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Criticism of tawarruq, GE Capital sukuk

2009-11-21T11:33:00.000-08:00

According to the Secretary General of the OIC Fiqh Academy, Abdul Salam Al-Abadi, some GCC-based banks have reduced their use of organized tawarruq following the OIC Fiqh Academy's criticism of the practice as not Shari'ah-compliant. None of the banks were identifies, but if it is the case that the OIC Fiqh Academy ruling had an effect, it increases the uncertainty in Islamic finance about which products are Shari'ah-compliant and also the Shari'ah risk associated with changing and differing views over time about whether a given product will remain accepted as Shari'ah-compliant. The Secretary General of the General Council for Islamic Banks and Financial Institutions (CIBAFI), Ezzadine Khoja, also criticized tawarruq. His criticism was that "The goods are just virtual, there is no real movement of the goods [...] All things are done by the bank, the bank at the end gives money and takes more. There is no effect on the economy".

The GE Capital sukuk for $500 million was priced at 175 basis points over Treasuries, which compares to 155 basis points over Treasuries for recently issued conventional debt. The difference of 20 basis points can be viewed as a 'sukuk premium'. It is unclear what this premium reflects, but it could be due to the relative lack of clarity about how sukuk function either in restructuring or default. The sukuk issuance comes 4 months after GE Capital ended its issuance of debt with a government backstop that began during the credit crisis. While GE Capital was a part of the Temporary Liquidity Guarantee Program, it issued $51 billion in long-term debt and $17 billion in commercial paper.

Other News

Russia could be a promising market for Islamic finance according to Lahem al Nasser writing in Asharq Alawsat.
The Islamic Bank of Britain is hoping to expand the number of Islamic mortgages it offers by expanding its distribution to other mortgage brokers.
Siddhartha Herdegen gave a talk about Islamic finance at the University of Utah.
An event by Credit Suisse focused on how Gibraltar could attract Islamic finance.
The Tamweel and Amlak merger is on track to be completed in the first quarter of 2010 as the default rate has declined from a high of 3%.
An article by the Secretary General of Islamic Economics Forum for Indonesian Development (ISEFID) describes the potential for Islamic finance in Indonesia.
The UAE has taken steps to have its companies and governments become more transparent following the economic and financial crisis.

Should issuers disclose the use of sukuk proceeds

2009-11-20T18:49:00.000-08:00

The way sukuk are structured involves setting up an external company to separate the assets of the sukuk from the company's assets and other business. Are some sukuk structured that way to issue sukuk to finance businesses that would not be halal investments in the underlying company?

The recent International Finance Corporation sukuk is an unremarkable sukuk apart from the identity of its issuer, but as I read through the prospectus, the use of an SPV as the issuer led me to consider whether the structure used by many sukuk could be a way for non-Shari'ah-compliant companies to raise funds using sukuk based on Shari'ah-compliant assets without investors necessarily knowing whether the proceeds would be used for a Shari'ah-compliant purpose.

The IFC sukuk was issued by a Cayman Islands-domiciled SPV, the Hilal Sukuk Company, and is similar to sukuk issued by the Islamic Development Bank. The SPV issues sukuk and then uses the proceeds to buy ijara contracts from the IFC, which acts as manager and collects the lease payments and distributes them to the holders of the sukuk.

The payments are smoothed over the maturity using a reserve account that accumulates excess profits and uses it to cover any shortfalls. Any balance in the reserve account at maturity is paid to the IFC as an incentive fee. At maturity (or in the case of default), the SPV has the right only to sell the assets back to the IFC at a pre-determined exercise price. Any shortfalls not covered by the reserve account are advanced by the IFC and then repaid from future lease payments or the sale of the assets at maturity, but beyond that, there is no recourse to other assets of the IFC (it is an unsecured debt).

However, the issue that arose in my mind was that the IFC is generally a conventional financial institution that issues debt to finance its lending (with interest). As such, were the IFC itself being considered as an investment by investors concerned about Shari'ah-compliance, it would probably not be judged to be a halal investment. However, it is able to issue sukuk because a portion of its lending is done in a Shari'ah-compliant manner through ijara (the assets for the IFC sukuk are ijara financing of medical equipment).

The way the sukuk prospectus describes it, the investors are buying investments from the SPV and those monies will be used solely for buying Shari'ah-compliant ijara assets from the IFC. The structure ensures that the relevant scope of Shari'ah review is on the structure of the sukuk certificates, the assets being used and the mechanism for lease payments to flow to sukuk certificateholders. There is not explicit mention in the prospectus to what the IFC will use the proceeds of the sukuk for.

They may use it to extend more financing using Shari'ah-compliant ijara contracts (or murabaha or other contracts). However, because money is fungible, it is impossible to tell whether the funds will be used eventually to support interest-bearing loans that make up a bulk of the IFCs assets. While the transaction itself is Shari'ah-compliant according to the scholars who reviewed it, it is not clear whether the use of the proceeds will be in halal areas.

Without the disclosure, there is a gap in some sukuk structures about whether they follow the spirit of the law and not just the letter. Could, for example, a large conventional bank that also offers a few Shari'ah-compliant mortgages use those assets to issue a sukuk to fund the rest of its balance sheet? At what point would the underlying issuer's business be raised with respects to the Shari'ah-compliance of the sukuk it issues. At this point it is not clear, but it is an important thing to consider as a growing number of issuers look to Islamic finance as a way to raise financing.

Islamic banks v. conventional banks, Islamic finance & SRI, GE Capital sukuk

2009-11-18T22:00:00.000-08:00

A study by two professors at Ajman University of Science and Technology found that Islamic banks outdid conventional banks. However, the study, as reported, only looked at four years of data for three Islamic and three conventional banks. Although it is useful to know that Islamic banks have outperformed conventional banks in the past four years (at least among a 6 bank sample), it is not really a useful finding for the industry as a whole.

The dangers of extrapolating using data on just a few institutions over a few years are well known, there is an additional hiccup that could reduce the value of the findings further. The sample period, 2006-2009, was one in which the conventional financial industry saw the most challenging events worldwide as global credit markets froze up and economic growth slowed. And this period was also accompanied by the impacts of these events on Islamic banks (I have long argued that they were susceptible to the financial crisis and economic downturn). However, the financial complexity of conventional banks versus Islamic banks is divergent and not just because of the requirements for Shari'ah-compliance.

Islamic banks are generally operating using primarily basic contracts like murabaha and ijara and have very little use of mudaraba and musharaka. They also have nearly no exposure to any derivatives products which have been particularly volatile. This volatility extends beyond the so-called toxic derivatives. For example, the volatility index, which is based on options on index components of the Standard & Poor's 500 Index, reached record highs in 2008 and have been elevated for much of 2008 and 2009.

Islamic banks, therefore, are involved in lower risk investments compared to their conventional competitors. They also do not have significant exposure to the products which are widely held up as the 'preferred' Islamic products with profit-and-loss sharing. I offer this criticism only to put what I am reading about the study in context of where there might be questions remaining that cannot be answered based on the current experience in Islamic banking. I also should note that I have not read the study. I would appreciate if it were emailed to me so that I could give a more complete analysis.

An article about sustainable finance which criticizes the 'value-neutral' approach to finance points to Islamic finance as potentially providing an example and starting point for a sustainable financial industry that incorporates social welfare in the financial industry. While it acknowledges the limitations of Islamic finance as it currently is practiced (particularly the focus on negative screens and an absence of positive screens), it does demonstrate the benefits of Islamic finance as one method of implementing social responsibility in finance. In a related development, Islamic investment bank First Energy Bank is investing $1 billion in a Saudi solar plant.

GE Capital is planning its first sukuk, which is expected to be a 5-year sukuk of more than $500 million.

The Atlanta-based unit of Arcapita, the Bahraini private equity group is profiled in an Atlanta business newspaper, including a description of the group's investment strategy which differs from the stereotypical idea of private equity, "Arcapita, unlike some private equity firms, doesn’t have an exit requirement for its investments. Still, 'we don’t hold anything forever'" according to Charles Ogburn, the executive director and head of corporate investment.

Other News

Saad Trading, Contracting & Financial Services announced that the Golden Belt 1 Sukuk Company, the issuer SPV for Saad's $650 million sukuk due in 2012, would be unable to make a periodic payment because the company's assets were frozen.
The Investment Dar is planning to present its $3.5 billion restructuring plan to creditors soon.
Gulf Finance House received a $100 million convertible murabaha facility from Deutsche Bank, which follows its $100 million convertible murabaha from Macquarie Bank. This is a part of the firm's efforts to "redesign" their business model.
Luxembourg would 'welcome' the establishment of an Islamic bank. The President of the Central Bank, Yves Mersch, says that "We had Islamic banking institutions in the seventies which discontinued its services and as for now there is no Islamic bank that operates in Luxembourg, but there is no prohibition to have a setup of such an institution".
Sarasin, the Swiss firm offering a Shari'ah-compliant wealth management offering will start with the Gulf but also include Southeast Asia next.
Malaysia continues to see growth in its domestic Islamic finance industry.
The Islamic Development Bank is going to offer financing of $1 billion to agricultural projects with the UN Food and Agriculture Organization (FAO).

Islamic and ethical finance, Nakheel sukuk, sukuk markets

2009-11-15T00:03:00.000-08:00

The CEO of Noor Islamic Bank highlighted the opportunity for Islamic banking to compete with conventional banking in the wake of the financial crisis. He suggested that the financial crisis has created additional demand for ethical and more risk averse financial services, which would benefit Islamic finance. I think that Hussain Al Qemzi, the CEO, is making an important point for the Islamic finance industry by recognizing the two selling points for Islamic finance, especially if it is going to be able to attract non-Muslim customers, is the ethical framework (which has many similarities to the ethical/sustainability-focused mindset that goes beyond just Muslims) and the relatively more risk averse structure of Islamic finance. A focus on these areas could assist Islamic financial institutions in expanding outside of the main areas where Islamic finance exists.

The Nakheel sukuk is now trading above the redemption value on maturity, reflecting the additional premium payable to sukuk holders if there is no qualified public offering before the sukuk matures. This also reflects confidence that the sukuk will be redeemed in full upon maturity, which has been a longstanding concern given the property market collapse in Dubai since the sukuk was issued. Nakheel is currently in talks with Dubai World, which has guaranteed the sukuk that mature in December. Bloomberg also has an article on the subject.

The sukuk market has rebounded by about 40% compared to the first ten months of 2008. However, the issuance has been mostly by sovereign or government-related entities (GREs). This means that the credit quality of new issues has improved, which Moody's believes is a positive because it will help develop a "more detailed yield curve" which will benefit corporate issuers in the future. However, the lack of many corporate issuers, besides the most highly rated issuers like Saudi Electric Company (which was forced to pay far more than their sukuk of 2007) is potentially problematic for the market. Without a variety of issuers across the credit ratings scale, there will be few opportunities for companies to enter the market and the continued growth in the market will be limited. Only time will tell whether this persists, but the first signs of a rebound in the corporate sukuk area should come from the secondary markets. If trading of listed corporate sukuk becomes more liquid, it may begin to entice new issuers into the market.

Islamic Finance Resources, another blog, has some great material posted up and one of the recent is a collection of webcasts and podcasts on Islamic finance. This site is definitely recommended as a source of invaluable resources on Islamic finance.

Other News

Sukuk could be the new alternative investment in the wake of the financial crisis which saw risky investments take large hits because of its more conservative structure.
Indonesia will not pay higher yields on sukuk than conventional bonds. This comes following investor demand for higher yields on several recent sukuk auctions.
SWIFT is working with Path Solutions on a financial messaging system for the Islamic banking industry.
Swiss company Sarasin is launching an Islamic wealth management unit.
QInvest and Fortis Bank are launching a Shari'ah-compliant ship financing fund.
Indonesian company Mitra is issuing a 200 billion rupiah ($21.4 million) sukuk along with a conventional bond.
Pakistan is considering issuing a sovereign sukuk.
Bank Negara Malaysia governor Dr. Zeti Akhtar Aziz gave a speech highlighting the prospects of Islamic finance integrating into the international financial system. She also highlighted in another speech the ability of Islamic finance to deal with the risks to the Islamic financial system.
UBS is planning to expand to offer Islamic derivatives to help clients hedge risks, reports Reuters.
DIFC and bankers in London are discussing partnerships and new opportunities. A conference held by UK Trade & Investment will discuss the effects of the credit crisis on Islamic finance.
France may also look to Malaysia for guidance on developing its Islamic financial industry. Australia may also become a source of sukuk based on its natural resource wealth, according to the deputy governor of the Malaysian central bank.
Hong Kong continues to move forward on its plans to attract Islamic finance with proposed tax changes to level the playing field for sukuk.
The FT discusses the attention paid to Islamic finance following the financial crisis.

Tuesday news bullets

2009-11-10T15:30:00.000-08:00

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

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

2009-11-07T19:18:00.001-08:00

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

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

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

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

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

Other News

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

Regulation in Islamic finance, Questions remain about Dubai GREs

2009-11-04T22:00:00.000-08:00

Malaysia's prime minister Najib Razak said that the Islamic financial industry needs strong regulation to ensure it avoids future crises. This has been an area where the industry has been slow to recognize its susceptibility to a similar financial crisis that occurred beginning in 2007 in the conventional financial industry. For too long, there were many articles talking about how the Islamic financial industry was 'immune' to crisis because of the way it operated. I have been pointing out that there are some aspects of the Islamic financial system (including lack of deposit insurance and a true 'lender of last resort') that could even make Islamic finance more vulnerable to a crisis if there was a serious loss of confidence in one or a few large Islamic banks. It is good to see that there is a greater recognition of the need for regulation to prevent either poor risk management or damaging innovation from creating a situation where there could be a crisis. Now, all that needs to happen is for these regulations to be adopted. That could take a while, although the Islamic FInancial Standards Board has begun discussing liquidity standards that would address one potential area of systemic risks in Islamic finance caused by the difficulties of Islamic banks in managing liquidity and asset and liability maturity mismatches.

Some of the proceeds from the recent Dubai sukuk, which raised $1.93 billion, will be used to pay the maturing $1 billion sukuk from the Dubai Civil Aviation Authority, which matured today. The UAE said that the timing of the issue of a $10 billion bond planned by Dubai that may be used to redeem the Nakheel sukuk maturing next month will "depend on the needs at the time" according to the Minister of Economy. In a contrary development, ratings agency Moody's Investor Service downgraded five government related entities (GREs) because the government after the Dubai finance department relinquished its obligations to cover the entities' debts. Although the GREs are not part of the government and do not have a government guarantee, they are closely tied to the government and any defaults would likely have repercussions on the Emirate's perceived creditworthiness.

Other News

Amlak and Tamweel, the two large Dubai-based Islamic mortgage firms will be merged beginning in January with their investors owning one-third of the resulting bank.
Gulf Finance House is planning on converting into a commercial bank from an investment bank and will issue $100 million in a convertible Islamic instrument. GFH issued Macquarie Bank with a $100 million convertible murabaha earlier this year.
The ISDA-IIFM template for Shari'ah-compliant derivatives will be released either this year or early next year.
The IFC listed its $100 million sukuk on the Bahrain Stock Exchange and NASDAQ Dubai.
The U.S. is selling the building in which its embassy has resided in London to Qatari Diar, which recently began the process of issuing sukuk to fund its European acquisitions. Al Salam Europe, the European unit of the Bahraini firm is also planning on expanding its investments in Europe with real estate and private equity investments planned by January.
Islamic finance could continue its rapid growth and see total assets of $4 trillion in 8-10 years according to the CEO of Doha Bank in a speech recently.

A scholar raises issues of copy-cat products, IFC sukuk, South Korea considers sovereign sukuk

2009-11-02T20:35:00.000-08:00

Shari'ah scholar Dr. Hatem El-Karanshawy, a former director of the Central Bank of Egypt, cautions the Islamic finance industry on 'Islamizing' products that do not inherently fit with Islamic principles. He says that venture capital can fit in well with few modifications. The growth in Islamic finance has been accompanied by 'copy-cat' versions of conventional financial products using contracts that allow Shari'ah scholars to approve them. In many cases, these products do provide value, but as I mentioned in a blog post two months ago, there is a need to keep in mind whether new innovation is beneficial in Islamic finance just as in the conventional financial industry.

The International Finance Corporation's $100 million sukuk is receiving favorable coverage from Arab News, which points out that many Arab countries have not yet stepped into the Islamic capital markets to raise funds. In addition to the most recent sukuk (and a Ringgit-denominated one it issued in 2004), the IFC has been involved in several other Islamic finance transactions over the past few years.

South Korea appears to be the latest non-Muslim majority country to work to attract Gulf money by passing laws that put Islamic finance including sukuk on equal regulatory and tax footing to conventional bonds. The country recently announced a list of state-owned companies that the government is looking to privatize and which it seeks Gulf investment. In addition, the government is considering an $80 billion initiative for environmentally-sustainable areas of growth. The government is also on a roadshow to gauge interest in a $500 million - $1 billion sovereign sukuk.

Other News

HSBC is considering subscribing to the second $10 billion tranche of bonds issued by Dubai. The first tranche was purchased by the UAE central bank.
Islamic banks' assets grew by 66% between the end of 2007 and the end of 2008 according to the Union of Arab Banks.
The NY Times published an article on the growth of Islamic finance in universities' curricula.
According to Standard & Poor's, the performance of Shari'ah-compliant equities lagged in the third quarter, a period when a lot of the leading stocks were financials.
Bahrain-based Al Baraka plans on spending $30-$50 million on a bank acquisition in Indonesia. The bank also says that the IPO of its Syrian unit is oversubscribed.

Why are sukuk in the GCC issued with short maturities?

2009-10-30T21:47:00.000-07:00

Mubadala, the Abu Dhabi sovereign wealth fund says that there needs to be a better developed secondary bond market for longer-term bonds to come to market. It also pointed to the need for a 'strong local bid'. Given that the GCC is the source of a large share of the sukuk issuance, and most sukuk outside of Malaysia are of maturities of 5 years or less, this poses a question of whether the Islamic financial industry can step in to fill the gap.

The sukuk secondary markets are notoriously illiquid, although there has been an improvement in this area as the number of new issues has declined in the past year or two. With a shortage of new issues, there has been an uptick in the trading of outstanding sukuk in the secondary markets. There has also been the nascent steps towards provide more opportunities for secondary market trading with the launch of bond and sukuk trading on the Saudi exachange Tadawul. However, even with these steps, there are few listed sukuk, with most trading on either NASDAQ Dubai (formerly the Dubai International Financial Exchange) or the Bahrain Stock Exchange.

As I have described before, the secondary market for sukuk has been caught in a chicken-or-egg problem (which came first?). During the boom times, there were a number of new issues, most of which were heavily oversubscribed. A decent proportion of these sukuk were listed on secondary markets theoretically giving investors who were not able to subscribe in the offering the chance to pick them up in the secondary markets. However, there wasn't much activity in the secondary markets.

This can be ascribed to two things. First, the secondary markets weren't active because the secondary markets weren't active. Although a tautological argument, it was true. If you subscribe to a sukuk and receive an allocation, then sell it on the secondary market, you would generally hope to be able to take the proceeds and purchase a new sukuk to replace it. In an illiquid secondary market, for one you could probably not receive what you perceive to be the fair value, but also, you would likely have to overpay for a replacement. Without the benefit of a market maker in the sukuk, the gap between bids and offers in the market perpetuated the illiquidity.

Second, the continuing stream of new issues made it less beneficial to chase the offer in the secondary market if there was a chance of getting in on a newly issued sukuk. Why pay up if there is a chance that another similar sukuk might come along that you might be able to receive an allocation at par?

However, this equation changed after the financial crisis when credit was generally scarce and expensive and there were few companies willing to issue new sukuk. In addition, the outstanding issuers were affected by the growing economic crisis so that their ability to repay came into question (in some cases, they defaulted on their sukuk). The investors in these sukuk, either through concern over the sukuk or their own need for cash, became more willing to participate in the secondary markets.

This created some market turmoil, with many sukuk trading far below par and yielding higher than may have been justified by the fundamentals of the companies and sukuk. However, it also created an opportunity for a few sukuk funds which launched over the past year to step in on the buy side of the market and create additional liquidity by narrowing the spread between the bid and ask of listed sukuk.

No sukuk exemplifies this transformation perhaps more than the Nakheel sukuk which matures in December. In an illiquid market, with concerns about Nakheel's ability to repay, the bond traded down to nearly 60% of its par value even though the payment on maturity, if made, would be nearly 115% of par. Since reaching this point, the sukuk has become more actively traded and has rebounded in the trading price to greater than par. Some of this rebound was due to the fundamental ability of Nakheel to pay, albeit with support from the Dubai government, but some could be chalked up to the greater liquidity and the entrance of bidders for the sukuk.

To be clear, the sukuk market remains illiquid in many listed sukuk names, but there has been a greater level of activity in secondary markets as of late. Returning to the initial point of what is needed for longer-term maturities, it is generally the case (even in US Treasuries, some of the most liquid bonds in the world) that longer maturity products are less liquid and more volatile in price than shorter-dated bonds. Without a liquid secondary market for shorter maturity bonds and sukuk, it is unlikely that investors would purchase longer-dated sukuk.

Mubadala's point is well taken and the sukuk market, largely as a result of external events, has begun to liquify. This is a necessary, but probably not sufficient, precondition for the introduction of longer maturity sukuk. The resolution of sukuk through cases of default will also go a long way towards reassuring investors that they will not be trappen in a 10-year or longer sukuk regardless of what happens. To see a possible future, the experience of Malaysia is instructive. The Malaysian secondary markets are active and there have been numerous resolutions of sukuk defaults. Consequently, there have been several longer-dated sukuk--for example, the Cagamas residential mortgage-backed securities which have maturity dates of over 10-years, something that has not happened in the GCC...yet.

Other News

The performance of the Dow Jones Islamic Market Indexes for October are now available.
The IFC sukuk was priced at 25 basis points over mid-swaps, which is the tightest pricing yet for a sukuk, although the sukuk received a higher pricing (by 10 basis points) over what conventional debt issued by the IFC would be priced at.
Germany's financial regulator jumps into the mix of European countries wanting to attract Islamic finance shortly after France passed laws defining the rules for Islamic financial products, but far behind the U.K., which has so far led the EU in its accommodation of Islamic finance.

Dubai issues $1.93 billion in sukuk

2009-10-28T22:30:00.000-07:00

Dubai announced the results of its 5-year sukuk issuance today. There were two tranches, one for $1.25 million of USD-denominated sukuk and the other was $680 million in AED denominated sukuk. The sukuk were priced at 375 basis points over mid-swaps. Bloomberg reports that the USD sukuk were priced to yield 6.39%. The AED tranche are floating-rate notes based on a spread over EIBOR, priced to yield 5.65% according to the same Bloomberg article.

The nearly $2 billion issuance is the first issuance of bonds by Dubai since April 2008, before the real estate markets in Dubai began to tumble in the wake of the global credit crisis. There are a number of maturing debt issues--some $6.8 billion in the fourth quarter of 2009--none more crucial to Dubai's reputation than the $3.52 billion Nakheel sukuk. The Nakheel sukuk is not officially sovereign debt, but it is a government-related entity guaranteed by Dubai World, the government-linked holding company.

Nakheel, the developer of the palm-shaped islands off the coast of the Emirate, has run into severe difficulty following the property crash in Dubai, and has confirmed it has received money from Dubai's Financial Support Fund, although the amount has not been disclosed. Although the funds raised in this sukuk issuance will go to the government, in part to pay maturing sovereign sukuk, there will soon be another $10 billion bond issuance, a part of the $20 billion bond program that was started with a $10 billion bond issued to the UAE central bank.

Nakheel has been reported to be in restructuring talks over the $3.52 billion sukuk, which could include a tender offer involving equity. However, a number of investors have publicly criticized the possibility of recieving equity for their investment. Due to the deferred lease payments throughout the sukuk, the total amount payable on maturity is around $4 billion. Were the Nakheel sukuk to not be fully redeemed upon maturity, it would send a bad signal to the bond markets about the credit-worthiness of other highly-indebted government-related entities and could affect the Dubai government's ability to raise future debt.

However, the ability of Dubai to access the international capital markets, as well as the support from the UAE central bank through the earlier bond, sends a positive signal that Dubai will not allow Nakheel to default on its debt. The outcome is still uncertain, although the secondary market trading in Nakheel suggests that there will be a favorable outcome. The latest pricing is 107 - 108.5 as of October 28th. The final maturity value of the Nakheel sukuk is near 115.

Other News

Indonesia plans its next sukuk in mid-November. The first two auctions have seen investors demanding higher yields. The first auction had all bids rejected and the second auction saw less than 5% of the total bids accepted.
Jordan continues to consider issuing a sukuk, although the discussions are in an early stage.
Next year may see $20 billion in sukuk issuance according to a poll. The issuance was $9.3 billion in the first seven months of 2009. The total sukuk issuance this year could be around $15-17 billion. However, with a pipeline estimated at $45 billion, this would be less than some expect.

Sukuk markets recovering, IFC sukuk listed in Dubai and London, Islamic asset management faces a 'chicken-or-egg' problem

2009-10-26T22:35:00.000-07:00

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

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.

Dubai wades back into international capital markets, sukuk coming back or are defaults too strong a headwind for the next year

2009-10-20T21:51:00.000-07:00

Dubai Civil Aviation may issue sukuk and conventional bonds to refinance $1 billion in debt maturing in November, in signs that Dubai may be re-approaching the sukuk and bond markets despite uncertainty about the level of debt in government-related entities like Dubai World and Nakheel, which has a $3.52 billion sukuk maturing in December. The ability of Dubai to tap capital markets has been buoyed by the return of risk appetite among investors as well as the repayment a month early by Nakheel of over $1 billion in bank debt extended earlier this year. However, there is still skepticism about Dubai's ability to restructure its debt and government-related entities.

A senior executive at Nomura believes that there will be a further uptick in the issuance of new sukuk by corporate and sovereign issuers in the next 18 months. The issuance through the end of September was $13.5 billion, primarily out of Saudi Arabia, which accounted for 44% of issuance and included sukuk from Saudi Electric Company and the Islamic Development Bank. Other more recent data shows that $18 billion in sukuk have been issued so far this year.

The sukuk market remains in a state of flux because of the unresolved issues about asset-based and asset-backed sukuk, which is discussed in an article in the Financial Times. The important point brought up in the FT article is that not all sukuk transfer ownership of the underlying asset to the investors. In many cases of asset-based sukuk, the asset is transferred to the SPV that issued the sukuk but with a repurchase agreement that requires the issuer to repurchase the asset in the case of default. This means that the asset ownership transfers back to the company and the sukuk holders are given essentially an IOU that the company will redeem the principal of the sukuk in a default. This is different from an asset-backed sukuk where ownership is transferred to the sukuk holders, who then have legal right to the asset. This was the case in the East Cameron sukuk, which was based on an overriding royalty interest that entitles the sukuk holders to a share of production in the underlying lease. Other sukuk transfer ownership of a tangible asset (the ORRI is legally recognized as real property in Louisiana, but is not a transfer of the underlying properties being drilled, which are leased from the US government).

Other News

The World Bank's IFC sukuk price guidance is 35-40 basis points over 5-year US Treasuries.
Jordan is considering offering sukuk to cover its growing budget deficit.
A columnist in the Guardian discusses the role of regulation and religion in finance.
Emirates Development Bank, the government funded bank that is anticipated to take over Islamic mortgage lenders Amlak and Tamweel is one step closer to launch, although the fate of Amlak and Tamweel remains uncertain.
Saudi Electric may tap sukuk markets again to finance a new contract the firm signed.
There is a nice article is in a Minnesota paper about local organization African Development Center, which offers Shari'ah-compliant home and business financing.
An English paper has a good article about the growth of Islamic finance.
Korea needs incentives for investments in sukuk, according to the head of Doha Bank's representative office in the country.
Islamic Finance Resources links to a recent paper on the history of Islamic finance in France, a relevant article given the recent French law about Islamic finance that was struck down by the constitutional court on procedural grounds.
Ithmaar is offering a rights issue as well as a 5-year mandatory convertible sukuk.
Gatehouse Bank, based in the UK, joined Paris Europlace, a Paris-based organization that promotes the French financial industry and established an Islamic Finance Commission in December 2007.

FSA rules on Islamic finance, France law struck down, 10-20% growth in 3 years in Islamic finance, other news

2009-10-15T21:43:00.000-07:00

The Financial Services Authority has released the suggestions received on its regulatory proposal for sukuk (Alternative Finance Investment Bonds) that was initially released late last year. The comments are incorporated into a revised proposed law that is open for comment until November 6, 2009.

France's new law on Islamic finance was struck down by the country's high court on procedural grounds although the opposition Socialists who asked for the review by the Constitutional Council who oppose it as a violation of the secular principles of France.

A study by BDO based on a poll of 173 financial services executives involved in Islamic finance puts the growth prospects for the industry at 10-20% over the next 3 years. A substantial percentage, 23%, said the industry could grow quicker and an equal percentage believed there would be little growth, between 0% and 10%, in the next 3 years. The industry continues to enjoy unsaturated markets and growing recognition by companies not necessarily considering Islamic finance based on a need for Shari'ah-compliant funding sources. However, there has been a severe economic downturn that has hurt the industry, a shortage of experienced practitioners and there are a number of issues remaining to be resolved, particularly how sukuk are treated if the issuer defaults on periodic payments. This is not necessarily going to be a quick process and it could be one of the reasons for the large percentage of sukuk this year coming from high-grade companies and sovereign issuers where the probability of default is far lower than some of the issuers in previous years.

The World Bank's International Finance Corporation is planning a $100 million sukuk to show its commitment to the Middle East and Islamic finance. The Reuters article notes that "they [the IFC] have only a few ijara contracts, that's really the limiting factor". This suggests that the structure they are considering would be similar to the Islamic Development Bank sukuk, which is based on a pool of financing provided to other parties by the Bank which can include murabaha and istisna'a, but must have at least 51% in ijara because they represent an underlying asset and not just a debt receivable.

Indonesia rejected all of the bids in its first monthly sukuk auction because investors were asking for higher yields than the Ministry of Finance was willing to accept. The decision is not seemed to be a significant setback because there is an expectation that the Indonesian central bank may raise interest rates. If the Ministry of Finance accepted higher yielding bids from investors in sukuk, it could increase the cost of raising conventional debt.

Investors in the Golden Belt 1 sukuk issued by the Saad Group do not know whether the next periodic payment will be made according to Citigroup, the sukuk trustee.

There is continues to be controversy about whether there need to be more safeguards for borrowers in Malaysia who default on bai' bithaman ajil (BBA) sales contracts. In some cases, a defaulting borrower can end up owing more than the amount of the financing originally taken. There has been controversy before around the BBA contract. A lower court said that the sale was not genuine and there was no difference between the profit charged and interest, although this was reversed by a higher court.

Other News

The Dubai Financial Services Authority (DFSA) issued proposals for changes to how it regulates Islamic financial services.
Shariah Capital, based in the US, is considering offering a Shari'ah-compliant ETF in the US and the UK, although no timeline for its launch is provided.
Etisalat plans a bond and sukuk raise that would begin with a $500 million tranche.
Bursa Suq Al-Sila', the Malaysian-based commodity murabaha exchange is expanding into the GCC.
The CIMA Certificate in Islamic Finance was launched recently. SHAPE Financial has launched its own certified Islamic financial analyst program.
Despite a downgrade to the Originator, a Tamweel Residential ABS sukuk did not have its rating changed by Moody's.
Sorooh is planning a Shari'ah-compliant fund to invest in European commercial property. ING is planning its own Shari'ah-compliant real estate fund with Amiri Capital that will invest in UK commercial property.
An opthamologist in Dubai proposes an Islamic economic system that I cannot even comprehend, but there is a $1 million reward to anyone who can prove that it wouldn't work.

Islamic securitization, other news

2009-10-10T14:38:00.000-07:00

A lawyer from Patton Boggs has an article in Islamic Finance News about the requirements for Shari'ah-compliant securitization to develop in the Middle East. Securitization markets across the world have been restricted following the credit crisis, but the securitization if done in a Shari'ah-compliant way would allow Islamic banks to increase the diversification of their assets and would free up capital for additional financing.

Other News

The Islamic Development Bank's $1.5 billion sukuk program and the first issue of $850 million in sukuk received a AAA rating from Fitch's and Standard & Poor's and a Aaa rating from Moody's Investor Services.
Malaysian ports operator Pelabuhan Tanjung Pelepaas plans to raise MYR1.5 billion ($441 million) from sukuk issues with a maturity of up to 10 years.
Standard & Poor's will be responsible for maintaining and calculating the National Bank of Abu Dhabi's NBAD UAE Listed Islamic Index.
The fate of Islamic mortgage firms Amlak and Tamweel continues to be discussed as a UAE state panel oversees their restructuring.
Swiss Re received approval to launch a retakaful unit in Malaysia. The takaful industry has been growing, but there is a shortage of retakaful firms forcing many takaful providers to use conventional reinsurance.
France sees Islamic finance as a potential way to deal with the credit crunch, although Islamic finance is not immune from similar crises that began in the U.S. in 2007.

Nakheel sukuk, Khazanah exchangeable sukuk in 2010, US Islamic mutual fund and ETF launching

2009-10-07T23:24:00.000-07:00

Nakheel's $3.52 billion sukuk traded at 107, its highest value since doubts emerged about the ability of Nakheel and Dubai World, which guarantees the sukuk, to repay. The rising price indicates that there is greater certainty that Dubai will ensure the sukuk is redeemed at maturity. The redemption value includes principal plus deferred lease payments, so the redemption value is greater than par. A blog post at The National notes that the sukuk is an unsecured obligation of the company, something that is clear in the prospectus but which had been questioned following the reported transfer of properties from Nakheel to Istithmar.

Khazanah Nasional plans more exchangeable, USD-denominated sukuk next year to reduce its stake in several of its holdings. Khazanah issued an exchangeable sukuk a couple years ago backed by shares of Telekom Malaysia. The sukuk was structured where the common shares were the assets on which the sukuk was based and the profits paid to investors were covered by the dividends paid on the common shares. The investors in the sukuk were able to later exchange their sukuk into shares of Telekom Malaysia.

The United States Islamic investment market is getting a lot deeper as Saturna Capital launched its Amana Developing World Fund and ShariahShares ETF should be launched in Q1 of 2010, managed by California-based Florentez Investment Management. The new Amana Fund will be invested in developed country-based companies with significant revenue from international operations. The ShariahShares ETF will likely include two passively-managed funds, one based on the FTSE Yasaar Shari'ah U.S. Index and the other on FTSE Yasaar Shari'ah Developed World ex-U.S.

In another sign that the sukuk market is still very undeveloped for longer maturity sukuk, even from sovereign issues, the Indonesian regular sukuk will likely have less than 15 years maturity. The Finance Ministry director in charge of Islamic markets told Reuters that "The maturity of the sukuk will likely be shorter [than 15 years because] the sukuk market is still not yet developed".

Other News

There is a good summary of the French legal changes to accommodate Islamic finance in the country, specifically the changes relating to murabaha and sukuk.
A few sovereign sukuk issues will come next year including Indonesia, Pakistan and South Korea. Not to mention the potential for the U.K., Singapore, Hong Kong and the Japan Bank of International Cooperation, which could also come next year.
An American firm developed a 'longevity-linked investment platform'.
Rushdi Siddiqui, the global head of Islamic finance for ThomsonReuters, recreated the Palm Jumeirah in his garden.
A new Islamic investment firm, Fajr Capital, launched with shareholders including Malaysian Khazanah Nasional, Brunei Investment Agency and the Abu Dhabi Investment Council.
The CEO of Unicorn Investment Bank discusses the investment bank's growth.
Daimler Financial will offer Shari'ah-compliant financing in the UAE.
The Kerala government in India will finance infrastructure projects and other investment opportunities through a Shari'ah-compliant investment company.
Syria is seeing growth in takaful.
The merger between Amlak and Tamweel, two troubled Islamic mortgage firms will 'take time' according to UAE central bank governor Sultan Nasser al-Suweidi.
Bahrain Financial Exchange launched two product development working groups, one devoted to developing Shari'ah-compliant products.
The Managing Director for the MENA region for Boeing says there will be growth in Islamic finance including in aircraft finance.
The Qatar Investment Authority and Malaysian Khazanah Nasional Bhd are working to set up a joint investment fund.

Sukuk in default, Amlak and Tamweel resolved?, Islamic law firm

2009-10-04T01:54:00.000-07:00

Malaysian ratings agency RAM Ratings Service has a very detailed overview of how sukuk function in cases of default comparing both the asset-based and asset-backed sukuk, as well as the differences between the Gulf and Malaysia. In asset-based sukuk, the asset is used to structure the transaction, but is not actually transferred to investors. The sukuk investors therefore become unsecured creditors of the issuer through a purchase undertaking that compels the issuer to repurchase the assets in cases of default. In asset-backed sukuk, the assets are sold to the SPV used to structure the transaction and the investors have recourse to this asset, which the sale to the SPV protects from the claims of the issuer's other creditors.

The problems at Amlak and Tamweel, two Dubai-based Islamic finance companies could be close to a resolution that sees them merged together into an Islamic bank that is partially government-owned. The two companies have not been providing any financing as their fate has been determined largely by the government of Dubai and the United Arab Emirates. The resolution proposed in some way resembles the conservatorship that was the end result of Freddie Mac and Fannie Mae in the U.S. with partial government ownership of the combined companies that would support the two companies' debt load.

An article provides greater detail about the workings of a Shari'ah-compliant law firm. In a time when law firms along with their financial clients are tightening it is interesting that there is a law firm that is beginning with a self-imposed limitation on the types of clients it will accept.

Other News

The Investment Dar announces that it has appointed a Chief Restructuring Officer following the Standstill Agreement with its creditors.
DIFC and the World Bank's Multilateral Investment Guarantee Agency are working together to develop the GCC's bond and sukuk markets. A more detailed summary of the issue is available from Emirates Business 24-7.
Malaysia continues to plan for a 20% market share for Islamic banking and takaful in 2010. The share for Islamic banks is currently about 17% and for takaful 7%.
China could be the next large market for Islamic finance, although regulatory hurdles remain.
The Islamic Bank of Britain is offering 2-year Islamic CD's yielding 4.5%, which will be fund the bank's Shari'ah-compliant financing. The bank recently revealed it had faced increases losses because of low interest rates that decreased the net interest margin on its financing activities.
QFinance launched an online reference guide to finance, including Islamic finance.
An Islamic cooperative bank has been opened in India. It marks another step on the slow development of the Islamic finance industry in India.
Islamic banking has begun to grow in Kazakhstan eight months after it changed laws to accommodate the industry.
The most recent issue of sukuk al-salam from the Central Bank of Bahrain were 100% oversubscribed with BD12m in subscriptions for the the BD6m issued.
Dow Jones has released the performance for September of its Islamic indices.
In an interview, the CEO of Hilal Bank is asked about the need for central regulation of Shari'ah-compliance, as well as the fallout from the credit crisis and the potential conflict of interest caused by Shari'ah boards being employed by the institutions they oversee.
Abu Dhabi's Tourism Development and Investment Company issued a $1.45 billion sukuk al-ijara that will have a AA rating from S&P.

Investment Dar, zakat fund, SRI and Islamic finance, IBB sees wider loss, France not ready for Islamic banks

2009-09-29T21:48:00.001-07:00

The Investment Dar is making progress with its creditors having reached a Standstill Agreement, which will postpone the claims by its creditors as part of its restructuring plan. There is not yet final resolution of the $100 million sukuk which the Investment Dar defaulted on, but the Standstill Agreement is a step on the way to a possible resolution.

A zakat fund managed by BMB Islamic is nearing launch. However, the fund has generated some controversy from Shari'ah scholars who argue that zakat is meant to be distributed to the needy and not invested.

A publication bringing together the contributions of 19 lawyers will explain the legal and Shari'ah aspects of Islamic finance will be published by Chancellor Publications. It was edited by Humayon Dar and Umar Moghul.

The BBC has an article on Islamic finance, one which describes the growth of Islamic finance, particularly in the U.K. following 9/11 when investing in the U.S. became more difficult and was perceived as having additional riskiness.

There is an interesting article from Gulf News about the differences between ethical investing and Islamic investing. While there are similarities in many of the screens used by Islamic and socially responsible investment funds, there are differences that may make some Shari'ah-compliant investments not pass other ethical screens, primarily those around environmental issues because Islamic indices have an overweighting in energy companies which often are not the most green.

Dr. Abbas Mirakhor warns that Islamic finance can face systemic failure and reputation risks because it is not well enough regulated internationally and in some countries. He was speaking at the Malaysian Securities Commission and said that the Malaysian system had the most advanced regulatory system for Islamic financial industry that could serve as a model. He also spoke about the potential for a food and commodity crisis. At an Islamic Financial Services Board seminar, Dr. Zeti Akhtar Aziz, the Bank Negara Malaysia governor said that the Islamic financial industry has been resilient and continues to grow and innovate with new products. However, there remain gaps in the legal framework, Shari'ah standardization and and Islamic financial products face different risks from conventional products. A prominent scholar Mohamed Akram Laldin says that Shari'ah scholars should be held accountable for "clear mistakes in their decisions".

The Islamic Bank of Britain saw its loss widen as the economic conditions and the low benchmark interest rates hurt the profitability of their increased deposits. The bank says it may need to scale back its growth unless it raises additional capital in order to continue its compliance with prudential capital requirements.

The head of France's central bank, Christian Noyer, says that the country is not yet ready to issue an Islamic banking license yet because of concerns over safety and soundness. The French Central Bank, which does not control monetary policy following the foundation of the European Central Bank, has been approached by several institutions looking to establish Islamic banks in the country, but does not yet have the same level of knowledge and familiarity with Islamic banking as the U.K. regulator, the Financial Services Authority.

The lising of sukuk from Petronas and Cagamas could signal the continuing growth in the sukuk markets following the credit crisis. In the wake of the credit crisis as the effects spread globally throughout the financial markets and economies, the issue of new sukuk nearly completely dried up compared to 2007 when a record amount of sukuk were issued.

Other News

Jamelah Kamaluddin becomes the first woman to head an Islamic bank with her appointment last year as the managing director of RHB Islamic Bank.
South Korea is offering tax incentives to promote the use of sukuk and has changed regulations to ensure that the profits for sukuk holders receives the same tax exemptions as interest payments on conventional bonds.
Kuwait Energy received a $50 million murabaha financing from the World Bank Group's International Finance Corporation.
An article discusses Islamic ETFs, including the recently launched, U.S.-based Javelin ETF, which has not turned interest in it yet into significant trading volume. The ETF market in the U.S. will be broadened with the launch of 2 new funds from ShariahShares, managed by California-based Florentz Investment Management.
Bloomberg will focus on Islamic finance in its expansion in the GCC.
The Muslim Community Cooperative Australia launched another fund, an Income Fund, following its launch of a Mortgage Income Fund.
Bank Negara Malaysia, the Malaysian central bank, has signed an agreement with the Hong Kong Monetary Authority to cooperate on financial issues particularly Islamic finance.
The National Bank of Kuwait launched its third Kuwaiti Dinar-denominated Ijara Fund.
Malaysian firm Sime Darby will issue RM4.5 billion ($1.3 billion) in medium-term Shari'ah-compliant notes
The report I wrote for Yasaar Media is briefly described in a press release available from AMEinfo.
Ernst & Young is organizing a conference on Islamic finance in the Channel Islands. Islamic retail banking executives and Shari'ah scholars will meet for a conference in Dubai on October 12 to discuss the future of the industry.

Yasaar Media report to be released on Friday, September 25

2009-09-24T06:51:00.000-07:00

UPDATE (Sepember 25): The PDF of the report is available from Yasaar Media.

The report I wrote for Yasaar Media on Islamic Finance in North America will be released tomorrow, but the press release came out today. The report shows the history of how Islamic finance developed in the United States since the 1980s. A lot of the headline grabbing developments have been retail-oriented, but the U.S. represents the destination of significant Shari'ah-compliant investment from the GCC and other parts of the world. The depth of the U.S. capital markets and breadth of the economy has provided a way for investors around the world--including in the GCC--to diversify their investments, and this extends to those using Shari'ah-compliant financing.

The press release is below, but the report will be available tomorrow from Yasaar Media.

Yasaar Media is a specialist media house that focuses exclusively on the Islamic finance domain. The founders of Yasaar Media recognise that there is a serious need for an information provider in the Islamic finance space: a provider that produces in-depth reports and studies on specific market niches, asset classes and countries. These reports are designed to be market-defining works that will become the benchmark in their field. As the Islamic finance industry grows and expands so too does the need for high quality analysis and comment that is produced in a timely fashion.

North America Next Big Growth Market for Islamic Finance

Dubai, 24 September 2009

As world economies struggle to move from recession to recovery, Islamic finance is being hailed as a possible alternative to risk-prone conventional financial services – even in the capitalist heartlands of the USA and Canada. Extensive evidence of this shift in action is presented in a new report called Islamic Finance in North America 2009 published tomorrow by Yasaar Media and co-published by Codexa Capital, UM Financial Group, King & Spalding, and Doha Islamic.

The report explores for the first time the true depth of penetration of Islamic finance in both the USA and Canada and concludes that both core North American markets could be set for a boom.

According to the report Islamic finance in North America has developed along two quite separate paths. The first path focuses on retail Islamic finance and centres mostly on home financing products and credit cards. The second path involves a number of high profile GCC-based Islamic investment banks and their deployment of hundreds of millions of dollars in private equity and real estate developments in North America.

With many global markets showing the first signs of emerging from the worst of the financial crisis, North America could be set to witness a surge in Islamic finance activity along both paths as institutions and individuals look for alternative financing propositions that shun the use of excessive risk. The significant inroads that Islamic finance has made in both the USA and Canada look set to be expanded upon in the years ahead.

Paul McNamara, editorial director of Yasaar Media, says, ‘Investors and businesses alike are still smarting from the worst ravages of the global recession and they are looking for a lower-risk alternative. Islamic financing structures are inherently more risk averse than their conventional counterparts and as a result such structures are now being studied closely in all sorts of markets – including highly sophisticated markets like those of North America’.

These important markets are examined for the first time as growth areas for Islamic finance. ‘Both the USA and Canada are home to some very experienced Islamic finance firms – both on the financial and the legal side – and many market observers are now watching closely to see how they will help accelerate development of Shariah financing in North America. These are lucrative markets and it makes sense that GCC- and Malaysia-based Islamic finance houses are watching them with great interest’, according to Mr. McNamara.

Islamic Finance in North America 2009 is published by Yasaar Media tomorrow (25-09-09)

Sukuk markets, tax changes in France, sukuk could reach $16 billion in 2009

2009-09-22T16:16:00.000-07:00

The Saudi Electric Company $1.87 billion sukuk could be the beginning of the resurgence in the sukuk markets according to an HSBC official. He cited a strong pipeline of sukuk. However, there has been a strong pipeline cited for nearly a year (up to $45 billion according to S&P). The catalyst could be the SEC sukuk because of its size (or the Petronas sukuk which came out of Malaysia shortly after). However, despite strong demand for the SEC sukuk which was oversubscribed, it still had a yield of SAIBOR+160bps compared to SAIBOR+45bps for the sukuk it issued in 2007. This suggests that although there is resurgent demand, it is still focused on sukuk issued by high-grade corporate issuers and sovereign issuers. Until there is a large sukuk outside of these categories or the pricing of new issues improve--which may improve following the resolution of the Nakheel sukuk by December of 2009--the sukuk in the pipeline will most likely stay in the pipeline.

France changed laws to facilitate the issuance of sukuk. The sukuk--by an unnamed financial institution--which would be the first in France and is expected to be up to €1 billion is being pushed back to later this year or early 2010 by "a number of challenges from the Shari'ah and legal point of view".

The global sukuk market will reach $16 billion this year according to Badlisyah Abdul Ghani of CIMB Islamic, with a majority coming from Malayisia. Also Gatehouse Bank in the UK executed a cross-border commodity murabaha transaction with CIMB Islamic using the Kuala Lumpur-based Bursa Suq Al Sila. Finally, CIMB Islamic confirmed it had invested "a couple of million dollars" in the Saad Group's Golden Belt 1 Sukuk. In the GCC, the sukuk issuance over the year to July 31 was $4.3 billion compared to $12.8 billion in conventional debt.

Other News

Delphi Trade Inc is starting a Shari'ah-compliant fund to help US firms finance exports.
Islamic finance must broaden its portfolio in order to continue growing.
The new conservative government in the UK remains committed to enhancing London's stature as a Western center for Islamic finance.
Bursa Malaysia sold 25% of its derivatives business to CME Group which will make these products available in the US through the CME's electronic platform.
Parts of Nakheel may be folded into Istithmar World, the investment arm of Dubai World.
The Nakheel sukuk redemption looms, but other Dubai-based companies may be planning bond offerings.
Indonesia will plan to offer sukuk with maturities of greater than 5 years in their regular offerings beginning this October.

Islamic finance workshop in Malaysia

2009-09-16T22:30:00.000-07:00

I have preparing for a 2-day workshop on Islamic finance that will take place in Kuala Lumpur, Malaysia on October 12-13 and have not been able to post as frequently as normal. I am looking forward to giving this and I would suggest that anyone interested should take a look at the description of the workshop, available from the conference organizer's website and register. The contact information for the organizer is also available on that site and they can provide a brochure with greater details about the topics covered.

Entering the 4th year of this blog

2009-09-13T11:18:00.001-07:00

I began writing this blog exactly three years ago in September 2006 and it has led to a lot of interesting discussions with other people throughout the Islamic financial industry. The landscape of the Islamic financial industry has changed signficantly since 2006 and has gone from being a rapidly growing industry in a positive economic climate to becoming a more established, but still rapidly growing industry that has now survived its first great test with the credit crisis that originated in the United States market for subprime mortgages which spread into a global economic crisis.

The economic recession has placed significant strain on some institutions within the Islamic financial industry and a few have defaulted on their sukuk, but overall the industry has held up rather well. The conservative lending practices and large liquidity buffers that most Islamic banks have has left them standing even as other banks throughout the world have not survived. The industry has not been immune to the crisis, but has for the most part made it through.

Although the Islamic financial industry in its current form is about 35 years old, this is not the first crisis it has weathered, but the tremendous growth, in particular since 2000 means that this is a much larger industry today than it was even a decade ago. The success in surviving one of the most global downturns intact suggests that Islamic finance has staying power and can continue to grow larger and more mature and continue to emerge from the shadows of being considered just a 'niche' industry.

For a glance back at what was being discussed when I began writing this blog, I went and found a few quotes from posts in September 2006.

September 14, 2006: "Dubai International Finance Centre (DIFC) has begun planning to become marketmakers in the sukuk (Islamic bond) market. Currently, there is little in the way of a secondary market for these instruments, so they are illiquid and held until maturity. The DIFC predicts that with sukuk issuance expanding from US$ 13 billion today to US$100 billion in five years, there will be an expansion in secondary markets for sukuk.

September 17, 2006: "Nadim Fattaleh, regional director at Boeing Capital Corporation (BCC), among industry experts, predicts that sukuk (Islamic bonds) backed by aircraft could become a large market. The aircraft would be purchased using investors' funds and then leased to airlines for use (ijara if the asset remains owned by the original purchaser or ijara wa iktina if the lease ends with the transfer of the property to the lessee). "

September 20, 2006: "The offered musharaka sukuk [for The Investment Dar] is the first of its kind to have a put and call options that let the buyer exit at year three with the same provision for the seller. The sukuk has been approved by the Shari'ah boards of both Unicorn Investment Bank and Investment Dar. "

September 21, 2006: "The Texas-based oil company East Cameron Partners made the first U.S. originated sukuk issue with their US$165.67 million issue. The issue was handled by Merrill Lynch and the Beiruit, Lebanon-based company Bemo Securitisation (BSEC), which provides Shari'ah-compliant securitization to SMEs."

Malaysia leading in sukuk, CBK appoints monitor for TID, Nakheel sukuk rises on comments, derivatives framework by year end, Islamic finance in France

2009-09-11T16:34:00.000-07:00

Malaysia remains the largest issuer of sukuk representing 45% of total issues followed by Saudi Arabia with 22% in the first 7 months of 2009 according to a report by Standard & Poor's. The largest issuer was Saudi Electric Company which issued a $1.8 billion sukuk. 20% of the sukuk issued were denominated in US$, up from 10% in 2008. 3/4 of all new issues were from sovereign issuers. In another report, the Securities Comission of Malaysia reported that through August 2009, more sukuk had been issued than all of 2008 which amonted to 58.2% of the total issuance of sukuk & bonds in the country through July (p from 57% in 2008).

The Investment Dar, whose sukuk is in default, has not filed its 2008 financial statements yet and will be monitored by a temporary monitor appointed by the Central Bank of Kuwait.

Troubled property firm Nakheel saw its sukuk rise over par in secondary market trading after Shaikh Mohammed bin Rashid Al Maktoum, ruler of Dubai, said he was not worried about either the $1 billion in maturity debt for the Emirate or the $3.52 billion maturing Nakheel sukuk. Speculation has been rising that Dubai will bail out Nakheel using the $20 billion it raised recently with half coming from the UAE Central Bank. I wrote a summary of this sukuk earlier this year when it was trading at a substantial discount to par.

The International Islamic Financial Market (IIFM) will finalize a master agreement for Islamic derivatives by the end of the year. The agreement, called Ta'Hawwut may be based on Arbun, which has been used to replicate call options in a Shari'ah-compliant way. Derivatives like options and swaps have have attracted some significant criticism for simply replicating conventional products. I recently wrote a blog post on whether all innovation is necessarily beneficial within the Islamic financial industry.

France wants to attract Islamic finance, but concerns remain about how well Islamic retail institutions would fit in with the country's strict separation between religion and state. The author of the article in Reuters has a blog post at the website providing additional insight behind the article.

An Australian newspaper has an article on the MCCA co-operative that recently offered a retail Shari'ah-compliant mortgage interest fund. It's an interesting article about a product that is not available in much of the world in Shari'ah-compliant fashion. However, it is available to some extent in the U.S. and Canada also in the co-operative model. However, one of the significant limitations of the co-operative model is that it often faces a shortage of capital to fund the home purchases for the members because it cannot access capital markets by securitizing the mortgages or, in the U.S., by using funding provided by Freddie Mac.

Other News

The government of the Indian state of Kerala plans to set up an Islamic bank according to the region's finance minister.
Two Bahrain-based Islamic investment firms, Inovest and Tharawat, are investing $32 million in a water filter production company.
An article on the recovery includes what I think is an important reminder that "'Islamic Finance's immunity is a myth which is brought up persistently', says Fares Mourad, Managing Director and Head of Islamic Finance at Swiss private bank Sarasin."
Does Islamic finance need more supervision?
Malaysia's state-owned body which owns transit assets priced RM2 billion ($573m) in 15- and 20-year sukuk.
Kuwait Turkish Participation Bank, majority owned by Kuwaiti firm Kuwait Finance House, received approval to conert its commercial office in Mannheim into an Islamic banking institution by the end of 2009 or early in 2010.
Abu Dhabi's Tourism Development & Investment Company may raise $1 billion in sukuk.
A $125 million syndicated secured ijara facility from a Kuwaiti issuer may have helped the market for other syndicated ijara facilities.
Qatari Diar is raising $962 million through a syndicated Islamic facility to fund investments in Europe.

News bullets

2009-09-05T12:26:00.000-07:00

The Islamic Development Bank is selling $500 million in sukuk
S&P has a report on the sukuk market for the first 7 months of 2009.
Islamic banking is growing in Kenya, albeit from a small base. Also, the Kenyan government issued a small 1 billion shilling ($13 million) sukuk to the country's two Islamic banks.

Is innovation in Islamic finance always good?

2009-09-02T22:10:00.000-07:00

Emirates Business spoke with a number of Islamic finance analysts and one point of consensus was that the Islamic finance industry is not yet viewed as a credible alternative, in part because it is not well understood globally but also in part because there are questions about products which use different means to essentially replicate conventional products. One of the suggestions was that particularly outside of the GCC, Islamic finance should drop the use of Arabic terms to emphasize that the industry does not exclusively target Muslims. This is a point I have heard from other people with in the industry, but replacing the Arabic product names, particularly while retaining the 'Islamic' label could diminish the ability to focus on the differences in how products are structured compared to conventional products, in large part because the outcome is in many cases nearly identical.

This article also leads to consideration of another important question about whether the focus on 'innovation' as it relates to mimicking additional conventional products (for example, Islamic hedge funds and multi-tranched sukuk) makes sense for the industry as a whole. There is clearly room for innovation in Shari'ah-compliant products, but just as the debate rages in the conventional financial world about whether financial innovation is beneficial for society, I think it is important to consider the question about which innovations are beneficial for the investors in the products or whether they are simply a new product that can contribute to the profits of the firms structuring them.

In contrast to the innovations that merely mimic more complex conventional financial products, the focus of innovation would be more beneficial were it to focus on developing alternatives for controversial but incredibly necessary products like commodity murabaha/tawarruq. These products have come under fire recently for their similarity with interest-based products where there is only nominal trade in an underlying asset in order to structure short-term liquidity management tools.

Another area where the industry's efforts would provide a real benefit to the industry would be in creating more standardized types of sukuk which could be priced competitively with conventional debt. Were there ready-made sukuk structures that were accepted by the majority of scholars--an easy one to start with would be ijara--then it could reduce structuring costs and encourage issuers to bring sukuk into the market. The use of similar structures by a broad number of issuers would also have the effect of increasing the comparability between different sukuk issues and holders of one sukuk could use standard credit analysis to compare it to other sukuk in the secondary market without worrying that structuring differences would lead one sukuk to behave differently, for example if there were a default.

Innovation can benefit both the developers of the innovation as well as the broader Islamic financial industry, but this need not always be the case. For example, the Total Return Swap engineered by Deutsche Bank was certainly an innovation--it used a wa'd swap to create a Shari'ah-compliant wrapper for non-Shari'ah-com-pliant hedge funds--but it also led to Sheikh Yusuf DeLorenzo to dub the fatwa permitting it as the "Doomsday Fatwa for Islamic Finance". He dubbed it thus because if it is possible to use a wa'd swap instead of an alternative structure, it makes it possible for any non-compliant product to be fairly inexpensively wrapped using the wa'd swap and could compromise the legitimacy of the entire industry if adopted throughout. Innovation in finance is different from innovation elsewhere because it is possible for the innovation to do little more than generate profits without contributing any broader benefit. In the wake of the global credit crisis, in part caused by this type of innovation, the importance of considering whether a given innovation is beneficial or detrimental.

Another excerpt from the Yasaar Media's Islamic Investment Banking 2009 report is published in AMEinfo, this one focuses on venture capital.

Islamic private equity could be the beneficiary of asset fire sales and mergers & acquisition activity following the economic downturn according to the managing director of Rasameel Structured Finance, Issam Al Tawari.

Other News

The rankings of largest banks in the GCC is out with four of the banks located in the UAE.
Malaysian asset manager Corston-Smith is planning a $282.5 million Shari'ah-compliant fund.
QInvest has proposed launching a $200 million Shari'ah-compliant fund focusing on shipping assets.
The Azerbaijani Islamic financial industry remains nearly non-existent because there are no laws authorizing Islamic banks, but this could change in the future as there is one bank that now offers Shari'ah-compliant products, although not murabaha due to regulatory restrictions.
Mauritius continues to try and attract Islamic finance as an attractive location to structure Islamic financial products.

Islamic Development Bank sukuk, Nakheel update, BNM releases SPR1 on murabaha, Takaful in the U.S.

2009-08-28T18:24:00.000-07:00

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

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.