate workers, which is fine on its own, but when combined with the underdeveloped private sector outside of energy, you see the levels of unemployment (particularly youth unemployment) which hurts future prospects for non-energy-related sectors.
Some countries have found industries in which they can grow; Bahrain (at least until the recent protests and martial law) had developed a large financial sector while Dubai developed itself as a real estate/tourism capital with a significant role in international trade through ifs port. However, each has its own limitations and does not on its own create a sustainable, diverse economy that would generate a diverse enough set of investment opportunities to keep more of the money generated from natural resources locally.
Then there is the financial sector locally, which does not have a stellar track record post-crisis (not alone in that regard in the financial industry). Too much of the money invested locally went into real estate, which created a bubble at least as significant as the subprime-fuelled bubble in the US (all real estate is local, so there were some exceptions). The key point for Islamic finance with this is that the real estate bubble did not have nearly the same conventional focus as it did in the U.S. The blow up in real estate (e.g. in Dubai) was due much more to sky high prices than it was to derivative products magnifying the extent of the growth in prices.
For this reason, Islamic banks--particularly investment banks--had a much greater exposure to this real estate bubble than they did to the U.S. bubble. Like conventional banks, they had extended credit to real estate developments (either directly or through "private equity" transactions) with the expectation that prices could keep risisng. When they stopped rising and began their precipitous fall, the investment banks shrivelled. With the real estate bubble gone, many of these investment banks and particularly the ones with a focus mostly on real-estate driven "private equity" have struggled to find a way to generate revenue.
Now, without a property bubble to generate investment activity locally and with the spigots opening anew with rising oil and natural gas prices, the capital is accumulating and it needs a home. The Islamic financial institutions (like conventional banks) are returning to growth slower than the flow of funds, so there is a greater and greater share that will need to be invested internationally. Thus, the countries, companies and fund managers internationally have returned to make a 'pitch' to the GCC to invest the funds in banks in Indonesia, regional governments in Russia and private equity funds in the United States (among others).
The downside to the GCC if this persists and nothing more sustainable is developed post-real estate bubble is that the funds will not benefit the local economies as much as they could if found a home developing non-energy-related industries locally. So, while much of the capital from the energy resources is being invested internationally, there should be a continued focus on greating local industries--particularly new small businesses--that will be able to absorb some of the capital and create a relatively larger impact in terms of employment than large, capital-intensive businesses like downstream energy business or financial services.
This theme of funds flowing out from the GCC and being sought out by countries, companies and fund managers internationally is not solely the domain for Shari'ah-compliant investments; it is probably larger on the conventional side. On the Islamic side, two recent countries vying for a piece of the GCC investment pie were Indonesia, which is trying to attract both money and expertise in Islamic finance, and Russia, whose region Tatarstan is considering issuing a sukuk focused on attracting foreign capital from the GCC.
With the sheer amount of capital flowing into the GCC (and mostly into the hands of a few wealthy individuals and sovereign wealth funds), there are probably good reasons why international investments are likely to be able to attract this capital (and benefits for the GCC from this occuring). However, the more that international investment opportunities are able to attract GCC capital, the slower the region will be to developing a domestic financial sector as well as capturing the spillover in other areas from regionally-focused investment firms.
The main impediment to the deployment of capital in the region is that there is still too much dependence on oil for a big chunk of the GDP in many of the GCC countries. Because of the large oil wealth (and relatively under-developed public goods like a proven legal system), there has not been as much progress on creating a private sector outside of the energy sector. Even within the energy industry, there has been a significant reliance on expatriate workers, which is fine on its own, but when combined with the underdeveloped private sector outside of energy, you see the levels of unemployment (particularly youth unemployment) which hurts future prospects for non-energy-related sectors.
Some countries have found industries in which they can grow; Bahrain (at least until the recent protests and martial law) had developed a large financial sector while Dubai developed itself as a real estate/tourism capital with a significant role in international trade through ifs port. However, each has its own limitations and does not on its own create a sustainable, diverse economy that would generate a diverse enough set of investment opportunities to keep more of the money generated from natural resources locally.
Then there is the financial sector locally, which does not have a stellar track record post-crisis (not alone in that regard in the financial industry). Too much of the money invested locally went into real estate, which created a bubble at least as significant as the subprime-fuelled bubble in the US (all real estate is local, so there were some exceptions). The key point for Islamic finance with this is that the real estate bubble did not have nearly the same conventional focus as it did in the U.S. The blow up in real estate (e.g. in Dubai) was due much more to sky high prices than it was to derivative products magnifying the extent of the growth in prices.
For this reason, Islamic banks--particularly investment banks--had a much greater exposure to this real estate bubble than they did to the U.S. bubble. Like conventional banks, they had extended credit to real estate developments (either directly or through "private equity" transactions) with the expectation that prices could keep risisng. When they stopped rising and began their precipitous fall, the investment banks shrivelled. With the real estate bubble gone, many of these investment banks and particularly the ones with a focus mostly on real-estate driven "private equity" have struggled to find a way to generate revenue.
Now, without a property bubble to generate investment activity locally and with the spigots opening anew with rising oil and natural gas prices, the capital is accumulating and it needs a home. The Islamic financial institutions (like conventional banks) are returning to growth slower than the flow of funds, so there is a greater and greater share that will need to be invested internationally. Thus, the countries, companies and fund managers internationally have returned to make a 'pitch' to the GCC to invest the funds in banks in Indonesia, regional governments in Russia and private equity funds in the United States (among others).
The downside to the GCC if this persists and nothing more sustainable is developed post-real estate bubble is that the funds will not benefit the local economies as much as they could if found a home developing non-energy-related industries locally. So, while much of the capital from the energy resources is being invested internationally, there should be a continued focus on greating local industries--particularly new small businesses--that will be able to absorb some of the capital and create a relatively larger impact in terms of employment than large, capital-intensive businesses like downstream energy business or financial services.
Sunday, February 21, 2010
Malaysian Islamic finance, Saudi Aramco/Total sukuk, real estate funds announced
Malaysian Islamic banks will see more competition in the next couple years as global banks enter the market, but Islamic bankers are confident they can handle the competition. This domestic competition may also lead to Malaysian Islamic banks to look elsewhere in the region and globally for new areas of business. The article provides a good summary of where the industry is in Malaysia and it is likely that the country will pass the 20% market share mark for Islamic banks as a total share of banking assets sometime this year. CIMB's Indonesian subsidiiary has seen strong growth in the past year.
Saudi Aramco and Total are reported to have hired bankers for a $1 billion sukuk, which would be the largest sukuk issued this year. The sukuk would help finance a $12 billion oil refinery the two companies expect to build in a joint venture.
A couple new real estate funds were announced. One is from Ajman Bank in the UAE. The other is Al Rajhi Bank and Arcapita Bank, who announced a $500 million real estate income fund.
Other News
Saudi Aramco and Total are reported to have hired bankers for a $1 billion sukuk, which would be the largest sukuk issued this year. The sukuk would help finance a $12 billion oil refinery the two companies expect to build in a joint venture.
A couple new real estate funds were announced. One is from Ajman Bank in the UAE. The other is Al Rajhi Bank and Arcapita Bank, who announced a $500 million real estate income fund.
Other News
- The FT has an interesting article on the pinch that is hitting many Kuwaiti investment firms, both conventional and Islamic.
- The Islamic financial industry should look towards alternative energy sukuk (among many areas) to cut the over-reliance on real estate-backed sukuk.
- An article describes a brief history of Islamic banking and also has a good look of the different types of products which make up a typical Islamic bank's assets and liabilities.
- Troubled Islamic mortgage lender in Dubai, Tamweel, says it will need AED1 billion ($272.3 million) in debt guaratees or equity at minimum, but will request a resumption of trading in its shares that have been suspended since 2008. The merger with Amlak Finance, another Islamic mortgage company is still "feasible" according to the chairman of Tamweel.
- If pension funds in Muslim majority countries shifted 30% of their assets into Shari'ah-compliant investments, it could provide the industry with a "massive boost".
Thursday, February 11, 2010
Gulf Finance House restructures debt; Warde on Islamic finance in the U.S.
Gulf Finance House repaid $200 million of its maturing $300 million debt facility after reaching an agreement with its creditors to defer the remaining $100 million for six months under a new murabaha agreement. The Islamic investment bank has another $50 million maturing on March 3 that is also expected to be delayed. The company saw its credit rating cut to selective default (SD) on the announcement.
Ibrahim Warde suggests that Islamic finance could be beneficial for the United States by creating new financial institutions and demonstrating that the U.S. is interested in "promoting a new era of equal economic prosperity and opportunity for Muslims here and abroad".
Other News
Ibrahim Warde suggests that Islamic finance could be beneficial for the United States by creating new financial institutions and demonstrating that the U.S. is interested in "promoting a new era of equal economic prosperity and opportunity for Muslims here and abroad".
Other News
- The sixth monthly issue of the Opalesque Islamic Finance Intelligence is now available. It is a good read, as always.
- Amlak is "hopeful" that the UAE federal government will approve its merger with Tamweel.
- The Saudi firm Dar Al Arkan will raise $750 million in sukuk, although as other news stories (linked to on Monday's post) note, the uptake has been weak.
- Korea Investment & Securities Co says that South Korea needs Islamic finance to curb its trade deficit. The firm recently hired Shari'ah scholar Mohammed Daud Bakar to "help it structure Islamic financial products".
- Kuwaiti Islamic bank, Boubyan Bank had only received subscriptions for 85% of its rights issue and said its board would recommend reopening the issue.
- Dubai Islamic Bank postponed its board meeting to discuss a wakala arrangement using funds from the UAE ministry of finance.
- Indonesian takaful growth will slow to 30%.
Tuesday, December 29, 2009
IIFM-ISDA Shari'ah-compliant hedging agreement, KFH investment in US real estate
Shari'ah-compliant hedging
The International Islamic Financial Market (IIFM) held a meeting of Shari'ah scholars in Dubai to discuss the Tahawwut (Hedging) Master Agreement. The Tahawwut Master Agreement, developed in partnership with the International Swaps and Derivatives Association (ISDA), has not been described in significant detail, in particular what types of hedging activities it would cover. There are certainly areas where hedging could be useful in the Islamic finance industry, and a standardized agreement could provide some standardization and a starting point for more discussions about the place of Shari'ah-compliant hedging products in the industry.
The difficulty with many hedging products in Islamic finance is that there are so few and each hedging transaction must have a counterparty to assume the hedged risk. For example, if an Islamic bank hedges against its foreign exchange or interest rate risk, there must be a counterparty that is essentially unhedged, which would probably be characterized as speculation. There could be a central counterparty that enters into enough transactions to be able to be relatively hedged itself, but this is not yet the case. Alternatively, a conventional bank could step in and act as the counterparty in the transaction. In this case, that bank would then go into the conventional swaps/derivatives markets to hedge its own risk.
This raises the question of whether the Shari'ah-compliant hedge was beneficial to anyone except the counterparty. If an Islamic bank hedges its risks with a conventional bank, which then hedges itself against the same risk, who benefits except for the conventional bank which inserts itself into the middle and presumably collects fees?
To some degree this problem occurs in other Islamic finance transactions. However, the nature of derivatives as opposed to other investment products, highlights this problem. In the best case, the IIFM-ISDA Tahawwut Master Agreement will provide a transparent and simple way for hedging transactions to be structured that will lead to the development of a common counterparty that only acts in Islamic derivatives. There are similar institutions in emerging market currency hedging. The scope of the problem would be large enough to probably require some assistance from a multi-lateral institution like the Islamic Development Bank.
KFH real estate investment in the U.S.
Kuwait Finance House made a $242 million investment in a real estate project in Chicago, Illinois which is currently under construction and is expected to be completed in 2011. The building will be a 40-storey Ritz-Carlton Residences, a condominium tower and $137.5 million of the project will be debt financed from German landesbanks Helaba.
Helaba recently arranged its first Shari'ah-compliant real estate deal in the U.K. with Gatehouse Bank, so the debt for the Chicago project may be Shari'ah-compliant. If it is not, it is likely to be separated from the equity using an ijara-istisna'a structure which has been used internationally over the past decade.
Other News
The International Islamic Financial Market (IIFM) held a meeting of Shari'ah scholars in Dubai to discuss the Tahawwut (Hedging) Master Agreement. The Tahawwut Master Agreement, developed in partnership with the International Swaps and Derivatives Association (ISDA), has not been described in significant detail, in particular what types of hedging activities it would cover. There are certainly areas where hedging could be useful in the Islamic finance industry, and a standardized agreement could provide some standardization and a starting point for more discussions about the place of Shari'ah-compliant hedging products in the industry.
The difficulty with many hedging products in Islamic finance is that there are so few and each hedging transaction must have a counterparty to assume the hedged risk. For example, if an Islamic bank hedges against its foreign exchange or interest rate risk, there must be a counterparty that is essentially unhedged, which would probably be characterized as speculation. There could be a central counterparty that enters into enough transactions to be able to be relatively hedged itself, but this is not yet the case. Alternatively, a conventional bank could step in and act as the counterparty in the transaction. In this case, that bank would then go into the conventional swaps/derivatives markets to hedge its own risk.
This raises the question of whether the Shari'ah-compliant hedge was beneficial to anyone except the counterparty. If an Islamic bank hedges its risks with a conventional bank, which then hedges itself against the same risk, who benefits except for the conventional bank which inserts itself into the middle and presumably collects fees?
To some degree this problem occurs in other Islamic finance transactions. However, the nature of derivatives as opposed to other investment products, highlights this problem. In the best case, the IIFM-ISDA Tahawwut Master Agreement will provide a transparent and simple way for hedging transactions to be structured that will lead to the development of a common counterparty that only acts in Islamic derivatives. There are similar institutions in emerging market currency hedging. The scope of the problem would be large enough to probably require some assistance from a multi-lateral institution like the Islamic Development Bank.
KFH real estate investment in the U.S.
Kuwait Finance House made a $242 million investment in a real estate project in Chicago, Illinois which is currently under construction and is expected to be completed in 2011. The building will be a 40-storey Ritz-Carlton Residences, a condominium tower and $137.5 million of the project will be debt financed from German landesbanks Helaba.
Helaba recently arranged its first Shari'ah-compliant real estate deal in the U.K. with Gatehouse Bank, so the debt for the Chicago project may be Shari'ah-compliant. If it is not, it is likely to be separated from the equity using an ijara-istisna'a structure which has been used internationally over the past decade.
Other News
- Saudi Hollandi Bank issued a $193 million subordinated, callable sukuk.
- The Islamic Development Bank saw its AAA rating affirmed by Standard & Poor's.
- Bursa Malaysia may allow individual investors to invest in sukuk. Following Dubai World's debt crisis and the multitude of questions asked regarding the ability of investors to have recourse to the underlying assets, it would seem that opening sukuk secondary markets up to individual investors could create the potential for problems down the road.
Wednesday, June 24, 2009
Islamic finance development in the US, Islamic debt trading, GCC wants to develop local debt markets
New global regulations on financial markets in the wake of the financial crisis--particularly those surrounding the securitization markets--could adversely affect the Islamic financial insdustry. In other U.S. news, Russell Investments is launching its own Islamic indexes with its fund partner Jadwa Investments.
U.S. real estate financing company W.P. Carey believes there is a 50% chance it will be able to launch an Islamic fund to purchase real estate. The idea dates back to 1997 when it planned to launch a Shari'ah-compliant fund, but abandoned the launch because of lack of attractive investments. The initial fund was focused on U.S. based property but the new one will probably have an international focus. The company specializes in sale and lease-back transactions which make it an attractive type of business in which to use Islamic finance.
A lawyer, Megat Hzaini Hassan, writes for Reuters about the permissibility of diifferent types of debt sales in the context of securitization of portfolios of different types of Islamic financial products. Apart from Malaysia, where debt sales (bay al'dayn) is more likely to be viewed as Shari'ah-compliant, the general sense is that if the majority of the assets being securitized are ijara (rather than murabaha), then debt re-sale is permissible because the ijara provides the financier with ownership of the underlying assets, rather than just a future stream of cash flows.
The recent wave of sovereign bond and sukuk issues in the GCC are part of a strategy to create a yield curve, encourage the development of more liquid secondary markets and increase corporate issuance following a steep drop-off in new issues as a result of the credit crisis. Out of the $750 million CBB sukuk 55% of the investors were from the region and there was enough demand for the entire issue to be subscribed by GCC-based investors.
Other News
U.S. real estate financing company W.P. Carey believes there is a 50% chance it will be able to launch an Islamic fund to purchase real estate. The idea dates back to 1997 when it planned to launch a Shari'ah-compliant fund, but abandoned the launch because of lack of attractive investments. The initial fund was focused on U.S. based property but the new one will probably have an international focus. The company specializes in sale and lease-back transactions which make it an attractive type of business in which to use Islamic finance.
A lawyer, Megat Hzaini Hassan, writes for Reuters about the permissibility of diifferent types of debt sales in the context of securitization of portfolios of different types of Islamic financial products. Apart from Malaysia, where debt sales (bay al'dayn) is more likely to be viewed as Shari'ah-compliant, the general sense is that if the majority of the assets being securitized are ijara (rather than murabaha), then debt re-sale is permissible because the ijara provides the financier with ownership of the underlying assets, rather than just a future stream of cash flows.
The recent wave of sovereign bond and sukuk issues in the GCC are part of a strategy to create a yield curve, encourage the development of more liquid secondary markets and increase corporate issuance following a steep drop-off in new issues as a result of the credit crisis. Out of the $750 million CBB sukuk 55% of the investors were from the region and there was enough demand for the entire issue to be subscribed by GCC-based investors.
Other News
- The Central Bank of Bahrain issued another of its regular sukuk al-ijara (No. 46) that have a return of 1.25% and mature in 182 days. It was oversubscribed 200%.
- The University of Leicester is holding a conference to look at whether the Islamic financial industry is more robust than the conventional financial industry as well to examine lessons from the crisis for Islamic finance.
- Africa Reinsurance Corp is planning a new takaful business. AfricaRe was founded in 1976 by the African Development Bank.
The Reims Management School in France is planning to offer an Islamic Banking & Finance course as part of its Masters in Management program.
- Shariah Fortune, a relatively new think tank based in Dubai, issued a report about Islamic finance gaining mommentum as well as the dangers from lack of standardization in the quality of Islamic finance.
Monday, June 01, 2009
(Late) Weekend Update
The Saudi government plans on starting a Fannie Mae-like institution to encourage the growth of sukuk and conventional bond markets. The counry is estimated to have a home ownership is 62% according to Ibrahim al-Assaf, the finance minister for the country, although some analysts estimate it at less than 1/2 this level. The development would provide a boost for Islamic banks by allowing them to remove assets from their balance sheet and also providing a large source of supply of sukuk to the market, which in turn could help provide Islamic banks with a better, more liquid investment to hold against short-term liabilities like deposits. However, the securitization into sukuk would have restrictions on the number of various types of Islamic mortgages. Although ijara mortgages are generally considered transferrable because they include ownership of an underlying assets, murabaha mortgages would not (except at par vale) because transfer represents the sale of cashflow from a loan, not an actual asset.
A Central Bank of Bahrain official, Abdul Rahman Al-Baker, executive director of financial supervision pointed out that as the industry crosses the $1.5 trillion mark (estimates of the size of the Islamic financial industry vary widely), it needs to broaden the customer base it addresses:
HSBC Amanah is joining a growing number of companies launching sukuk funds with their HSBC Amanah Sukuk Fund that will be domiciled in Saudi Arabia. The fund is expected to hold about 12 to 14 companies' sukuk from the GCC region and have a 4-year maturity.
Banking officials in Iraq are looking at ways to encourage Islamic banks according to Central Bank advisor Mudher Kasim. The article describes the difficulty facing Islamic banks due to the regulation about banks investing in real estate and their mandatory capital reserves.
Advantage Consulting Company Managing Director Safa Abdul Rahman Al-Hashem provides a criticism of products that replicate conventional financial products.
A Central Bank of Bahrain official, Abdul Rahman Al-Baker, executive director of financial supervision pointed out that as the industry crosses the $1.5 trillion mark (estimates of the size of the Islamic financial industry vary widely), it needs to broaden the customer base it addresses:
"In addition to adequate regulations there is a need for creating the necessary framework for investment instruments targeting small investors, medium size investors, as well as professional or high net-worth individuals, who would like to invest their funds in accordance with Shariah principles,"
HSBC Amanah is joining a growing number of companies launching sukuk funds with their HSBC Amanah Sukuk Fund that will be domiciled in Saudi Arabia. The fund is expected to hold about 12 to 14 companies' sukuk from the GCC region and have a 4-year maturity.
Banking officials in Iraq are looking at ways to encourage Islamic banks according to Central Bank advisor Mudher Kasim. The article describes the difficulty facing Islamic banks due to the regulation about banks investing in real estate and their mandatory capital reserves.
Advantage Consulting Company Managing Director Safa Abdul Rahman Al-Hashem provides a criticism of products that replicate conventional financial products.
Monday, May 25, 2009
S&P report summary (part 1)
Standard & Poor’s released their Islamic Finance Outlook 2009 a few weeks ago and in addition to descriptions of how S&P rates Islamic financial institutions, sukuk and takaful, there are a number of points they raise that I think are extremely important for the industryas it deals with the current crisis and looks out beyond. The report begins with a detailed description of how S&P believe Islamic banks will be able to handle the economic crisis that has followed the financial crisis. They identify a number of potential problem areas and discuss a few mitigating factors that should help Islamic banks weather the crisis. The first area of concern expressed by S&P is with Islamic bank's liquidity situation:
In discussing the liquidity needs specific to Islamic financial institutions, S&P also raises the issue of how governments can lend support to Islamic banks. Unlike, conventional financial institutions, the traditional 'lender of last resort' and unconventional programs like the Capital Purchase Program (TARP) in the US are not available to Islamic financial institutions. Instead, S&P points to the UAE as an example: "The UAE has based its support to IFIs on wakala, which has required some time to implement". I have not seen specifics on these wakala agreements, but I would imagine they are temporary investments through Islamic banks where the banks are paid a fee to manage the investment, but are then required to later return the investment plus profit minus wakala fees to the government. Although this type of support has already been given to some Islamic banks, S&P points out that not all Islamic banks will need it; more conservative balance sheets leave them with a greater degree of protection than conventional banks:
The next area S&P covers is the effect of a large exposure to real estate and the sukuk market. S&P notes:
There are more areas of the S&P report that I have not covered that I hope to write about in future posts including more on sukuk, the impact of profit-sharing investment accounts (PSIA) on Islamic banks' stability, takaful and additional regional growth in Islamic finance, particularly in France.
"We understand that IFIs’ instruments for managing liquidity are scarce compared with those of conventional counterparts. IFIs generally place any excess available liquidity with other international or local banks through Sharia-compliant instruments (mainly international murabaha). The market for sukuk notes remains fairly illiquid because no developed secondary market exists. We understand that investments in sukuk are mainly classified as held to maturity. We are of the view that IFIs could take advantage of the current challenging times to innovate and broaden the offering of acceptable instruments for liquidity management."This is likely to become an even greater concern for Islamic banks as sukuk issuance remains weak and other methods of liquidity management are being examined for whether they are Shari'ah compliant. The particular method that one primary product is used in the Gulf and elsewhere for liquidity management, organized (as opposed to classical) tawarruq, was recently ruled by the OIC Fiqh Academy to contain riba:
"It is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occurs between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered as containing the element of riba."This ruling, while not binding on Islamic financial institutions, will likely result in a revision of Islamic banking practices with regards to liquidity management that will shift towards commodity murabaha at first and other products later. Even this is fraught with some difficulty because it remains unclear whether the ruling applies only to organized tawarruq or is extended beyond it to commodity murabaha.
In discussing the liquidity needs specific to Islamic financial institutions, S&P also raises the issue of how governments can lend support to Islamic banks. Unlike, conventional financial institutions, the traditional 'lender of last resort' and unconventional programs like the Capital Purchase Program (TARP) in the US are not available to Islamic financial institutions. Instead, S&P points to the UAE as an example: "The UAE has based its support to IFIs on wakala, which has required some time to implement". I have not seen specifics on these wakala agreements, but I would imagine they are temporary investments through Islamic banks where the banks are paid a fee to manage the investment, but are then required to later return the investment plus profit minus wakala fees to the government. Although this type of support has already been given to some Islamic banks, S&P points out that not all Islamic banks will need it; more conservative balance sheets leave them with a greater degree of protection than conventional banks:
"The still-adequate liquidity that we understand is available at rated Islamic commercial banks partially mitigates liquidity risk. On Sept. 30, 2008, these banks recorded, according to our estimates, a ratio of liquid assets to total assets of 19.9%. We understand that this ratio continued to decline in the final quarter of 2008, however, albeit remaining adequate."Although they have sufficient liquidity now, the economic crisis spread to the GCC later than many other countries and therefore the problems in their banking markets could be at an earlier stage. Still it is a positive thing to have a large amount of liquid assets which should cushion many Islamic financial institutions.
The next area S&P covers is the effect of a large exposure to real estate and the sukuk market. S&P notes:
"According to Islamic finance principles, all transactions must be backed by a tangible asset. Therefore, one of the preferred asset classes of Islamic banks is real estate. We calculate total direct exposure to the real estate sector for IFIs that we rate at the equivalent of about 20% of total loans, which, in our opinion, is high and makes IFIs vulnerable to the correction in this previously fast-growing sector. In addition, we believe that certain loans to individuals granted by Islamic banks were used to finance real estate transactions."The exposure to real estate is likely to be one of the areas where future difficulties are likely to emerge within the Islamic banking industry. However, in addition to direct lending for real estate projects, Islamic banks also hold sukuk on their books, many of which are issued by other Islamic banks or for real estate-related projects. This could create difficulties in the long run but in the short run there is some protection afforded Islamic banks because the sukuk are "mainly classified as held to maturity". This means that most of the sukuk on bank balance sheets are not marked to market. This will help to avoid one of the major systemic risks associated with the shortage of investment instruments for Islamic banks. Because sukuk are in great demand and short supply, more so with the fall off in supply and no growth in a liquid secondary market, Islamic banks have many sukuk holdings that are relatively undiversified with a good deal of sukuk held being issued by other Islamic banks. If these sukuk were required to be marked to market (which should eventually be the case when the supply begins to increase and a liquid secondary market develops) then distress in one Islamic bank would lead to many other Islamic banks taking hits to their balance sheet which could, if the distressed sukuk were a large enough component of their balance sheet, spread the problems across the Islamic banking industry.
There are more areas of the S&P report that I have not covered that I hope to write about in future posts including more on sukuk, the impact of profit-sharing investment accounts (PSIA) on Islamic banks' stability, takaful and additional regional growth in Islamic finance, particularly in France.
Friday, May 08, 2009
IFSB summit, Moody's weighs in on sukuk form versus substance, Sheikh DeLorenzo on Islamic home finance in the US
Moody's released a report looking at the future of the sukuk market with a suggestion that investors look not just at the form of the structure, but the substance as well. Although many sukuk use standard forms (as approved by AAOIFI), they can vary significantly across different individual sukuk using the same form. This is particularly important, Moody's notes, because "The assets in the structure are commonly there for Shari'ah compliance purposes only, and ultimately have no bearing on the risk or performance of the sukuk investments, particularly in a distress situation." This is an important point because it raises questions about whether the sukuk market has focused too much on structuring transactions to receive Shari'ah-compliance and too little on creating a different asset class.
There is an interesting opinion article written by Shari'ah scholar Sheikh Yusuf DeLorenzo describing the benefits from the Islamic home finance product in the US for both Muslims and non-Muslims. These benefits are due to the participatory structure of many forms of Islamic home finance in the US and the non-recourse nature of the loans. The combination of these two factors, according to Sheikh DeLorenzo, leads to a lower rate of foreclosure following delinquency because the Islamic finance companies can only take the house in a foreclosure and if this value is below the outstanding amount owed (the mortgage is 'under water'), the bank faces a loss. Although this is the case in many states for all mortgages, it is not always the case in conventional mortgages.
The IFSB says that Islamic finance regulators need to focus on the entire system instead of having a narrow focus on individual institutions to prevent a repeat of the current crisis facing the conventional financial industry in the Islamic finance industry. I think this is very important because there are fewer safeguards on the industry to prevent contagion from spreading from one troubled institution to healthy institutions, like inter-bank money market and a 'lender of last resort'. The president of the Islamic Development Bank Dr. Ahmad Mohamed Ali said at the IFSB summit that the industry still has a significant amount of innovation needed to continue its rapid growth. The head of the IFSB was also quoted speaking to the Straits Times: "It all comes down to risk management. You've to have proper risk management and proper governance and practices so that an institution doesn't fall down".
Bank Negara deputy governor is quoted speaking about two critical issues that the Islamic finance industry needs to deal with to become more resilient in the future:
Other News
There is an interesting opinion article written by Shari'ah scholar Sheikh Yusuf DeLorenzo describing the benefits from the Islamic home finance product in the US for both Muslims and non-Muslims. These benefits are due to the participatory structure of many forms of Islamic home finance in the US and the non-recourse nature of the loans. The combination of these two factors, according to Sheikh DeLorenzo, leads to a lower rate of foreclosure following delinquency because the Islamic finance companies can only take the house in a foreclosure and if this value is below the outstanding amount owed (the mortgage is 'under water'), the bank faces a loss. Although this is the case in many states for all mortgages, it is not always the case in conventional mortgages.
The IFSB says that Islamic finance regulators need to focus on the entire system instead of having a narrow focus on individual institutions to prevent a repeat of the current crisis facing the conventional financial industry in the Islamic finance industry. I think this is very important because there are fewer safeguards on the industry to prevent contagion from spreading from one troubled institution to healthy institutions, like inter-bank money market and a 'lender of last resort'. The president of the Islamic Development Bank Dr. Ahmad Mohamed Ali said at the IFSB summit that the industry still has a significant amount of innovation needed to continue its rapid growth. The head of the IFSB was also quoted speaking to the Straits Times: "It all comes down to risk management. You've to have proper risk management and proper governance and practices so that an institution doesn't fall down".
Bank Negara deputy governor is quoted speaking about two critical issues that the Islamic finance industry needs to deal with to become more resilient in the future:
"There are a lot of issues that need to be addressed, for example the link to economic activity also has got its shortcomings because they are too focused on real estate for example. The absence of a money market that is also a source of risk."
Other News
- France's new laws that put Islamic finance on equal footing with conventional financial institutions for taxes has attracted the first institution, the Islamic Finance Advisory and Assurance Services, a UK-based consultancy.
- There is an article in Foreign Policy magazine that I may have already linked to about Shari'ah scholars and the Islamic finance industry.
- The Islamic Development Bank is planning a $500 million sukuk in the first half of 2009. The proceeds will fund the IsDB's activities in member countries this year. This is the bank's first issue in a five-year bond program that aims to raise $1 billion per year. The Monetary Authority of Singapore expects $1.3 billion in sovereign sukuk issues from Singapore, Malaysia and Indonesia in the first half of 2009. The Monetary Authority of Singapore also unveiled measures to attract Islamic finance to the city-state including legal and regulatory changes that allow Singaporean dollar sukuk to be treated identically with conventional government bonds.
- Dubai Islamic Bank is going to buy back $200 million of its $750 million outstanding sukuk in a tender offer at between 86% and 90% of par. The Shari'ah-compliance of debt buybacks was not raised in the article. The sukuk last traded March 13 on the London Stock Exchange at 82. The buy back is therefore being offered between a 5% to 10% premium.
- RHB Islamic, the Malaysian bank, is expanding its business to Singapore and has applied for a full banking license in the country.
- Gatehouse Bank in the UK is setting up a Shari'ah-compiant investment strategy focused on the water industry with Sustainable Asset Management (SAM).
- Islamic mortage companies Amlak and Tamweel will receive "major government support" due to their losses caused by the collapsing property markets, increased funding costs and halt in financing.
- Fattah Finance, a Shari'ah-compliant brokerage subsidiary of Almaty Financial Centre, is the first Islamic finance company to open in Kazakhstan following the changes in law to allow Islamic finance. Mauritius' first Islamic bank, HSBC Mauritius Amanah, opened today.
- A Shari'ah manager at BMB Islamic provides an overview of the basic principles of Isalmic finance.
Tuesday, March 03, 2009
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:
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:
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: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.
- 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.
Wednesday, February 25, 2009
Mid-week update
Although Islamic banks are not experiencing write-downs connected to derivatives products, they are experiencing significant losses from falls in the real estate markets, particularly in the GCC. S&P estimates that Islamic banks have nearly 20% of their assets backed by real estate.
UK Trade & Investment and the central bank of Malaysia, Bank Negara, signed a Memorandum of Understanding to work together to promote the global Islamic finance industry. Malaysian central bank governor Dr. Zeti Akhtar Aziz commented on the MoU to Malaysian paper The Star.
Islamic banks in the GCC are likely to go through a round of consolidation that will create larger, better capitalized institutions according to the head of AAOIFI.
Gatehouse Bank, one of the newest Islamic wholesale banks in the UK is closing its first deal. According to CEO David Testa, it will be "a built property with a very strong tenant in continental Europe. It is a refinance deal connected to a governmental entity". There is less interest in general in promoting Islamic finance among governments in continental Europe than in the UK although the French government said it was exploring regulatory and legal changes to put Islamic finance on a level playing field with conventional finance.
Daud Vicary Abdullah, a specialist in Islamic finance at Deloitte in Malaysia says the industry will grow by double digits in the next few years as it experiences rapid growth in Muslim-minority countries.
Reliance Capital, India's largest asset manager, is going to base its Islamic finance unit in Malaysia.
UK Trade & Investment and the central bank of Malaysia, Bank Negara, signed a Memorandum of Understanding to work together to promote the global Islamic finance industry. Malaysian central bank governor Dr. Zeti Akhtar Aziz commented on the MoU to Malaysian paper The Star.
Islamic banks in the GCC are likely to go through a round of consolidation that will create larger, better capitalized institutions according to the head of AAOIFI.
Gatehouse Bank, one of the newest Islamic wholesale banks in the UK is closing its first deal. According to CEO David Testa, it will be "a built property with a very strong tenant in continental Europe. It is a refinance deal connected to a governmental entity". There is less interest in general in promoting Islamic finance among governments in continental Europe than in the UK although the French government said it was exploring regulatory and legal changes to put Islamic finance on a level playing field with conventional finance.
Daud Vicary Abdullah, a specialist in Islamic finance at Deloitte in Malaysia says the industry will grow by double digits in the next few years as it experiences rapid growth in Muslim-minority countries.
Reliance Capital, India's largest asset manager, is going to base its Islamic finance unit in Malaysia.
Monday, February 09, 2009
Necessity, Islamic finance institutions face different risks, Islamic housing co-operatives in the U.S., IFSL Islamic Finance 2009 report released
I don't know whether this is an accurate characterization of the situation, but an article from Datamonitor states that "Union National Bank and Abu Dhabi Islamic Bank will issue capital notes with a principal amount of AED2 billion each. he notes will bear interest at a rate of 6% per annum payable semi-annually". This description is followed by an explanation from the CEO of ADIB (emphasis mine) that "We are firmly behind the government's prudent plan to continue shoring up the local economy and, given that one of the principles of Sharia'a law is acting in the public benefit, these sukuk will provide an ideal base on which to contribute to this plan". The description as 'interest' may be a slip up but should not be written off that quickly: the injection of capital demonstrate considerable flexibility by Islamic banks when times are tough. The interbank money market is nonexistent for Islamic banks and central banks are unlikely to extend qard loans to banks, even to support them. Instead, the governments will step in as they would for most other financial institutions: they will inject funds in and extract their pound of flesh for this support to ensure they do not create any moral hazard for the banks management in the future.
In the case of Islamic banks, they may not necessarily offer this additional capital in a Shari'ah-compliant investment; banks will either take the capital (offering the rationale that it was only taken to ensure the survival of the institution) or close its doors if it cannot find other sources of capital. As I understand it, most Shari'ah scholars would find this outcome unpleasant, but ultimately approve it on the basis of necessity (darura).
An article in The National (UAE) describes the additional risk held by Islamic financial institutions in a collapsing property market:
There's an article that doesn't present much new information, but is one of few to focus on the Islamic home finance co-operatives, an institutional form that started predominantly in Canada and have been largely ignored in articles about Islamic finance in the U.S. Despite their small size, they provide arguably a better model (at least in terms of demonstrating the risk-and-reward-sharing that Islamic finance claims to espouse) than the lenders which sell Islamic loans to Freddie Mac and Fannie Mae.
The Islamic finance industry in the U.K. is larger than in Pakistan when measured by total assets, according to a new report from the International Financial Services London, an organization that promotes London's financial industry. The entire report, Islamic Finance 2009," is available as a PDF and the Excel versions of the tables in the report are available from IFSL's website. Other highlights include:
In the case of Islamic banks, they may not necessarily offer this additional capital in a Shari'ah-compliant investment; banks will either take the capital (offering the rationale that it was only taken to ensure the survival of the institution) or close its doors if it cannot find other sources of capital. As I understand it, most Shari'ah scholars would find this outcome unpleasant, but ultimately approve it on the basis of necessity (darura).
An article in The National (UAE) describes the additional risk held by Islamic financial institutions in a collapsing property market:
"The problem is particularly acute because of the off-plan model adopted in the Emirates, where a buyer signs up for a home but pays only 10 per cent until it is built. Under Islamic finance, the bank stumps up all the instalments to the developer during the construction period, but does not start recouping its outlay until after the building is complete, which can take three to five years. Banks typically finance 90 per cent of the purchase and are liable for all instalments to the developer during the construction phase, while the buyer pays nothing.
Under the Islamic model, the lender takes all of the equity risk, while the end-user signs a separate lease agreement with the bank. This exposes Islamic banks to potentially greater liabilities than conventional mortgage banks. As prices continue to fall, there is a large and growing incentive for property buyers and banks to foreclose on home finance.
There's an article that doesn't present much new information, but is one of few to focus on the Islamic home finance co-operatives, an institutional form that started predominantly in Canada and have been largely ignored in articles about Islamic finance in the U.S. Despite their small size, they provide arguably a better model (at least in terms of demonstrating the risk-and-reward-sharing that Islamic finance claims to espouse) than the lenders which sell Islamic loans to Freddie Mac and Fannie Mae.
The Islamic finance industry in the U.K. is larger than in Pakistan when measured by total assets, according to a new report from the International Financial Services London, an organization that promotes London's financial industry. The entire report, Islamic Finance 2009," is available as a PDF and the Excel versions of the tables in the report are available from IFSL's website. Other highlights include:
- "The Islamic finance industry has felt the influence of the credit crunch and downturn in the global economy in 2008, with a drop in Sukuk issuance and a fall in the value of equity funds. Islamic banks, however, have been less affected than many conventional banks because they are not exposed to losses from investment in toxic assets nor have they been dependent on wholesale funds, as they are prohibited from these activities."
- "Western countries in Europe and North America. Countries such as the US, France, Germany and the UK each have indigenous Muslim populations of between one and five million. Moreover, the customer base in Western countries is not necessarily restricted to Moslems: other customers may be attracted by the ethical and environmental basis of Islamic finance."
- "Islamic banks, like conventional banks, need to have appropriate capital and adequate access to liquidity and manage risks appropriately. This includes managing their exposure to bad debts arising from the general downturn in business."
- "Sukuk issuance fell away during 2008 to an estimated $20bn. Key contributing factors were a decline in asset valuation, a lack of liquidity and a lack of market confidence. [...] Although market activity has fallen away, particularly in the second half of 2008, the long term prospects for Sukuk are positive once markets recover."
Thursday, January 08, 2009
Sukuk issuance falls 66% in 2008, lowest since 2005
The issuance of new sukuk fell to $15.77 billion in 2008 compared with $46.65 in 2007 according to data collected by the Islamic Finance Information Service (IFIS), a drop of 66.2% year-over-year. The last time issuance was lower than the 2008 total was 2005 when $10.76 of sukuk were issued. The global credit crisis and difficult economic conditions were blamed for the fall which demonstrate that, although Islamic finance does not have exposure to the direct causes of the crisis (subprime-backed mortgages and derivatives), it is affected by the health of the conventional credit market and global economic conditions.
Cerulli Associates estimates that Shari'ah-compliant funds have $65 billion in assets under management and are expected to grow at an annualized 12% rate. The article describes this total as "a figure that’s more modest than the hundreds of billions of dollars often cited by regulators and industry players". Although there is fair criticism to the $300-$500 billion number often cited as the size of the Islamic finance industry (reliable statistics are largely unavailable), the $65 billion in the fund management industry should not be compared with the "hundreds of billions of dollars". Usually the $300-$500 billion figure is cited to account for the entire size of the Islamic finance industry worldwide which includes assets management, retail banking, sukuk and the other areas of Islamic finance like private equity.
The Dubai Shariah Hedge Fund Index was launched containing four Shari'ah-compliant hedge funds using Shariah Capital's long/short trading platform, most of which focus on commodities. Because conventional short selling is not Shari'ah-compliant because of prohibitions of selling things one does not own, the hedge fund platform has raised some criticism that the idea of an 'Islamic hedge fund' is not possible nor desirable.
The growth rate of the Islamic finance industry is expected to exceed the general economic growth rate in Malaysia. The second finance minister of Malaysia Nor Mohamed Yakcop believes the Anglo-Saxon capitalist system has failed and "If the Islamic banking system had made an impact earlier, then it may have been possible to avoid the economic disorder as the system will not bring such problems". I believe this is further expression of naivete that the Islamic financial system will not be accompanied by any of the problems of its conventional counterpart such as greed.
A real estate company in the UK used Islamic finance to refinance the debt on its property holdings in London.
Indonesia will issue a sovereign sukuk aimed at retail investors in February.
One of the conventional banks in Kuwait, the Global Investment House, has defaulted on its debt. Global Investment House along with Islamic bank The Investment Dar announced that they needed up to $1 billion in loans from the government. The Investment Dar has been reported to be selling assets including part of its stake in Aston Martin which it acquired in a Shari'ah-compliant LBO in 2007.
Cerulli Associates estimates that Shari'ah-compliant funds have $65 billion in assets under management and are expected to grow at an annualized 12% rate. The article describes this total as "a figure that’s more modest than the hundreds of billions of dollars often cited by regulators and industry players". Although there is fair criticism to the $300-$500 billion number often cited as the size of the Islamic finance industry (reliable statistics are largely unavailable), the $65 billion in the fund management industry should not be compared with the "hundreds of billions of dollars". Usually the $300-$500 billion figure is cited to account for the entire size of the Islamic finance industry worldwide which includes assets management, retail banking, sukuk and the other areas of Islamic finance like private equity.
The Dubai Shariah Hedge Fund Index was launched containing four Shari'ah-compliant hedge funds using Shariah Capital's long/short trading platform, most of which focus on commodities. Because conventional short selling is not Shari'ah-compliant because of prohibitions of selling things one does not own, the hedge fund platform has raised some criticism that the idea of an 'Islamic hedge fund' is not possible nor desirable.
The growth rate of the Islamic finance industry is expected to exceed the general economic growth rate in Malaysia. The second finance minister of Malaysia Nor Mohamed Yakcop believes the Anglo-Saxon capitalist system has failed and "If the Islamic banking system had made an impact earlier, then it may have been possible to avoid the economic disorder as the system will not bring such problems". I believe this is further expression of naivete that the Islamic financial system will not be accompanied by any of the problems of its conventional counterpart such as greed.
A real estate company in the UK used Islamic finance to refinance the debt on its property holdings in London.
Indonesia will issue a sovereign sukuk aimed at retail investors in February.
One of the conventional banks in Kuwait, the Global Investment House, has defaulted on its debt. Global Investment House along with Islamic bank The Investment Dar announced that they needed up to $1 billion in loans from the government. The Investment Dar has been reported to be selling assets including part of its stake in Aston Martin which it acquired in a Shari'ah-compliant LBO in 2007.
Saturday, January 03, 2009
Non-Muslims not sought out by GCC Islamic banks; Tier II capital sukuk issued; More data on Dubai's real estate market collapse
Most non-Muslims in the GCC do not seek out Islamic banking products at the retail level, instead opting for conventional banking products. However, some seek out Islamic banking products because, in the words of one Malaysian expat: "Malaysians have a sense of what Islamic banking is about. Maybe the returns are not that high, but it feels more secure and safe." In other cases, non-Muslims receive financing from an Islamic bank because that is what is available, for example, at a car dealership. Jawad Ali, a partner at King & Spalding, believes that retail Islamic banking products are not "geared towards retail customers" and receive more attention from high net worth clients who care not only about the cost, but are interested in how the financial product "works" to ensure it is Shari'ah-compliant. There is also very little need for Islamic banks to attract non-Muslim clients because the demand from Muslims has not yet been saturated.
Saudi Hollandi Bank issued a SAR 775 million ($207 million) sukuk as the first tranche of SAR 1.5 billion in Tier II capital. Tier II capital includes debt that is subordinated to the bank's depositors. The sukuk is callable after 5 years and returns Saudi Interbank Offer Rate (SIBOR) plus 200 basis points and is a mudaraba sukuk. This sukuk is an example of one in which additional transparency from the bank and the Shari'ah board about its Shari'ah-compliance would be helpful. It appears to be the equivalent of a floating rate bond benchmarked to an interest rate. It would be useful to see how the return on the investment is related to the underlying profits of the bank, rather than just based on a market-derived interest rate disconnected from the bank's operations.
AIM-listed Tejoori, a Shari'ah-compliant investment trust, released preliminary earnings for 2008 that showed a significant loss and very little remaining cash following a full change in their board in April 2008. The preliminary report for 2008 also mentioned that the new board would reduce its "high exposure to the Dubai real estate market".
I normally do not concentrate on individual company's results (and do not make any recommendations of any investments), but this company has investments primarily concentrated in real estate in Dubai and its difficulties, I believe, are indicative of a collapsing bubble in real estate in parts of the GCC, most noticeably in Dubai. The largest Tejoori investment is in the Lagoons, a project in Dubai managed by Omniyat Properties. Another company working on the Lagoons recently announced layoffs from staff working on other projects. The article described the real estate market in Dubai: "In just two months, Dubai has moved from being a safe haven to a market where virtually no major project is left unaffected by the credit crunch". The difficulties in the real estate market in Dubai may not have anything to do with Islamic finance, but as I have said before in this blog, Islamic finance is affected by global economic conditions and investment companies and banks in the GCC with a lot of exposure to the real estate market may see the greatest declines as the credit crisis sweeps across the globe. This is merely one example.
University Bancorp, the parent company of University Islamic Financial Corp, decided to voluntarily delist itself from the NASDAQ to save money on legal and accounting costs associated with being a publicly traded company.
Saudi Hollandi Bank issued a SAR 775 million ($207 million) sukuk as the first tranche of SAR 1.5 billion in Tier II capital. Tier II capital includes debt that is subordinated to the bank's depositors. The sukuk is callable after 5 years and returns Saudi Interbank Offer Rate (SIBOR) plus 200 basis points and is a mudaraba sukuk. This sukuk is an example of one in which additional transparency from the bank and the Shari'ah board about its Shari'ah-compliance would be helpful. It appears to be the equivalent of a floating rate bond benchmarked to an interest rate. It would be useful to see how the return on the investment is related to the underlying profits of the bank, rather than just based on a market-derived interest rate disconnected from the bank's operations.
AIM-listed Tejoori, a Shari'ah-compliant investment trust, released preliminary earnings for 2008 that showed a significant loss and very little remaining cash following a full change in their board in April 2008. The preliminary report for 2008 also mentioned that the new board would reduce its "high exposure to the Dubai real estate market".
I normally do not concentrate on individual company's results (and do not make any recommendations of any investments), but this company has investments primarily concentrated in real estate in Dubai and its difficulties, I believe, are indicative of a collapsing bubble in real estate in parts of the GCC, most noticeably in Dubai. The largest Tejoori investment is in the Lagoons, a project in Dubai managed by Omniyat Properties. Another company working on the Lagoons recently announced layoffs from staff working on other projects. The article described the real estate market in Dubai: "In just two months, Dubai has moved from being a safe haven to a market where virtually no major project is left unaffected by the credit crunch". The difficulties in the real estate market in Dubai may not have anything to do with Islamic finance, but as I have said before in this blog, Islamic finance is affected by global economic conditions and investment companies and banks in the GCC with a lot of exposure to the real estate market may see the greatest declines as the credit crisis sweeps across the globe. This is merely one example.
University Bancorp, the parent company of University Islamic Financial Corp, decided to voluntarily delist itself from the NASDAQ to save money on legal and accounting costs associated with being a publicly traded company.
Tuesday, December 23, 2008
Islamic finance running into problems in the GCC, expanding elsewhere
France is considering regulatory and tax changes to allow Islamic banks to compete and enter the market which could be one of the largest in Europe based on the relative share of the population that is Muslim. At least three banks have requested permission to operate in France, the Qatar Islamic Bank, Kuwait Finance House and Al Baraka Islamic Bank of Bahrain. The Islamic banks operating in the UK would also likely be interested in France and would probably face an easier time expanding because of the financial sector harmonization promoted by the European Union.
The Commercial Bank of Kuwait cancelled plans to buy a 19 percent stake in Boubyan Bank from The Investment Dar, something that was part of reported plans by the Investment Dar to raise money.
As a result of the credit crisis, the Turkish government is considering issuing sukuk, although like the Islamic banking sector, it will not be explicitly labeled as Islamic (Islamic banks are called 'special finance houses' in the country).
A Shari'ah-compliant green fund trading carbon credits is being launched, although it is not immediately clear to me how they will engage in 'active trading' in the carbon markets in a Shari'ah-compliant way.
The market for sukuk and IPOs in Saudi Arabia has taken a tumble since the credit crisis spread across the world and out of the financial system into the real economy. The Central Bank of Bahrain's regular ijara sukuk issue was oversubscribed as normal however. The State Bank of Pakistan, the country's central bank, successfully issued Rs. 6 billion ($76 million) in sukuk, providing Islamic banks an investment for their surplus liquidity.
The property market in Dubai is experiencing a squeeze and, although it is not clear which companies bear the greatest brunt of it, there are probably some Islamic finance companies that will be hurt. Dar Al Shari'ah, a consulting subsidiary of Dubai Islamic Bank, believes that publicly traded Shari'ah-compliant securitizations could provide funding for home finance that would allow smaller investors to become involved.
An article compares the zero interest rate policies of the Bank of Japan and the US Federal Reserve to Islamic banking. I think the analogy is entirely incorrect because Islamic finance doesn't actually use a 'zero interest rate', it structures financing differently. Although some of the products may resemble interest-bearing instruments, they are not offered at zero cost. Borrowers are making financing available based on an expected (non-zero) return. I think that many articles miss the real compelling facets of Islamic finance when it is boiled down to 'they don't use interest'.
The Commercial Bank of Kuwait cancelled plans to buy a 19 percent stake in Boubyan Bank from The Investment Dar, something that was part of reported plans by the Investment Dar to raise money.
As a result of the credit crisis, the Turkish government is considering issuing sukuk, although like the Islamic banking sector, it will not be explicitly labeled as Islamic (Islamic banks are called 'special finance houses' in the country).
A Shari'ah-compliant green fund trading carbon credits is being launched, although it is not immediately clear to me how they will engage in 'active trading' in the carbon markets in a Shari'ah-compliant way.
The market for sukuk and IPOs in Saudi Arabia has taken a tumble since the credit crisis spread across the world and out of the financial system into the real economy. The Central Bank of Bahrain's regular ijara sukuk issue was oversubscribed as normal however. The State Bank of Pakistan, the country's central bank, successfully issued Rs. 6 billion ($76 million) in sukuk, providing Islamic banks an investment for their surplus liquidity.
The property market in Dubai is experiencing a squeeze and, although it is not clear which companies bear the greatest brunt of it, there are probably some Islamic finance companies that will be hurt. Dar Al Shari'ah, a consulting subsidiary of Dubai Islamic Bank, believes that publicly traded Shari'ah-compliant securitizations could provide funding for home finance that would allow smaller investors to become involved.
An article compares the zero interest rate policies of the Bank of Japan and the US Federal Reserve to Islamic banking. I think the analogy is entirely incorrect because Islamic finance doesn't actually use a 'zero interest rate', it structures financing differently. Although some of the products may resemble interest-bearing instruments, they are not offered at zero cost. Borrowers are making financing available based on an expected (non-zero) return. I think that many articles miss the real compelling facets of Islamic finance when it is boiled down to 'they don't use interest'.
Friday, November 28, 2008
New sukuk are smaller than last year; profits hold up for Islamic banks although challenges remain
A blog post at PBS, the U.S. public broadcasting organization, provides a brief description of Islamic banking seen through the prohibition of usury in the three large monotheistic religions: Judaism, Christianity and Islam. The U.K. may be providing the greatest example of how to allow Islamic banking to operate on a level playing field with conventional financial products.
A panel at a conference in the Dubai International Financial Centre (DIFC) tackles difficult subjects like the effect of the credit crisis on Islamic finance and the potential for 'greater good' efforts to expand Islamic financial principles to financial products without the 'Islamic' label (e.g. 'ethical' and 'green').
In another report, data show that the sukuk market has fallen off in 2008 compared with 2007. Issuance in the GCC fell from $14.15 billion in the first nine months of 2007 to $8 billion in the same period in 2008. The number of sukuk issued in the GCC only from 36 to 34 which means that the average size of sukuk has fallen (from $393 million to $235 million). There were some sukuk significantly larger than average issued by real estate companies: eight accounting for $4.85 billion (compared with seven in the same period in 2007 valued at $3.42 billion). This means the remaining 26 sukuk issued this year only averaged $121 million compared with the non-real estate issues in 2007 which averaged $370 million.
Business Week had a story that I missed a few weeks ago about Islamic finance weathering the credit crisis, but which was mentioned in another article on Islamic finance, because of its additional screens which help Shari'ah-compliant investors avoid some of the pitfalls that have been hurt the most in the credit crisis. Some non-Muslim investors may even be attracted to the industry by its relatively simple screens used to exclude companies that, while conforming with the Shari'ah screens, may also perform better in bad markets for several reasons including a lower reliance on debt financing.
Although Islamic finance is less susceptible to the credit crisis, Moody's warns that it is not completely isolated from global economic trends and are overexposed to real estate markets, particularly in the GCC, which have only recently began slowing. Despite this, the profits of Islamic banks remained strong in the last year.
The Islamic Development is planning a sukuk to raise money to assist member countries suffering in the wake of the credit crisis.
A panel at a conference in the Dubai International Financial Centre (DIFC) tackles difficult subjects like the effect of the credit crisis on Islamic finance and the potential for 'greater good' efforts to expand Islamic financial principles to financial products without the 'Islamic' label (e.g. 'ethical' and 'green').
In another report, data show that the sukuk market has fallen off in 2008 compared with 2007. Issuance in the GCC fell from $14.15 billion in the first nine months of 2007 to $8 billion in the same period in 2008. The number of sukuk issued in the GCC only from 36 to 34 which means that the average size of sukuk has fallen (from $393 million to $235 million). There were some sukuk significantly larger than average issued by real estate companies: eight accounting for $4.85 billion (compared with seven in the same period in 2007 valued at $3.42 billion). This means the remaining 26 sukuk issued this year only averaged $121 million compared with the non-real estate issues in 2007 which averaged $370 million.
Business Week had a story that I missed a few weeks ago about Islamic finance weathering the credit crisis, but which was mentioned in another article on Islamic finance, because of its additional screens which help Shari'ah-compliant investors avoid some of the pitfalls that have been hurt the most in the credit crisis. Some non-Muslim investors may even be attracted to the industry by its relatively simple screens used to exclude companies that, while conforming with the Shari'ah screens, may also perform better in bad markets for several reasons including a lower reliance on debt financing.
Although Islamic finance is less susceptible to the credit crisis, Moody's warns that it is not completely isolated from global economic trends and are overexposed to real estate markets, particularly in the GCC, which have only recently began slowing. Despite this, the profits of Islamic banks remained strong in the last year.
The Islamic Development is planning a sukuk to raise money to assist member countries suffering in the wake of the credit crisis.
Thursday, November 06, 2008
Islamic finance at risk from fall in prices in the real estate market; CGAP study on Islamic microfinance released
My fears that the credit crisis in conventional financial markets is spilling over to Islamic finance are becoming to be realized. The primary mechanism I identified in my blog (and in greater detail in a forthcoming opinion piece for Business Islamica magazine) for transmitting a crisis through the Islamic banks was falling property prices in the GCC countries that had mostly escaped the direct fallout from the subprime crisis that began in the United States. Although the prices have not fallen as dramatically as in Western countries, they are beginning to fall and this has an effect on Islamic banking because these assets are the underlying physical property used in many Islamic financing deals. From a Gulf Daily News article: "Falling prices in mainly Muslim countries in the Middle East and Southeast Asia are likely to affect the Islamic finance market due to heavy reliance on such assets to support deals." A senior analyst at Zawya, Alexandra Tohme, adds her opinion on the link between Islamic financial institutions and the global credit crisis.
The Dinar Standard has an interesting article about the potential for Islamic banking in Europe.
The Financial Times has a Q&A on the basics of Islamic finance, as do a number of newspapers in the U.S. and there is also an article on finance based in Christianity.
Islamic finance could still grow by 20-25% a year despite the financial crisis according to Rushdi Siddiqui, the Global Director of the Dow Jones Islamic Market Indexes, but "Islamic banks should diversify their investments to generate revenues from different areas."
Hedge fund managers are targeting Muslim investors in the Middle East by developing Shari'ah-compliant hedge funds, but is it too late for them to attract investors given their often poor returns during the past couple of years.
The DIFC has lent its support to the new Master Agreements for Treasury Placements (MATP), the standardized contract from the International Islamic Finance Market (IIFM) that was recently announced.
Zurich Financial Services Group has launched a joint venture takaful company with the Abu Dhabi National Takaful Company to expand their operations in the GCC region.
The Consultative Group to Assist the Poor (CGAP), a multi-lateral effort to promote microfinance and based at the World Bank, released a study of 125 Islamic microfinancial institutions.
The Dinar Standard has an interesting article about the potential for Islamic banking in Europe.
The Financial Times has a Q&A on the basics of Islamic finance, as do a number of newspapers in the U.S. and there is also an article on finance based in Christianity.
Islamic finance could still grow by 20-25% a year despite the financial crisis according to Rushdi Siddiqui, the Global Director of the Dow Jones Islamic Market Indexes, but "Islamic banks should diversify their investments to generate revenues from different areas."
Hedge fund managers are targeting Muslim investors in the Middle East by developing Shari'ah-compliant hedge funds, but is it too late for them to attract investors given their often poor returns during the past couple of years.
The DIFC has lent its support to the new Master Agreements for Treasury Placements (MATP), the standardized contract from the International Islamic Finance Market (IIFM) that was recently announced.
Zurich Financial Services Group has launched a joint venture takaful company with the Abu Dhabi National Takaful Company to expand their operations in the GCC region.
The Consultative Group to Assist the Poor (CGAP), a multi-lateral effort to promote microfinance and based at the World Bank, released a study of 125 Islamic microfinancial institutions.
Wednesday, October 22, 2008
Coud the credit crisis spillover into Islamic finance? Sukuk issuance expected to exceed 2007 total
Despite delays in many planned sukuk, Kuwait Finance House expects sukuk issuance in 2008 to top the total from 2007 even though issuance through the first three quarters fell below 2006 and 2007 totals for the same period. The rationale is that since the economy is still growing rapidly in the areas in which many sukuk are originated, the GCC and Malaysia, and non-Muslims continue to invest in sukuk. This has been the case for much of the year, but there are indications that the real estate market in the GCC region is slowing from its torrid pace in 2007 and early 2008. Also, many of the non-Muslims investing in sukuk were hedge funds looking to have exposure to another asset class and many Western funds have been faced with redemption requests from their investors, damping their future demand for sukuk. KFH expects a total issuance of sukuk to be between $40 and $45 billion in 2008 compared with $32.65 billion in 2007.
An article in a newspaper in Guernsey proposes Islamic finance as an alternative to the problems created in the recent past by (conventional) financial system excesses. Overexposure to real estate investments, though, may pose a threat to the Islamic finance industry. Some Islamic finance practitioners see the Shari'ah-compliant securitization that is the heart of the sukuk market as a guard against the excesses that led to the credit crisis. I think that, not only will it not necessarily protect the Islamic finance industry, the use of some securitization products, particularly the opaque, highly structured ones could create a crisis within the Islamic finance industry, and one with a similar economic trigger: the fall in real estate values.
Also, despite growing rapidly over the past 8 years, Islamic finance has yet to make a significant impression on the global banking industry.
Without specifying who should lead, second finance minister of Malaysia Nor Mohamed Yakop wants a standardized documentation and policies for the Islamic finance industry. Currently, there are two main standards-setting bodies, AAOIFI in the GCC and the IFSB in Malaysia.
An article in a newspaper in Guernsey proposes Islamic finance as an alternative to the problems created in the recent past by (conventional) financial system excesses. Overexposure to real estate investments, though, may pose a threat to the Islamic finance industry. Some Islamic finance practitioners see the Shari'ah-compliant securitization that is the heart of the sukuk market as a guard against the excesses that led to the credit crisis. I think that, not only will it not necessarily protect the Islamic finance industry, the use of some securitization products, particularly the opaque, highly structured ones could create a crisis within the Islamic finance industry, and one with a similar economic trigger: the fall in real estate values.
Also, despite growing rapidly over the past 8 years, Islamic finance has yet to make a significant impression on the global banking industry.
Without specifying who should lead, second finance minister of Malaysia Nor Mohamed Yakop wants a standardized documentation and policies for the Islamic finance industry. Currently, there are two main standards-setting bodies, AAOIFI in the GCC and the IFSB in Malaysia.
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