Sukuk Defaults Expose Islamic Finance Soft Spot

First defaults of sukuk are set to expose the vulnerabilities of Islamic finance, with most investors expected to have no better legal redress than conventional bondholders as underlying assets have not been truly transferred to them.

The current financial and economic crisis is a first for the US$1 trillion (RM3.5 trillion) Islamic finance industry, which over the past few years has been spoilt by cheap oil money, and legal provisions and protection clauses in sukuk worth billions of dollars are being tested for the first time.

Islamic bonds, or sukuk, are structured as profit-sharing or rental agreements and their returns are derived from underlying assets. Islamic finance caters to investors who would like to avoid paying or earning interest, prohibited by Islamic law.

Kuwait’s Investment Dar said in May it had defaulted on a US$100 million sukuk registered in Bahrain and in the United States a court case is ongoing on the East Cameron Partners Sukuk by bankrupt Texas-based East Cameron Gas Company.

Despite its earlier billing as a safer alternative to traditional banking due to its requirement for assets to underpin deals, Islamic bondholders may not have any more legal safeguards than conventional counterparts in case of default.

With rare exceptions, sukuk issuers have created special purpose vehicles (SPV) to pool assets underlying the issue, but they have not been securitized for a true sale to investors.

“Secular, non-Sharia courts upholding those structures are more likely to consider sukuk holders to have contractual rights as opposed to proprietary rights and as a result rank them as creditors rather than equity holders,” said Muneer Khan, partner and head of Islamic finance at law firm Simmons and Simmons.

A US$650 million sukuk issued by troubled Saudi group Saad, which is undergoing debt restructuring, for example is seen as an asset-based, rather than an asset-backed, sukuk. Yields of the sukuk jumped to above 70 per cent in mid-June, as investors feared a default of the issue.

Most sukuk are structured as asset-based instruments, rather than asset-backed securitisation where “you always have a claim for that particular asset that has been sold to you as the investor”, said Megat Hizaini Hassan, an Islamic banking lawyer in Kuala Lumpur.

CHASING ASSETS

“Everybody is chasing the same assets if they have not been transferred to the name of the sukuk holders,” said Samer Amro, senior associate at law firm Dewey LeBoef.

Other uncertainties are likely to arise from sukuk defaults, including a debate about how courts will interpret repurchase clauses which are structured to follow a controversial ruling by prominent jurist Sheikh Muhammad Taqi Usmani in late 2007.

Taqi had ruled that repurchase guarantees found in most sukuk contradict Islamic laws, as they violate the principle of sharing risks and returns.

“If you’re looking at the newer structures where the repurchase obligations are left to be determined at the time of repurchase, there may be some issues there,” said Megat Hizaini.

“You don’t really know how the courts will treat it in the situation,” he said.

Islamic finance is governed by scholars’ rulings, national regulators and its own standard-settings bodies such as Bahrain-based AAOIFI, the Accounting and Auditing Organisation for Islamic Financial Institutions.

“In the Middle East, it’s going to put to the test many of the legal protections that were originally built into the sukuk,” said Mohammad Faiz Azmi, global Islamic finance leader at PriceWaterhouseCoopers, adding that countries in the region typically do not have bankruptcy laws as sophisticated as in Europe.

“When these sukuk start to default, it would be very apparent which jurisdiction has a more robust system than others,” he said.


HURDLES TO TRUE SUKUK
Corporates with perceived higher risks that are facing high borrowing costs and a sluggish regional IPO market could use true sukuk sales with full ownership transfers as an avenue to the capital markets.

“It adds some credit-enhancement, it adds credit-worthiness,” said Rizwan Khan, a senior associate at law firm Norton Rose.

But the paperwork involved in registering ownership transfers in the Gulf Arab region and restrictions on foreign ownership of land make true sukuk sales difficult.

Issuers have to register the SPVs, to which asset ownership would have to be transferred, in Bahrain or the Cayman Islands, as regulatory frameworks in other Gulf countries like Saudi Arabia and Kuwait do not fully cover sukuk structures.

This turns the SPV into a foreign buyer, limiting the pool of assets.

“This is not going to change unless laws are enacted, in particular on the ownership issues,” Khan said.

From Reuters

Financial Partnerships

In theory, Islamic banking is based upon the concept of making financial profit by taking risks through financial speculation, financial partnerships and other financial transactions that are permissible under Islamic law whilst at the same time avoiding incurring debt that represents a high risk both to the individual and to the market in general.

Such debts leads to wealth being amassed by the privileged few who are capable of offering sufficient guarantees of financial solvency whereas the overwhelming majority of middle class professionals and small and medium enterprises cannot afford to incur such debts and are therefore unable to finance their own projects and achieve the desired growth and development. This type of debt would in any case suffocate the majority of small and medium businesses and ultimately lead to serious financial loss.

Small and medium businesses account for around 90 percent of companies worldwide, as well as providing between a reported 40 and 80 percent of employment. According to a study published by the Arab Orient Centre for Strategic and Civilization Studies, small and medium businesses account for around 85 percent of Britain's gross domestic product [GDP] and around 51 percent of America's GDP. In addition to this, between 1979 and 1995 around 75 percent of employment in the US was in the small and medium business sector.

Financing designs and products by continuously incurring debt will also ultimately kill off the spirit of creativity and inventions [by doing away with the concept of competition and financial solvency]. Financing is the umbilical cord that nurtures this, and since [much] financing is now obtained by taking out loans and thereby incurring debt, money inevitably end up with the privileged few when this umbilical cord is severed.

This manner of financing is warned against in the Holy Quran, "What Allah has bestowed on His Messenger (and taken away) from the people of the townships - belongs to Allah- to His Messenger and to kindred and orphans, the needy and the wayfarer; In order that it may not (merely) make a circuit between the wealthy among you. So take what the Messenger assigns to you, and deny yourselves that which he withholds from you. And fear Allah; for Allah is strict in Punishment." [Chapter Al-Hashr; Verse 7].

However the practical application of Islamic Banking has violated this, changing from a financial system founded on partnership to one based on debt. In some Islamic Banks, assets from Murabaha constitute as much as 92 percent of the overall financial portfolio. The Islamic banking system has also switched from operating via [Shariaa-compliant] rates of profit and has adopted interest rates, something that brings the Islamic Banking system closer to the conventional banking system. Islamic banking tools are also now used in risk management and credit policies; this makes the system vulnerable to the economic defects that are inherent in such practices in precisely the same manner as the conventional banking system.

Islamic banking has therefore ceased to be a safe haven for investors. It has become exposed to the risk of bad debts as the system is set up only to offer loans to a small number of individuals with substantial financial solvency as well as large corporations who are able to provide financial guarantees. These loans are provided without really examining the feasibility of the projects being funded or even knowing whether this financing is granted via Tawarruq or Murabaha. These kinds of financial practices do not occur when financing is provided via partnership or speculation.

Sukuk have also become vulnerable as a result of failures in meeting their financial obligations as a result of the legislative chaos that the Sukuk market is currently encountering and also because in many cases the assets being transferred to Sukuk-bearers are not genuine. In addition to this, Sukuk companies are now also including a contract where in the case of financial default the customer is obliged to immediately pay the value of the Sukuk in full. This only serves to increase the rate of default on Sukuk, and has therefore raised the risk that Sukuk bonds are exposed to. Islamic Banking has also become more liable to risk from individual bankruptcy as a result of the expansion seen in granting consumer credit based upon Tawarruq.

Islamic Banking has moved away from the values and principles that it was originally based on, and the Muslim community is no longer reliant upon this financial system to contribute to its progress and development. The damage caused by debt on the Islamic Banking system is therefore clear for all to see. Islamic Banking is no longer a system built upon partnership in profit and loss coming from actual financial activity that creates job opportunities and genuine products. Unfortunately, Islamic Banking is no longer a financial system that can make a difference to the world. Islamic Banking has crossed the line.

Maybank Singapore To Launch First Islamic Term Deposit For Retail Clients

Maybank Singapore will launch the first Islamic Term Deposit (Term Deposit-i) targeted at retail clients tomorrow, making it the first bank here to offer the Islamic banking product to that market segment.

As the first mover in the market, Term Deposit-i will pay profits upfront, the bank announced today, bucking the local trend of Islamic term deposits for high networth customers.

A similar product, Profit Now Account-i was launched by Maybank Islamic Bhd in Malaysia last May and it was well-received with more than RM1.3 billion total deposits to date.

In a statement here Thursday, the bank said Islamic banking products were sought after by local customers who were scouting for alternative investment avenues with the current change in investment landscape.

The bank is offering for a limited period, promotional rates of 0.6 percent, one percent and 1.4 percent for a tenure of three, six and 12 months respectively.

The minimum placement is S$10,000 (S$1=RM2.42) for a 12-month tenure or a minimum of S$25,000 for a three- and six-month tenure.

This deviates from the current available Islamic term deposit products in the market.

Some products require a minimum placement of US$500,000, catering only to the high networth segment.

The bank said Term Deposit-i was based on the commodity Murabaha principle, which was on a cost plus profit sale concept.

Under this concept, a specific syariah-compliant commodity will be identified and used as the underlying asset for the sale and purchase transaction between the customer and the bank.

Maybank Singapore currently offers other innovative Islamic banking products such as iSAVvy Savings account-i, a syariah-compliant online savings account.

The bank said since the introduction of the Islamic deposit products in 2005, it had seen an average year-on-year increase of over 40 percent in Islamic deposits.

This increase aligned with the global expected growth of over 40 percent to US$1 trillion by 2012, Maybank said.

Maybank Singapore Islamic banking head, Mohd Ismail Hussein, said the current market presented an opportune time to take on a back-to-basic approach.

"Consumers are on the lookout for an alternative to conventional products and this term deposit, being syariah-compliant may well match their needs," he said.

Mohd Ismail said Islamic banking was a fairly new concept in Singapore but was gaining momentum including from among the bank's non-Muslim Islamic banking customers.

"With Maybank being the market leader in Islamic banking in Malaysia, the operations in Singapore is in good stead to 'break the ice' between Islamic banking and the local retail market," he said.

Ambank's New Islamic Fund Aims To Perform In Bull Marts

AmIslamic Bank's second Islamic structured deposit, AmMomentum Select Islamic Negotiable Instrument of Deposit (NID-i), aims to perform in bull markets and protect investors against bear markets.

AmBank retail banking executive director, Mahdi Murad, said the NID-i was a highly innovative rule-based asset allocation strategy that used momentum to decide how to invest in a portfolio of multiple assets.

"It automatically avoids underperforming asset classes and takes advantage of bull markets," he said at the launch of the fund here Wednesday.

The NID-i is a four-year syariah-compliant principal protected structure that provides diversified exposure in 100 syariah-compliant stocks in 44 countries and in four indices namely, equity, energy, agriculture and metal.

It is essentially a deposit with a fixed tenure and returns are linked to the performance of syariah-compliant underlying assets, which may be equities, bonds, commodities, foreign exchange, indices or any combination of these assets.

Mahdi said the fund was suitable for investors who wanted to ride on the economic recovery but were uncertain about which asset classes to invest in and when was the best time to invest.

Meanwhile, the bank's structured products senior manager in treasury and markets, Hoe Cheah Kit, said investors could expect a two percent return for the first year.

"Upon completion of the four-year tenure, they can expect the principal and the two percent return if it was not drawn out before," he said.

On the expected average return for the fund, he said: "Going into the next four years, it depends on how fast the market recovers from here onwards."

Hoe said in the last seven years, where the bull run was in 2007 and early 2008, the average return was eight percent.

For the bank's first Islamic structure deposit launched last September, it gave a 1.5 percent return for the first six months, he said.

He said although the net asset value of the first fund was now lower then when it was first launched, it was now on a recovery trend.

"We went through a hard time in the second half of 2008. But even then we raised RM45 million (for the first fund) and saw momentum picked up over the last few months," he said.

The NID-i targeted a fund size of RM75 million during its 30-day offer period, he said.

Hoe said the bank aimed to launch another conventional structured product by year-end.

Economic Environment Will Improve

Malaysia believes that with further collaboration with the Gulf states it can share knowledge and expertise in Islamic finance to help improve the current economic environment.

As such, Prime Minister Datuk Seri Najib Tun Razak has called for closer cooperation between the Gulf states and Malaysia to promote the Islamic financial system for a more holistic approach to long-term economic development.

"The states, with their financial resources, and Malaysia, with the knowledge and expertise in Islamic finance, provide a natural match and synergy for closer cooperation.

"We must use the opportunities available to us, even in these difficult times, to strengthen our economies and emerge stronger when the global economic environment improves.

"I am very confident that it will surely improve, just as the sun will rise again tomorrow," he said in his article on "Playing Our Part in Building a Safer, Prosperous World" published by the Egyptian Gazette newspaper Wednesday.

The prime minister is here to attend the 15th Non-Aligned Movement (NAM) summit which was officially opened by Egyptian President Hosni Mubarak Wednesday.

Najib, who is also finance minister, said that in the wake of the current crisis and the failure of the conventional banking system, there was increased interest in Islamic finance.

He said Malaysia, a leader in this area with some 60 per cent of the world's issuance of 'sukuk' (Islamic bonds) originating from Malaysia last year, was prepared to share its expertise for the greater and common good of the Muslim world.

He said the Securities Commission (SC) and the Dubai Financial Services Authority (DFSA) had agreed to allow cross-border distribution and marketing of Islamic funds between Malaysia and the Dubai International Financial Centre (DIFC).

Najib said it could be strengthened with the establishment of an economic council between the Gulf states and Malaysia.

He said it would offer far-reaching benefits to members as well as other countries in the two regions -- Southeast Asia and the Gulf region -- and between Asean and the Gulf Cooperation Council.

"One of the most important lessons to be learned from the ongoing economic crisis is that we must never be boxed in by orthodoxy in economic matters, but focus more on what works, what is needed and what will best serve the long-term needs of our people," he said.

He said that in Malaysia, there have been criticisms from those who wanted to defend the status quo or ignore the different times we lived in.

"But without these policies, Malaysia would be left behind, ill-equipped to compete in the high-value economic sectors of the future that will propel Malaysia into the higher income group," he said.

On NAM, he said that though the organisation was set up under a very different political and economic environment, the challenges it faced today were no less important.

"The Cold War may be over but we are confronted with the most severe economic crisis in decades, new international security threats that strain relationships and questions about shifts in economic power across regions and between peoples," he said.

HSBC Shows Resilience Amid Crisis

HSBC clinched a series of major industry awards in the Asia-Pacific region in the first half of 2009, reflecting its resilience in difficult economic conditions.

The awards, organised by leading financial publications, include regional, country and territory awards as well as recognition for outstanding performance in various business areas.

Euromoney, in its 2009 Awards for Excellence programme, named HSBC Best Bank and Best Debt House in Hong Kong. In the publication's Foreign Exchange Poll 2009, HSBC was ranked number one in the "Best for Currencies - Hong Kong Dollar" category.

Earlier in the year, HSBC Amanah won Best Sukuk House, Best Fund Manager and Best Takaful House in Euromoney's Islamic Finance Awards.

In FinanceAsia's Country Awards for Achievement 2009, HSBC was recognised for its outstanding strength in its operations in Hong Kong and some emerging markets in Asia. HSBC in Hong Kong, in addition to winning the Best Bank title, also won Best Bond House, Best Cash Management Bank, Best Trade Finance Bank and Best Foreign Exchange Bank titles. HSBC was also named top Foreign Commercial Bank in mainland China, Malaysia and Vietnam.

HSBC in Malaysia also fared well in Islamic finance and transaction banking. In the Asset's Triple A Islamic Finance Awards 2009, the bank won Best Islamic Debt House award as well as the Best Islamic Project Finance Deal in the country and the Most Innovative Islamic Finance Deals. In the Asset's Triple A Transaction Banking Awards 2009, HSBC in Malaysia was named Best Trade Finance Bank, Best Transaction Bank, Best Sub-custodian Bank and Best Domestic Custodian. In the same awards programme, HSBC in Vietnam also won Best Trade Finance and Best Sub-custodian awards.

In The Asian Banker's Excellence in Retail Financial Services Awards 2009, HSBC won Best Regional Retail Business in Asia. In the same programme, HSBC in mainland China topped other foreign banks in retail banking while HSBC in Hong Kong won the Excellence in SME Banking award.

UAE's Islamic Financial Firms To Bring Changes In Canberra's Financial Services Sector

The first Islamic financial Services Mission of the UAE to Australia ended successfully and the Dubai Export Development Corporation is expecting new business opportunities for the Islamic Finance sector as a result of the trade mission.

UAE's Islamic financial firms, part of the delegation to Australia, have met with the Treasury officials in Canberra to discuss the current rules governing its financial services and incorporate Islamic financial products.

Jointly organised by EDC and the Australian Trade Commission (Austrade), the Trade Mission delegates are seeking to encourage changes in Australia's federal taxation which will allow Islamic financial products to be treated at par with conventional financial products. The Australian financial system, like most in other parts of the world, is based on the principle of payment and receipt of interest that disadvantages Shariah compliant financial products.

'One of the important aims of this mission is to initiate a dialogue between UAE's Islamic Financial firms and the Australian authorities so as to discuss changes that will allow Islamic Firms to be established in the country and to be treated on an equal footing with conventional financial firms,'
said Engineer Saed Al Awadi, Chief Executive Officer, EDC.

'Australia, with a Muslim population of about 400,000 people and growing at 20% per year, is an attractive market for UAE's Islamic Financial Firms. It is estimated that the annual household purchasing power of Australian Muslims is in excess of $3.3bn. Of course, Islamic Finance is not only limited to Muslims but is also popular to non-Muslims such as in the case of Dubai,' he added.

With a federation of six states and two territories, Australia levies state and federal taxes hence, Islamic financial firms have to overcome both of them. This means that for Shariah compliant products such as Murabaha mortgages tend to pay stamp duty, the most important tax at the state level, twice ie at the time of purchase and then when the loan is paid off. This adds to the borrower's burden and makes Shariah financial products uncompetitive.

However, some states in Australia such as Victoria have approved the State Taxation Act (Amendment) Act 2004, through the State Legislative Assembly and Legislative Council, which abolished double stamp duty on Islamic home finance. Other states are also considering making similar changes to their state taxation in order to accommodate Shariah compliant home finance.

Another example of double taxation is the Islamic trading of commodities requires a physical holding of the asset, which is very different from conventional commodity trading whereby the asset need not exist. Similarly, Shariah compliant deposits pay a profit rather than interest and this should not disadvantage the investor.

Al Awadi explained that, 'These challenges are being faced in most countries abroad. In 2005 and 2006, the UK government headed by the then Chancellor Gordon Brown introduced a legislation to incorporate Shariah compliant products into the UK financial services framework. Although, the UK does not mention Islamic finance it nevertheless used such contracts to base the changes in taxation. For example, the Finance Act 2005 under section 47 defines a purchase and resale contract which happens to correspond to a traditional murabaha contract. In a similar manner, a shariah compliant deposit is treated as a profit share return or in an Islamic context a Mudarabah contract.

'As a direct result of these changes, the UK now boasts two Islamic banks and a number of banks with Islamic windows. We hope to achieve similar modifications within the Australian financial system through our recent trade mission, eventually introducing Islamic financial products down under,' he concluded.

Kym Hewett, Austrade Senior Trade Commissioner in Dubai, commented, 'I am keen to see the positive experience the delegates on the initial mission translate into a great level of understanding on Islamic Financial products and deeper level of engagement between financial institutions in Australia and the UAE. Austrade's relationship with EDC continues to evolve since our Tradelink Partnership signing in 2008.'

From AME Info

KFH Wins 'Innovative Islamic Bank' Award

Kuwait Finance House (KFH), one of the largest and pioneering Islamic banks, has been named as the 'Most Innovative Islamic Bank' at this year's London Sukuk Summit.

"The 2009 London Sukuk Summit Islamic Finance Awards" were given recently at a gala dinner in Radisson Hotel, London.

The awards were in recognition of the achievements, progress and effort by individuals and institutions in the Islamic finance space. This year there were 24 award categories.

The KFH won another award when Ali Al-Ghannam, head of International Real Estate at KFH, clinched the 'Most Innovative Islamic Real Estate Financing Transaction' for the $1bn investment in the Multi-Million Dollar Iskandar City Development Project in Johor in Malaysia through its long-term Al-Nibras II Fund.

KFH is one of the few banks that weathered the worse effects of the global financial crisis and subsequent credit crunch especially in Kuwait and the GCC countries.

The bank, earlier this year, reported total profits of KD379.35 million ($1.3 billion) for 2008 with assets increasing to KD10.54 billion and deposits to KD 6.612 billion. The KFH Board had also recommended a 40 per cent cash dividend, and a 12 per cent stock dividend to shareholders for 2008.

KFH in recent months has also been spearheading a global expansion drive which is yet another sign that the Islamic finance market is bouncing back albeit a bit more cautious and selective.

In other awards category, this year's 'Islamic Banker of the Year Award' went to Ayman Sejiny, CEO of Unicorn Bank in Saudi Arabia.

Sejiny is recognized for his role in helping to structure and launch the three Sukuk issued by Dar Al-Arkan Real Estate Development Company (DAAR) to date and in helping to establish Unicorn Investment Bank in Bahrain. DAAR is a major shareholder in Unicorn Investment Bank.-

From Trade Arabia News

Integration Of Islamic Finance Should Be Facilitated Across Jurisdictions

The international integration of Islamic finance should be facilitated by the mutual recognition of financial standards and products across jurisdictions, said Bank Negara Governor, Tan Sri Dr Zeti Akhtar Aziz on Wednesday.

"It is one of the most important factors in sustaining the internationalisation of that sector," she said in her address at the Malaysia-United Kingdom (UK) Islamic Finance Forum held here.

She said that there had already been the progressive convergence of Shariah views and rulings, and the mutual recognition of financial standards and products across jurisdictions.

"As this continues to occur, it would be a major driver towards greater international financial integration," she added.

"This convergence and harmonisation is taking place with greater engagement among the regulators, practitioners and scholars in Islamic finance across jurisdictions," she highlighted.

The Lord Mayor of the City of London, Alderman Ian Luder also attended the one-day forum, organised in collaboration with the Commonwealth Business Council.

Luder was leading a business delegation representing UK-based financial and professional services firms to Malaysia, for three days from Tuesday.

According to Zeti, the UK and Malaysia had one of the oldest relationships which has been dynamic while evolving in the rapidly changing international environment.

"The bilateral trade in goods between both Malaysia and the UK only accounts for 1.4 percent of our total trade. But Malaysia's bilateral trade in services with Britain accounted for 6.3 percent of our trade in services in 2008.

"While the balance of trade is in our favour, the balance in the services account is in favour of the UK, amounting to RM2.3 billion," Zeti said.

Meanwhile, Zeti said Islamic financial assets comprised 17 percent of the total assets of the banking system in Malaysia and the daily average volume transacted in the Islamic money market was RM6 billion.

The sukuk market, which has been expanding at an average annual rate of 22 percent, now accounts for more than 50 percent of the Malaysian bond market, she stated.

From Bernama

Islamic Economic System Only Way Out

The recent global economic crisis was not caused just by sub-prime loans and credit derivative swaps but the more fundamental drawback of the system was behind the meltdown.

C.H. Abdul Raheem, a senior chartered accountant, prominent scholar in Islamic Economics and general manger Finance and Business Planning with Tasnee Company- Jubail, expressed these views at a lecture on “Global Economic Crisis- an Alternate View”.

The event was recently organized by Thanima- a socio-cultural organization of Indian expatriates in the Kingdom. Raheem, is also the founder of Alternative Investment Credit Limited (AICL) a non – banking financial institution, which is run by Islamic banking concepts, implemented in Kerala state in year 2001 with the approval of the Reserve Bank of India.

“Any economic system has to take care of different behavioral aspects of human beings, and moral part is very important, and systems based on material gains alone will not work in the long run,” Raheem said.

The economist said that Islamic economic system, which advocated a balanced combination of individual freedom and social responsibility backed by a strong moral base, was the only viable alternative.
“Islam has structural and compulsory wealth re-distribution mechanism such as Sadaqa, Zakat, Will, Waqf, law of inheritance etc. There were period in human history when these principles were successfully practiced and prominent economist lived in those time and wrote valuable books on Islamic economics and practice”, he said.

Raheem said that the two important symbol and icons of capitalist system – the interest-based banking and the speculative stock exchange system - had miserably failed.
“Capitalism, especially interest-based economy, has brought in huge disparities between the rich and the poor. The capitalist system is practically dead as the western governments has nationalized most of the banks and other industrial corporations, which is a big anti-thesis of capitalism,” he said, adding that implementing a non-interest banking and investment system, which is divine and an ethical procedure is the only practical solution to solve to cover up the present situation.

From Saudi Gazette

SLIBF Conference To Explore More Opportunities

The 1st Sri Lanka Islamic Banking and Finance (SLIBF)Conference, due to be held on July 20 and 21 2009, will see the key stakeholders in the IBF industry convening at a single forum for the very first time.
Aptly titled "Entering a New Era", the Conference will explore the opportunities that this very dynamic and fast growing industry offers.

The end of a three decade old conflict in Sri Lanka is expected to offer incumbents as well those poised to enter the industry opportunities that would extend beyond the shores of Sri Lanka. India, which is only just beginning to open its doors to an industry that is expected to touch the USD 1 Trillion mark worldwide by the year 2010 and growing at a phenomenal pace of between 15-20%, would be of special interest to players that are seeking to leverage off the knowledge and experience that we have gained over the past decade or so. This is a special area of interest that would be dealt with intensively during the two-day event.

The Conference will also seek to discuss the challenges faced by the industry, including Regulatory constraints. Participants will be able to hear very eminent speakers and experts from the legal, auditing and regulatory field discussing this area at some length. The recent granting of a Provisional license for an Islamic bank is indicative of the proactive stance that the regulators have taken in dealing with this very exciting industry.

A panel of speakers that is expected to exceed 25 will not be limited to Sri Lanka either. Speakers from as far away as Mauritius, South Africa, the USA and the United Kingdom, just to name a few, will share their experiences of the growth of IBF in their respective countries. Developments in the Gulf region, which has largely been responsible for the interest shown by nations that straddle the globe, will also be discussed by experts from the region.

This will not be limited to particular sectors either with experts in Marketing, Consulting and Fund Management discussing their particular facets of IBF in great detail.

The programme is expected to demystify what many in the financial sector are still coming to terms with. An industry which does not discriminate on religion or race but still perceived by some as being the exclusive domain of "Muslims" will be dissected by the delegates in the fervent hope that such notions will not linger in the minds of the public at large. Islamic bankers will also be joined by their counterparts in conventional banking so as to ensure that the delegates are also given different perspectives of Islamic banking.

At the end of the event, the delegates should have a much greater understanding of the intricacies of an industry that still remains an enigma to some. More details could be obtained from the conference organisers, UTO EduConsult Pvt. Ltd. on 0773 501246 or rozana@utoeduconsult.com.

The Sunday Times

Memorandum Signed On Training Programmes In Islamic Finance

MENATSA Training & Development has announced the signing of a memorandum of understanding (MoU) with First Global Knowledge Center (FGKC) to offer a range of specialised training programmes in Islamic finance to institutions and individuals in the GCC.

The MoU was signed by managing director of MENATSA T&D, Damian Brown, and strategy adviser to First Global Group, MHM Faizer.
A spokesperson explained that the Islamic Finance Qualification (IFQ) that participants will earn is of an internationally recognised standard awarded by the Securities and Investment Institute.

Brown said: “Over the past several years, MENATSA T&D has successfully developed leaders in various industry disciplines. We feel honored to offer professional education to Qatar-based institutions and their employees through this memorandum, which reflects our commitment to forge strategic alliances with top global performers.”

“We believe FGKC’s programs will enable professionals with differing backgrounds and working in various departments to partake in one of the fastest growing sectors in the global financial industry,” he added.

We've Lost Icelandic banks, Now Lets Try The Islamic Banks

GK Partners is pleased to announce the first conference as part of its Access to Islamic Finance (A2IF) programme, which focuses on extending and enhancing the size and accessibility of Islamic finance in the United Kingdom.

The first conference of the series, which takes place at the British Library on Monday 13 July 2009, focuses on how Islamic finance investment in British businesses can be improved and will feature presentations from industry experts and chief executives of major public and private sector bodies.

“In the past year, the world has witnessed cataclysmic turmoil in global finance, with severe impacts on the fortunes of countries, companies, charities and individuals. The reckless financial speculation and excessive risk-taking that led to the unsustainable accumulation of phenomenal volumes of toxic assets are against the basic principles and practices of Islamic finance. The unfortunate reality of the credit crunch, sub-prime mortgages and economic recession, has created renewed interest in ethical and socially responsible financial practices.” says Gibril Faal, Director of GK Partners and Convenor of the conference.

The conference has received a ringing endorsement from the government. Speaking on 6 July 2009, Rt. Hon. Lord Mandelson, First Secretary of State, Lord President of the Council
Secretary of State for Business, Innovation & Skills said “I welcome this conference. In particular, the aim of increasing and optimising access to Islamic financial products through the strengthening of partnerships between the financial, business and enterprise (including social enterprise) and voluntary & charitable sectors. It will be useful in furthering understanding of the contribution Islamic finance can make to our economic and social communities at all levels.”

To attain the untapped financial and socio-economic benefits of Islamic finance, a new proactive approach is required. Apart from further facilitative regulatory reform, there is a need for focused promotion and awareness-raising amongst the diverse potential clients, especially from non-Muslim communities and unengaged corporate, SME and social economy sectors.

“Islamic finance is available to Muslims and non-Muslims.The ‘Access to Islamic Finance’ conference will help advisers, practitioners and policymakers understand the technicalities, accessibility and benefits of Islamic finance.” says Faal.

The Access to Islamic Finance (A2IF) programme is a comprehensive and inclusive approach,
based on new forms of synergistic cross-sectoral partnerships. The practical business benefits and ethical virtues of Islamic finance are relevant and consistent with the values and financing needs of commercial and social enterprises from a wide range of sectors.

Through the A2IF programme, we seek to increase and optimise actual access to Islamic financial products and services by creating and strengthening purposeful partnerships with, amongst others: corporate and SME clients and their trade associations; public sector asset developers and managers; ethical and social enterprise clients and their trade associations; regeneration and community investment companies and agencies; charity investment and trust fund managers; financial policy and regulatory bodies; social integration and community cohesion agencies.

From Global Arab Network

Britain Seeks Malaysian Expertise

Britain welcomes the liberalisation of Malaysia’s financial services sector, in particular, the areas concerning Islamic finance.

The Lord Mayor of London Alderman Ian Luder said Britain and Malaysia had long established links in the field of Islamic finance.

“We are particularly keen to follow this up by working with Malaysia in areas such as professional exchanges between Islamic finance staff, experts and student and joint education programmes,” he said in his speech at the Malaysia-UK Islamic Finance Forum here on Wednesday.

The liberalisation measures include the issuance of five new legal licences for international law firms in Islamic finance.

Bank Negara has also raised foreign ownership limits of local Islamic banks, investment banks and insurance companies to 70% from 49%.

“We also believe we should work together on policy exchanges and mutual recognition of standards, and we are very keen to work with your expertise in developing the market,” Luder said.

He said syariah-compliant finance was a global growth area, with Muslims making up a fifth of the world population.

“Indeed, Britian has become the leading Western country for syariah-compliant by assets and London has been providing syariah-compliant financial services for 30 years,” he said.

He added that Malaysia had an “even longer” history in syariah-compliant finance.

Sharia Index For Thai Stock Market

Global index provider FTSE International and the Stock Exchange of Thailand (SET) have teamed up to create the FTSE SET Sharia Index (FSTSH) as a basis for index-linked products.

The FSTSH, which made its official debut on the SET on May 25, opens up the Thai capital market to investors looking for Islamic investment products. The index includes a wide range of products including exchange traded funds, funds and other index-linked products.

The FSTSH is the seventh index in the FTSE SET Index series, which is designed to measure the performance of the Thai capital market and serves as a basis for index-linked products. The first six indexes in the series are segmented by market capitalisation.

The launch of the FSTSH addresses the expanding sharia investment market.

Moody's says Islamic finance has been growing at an impressive rate of 15 per cent per year for the past three years. This is a result of the economic strength of Islamic countries and the promotion of Islamic finance products in many countries such as Indonesia, Malaysia and Singapore. In Thailand, four Islamic funds have been established to date.

Securities to be included in FSTSH must pass two Islamic finance screenings. In a business-activities screening, the issuers of the securities must be consistent with sharia law. This means they must not be involved in conventional finance (non-Islamic banking, finance and insurance), alcohol, pork-related products and non-halal food production, packaging and processing or any other activities related to pork and non-halal food, entertainment (casinos, gambling, cinema, music, pornography and hotels), tobacco or weapons, arms and defence manufacturing.

In a financial-ratios screening, issuers of securities must have debts amounting to less than 33 per cent of total assets; cash and interest-bearing items must represent less than 33 per cent of total assets; accounts receivables and cash must represent less than 50 per cent of total assets; and total income from interest and non sharia-compliant activities must not exceed 5 per cent of total revenue.

The strict enforcement of the above screenings assures investors of the stability of the issuers, thus enhancing investor confidence in the FSTSH. While catering to domestic and international investors looking to invest in a transparent and sharia-compliant manner, the FSTSH is aimed at encouraging issuers to create structured investment products tailored to the global Islamic market.

Sukuk Defaults Seen Rising As Global Slowdown Weighs

A default on Islamic bonds by Kuwaiti firm Investment Dar is just the tip of the iceberg, with more failures expected as the weak global economy hits issuers, industry experts warned on Wednesday.

Unlike traditional banking, the $1 trillion Islamic finance industry has just begun to feel the chill of the global downturn, with practitioners and analysts trying to assess the extent of the fallout on the sector.

Investment Dar said in May it had defaulted on a $100 million Islamic bond, the first such default for a major, public Islamic instrument in the Gulf.

Troubled Saudi conglomerates Saad Group and Ahmad Hamad Algosaibi & Bros, are restructuring their debt, triggering concerns of a spillover effect on the Islamic finance industry.

Neale Downes, a Bahrain-based lawyer at Trowers & Hamlins, estimated that 5-8 percent of Islamic bonds, or sukuk, in the market are susceptible to default as many were raised for real estate projects which have been hurt by the slowdown.

"A lot of the issuers are ultimately really sovereign or quasi sovereign so they will probably be able to draw on government support either directly or behind the scenes," Downes said on the sidelines of an Islamic banking conference in Kuala Lumpur.

The value of sukuk issued in 2008 dropped by more than 56 percent compared with 2007 to $14.9 billion, due mainly to the global credit crunch, according to Standard & Poor's. It expects the market to recover in the second half of 2009 or early 2010.

"The longer the global recession goes, the higher the likelihood of default," said Mohammad Faiz Azmi, global Islamic finance leader at PricewaterhouseCoopers.

"People are now using reserves or savings to try to keep themselves going. How long can that last? So far what we've seen is the tip of the iceberg."

From Reuters

Scholars Juggle Faith, Commerce As Sharia Finance Grows

Religion may be the bedrock of Islamic finance but influential sharia adviser Mohd Daud Bakar says the bottom line drives the industry.

"Commercial gains are very important," said Daud, who is listed by consultants Funds@Work as among the world's most active scholars, sitting on 22 sharia boards.

"We are not a charitable organisation. Shareholders are looking for ROE (return on equity) at the end of the day."

As Islamic banking tries to reach wider markets, sharia scholars such as Daud are weighing more than just Islamic tenets when they rule on the validity of financial instruments, reflecting commerce's growing role in the $1 trillion industry.

The desire to win market share, the level of expertise of individual scholars and the scarcity of scholars may all shape Islamic financial rulings and the future of the sector.

Some sharia advisers say it is not always easy to balance religion and business as they grapple with modern funding techniques that sometimes challenge Islam's basic beliefs.

Once at odds with the sharia's ban on gambling and excessive speculation, contentious conventional practices such as hedge funds, short-selling and derivatives are slowly finding a place in Islamic finance.

Tasked with applying Islamic law and global financial practices, sharia scholars are powerful gatekeepers, whose approvals are necessary before a product can be marketed as an Islamic instrument.

There are no official figures but some practitioners say there are around 200 sharia scholars worldwide.

Some sharia advisers say the drive to grow the industry influences their decisions on whether certain products meet the sharia's standards.

Ahmad Hidayat Buang, who advises Islamic insurer Takaful Ikhlas, says Malaysian scholars try to meet companies' business needs, reflecting a popular view that the Southeast Asian country is more liberal in its sharia interpretation than the Gulf.

"We see what happens, then we try to adopt the more flexible view of sharia in order that our product could be introduced," said Hidayat.

"It's not necessarily a question of sharia. When you decide on the matter many aspects have to be taken into consideration."

STAR ENDORSEMENTS?

Sharia scholars are not formally accredited by a single authority so their qualifications can vary vastly, raising questions about the ability of some to understand complex financial structures, especially if they are pressed for time.

With newer financial firms, "they know that the sharia board can be very powerful so they bring in very junior scholars and give them very little information or not enough information within a very limited period of time," said Megat Hizaini Hassan, a Kuala Lumpur-based Islamic banking lawyer.

"So these scholars may be under pressure to give approvals or certifications."

A select group of sharia scholars are highly sought after as the bigger a scholar's name, the greater the drawing power of the product he approves. The industry's most influential figures can make or break markets with their decrees.

Bankers say Islamic bond issuance fell sharply last year after Sheikh Muhammad Taqi Usmani, chairman of the board of scholars at influential industry body AAOIFI, declared about 85 percent of sukuk were un-Islamic.

Among the most active scholars are Bahrain's Sheikh Nizam Mohammad Saleh Yacouby, who sits on 46 advisory boards, and Syria's Abdul Sattar Kareem Abu Ghuddah, who is on 45 boards, according to Funds@Work.

This has raised concerns about whether some scholars have enough time to thoroughly vet contracts, some of which consist of reams of documents detailing complex financial instruments.

There are also concerns about the possibility of Islamic financial rulings being affected by conflicts of interest where a scholar sits on various boards.

"Sharia board conflicts of interest are part of the practice of modern economic institutions," said Mousa Isa, a sharia adviser in Saudi Arabia. "There should be transparency."

Other contentious issues include giving scholars incentive-based payments linked to the success of products they approve. This echoes complaints about the hefty bonuses of some Wall Street bankers which analysts say fuelled excessive speculation and helped trigger the recent credit crisis.

Ayashi Faddad, sharia adviser at Islamic Development Bank, said scholars' fees should be approved directly by shareholders, not management, to reduce potential for conflicts of interest.

But scholars say some lines cannot be crossed. In cases where there is no room for Islam to accommodate a structure or product, Daud said "the commercial must adjust to the sharia".

From Reuters

Turkey Should Think About Islamic banking

While the global financial system still has not found a departure point for itself, alternative financial structures seem here to stay, says a renowned expert on Islamic banking.

Lord Mohamed Iltaf Sheikh, the founder of the Conservative Muslim Forum who visited Sunday's Zaman, said that the Islamic banking system, which is based on religious ethics, continues to generate business in many countries, particularly in the Middle East.

Lord Sheikh has set up an advisory and consultancy company to advise interested parties on Islamic banking and Islamic insurance. Sheikh observes that Muslim communities in Europe already constitute a significant economic realm not only by dint of their population but also because of their cultural assets. For this reason, he gives great importance to establishing Islamic banks in Europe based on principles such as transparency and neutrality. He states that in the United Kingdom the Islamic way of doing business has been bolstered as a government policy. The UK is the eighth largest country in the number of Islamic finance and insurance companies it hosts. The British government has already adopted several concessions meant to encourage Islamic banking not only for Muslims but also for the general public. Lord Sheikh pointed out that anybody who acquires a property using Islamic banking principles is exempted from the stamp tax while signing over the property. Lord Sheikh's vision of Islamic banking is not only about elimination of “riba,” or usury, but also about cooperating and investing in socially and environmentally responsible projects.

Though Islamic banking is the fastest growing financial market in the world, with 30 percent annual growth in banking and 20 percent in the insurance sector, Sheikh believes that Islamic banking will not become a substitute for the conventional banking system. “It is due to the lack of capacity,” he says. “Islamic banks cannot afford to handle huge transactions, for the time being.” But this could change in the near future, given the massive growth in the sector. Sheikh noted the fact that the Vatican has praised the Islamic banking system as an alternative to the conventional understanding of the financial markets. Sheikh thinks that with its population of 70 million Turkey should encourage and invest in Islamic banking, more so than any other country in the region.

Lord Sheikh is not only lobbying for Islamic banking within the capitalist West, but also among Muslim communities themselves. In the realm of insurance, Muslim communities are fairly reluctant to purchase a life or health insurance policy because of a religious belief in destiny. Sheikh has been trying to educate Muslim communities about the kind of input human will should provide for divine destiny to take care of human beings' needs. He says that their professional advice and expertise in Muslim countries is important for spreading the idea of insurance in those countries.

Thanks to the development of Islamic economies throughout the world, the term “Islamic banking” has gained significant meaning in today's financial system. Islamic banking activity connotes a typical financial system that operates in harmony with Islamic principles and modes of life. For example, the payment of fees for the renting of money, or “riba,” is strictly prohibited according to Islamic principles. Despite many commonalities shared with conventional banking system, Islamic finance is based on equal sharing of profits and alternatives to riba.

Islamic banks have grown recently in the Muslim world but remain a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably the Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of riba.

Lord Sheikh, chairman of the Conservative Ethnic Diversity Council, started his career by joining Sun Alliance Insurance Company in London. Sheikh has been the president of the Insurance Institute of Croydon and a member of the National Council of the Chartered Insurance Institute. He was regional chairman of the British Insurance Brokers Association.

From Sunday's Zaman

Islamic Bank Expands Lending In South

The state-owned Islamic Bank (IBank) has set target to expand its lending portfolio by another 20 billion baht in deep South this year, bank president Theerasak Suwannayos said.

The loan expansion is inline with the government’s policy to rehabilitate the economy and to curb the unrest in the five southern border provinces of Satun, Songkhla, Yala, Pattani and Narathiwat, Mr Theerasak said.

However, the bank president admitted that his bank currently has only four billion baht liquidity in hands and he had discussed with Finance Minister Korn Chatikavanij to ask for an approval for the bank’s plan to raise capital by six billion baht.

After the capital raising, the bank will have capacity to grant as many as 60 billion baht in new loans.

Islamic Finance Eases Scots' Home Crisis

"I would be happy to sit down and talk to them about their ideas," says Minister Neil.
The government in Scotland is contemplating an innovative scheme on using Shari`ah-compliant investments to address the housing dilemmas Scots are facing in the ongoing severe recession.

"I would be happy to sit down and talk to them about their ideas," Housing Minister Alex Neil told the Sunday Times on July 12.

Officials from the Islamic Finance Council (IFC), a Scotland-based body representing Islamic financial interests worldwide, will discuss with Neil how Islamic finance could be used to help plug the funding gap for new social housing in the European country.

Under an IFC plan, Shari`ah-compliant finance can fund new shared-ownership homes with backing from the government.

But unlike those with conventional mortgages, householders would be largely insulated from negative equity.

If the occupier had a 10% stake in a property worth £200,000 that later fell in value to £150,000 and wanted to sell, the financier with a 90% stake would not be able to recover the £180,000 they had put in initially.

Instead, they would have to settle for 90% of the sale price, recovering only £135,000, and the householder would avoid having to cover the £45,000 shortfall.

As for Islamic financiers, if and when property prices rise, they could qualify for a higher share of the profits when homes are sold, gaining not only 90% of the final value but an extra bonus from the proceeds.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Transactions by Islamic banks must be backed by real assets -- not shady repackaged subprime mortgages.

Attractive

IFC officials believe the scheme would be the answer to housing problems in Scotland as it would lead to a rise in the availability of affordable homes.

"The ability to avoid negative equity is a very powerful message that would resonate for many in the middle classes who can’t afford to be stuck in such an awkward situation," Omar Shaikh, of the IFC, told The Times.

Islamic finance partnership would also save the Scottish government millions of pounds at a time when its budget is under unprecedented pressure because of the recession.

Shaikh affirms that Islamic finance products provide a wide range of investment opportunities that would prove attractive to ethical investors.

"It could also be a very attractive product in the current climate for people of all faiths and none."

He asserted that the Islamic finance industry, globally, has become "very energetic" recently as it keeps growing at a rapid pace.

"There is absolutely an appetite for this."

Islamic finance is one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

Launch of Yasaar Human Capital

The launch of Yasaar Human Capital, based in the Dubai International Financial Centre, is further evidence that the UAE economy is back on a path to growth. Yasaar Human Capital is a specialist executive search and human resources firm working within the Islamic finance sphere and has been established to capitalise on the growth and strength of the industry.

The team behind Yasaar Human Capital focuses on executive search, talent management, advisory, and leadership within the Islamic finance domain both within mature and immature markets. Being headquartered in Dubai is a testament to the leadership role that the emirate is taking in the development of the Islamic finance industry.

Managing director of Yasaar Human Capital, Fuwad Beg, said, 'The Islamic finance industry has reached a level of maturity and sophistication which means that it requires leaders with specialist skills and knowledge. The goal of Yasaar Human Capital is to foster and nurture that talent and ensure that the future growth of the industry is both focused and strong. We do that by placing the best people within the best roles'.

Chief executive of Yasaar Limited, Majid Dawood, said, 'The launch of Yasaar Human Capital is the next step in strengthening and building the Yasaar brand as a leader in Islamic finance. Yasaar Limited is already a leading Shariah consultancy and Yasaar Media is on its way to becoming a leader in the Islamic finance media space. Yasaar Human Capital will be a great help in lifting the quality of talent in the industry'.

This year marks a critical turning point in the history of the Yasaar Group as the company branches out into different areas of the Islamic finance arena through offering a variety of market-leading products and services.

Yasaar Human Capital is headquartered in the Dubai International Financial Centre and provides functional expertise in executive search, human resource advisory, talent management and leadership development to multi-national, mid-cap and start-up companies within the Middle East, Asia, and Europe.

Islamic Bonds: Easy Way To Raise Cash

Its newest “social and ethical” banking product: the “Sukuk”--Islamic bonds--proposes an alternative for Government of issuing new debt on potentially cheaper and less risky terms.

“The scope for Government issuing the Sukuk, known as Sovereign Sukuk, is clearly enormous. It provides the State with the possibility of issuing new debt on potentially cheaper and less risky terms than those applying to conventional bonds,” says Dr Muniruddeen Lallmahamood, Certified Sharia Advisor and Auditor.

“Sukuk is a funding alternative that can enable Government and private entrepreneurs to raise cash when tax collection is no longer an option or that traditional investors get scarce,” he says.

Sukuk, it seems, has emerged as the latest investment trend around the world. According to Mckinsey's data, Sukuk issuances were estimated to have generated some US $ 60 billion at October 2008 from a mere US$0.3 billion in 2000.

Dr Lallmahamood says numerous advantages will emerge from the issue of such Islamic bonds in Mauritius. He says it will allow a diversifying of our traditional investment base attracting investors from the gulf and the Middle East and at the same time offering an alternative investment instrument both for domestic and international investors seeking sharia compliant instruments and social investments.

“It is a fact that those who buy and sell conventional bonds are rarely interested in what is actually being financed through the bond issue. With the Sukuk, the buyer can monitor the purpose for which he buys or sells the bonds, and may refrain from doing so if the bond issue involves the production or sale of alcohol, pornography or tobacco, all against
the Sharia,” he says.

He adds: “It will also allow the widening of the sharia based financial products in Mauritius, while diversifying financing sources in order to increase the flexibility of the government's long term funding strategy, allowing the state to be less dependent on institutions such as the International Monetary Fund, the World Bank or the African Development Bank.”

There presently exist 14 classes of Sukuk according to the Accounting and Auditing for Organizations of Islamic Finance Institutions (AAOIFI). Sukuk could be used for various economic and trading purposes, including raising funds for land cultivation or even irrigation of land. However the most common is the Sukuk ljara concerned with real estate assets.

Issuing Sukuk outside an islamic jurisdiction will raise a variety of legal and practical issues, says Dr Lallmahamood. “A review of the current regulatory framework will be essential in order to make the financial legislation sharia compliant. We need to review laws regarding bankcrupcy, tax, trust, corporations, securities regulations, real property.

Such amendments will allow Mauritius to leverage on its competitive financial sectors. Another hurdle for the moment is the absence of a supervisory sharia board. Moreover, projects that are typically local currency generators for utilities, toll roads and dams works have difficulties in attracting long term foreign capital because of the inherent currency risk of depreciation. However a solution to this problem could be to issue Sukuk in stable currencies such as the dollar or the euro,” Dr Lallmahamood says.

At a time where builders, developers and manufacturers as well as Government are looking for investments, Dr Lallmahamood says the Sukuk could be an interesting and useful alternative to classic bonds and investment sources.

CIMB To Manage Islamic Infrastructure Fund

CIMB Standard, Asian private equity and infrastructure fund specialists, have been appointed manager and advisor to a new $500 million Islamic Infrastructure Fund, jointly sponsored by the Asian Development Bank (ADB) and the Islamic Development Bank (IDB).

A Statement issued by the firm noted that, the Islamic Infrastructure Fund (IIF), Asia's first major multi-country Islamic infrastructure fund, will make Shariah-compliant equity investments in emerging countries in Asia with significant infrastructure opportunities to meet their developmental needs.

Amongst such countries are Azerbaijan, Bangladesh, Indonesia, Kazakhstan, Malaysia, Pakistan and other member countries common to both ADB and IDB. The IIF will receive an initial commitment of $250 million from the joint Sponsors - ADB and IDB. The IIF will also help bridge the gap between Islamic investors who require Shariah-compliant products and project sponsors who need capital to build crucial infrastructure. The IIF will adopt a unique investment strategy and seeks to achieve a superior risk-return proposition for investors.

"As Asia seeks to claim a greater share of the world economic pie, heavy emphasis will be placed on its infrastructure development to facilitate sustainable economic growth. With demand for such investments estimated to exceed $8 trillion in the coming decade, we are very confident about the appetite for this new fund" said CIMB Group Chief Executive, Dato' Sri Nazir Razak at the launch of the fund. He added "The majority of private equity funds are focused on large markets such as China and India creating a gap which we intend to fulfil by leveraging on our expertise as a focused regional player."

Nicholas Hamilton, Standard Bank's Chief Executive of the Asia Pacific region said "Today's launch of the IIF marks a significant milestone in our partnership with CIMB Group, which began in 2006, and is now a leading investor in Malaysia and Southeast Asia. As a recognised specialist emerging market bank, we are able to leverage on our global network to ensure long-term sustainability. Together with CIMB Group's vast network and experience in Islamic banking, we firmly believe in the success of our joint venture."

ADB's Private Sector Operations Department, Director of Capital Markets & Financial Sector Division, Robert van Zweiten, said, "Infrastructure in many of the countries that are members of both ADB and IDB is less developed than the Asian average. We expect the fund to help channel investments into critical infrastructure projects in the region which will, in turn, improve the prospects for economic growth and poverty reduction."

Meanwhile, IDB's Director of Country Operations Department (Asia) Dr. Walid Abdelwahab, said that IDB expects the IIF to attract capital from the Islamic world, notably the Middle East. "There is still a substantial amount of wealth in that region and investors there are increasingly interested in putting their money to work in a way that complies with their faith," he said.

Al-Amanah To Study Islamic Finance

AL-AMANAH Islamic Investment Bank of the Philippines will be sending some of its employees for training in Malaysia in its bid to acquire the best practices in Islamic finance and to turn around its finances.

"We are sending a group of 15 employees to Malaysia next week to study Islamic banking because we want the bank to give special focus on this kind of banking system," Armando O. Samia, newly elected interim chairman and chief executive officer of Al-Amanah, said in a statement.

He also said the bank is currently exploring possible tie-ups with other Islamic banks that would allow it to learn the best practices in Islamic finance.

Malaysia is the world’s largest Islamic finance market. It is the largest issuer of Islamic bonds called sukuk and has built up expertise in Islamic fund management and insurance.

According to auditing firm PriceWaterhouseCoopers, Malaysia’s Islamic financial system is regarded as one of the most progressive in the world.

UAE Residents Become Saving-Savvy

The global financial meltdown has triggered enormous repercussions in all industries as companies struggle to break even and individuals are left neck-deep in debt.

Investors flocked to the UAE, plunging money into various assets and investment schemes designed to pay out high returns.

However, this is all changing. Jacques Bernard, Chief Investment Officer, National Bonds, talked to Gulf News about the increase of savings rates and why it's time for the transparency issue to stop casting its shadow over the Gulf.

Gulf News: What about future investment plans for National Bonds? Do you think you might move away from say, real estate and move into other sectors that you perhaps haven't considered before?

Jacques Bernard:Yes, so far the sectors we've considered and invested in are education, retail - retail being food - Islamic insurance and we'll continue to look at opportunities in healthcare because I think those are critical.

The bulk of our investments are in the UAE and we have a mission to give back to the community, basically to develop the UAE and where we feel there's a need.

We'll try to fill the gap if the numbers actually do come together. And also it makes a lot of economic sense if there's a need, it's usually a very profitable kind of venture.

Dubai has admitted that the quality of healthcare facilities in the UAE is quite low compared with other regions, so it seems the potential market for healthcare is huge.

Yes, there's a huge market but there are so many sectors and sub-sectors in healthcare that you need to take a look at what your investment entails. Some are very speciality-driven, some are very primary healthcare which is more what we are looking at.

Primary healthcare is the mother taking her child...so the basic needs. And I think as well, which is interesting now, healthcare is more decentralised, especially in Dubai. You have this Healthcare City which is more of a speciality-driven centre as opposed to a primary healthcare being closer to their residents.

And you're even starting to see hospitals in Dubai such as a Saudi-German hospital which is a good thing, as it has the emergency units and so forth.

And so healthcare is something we're looking at but again we'll need to see the numbers and see if the numbers are valid.

Is it possible to put a figure on the future investments that you're starting?

Not really. The thing is the most predictable investments that we have are short-term investments.

Basically we invest bulk in Saudi deposits, Sharia instruments, murabaha, that's kind of predictable but private equity, it could come about or it could not come about.

You see a lot of private equity firms raising a lot of money and then actually having trouble investing it because there's a lot of possibilities and few winners so I wouldn't be able to give any number as to our investment in healthcare. It could be significant or it could be nothing.

Whereas now you are very focused on the UAE, do you have plans to go abroad?

In terms of investment, not really. We are UAE-based, a lot of opportunities still exist in the UAE especially, I would call it the yield and the income side of the business, which is sukuk which is also the money market returns. Money market returns in the UAE are much higher than those of the US.

We don't rule out going abroad but not in the immediate future.

Considering the financial situation, do you think people will be more likely to invest in more secure assets like bonds or even gold as opposed to other assets, such as real estate which they can lose out on?

Yes, definitely. I think we distinguish between investments and savings and I think people are coming about in terms of understanding the difference now.

It's not an investment if you actually are using the house and living in it, that could almost be considered a saving scheme because obviously should the market shrink, you increase your capital and avoid basically paying rent.

And it's not just in the UAE that saving schemes are popular.

There is a worldwide soaring of saving rates and what's interesting is the countries that were most affected by the crisis are those where the savings rates are shooting through the roof.

To name two, one is Spain where the savings rate is going to be reaching 30 per cent in 2010 because of the real estate crisis. Of all the European countries, they were, with the UK, the ones that suffered the most.

And if you actually take a look at the US they went from a savings rate of zero and they're predicted to actually obtain five. Now five is still low but five is fivefold. So I think the savings is something that is on the rise, it's global and we see it in the UAE.

So how does the UAE rate then in terms of saving? Do people generally save here or is it something that will grow?

Well it's very obvious that in the past, everything was geared at spending and investing. And now we've reversed that culture.

But there's no numbers published on savings rates for the UAE. But what we're witnessing clearly is that the trend is towards savings and hopefully that will continue.

Will people move away from real estate and into say, gold and savings?

Well I would still consider gold not as a savings. It's an investment that is so bearish that by definition if things do recover you might actually see a big drop in gold price so I don't consider savings in gold to be equal.

It's been predicted that there's going to be an exodus of expats from the country this summer. Do you believe this and will it affect business?

Well our business is different. We do of course have expat clients but our Emirati clients is overwhelming in terms of proportion. Now it's hard to comment on expat flow as we don't know, people are coming in, people are going out, people coming in with visas.

We're in a different situation than most institutions because you have to bear in mind we're a savings institution. We're not a bank with credit cards, liabilities. So I can't say so far we'll be affected if the event has occurred.
Fact file

hat is National bonds? A private joint stock shareholding company, National Bonds Corporation was launched in March 2006.

The Government of Dubai holds a 50 per cent ownership in the company with each of its shareholders, comprising Dubai Bank, Dubai Holding and Emaar Properties, holding 16.6 per cent ownership respectively.

National Bonds Corporation is Sharia compliant, with a dedicated Sharia Board to oversee all financial aspects, including product-related operations and investments.

In December 2006, National Bonds Corporation launched property development projects - "Skycourts," the elegant and affordable freehold residential community in the heart of Dubailand, and Flamingo Creek in the Lagoons.

In 2007, National Bonds Corporation launched National Properties, a wholly-owned, full-service real estate subsidiary that offers distinctive homes and lifestyle options to the multinational UAE community.

National Bonds Corporation has invested in Taaleem PJSC, an initiative aimed at raising quality standards in the region's education sector.

It is the new brand for Beacon Education that aims to inspire young minds, and help them identify and develop their passions and talents.

National Bonds Corporation has also invested in BCS, a Strata Management company specialising in property management, Souk Extra the retail community shopping chain, and in M'sharie, the private equity arm of Dubai Investments.

National Bonds is the National Saving Scheme of the UAE that provides UAE nationals, residents and non-residents over the age of 16 with a credible, safe and Sharia-compliant savings opportunity.

Minors can also own National Bonds, provided the bonds are purchased by the parent/guardian. Each bond costs Dh10, with a minimum purchase of Dh100; National Bonds can be purchased from nearly 500 outlets across the UAE, including exchange houses and banks.

These include Emirates Islamic Bank, Dubai Islamic Bank, Sharjah Islamic Bank, Dubai Bank , Al Hilal bank and exchange houses: Al Ansari, Al Fardan, Al Ghurair, Redha Al Ansari, Al Rostamani International, UAE, Wall Street, Lari, Orient, Al Razouki International, Sharaf and Habib Exchange Company.

National Bonds can also be purchased online at www.nationalbonds.ae or call toll free 800-BONDS (26637). National Bonds awards 101 prizes every week, of amounts ranging between Dh1 million, Dh10,000, Dh5,000, Dh1,000 and Dh500.

This amounts to an impressive Dh1,155,000 in total prize money awarded each week. The programme is based on the Islamic principle of Mudaraba, whereby at the end of the financial year 20 per cent of the profits made by the National Bonds Corporation will be distributed among bondholders.


From Gulf News

National Bonds Answers Your Questions

So I did a post a while back about National Bonds, the UAE's savings-slash-raffle scheme, moving to weekly drawings (they had previously done monthly draws). A lot of readers had questions, so I posed them, along with a few of my own, to the folks who run the place. Here is what they had to say:

One reader of the blog asked the following question: "I am considering investing in National Bonds as are other members of my family. Is it a wise choice considering Dar's $100M sukuk default? How will this affect certificate holders? Will the yearly interest rate also be affected?"

National Bonds Corporation PJSC provides a safe, transparent and a Sharia compliant savings opportunity that is preferred by many people across the UAE Nationals and Expatriates alike - with over 500,000 bondholders across 91 nationalities now saving with us and by giving them a chance to win 101 weekly prizes, the top prize being AED 1 million and the remaining prizes from AED 500 to AED 10,000.

While National Bonds cannot comment directly on the particular situation involving Investment Dar we can disclose that we have no ties or investments with Investment Dar. We can assure you that our investments are sufficiently diverse, such that no single event or company will significantly affect the profit rate we return to our bondholders. Our investment strategy is designed to mitigate risk. While sukuk is part of this, we also invest in a broad range of other short-term Sharia-compliant assets. Our bondholders' money is also invested in longer-term infrastructure and income related projects.

Because National Bonds manages people's savings, we are very cautious with our investments. To ensure we invest safe and sound, we have a dedicated, qualified investment team headed by a highly qualified Chief Investment Officer with 25-years international experience in the industry with leading financial institutions. He reports regularly to NBC's investment committee, which monitors the investments portfolio reporting itself to NBC's Board of Directors.

National Bonds posted a handsome profit rate last year: over 7 per cent. At this juncture in the middle of the year, how are things going? Are you anticipating that you'll be able to match or exceed the profit rate of last year?

This is true - National Bonds returned an impressive profit rate of over 7 percent last year and over 6 percent in 2007 vs. comparable savings schemes. Although it's is not possible to determine in advance this year's profit rate, the first half has been positive for National Bonds and we foresee to remain as competitive in 2009 as we have been in the past.

What kind of investments or what sectors is National Bonds investing in this year? Are you changing your investment focus now that it appears the UAE's economy might be on a rebound? Are you looking to take a mostly aggressive or conservative stance?

This year we are adding to our already diverse investment portfolio and concentrating on lower-risk investments. We continue to invest the bulk of our assets in a mix of short-term assets including sukuks and other Shariah-compliant products.

Because we are dealing with people's savings, we need to be very prudent about how we invest. Our investment choices do tend to be more conservative and we focus on assets that are aligned with our commitment to provide a safe, secure and Sharia-compliant way for our bondholders to save.

So far it appears that National Bonds has invested mainly in the UAE - Souq Extra, BCS and other National Bonds initiatives are all based here. How important are investments outside of the UAE, either in the GCC or elsewhere, to your overall portfolio?

National Bonds Corporation PSJC firmly believes that investing back in the UAE with a community driven approach by making a difference in people's everyday lives.

Our investments are diverse from property development projects, to educational like Taaleem PJSC, which is an initiative aimed at raising quality standards in the region's education sector, BCS - providing strata management services, Souq Extra - Retail Community Shopping Chain and in private equity firms like M'sharie, the private equity arm of Dubai Investments.

We will always look at opportunities to expand National Bonds Corporation (PJSC) to reach more countries within the GCC and further abroad with our objective of serving the bondholder's best interest regardless of location.

You announced recently that you have moved to weekly draws (the draws had been monthly before). Why did you decide to do this, and have you seen sales jump as a result?

National Bonds Corporation PJSC aims to position itself as "everyone's favorite place to save & invest". As such, the draw format change is aimed to encourage more people to save and get rewarded on their savings. National Bonds hopes to fulfil the aspirations of many more bondholders and see even more "Millionaires" in the National Bonds family. This year, we are committed to increase the number of savers and hope the existing bondholders increase their bond value through numerous initiatives like the new draw format, further expansion of the distribution network and introduction of innovative products and services. We have seen an encouraging trend in sales in the first half and are expecting a 100% growth by end 2009.

From The National

Be Positive in Dealing With Decision To Establish Sukuk Market

No two people can disagree over the importance of the step taken by the [Saudi Arabian] Capital Market Authority [CMA] to launch a secondary Sukuk market which will stimulate the public and private financial sector in the issuance of Sukuk bonds. The establishment of this secondary market will transform Saudi Arabia into a major player in this promising market that studies expect will witness unprecedented growth in the near future. The International Monetary Fund [IMF] expects that that by 2010 Sukuk revenue will amount to US $200 billion. The public and private sector will be able to benefit from this revenue rather than seeking investment opportunities outside of Saudi Arabia. According to the McKinsey Competitive Report [issued by the World Islamic Banking Conference], Saudi Arabia is ranked second behind Iran with regards to assets from the Islamic banking industry.

The existence of a secondary Sukuk market is one of the important steps that will enable Riyadh to become one of the most important financial centres of the Islamic banking industry. This is a status that is long overdue and one that Riyadh fully deserves but has failed to achieve due to the previous lack of conviction in the Islamic banking industry on the part of some involved in the Saudi financial sector. This opened the door to some of the capital cities of the neighbouring countries, and even Western and Asian cities, to take over this role. The competition between Riyadh and these capital cities has become more complex, especially since these capital cities have preceded Riyadh in gaining a foothold in this sector. However despite this, Saudi Arabia's task is not impossible so long as efforts are combined and strategies are developed and plans are implemented to help achieve this objective.

Therefore I believe that the step taken by the CMA to launch a secondary Sukuk market must be supported by all parties interested in putting Riyadh on the map of the Islamic banking industry. If anybody has objections to or observations on this decision – whether these are juristic or technical – they should be brought to the attention of the CMA in a calm and rational manner. There should not be any loss of control or media incitement, as this will only result in the severance of dialogue and the CMA maintaining its decision, something which was proven in previous experiences with governmental bodies. These emotional methods [of objecting to a decision] have not led to any changes, and in fact the opposite has occurred with the governmental upholding its position and refusing to make any of the proposed changes.

For this reason, I urge the religious figures who are concerned with this decision [with regards to a secondary Sukuk market] to sit down with the CMA and discuss the details surrounding this, and whether it would be possible to modify or neutralize this. However only Sharia-compliant Sukuk bonds will be traded in this secondary market, and these Sukuk bonds could not have been issued except without the blessing of God and the CMA efforts that facilitated their issuance. The CMA is also the first Saudi Arabian financial regulatory body that specifically mentions Islamic banking in its charter, specifically in the chapters dealing with Islamic investment.

I believe that the timing of the launch of the secondary Sukuk market will encourage public and private institutes to issue Sukuk bonds which will help push this market forward, especially since trading in this market is limited to initial public offering [IPO], which we well know is within the provision of Islamic Sharia law. We know this because the majority of Saudi Arabian investors refuse to utilize any investment tool that is not compatible with Islamic Sharia law.

My words should not be misunderstood as a call to not distinguish between what is Halal [religiously permissible] and Haram [religiously forbidden] with regards to what is taking place in this market. Rather, I am requesting that the discussions that occur on this issue take place in a calm and rational manner away from slander and rebuke, which is something that has been advocated in the Holy Quran. ‘Invite [all] to the way of thy Lord with wisdom and beautiful preaching; and argue with them in ways that are best and most gracious: for thy Lord knoweth best, who have strayed from His Path, and who receive guidance,’ [Surat an-Nahl: 125]. This was also advocated by the Prophet Mohammed (PBUH) in the Sahih Muslim collection of Hadith [Prophetic traditions]. On the authority of Abu Massoud al-Ansari “A person came to the Messenger of Allah (PBUH) and said ‘I keep away from the morning prayers on account of such and such [a man] because he keeps us so long.’ I never saw the Messenger of God [PBUH] more angry when giving an exhortation than he was that day. He said ‘When any one of you leads the people in prayer, he should be brief for among them are the young and the aged, the weak and the sick.’ It was Prophet Mohammed’s nature to act in this manner [i.e. to speak in a calm, generous, and rational way], and this is something that we should emulate.

From asharq alawsat

Debt Management With A Conscience

THE world experienced two major financial crises within a decade: the currency and stock market crises of 1997-98, and now a crippling recession that began with the US subprime debacle caused by excessive lending to borrowers unable to make repayment.
Both originated in "asset bubbles" and unlimited creation of fiat money that loaded the market with the sale of debts, or bay' al-dayn, as it is known in the jargon of syariah law. Dealing in debts that lacked any asset base overwhelmed the financial system.

Transactions in derivatives and contra trading in stocks proceed largely over debts that are bought and sold through mere exchange of promises by speculators and hedge funds that take risks far in excess of their available assets.

It is different in Islamic finance, which is structurally averse to indulgence in debt-based transactions.

The capitalist banking and financial institutions, moreover, make profits but have no mechanism to share possible losses. A different scenario exists in Islamic finance, which favours equity financing, in which the parties involved share the prospects both of profit and loss.
Islamic finance transactions also proceed over underlying assets, trades and services that hold real market value. Pure unsecured debt plays a minimal role, essentially confined to an act of goodwill or qard hassan, without a commercial prospect.

The half-a-dozen or so contracts in use in the Islamic system proceed over trades and services, as in the case of musharakah and mudarabah, which consist of participation finance, profit and loss sharing. Banks and financial institutions that enter these contracts effectively become partners in a project and hold a stake in both its failure and success.

Islamic finance admittedly permits debt-based transactions, which are, however, limited to situations where only one of the two countervalues consist of a debt. For example, in bay's bi-thaman aajil, or deferred sale, only the price, but not the sale object, consists of a debt.

Since a sale takes place over a real asset, such as a building or a plant, the debt in question is asset-based and proportionate to the price of the sold item.

This is also the case in the forward sale of salam, in which only the sale object, but not the price, consists of a debt. All the contractual details of the debt in salam must be specified in writing to ensure commitment, proportionality and equivalence in the exchange of values.

Syariah law does not approve of a financing scheme in which both the countervalues consist of debt. A difference of opinion has thus arisen over the validity of istisna', or manufacturing contract, whereby an order is placed for the manufacture of goods, be it a house, ship or handicraft.

Nothing changes hands at the time of contract, and both sides of the bargain consist of debts payable in the future -- which is why Muslim jurists have considered istisna' as basically ultra vires. Yet istisna' has been exceptionally validated by consensus (ijma') because of the people's need for it.

A similar line of analysis can be extended to the entire range of contracts that represent the bulk of Islamic banking and finance transactions. Murabahah or cost-plus-profit sale, which is very common, may or may not involve a debt as it can be spot or deferred. Only when deferred does it involve a debt, in which case it would resemble bay's bi-thaman aajil.

The contract of wadi'ah or deposit, also widely practiced, does not involve either a debt or exchange of values and is therefore free of financial speculation and risk-taking.

Since syariah law proscribes the giving and taking of banking interest, or indeed of any unwarranted increase that violates the principle of equivalence in countervalues, syariah-compliant transactions are less vulnerable to interest-rate fluctuations.

The syariah is similarly averse to excessive risk-taking (gharar) that threatens due fulfilment of contractual obligations, especially in deferred and forward sales, which involve debt.

The applied rules of Islamic financing in Malaysia and elsewhere limit exposure to risk, in that a transaction is not permitted with a company or institution whose balance sheet consists of debt that exceeds 50 per cent of its total available assets. This is a major restraint that curbs asset bubbles of the kind that continue to plague contemporary finance.

These are some of the in-built elements of stability in Islamic finance that are generally absent in their conventional counterparts. Yet, the advantages of Islamic finance can only materialise when compliance with syariah principles is assured, which is not always the case. Many contract specifications are followed in form but not in spirit by the Islamic financial institutions.

For instance, the detailed requirements of delivery and possession are often ignored, and buying and selling take place in the same session. Murabahah is thus manipulated for the purpose mainly of securing the price differential, or mark-up, which is made payable at a later date, and the net result is not very different from earning interest on a conventional loan.

Similarly, the very commonly practised sell-and-buy-back transaction of inah often consists of a price differential in the same session and a quick profit-taking that resembles riba.

Formal compliance that amounts to effective non-compliance has thus aroused much criticism among Muslims, who go to Islamic banks often with pious motives to avoid the forbidden riba, but remain askance about whether the Islamic banks really measure up to their expectations.

These institutions are, like their conventional counterparts, eager to lend as much as possible and gain as much profit as they can. The inner stability and resilience of Islamic finance will not hold, and the low risk element therein is bound to diminish unless the syariah principles that regulate such transactions are faithfully observed.

By Mohamad Hashim Kamali
The writer is chairman and CEO of the International Institute of Advanced Islamic Studies (IAIS) Malaysia

Shariah Sensitive Assets In GCC, Asia Top US$700 Billion

Shariah sensitive assets in the Gulf Cooperation Council (GCC) countries and Asia touched US$736 billion in 2008 compared to US$267 billion in 2007, said the third annual Ernst & Young Islamic Funds and Investments Report (IFIR) 2009.

In a statement Tuesday, Ernst & Young said that in computing the total asset size this year, the report included Awqaf and Endowments, Takaful operators in Malaysia, sovereign wealth funds in the Middle East and North Africa (MENA) and Asia, as well as the markets of Pakistan and Southeast Asia.

It said that although the Islamic asset management industry had a potential revenue pool of US$3.86 billion, the size of funds remained small with over 50 percent having assets under management of US$20 million or less.

Ernst & Young also stated that the largest concentration of Islamic funds remained in the Middle East and equity funds led the field of choice of asset type. Saudi Arabia held US$19.28 billion in total assets under management for Islamic funds while Malaysia US$4.579 billion, it said.

"The untapped markets in Asia and MENA are a source of growth for the Islamic funds due to their large Muslim populations. These markets, where Islamic finance is still in its infancy include Indonesia, Pakistan, India, Bangladesh, Turkey, Iran and Nigeria," it said.

Ernst & Young said that the average return from Islamic equity funds fell to minus 39 percent in 2008 compared to a 23 percent return in 2007. In the first quarter of 2009, the average return stood at minus 3.7 percent.

On Islamic fixed income funds, the average return dropped from three percent in 2007 to one percent in 2008 and the first quarter of 2009.

Meanwhile, Sukuk issuance slowed as spreads widened -- Sukuks worth US$15.5 billion were issued in 2008 compared to US$47.1 billion in 2007. The report estimated that US$27.5 billion worth of Sukuks would be issued in 2009.

"Last year, we highlighted the phenomenal rate of growth experienced in the Islamic asset management industry. The landscape has changed significantly now, yet the fundamentals of the Islamic fund industry remain strong.

"With almost US$50 billion in fund assets under management and a large, expanding and untapped Muslim population, there are likely to be considerable opportunities in the future.

"This is a time when strategic choices have to be made and market participants have to adapt to survive," said Ernst&Young Islamic Finance Services Group (IFSG) partner and its head of Assurance Services of Malaysia Abdul Rauf Rashid.

Sukuk - Where Next?

Turbulence in the financial markets during 2008 and the resulting collapse of the securitisation markets has made it increasingly difficult for companies to access these markets in order to raise additional finance. The Islamic securitisation market, often referred to as the Sukuk market, has not been immune to this economic downturn, indeed it has also suffered from controversy over the very nature of some Sukuk structures and suggestions that some Sukuk in issue were not Shari’a-compliant.

However, even with a struggling global economy, organisations throughout the world still need to raise finance to fund their activities, and in some cases their expansion plans. With a continuing lack of bank credit and with no sign of a recovery for the IPO markets, corporate issuers seem to be returning to the financial and securitisation markets and several of these prospective issuers have indicated that they are either planning or actively considering raising funds thorough the Sukuk market.

This article will seek to show that Sukuk structures continue to be a useful way to raise finance for both Islamic and non-Islamic organisations. Furthermore, if, as is expected, the Sukuk-based securitisation market (particularly for asset-backed transactions), recovers more quickly than the conventional securitisation market, will those involved in structuring non-Islamic securitisation transactions learn any lessons regarding the principles of sharing risk and reward and reflect this in conventional structures?

Sukuk
Many readers will be familiar with the general concept of Sukuk, but it is important to reflect on the basic principles in order to appreciate how the market for Sukuk may develop.

In Shari’a Standard No. (17) on Investment Sukuk, the Accounting and Auditing Organization for Islamic Financial Institutions, (AAOIFI) gives the following definition of Sukuk:

“Investment Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity”.

The standard makes it clear that Sukuk must be backed by assets that are subject to a Shari’a-compliant contract, e.g. an Ijara contract, sets out 14 examples of Sukuk structures and distinguishes investment Sukuk from shares, notes and bonds.

Furthermore, the Standard makes it clear that the Sukuk documentation must demonstrate:

* That any income arising must derive from the underlying activities for which the funding has been used, and not simply comprise interest,
* The Sukuk must be backed by real underlying assets and these assets must be halal (allowable) in nature and be being utilised as part of a halal activity, and
* There must be full transparency as to rights and obligations of all parties.

Thus a large part of the conventional securitisation market – for example, mortgage-backed securities – would be prohibited because the income element (though not the principal) of the cash flow would be characterised as riba. Similarly, CDOs and other such instruments could not be allowed as an asset class as these represent “Debt” rather than an allowable commodity or activity. However, investment in tangible assets, used for productive purposes, and reaping the rewards arising from those assets is a core principle of Islamic finance and it is this principle on which Sukuk securitisation structures are founded.

Whilst AAOIFI standards are not compulsory from an international perspective, they are generally binding in six Middle Eastern countries, together with the Dubai International Financial Centre. Furthermore, it is difficult to imagine how an issuer would be able to obtain a fatwa from a recognised Shari’a Supervisory Board if the structure did not comply with Standard 17, thereby making adherence with the standard obligatory from a business perspective.

AAOIFI resolution on Sukuk
In late 2007 Sheikh Muhammad Taqi Usmani, as Chairman of AAOIFI, issued a statement (that was subsequently heavily misquoted) in which it was claimed that many of the Sukuk structure in existence at that time would fall foul of basic Shari’a principles, in particular, many appeared to violate the principle of risk and profit-sharing by promising to pay back capital. Subsequently, in February 2008, AAOIFI issued a statement setting out six core principles for structuring and implementing Sukuk transactions, noting that it was these principles that were often being disregarded in the larger or volume-based Sukuk structures.

A key feature of the AAOIFI resolution is to be found in the final paragraph. This calls for Islamic financial institutions to:

“decrease their exposure to debt-related operations and to increase their operations based on true partnerships and the sharing of risk and reward”

Whilst there is still much debate as to whether Sukuk can be used to raise debt for an institution (i.e. where the underlying structure is asset-based), it is clear that the resolution endorses the use of Sukuk to finance the acquisition of actual assets on behalf of an Islamic entity and in particular where the financing is structured as a traditional asset-backed securitisation.

The Markets
The growth of the Sukuk market in the 21st century, albeit from a very small base, seemed unstoppable, with an approximate cumulative doubling each year from 2002 through to 2007, see chart below.
Global_sukuk_issuance_Islamic_securitisation_market
The chart shows the dramatic decline in new issues during 2008, but it is impossible to determine how much of this decline was attributable to global economics and how much to restraint arising from concerns over the validity of Sukuk structures following the AAOIFI announcements. Similarly, many of the Sukuk issued previously would have had a 3 to 5 year tenure and therefore were repaid in 2008, with market conditions preventing these from being rolled over.

So what are the factors that will drive the resurgence of the Sukuk market. First and foremost is a need to finance the large number of construction and infrastructure projects throughout the GCC. Historically, the financing for many such projects benefited from direct or indirect governmental guarantees, but this was one of the concerns that led to the original AAOIFI statement as Sukuk holders are supposed to bear the risks of ownership and not be immune to affects of changes in the profitability of the venture; it remains to be seen as to how such support can be built into a structure whilst still giving an element of risk. Similarly, private companies throughout the region have been starved of finance and whilst these companies will need to demonstrate that they either have a strong track record or a good business case, together with a pool of appropriate assets to securitise, the entrepreneurial spirit of the region, coupled with pent-up demand for Shari’a-compliant investment products is likely to make such corporate Sukuk structures an attractive proposition for both regional and international investors.

International institutional demand for Sukuk cannot be understated, with both Islamic and non-Islamic or Western institutions participating in many of the large quasi-governmental Sukuk issues of 2006 and 2007. Similarly, several counties in the West have made various announcements as to their own plans to issue Sukuk, most notably the UK Treasury whose plans for a Sukuk have been on/off for the past three years.

The retail market for Sukuk is slowly opening up although demand seems to outstrip supply because of the lack of Sukuk available through the secondary market, which makes it difficult for retails investors to acquire Sukuk. Several institutions have established Sukuk funds to allow retail investors to participate in Sukuk issued by number of different institutions, but to date these too seem to be having difficulty in acquiring appropriate assets due to the lack of supply.

The similarity between Sukuk and traditional asset-backed securitisation structures will be readily apparent. However, as demonstrated in the points raised above, there is much more to establishing a Shari’a-compliant securitisation transaction than a simple rewording of conventional transaction documentation.

The call for a “back to basics” approach contained within the AAOIFI resolution on Sukuk had a negative impact on the issuance of Sukuk in 2008. Whether this will affect the ability of institutions to create innovative Sukuk structures going forward is an unanswered question, but in the author’s experience, provided the basic tenets of Shari’a Law are adhered to, the Scholars will generally accept such innovation.

From Global Arab Network