- The head of Shari'ah and CEO of IIMF believe that greater transaction document standardization, like the Master Agreement on Treasury Placement released by IIFM, will benefit the industry.
- There are a number of articles on Khazanah's S$1.5 billion ($1.1 billion) sukuk, including from Bloomberg, AsiaOne News and and Reuters.
- The Deputy Governor of the Central Bank of Malaysia gave a speech at the 21st Conference of Presidents of Law Associations of Asia on Islamic finance. The full text is available as a pdf.
- Al Rajhi Investment and Banking Corporation Malaysia Bhd, a subsidiary of the Saudi Islamic bank Al Rajhi Bank joined the Bursa Suq Al-Sila', the commodity murabaha/tawarruq platform in Malaysia.
- An article offers a few details about the Family Bank Bahrain, an Islamic microfinance institution that is working with the Grameen Trust.
- An article published by Zawya, written by three lawyers at King & Spalding, covers the different trends in how Islamic financial products are taxed.
- BMB Islamic released its Global Islamic Finance Report 2010, which in addition to describing the industry's growth also acknowledges that there is a shortage of authentic data on the size, growth and performance of the institutions making up the industry.
- The Maldive's Monetary Authority issued the first Islamic banking license to Maldives Islamic Bank Pvt. Ltd.
- Bloomberg has another article about the potential for growth in sukuk issuance from Asia while the GCC primary markets are at their slowest pace since 2005.
- A commenter for the Guardian Michael Tomasky takes a look at Islamic finance and realizes that the hyperbolic charges leveled against it are ridiculous on further examination.
- An Islamic brokerage, Makaseb Islamic Financial Services, in Abu Dhabi is closing.
- Malaysian companies Axiata Group Bhd and Malaysia Airports Holding Bhd are planning RM4.2 billion ($1.3 billion) in 7-10 year sukuk and RM3.1 billion ($981 million) in sukuk of unspecified tenor, respectively. The bulk of the Axiata sukuk will be sold to the Employees Provident Fund.
Showing posts with label standardization. Show all posts
Showing posts with label standardization. Show all posts
Thursday, August 05, 2010
Thursday bullets
Tuesday, May 18, 2010
Future growth in Islamic finance, sukuk news
Future growth in Islamic finance
An article in the National newspaper provides a good summary of the growth areas in Islamic finance, as well as the areas of controversy which remain in these areas. The largest focus is on whether creating Shari'ah-compliant hedging contracts is a help or hindrance for the growth of the industry. In some aspects I can see how it reinforces the view that Islamic finance does nothing but mimic conventional financial products. However, as the article notes, longer term financing like what would be necessary for project finance, would be largely absent were there not a way to hedge against currency, commodity price or interest rate fluctuations.
The article also discusses the lack of Islamic microfinance. Moinuddin Malim, the CEO of Mashreq Al Islami, is quoted as saying "We have not yet reached our real audience. We need to develop microfiannce to enable communities to thrive in their own right and bring living standards to them". I would disagree with his characterization of "bringing living standards to them" and replace that with bring affordable, Shari'ah-compliant financial alternatives, but it is definitely an underserved area of Islamic finance. The CGAP competition which recently closed (and I advised two groups who submitted proposals) is a good effort because it focuses on providing seed money to develop sustainable financial institutions (either non-profit or for-profit). However, outside of this and a few efforts by a couple small efforts by (mostly) global financial institutions in Islamic finance, there has been not much more than lip service paid to the need for Islamic microfinance.
There is a lot more to Islamic finance than just structured products that mimic conventional finance for large corporations and sovereigns. Islamic retail banking fills some of the need with a reach towards a larger number of Muslim consumers, but there are many Muslim (and non-Muslim) 'unbanked'. This is the consumer base that the Grameen Bank was formed to serve and it has now attracted a lot of attention from larger financial institutions. The same need is present for the Islamic financial industry to fill and it should be a quicker transition for Islamic financial institutions to recognize this need (and potential) now that conventional microfinance is well established with participation from the larger financial institutions. It is also ideally suited to the underlying ethics behind Islamic finance, which should feel a greater need to promote economic empowerment based on its ethical foundations.
Another article describes the re-emergence of innovation within the Islamic financial industry which has largely been absent during the recession. There are areas--like liquidity management--where innovation can be a positive development to increase the available investment opportunities (particularly short-term and overnight). However, there are also a lot of 'innovations' during the 2005-2008 period in structured products and especially real estate, where 'innovation' can turn into 'high fees with little other benefit'. One example of this that has been described in detail was Gulf Finance House, which was described in a recent paper by Mohammed Khnifer.
The issue of standardization remains contentious. The debate, however, depends on what standardization means, which Debshis Day of Clifford Chance pointed out, is unclear. "Standardization, what does that really mean? It is very difficult for everybody to agree on one thing. People need to understand that even in a conventional market there is not pure standardization". I would agree with him that complete standardization is neither possible nor probably desirable. There are certain areas (like the ISDA-IIFM derivatives standard and the IIFM standardized murabaha agreement) where standardization can be beneficial by reducing costs associated with replicating the same structure. However, these standardized contracts are not, nor should be, mandatory. There are numerous areas where improvements can be made and leaving the door open to new products or new variations of existing products makes sense for the industry as a whole.
Sukuk News
Unicorn Investment Bank and Standard Chartered report they have mandates to work on issuance of $6 billion in sukuk this year. Reportedly, over $4 billion of this amount will be advised by Standard Chartered. An executive at HSBC, Mohammed Dawood, says that issuance of dollar-denominated sukuk may reach $5 billion, matching the previous year's total. The total issuance may be $8.5 billion, about last year's level, but far below the pre-crisis levels in 2007 and 2008. However, due to the Greek crisis and Ramadan, most issuance will be pushed into the third quarter. Al Rajhi Bank, which has been largely absent from the sukuk market due to concerns by its Shari'ah board over the compliance of the sukuk in the markets, plans to launch a sukuk with Cagamas, the Malaysian housing finance agency, in June. Indonesia recently sold $467.5 million in sukuk to the government-managed Hajj fund.
U.S. issuers could make up part of the issuance in the second half of this year or in 2011. GE Capital, which issued a $500 million sukuk last year (my summary of that sukuk) is planning a 'benchmark' sized sukuk in late 2010 or 2011, which is generally over $500 million. In addition, Unicorn Investment Bank, which has a U.S.-based private equity subsidiary UIB Capital, is working on a $250 million sukuk for a U.S.-based company. The only two sukuk issued by U.S.-based companies so far have been the East Cameron sukuk, which ended with investors owning the underlying asset after the issuer entered bankruptcy, and the 2009 GE Capital sukuk.
Another rare issuer coming to market is Malaysia, which will likely offer its first international sukuk since 2002. The sukuk, expected to be an ijara sukuk with a 5-year tenor is said to be backed by government hospital assets. The issue is reported to be a $1 billion, however, it has not been formally announced and is expected to be announced at an Islamic economic forum in Kuala Lumpur.
Robin Amlot writes an interesting review of an e-book published by Euromoney, written by Parvez Daruwalla and Shahzad Siddiqui, in Islamic Business & Finance. The e-book talks about whether the sukuk structure, and in particular sovereign sukuk, could be done better.
Article by the CEO of Gatehouse Bank
Richard Thomas, the CEO of Gatehouse Bank, an Islamic wholesale bank in the UK, has an article about Islamic finance. While in general, he speaks to the general outlook for Islamic finance globally, he makes two notable points. First, he does not fall into the "Islamic finance is immune from the crisis" trap and secondly, he acknowledges the overlap between Islamic finance and ethical/sustainable finance. He writes:
Other News
An article in the National newspaper provides a good summary of the growth areas in Islamic finance, as well as the areas of controversy which remain in these areas. The largest focus is on whether creating Shari'ah-compliant hedging contracts is a help or hindrance for the growth of the industry. In some aspects I can see how it reinforces the view that Islamic finance does nothing but mimic conventional financial products. However, as the article notes, longer term financing like what would be necessary for project finance, would be largely absent were there not a way to hedge against currency, commodity price or interest rate fluctuations.
The article also discusses the lack of Islamic microfinance. Moinuddin Malim, the CEO of Mashreq Al Islami, is quoted as saying "We have not yet reached our real audience. We need to develop microfiannce to enable communities to thrive in their own right and bring living standards to them". I would disagree with his characterization of "bringing living standards to them" and replace that with bring affordable, Shari'ah-compliant financial alternatives, but it is definitely an underserved area of Islamic finance. The CGAP competition which recently closed (and I advised two groups who submitted proposals) is a good effort because it focuses on providing seed money to develop sustainable financial institutions (either non-profit or for-profit). However, outside of this and a few efforts by a couple small efforts by (mostly) global financial institutions in Islamic finance, there has been not much more than lip service paid to the need for Islamic microfinance.
There is a lot more to Islamic finance than just structured products that mimic conventional finance for large corporations and sovereigns. Islamic retail banking fills some of the need with a reach towards a larger number of Muslim consumers, but there are many Muslim (and non-Muslim) 'unbanked'. This is the consumer base that the Grameen Bank was formed to serve and it has now attracted a lot of attention from larger financial institutions. The same need is present for the Islamic financial industry to fill and it should be a quicker transition for Islamic financial institutions to recognize this need (and potential) now that conventional microfinance is well established with participation from the larger financial institutions. It is also ideally suited to the underlying ethics behind Islamic finance, which should feel a greater need to promote economic empowerment based on its ethical foundations.
Another article describes the re-emergence of innovation within the Islamic financial industry which has largely been absent during the recession. There are areas--like liquidity management--where innovation can be a positive development to increase the available investment opportunities (particularly short-term and overnight). However, there are also a lot of 'innovations' during the 2005-2008 period in structured products and especially real estate, where 'innovation' can turn into 'high fees with little other benefit'. One example of this that has been described in detail was Gulf Finance House, which was described in a recent paper by Mohammed Khnifer.
The issue of standardization remains contentious. The debate, however, depends on what standardization means, which Debshis Day of Clifford Chance pointed out, is unclear. "Standardization, what does that really mean? It is very difficult for everybody to agree on one thing. People need to understand that even in a conventional market there is not pure standardization". I would agree with him that complete standardization is neither possible nor probably desirable. There are certain areas (like the ISDA-IIFM derivatives standard and the IIFM standardized murabaha agreement) where standardization can be beneficial by reducing costs associated with replicating the same structure. However, these standardized contracts are not, nor should be, mandatory. There are numerous areas where improvements can be made and leaving the door open to new products or new variations of existing products makes sense for the industry as a whole.
Sukuk News
Unicorn Investment Bank and Standard Chartered report they have mandates to work on issuance of $6 billion in sukuk this year. Reportedly, over $4 billion of this amount will be advised by Standard Chartered. An executive at HSBC, Mohammed Dawood, says that issuance of dollar-denominated sukuk may reach $5 billion, matching the previous year's total. The total issuance may be $8.5 billion, about last year's level, but far below the pre-crisis levels in 2007 and 2008. However, due to the Greek crisis and Ramadan, most issuance will be pushed into the third quarter. Al Rajhi Bank, which has been largely absent from the sukuk market due to concerns by its Shari'ah board over the compliance of the sukuk in the markets, plans to launch a sukuk with Cagamas, the Malaysian housing finance agency, in June. Indonesia recently sold $467.5 million in sukuk to the government-managed Hajj fund.
U.S. issuers could make up part of the issuance in the second half of this year or in 2011. GE Capital, which issued a $500 million sukuk last year (my summary of that sukuk) is planning a 'benchmark' sized sukuk in late 2010 or 2011, which is generally over $500 million. In addition, Unicorn Investment Bank, which has a U.S.-based private equity subsidiary UIB Capital, is working on a $250 million sukuk for a U.S.-based company. The only two sukuk issued by U.S.-based companies so far have been the East Cameron sukuk, which ended with investors owning the underlying asset after the issuer entered bankruptcy, and the 2009 GE Capital sukuk.
Another rare issuer coming to market is Malaysia, which will likely offer its first international sukuk since 2002. The sukuk, expected to be an ijara sukuk with a 5-year tenor is said to be backed by government hospital assets. The issue is reported to be a $1 billion, however, it has not been formally announced and is expected to be announced at an Islamic economic forum in Kuala Lumpur.
Robin Amlot writes an interesting review of an e-book published by Euromoney, written by Parvez Daruwalla and Shahzad Siddiqui, in Islamic Business & Finance. The e-book talks about whether the sukuk structure, and in particular sovereign sukuk, could be done better.
Article by the CEO of Gatehouse Bank
Richard Thomas, the CEO of Gatehouse Bank, an Islamic wholesale bank in the UK, has an article about Islamic finance. While in general, he speaks to the general outlook for Islamic finance globally, he makes two notable points. First, he does not fall into the "Islamic finance is immune from the crisis" trap and secondly, he acknowledges the overlap between Islamic finance and ethical/sustainable finance. He writes:
"Islamic finance has, however, been met with enormous challenges. It has not escaped the global downturn despite Islamic banks being safeguarded by the nature of their Shariah principles against exposure to subprime mortgages and the other toxic assets that have hurt the balance sheets of so many of the world’s biggest financial institutions. "
[...]
As it is, a substantial amount of business transacted in an ethical or sustainable format may qualify as Sharia compliant. This demand for products and investments, while primarily fuelled by the world’s 1.3 billion Muslims, is supporting interesting crossover products that benefit from the same ethical criteria."
Other News
- Golden Belt Sukuk holders approved the dissolution of the sukuk trust, making the sukuk holders unsecured creditors of Saad Group.
- The Central Bank of Bahrain's sukuk al-ijara issue was oversubscribed by 230%. The sukuk has a maturity of 182 days.
- Dana Gas reset the conversion rate on its sukuk according to JPMorgan Chase & Co., the calculation agent.
- South African investment management firm is planning on launching its products outside of its home country including within Europe.
- Aston Business School will launch an MSc and PhD program in Islamic banking with sponsorship from the CEO of Dubai-based Surgi Tech.
- Al Rajhi Steel Industries, a Saudi rebar manufacturer obtained a $196.5 billion Shari'ah-compliant bank loan to finance construction of a new plant in Jeddah.
- The Iraqi bank Ashur Bank is exploring offering an Islamic banking window, for which it submitted an application six months ago to the Central Bank of Iraq. 7 of Iraq's 42 banks are Islamic banks.
Saturday, May 15, 2010
Nakheel repays its sukuk, FT Special Report
The Nakheel restructuring discussions continue as Nakheel repays the Nakheel Development 3 sukuk for $980 million (Thursday) with assistance from the Dubai Financial Support Fund. The trade creditors of Nakheel are close to approving the deal which would pay them 40% in cash with the remainder in a "publicly traded security with a 10 percent per annum return". Previous reporting said the security would be a sukuk, which is not mentioned in the latest news. AFP reports that 50% of trade creditors have agreed to the plan; 65% approval is needed for it to be approved. One interesting piece of information contained in the article that I had not seen explicitly mentioned was that upon the approval of a restructuring plan, Nakheel would no longer be part of Dubai World and would instead be owned directly by the government of Dubai. The repayment of the Nakheel sukuk is described as a part of the debt restructuring plan for Dubai World.
The Dubai World debt restructuring is an extremely complex process with many different stakeholders with different goals. However, it appears that there has been differential treatment of various parties without regards to their seniority (excepting the initial Nakheel Development sukuk). The first Nakheel sukuk provided sukuk investors with a mortgage over the underlying (undeveloped) properties, but the trade creditors, investors in Nakheel Development 2 and 3 sukuk and the other debt holders are all unsecured creditors of either Dubai World or one of its subsidiaries. In general, a restructuring should (in my opinion) treat all unsecured creditors equally if the debt restructuring for all entities (with the exception of excluded business like DP World) is done at once. In the current deal, all investors are theoretically being repaid at par but sukuk holders receive their payment upon the scheduled maturity dates while trade creditors receive 40% cash payment with the remainder paid in the form of a tradable security and other creditors have maturities extended with a 1% interest rate being offered.
There are good reasons for some of these developments--the Dubai government recognizes that trade creditors receiving cash on their claims (at least on a portion) will help the local economy. Paying sukuk holders on the near-term maturity will avoid default. However, it is troubling for the Islamic finance industry as a whole because it could create a perception problem for the industry. In general, the products used in Islamic finance are created to mimic conventional bonds, but their robustness in cases of default is unproven. A default by Dubai World on sukuk could have ripple effects because it was viewed (incorrectly) as a quasi-sovereign issue. However, on-time repayment of the sukuk while other creditors see the maturity extended and the interest rate dropped could make companies less likely to consider sukuk.
The rationale is somewhat convoluted, but I will try to explain it. A company that uses both conventional and Islamic forms of debt finance brings a conventional unsecured, senior bond to the market. Before that bond matures, the company issues an unsecured, senior sukuk (equal in seniority with the conventional bond) to diversify its funding sources that makes up a relatively small share of the company's total debt. When the time comes to roll over the conventional bonds, the investors balk at the debt pointing to Dubai World and asking "If you run into trouble, will the sukuk certificateholders have de facto seniority over the bond holders? Will they be repaid while we wait for a debt resolution?". The prospects for the issuance of sukuk by a conventionally financed company to create investor concerns among conventional bondholders could make such a company think twice about issuing the sukuk in the first place. This would deprive the Islamic finance industry and sukuk markets of a large group of potential issuers and will slow the growth of a portion of the industry, but not just investment banks who work on the sukuk issuers. Takaful companies, for example, will see the shortage of sukuk accentuated if potential issuers do not issue sukuk for this reason.
The Financial Times has a special report on Islamic finance. Rather than try to summarize each article, I will just list the articles and recommend them all:
Other News
The Dubai World debt restructuring is an extremely complex process with many different stakeholders with different goals. However, it appears that there has been differential treatment of various parties without regards to their seniority (excepting the initial Nakheel Development sukuk). The first Nakheel sukuk provided sukuk investors with a mortgage over the underlying (undeveloped) properties, but the trade creditors, investors in Nakheel Development 2 and 3 sukuk and the other debt holders are all unsecured creditors of either Dubai World or one of its subsidiaries. In general, a restructuring should (in my opinion) treat all unsecured creditors equally if the debt restructuring for all entities (with the exception of excluded business like DP World) is done at once. In the current deal, all investors are theoretically being repaid at par but sukuk holders receive their payment upon the scheduled maturity dates while trade creditors receive 40% cash payment with the remainder paid in the form of a tradable security and other creditors have maturities extended with a 1% interest rate being offered.
There are good reasons for some of these developments--the Dubai government recognizes that trade creditors receiving cash on their claims (at least on a portion) will help the local economy. Paying sukuk holders on the near-term maturity will avoid default. However, it is troubling for the Islamic finance industry as a whole because it could create a perception problem for the industry. In general, the products used in Islamic finance are created to mimic conventional bonds, but their robustness in cases of default is unproven. A default by Dubai World on sukuk could have ripple effects because it was viewed (incorrectly) as a quasi-sovereign issue. However, on-time repayment of the sukuk while other creditors see the maturity extended and the interest rate dropped could make companies less likely to consider sukuk.
The rationale is somewhat convoluted, but I will try to explain it. A company that uses both conventional and Islamic forms of debt finance brings a conventional unsecured, senior bond to the market. Before that bond matures, the company issues an unsecured, senior sukuk (equal in seniority with the conventional bond) to diversify its funding sources that makes up a relatively small share of the company's total debt. When the time comes to roll over the conventional bonds, the investors balk at the debt pointing to Dubai World and asking "If you run into trouble, will the sukuk certificateholders have de facto seniority over the bond holders? Will they be repaid while we wait for a debt resolution?". The prospects for the issuance of sukuk by a conventionally financed company to create investor concerns among conventional bondholders could make such a company think twice about issuing the sukuk in the first place. This would deprive the Islamic finance industry and sukuk markets of a large group of potential issuers and will slow the growth of a portion of the industry, but not just investment banks who work on the sukuk issuers. Takaful companies, for example, will see the shortage of sukuk accentuated if potential issuers do not issue sukuk for this reason.
The Financial Times has a special report on Islamic finance. Rather than try to summarize each article, I will just list the articles and recommend them all:
- "Derivatives: 'In need of robust architecture'"
- "Rich potential in emerging markets"
- "Products: Industry 'strays too far from its roots'
- "Hedge funds: Industry once more at centre of attention"
- "Malaysia: Ahead of the game in local contest
- "Sukuk: Sustained recovery expected in second half of the year"
Other News
- Differences in interpretation and the lack of enforcement powers by standardization bodies like AAOIFI could be hindering the Islamic financial industry's growth.
- Bahraini Islamic investment bank Elaf Bank was appointed to arrange sukuk for two Indonesian companies.
- Dubai Islamic Bank approved a wakala agreement with the Ministry of Finance. The wakala agreement converts a $1 billion deposit by the government that was part of efforts to shore up local banks in the wake of the debt troubles at Dubai World.
- An article in the UK looks at Islamic ETFs from iShares available in the UK.
Tuesday, May 11, 2010
Rushdi Siddiqui interviews four scholars, sukuk update
First, thank you to those who have responded with feedback about a possible email newsletter of blog postings (and maybe other commentary). I would appreciate any other feedback, either as a comment to this post or in an email to blake@sharingrisk.org.
I think that Rushdi Siddiqui's latest article, an interview with four prominent Shari'ah scholars, Dr. Hussain Hamid Hassan, Dr. Mohammad Daud Bakar, Yousuf Talal DeLorenzo and Dr. Mohammad Akram Laldin is one of the most important articles for everyone interested in Islamic finance to read. It contains insights into how Shari'ah scholars see their role, the role of Shari'ah governance and the integration of younger less well-known scholars into the Shari'ah advisory role. It contains the most candid reflections of Shari'ah scholars that I have seen published about their own role both as advisors to Islamic financial institutions and as teachers and mentors of the Shari'ah scholars who will someday fill their shoes.
There is a good chunk of news about sukuk from the last couple days. The forward looking news starts with a $1.9 billion sukuk issued by Saudi Electric Company, which was issued at 95 basis points over SIBOR. As I wrote about in July 2009, the last sukuk from SEC was at a significant premium (160 bps over SIBOR) compared to it's (pre-crisis) sukuk issuance which was priced at 45 bps over SIBOR. The current sukuk is still at a premium to its 2007 sukuk, but by a far smaller margin. The shrinking yield premium for highly-rated issuers could lead to other non-high-grade corporate issuers to re-enter the sukuk market. The last estimate I have seen of the sukuk pipeline (sukuk planned but not issued) from Standard & Poor's was $50 billion, which likely includes lower rated corporates waiting for yield spreads for new issuance to decline.
Issues of sovereign sukuk, both domestically and internationally, remains active with Malaysia issuing a three-year, $311 million (MYR 3 billion) Sukuk 1Malaysia 2010 for domestic investors. In the wake of the Greek debt crisis, Indonesia is trimming but not cancelling the sukuk issuance expected in June or July of this year, but reiterated guidance that it would be a "benchmark" size, which typically means at least $500 million. The previous announcement was that the sukuk would be for $750 million. The Dubai Multi Commodities Centre just redeemed its $200 million, five-year sukuk issued in May 2005 with a final $20 million repayment. The certificateholders of Nakheel's $980 million Nakheel Development 2 sukuk have been told informally that the sukuk will be repaid on time. The funds necessary to repay the sukuk are reported to have been provided by the Dubai Financial Support Fund. This could spark some controversy among other Dubai World subsidiaries' creditors groups who have not yet finalized a debt restructuring which could see the other debt maturities extended and a 1% interest rate paid to creditors.
An article tackling the oft-debated issue of standardization in Islamic finance provides a very interesting view on the issue and what the current issues raised by tawarruq and the TID v. Blom Bank case. Reuters adds a factbox about the regulation of Islamic finance globally.
PricewaterhouseCoopers raises the issue, likely to confront Asian issuers of sukuk, about whether the illiquidity (and possible fluctuations) in their currencies will hamper the development of their Islamic finance appeal outside of the region. The issue has been confronted to some degree with Indonesia's dollar-denominated global sukuk issue last year and talk about a 10-year Malaysian dollar-denominated sukuk. There should remain a focus on developing domestic markets for Islamic finance, particularly within Indonesia where Islamic finance remains less developed. However, the internationalization of Islamic finance within Southeast Asia (and potentially South Korea, Japan and China) will strengthen the industry as a whole by providing additional geographical diversification for investors in dollar (and euro and pound and yen) denominated sukuk.
I think that Rushdi Siddiqui's latest article, an interview with four prominent Shari'ah scholars, Dr. Hussain Hamid Hassan, Dr. Mohammad Daud Bakar, Yousuf Talal DeLorenzo and Dr. Mohammad Akram Laldin is one of the most important articles for everyone interested in Islamic finance to read. It contains insights into how Shari'ah scholars see their role, the role of Shari'ah governance and the integration of younger less well-known scholars into the Shari'ah advisory role. It contains the most candid reflections of Shari'ah scholars that I have seen published about their own role both as advisors to Islamic financial institutions and as teachers and mentors of the Shari'ah scholars who will someday fill their shoes.
There is a good chunk of news about sukuk from the last couple days. The forward looking news starts with a $1.9 billion sukuk issued by Saudi Electric Company, which was issued at 95 basis points over SIBOR. As I wrote about in July 2009, the last sukuk from SEC was at a significant premium (160 bps over SIBOR) compared to it's (pre-crisis) sukuk issuance which was priced at 45 bps over SIBOR. The current sukuk is still at a premium to its 2007 sukuk, but by a far smaller margin. The shrinking yield premium for highly-rated issuers could lead to other non-high-grade corporate issuers to re-enter the sukuk market. The last estimate I have seen of the sukuk pipeline (sukuk planned but not issued) from Standard & Poor's was $50 billion, which likely includes lower rated corporates waiting for yield spreads for new issuance to decline.
Issues of sovereign sukuk, both domestically and internationally, remains active with Malaysia issuing a three-year, $311 million (MYR 3 billion) Sukuk 1Malaysia 2010 for domestic investors. In the wake of the Greek debt crisis, Indonesia is trimming but not cancelling the sukuk issuance expected in June or July of this year, but reiterated guidance that it would be a "benchmark" size, which typically means at least $500 million. The previous announcement was that the sukuk would be for $750 million. The Dubai Multi Commodities Centre just redeemed its $200 million, five-year sukuk issued in May 2005 with a final $20 million repayment. The certificateholders of Nakheel's $980 million Nakheel Development 2 sukuk have been told informally that the sukuk will be repaid on time. The funds necessary to repay the sukuk are reported to have been provided by the Dubai Financial Support Fund. This could spark some controversy among other Dubai World subsidiaries' creditors groups who have not yet finalized a debt restructuring which could see the other debt maturities extended and a 1% interest rate paid to creditors.
An article tackling the oft-debated issue of standardization in Islamic finance provides a very interesting view on the issue and what the current issues raised by tawarruq and the TID v. Blom Bank case. Reuters adds a factbox about the regulation of Islamic finance globally.
PricewaterhouseCoopers raises the issue, likely to confront Asian issuers of sukuk, about whether the illiquidity (and possible fluctuations) in their currencies will hamper the development of their Islamic finance appeal outside of the region. The issue has been confronted to some degree with Indonesia's dollar-denominated global sukuk issue last year and talk about a 10-year Malaysian dollar-denominated sukuk. There should remain a focus on developing domestic markets for Islamic finance, particularly within Indonesia where Islamic finance remains less developed. However, the internationalization of Islamic finance within Southeast Asia (and potentially South Korea, Japan and China) will strengthen the industry as a whole by providing additional geographical diversification for investors in dollar (and euro and pound and yen) denominated sukuk.
Wednesday, March 10, 2010
Dubai World; Islamic 'lender of last resort'
News about possible options for Dubai World continue to surface in media reports and the latest is that Dubai World may seek to simply rollover its debts and lower the interest payments and repay over an eight to ten year period. The outcome for sukuk holders was not discussed specifically in the reports and I am still not sure whether the Dubai World restructuring will include specific accommodations to account for Shari'ah-compliance concerns. In my opinion, and I am not a scholar so I can't speak definitively about this, that any extension of maturity with continued lease or profit payments could be difficult because it would effectively exchange a delay in repayment for a higher level or repayment, which would probably raise some issues. However, I recall that the Nakheel sukuk incorporated defaults by extending the lease term and continuing the lease payments until repayment (analogous to what is being proposed), while retaining the lease as the source of the payments. This would probably be viewed more favorably because it would not include a delay in repayment in exchange for increasing the principal (by making periodic payments for a longer period). However, not all of the Dubai World Islamic debt is structured as ijara. One source in the FT article said that creditors could receive a share of future profits, which could be a way to extend the maturity by turning a murabaha or other facility into a mudaraba or musharaka. However, the lack of clarity on this issue in the media report suggests that there is either a minority of debt that is Shari'ah-compliant or the issue of Shari'ah-compliance is not at the forefront and is being viewed as a later issue when the general terms are agreed for something to be engineered to work around any issues. The National newspaper also offers its slightly different analysis. The Nakheel sukuk are discussed in another article as JP Morgan indicated in a note that sukuk holders could receive repayment at par.
The Union of Arab Banks says it is finalizing a way to allow Islamic banks to approach the central banks of the region for support. This is an important issue because without 'lender-of-last-resort' protection, Islamic banks are more vulnerable to runs. The lack of this support potentially can turn a liquidity crisis at Islamic banks into a solvency crisis if they are forced to unload assets at fire sale prices to meet depositors' withdrawals. This vulnerability should overshadow the more conservative lending standards in the pronouncements of Islamic banks' supposed immunity to crisis. The interbank market is important for banks to be able to have lower reliance on high levels of liquid assets that can reduce their profitability and thus the competitiveness with conventional banks. Following the launch of larger banks like Istikhlaf, which appears only to be an investment bank at the time being, there will need to be more attention paid to the systemic risk posed by larger Islamic banks. Without liquidity facilities at the central banks, investment banks and retail banks in the Islamic financial industry are extremely vulnerably. Beyond the fleeing of depositors in a 'classic' bank run, the demise of Lehman Brothers and Bear Stearns show how a run can start even without depositors if the wholesale funding partners of a bank withhold credit all at once. Both 'classic' and 'Lehman' runs should be considered in judging the urgency of establishing a 'lender of last resort' facility. When there is a new bank with $3 billion in capital expected, this could translate into $60 billion in assets (assuming a leverage ratio of 20:1). That would be a huge institution that would pose systemic risk to the Islamic financial system. It is an issue that deserves a lot of attention.
Other News
The Union of Arab Banks says it is finalizing a way to allow Islamic banks to approach the central banks of the region for support. This is an important issue because without 'lender-of-last-resort' protection, Islamic banks are more vulnerable to runs. The lack of this support potentially can turn a liquidity crisis at Islamic banks into a solvency crisis if they are forced to unload assets at fire sale prices to meet depositors' withdrawals. This vulnerability should overshadow the more conservative lending standards in the pronouncements of Islamic banks' supposed immunity to crisis. The interbank market is important for banks to be able to have lower reliance on high levels of liquid assets that can reduce their profitability and thus the competitiveness with conventional banks. Following the launch of larger banks like Istikhlaf, which appears only to be an investment bank at the time being, there will need to be more attention paid to the systemic risk posed by larger Islamic banks. Without liquidity facilities at the central banks, investment banks and retail banks in the Islamic financial industry are extremely vulnerably. Beyond the fleeing of depositors in a 'classic' bank run, the demise of Lehman Brothers and Bear Stearns show how a run can start even without depositors if the wholesale funding partners of a bank withhold credit all at once. Both 'classic' and 'Lehman' runs should be considered in judging the urgency of establishing a 'lender of last resort' facility. When there is a new bank with $3 billion in capital expected, this could translate into $60 billion in assets (assuming a leverage ratio of 20:1). That would be a huge institution that would pose systemic risk to the Islamic financial system. It is an issue that deserves a lot of attention.
Other News
- The Dubai Financial Services Authority issued five Islamic finance handbooks for firms operating in the DIFC.
- Having announced last year investments in Chicago and a joint-venture with a publicly traded REIT, Kuwait Finance House is planning further expansion in the US, China and Canada. Other Islamic banks have urged China to consider Islamic banking as a way to attract capital from the Middle East.
- Indonesia raised 999 billion rupiah ($108.9 million) in its latest sukuk auction with a maturity range of 5 to 15 years sukuk. It had no winning bids for an 11-year sukuk auction. There have been several recent failed auctions for sukuk with investors demanding too high a yield to be accepted by the Ministry of Finance.
- Forbes has an article (written by Oxford Analytica) on the moves towards standardization in Islamic finance.
- The Islamic Development Bank will soon launch a roadshow to raise money for Istikhlaf, the 'Islamic Goldman Sachs' expected to begin operations later this year.
- Dar Al-Arkan redeemed a $600 million sukuk.
- The Jordanian government borrowed $100 million from Jordan Islamic Bank to finance a stockpile of wheat and barley.
- Centennial College in Toronto will offer an Islamic finance course starting in May.
- Has Islamic finance helped cushion Bahrain from the blow of the global recession? The finance minister thinks so.
- The Investment Dar continues to struggle on its restructuring and may seek protection under the country's financial stability law.
- Amana Takaful, a Sri Lankan takaful provider received an insurance license in the Maldives. The takaful industry continues to struggle over the lack of sufficient supply of appropriate investments, like sukuk, and a shortage of talent.
Thursday, February 11, 2010
Thoughts before the Reuters summit on Islamic finance
The Reuters summit has not occurred yet (it is scheduled for next week) but there is one article which prefaces the summit and discusses how the industry has not yet found a way to move beyond the real estate driven crisis that began over recent years. There were four things mentioned in the article that are relevant as the industry tries to move beyond the crisis. When the summit concludes, it will be interesting to hear the different viewpoints on these areas, but in advance, I'll lay out my opinions on these four topics.
Maturity mismatches
"'This situation is very common whereby companies have gone out to get short-term funding but then put it into illiquid assets (such as real estate),' [Mohieddine Kronfol, managing director at Algebra Capital] said."
The maturity mismatch problem--that of borrowing short term to purchase long-term assets--is one that is important throughout finance. The real estate bust in the U.S. was precipitated in large part by this exact thing. Bank's structured investment vehicles (SIVs) were financed using asset-based commercial paper and then bough mortgage-backed securities. Their difficulties, which led them to be taken back onto bank's balance sheets was an inability to roll this ABCP, which created a liquidity crisis in the SIVs and the rest is history.
The Islamic banking problem is not necessarily as extreme as the SIV problems (commercial paper is debt with a maturity of less than 270 days). However, it serves as a good example of the effects of a maturity mismatch in a crisis. In Islamic banking, the maturities are generally not quite as short, but the problems remain. The financing done by Islamic banks for real estate projects, many of which were not even expected to be completed in a couple years time, was rarely in excess of 5 years. Overall, there have been few (non-Malaysian) sukuk issued with maturities of greater than 5 years and this is not necessarily surprising given that they were issued in emerging markets and the riskiness of a sukuk issue is to some degree affected by its maturity. Changing interest rates (on which the coupons on new sukuk are based), alongside with market, political and credit risks means that investors are wary of investing in longer maturity debt.
That said, the larger problem in Islamic is the over-concentration of investments in one sector (real estate) and the general collapse of several real estate markets. There is always additional risk in not diversifying and the real estate boom in the Gulf coincided with a global boom that ended in 2007-2008. The maturity mismatch is not going to be overcome quickly and the lower-than-expected size of the Dar Al Arkan sukuk suggests that issuers of sukuk who are not sovereigns or high-grade corporate issuers are not going to be received as well as they were in the boom year. The Dar Al Arkan sukuk was a 5-year sukuk, continuing the trend of shorter-maturity issues.
As the market rebounds and investors become more comfortable with sukuk, the maturity of new sukuk could lengthen. However, that will require greater institutional changes in the markets from which sukuk are issued. There needs to be greater legal certainty about whether the rules under which sukuk are issued will remain constant five years from now, let alone ten years from now if the maturity profile of new sukuk is to increase.
Reliance on transitory sources of profits
"Asset management is seen as a key growth area for the industry, but experts say it needs to diversify its products by adding fixed-income components to its funds that are focused on real estate and private equity."
The Islamic finance market has been focused a lot on the high profile deals and also those which net the financial institutions the highest fees during the past few years. There have been many structured products and private equity deals that have captured the headlines of the industry. To be fair, there has also been more development on more plain vanilla products, but it has taken a back seat to these other areas like private equity and large real estate projects.
This is great for banks when everyone's dancing (to paraphrase Chuck Prince on the eve of the crisis). However, it means that the revenue sources for many Islamic banks, particularly investment banks, is very cyclical. When these deals are plentiful, the banks are making bumper profits, but when these opportunities disappear, we see banks run into problems handling their debt load, as recent problems at Gulf Finance House (which was downgraded to 'Selective Default' in the wake of its debt restructuring/rollover) evidence.
There are more stable forms of revenue and asset management is one of them because it has a longer-term focus rather than the transactional focus on the investment banking business. It may be less lucrative in boom times, but it is often more stable in times of stress in the financial markets. This balance between different activities is not one that only applies to Islamic financial institutions, but it is one piece in the puzzle about why some Islamic financial institutions have run into trouble recently.
Lack of standardized regulation
"Regulation also remains fragmented, with central banks, its own standard-setting bodies and scholars interpreting Islamic law all having a say in governing the industry."
The issue of standardization is one of the most complex issues in Islamic finance. I have refined my own views on standardization of individual products and that is a particularly difficult area for the industry to grapple with. However, the standardization of regulation is I think less difficult. Uncertainty of how Islamic finance is in most cases negative to the industry's growth. The uncertainty, for example, on Shari'ah issues plays one factor in the lack of longer maturity sukuk because of doubts that the accepted Shari'ah standards today will be so ten years down the line. When investors look at a sukuk, the risk that the structure will not be viewed as acceptable several years down the road may detract from interest in it. This risk may be heightened by the AAOIFI revision of standards on mudaraba and musharaka, which provide tangible examples how an accepted structure could be frowned upon by Shari'ah standards in a couple years time.
There is very little the industry can do to mitigate this risk because the rules are still in flux and individual Shari'ah scholars may view different products with different levels of acceptance even at one point in time. The only thing that can reduce this uncertainty is to build an institutional framework in which standards can be established and revised. To some degree, this is already taking place with development of standards by AAOIFI and the IFSB. However, there can not be too much work towards the goal of increasing certainty about what is and is not acceptable from a Shari'ah point of view.
Lack of size among local Islamic financial institutions
"The industry also needs to create bigger players, with local banks being too small to grab market share from the Islamic windows of Western conventional banks in syndicating loans and arranging Islamic bonds, or sukuk."
To some degree, the problem with standardization of Shari'ah supervision is intertwined with the lack of local financial institutions of sufficient size to compete with Islamic windows of the global financial firms. These firms are primarily (if not solely) involved in Islamic finance with an eye to the profits from creating products that receive Shari'ah approval. They may be staffed with people who believe that Islamic finance can provide a new model for financial services based on the Shari'ah, but on an institutional level, they are focused on profits.
THe smaller (mostly GCC-based) Islamic financial institutions that compete with them also share the desire to maximize profits, but there may be more of an institutional bias towards the development of the Islamic finance industry longer-term. A fully Shari'ah-compliant financial institution will depend for its survival upon the industry remaining relevant and will have much more difficulty changing businesses if Islamic finance is stymied. The global financial institutions, on the other hand, are able to shift between the businesses (conventional and Islamic) which produce the greatest profits and may act with a short-term focus on pushing the envelope by becoming the first bank to offer a Shari'ah-compliant version of XYZ conventional product.
That being said, there are benefits for the involvement of large financial institutions with their greater resources to develop the industry and their (often) longer history of operating within global financial markets. This benefit may outweigh the short-term costs of their involvement and so long as there is sufficient infrastructure built to support the growth in the Islamic financial industry that is apart from the shorter-term focus of the global financial institutions, the industry can benefit from their involvement.
Maturity mismatches
"'This situation is very common whereby companies have gone out to get short-term funding but then put it into illiquid assets (such as real estate),' [Mohieddine Kronfol, managing director at Algebra Capital] said."
The maturity mismatch problem--that of borrowing short term to purchase long-term assets--is one that is important throughout finance. The real estate bust in the U.S. was precipitated in large part by this exact thing. Bank's structured investment vehicles (SIVs) were financed using asset-based commercial paper and then bough mortgage-backed securities. Their difficulties, which led them to be taken back onto bank's balance sheets was an inability to roll this ABCP, which created a liquidity crisis in the SIVs and the rest is history.
The Islamic banking problem is not necessarily as extreme as the SIV problems (commercial paper is debt with a maturity of less than 270 days). However, it serves as a good example of the effects of a maturity mismatch in a crisis. In Islamic banking, the maturities are generally not quite as short, but the problems remain. The financing done by Islamic banks for real estate projects, many of which were not even expected to be completed in a couple years time, was rarely in excess of 5 years. Overall, there have been few (non-Malaysian) sukuk issued with maturities of greater than 5 years and this is not necessarily surprising given that they were issued in emerging markets and the riskiness of a sukuk issue is to some degree affected by its maturity. Changing interest rates (on which the coupons on new sukuk are based), alongside with market, political and credit risks means that investors are wary of investing in longer maturity debt.
That said, the larger problem in Islamic is the over-concentration of investments in one sector (real estate) and the general collapse of several real estate markets. There is always additional risk in not diversifying and the real estate boom in the Gulf coincided with a global boom that ended in 2007-2008. The maturity mismatch is not going to be overcome quickly and the lower-than-expected size of the Dar Al Arkan sukuk suggests that issuers of sukuk who are not sovereigns or high-grade corporate issuers are not going to be received as well as they were in the boom year. The Dar Al Arkan sukuk was a 5-year sukuk, continuing the trend of shorter-maturity issues.
As the market rebounds and investors become more comfortable with sukuk, the maturity of new sukuk could lengthen. However, that will require greater institutional changes in the markets from which sukuk are issued. There needs to be greater legal certainty about whether the rules under which sukuk are issued will remain constant five years from now, let alone ten years from now if the maturity profile of new sukuk is to increase.
Reliance on transitory sources of profits
"Asset management is seen as a key growth area for the industry, but experts say it needs to diversify its products by adding fixed-income components to its funds that are focused on real estate and private equity."
The Islamic finance market has been focused a lot on the high profile deals and also those which net the financial institutions the highest fees during the past few years. There have been many structured products and private equity deals that have captured the headlines of the industry. To be fair, there has also been more development on more plain vanilla products, but it has taken a back seat to these other areas like private equity and large real estate projects.
This is great for banks when everyone's dancing (to paraphrase Chuck Prince on the eve of the crisis). However, it means that the revenue sources for many Islamic banks, particularly investment banks, is very cyclical. When these deals are plentiful, the banks are making bumper profits, but when these opportunities disappear, we see banks run into problems handling their debt load, as recent problems at Gulf Finance House (which was downgraded to 'Selective Default' in the wake of its debt restructuring/rollover) evidence.
There are more stable forms of revenue and asset management is one of them because it has a longer-term focus rather than the transactional focus on the investment banking business. It may be less lucrative in boom times, but it is often more stable in times of stress in the financial markets. This balance between different activities is not one that only applies to Islamic financial institutions, but it is one piece in the puzzle about why some Islamic financial institutions have run into trouble recently.
Lack of standardized regulation
"Regulation also remains fragmented, with central banks, its own standard-setting bodies and scholars interpreting Islamic law all having a say in governing the industry."
The issue of standardization is one of the most complex issues in Islamic finance. I have refined my own views on standardization of individual products and that is a particularly difficult area for the industry to grapple with. However, the standardization of regulation is I think less difficult. Uncertainty of how Islamic finance is in most cases negative to the industry's growth. The uncertainty, for example, on Shari'ah issues plays one factor in the lack of longer maturity sukuk because of doubts that the accepted Shari'ah standards today will be so ten years down the line. When investors look at a sukuk, the risk that the structure will not be viewed as acceptable several years down the road may detract from interest in it. This risk may be heightened by the AAOIFI revision of standards on mudaraba and musharaka, which provide tangible examples how an accepted structure could be frowned upon by Shari'ah standards in a couple years time.
There is very little the industry can do to mitigate this risk because the rules are still in flux and individual Shari'ah scholars may view different products with different levels of acceptance even at one point in time. The only thing that can reduce this uncertainty is to build an institutional framework in which standards can be established and revised. To some degree, this is already taking place with development of standards by AAOIFI and the IFSB. However, there can not be too much work towards the goal of increasing certainty about what is and is not acceptable from a Shari'ah point of view.
Lack of size among local Islamic financial institutions
"The industry also needs to create bigger players, with local banks being too small to grab market share from the Islamic windows of Western conventional banks in syndicating loans and arranging Islamic bonds, or sukuk."
To some degree, the problem with standardization of Shari'ah supervision is intertwined with the lack of local financial institutions of sufficient size to compete with Islamic windows of the global financial firms. These firms are primarily (if not solely) involved in Islamic finance with an eye to the profits from creating products that receive Shari'ah approval. They may be staffed with people who believe that Islamic finance can provide a new model for financial services based on the Shari'ah, but on an institutional level, they are focused on profits.
THe smaller (mostly GCC-based) Islamic financial institutions that compete with them also share the desire to maximize profits, but there may be more of an institutional bias towards the development of the Islamic finance industry longer-term. A fully Shari'ah-compliant financial institution will depend for its survival upon the industry remaining relevant and will have much more difficulty changing businesses if Islamic finance is stymied. The global financial institutions, on the other hand, are able to shift between the businesses (conventional and Islamic) which produce the greatest profits and may act with a short-term focus on pushing the envelope by becoming the first bank to offer a Shari'ah-compliant version of XYZ conventional product.
That being said, there are benefits for the involvement of large financial institutions with their greater resources to develop the industry and their (often) longer history of operating within global financial markets. This benefit may outweigh the short-term costs of their involvement and so long as there is sufficient infrastructure built to support the growth in the Islamic financial industry that is apart from the shorter-term focus of the global financial institutions, the industry can benefit from their involvement.
Friday, December 18, 2009
World Bank, ThomsonReuters to provide assistance for standardization and improving data in the Islamic finance industry
The World Bank says it is committed to helping the Islamic finance industry turn its voluntary standards into binding standards. I would imagine that this assistance would be focused primarily on accounting and auditing standards that have been issued by AAOIFI and the IFSB, rather than Shari’ah standards. The former is an admirable goal to ensure that Islamic financial institutions incorporate global accounting standards within the guidelines of the Shari’ah. The latter, however, is a mixed bag. There are areas where some standardization of Shari’ah rulings could benefit the growth of the Islamic financial industry, but too much, especially pushed to quickly, could limit beneficial innovation that will eventually reduce the reliance on controversial products like tawarruq/commodity murabaha. It is also a little curious that the World Bank and not the International Monetary Fund would be taking the lead on this standardization. The World Bank is primarily focused on development, while the IMF has a mandate that focuses more on financial market and exchange rate stability.
Thomson Reuters is launching an Islamic finance portal in 2010 that will provide one source of data on the Islamic finance industry. I think this is essential for the Islamic finance industry to grow, particularly to expand into Western markets and attract more interest from the global financial industry. While this could be a mixed blessing if it reinforces the reliance on conventional financial product replication, However, it should also provide some transparency that is necessary for the industry to mature, as well as providing the needed data for debate within the industry.
I would recommend heading over to Opalesque and downloading the latest Islamic Finance Intelligence (registration required). They offer a (free) monthly newsletter that is always of very high quality.
The Islamic Development Bank is planning another $850 million sukuk issue in 2010. This follows a similar size issue in 2009 and could signal a continued dominance of sovereign, multilateral and high-grade corporate (e.g. GE Capital) issuers in the next year. I have been critical recently about the lack of seeming promise for a wider diversity of issuer quality, but there could be a benefit to these types of issuers dominating the market following the Nakheel debacle. The area where these highly rated issuers can contribute most to the market is by testing the longer maturity issues. Most sukuk are now issued with five to ten year maturities, although the number of issues are clumped more towards the five year maturities. If Islamic finance is going to grow sustainably and if there is a chance for the industry to move away from LIBOR as a pricing through the development of a Shari’ah-compliant yield curve, then two things will have to happen. First, the maturity profile of new sukuk issues will need to expand into the longer maturity sukuk and second, we will need to see a return of lower rated issuers.
The Indian state of Kerala is planning to issue sukuk next year, the country’s first.
The Bank of Kuwait and the Middle East will transform itself into an Islamic bank in the second quarter of next year.
Could the bailout of Dubai that started with the bailout of the Nakheel sukuk lead to Abu Dhabi running out of liquidity? I would lean towards doubting it because Abu Dhabi has made it clear that the funds it has already provided to Dubai are not the sign of an open checkbook by requiring a standstill agreement and pressuring Dubai into taking credible steps to achieving a successful restructuring. However, with little transparency about how much of the Abu Dhabi sovereign wealth fund is in illiquid investments, the question should still be asked and it would be foolish to assume that Abu Dhabi has infinite liquidity to support the other emirates. However, even if investors react positively to the new law in Dubai surrounding the restructuring being judged under DIFC law, there is a long road ahead.
Thomson Reuters is launching an Islamic finance portal in 2010 that will provide one source of data on the Islamic finance industry. I think this is essential for the Islamic finance industry to grow, particularly to expand into Western markets and attract more interest from the global financial industry. While this could be a mixed blessing if it reinforces the reliance on conventional financial product replication, However, it should also provide some transparency that is necessary for the industry to mature, as well as providing the needed data for debate within the industry.
I would recommend heading over to Opalesque and downloading the latest Islamic Finance Intelligence (registration required). They offer a (free) monthly newsletter that is always of very high quality.
The Islamic Development Bank is planning another $850 million sukuk issue in 2010. This follows a similar size issue in 2009 and could signal a continued dominance of sovereign, multilateral and high-grade corporate (e.g. GE Capital) issuers in the next year. I have been critical recently about the lack of seeming promise for a wider diversity of issuer quality, but there could be a benefit to these types of issuers dominating the market following the Nakheel debacle. The area where these highly rated issuers can contribute most to the market is by testing the longer maturity issues. Most sukuk are now issued with five to ten year maturities, although the number of issues are clumped more towards the five year maturities. If Islamic finance is going to grow sustainably and if there is a chance for the industry to move away from LIBOR as a pricing through the development of a Shari’ah-compliant yield curve, then two things will have to happen. First, the maturity profile of new sukuk issues will need to expand into the longer maturity sukuk and second, we will need to see a return of lower rated issuers.
The Indian state of Kerala is planning to issue sukuk next year, the country’s first.
The Bank of Kuwait and the Middle East will transform itself into an Islamic bank in the second quarter of next year.
Could the bailout of Dubai that started with the bailout of the Nakheel sukuk lead to Abu Dhabi running out of liquidity? I would lean towards doubting it because Abu Dhabi has made it clear that the funds it has already provided to Dubai are not the sign of an open checkbook by requiring a standstill agreement and pressuring Dubai into taking credible steps to achieving a successful restructuring. However, with little transparency about how much of the Abu Dhabi sovereign wealth fund is in illiquid investments, the question should still be asked and it would be foolish to assume that Abu Dhabi has infinite liquidity to support the other emirates. However, even if investors react positively to the new law in Dubai surrounding the restructuring being judged under DIFC law, there is a long road ahead.
Monday, October 26, 2009
Sukuk markets recovering, IFC sukuk listed in Dubai and London, Islamic asset management faces a 'chicken-or-egg' problem
The sukuk market is expected to recover following signs that Nakheel will avoid default and GE Capital Corporation, which has a joint venture with Abu Dhabi-based Mubadala, was reported to be considering issuing a sukuk. The recovery in Nakheel's sukuk have come following the $10 billion in bonds issued by Dubai and the prospect for the Emirate to issue $6.5 billion in bonds and sukuk. The sukuk-reported to be $2.5 billion of this amount-are reported to be priced near 6%. The funds from the bond and sukuk issuance are expected to be administered by the Dubai Financial Support fund, which has provided some assistance to Nakheel.
With the listing of the World Bank Group's IFC sukuk, NASDAQ Dubai expects the sukuk and bond markets to pick up before the IPO market. The sukuk will be listed on both NASDAQ Dubai and the London Stock Exchange and is rated Aaa by Moody's.
The Islamic asset management industry faces a 'chicken-or-egg' problem as the industry has a shortage of investments to choose from, particularly in the fixed income area, while there are few investments available because of questions about the strength of demand. The increasing involvement by governments is a double-edged sword, notes an article from Reuters. Governments can provide a source of issuers willing and able to issue sukuk, but could crowd out other issuers, particularly lower-rated issuers. So far this year, roughly 80% of sukuk have come from government issuers and many of the others were issued by high-grade corporate issuers.
Emirates Business 24/7 has an interesting article about the debate over standardization in Islamic finance. There are many views on how standardization should happen, whether it should be a goal at all and what aspects of the industry should be standardized.
Other News
With the listing of the World Bank Group's IFC sukuk, NASDAQ Dubai expects the sukuk and bond markets to pick up before the IPO market. The sukuk will be listed on both NASDAQ Dubai and the London Stock Exchange and is rated Aaa by Moody's.
The Islamic asset management industry faces a 'chicken-or-egg' problem as the industry has a shortage of investments to choose from, particularly in the fixed income area, while there are few investments available because of questions about the strength of demand. The increasing involvement by governments is a double-edged sword, notes an article from Reuters. Governments can provide a source of issuers willing and able to issue sukuk, but could crowd out other issuers, particularly lower-rated issuers. So far this year, roughly 80% of sukuk have come from government issuers and many of the others were issued by high-grade corporate issuers.
Emirates Business 24/7 has an interesting article about the debate over standardization in Islamic finance. There are many views on how standardization should happen, whether it should be a goal at all and what aspects of the industry should be standardized.
Other News
- The International Swaps and Derivatives Association (ISDA) is expected to release guidelines on Islamic derivatives, and these could come by December. The standardized agreement, being jointly developed by the ISDA and the International Islamic Finance Market (IIFM), would provide a standardized contract for Shari'ah-compliant hedging products.
- The opening of the country's first Islamic bank led German paper Das Spiegel to write a good article that provides an overview of the industry's development.
- Tamweel, the troubled Dubai-based Islamic mortgage company, made a periodic payment on its sukuk due in 2013.
- The Irish Revenue Service has clarified its rules on the taxation of Islamic finance products and a summary is available from Arab News.
- The CIO of CIMB-Principal Islamic Asset Management Dr. Zeid Ayer believes that Brunei should open its sukuk up to international investors to broaden the base of investors. The sultanate issues sukuk despite large oil reserves and little need to raise financing as a way to promote the growth of its Islamic finance industry.
- The results of an Islamic Finance Perceptions survey are summarized in an article.
- As Malaysia issues RM3 billion ($888 million) in sukuk, it has also extended the tax exemption on Islamic financial products to 2015 that have helped the industry grow rapidly in the country.
Friday, August 28, 2009
Islamic Development Bank sukuk, Nakheel update, BNM releases SPR1 on murabaha, Takaful in the U.S.
The descriptions of the Moody's Aaa rating given to the $1.5 billion sukuk provide some details about the way they are structured, a hybrid structure combining the investments made by the bank to governments and companies. The hybrid sukuk combines "ijara assets, murabaha contracts, istisna'a contracts and Islamic Development Bank investments in equity and sukuk certificates". The sukuk represent ownership of the pool of assets which are serviced by the Islamic Development Bank. Profits are paid during the term of the sukuk and the sukuk assets are repurchased upon maturity. One interesting part of the sukuk is that their profit payments appear to be fixed during the term of the sukuk and the SPV issuing the sukuk is given a noninterest-bearing line of credit with the Islamic Development Bank to make up any shortfall in periodic payments. Given the structure of the sukuk in which most of the assets are likely to be ijara, murabaha, istisna'a and sukuk, the profit payments should be relatively predictable. The line of credit makes the sukuk equivalent to senior unsecured debt of the IsDB.
Two large holders of Nakheel's sukuk which matures in December 2009 belive that there will be no restructuring and that the sukuk will be repaid in full upon maturity. Meanwhile Nakheel is apparently selling liquid assets at a steep discount to raise cash to repay the sukuk. The National reports that Nakheel has sold its stake in Australia's Mirvac for 80% less than it paid in 2007.
Bank Negara Malaysia, the Malaysian central bank, released its guidance on the Shari'ah-compliance requirements for murabaha (Shariah Parameter Reference 1) to encourage standardization and is working on similar SPRs for ijara, mudaraba, musharaka, istisna'a and wadi'ah.
Takaful is now available in the U.S. from a subsidiary of now-government-owned AIG that is available through exclusive broker Zayan Takaful. So far the takaful is available in 13 states although only a few hundred people have signed up. The article also has an interesting discussion about differences in opinion about the need for takaful and the acceptability of it in its current form.
Other News
Two large holders of Nakheel's sukuk which matures in December 2009 belive that there will be no restructuring and that the sukuk will be repaid in full upon maturity. Meanwhile Nakheel is apparently selling liquid assets at a steep discount to raise cash to repay the sukuk. The National reports that Nakheel has sold its stake in Australia's Mirvac for 80% less than it paid in 2007.
Bank Negara Malaysia, the Malaysian central bank, released its guidance on the Shari'ah-compliance requirements for murabaha (Shariah Parameter Reference 1) to encourage standardization and is working on similar SPRs for ijara, mudaraba, musharaka, istisna'a and wadi'ah.
Takaful is now available in the U.S. from a subsidiary of now-government-owned AIG that is available through exclusive broker Zayan Takaful. So far the takaful is available in 13 states although only a few hundred people have signed up. The article also has an interesting discussion about differences in opinion about the need for takaful and the acceptability of it in its current form.
Other News
- Al-Arabiya has an article profiling Shari'ah scholar Sheikh Nizam Yaquby.
- Sime Darby, a Malaysian conglomerate, is reported to be planning to raise RM4 billion ($1.14 billion) by issuing a sukuk.
- Islamic banks grew assets during 2008 compared with 2007.
- CNN has a story about the growing demand for Islamic finance education in the wake of the credit crisis which gives a pretty decent summary of how the industry was affected by the credit crisis.
- A list of the top Shari'ah scholars and some of the institutions on whose boards they sit.
- Islamic indices have underperformed during the past month.
Tuesday, August 11, 2009
Moody's report, takaful for sukuk, development of Islamic finance industry, tawarruq, AAOIFI stepping into Shari'ah-compliance
Moody's released a Special Comment about Islamic banks that highlights their relative stability despite their rapid growth because they are conservatively leveraged, have maintained generally high profit margins and retain significant liquidity. However, beneath this positive outlook, Moody's highlights some of the risks facing Islamic banks. For example, if they are not able to develop sufficient investment of their liquidity, an economic boom could leave them lagging. In part, Islamic banks are limited in their utilization of this liquidity because they lack long-term funding sources and therefore keep additional liquidity to meet shorter-term liquidity needs. The same day (yesterday), Moody's placed four UAE banks' ratings on review for possible downgrade including Dubai Islamic Bank.
The Islamic financial industry is developing outside of Muslim-majority countries but none have the regulatory framework as well developed to allow Islamic finance than the United Kingdom according to two articles looking at the West Midlands in England and Scotland. An article in The Lawyer has a good analysis of of the future of Islamic finance for the GCC and the prospects for the region to be outdone in some areas by non-Muslim majority countries if there is a sovereign sukuk from another region. Another article from Gulf News talks about Islamic asset management and the scarcity of Islamic money markets.
AAOIFI is going to review the Shari'ah-compliance of Islamic financial products to "homogenize the market" on a limited basis. It presents an interesting expansion of the role of AAOIFI which has been limited until now on establishing accounting standards for the industry but which I believe could be a significant development in bridging the gap between the Malaysian model of nation-wide Shari'ah boards and the GCC where each institution has its own Shari'ah board.
Sheikh Yusuf DeLorenzo added his support to tawarruq for its necessity for Islamic finance to function while adding that it should not be used as a financing instrument on its own and rather should be "a means to an end".
Takaful providers could offer sukuk insurance, according to a Reuters article. However, this raises some questions about how much Islamic finance should replicate conventional finance because a takaful policy on sukuk would essentially replicate the credit default swaps (CDS) that led to some problems in the conventional market during the credit crisis. However, the products do provide investors with an assurance they will not lose their entire investment in a sukuk should the issuer default. It would likely be a requirement that the insurance is only available to holders of sukuk and not available as a speculative tool as it has become for some investors with CDS.
Jadwa Investment has a report on sukuk.
Other News
The Islamic financial industry is developing outside of Muslim-majority countries but none have the regulatory framework as well developed to allow Islamic finance than the United Kingdom according to two articles looking at the West Midlands in England and Scotland. An article in The Lawyer has a good analysis of of the future of Islamic finance for the GCC and the prospects for the region to be outdone in some areas by non-Muslim majority countries if there is a sovereign sukuk from another region. Another article from Gulf News talks about Islamic asset management and the scarcity of Islamic money markets.
AAOIFI is going to review the Shari'ah-compliance of Islamic financial products to "homogenize the market" on a limited basis. It presents an interesting expansion of the role of AAOIFI which has been limited until now on establishing accounting standards for the industry but which I believe could be a significant development in bridging the gap between the Malaysian model of nation-wide Shari'ah boards and the GCC where each institution has its own Shari'ah board.
Sheikh Yusuf DeLorenzo added his support to tawarruq for its necessity for Islamic finance to function while adding that it should not be used as a financing instrument on its own and rather should be "a means to an end".
Takaful providers could offer sukuk insurance, according to a Reuters article. However, this raises some questions about how much Islamic finance should replicate conventional finance because a takaful policy on sukuk would essentially replicate the credit default swaps (CDS) that led to some problems in the conventional market during the credit crisis. However, the products do provide investors with an assurance they will not lose their entire investment in a sukuk should the issuer default. It would likely be a requirement that the insurance is only available to holders of sukuk and not available as a speculative tool as it has become for some investors with CDS.
Jadwa Investment has a report on sukuk.
Other News
- The Star in Malaysia has an interview with central bank governor Dr. Zeti Akhtar Aziz.
- The Malaysian central bank believes it is a good time for the government to issue sukuk.
- HSBC says that Indonesia could tap up to $4.75 billion by issuing sukuk.
- Saudi Arabian firm Zain Saudi Arabia closed a $2.5 billion murabaha financing facility, in part being used to roll over existing murabaha.
- Yasaar Human Capital believes hiring in the Islamic finance industry will pick up after Ramadan.
- A lawyer experienced in Islamic finance has moved to a Polish law firm and hopes to use this experience in Poland. There has been little Islamic finance activity in Poland save for a deal by the Qatar Investment Authority to buy two shipyards.
Tuesday, May 05, 2009
FT special report, Tamweel and Amlak, and other news
Financial Times Special Report on Islamic Finance
One article focuses on the Shari'ah scholars and includes details about the dissent among the Shari'ah scholar community about Sheikh Usmani's criticism of some sukuk forms. I have been generally supportive of his criticism as an example of how the Shari'ah scholars are using their influence to shape the future of the industry, but the focus on strict interpretation also limits innovation in the industry. The issues of standardization and workload on the Shari'ah scholars (as well as the shortage of 'brand name' scholars) has hampered the industry's growth by focusing scholars efforts on certifying plain vanilla Islamic financial products instead of allowing them to focus on more controversial products and help shape the dialogue about the future direction of the industry.
Another article takes up the breather given to scholars caused by the global credit crisis to debate and deliberate on the industry's future. This is a vital topic for an industry that has grown so rapidly in recent years and will ultimately help the industry's progress. One interesting tidbit from the article is that the industry appears near to seeing an alternative to commodity murabaha for short-term liquidity management. Another article focuses on this issue and on standardization.
The sukuk market could be set for a resurgence as global credit conditions are under less stress and one of the principal sources of liquidity--oil revenues--should rebound a bit with the rise of oil prices from lows around $30 to $50. The sukuk market, however, will not be the same and most of the issuance will probably be local currency ijara deals because the recent AAOIFI ruling (Feb. 2008) cast doubt on the Shari'ah-compliance of many mudaraba and musharaka sukuk.
Islamic banks are not necessarily immune from the spill-over effects of the credit crisis into an economic crisis, especially those with high exposure to real estate as the property markets in the Gulf have tumbled. This article also cites a Nomura study of Islamic banks in Turkey during the crisis in 2001 and find no significant advantage. Further, the 'profit equalization reserves' set aside by Islamic banks may not be sufficient to offset losses and could cause Islamic bank deposits to 'break the buck'. I highlighted this potential problem several months bank in Business Islamica and it is a serious problem that may require government intervention if property markets continue to deteriorate.
Two other articles discuss Islamic finance in Asia and the West. One talks of the goal of Malaysia to become an Asian hub for Islamic finance, the other focuses on France and the US as potential challengers to the UK's lead in accommodating Islamic finance following the delay in a UK sovereign sukuk.
The special report concludes with a column by HSBC Amanah's chief executive Mukhtar Hussain.
Tamweel, Amlak and liquidity issues in Islamic finance
Tamweel reported profits for 2008, although it had a loss in the fourth quarter due to "a sharp rise in funding costs, significantly lower business origination levels which affected fee income, substantially lower income from property sales [...[ and higher prudential provisioning on the home finance portfolio". It also excludes a significant amount which was off balance sheet following securitization. The results demonstrate the difficulties caused by the economic crisis and property market crash that affects Islamic and conventional financial institutions alike. Amlak Finance, the Islamic mortgage company in Dubai that will be likely merged with Tamweel is also seeing a rise in delinquencies. The first-hand crisis in subprime mortgages and derivatives has led to a liquidity crunch hitting parts of the Islamic finance industry as a whole.
Other News
One article focuses on the Shari'ah scholars and includes details about the dissent among the Shari'ah scholar community about Sheikh Usmani's criticism of some sukuk forms. I have been generally supportive of his criticism as an example of how the Shari'ah scholars are using their influence to shape the future of the industry, but the focus on strict interpretation also limits innovation in the industry. The issues of standardization and workload on the Shari'ah scholars (as well as the shortage of 'brand name' scholars) has hampered the industry's growth by focusing scholars efforts on certifying plain vanilla Islamic financial products instead of allowing them to focus on more controversial products and help shape the dialogue about the future direction of the industry.
Another article takes up the breather given to scholars caused by the global credit crisis to debate and deliberate on the industry's future. This is a vital topic for an industry that has grown so rapidly in recent years and will ultimately help the industry's progress. One interesting tidbit from the article is that the industry appears near to seeing an alternative to commodity murabaha for short-term liquidity management. Another article focuses on this issue and on standardization.
The sukuk market could be set for a resurgence as global credit conditions are under less stress and one of the principal sources of liquidity--oil revenues--should rebound a bit with the rise of oil prices from lows around $30 to $50. The sukuk market, however, will not be the same and most of the issuance will probably be local currency ijara deals because the recent AAOIFI ruling (Feb. 2008) cast doubt on the Shari'ah-compliance of many mudaraba and musharaka sukuk.
Islamic banks are not necessarily immune from the spill-over effects of the credit crisis into an economic crisis, especially those with high exposure to real estate as the property markets in the Gulf have tumbled. This article also cites a Nomura study of Islamic banks in Turkey during the crisis in 2001 and find no significant advantage. Further, the 'profit equalization reserves' set aside by Islamic banks may not be sufficient to offset losses and could cause Islamic bank deposits to 'break the buck'. I highlighted this potential problem several months bank in Business Islamica and it is a serious problem that may require government intervention if property markets continue to deteriorate.
Two other articles discuss Islamic finance in Asia and the West. One talks of the goal of Malaysia to become an Asian hub for Islamic finance, the other focuses on France and the US as potential challengers to the UK's lead in accommodating Islamic finance following the delay in a UK sovereign sukuk.
The special report concludes with a column by HSBC Amanah's chief executive Mukhtar Hussain.
Tamweel, Amlak and liquidity issues in Islamic finance
Tamweel reported profits for 2008, although it had a loss in the fourth quarter due to "a sharp rise in funding costs, significantly lower business origination levels which affected fee income, substantially lower income from property sales [...[ and higher prudential provisioning on the home finance portfolio". It also excludes a significant amount which was off balance sheet following securitization. The results demonstrate the difficulties caused by the economic crisis and property market crash that affects Islamic and conventional financial institutions alike. Amlak Finance, the Islamic mortgage company in Dubai that will be likely merged with Tamweel is also seeing a rise in delinquencies. The first-hand crisis in subprime mortgages and derivatives has led to a liquidity crunch hitting parts of the Islamic finance industry as a whole.
Other News
- The New York Times has two articles about Islamic finance in the last few days. One includes an analysis of Christianity, Judaism and Islam in terms of their approach to finance and in particular their attitudes towards debt. The other focuses on a few Muslims in New York City who have received home financing from Guidance Residential, a Virginia-based Islamic finance company.
- Amid the difficulties facing the Islamic finance industry from the economic crisis caused by the global financial meltdown last year, Kuwait Finance House continues its expansion into China and Saudi Arabia to make it an even more global firm.
- American fund manager Franklin Templeton may be eyeing expansion in the Gulf and into the Islamic finance industry through its option to acquire up to 40% of Algebra Capital.
- Jordan has provided $10 million in financing to the Islamic Development bank to support microfinance programs.
- The International Islamic Financial Market (IIFM) held its 20th annual meeting and discussed, among other issues, its work on creating standardized contracts for several frequently used Islamic finance products.
- South Korea continues its efforts to make inroads into the Islamic finance industry at the IFSB meeting as a way to attract capital from the Islamic world.
- UBS's plan to increase its staff in the Gulf region and make inroads into Islamic finance appear to be on hold due to the company's problems arising from the credit crisis.
- Azerbaijan is considering legislation to allow Islamic financial institutions to begin offering products in the country.
Monday, March 02, 2009
First U.S. state agency to offer Islamic finance, Gold ETC, harmonization in Shari'ah-compliance
Minnesota Housing, a state agency, becomes the first in the U.S. to offer Muslims home finance that is Shari'ah-compliant (using murabaha) through Devon Bank, a bank in Chicago, Illinois which offers Islamic home finance nationwide. The first borrowers closed on the purchase of their first home and there are reportedly up to 10 more clients in the pipeline. The offering of home finance products to Muslims structured to be similar to conventional mortgages, but done in a Shari'ah-compliant way were pushed by Hussein Samatar, the director of the African Development Center (ADC) in Minneapolis.
Dubai Multi-Commodity Centre (DMCC), a Dubai-based commodity exchange, launched the first Shari'ah-compliant Exchange Traded Commodity (ETC). The ETCs are fully backed by physical gold stored at HSBC and each certificate is equivalent to 1/10th of 1 troy ounce of gold. The ETC website provides information about the security and the NASDAQ Dubai website has additional information.
The President of the Islamic Bank of Thailand says that while Shari'ah standard harmonization is likely in the long-term, it is neither possible nor desirable in the near term. The bank's president uses the example that it uses bay al-inah (a similar transaction to murabaha but involving a repurchase of a good by the financial institution). The rationale for the use of the product, which is not viewed as Shari'ah-compliant in the GCC region, is that it is used in transactions to provide microfinance and "the poorer people, what kind of asset could they sell to us?" for use in a sale and lease-back (ijara) financing. I think that, although it will lead to some inefficiencies particularly on products that are attempting to bridge the Asia-GCC divide, in general, it is better to have products available that meet the needs of consumers in the short-run and over the longer-term, as the industry matures, there will be more harmonization of Shari'ah standards and the process of moving this direction will be driven by both consumer demand and the requirements of Shari'ah scholars to ensure that products are moving towards convergence near the (high) optimal level of Shari'ah-compliance and not the sub-optimal race to the bottom level.
Total banking assets in the Shari'ah-compliant banking system of Malaysia grew by 23% in 2008, a year that saw significant trouble in the global banking market. In addition, the risk rated capital of Islamic financial institutions was 15.2% and non-performing loans declined to 2.4%.
Despite having a small relative share of the financial system being Shari'ah-compliant institutions, the Indonesian Vice President believes that the laws passed to facilitate the industry's growth will spur it over the next few years. However, the Vice President who was being quoted also declared that "We all know that Muslim countries with Islamic economic systems during this current [crisis] situation are relatively unaffected by serious problems". Although I do believe that there are benefits from development of Islamic financial institutions, it is extremely myopic to declare that Islamic finance has and will always be immune to crisis. Dubai has one of the most developed Islamic financial systems, but the over-dependence on property as a physical asset (which now backs about 20% of all Islamic bank assets) made the Emirate extremely vulnerable to global economic and credit conditions.
I found this interview transcript quite interesting. It is with K.K. Ali, the CEO of a musharaka-based finance company (Alternative Investments and Credits Limited) in Kerala, India affiliated with Jamaat-e-Islami Hind, a Muslim organization in the country. It provides, I think, a more ground-level view of the difficulties associated with using musharaka finance.
Scotland believes its tradition of having faith-based and ethical finance makes it a logical step to try and attract Islamic finance. A Scottish organization is holding a conference on Islamic finance in Edinburgh at the beginning of April.
Dubai Multi-Commodity Centre (DMCC), a Dubai-based commodity exchange, launched the first Shari'ah-compliant Exchange Traded Commodity (ETC). The ETCs are fully backed by physical gold stored at HSBC and each certificate is equivalent to 1/10th of 1 troy ounce of gold. The ETC website provides information about the security and the NASDAQ Dubai website has additional information.
The President of the Islamic Bank of Thailand says that while Shari'ah standard harmonization is likely in the long-term, it is neither possible nor desirable in the near term. The bank's president uses the example that it uses bay al-inah (a similar transaction to murabaha but involving a repurchase of a good by the financial institution). The rationale for the use of the product, which is not viewed as Shari'ah-compliant in the GCC region, is that it is used in transactions to provide microfinance and "the poorer people, what kind of asset could they sell to us?" for use in a sale and lease-back (ijara) financing. I think that, although it will lead to some inefficiencies particularly on products that are attempting to bridge the Asia-GCC divide, in general, it is better to have products available that meet the needs of consumers in the short-run and over the longer-term, as the industry matures, there will be more harmonization of Shari'ah standards and the process of moving this direction will be driven by both consumer demand and the requirements of Shari'ah scholars to ensure that products are moving towards convergence near the (high) optimal level of Shari'ah-compliance and not the sub-optimal race to the bottom level.
Total banking assets in the Shari'ah-compliant banking system of Malaysia grew by 23% in 2008, a year that saw significant trouble in the global banking market. In addition, the risk rated capital of Islamic financial institutions was 15.2% and non-performing loans declined to 2.4%.
Despite having a small relative share of the financial system being Shari'ah-compliant institutions, the Indonesian Vice President believes that the laws passed to facilitate the industry's growth will spur it over the next few years. However, the Vice President who was being quoted also declared that "We all know that Muslim countries with Islamic economic systems during this current [crisis] situation are relatively unaffected by serious problems". Although I do believe that there are benefits from development of Islamic financial institutions, it is extremely myopic to declare that Islamic finance has and will always be immune to crisis. Dubai has one of the most developed Islamic financial systems, but the over-dependence on property as a physical asset (which now backs about 20% of all Islamic bank assets) made the Emirate extremely vulnerable to global economic and credit conditions.
I found this interview transcript quite interesting. It is with K.K. Ali, the CEO of a musharaka-based finance company (Alternative Investments and Credits Limited) in Kerala, India affiliated with Jamaat-e-Islami Hind, a Muslim organization in the country. It provides, I think, a more ground-level view of the difficulties associated with using musharaka finance.
Scotland believes its tradition of having faith-based and ethical finance makes it a logical step to try and attract Islamic finance. A Scottish organization is holding a conference on Islamic finance in Edinburgh at the beginning of April.
Wednesday, December 31, 2008
Last post of 2008
The past year has been a difficult one for conventional financial markets and the problems that began in the subprime mortgage industry spilled over to the economy as a whole. The problems which began in California, Nevada, Arizona and Florida have, by year end, expanded far outside these U.S. sunbelt states to impact global economic growth across Europe, Asia and the Middle East. These developments affected the Islamic finance market directly: most sukuk lease and profit payments are based on LIBOR (or another interbank interest rate) and the profitability of Islamic banks is directly related to the return on its investments which are heavily dependent on the economy.
The challenge for the Islamic financial industry in the coming year is to recognize and accept the linkages that connect it (through LIBOR and the global economy) to the conventional financial industry. Although Islamic finance presents a different approach to banking that in many ways represents a return to an intermediation role connecting depositors and borrowers. The lack of diversification in asset sector allocation, which is currently tilted towards struggling energy and property markets, could lead to the collapse of some Islamic finance institutions with exposure to underperforming investments in these markets.
One of the clearest description of these risks is from Badlisyah Abdul Ghani, the CEO of CIMB Islamic, the Malaysian Islamic bank, in an article from Reuters. The primary distinctions he draws are between banks with the most exposure to property markets versus those (mostly outside the GCC) with less exposure and (more importantly) the banks with sovereign backing versus private backing. The Islamic banks with the backing of a sovereign government are unlikely to fail no matter how impaired their assets become because they are, but private Islamic banks are going to be allowed to fail. The importance of sovereign backing was highlighted by the Tamweel and Amlak merger in progress with government assistance.
ING also highlights the reaction in the bond (conventional and Islamic) markets that are pricing in a depression, particularly those companies with exposure to the property market. One indicative sukuk they mention is the Nakheel Properties sukuk which was yielding 32 percent, although the secondary market is not very active.
There are bright spots to the industry in the coming year as economic growth should return eventually. There will be a few new sovereign sukuk issues from Indonesia and perhaps one or more non-Muslim majority country. The outlook long-term for Islamic finance is strong. A resumption in sukuk issuance would create more discussion among Islamic finance practitioners and Shari'ah scholars about creating products with greater differentiation from conventional products. Whatever challenges arise in the coming year, they will provoke a response that should make the industry more resilient in the long term and hopefully help nudge the industry towards more standardization.
The challenge for the Islamic financial industry in the coming year is to recognize and accept the linkages that connect it (through LIBOR and the global economy) to the conventional financial industry. Although Islamic finance presents a different approach to banking that in many ways represents a return to an intermediation role connecting depositors and borrowers. The lack of diversification in asset sector allocation, which is currently tilted towards struggling energy and property markets, could lead to the collapse of some Islamic finance institutions with exposure to underperforming investments in these markets.
One of the clearest description of these risks is from Badlisyah Abdul Ghani, the CEO of CIMB Islamic, the Malaysian Islamic bank, in an article from Reuters. The primary distinctions he draws are between banks with the most exposure to property markets versus those (mostly outside the GCC) with less exposure and (more importantly) the banks with sovereign backing versus private backing. The Islamic banks with the backing of a sovereign government are unlikely to fail no matter how impaired their assets become because they are, but private Islamic banks are going to be allowed to fail. The importance of sovereign backing was highlighted by the Tamweel and Amlak merger in progress with government assistance.
ING also highlights the reaction in the bond (conventional and Islamic) markets that are pricing in a depression, particularly those companies with exposure to the property market. One indicative sukuk they mention is the Nakheel Properties sukuk which was yielding 32 percent, although the secondary market is not very active.
There are bright spots to the industry in the coming year as economic growth should return eventually. There will be a few new sovereign sukuk issues from Indonesia and perhaps one or more non-Muslim majority country. The outlook long-term for Islamic finance is strong. A resumption in sukuk issuance would create more discussion among Islamic finance practitioners and Shari'ah scholars about creating products with greater differentiation from conventional products. Whatever challenges arise in the coming year, they will provoke a response that should make the industry more resilient in the long term and hopefully help nudge the industry towards more standardization.
Wednesday, November 19, 2008
Standardization may support innovation, says Sheikh Nizam Yaquby
Sheikh Nizam Yaquby, a prominent Shari'ah scholar, commented on the controversy about whether standardizing Shari'ah-compliance in some ways harms the future of the industry. In contrast to the Shari'ah board of AAOIFI which criticized calls for standardization as detrimental to ijtihad, Sheikh Yaquby said: "In Islamic law we encourage debate, research, scholarship and it is an ongoing process which cannot be stopped by anybody. However, for the purpose of standardisation, it is important to have certain prudential rules and basic contracts especially repetitive ones to be accepted among a group." I have had the pleasure of hearing Sheikh Yaquby speak a few times and he always provides an interesting counter-argument to the conventional wisdom. I have frequently said that using Shari'ah scholar's time for approving the same contract over and over is not a valuable use of their time and it reduces the amount of time they can spend working on innovative products. I hope that his comments on this subject will start a fresh discussion about the merits of standardization in some areas and Shari'ah board review of individual contracts in other areas.
The International Islamic Financial Market (IIFM) is working on its second standardized contracts following the Ta'Hawwut Master Agreement (for treasury placement): I'aadat Al Shiraa'a Master Agreement (repurchase). The IIFM has also now thrown its support behind the AAOIFI Shari'ah board's refusal this year to allow repurchase agreements as a positive development for the industry in the future.
Sukuk issuance continues to struggle in 2008 compared with previous years because of the credit crisis. The reduced level of issuance and reflection on the dominance of ijara sukuk has led to suggestions that the sukuk issuance process should be reexamined.
The Aston School of Business in Birmingham, UK is planning to have a program in Islamic finance if it can find the necessary financing. Brimingham, the second largest city in the UK has a significant Muslim population and is home to the Islamic Bank of Britain, the Islamic retail bank. The Islamic Bank of Britain recently announced low cost home finance that could help spur the use of Islamic home finance by non-Muslims. The UK government sees Islamic finance as a way to promote greater inclusion of Muslims in the U.K., although many Muslims remain wary about whether the Islamic banking industry in the country is 'Islamic'.
A new website provides information about Islamic finance in France (available only in French).
The International Islamic Financial Market (IIFM) is working on its second standardized contracts following the Ta'Hawwut Master Agreement (for treasury placement): I'aadat Al Shiraa'a Master Agreement (repurchase). The IIFM has also now thrown its support behind the AAOIFI Shari'ah board's refusal this year to allow repurchase agreements as a positive development for the industry in the future.
Sukuk issuance continues to struggle in 2008 compared with previous years because of the credit crisis. The reduced level of issuance and reflection on the dominance of ijara sukuk has led to suggestions that the sukuk issuance process should be reexamined.
The Aston School of Business in Birmingham, UK is planning to have a program in Islamic finance if it can find the necessary financing. Brimingham, the second largest city in the UK has a significant Muslim population and is home to the Islamic Bank of Britain, the Islamic retail bank. The Islamic Bank of Britain recently announced low cost home finance that could help spur the use of Islamic home finance by non-Muslims. The UK government sees Islamic finance as a way to promote greater inclusion of Muslims in the U.K., although many Muslims remain wary about whether the Islamic banking industry in the country is 'Islamic'.
A new website provides information about Islamic finance in France (available only in French).
Friday, November 14, 2008
Islamic hedge funds, short selling, derivatives, standardization.
Amiri Capital, a Malaysian firm, plans on launching its Shari'ah-compliant hedge fund early in 2009. The delay was delayed from this year when the prime broker they had been working with, Lehman Brothers, went out of business in September. The hedge fund's structure of its mechanism for shorting stocks (which, as conventially practiced, is haram because it amounts to selling something that you do not own). Two contracts, arbun and salam, are mentioned as possibilities. Using arbun, the purchaser provides the seller with a deposit towards the purchase of a good at a future date. If the purchase is not made, the seller keeps the deposit. Salam contracts establish a sale at a given price with delivery on a future date.
The Securities Commission in Malaysia is also deciding whether to allow Islamic financial institutions to short a limited number of stocks in order to "boost market liquidity" and that this has been approved by the SC's Shari'ah board.
The Malaysian central bank, Bank Negara, plans to issue guidelines for Islamic financial institutions to create greater standardization and establish a international Shari'ah research academy, a helpful development at odds with sentiments of members of the AAOIFI Shari'ah board.
The International Swaps and Derivatives Association (ISDA) and the International Islamic Finance Market (IIFM) are working on a standardized master agreement for Shari'ah-compliant derivatives for hedging (Ta'Hawwut).
The governor of the Central Bank of Bahrain, Rasheed Al Maraj, says that the credit crisis has been little impact on the Islamic financial institutions so far but, "The effects of the global financial crisis on the real economy have the potential to transmit shocks to Sharia-compliant institutions as well. This means that there must be a very high priority placed on sound management and risk management practices at Islamic financial institutions".
Fox News, a conservative news organization jumps on the anti-Islamic finance bandwagon in a story full of hyperbole, misinformation and fear-mongering with Frank Gaffney even saying that Islamic finance is a "seditious system that supports jihad". I typically don't like to even give space on my blog to criticisms that have so little basis in fact, but when they emerge from the fringe network of think tanks that create their own little echo chamber into a news organization that has mass appeal (in the U.S. at least), it should be mentioned for what it is.
One positive point in the article was a few quotes from Islamic finance practitioners who were quoted refuting the specious allegations thrown around:
The Securities Commission in Malaysia is also deciding whether to allow Islamic financial institutions to short a limited number of stocks in order to "boost market liquidity" and that this has been approved by the SC's Shari'ah board.
The Malaysian central bank, Bank Negara, plans to issue guidelines for Islamic financial institutions to create greater standardization and establish a international Shari'ah research academy, a helpful development at odds with sentiments of members of the AAOIFI Shari'ah board.
The International Swaps and Derivatives Association (ISDA) and the International Islamic Finance Market (IIFM) are working on a standardized master agreement for Shari'ah-compliant derivatives for hedging (Ta'Hawwut).
The governor of the Central Bank of Bahrain, Rasheed Al Maraj, says that the credit crisis has been little impact on the Islamic financial institutions so far but, "The effects of the global financial crisis on the real economy have the potential to transmit shocks to Sharia-compliant institutions as well. This means that there must be a very high priority placed on sound management and risk management practices at Islamic financial institutions".
Fox News, a conservative news organization jumps on the anti-Islamic finance bandwagon in a story full of hyperbole, misinformation and fear-mongering with Frank Gaffney even saying that Islamic finance is a "seditious system that supports jihad". I typically don't like to even give space on my blog to criticisms that have so little basis in fact, but when they emerge from the fringe network of think tanks that create their own little echo chamber into a news organization that has mass appeal (in the U.S. at least), it should be mentioned for what it is.
One positive point in the article was a few quotes from Islamic finance practitioners who were quoted refuting the specious allegations thrown around:
"Nicholas Kaiser, fund manager at Amana Mutual Funds Trust in Bellingham, Wash., said that his company's Shariah-compliant mutual fund products are no different from any other religious funds and that the company carefully screens its investors. 'Our shareholders are American. We don't take money from non-Americans because of money-laundering laws. We have to know our shareholders and be sure they aren't engaged in nefarious activities. We screen and check and verify every shareholder,' Kaiser said. 'We simply take people's money, invest it and give it back to them when they want it. We don't try and convert the country. We don't have any religious position. We aren't evangelical. We aren't zealots. We're money managers,' Kaiser said. 'I happen to be Episcopalian.'"
Ibrahim Warde, a professor at Tufts University, is quoted explaining the motivations of the extreme critics of Islamic finance: ""People who don't like Islam and who are afraid of Islam would obviously not like the notion of Islamic finance. I'm not sure that those who hold this view necessarily know much about it, but it's some kind of visceral view that some people hold"
Tuesday, September 23, 2008
Shari'ah risk, the credit crunch, falls in sukuk issuance
Another article discussing the controversy surrounding the ruling by AAOIFI on the repurchase agreements contained in many sukuk also brings up another as yet unexperienced risk: default. Until now, the focus was on 'Shari'ah risk' of which the AAOIFI ruling was the most striking example. It essentially ruled that a common form of ijara sukuk containing the repurchase of the underlying asset at par which was approved by Shari'ah boards was no longer Shari'ah-compliant.
Different people within the Islamic finance industry have different views on whether the Islamic finance industry has been and can be moving towards standardization. I believe some degree of standardization is necessary, for no other reason than it would help address the shortage of Shari'ah scholars for the time being until there is a less dire shortage of scholars. Khalid Howladar, a senior credit officer at Moody's, believes that Shari'ah-compliance will not necessary become standardized, nor should it, since the most important factor for Shari'ah-compliance is not form, but the intention behind the transaction.
The credit crunch has had a significant impact on the Islamic finance industry and represents part of the cause of the fall in sukuk issuance. Other products, like Amiri Capital's "Shariah fund of hedge funds", are delayed. Amiri's launch is delayed because their prime broker, Lehman Brothers, is now bankrupt and mostly sold off to Barclay's and Nomura.
A Shari'ah scholar, Mohammad Akram Laldin, raised the prospect of new controversy about Shari'ah-compliance by criticizing products that merely mimic conventional finance products. Speaking to Reuters, he remarked, "People tend to, to a certain extent, dilute some of the principles or objectives of certain contracts in order to accommodate conventional features".
The Islamic Bank of Britain released its first half 2008 financial results showing a smaller loss than during the current period caused by the launch of several products.
The G8 countries continue to race towards being the first to issue a sovereign sukuk.
Dubai Group, a conglomerate of companies, wants the Dubai International Financial Centre (DIFC) to become a center of Islamic finance.
The Central Bank of Bahrain sukuk al-ijara was oversubscribed by 120%.
Different people within the Islamic finance industry have different views on whether the Islamic finance industry has been and can be moving towards standardization. I believe some degree of standardization is necessary, for no other reason than it would help address the shortage of Shari'ah scholars for the time being until there is a less dire shortage of scholars. Khalid Howladar, a senior credit officer at Moody's, believes that Shari'ah-compliance will not necessary become standardized, nor should it, since the most important factor for Shari'ah-compliance is not form, but the intention behind the transaction.
The credit crunch has had a significant impact on the Islamic finance industry and represents part of the cause of the fall in sukuk issuance. Other products, like Amiri Capital's "Shariah fund of hedge funds", are delayed. Amiri's launch is delayed because their prime broker, Lehman Brothers, is now bankrupt and mostly sold off to Barclay's and Nomura.
A Shari'ah scholar, Mohammad Akram Laldin, raised the prospect of new controversy about Shari'ah-compliance by criticizing products that merely mimic conventional finance products. Speaking to Reuters, he remarked, "People tend to, to a certain extent, dilute some of the principles or objectives of certain contracts in order to accommodate conventional features".
The Islamic Bank of Britain released its first half 2008 financial results showing a smaller loss than during the current period caused by the launch of several products.
The G8 countries continue to race towards being the first to issue a sovereign sukuk.
Dubai Group, a conglomerate of companies, wants the Dubai International Financial Centre (DIFC) to become a center of Islamic finance.
The Central Bank of Bahrain sukuk al-ijara was oversubscribed by 120%.
Saturday, June 28, 2008
UK Islamic home finance, sukuk; DIFC CEO calls for standardization; Indonesia plans sukuk in August
The Guardian newspaper in the UK describes in detail the different types of Shari'ah-compliant home financing available in the country. There were a few very interesting facts presented. First, a small minority of customers using the Shari'ah-compliant home financing are non-Muslims; currently about 2 percent of the Islamic Bank of Britain's customers are non-Muslims who turn to Islamic home finance for ethical reasons. Second, and this may provide a way for Islamic banks to broaden their interest beyond the Muslim market, is that in some cases, Islamic home finance is cheaper than traditional mortgages.
Nasser Al Shaali, the CEO of the Dubai International Financial Center (DIFC), commented on the difficulty of operating Islamic finance in regulatory environments premised on only conventional banks operating, but also that the lack of standardization (such as standard, widely accepted fatawa) is hampering the industry's growth. While many countries are anathema to developing parallel regulatory systems for Islamic and conventional banking (as Malaysia has already done), there is still a case for assessing whether regulatory requirements designed for conventional banks are adequate for supporting a sound financial system where conventional and Islamic banks operate side-by-side.
The Indonesian government plans to issue its first sukuk in August and will use an ijara structure based on assets from the finance ministry. A cynical observer might question whether the assets of the finance ministry are Shari'ah-compliant since many activities in the finance ministry surely involve interest such as the also announced ORI005, the fifth retail (conventional) bond.
Meanwhile, Islamic banking continues to develop in Bangladesh but faces challenges in Thailand.
The UK government is "dragging its feet" and is unlikely to issue its first sukuk this year according to Mohaimin Chowdhury, head of legal, Shari'ah and compliance at the European Islamic Investment Bank. Although the difficulties for a sovereign sukuk from a tax perspective are real and the uncertain market conditions create challenges, Mr. Chowdhury feels they could "deal with them quicker". Kitty Ussher, the Finance Ministry is quoted as saying "There's no doubt in my mind that if we can find a way that works for the taxpayers to do it, the benefit to the City of London in terms if prosperity, jobs and expertise will be enormous [however] we just felt that since this is the first time we are doing it, it would be simpler and less risky to sell Treasury bills". Dr. Mohammed Ramady speaks to the situation in the U.K. and U.A.E. regarding the Islamic finance market as a whole in an editorial.
"If you bought a property for £250,000 using a diminishing Musharaka plan from HSBC Amanah, you would pay around £1,553 a month (made up of £1,246 in rent and £307 in contribution payments to increase your share), based on the bank buying 90 per cent and you putting down a 10 per cent deposit. If you took out a conventional two-year fixed-rate loan with HSBC (at 6.29 per cent and with a £799 fee) on £250,000, you'd pay around £1,655 a month over 25 years.". There are of course differences in availability and structure that could negate the difference, the development of cost competitive Islamic home financing is a good thing for the industry as it seeks to expand beyond its current niche role.
Nasser Al Shaali, the CEO of the Dubai International Financial Center (DIFC), commented on the difficulty of operating Islamic finance in regulatory environments premised on only conventional banks operating, but also that the lack of standardization (such as standard, widely accepted fatawa) is hampering the industry's growth. While many countries are anathema to developing parallel regulatory systems for Islamic and conventional banking (as Malaysia has already done), there is still a case for assessing whether regulatory requirements designed for conventional banks are adequate for supporting a sound financial system where conventional and Islamic banks operate side-by-side.
The Indonesian government plans to issue its first sukuk in August and will use an ijara structure based on assets from the finance ministry. A cynical observer might question whether the assets of the finance ministry are Shari'ah-compliant since many activities in the finance ministry surely involve interest such as the also announced ORI005, the fifth retail (conventional) bond.
Meanwhile, Islamic banking continues to develop in Bangladesh but faces challenges in Thailand.
The UK government is "dragging its feet" and is unlikely to issue its first sukuk this year according to Mohaimin Chowdhury, head of legal, Shari'ah and compliance at the European Islamic Investment Bank. Although the difficulties for a sovereign sukuk from a tax perspective are real and the uncertain market conditions create challenges, Mr. Chowdhury feels they could "deal with them quicker". Kitty Ussher, the Finance Ministry is quoted as saying "There's no doubt in my mind that if we can find a way that works for the taxpayers to do it, the benefit to the City of London in terms if prosperity, jobs and expertise will be enormous [however] we just felt that since this is the first time we are doing it, it would be simpler and less risky to sell Treasury bills". Dr. Mohammed Ramady speaks to the situation in the U.K. and U.A.E. regarding the Islamic finance market as a whole in an editorial.
Saturday, June 14, 2008
DIFC studies standardization, Japanese Diet to allow Islamic finance
The Dubai International Financial Centre (DIFC) is launching a research effort to study the possibility for greater standardization of Islamic finance globally as well as within the UAE and GCC.
A new bill is being proposed in the Japanese Diet to allow banks to begin conducting Islamic finance. While there is very little domestic demand for Islamic finance, Japanese banks see Islamic finance as a way to attract investors from the oil-rich GCC, some of whom often will only participate in investments if they are Shari'ah-compliant.
Islamic banking should continually be aware of its position and competitiveness with conventional banks to ensure that it can continue growing rapidly says Nicholas Brewer. In Malaysia, for example, Islamic banks are used by many non-Muslims because they offer competitive pricing and some aspects of Islamic banking may be viewed as more favorable to the borrower.
An editorial in the Guardian questions whether the literal interpretation of the prohibition of riba as interest may cause some to overlook the greater social requirements of Islam. Overly focusing on 'avoiding interest' but not necessarily having a focus on the underlying reason for the prohibition (and other requirements beyond avoiding interest). It would be possible to create an exploitative payday loan with high cost to the borrower while adhering to a narrow interpretation of the prohibition of riba by using murabaha or ijara (although it would be unlikely to be approved once Shari'ah scholars looked into more than just its form).
A new bill is being proposed in the Japanese Diet to allow banks to begin conducting Islamic finance. While there is very little domestic demand for Islamic finance, Japanese banks see Islamic finance as a way to attract investors from the oil-rich GCC, some of whom often will only participate in investments if they are Shari'ah-compliant.
Islamic banking should continually be aware of its position and competitiveness with conventional banks to ensure that it can continue growing rapidly says Nicholas Brewer. In Malaysia, for example, Islamic banks are used by many non-Muslims because they offer competitive pricing and some aspects of Islamic banking may be viewed as more favorable to the borrower.
An editorial in the Guardian questions whether the literal interpretation of the prohibition of riba as interest may cause some to overlook the greater social requirements of Islam. Overly focusing on 'avoiding interest' but not necessarily having a focus on the underlying reason for the prohibition (and other requirements beyond avoiding interest). It would be possible to create an exploitative payday loan with high cost to the borrower while adhering to a narrow interpretation of the prohibition of riba by using murabaha or ijara (although it would be unlikely to be approved once Shari'ah scholars looked into more than just its form).
Saturday, May 17, 2008
Islamic finance globalizes, receives growing attention as a 'safer' alternative to conventional finance
The governor of the Central Bank of Bahrain met with his counterpart from the Monetary Authority of Singapore, the city-state's central bank, to discuss ways that Bahrain can help Singapore develop its Islamic finance industry. Singapore is planning to issue a sukuk soon. Meanwhile, Dubai will work with Hong Kong to develop Islamic finance in China. A Shari'ah-compliant ETF will be launched in the second half of 2008 on the Taiwan stock exchange. The Financial Times discusses new efforts from policymakers in Paris to rival London as the European center of Islamic finance.
The most recent article I wrote is in the current issue of Islamic Business & Finance. The article focused on Islamic microfinance.
Islamic finance is becoming viewed as a 'safer' alternative to conventional finance in the wake of the subprime crisis. The Islamic Bank of Asia is seeing similar growth in demand for Islamic finance from both Muslims and non-Muslims because of its perceived status as 'safer'. The same idea is one of a number discussed in a Washington Post article on the growth in Islamic home finance in the United States, even as the mortgage market shrinks.
The African Development Center in Minneapolis has been providing small business loans with the city's Community Planning and Economic Development agency. The loans provided through ADC are the first in the U.S. to be provided from a public agency and also be Shari'ah-compliant. The CPED description does not provide a description of the structure of the finance that makes it Shari'ah-compliant.
An interview with the head of Praesidium Consulting covers continuing fall out from the questions over Shari'ah-compliance of sukuk.
A paper in Sri Lanka discusses the differences in treatment of Islamic finance by the country's tax authorities.
An article from Reuters highlights the continued push for 'standardization' of Islamic finance.
Toyota plans to issue its first sukuk in Malaysia.
The most recent article I wrote is in the current issue of Islamic Business & Finance. The article focused on Islamic microfinance.
Islamic finance is becoming viewed as a 'safer' alternative to conventional finance in the wake of the subprime crisis. The Islamic Bank of Asia is seeing similar growth in demand for Islamic finance from both Muslims and non-Muslims because of its perceived status as 'safer'. The same idea is one of a number discussed in a Washington Post article on the growth in Islamic home finance in the United States, even as the mortgage market shrinks.
The African Development Center in Minneapolis has been providing small business loans with the city's Community Planning and Economic Development agency. The loans provided through ADC are the first in the U.S. to be provided from a public agency and also be Shari'ah-compliant. The CPED description does not provide a description of the structure of the finance that makes it Shari'ah-compliant.
An interview with the head of Praesidium Consulting covers continuing fall out from the questions over Shari'ah-compliance of sukuk.
A paper in Sri Lanka discusses the differences in treatment of Islamic finance by the country's tax authorities.
An article from Reuters highlights the continued push for 'standardization' of Islamic finance.
Toyota plans to issue its first sukuk in Malaysia.
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