Malaysia: Infrastructure sukuk receives a major boost

Infrastructure sukuk has received a major boost when Projek Lebuhraya Usahasama Berhad (PLUS Berhad) last week closed a record landmark RM30.6 billion sukuk issuance program comprising both government guaranteed (GG) and non-government guaranteed AAA-rated (AAA) issuances of varying tenors, sizes and expected returns and yields to maturity (YTMs).

The issuance was through PLUS Malaysia Sdn Bh, which is a jointly-owned special purpose company of UEM Group Berhad and the Employees Provident Fund (EPF), which was set up to acquire the Malaysian business and undertakings including the assets and liabilities of PLUS Expressways Berhad, the major provider of expressway operation services in Malaysia, under a privatization exercise (proposed acquisition). Following the completion of the proposed acquisition, PLUS Malaysia's wholly-owned subsidiary, PLUS Berhad will acquire all the assets and liabilities of the respective concession companies via the issuance of the GG Sukuk and AAA Sukuk Musharaka.

The program, according to lead arranger and Principal Adviser, CIMB Investment Bank, comprised RM11 billion of GG issuances and RM19.6 billion of AAA issuances and are based on a bought deal and private placement basis. The non-government guarantee component could be increased to RM23.35 billion.

It is no secret that national road agencies from several countries, especially those in emerging countries, have been watching the PLUS offering closely with the hope of attracting investors to participate in their own road expansion and rehabilitation programs with the strong interest and therefore possibility of issuing Sukuk to do this against toll roads operated by these agencies.

Countries with huge areas such as Saudi Arabia, Turkey, India, South Africa, China, Pakistan, Iran, Egypt and do on, whose road infrastructure needs further development and rehabilitation, in particular could use competitive financing alternatives such as Sukuk to fund these needs based on innovative and fair revenue models.

Two national road agencies — one from a Muslim country and the other from a non-Muslim country — have in fact confirmed that they have initiated feasibility studies and preliminary discussions to issuing sukuk as part of their source of funding diversification strategies. The major problem is lack of familiarity about the structures of Sukuk; issues relating to prohibitive demands on collateral and guarantees; lack of legal infrastructure in the domicile of the potential new issuers; and concern over the Shariah compliance of such issuances. 

One of the national road agencies stressed that it has had discussions in the past with several potential lead managing suitors for a potential sukuk, but discussions did not progress because of legal limitations over asset ownership.

With the difficult global bond market conditions, there are signs that infrastructure companies are seeking to diversify to other funding sources in addition to the traditional equity and government budget financing. Sukuk is emerging as an attractive and viable alternative.

A few months ago, for instance, Syarikat Prasarana Negara Berhad, the Malaysian public infrastructure company wholly-owned by the Ministry of Finance, successfully closed its RM2 billion Sukuk Al-Ijarah offering under its RM4 billion nominal value sukuk program, whose proceeds will be used mainly to part finance the Kelana Jaya and Ampang LRT Line Extension Project and other infrastructure improvement initiatives by Prasarana. The issuance is guaranteed by the Malaysian government. 

Prasarana usually issues only conventional bonds to finance its activities. The company was set up to facilitate, undertake and expedite public infrastructure projects approved by the government and together with its group of companies are also asset-owners and operators of several public transport providers, namely the Ampang and Kelana Jaya lines, KL Monorail system, bus operations in Klang Valley and Penang, as well as the cable car services in Langkawi.

This RM2bn issuance was the first time that the company tapped the Islamic capital market with a sukuk issuance, and according to Prasarana Chief Executive Officer Shaipudin Shah Harun, there will be further finance raising forays in the future to fund the company's expansion plans, and Parasarana is committed to contribute to the further development of the Malaysian sukuk market. This issuance was actually structured in 2009 by joint lead managers and arrangers AmInvestment Bank and CIMB Investment Bank, with Bank Islam Malaysia acting as co-manager. But the issue was delayed due to the impact of the global financial crisis which badly affected pricing and yields in both the conventional bond and sukuk markets.

Sukuk and infrastructure should be a natural fit. While the sukuk market has flourished over the last four years, these have concentrated more on raising finance for balance sheet purposes; refinancing existing more expensive debt including very often conventional finance debt; overcoming the mismatch between short-term deposits and longer term liabilities by raising longer term financing; and providing working capital and funds for expansion.

Sukuk for development and infrastructure projects such as pure project sukuk have been hardly a feature of the sukuk landscape, although there have been a few exceptions. This is surprising given the estimated multi-trillion dollar infrastructure spend in the IDB member countries over the next decade or so.

The latest PLUS Sukuk Program, whose issuer and obligor is provides an ambitious financing conduit for the toll road services operator, which some observers stress would only be possible in a country such as Malaysia where the government is a proactive supporter of involving Islamic finance in the economy together with conventional financing options under its economic transformation program (ETP).

The GG issuances comprised two tranches of RM5.5 billion each — the one with a tenor of 26 years with a periodic distribution rate of 4.86 percent and the other with a tenor of 27 years and 353 days with a periodic distribution rate of 5 percent respectively.

The AAA issuances, which are Sukuk Al-Musharaka, comprised a total of 21 tranches with tenors ranging from 5 years to 25 years with a periodic distribution rate ranging from 3.9 percent to 5.75 percent respectively.

PLUS Expressways operates and maintains 973 kilometers of inter-urban toll expressways in Peninsular Malaysia, stretching from the border of Thailand in the north to the border of Singapore in the south, linking all major cities on the west coast of Peninsular Malaysia.

(Arab News/15-Jan-2012)

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Qatar Islamic banking directive to set example for other markets

The deadline of Dec. 31, 2011, as per the directive issued by the Central Bank of Qatar (CBQ) in January 2011 requiring the country's conventional banks which have opened Islamic banking windows to close them down, has passed almost unnoticed.

Despite the initial outcry at the time of the announcement of the directive stressing that it was too arbitrary and the grace period was too tight, there has been no upheaval of the Islamic finance industry in the emirate. Some Islamic bankers are now arguing that the move was required to stem the alleged rampant co-mingling of conventional and Islamic funds at some of the Islamic banking windows, and that the Qatari Islamic banking sector has been successfully re-aligned and consolidated.

The successful implementation of the directive in Qatar could well have implications for other markets in the region and beyond where Islamic banking windows are prevalent. The clear message of the directive is that dedicated standalone Islamic banks are preferable to half-way houses where co-mingling and all sorts of compromises are possible if not the norm. They also give greater legal, regulatory and Shariah compliance clarity and comfort to those depositors and investors interested in Islamic finance.

The affected banks included the Al-Islami window of Qatar National Bank (QNB), the largest bank in the emirate; Commercial Bank of Qatar; Doha Bank; HSBC Amanah; Ahli Bank; Al-Khaliji Bank and International Bank of Qatar (IBQ), which between them had 16 Islamic banking branches in Qatar.

On Jan. 1, 2012 it became clear that only one such window, Al-Yusr of International Bank of Qatar, was acquired by two local Islamic banks — the retail banking assets and business was acquired by Barwa Bank, the newest of the Qatari Islamic banks, while the corporate banking assets and portfolio was acquired by Qatar Islamic Bank (QIB), the largest Islamic bank in the emirate.

The other banks had wound down their Islamic banking window operations complete with removing all signage and of course not opening any new accounts or businesses. Existing Islamic banking customers were in some cases given the option of switching to the banks' conventional banking business or in other cases to continue payments until affected Islamic financing facilities matured.

An unrepentant CBQ Gov. Sheikh Abdullah bin Saud Al-Thani as late as mid December 2011 warned the affected banks that the directive was "irreversible" and that they must comply with its provisions. In his keynote speech to the 8th International Conference on Islamic Economics and Finance (ICIEF) which was held in Doha in December 2011, Al-Thani articulated the reasons behind the central bank's directive, which he confirmed is irreversible.

The Islamic Banking Windows, according to Gov. Al-Thani, made it difficult for the banking regulator to effectively implement its monitoring and supervision of these windows.

This issue could not have been highlighted more aptly during the acquisition of Al-Yusr's Islamic Retail Banking business. As the first such transaction to be closed in the region, albeit under Qatari law, there were some legal and other regulatory challenges which UK law firm, Eversheds, which acted for Barwa Bank, successfully navigated through within the provisions of existing Qatari legislation.

"The IBQ window was not a separate legal entity. As such, its assets and liabilities were a part of the conventional bank. We therefore had to consider how best to separate and then package and transfer these assets and liabilities. There were also challenges concerning transition services that were required post completion to serve the transferring customers," explained Amjad Hussain, partner and head of Islamic Finance at Eversheds, in a recent interview.

The central bank also found that the coupling of conventional and Islamic banking activities at the same institution, undermined competition and transparency in the affected banks. At the same time, there is much confusion over the balance sheet treatment of the assets and liabilities of the Islamic banking windows in the financial reports of the conventional banks, which are not separated. As such this has implications for the risk management process of the institution.

Al-Thani gave the thumbs up to the Qatari Islamic banking industry which boasts four Islamic banks — Qatar Islamic Bank, Qatar International Islamic Bank, Masraf Al-Rayan and Barwa Bank. These banks, he added, have a crucial role in the country's banking sector and economy, in compliance with the objectives of the Qatar Vision 2030 and its first application through the First Strategic National Development Project 2011-2016.

He reminded Qatari Islamic banks of their partnership role in financing economic development and projects in the country, and stressed that he was confident that the Qatari Islamic banks will rise to and are capable of taking up this challenge together with their conventional counterparts. The Islamic banking sector has a 20 percent market share of the total banking industry in Qatar, which has four dedicated standalone Islamic banks.

It was way back in 2005 that the CBQ allowed conventional banks to launch Islamic Banking Units (IBUs), which have contributed to the growth of the sector and to the profitability of the banks, and which have attracted an estimated customer base of just under 100,000.

Eversheds' Hussain rejects any notion of arbitrariness in the action of the CBQ in issuing the directive. The action, he contended, is "part of a wider process of supporting and shoring up the banking industry in Qatar. You have to look at it in the context of the proactive approach of the central bank during the recession when it helped a number of local banks to remove some of the toxic debts that they had exposure to. The CBQ is also making sure that there are enough opportunities for all the market players."

Previously, the Islamic banking windows were barely competing because of co-mingling issues and because they were able to offset overheads through the conventional banks. There was a feeling that the market was not as transparent as it could be. In addition to regulatory issues, the central bank had to deal with two separate businesses dealing with different banking activities - Islamic and conventional.

"I believe competition was an issue, because the pure Islamic banks were seen to be at a disadvantage. The Islamic banking windows at the conventional banks were able to use backroom services in their banks. There were also regulatory and corporate governance concerning how manage different banking platforms under one roof which is what the conventional banks were trying to do. This resulted in a culmination of issues which the CBQ is trying to address in its efforts to improve out the banking sector," explained Hussain.

(Arab News/22Jan2012)

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AAOIFI's Shari'a Board Resolutions on Sukuk-English version

In the name of Allah, the Beneficent, the Merciful. 

Praise be to Allah, and peace and blessings on His Noble Prophet and on his family and Companions 

As to what follows: 

The Shari'ah Board of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), in view of the increased use of Sukuk worldwide, the public interest in them, and the observations and questions raised about them, studied the subject of the issuance of Sukuk in three sessions; first, in al-Madinah al-Munawwarah, on 12 Jumada al-Akhirah 1428 AH (27 June, 2007), second, in Makkah alMukarramah, on 26 Sh'aban 1428 AH (8 September, 2007), and third in the Kingdom of Bahrain on 7 and 8 Safar 1429AH (13 and 14 February, 2008).  

Following the meeting of the working group, appointed by the Board, which met in Bahrain, on 6 Muharram 1429AH (15 January, 2007), which was also attended by a significant number of representatives from various Islamic banks and financial institutions, the working group presented its report to the Shari'ah Board.

After taking into consideration the deliberations in these meetings and reviewing the papers and studies presented therein, the Shari'ah Board - while re-affirming the rules provided in the AAOIFI Shari'ah Standards concerning Sukuk - advises Islamic financial institutions and Shari'ah Supervisory Boards to adhere to the following matters when issuing Sukuk:

First: Sukuk, to be tradable, must be owned by Sukuk holders, with all rights and obligations of ownership, in real assets, whether tangible, usufructs or services, capable of being owned and sold legally as well as in accordance with the rules of Shari'ah, in accordance with Articles (2)1 and (5/1/2)2 of the AAOIFI Shari'ah Standard (17) on Investment Sukuk. The Manager issuing Sukuk must certify the transfer of ownership of such assets in its (Sukuk) books, and must not keep them as his own assets.

Second:  Sukuk, to be tradable, must  not represent receivables or debts, except in the case of a trading or financial entity selling all its assets, or a portfolio with a standing financial obligation, in which some debts, incidental to physical assets or usufruct, were included unintentionally, in accordance with the guidelines mentioned in AAOIFI Shari'ah Standard (21) on Financial Papers.

Third:  It is not permissible for the Manager of Sukuk, whether the manager acts as Mudarib (investment manager), or Sharik (partner), or Wakil (agent) for investment, to undertake to offer loans to Sukuk holders, when actual earnings fall short of expected earnings. It is permissible, however, to establish a reserve account for the purpose of covering such shortfalls to the extent possible, provided the same is mentioned in the prospectus. It is not objectionable to distribute expected earnings, on account, in accordance with Article (8/8)3 of the AAOIFI Shari'ah Standard (13) on Mudaraba, or to obtaining project financing on account of the Sukuk holders.

Fourth:  It is not permissible for the Mudarib (investment manager), sharik (partner), or wakil (agent) to undertake {now} to re-purchase the assets from Sukuk holders or from one who holds them, for its nominal value, when the Sukuk are extinguished, at the end of its maturity. It is, however, permissible to undertake the purchase on the basis of the net value of assets, its market value, fair value or a price to be agreed, at the time of their actual purchase, in accordance with Article (3/1/6/2)4of AAOIFI Shari'ah Standard (12) on Sharikah (Musharaka) and Modern Corporations, and Articles (2/2/1)5 and (2/2/2)6 of the AAOIFI Shari'ah Standard (5) on Guarantees. It is known that a Sukuk manager is a guarantor of the capital, at its nominal value, in case of his negligent acts or omissions or his non-compliance with the investor's conditions, whether the manager is a Mudarib (investment manager),  Sharik (partner) or Wakil (agent) for investments.  In case the assets of Sukuk of al-Musharaka, Mudarabah, or Wakalah for investment are of lesser value than the leased assets of "Lease to Own" contracts (Ijarah Muntahia Bittamleek), then it is permissible for the Sukuk manager to undertake to purchase those assets -  at the time the Sukuk are extinguished - for the remaining rental value of the remaining assets; since it actually represents its net value.

Fifth: It is permissible for a lessee in a Sukuk al-Ijarah to undertake to purchase the leased assets when the Sukuk are extinguished for its nominal value, provided he {lessee} is not also a partner, Mudarib, or investment agent. Sixth:  Shari'ah Supervisory Boards should not limit their role to the issuance of fatwa on the permissibility of the structure of Sukuk. All relevant contracts and documents related to the actual transaction

must be carefully reviewed {by them}, and then they should oversee the actual means of implementation, and then make sure that the operation complies, at every stage, with Shari'ah guidelines and requirements as specified in the Shari'ah Standards. The investment of Sukuk proceeds and the conversion of the proceeds into assets, using one of the Shari'ah compliant methods of investments, must conform to Article (5/1/8/5)7 of the AAOIFI Shari'ah Standard (17).  Furthermore, the Shari'ah Board advises Islamic Financial Institutions

to decrease their involvements in debt-related operations and to increase true partnerships based on profit and loss sharing in order to achieve the objectives of the Shari'ah.

In the end, all praise is due to Allah, Lord of all the Worlds!

Note:

1

2. Definition of Sukuk: Investment Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity, however, this is true after the receipt of the value of the Sukuk, the closing of the subscription and employment of funds received for the purpose for which the Sukuk were issued.

2

5/1/2  It is permissible to issue certificates for (to securitize) assets that are tangible assets, usufruct and services by dividing them into equal shares and issuing certificates for their value. As for debts owed as a liability, it is nor permissible to securitize them for the purpose of trading.

3

 8/8 The Mudarib is entitled to a share of profit as soon as it is clear that the operations of the Mudaraba have led to the realization of a profit. However, this entitlement is not absolute, as it is subject to the retention of interim profits for the protection of the capital. It will be an absolute right only after distribution, i.e. when actual or constructive valuations take place. It is permissible to distribute the realized profit among the parties on account, in which case the distribution will be revised when actual or constructive valuation takes place. The final distribution of profit should be made based on the selling price of the Mudaraba assets, which is known as actual valuation. It is also permissible that the profit be distributed on the basis of constructive valuation, which is valuation of the assets on the basis of fair value. Receivables shall be measured at the cash

equivalent, or net realizable, value, i.e. after the deduction of a provision for doubtful debts. In measuring receivables, neither time value (interest rate) nor discount on current value for extension of period of payment

shall be taken into consideration

4

 3/1/6/2 It is permissible for a partner to issue a binding promise to buy, either within the period of operation or at the time of liquidation, all the assets of the Sharika as per their market value or as per agreement at the date of buying. It is not permissible, however, to promise to buy the assets of the Sharika on the basis of face value.

5

2/2 Guarantees in trust (fiduciary) contracts

2/2/1 It is not permissible to stipulate in trust (fiduciary) contracts, e.g. agency contracts or contracts of deposits, that a personal guarantee or pledge of security be produced, because such a stipulation is against the

nature of trust (fiduciary) contracts, unless such a  stipulation is intended to cover cases of misconduct, negligence or breach of contract. The prohibition against seeking a guarantee in trust contracts is more stringent in Musharaka and Mudaraba contracts, since it is not permitted to require from a manager in the Mudaraba or the Musharaka contract or an investment  agent or one of the partners in these contracts to guarantee the capital, or to promise a guaranteed profit. Moreover, it is not permissible for these contracts to

be marketed or operated as a guaranteed investment.

6

 2/2/2 It is not permissible to combine agency and personal guarantees in one contract at the same time (i.e. the same party acting in the capacity of an agent on one hand and acting as a guarantor on the other), because

such a combination conflicts with the nature of these contracts. In addition, a guarantee given by a party acting a an agent in respect of an investment turns the transaction into an interest-based loan, since the capital of the investment is guaranteed in addition to the proceeds of the investment, (i.e. as though the investment agent had taken a loan and repaid it with an additional sum which is tantamount to riba). But if a guarantee is not stipulated in the agency contract and the agent voluntarily provides a guarantee to  his clients independently of the agency contract, the agent becomes a guarantor in a different capacity from that of agent. In this case, such an agent will remain liable as guarantor even if he is discharged from acting as agent.

7

5/1/8/5 The prospectus must state that the investment of the realized funds and the assets into which the funds are converted will be undertaken through Shari’ah-compliant modes of investment.

(AAOIFI/Feb2008)

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Egypt May Sell Foreign-Currency Sukuk, Deposit Certificates

Egypt may issue an Islamic bond or alternatively certificates of deposit in foreign currency for Egyptians abroad, the finance minister said.

“We are studying issuing sukuk,” or Islamic bonds, Mumtaz el-Saeed said by telephone in Cairo. “We are comparing the benefits of issuing certificates of deposit with those of sukuk for Egyptians abroad,” adding that his preference is for the certificates. The government hopes to issue one or the other during the current fiscal year ending June 30, he said.

Egypt is struggling to recover from a year of unrest in the wake of the uprising that ousted President Hosni Mubarak last February. The economy grew 1.8 percent in the last fiscal year, the slowest pace in at least a decade, as income from tourism and foreign investment dried up. Tourist arrivals fell 33 percent in 2011, while international reserves are at the lowest level since March 2005.

The government formally requested a $3.2 billion loan from the International Monetary Fund on Jan. 16. An agreement is expected “within weeks,” Fayza Aboulnaga, minister of planning and international cooperation, told reporters.

Egypt turned down a similar arrangement with the fund in June, with officials saying they didn’t want to burden future governments with debt. Foreign currency reserves dropped 32 percent in the following six months while yields on all treasury-bill maturities rose this quarter to the highest since Bloomberg started tracking the data in 2006.

‘Sound Fundamentals’

The economy “despite its solid and sound fundamentals,” faces challenges that have to be addressed by an economic program that safeguards stability and “creates conditions for a strong recovery,” the IMF’s mission said in an e-mailed statement yesterday.

A program drafted by the Egyptian authorities is being discussed “with emerging political parties to ensure broad political support,” the IMF said. The mission met with the economic committee of the Muslim Brotherhood’s Freedom and Justice Party, and also talked to members of other parties and with the civilian body advising the ruling military council, it said.

The Brotherhood’s party gained the most votes in elections for the lower house of parliament, which is due to convene on Jan. 23, two days before the anniversary of the start of the uprising that led to the ouster of Mubarak. It is still unclear what authority the assembly may have. Activists have called for mass rallies on Jan. 25 to call on the country’s ruling generals to hand over power to civilians immediately.

‘Historic Transition’

The IMF’s meetings this week “provided us with a cross- section of views about Egypt’s current economic and political situation, and possible avenues to address the challenges facing the economy,” the fund said. “It also gave us an opportunity to explain the role the IMF could play in support of Egypt’s historic transition.”

(Bloomberg/19Jan2012)
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Words of wisdom: Excellence

Excellence is the gradual result of always striving to do better.

The will to win, the desire to succeed, the urge to reach your full potential, the commitment and discipline are the keys that will unlock the door to personal excellence.

Excellence is in the details.  Give attention to details and excellence will come.

Excellence is the unlimited ability to improve the quality of what you have to offer.

Persistence is the twin sister of excellence.  One is a matter of time, the other, a matter of quality.

"Excellence is doing ordinary things extraordinarily well."

“It is the excellence of a man’s faith that he gives up meaningless work.” -- Prophet Muhammad s.a.w [Tirmidhi, Ahmad]

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CEO / Consultant:  www.ahmad-sanusi-husain.com

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Words of wisdom: Success

The great successful men of the world have used their imagination.  They think ahead and create their mental picture in all its details, filling in here, adding a little there, altering this a bit and that a bit, but steadily building - steadily building.

Success does not consist in never making blunders, but in never making the same one a second time.

If you wish success in life, make perseverance your bosom friend, experience your wise counselor, caution your elder brother, and hope your guardian genius. 

The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year.

The toughest thing about success is that you've got to keep on being a success.

Most successful men have not achieved their distinction by having some new talent or opportunity presented to them. They have developed the opportunity that was at hand.

Don't wait until everything is just right. It will never be perfect. There will always be challenges, obstacles and less than perfect conditions. So what. Get started now. With each step you take, you will grow stronger and stronger, more and more skilled, more and more self-confident and more and more successful.

For success, attitude is equally as important as ability.

Success is simple. Do what's right, the right way, at the right time.

Success means doing the best we can with what we have. Success is the doing, not the getting; in the trying, not the triumph. Success is a personal standard, reaching for the highest that is in us, becoming all that we can be.

Every success is built on the ability to do better than good enough.

Success is doing ordinary things extraordinarily well.

Some people dream of success while others wake up and work hard at it.

Patience, persistence and perspiration make an unbeatable combination for success.

Success will not lower its standard to us. We must raise our standard to success.

The best way to succeed in this world is to act on the advice you give to others.

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Words of wisdom: Management

"Effective leadership is putting first things first. Effective management is discipline, carrying it out."  (Stephen Covey)

"Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall." (Stephen Covey)

"I believe the real difference between success and failure in a corporation can be very often traced to the question of how well the organization brings out the great energies and talents of its people." (Thomas J. Watson, Jr)

"The conventional definition of management is getting work done through people, but real management is developing people through work." (Agha Hasan Abedi)


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Islamic finance unbound - expanding exponentially

While uncertainty continues to roil global markets, driving many investors into full retreat, one part of the financial sector is expanding exponentially:

Islamic-law-compliant financial assets have grown from about $5 billion in the late 1980s to roughly $1.2 trillion in 2011.

This asset class, which is characterised by shared risk between institutions and clients, avoided many of the most severe consequences of the global financial crisis that began in 2008. This resilience, along with several other key features, underpins the high performance and growing popularity of Islamic finance.

The global financial crisis adversely affected a small number of Islamic financial institutions as the real economy contracted and some issuers of Islamic bonds defaulted. But the risk-sharing inherent to Islamic finance made such instruments more resistant to the first round of financial contagion that hit in 2008. Leading economists, such as Harvard University’s Kenneth Rogoff, have suggested that Islamic finance demonstrates the advantages of more equity and risk-sharing over the conventional bias in favour of debt instruments.

Several distinctive features have made Islamic financial institutions relatively stable throughout the crisis. One such feature is that Islamic finance emphasises asset-backing, thereby ensuring a direct link between financial transactions and real economic activities. Institutions’ savings and investment returns are closely linked, because they are determined by the real sector, not the financial sector.

This creates a flexible adjustment mechanism, should unanticipated shocks occur. It also ensures that real asset and liability values are always equal, while prohibiting excessive leverage and several forms of complicated securitisation. Moreover, Islamic finance is more equitable: Lenders and borrowers share risks and rewards, which increases the focus on long-term goals and discourages excessive short-term risk-taking.

In short, Islamic financial institutions treat their clients like business partners. They therefore have strong incentives to evaluate financing requests carefully, and to assist borrowers in bad times, thus reducing the pressure to sell assets at “fire-sale” prices and minimising the likelihood of financial contagion. Finally, the Islamic financial framework protects deposit balances, and prevents excessive credit growth.

Islamic financial instruments are currently available in at least 70 countries, and today represent about 0.5% of global financial assets. But the prospects for continued rapid growth are strong. In its November 2011 ‘Global Islamic Banking Report’, Deutsche Bank projects a 24% compounded annual growth rate in Islamic assets over the coming three years. There are five main reasons for this forecast:

• Islamic finance offers savers and investors practical alternatives to conventional instruments.

• The quality of Islamic financial services is improving, and these services are not limited to particular clients.

• Conventional multinational financial institutions are increasingly offering Islamic assets, and there is growing interest in them in London, Luxembourg, and other world financial capitals.

• The commodity boom in some Muslim countries has generated surpluses that need to be allocated through financial intermediaries and sovereign wealth funds.

• Islamic financial instruments can comply with sharia – Islam’s moral code and religious law – as well as send signals of change compatible with recent developments in several Muslim-majority countries.

But realising the potential of Islamic finance requires strong supervisory oversight. Financial institutions need to enhance pre-lending screening and post-borrowing monitoring. It is also problematic that, in many countries, debt receives advantageous tax treatment, which favours leverage over equity and profit/loss-sharing arrangements. This should change.

Moreover, mortgages, mutual insurance, leasing, and microfinance are underdeveloped in Islamic finance; insolvency and bankruptcy procedures must be improved; and mechanisms to deal with “Islamic bond” defaults must be established. Finally, Islamic financial institutions must address concerns about liquidity-risk management, compliance with Basel III (the Basel Committee on Banking Supervision’s most recent global regulatory standard), international accounting standards, and corporate governance.

While recent reports emphasise the size and growth of Islamic financial assets and instruments, it is the quality of services, continued financial innovation, and sound risk-management practices that will ultimately define their success. By addressing its shortcomings, Islamic finance could encourage inclusive growth in many developing countries.

If Islamic finance can resolve key regulatory and corporate-governance issues, it has the potential to meet more people’s banking and investment needs, expand its reach, and contribute to greater financial stability and inclusion in the developing world. That is something that everyone should welcome.

(by Mahmoud Mohieldin, Managing Director of the World Bank/11Jan2012)

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CEO / Consultant:  www.ahmad-sanusi-husain.com

Islamic Investment: www.islamic-invest-malaysia.com

Halal friendly: Crescentrating announces Top 10 Halal Friendly Holiday Destinations for 2012

Crescentrating just announced its Top 10 Halal Friendly Holiday Destinations for 2012. This year’s top 10 destinations were split into two categories; Top 10 among the Organisation of the Islamic Cooperation (OIC) countries and the top 10 among the other countries.

This year’s list was compiled based on the Muslim Lifestyle Friendly (Halal Friendly) facilities and services available to Muslim visitors such as Halal food availability, Halal certified restaurants, and the availability of mosques, family friendly attractions etc., in the particular destination.

OIC Countries, which are generally Halal Friendly, offer a more hassle free vacation due to the readily available supply of Halal food, prayer facilities and the general family-friendly atmosphere. These destinations not only offer their Halal-conscious tourists these necessary Halal friendly facilities, but they also have great tourist attractions such as theme parks, nature excursions, shopping opportunities and wonderful beaches!

Malaysia, which is ranked as the Top Halal Friendly Holiday Destination in an OIC country, offers much to Muslim travelers; Malaysia was followed by Egypt, Turkey, Indonesia, United Arab Emirates, Morocco, Tunisia, Jordan, Brunei and Qatar.

All of the non OIC countries listed have the basic Halal friendly facilities available as well, though they may not be as frequent or as popular as in OIC countries. The destinations offer unique surroundings, atmospheres and attractions for the many visitors they welcome.

Bosnia and Herzegovina is ranked as the most Halal Friendly Holiday Destination in a non OIC country; this crossroad where East meets West is an eclectic mix of traditional masjids and modern ski resorts giving its tourists the best of both worlds. BiH was followed by Singapore, South Africa, Sri Lanka, Gold Coast (Australia), Delhi (India), London (UK), Bangkok (Thailand), Munich (Germany) and Vienna (Austria) as the Top 10 Halal Friendly Holiday Destinations among non OIC countries for 2012.

For a more in-depth look at the Halal Friendly Holiday Destinations of 2012, visit www.crescentrating.com.

Crescentrating Pte Ltd. is a Singapore based company focused on the development of the Halal Friendly Travel market segment worldwide. Establishments are crescentrated on a scale of one to seven based on the services and facilities they provide to Muslim travelers. The Board of Directors and Board of Advisers of Crescentrating Pte Ltd. come from diverse backgrounds, bringing unique skills and knowledge from the Islamic Banking Industry, Halal Food Industry, Research and Consultancy, Islamic Scholarship and Corporate experience. All of them are well-established individuals with International and pioneering experience in their chosen fields. (Iqraa Int./7Jan2012)

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Alfalah Consulting:  www.alfalahconsulting.com

CEO / Consultant:  www.ahmad-sanusi-husain.com

Islamic Investment: www.islamic-invest-malaysia.com

Oman’s Islamic banking model will be a combination of the best available models

Taking advantage of its late initiation into Islamic banking, Oman will offer a unique model for the sector, which will be a combination of different models available across the world, according to Central Bank of Oman (CBO). H E Hamood Sangour al Zadjali, executive president of CBO, talking on the sidelines of the Oman Islamic Economic Forum, said that Oman’s Islamic banking model will be a combination of the best available models across the world rather than a copy of any single one. 

“Considering the local environment we expect to create an exemplary and unique Islamic banking model. We would include suitable elements from all the different models available. We have hired consultants and they are working on it.”

The two-day forum kicked off under the auspices of H H Sayyid Shihab bin Tariq al Said in the presence of Tun Abdullah bin Haji Ahmad Badawi, former prime minister of Malaysia.

H E Zadjali said that CBO is preparing the necessary rules and regulations for Islamic banking which are expected to be ready by the end of the first quarter of 2012. 

(BusinessToday/4Jan2012)

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Alfalah Consulting:  www.alfalahconsulting.com

CEO / Consultant:  www.ahmad-sanusi-husain.com

Islamic Investment: www.islamic-invest-malaysia.com

Saudi budget implies growing role for Islamic finance

At first glance there is no direct mention of the role of Islamic banking and finance in the Kingdom's economy in the 2012 Saudi national budget announced last week in Riyadh.

But reading between the lines and judging by some of the initiatives launched by various agencies, banks and corporates in the Kingdom leading up to the budget announcement, it is clear that the Islamic finance industry is expected to contribute its fair share in crucial areas such as the financing of small-and-medium-sized enterprises (SMEs) primarily to generate employment especially for the youth; the provision of mortgage or housing finance and housing development finance; funding infrastructure and projects including through PFI (Public Private Financing); and helping Saudi corporates to diversify sources of funding away from bank finance to raising finance through the capital markets, predominantly through sukuk origination, which is expected to go viral in 2012 and beyond.

The involvement of Islamic finance in the Saudi economy is very real and potentially substantial, but in terms of government announcements it is more through nuances as opposed to official financial policy and financial inclusion measures.

For instance, the General Authority of Civil Aviation (GACA) in Saudi Arabia according to its director general, Prince Fahd bin Abdullah, has "agreed with the Saudi Finance Ministry and the Saudi Arabian Monetary Agency (SAMA) to launch sukuk to fund the new $7.2 billion Jeddah Airport project. The $7.2 billion sukuk program will be self-financing instruments of the General Authority of Civil Aviation, but if there is any shortage in the funding, the Ministry of Finance will cover it to curtail any delays in the project."

While this suggests that the issuance may carry Saudi government guarantees, with the Ministry of Finance being the issuer probably through a standalone special purpose vehicle (SPV) and the obligor, there was no reference to this in the 2012 national budget nor in any Ministry of Finance announcements. Nor was it mentioned in the 47th annual report of SAMA which was presented to Custodian of the Two Holy Mosques King Abdullah on Dec. 12 by the outgoing Gov. Muhammad Al-Jasser, who started his new promotion as minister of economy and planning on the next day on Dec. 13. The issuance in any case will be dependent on the restructuring of GACA into a stock-holding company with four separate constituent companies - one specializing in international airports, one in domestic airports, one in air navigation, and one in technology transfer and information services.

Another sign of the growing importance of Islamic finance in Saudi corporate fund raising is the announcement last week by the Capital Market Authority (CMA) that "in continuance with its efforts to develop and diversify investment channels in the capital markets via offers of securities," it has approved a request by Saudi Basic Industries Corp. (SABIC), the world's largest petrochemicals exporter, to issue and offer sukuk with a value that does not exceed SR5 billion. This would be SABIC's 4th sukuk issuance, easily the most proactive player in the oil and gas sector in the world to raise Shariah-compliant funds as part of a diversification of sources of funding strategy.

Several other Saudi issuers have reported interest in raising funds through sukuk including Saudi Electricity Company (SEC) and Saudi Aramco, the world's largest oil producer and exporter.

The fact that Al-Jasser is now the economy minister may turn out to be a blessing in disguise because he can leverage his experience acquired in Islamic finance when he was the SAMA governor from 2009 to 2011. This, especially to promote greater relevance of the banking sector, both conventional and Islamic, to the real economy and the sector to contribute a greater share to GDP. Al-Jasser's tenure at SAMA is relatively short and he did not even complete his full four-year term. On contrast, his predecessor, Hamad Al-Sayari, was governor for a staggering 26 years from 1983 to 2009. All eyes will be on the new SAMA governor, Fahad bin Abdullah Al-Mubarak, who assumed office on Dec. 13 for a four-year term.

The total 2012 budget amounts to SR1.392 trillion ($371.2 billion) of which total expenditure is projected at SR690 billion ($184 billion) and total revenues are projected at SR702 billion ($187.2 billion). This is based on an oil price of $74 per barrel. But in reality the actual budget expenditure and revenues can markedly differ especially for an economy such as Saudi Arabia's because of its dependence on oil exports and thus also the volatility in the price of crude oil. This in turn can have an impact on the prices of other commodities especially if transport costs increase sharply because of higher oil prices.

Not surprisingly the budget is conservative in that it is based on a relatively low price of oil at $74 per barrel given that only a few days after it was announced the actual price of crude oil was hovering at the $100 per barrel. The budget has also been characterized by no lesser person than King Abdullah as one for economic growth and jobs. The government also wants to see the nonoil public and private sector contribute more to real GDP.

New development projects are allocated SR265 billion with education, transport and health infrastructure getting the bulk of the expenditure.

The Kingdom has also earmarked the construction of 500,000 new housing units at a cost of SR250 billion. This was not allocated in the 2012 budget. Instead SR250 billion of the 2011 budget surplus was deposited in a special account at SAMA to fund the program starting in 2012. This is where Islamic finance has a main chance. Already five Islamic mortgage (home finance) companies have been established in Saudi Arabia, including Saudi Home Loans Company; Deutsche Gulf Finance, Tamweel, Amlak and the proposed mortgage company by the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IDB) Group. The limit of housing loans extended by the Real Estate Development Fund too was increased from SR300,000 to SR500,000 which will hopefully provide more houses for citizens and constrain the inflationary pressures stemming from the increase in house rents.

"I do not think the SAMA will give any more licenses in the Islamic mortgage finance market space. We will focus on the Saudi market. The housing sector is the big mover in the Kingdom. The government has announced that it will be spending SR250 billion on this sector over the next 10 years to build 500,000 units. The Kingdom's demography is also very young. The housing gap is 150,000 units a year. What would make the sector really flourish is the adoption of the Saudi mortgage law," explained Khaled Al-Aboodi, CEO of ICD.

Al-Aboodi, however, warned that ICD has hitherto not incorporated the company because it is waiting for the mortgage law to be adopted. But the corporation's board of directors recently took the decision to start the incorporation process of the mortgage finance company which will of course be Shariah-compliant. And which it is hoped will be finalized by the early part of 2012.

Another target group in the budget are SMEs especially funding them directly. In the past this was done through bank finance which would be extended financing to SMEs. "We are also using our Ijara companies to facilitate financing directly to the SMEs and through the creation of SME investment funds. We are establishing the first SME Investment Fund in Saudi Arabia which will be a SR1 billion Shariah-compliant SME fund, which will be the first of its kind. We will be financing companies that are not big enough to progress on their own. It will involve a lot of technical assistance in terms of business processes, financial reporting, ownership structures etc. The goal is once the companies are restructured and on a sound footing, ICD will exit the investment. We want to leave a sound company that would be able to attract future lines of financing from ICD or local banks, explained Al-Aboodi.

Even this fund will target the real estate and mortgage sector. "We are thinking of focusing on the small real estate developers who are building say 30 to 40 villas. They have a good business model but they are relaying on their own resources. It takes them a year to turnaround their projects. We want to support them, transform them and finance them as and when required. Real estate sector is important because it is also moving the other sectors such as the construction and the building materials industries. The demand for housing units is there. The annual gap for housing in Saudi Arabia is about 150,000 units," he added.

(Mustaq Parker/Arab News/1-Jan-2012)

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