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Friday, 30 March 2012

Islamic Lending Grows as Western Banks Take Breather

DUBAI — As European banks have pulled back from overseas exposures to concentrate on cleansing their balance sheets and strengthening their core businesses, Middle Eastern and Asian borrowers have turned to local investors and alternative forms of financing, analysts say, with issues of Islamic bonds, or sukuk, notably on the rise.

In the first three months of 2012, $6 billion of sukuk were sold in the six countries of the Gulf Cooperation Council, approaching the total of $7.3 billion issued in the whole of 2011, according to data from the Dubai bank Emirates NBD.
“Many issuers who could have raised funds from European banks are now issuing sukuk and conventional bonds,” said Eric Swats, head of asset management at Rasmala Investments in Dubai. “Without the avenue of European financing available, they are turning to the loan markets.”
European banks lent about $237 billion into the G.C.C. region in the first nine months of 2011, according to a new report by Moody’s Investors Service, which said that Moody’s now expected to see “a sustained reduction of lending at a time when the G.C.C. faces sizable funding requirements.”
The six Gulf countries have an estimated $1.8 trillion of capital investments under way or planned over the next 15 years, the report noted.
Saudi Arabia, Kuwait and Oman, which have relatively low exposures to European lenders, are likely to be less materially affected by their retrenchment than the United Arab Emirates, Qatar and Bahrain, it said.
Much of Qatar’s rapid growth has been, and continues to be, financed domestically fromoil and gas revenue through a banking system that effectively recycles government deposits into loans to government-related entities and contractors. But despite the country’s huge wealth, analysts say foreign banks remain a main source of financing, particularly for coming World Cup 2020 infrastructure projects.
As of September 2011, the cumulative total of European bank lending to Qatar amounted to about $43 billion, equivalent to 25 percent of Qatar’s $173 billion annual gross domestic product.
European bank financing of the U.A.E. economy as of September last year amounted to $99 billion, or 28 percent of the country’s $358 billion annual G.D.P.
“The U.A.E. economy, particularly Dubai, has a significant reliance on foreign funding,” said Khalid Howladar, an analyst at Moody’s in Dubai. A further withdrawal of European banks “would leave a significant funding gap in the local economy, and new financing strategies would need to be found.”
Analysts say that Bahrain is the G.C.C. country most vulnerable to a pullback of European financing.
As of September, European bank financing of the Bahraini economy totaled $19 billion, or 76 percent its $25 billion annual output. In the first five months of 2011, all deposits placed with Bahraini domestic-focused banks fell about 4.3 percent, led by an 18.6 percent slump in deposits from foreign banks as Bahrain exploded into social unrest, the Moody’s report showed. West European banks withdrew $13 billion and U.S. banks $5 billion.
By September last year West European depositors had withdrawn an additional $3 billion of financing from Bahrain-based wholesale banks.
Faced with a scarcity of international funds, governments and some private companies in Asia and the G.C.C. are issuing sukuks to tap local liquidity pools for infrastructure projects, according to a report by Standard & Poor’s.
Qatar Petroleum is considering a corporate sukuk issuance this year, while the Bahraini central bank issued a sukuk last month that was oversubscribed.
Saudi Arabia is embarking on an ambitious infrastructure plan and its recent $4 billion sukuk issuance through the Saudi General Authority of Civil Aviation was three-times oversubscribed, the S.&P. report said.
While sukuk issuance has mainly been completed by the public sector, private companies have begun to issue Islamic bonds, including the $400 million sukuk announced in January by Majid Al Futtaim Holding, based in Dubai.
That issue “may open the market to other purely privately owned regional companies,” Nick Stadtmiller, head of fixed income research at Emirates NBD, said at a conference in Dubai.
Analysts say that Asian banks could also fill the financing gap in the future.
Asian and U.S. bank financing in the G.C.C. represented only 1.9 percent and 2.3 percent, respectively, of the region’s G.D.P. as of September 2011, according to the Moody’s report. Asian banks are most likely to increase their participation in the region, given major Asian trade flows with the G.C.C. American banks are likely to remain small players given their own domestic issues.
“The amount of trade between the Gulf and Asian countries has increased and the banks are starting to come in on the back of these projects,” Mr. Howladar said. Still, for now, the focus is on sukuk.

(New York Times / March 28, 2012)

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Dinars old and new

A recent edition of the German magazine GEO-Epoche ran a special feature on the Vikings in which was stated: “As many as 100 million Arab coins were taken north by the Vikings, and more than 80,000 have been found in Sweden alone.” Notorious as heathen antichrists they may have been, but the Vikings clearly had no issues about symbols of belief from the East circulating in their marketplaces. The Vikings’ little boats boldly visited faraway Islamic cities all the way to Baghdad. Coins from the Islamic world served to bring peoples together for centuries.

In what could be referred to as the Golden Years, the Islamic Dinar was a bastion against inflation. The purchasing power of gold in the Orient remained more or less unchanged for almost 2,500 years, and gold served as a reference point for silver currencies, whose value would tend to fluctuate. “Under Darius the Great (522-486),” recounts coin expert Walther Hinz in his study on Islamic currencies, “a wether cost an average of 5.40 gold marks. The same price is in evidence in Anatolia in the year 1340, to name but one example.”

If you google the Islamic Dinar today you will find over two million listings. Thousands of websites are discussing the use, sale and importance of the traditional Islamic currency. There was a time when the famous 4.25 gram gold coin seemed to have been chased out of Muslim consciousness by the global advent of fiat currencies. The fall of the Islamic world went hand in hand with the decline of coinage. In his book on Osmanli history, Halil Inalcik describes not only the collapse of the Ottoman dynasty, but also the giving-up of gold and silver currencies in favour of paper money in the year 1840.

In Europe, gold and silver linked currencies were accused more and more of being old fashioned and behind the times. The global triumph of the European banks would have been inconceivable without the introduction of strategic endebtment and paper money. But in today’s times of inflation and amid widespread injustice caused by currency speculation, people’s attitudes towards paper money are once again changing.

With the ongoing debt and banking crisis, Muslims also are recalling the meaning of their old units of measurement. It is an important matter, since the unit of the Dinar concerns not only mundane economic affairs, it is also linked to the correct payment of Zakat. The standardisation of weights and the details of exchange rates between units were, in everyday Muslim life, virtually always connected to the necessity to pay Zakat correctly. As early as the reign of Khalif Umar, a fixed standard weight of the coins used was decided on, above all to facilitate easier Zakat calculation.

The ruler Abdulmalik later took the production of coinage into Muslim hands in what was an important currency reform, establishing his own mint. In his essay entitled The Monetary Reforms of Abdulmalik, Philip Grierson describes the efforts made to give the coins a uniform appearance and size. The prerogative of coinage was considered an important symbol of political sovereignty in Islam. In his famous Muqaddima, Ibn Khaldun dedicates a whole chapter to the minting of coins, reminding his readers about the obligations of the political leader: “He must establish the mint in order to protect the currency used by people in their mutual transactions against counterfeiting.”

Today, a world of Dinars is being brought back to life by hundreds of independent players. In principle, any Islamic authority anywhere in the world can bring a new Dinar into circulation with its own design. Leading manufacturers have however agreed on weights and sizes, as well as certain standards of production. The technical achievements of the 21st century allow coins of the highest quality and purity to be made.

In a world of global trade, the quality and authenticity of coins is important. Counterfeit coins are an age-old problem, although today, new security features can be incorporated in the coins which previously were unknown. For example, an elaborate process allows holograms to be sprayed onto gold coins in order to make them immune to forgery. Other suppliers are experimenting with invisible security features which can be detected by users using simple equipment.

Modern Internet payment systems have put paid to the idea that the Dinar is backward-looking romanticism. Dinars are not being minted for the museum’s sake but rather to be collected in Waadias, bought and sold through Wakalas, and sent around the world using modern payment systems. Seen this way, Dinars can form the basis for a sophisticated economic system and a potential world currency, as well as a real-value foundation for investment agreements within the scope of Islamic contracts.

An important facet of all this is the physical existence of the currency, which must be guaranteed at all times. Trading with promises of payment printed on paper is expressly forbidden in Islamic law. Interaction between diverse financial establishments within Islam makes an economic model without the existence of conventional banks absolutely feasible. More and more people are rediscovering this truly ‘alternative’ aspect of Islam, including in the West.

Whether and how you use a Dinar is not a political issue, nor is it an indicator of a liberal or conservative outlook, the Dinar is simply the foundation and accounting unit of Islamic economic law. And in the marketplace, the Dinar can still be used as a means of payment by merchants, consumers, retailers, and the general public at large – regardless of religion. The Islamic market permits free choice in the means of payment. Users trust the Dinar simply on account of its weight and the inherit value it contains.

The Dinar as a unit of measure also resonates with a philosophy which interpreted the introduction of paper money as a key to unfettered capitalism and thus a threat to the creation, as Goethe foresaw. Limiting the power of technology – especially financial technology – is indeed a major dimension of Islamic financial law. Trading justly and with mutual consent is one of the most important Quranic injunctions.

But now there are other reasons to launch currencies covered by gold and silver. Something of a world movement has emerged in support of gold. In the USA alone, 13 federal states want to introduce genuine coins as a statutory means of payment. In Europe, the sale of Dinars and other gold-based private currencies is subject to practical limitations. Germany’s Monetary Act and Medallion Ordinance allow you to produce medallions, but they must be sold with value added tax, making them unable to compete against state-issued coins (statutory currencies).

But even in Germany there are some weighty voices, including in the Bundestag, advocating a free choice of currency without prejudice in favour of government money. According to the liberal standpoint of FDP Bundestag Member Frank Schäffler, only free competition between currencies can prevent states from pumping masses of bad money into circulation. The idea of allowing the rules of the market to apply to currencies is attracting more and more adherents.  

(Globalia Megazine / 30 March 2012)

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Global Islamic finance assets hit $1.3 trillion

LONDON, March 29 (Reuters) - Islamic financial assets around the world hit $1.3 trillion in 2011, a 150 percent increase over five years as the industry expands into new country's beyond core markets in the Middle East and Malaysia, a report on Thursday estimated.

Developed markets in Malaysia, Iran and the Gulf remain fertile ground for future growth, but considerable potential also exists for expansion as more countries look to cultivate Islamic banking operations, including Australia, Azerbaijan, Nigeria and Russia, the report by lobby group TheCityUK's UK Islamic Finance Secretariat (UKIFS) said.

The figures were based on UKIFS growth estimates projected on end-2010 figures from a survey of the top 500 Islamic Financial Institutions conducted by The Banker publication.

"Considerable potential exists for expansion of the industry worldwide, although appropriate legal and regulatory structures are crucial for its development in individual countries," the report noted.

Morocco is also looking to launch its first fully-fledged Islamic bank in 2013, Reuters reported on Monday

A lack of global standardisation among Islamic institutions has been one of the main challenges for the Islamic finance industry. While regulatory bodies such as AAOIFI in Bahrain and IFSB in Malaysia have attempted to provide standards for sharia-compliant transactions, they are guidelines rather than enforceable rules.

The long-term impact of the Arab spring uprisings as new countries open up to Islamic finance remains to be seen and any further spread of political unrest could negatively affect prospects in some Middle Eastern countries, the report said.

Egypt, for instance, has raised the possibility of issuing a sovereign sukuk (Islamic bond), whileTunisia has set up a working group that will study how to develop Islamic finance in the country.

Sukuk issuance globally increased 62 percent to $84 billion in 2011, with Malaysia accounting for two thirds of that.

Islamic funds under management reached a high of $58 billion in 2010, with the available pool about 10 times larger at over $500 billion, the report found. Fierce competition, though, has driven down management fees worldwide from 1.5 percent in 2006 to 1 percent in 2011.

The new figures are higher than those predicted by Ernst and Young in a report in November, in which the consultancy estimated Islamic finance assets could climb 33 percent from 2010 levels to $1.1 trillion by the end of 2012.

Islamic assets represent only around 1 percent of the global financial market.

UKIFS is a wholly-owned subsidiary of TheCITYUK, a lobby group composed of members across the financial services sector, including lawyers, bankers and asset managers.

(Reuters / 29 MArch 2012)

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Wednesday, 28 March 2012

Key Islamic standard for hedging launched

MANAMA: The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) have launched the ISDA/IIFM Mubadalatul Arbaah (Profit Rate Swap) product standard to be used for Islamic hedging purposes.
The Mubadalatul Arbaah (MA) standard follows on from the ISDA/IIFM Tahawwut (Hedging) Master Agreement and provides the industry with a framework for Islamic risk mitigation.
The launch of the Tahawwut Master Agreement as the template for Sharia-compliant risk management was officially announced by Central Bank of Bahrain (CBB) in March 2010.
"Islamic Financial Institutions (IFIs) have largely shown resilience in the current difficult financial environment and some are even going through an expansion phase," IIFM chairman and CBB executive director of banking supervision Khalid Hamad said.
"However, due to the inter-linkages with the global financial system, the balance sheet of IFIs are exposed to fluctuation in foreign currency rates and also cash flow mismatches due to fixed and floating reference rates.
"IIFM recognises the importance of this critical segment at an early stage and undertook the challenge of developing global Islamic hedging standards in collaboration with ISDA.
"I am confident that such joint efforts will continue in the future for the benefit of the industry," he said.
"ISDA is pleased to continue its partnership with the IIFM as part of its own on-going efforts and commitment to building safe and efficient OTC hedging markets, across both global and Islamic financial markets" said ISDA chief executive Robert G Pickel.
"The ISDA/IIFM Tahawwut Master Agreement was a major milestone in the development of risk management in Islamic finance and the development of the ISDA/IIFM confirmation templates for Islamic Profit Rate Swaps is a natural step in the evolution and development of the market," he said.
The MA Agreement is a mechanism structured to allow bilateral exchange of profit streams from fixed rate to floating rate or vice-versa.
The documentation provides product schedules based on two separate structures for transacting MA to mitigate cash flow risk.
The MA standard documentation has been developed under the guidance and approval of the IIFM Sharia Advisory Panel, in co-ordination with the external legal counsel Clifford Chance as well as market participants globally.
"The MA Standard has given to the industry access to a robust and well developed product documentation under the Tahawwut Master Agreement to manage cash flow risk for various Islamic Capital Market instruments such as sukuk which has seen increasing number of fixed profit rate issuances in the last few years and as the sukuk market grows, the need for hedging will also increase," said IIFM chief executive Ijlal A Alvi.
"IIFM has taken a lead in preparing Islamic financial product and documentation standards for specific areas of the industry to provide best practices and clarity for sound business activities," said IIFM Sharia head Dr Ahmad Rufai.
(GulfDailyNews / 28 March 2012 )

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Malaysia: Cagamas issues RM500m Islamic bond (sukuk)

Malaysia’s Cagamas Bhd, the country’s mortgage corporation, said today it has issued a multi-tenured RM500 million (US$162.34 million) Islamic bond to widen and diversify its investor base. 

The Cagamas bond is structured under wakala concept that involves the use of an agency agreement in which one firm accepts funds from another to invest on its behalf in a syariah-compliant manner. 

“The uniqueness of the sukuk wakala structure arises from the co-mingling of the debts arising from a commodity murabahah transaction with equity assets constituting an investment portfolio,” Cagamas said in a statement. 

Cagamas said the sukuk wakala, which was issued out of its RM60 billion commercial paper and medium-term note programmes, was priced at yields of 3.35 per cent, 3.50 per cent and 3.70 per cent for one, three and five year tenures respectively. 

AmInvestment Bank Bhd and RHB Investment Bank Bhd were the joint lead managers for the issuance. -- REUTERS

(BusinessTimes / 28 March 2012 )

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Tuesday, 27 March 2012

Sound bites in Islamic finance

“Interest equals disinterest because the lender has nothing to do with the borrower and his business. Islamic finance aims at creating an economy in which one financial dollar equals one real economy dollar.” Yusuf Talal DeLorenzo, syariah scholar 

TODAY’S attention span can be described by a seven letter word “TWITTER”. The amount of seconds in a minute, minutes in an hour and hours in a day is the same as far as one can remember, yet we seem to be busier than ever in an information overload world.

It seems the typical time for processing, analysing and drawing conclusions of, say, news headlines is confined to the first few paragraphs of a story and we must act fast in scrolling headlines in real time.

In a world of “hyper-trading” and “flash crashes”, information is the new currency of choice for the informed. John Naisbitt, a futurist and best-selling author, stated it eloquently, “… the new source of power is not money in the hands of a few, but information in the hands of many”.

However, it seems we have also reached the point of being “efficiently destructive” as the US subprime and eurozone debt crises may be examples of “over-reaction” to data points.

The attention span in Islamic finance also seems shorter. In the course of the last few years, I’ve tried to explain aspects of the industry in catch phrases and sound bites. It is not meant to be a gimmick or attributed to laziness, but reflects the financial world landscape we operate in today. It’s well accepted that Islamic finance is a subset of conventional financial, and today, a better understanding may just require sound bites that conjure up a mental picture of what the user has already encountered.

Thus, financial industry participants have heard or read phrases like “efficiency, intermediation, 1.0 or 2.0, eurobond and shelf registration”, etc, and such words produce a mental picture of what is being described. It then becomes an easier task in describing parts of Islamic finance, from work in progress to existing offerings, to open minded interested parties. 

Boring finance is vogue: Several years ago, I was presenting on structuring, screening and product offerings in Islamic finance. After the polite “golf clap”, an audience member, probably a trader or hedge fund manager commented “this stuff is boring, how do you juice returns?” I replied, “boring finance” meaning lack of use of excessive leverage and turbocharged derivatives, has (typically) a narrower bandwidth of returns, but a global target market. He replied, “what is the point when financial engineering is not allowed to lead your industry?”

Well, the subprime and sovereign debt crises have flushed out one important takeaway: Investors had more risk than they thought they had. The transparency associated with “boring finance” seems to be vogue today as “risk” is better understood.

Islamic Finance 2.0: We need to speak in the language of the worldwide web (www), as it’s the “lingua franca” of the community seeking connectivity to undertake collaborations for the benefit of Islamic finance contributions. It took the Islamic finance industry nearly 40 years to reach the magical US$1 trillion (RM3.07 trillion) size, i.e., 1.0. Now, the consensus is that it should take five years to reach US$2 trillion (RM6.14 trillion), hence, 2.0. 

Information intermediation: To get to Islamic finance 2.0, information intermediation (prerequisite for financial intermediation) needs to be conventionally efficient. In certain quarters, the western financial model or system may be discredited, however, it is difficult to deny the information side of the model is discredited.

Today, information about Islamic finance, from news to data to structures to fatwas, is fragmented, scattered and (oftentime) stale. For example, today Islamic finance news is not time sensitive. Hence, there may be 10 stories on, say conventional funds in one hour globally on the wire service, but only 10 Islamic fund stories in a month.

For an effective output, one needs to have an informed input. The information intermediation must be to the standards of a western/conventional terminal user. 

Conventionally efficient: It is assumed that the financial sector is the lubricant of any well functioning G-20 economy, which includes three Muslim countries — Turkey, Saudi Arabia and Indonesia — where Islamic finance exists.

Today, Islamic finance is best categorised as an emerging market phenomenon and national/domestic in nature. Therefore, Islamic finance information as part of pre-trade work flows for various existing asset classes, from treasury to sukuk to compliant investing, needs to become conventionally efficient. 

The conventional efficiency of Islamic information can be seen as:
q MORE precisely measuring, mitigating and monitoring risk, including capital charges for compliant participatory instruments, 

q CROSS selling Islamic finance to non-Islamic community, including joint ventures, and 

q REACHING the non-bankable and disenfranchised customers. Put differently, such information efficiency will act as growth factors and facilitators.

A.I.R. (Authenticity, Innovation & Reach): One of the battle cries in Islamic finance is (indigenous) authenticity as it goes to:

q DELINKING or decoupling from the law necessity and conventional finance, and 

q ADDRESSING the question for the man on the street, “what’s the difference?” The authenticity (A), less standardisation, will typically set the foundation of innovation (I), and where there is “A and I”, reach (R) generally follows.

However, some in Islamic finance have commented it may be just “hot air”. An example of indigenous authenticity that has been classified as innovation is the alternative Libor, Islamic Interbank benchmark Rate (IIBR) launched in November 2011. It has been an ongoing industry issue, delinking from Libor and it was addressed by industry institutions and market participants. IIBR is now reaching the early acceptance stage whereby its being discussed by lawyers for inclusion into modalities of contracts as reference price.

Malaysia is nearing Shelf Registration Efficiency for sukuk: The sukuk has become the poster-child for Islamic finance and no one country has done more sukuk growth and development than Malaysia and its stakeholders, from Bank Negara Malaysia to the Securities Commission to the Association of Islamic Banks Malaysia (AIBM) to the Bond Pricing Agency of Malaysia (BPAM) and so on. Thus, the time to market is measured in weeks and not months. Hence, Malaysia sukuk market development seems to be following the early growth patterns of the eurobond market.

Furthermore, the sukuk development flushes an important point about debt capital markets (DCM): It is about liquidity and not just listings. Thus, jurisdictions that issue press releases about number of sukuk listed or the total size (dollar amount) of listed sukuk are missing the bigger point — DCM development is about liquidity as liquidity begets liquidity and listings. 

Islamically over-leveraged: As one can be conventionally over-leveraged, one can be Islamically over-leveraged. Thus, there is no “divine put” in Islamic finance as the “syariah” will not save someone from bad business decisions, bad documentation or be “lender of last resort”. Thus, there have been sukuk defaults and bankruptcies, Islamic investments banks (really real estate project banks) changing the business model, etc. 

Islamic finance (today) is about personalities: When Christine Lagarde was the French Minister of Economic Affairs, Islamic finance was moving forward in France and now seems to have been put on hold after she left for the IMF. When Gordon Brown was the UK Prime Minister and Chancellor of Exchequer, Islamic finance was also moving, and upon his leave, Islamic financial seems to have taken a sabbatical in the country. 

Thus, it seems there may be “key-person” risks in Islamic finance, and more so in Muslim countries where it is flourishing; Malaysian central bank governor Tan Sri Dr Zeti Akhtar Aziz, Securities Commission chairman Tan Sri Zarinah Anwar (she is to leave at the end of the month and there is much confidence in her successor Datuk Ranjit Ajit Singh), Islamic Financial Services Board (IFSB) secretary general Rifaat Abdul Karim (his successor Jaseem Ahmed has carried on the work to the next level) and others. 

As with any new industry, personalities will give way to institutions, and institution like Malaysia’s AIBM is a good case study on how to formalise a movement.

Islamic finance is a sunrise industry: The US$1 trillion industry has moved from viability (an alternative to conventional finance) to credibility (establishment of Islamic windows/subsidiaries) and has arrived at durability (global financial crisis). It is now beginning the journey to sustainability and scalability, with the hope of A.I.R. for mankind.

(BusineesTimes / by Rushdi Siddiqui / 27 March 2012)

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Islamic banks with no interest coming to Croatia

Islamic banks, banks which prohibit the payment or acceptance of interest or fees for loans of money, will soon arrive in Croatia. Dr. Sukrija Ramic, a member of the Sharia Board of the first Islamic bank on European soil, Bosna Bank International, has announced that legal regulations have been completed that will open the way for new Islamic banks to open in the region.
Ramic has said that Croatia, with its Catholic majority population, could accept an Islamic bank in the country before Bosnia and Herzegovina, since Pope Benedict XVI has previously recommended that commercial banks look to the principles of Islamic finance.
Islamic banks are not only intended for Muslims but for all citizens. There are no special requirements for non-Muslims. Apart from Islamic banks having no interest, there are several other differences between Islamic and conventional banking. Islamic banks do not finance alcohol, tobacco, pornography, prostitution, gambling or the weapons industries. In other words, investment projects must be halal, reported Croatian daily newspaper Vecernji list.

( / 26 March 2012 )

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Morocco eyes first Islamic bank launch in 2013

RABAT: Foreign Islamic banks will be allowed to take up to 49 percent of Morocco's first fully-fledged Islamic bank in 2013, as the country aims to become a regional financial hub, a government minister said on Monday.

The government will submit to parliament a draft bill with a set of regulations for the introduction of Islamic finance products in the country within the next few weeks, General Affairs and Governance minister, Najib Boulif, told Reuters.
"We expect parliament to approve the bill before the end of this year. The current plan is to allow a gradual introduction of Islamic banks to preserve the competitiveness of existing(conventional) banks," said Boulif.

The draft bill will be added as a chapter to the country's Banking Law, providing a set of regulations on all Islamic finance products which specialised lenders will be able to offer from Morocco, Boulif said.

It is the first time that the Moroccan government, led since December by the moderate Islamist Justice and Development Party (PJD) has detailed how it intends to develop Islamic finance in the country of 34 million.

Morocco does not allow fully-fledged Islamic institutions but started in 2010 allowing conventional banks to offer a limited set of Islamic financial services products although customers complain they are subject to higher fees than conventional banking products.

So far only AttijariWafa, the country's biggest bank which is indirectly controlled by a holding company owned by Morocco's ruling monarchy, offers four such services based on Murabaha financing but only for personal finance.

Immediately after parliament approves the law, Moroccan authorities will allow local banks and foreign Islamic banks to set up the first Morocco-based Islamic lender, Boulif said.

"Local banks will be allowed to take at least 51 percent of its capital and as much as 49 percent will go to foreign Islamic lenders. There is a very strong demand from abroad for such a project," said Boulif, himself a member of the PJD.
Traders in Casablanca cite Qatar's International Islamic Bank as one of the likeliest foreign Islamic banks to want a foothold in Morocco.

"We thought it is best to start with one Islamic finance institution as we wish to assess closely the experience to ensure its success. If it proves to be a success within six months, then nothing should stop us from authorising more Islamic lenders," added Boulif.

In allowing fully-fledged Islamic finance institutions to operate in Morocco, Rabat aims to overcome what has become a chronic shortage of liquidity, speed up economic growth and help its ambitions to develop a regional finance hub in Casablanca.

"Our economy is in desperate need for a push to help it jump to an economic growth pattern above the (annual) 4 percent we have had in recent years," said Boulif.

When in opposition PJD legislators had said the development of a fully-fledged Islamic finance system in Morocco would add 2 percentage points to annual GDP growth.

"Morocco is struggling with liquidity shortage that forces the central bank to inject between 30 and 35 billion dirhams each week (into the banking system). This shortage hurts the financing of investment and impacts lending growth," Boulif said.

Morocco is also working on a developing a regional financial hub known as the Casablanca Finance City with a view to winning business with other countries in the north and west of Africa.

"We are keen to capitalise on the stability we enjoy here to turn Morocco into a regional Islamic finance platform," Boulif said, adding however that Tunisia and Libya may also harbour similar ambitions.

"Good investment opportunities don't wait. I think we will have to work pretty quickly to enact the new law in 2012 and not squander a very good and rare opportunity.

(TheDailyStar / 26 March 2012)

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Monday, 26 March 2012

Financing on faith: The rise of Islamic finance

On the surface, the Islamic finance industry in the Gulf has never been healthier. When Emirates Airline looked at the markets last year to secure financing for yet another tranche of new aircraft, it decided against its traditional option; the European banks.
“We were kind of planning for finance from European banks, but it’s just a bit difficult now,” Emirates president Tim Clark told Reuters in November. “We still have the Islamic finance market to go with, and other funding options are always open for us.”
That kind of approach is telling. As European finance houses wilt under the pressure of the continent’s sovereign debt crisis, fast-growing emerging markets firms are in dire need of liquidity that Islamic banking institutions apparently stand willing and ready to provide.
Another example of the industry’s popularity was investment banking behemoth Goldman Sachs, which announced last October that it was planning to issue as much as $2bn through sukuk. Recent reports indicate that the Goldman sukuk could well be received positively, particularly by Saudi investors.
And in November last year, the launch of the Islamic interbank benchmark rate (IIBR) was another sign of the growing maturity of the local industry. A result of the collaborative approach taken by Islamic finance institutions, industry associations and sharia scholars, the IIBR finally offers a proprietary benchmark that decouples the sector from more conventional pricing.
Global sukuk issuance exceeded $85bn last year, more than 90 percent higher than the previous year, according to Kuwait Finance House Research Limited (KFHR). Its monthly report on the Islamic bond market also said issuance during December fell below the average, hitting $5bn.
The report showed that sovereign issuance was the main catalyst for the sukuk market last year, making up $59bn, while companies' issuance reached $19bn. The 2011 total to $85.1bn represented a year-on-year increase of 90.2 percent compared to 2010, KFHR added. The global sukuk secondary market also reached an all-time high of $178.2bn by the year-end, a 24 percent increase on 2010, the report said.
On a monthly basis, December was a quiet month for issuances outside of Malaysia. However, the primary market still recorded a year-on-year increase of 0.7 percent.
The largest issuance for the month was the third issuance of the year for Pakistan Domestic Sukuk Company Limited which issues on behalf of the government. The $781.1m sukuk Ijarah was structured with a three-year tenure. The vast majority of primary market issuances were domiciled in Malaysia with only one sukuk each arising from Pakistan and Bahrain, the report added.
However, while the sharia-compliant industry is clearly popular, it still faces plenty of criticism. Is the industry simply seeing success by default due to the problems being faced by more traditional sources of finance, or is the trend on merit alone?
While acknowledging the key role that Islamic finance institutions are now playing in terms of delivering liquidity to governments and corporations who need it now more than ever, ratings agency Standard & Poor’s last month warned that systemic opacity still remained a concern.
“Until the Islamic finance industry overcomes its long-term problems, we do not expect sukuk to become a mainstream asset class,” S&P wrote, in a report entitled ‘Global Crisis Boosts Growth In A Lively But Fragmented Sukuk Market’. “The huge variety of sukuk structures continues to deter some investors, in our view.
“The process for resolving defaults and restructuring sukuk also remains uncertain; although an increase in the number of issues that have been listed has increased pricing transparency,” the report added.
The Goldman sukuk has been something of a case in point. While the issuance may well be welcomed by many, experts have already pointed to alleged flaws in its structure, suggesting that due to a series of technicalities, the sukuk may not be sharia-compliant. Needless to say, Goldman has denied the accusation, but the fact remains that different scholars tend to have different assessments about the viability of sukuk.
Another factor that is affecting the industry is the relatively small size of the market. According to Reuters, global Islamic finance assets total nearly $1 trillion, while the market for sukuk is equivalent to roughly one percent of global bond issuance.
That being said, 2012 looks like being a positive year. HSBC is forecasting global issuance of sukuk to total $44bn in 2012, about $14bn of which will emanate from the Middle East. Saudi Arabia gave the market a particular boost earlier this year, when it issued its first government-backed sukuk (see box out) — the proceeds of which will go to develop Jeddah’s airport. The move is being seen as many as a government bid to get behind the Islamic bond market ahead of a slew of expected issuances this year.
Following a major issuance by Saudi International Petrochemical Company (Sipchem) on the Saudi bourse last year, much is expected of the kingdom’s corporates in 2012. Dairy giant Almarai said in November last year that its board had approved a sukuk as the company plans a $1.1bn investment in the poultry sector. And Saudi Aramco-affiliated companies alone need to raise as much as $26bn to fund refinery and petrochemicals projects, according to National Commercial Bank (NCB).
Meanwhile, in the UAE, Emirates NBD is currently considering its maiden sukuk, although Dubai’s biggest bank has also diversified its debt issuances via the lender’s first ‘dim sum’ bond in March. Other corporates that are also believed to be preparing for sukuk issuance are Al Hilal Bank, Tamweel, mall developer Majid Al Futtaim and Emirates Islamic Bank, while Nakheel will be hoping to issue the second tranche of its sukuk in the first half.
“There is little in the current market conditions to suggest that the recent strong momentum in sukuk issuance will slow down in the near term,” a research note from NCB states. “The resilience of the market benefits from a greater uniformity of structures, more robust regulations and practices, as well as product innovation, which has made it possible to issue sukuk in areas such as project finance.
Omani Islamic lenders mull IPOs
Bank Nizwa, Oman’s first Islamic bank, is likely to launch a OMR60m ($155m) initial public offering (IPO) in April, it was reported on Monday last week.
Sources at the bank told The Times of Oman newspaper the lender will offer 40 percent capital as part of the IPO, which will be managed by Oman Arab Bank and will be unveiled for subscription for one month.
While the Capital Market Authority (CMA) said that the bank had not yet filed any paperwork, there was still time for it to do so in order to launch an IPO in April.
“We haven’t received anything from them. However, if the bank fulfills the requirements, there will not be any problem for them to come out with an IPO next month,” a CMA source was quoted as saying.
Islamic rival Al Izz Bank International is also planning an IPO and the CMA confirmed a draft prospectus had already been received. Al Izz Bank International is planning to float a OMR40m ($103.89m) IPO, which will be managed by BankMuscat.
Yemen plans sukuk issuance
Yemen, the Arab world’s poorest country, plans to issue Islamic bonds soon to finance government projects, Central Bank governor Mohamed Awad Bin Humam said in an interview.
“We have plans with the Finance Ministry to issue Islamic bonds to finance government projects and other sukuk,” Bin Humam said in a telephone interview from Sana’a. “We will try to do so as soon as possible.”
Middle East and Asian governments are turning to local sukuk investors to finance infrastructure projects as European lenders reduce overseas exposure amid the region’s sovereign debt crisis. Global issuance of so-called sukuk, or Islamic bonds, increased to $84.5bn in 2011, a 64.5 percent rise on the previous year, S&P said in a report this month.
Yemen last sold Islamic bonds, which pay profit rates to adhere to the religion’s ban on interest, at the start of last year. Bin Humam declined to elaborate on the size or timing of the next sale.
Bin Humam said Yemen’s foreign reserves now stand at $4.6bn, down from $5.9bn in December. “We used the money to finance petroleum products, government services and to buy wheat, flour and sugar,” he said.
More than half the country’s population of 23 million is under 20 years old and about 40 percent of the people live on the equivalent of less than $2 a day, according to the 

United Nations.

( / 25 March 2012)

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Sunday, 25 March 2012

Arab Spring leaves fertile ground for growth of Islamic finance

In the countries swept by the Arab Spring, recent elections were dominated by Islamist parties. This will further encourage the development of the Islamic finance market, experts believe.

"The recent free elections in a number of the affected countries have shown a desire by the people to organise their financial affairs in a manner that reflects their religious beliefs," notes Tariq Hameed, managing associate at Simmons & Simmons in Dubai.

In a report entitled "Blue Print for Islamic Finance Following the Arab Spring" published in February 2012, Hameed notes that the parties winning the most seats in the recent elections in Tunisia, Morocco, Egypt and Libya have all stated their support for Islamic finance.

"The countries affected by the Arab Spring will be expected to deliver economic solutions that directly affect the people that recently voted for them," he argues.

Apart from the desire of the population to move towards a more religious society, there are several reasons why Islamic finance should proliferate in the countries that witnessed the protests of the Arab Spring.

First: the current lack of banking facilities. 

A 2010 study by Dr Dhafer Saidane for the United Nations notes the proportion of people with access to banking services in some North African countries is extremely low - approximately 25% in Morocco and 33% in Tunisia. 

Hameed notes only 10% of Egyptians have access to a bank. "There was a lack of offerings," he says. "Many didn't engage with the conventional banking system."

For the new governments ready to introduce their people into the financial system, Islamic banking therefore represents an attractive alternative to the 'conventional', distrusted Western banking system.

"Introducing Shariah-compliant current and savings accounts would therefore be important to draw people into the financial system," Hameed says.

In Tunisia, the country where the Arab Spring movement allegedly started in December 2010 in the wake of Mohamed Bouazizi's self-immolation in protest of police corruption and ill treatment, steps have already been taken to develop Islamic banking and finance. 

In its Finance Act 2012, Nahda, the Islamist party which has claimed victory in Tunisia's October 2011 elections, has incorporated several changes to facilitate the spread of Islamic finance practices, including a special taxation framework for Islamic banking and the introduction of a regulatory framework for Islamic bonds.

The Tunisian government not only supports the development of Islamic finance, but also sees it as a tool to turn the country into a finance hub in North Africa.

In reality, the industry in the region is up for grabs. Islamic finance has so far failed to take off in North Africa, which currently has less than a 1% share of global Islamic banking assets, according to a report by consultancy McKinsey.

"There are three factors that account for the relative underdevelopment of Islamic banking in North Africa; first the limited development of retail banking generally; second the lack of knowledge of Islamic banking amongst potential clients; and third the absence of (the former) government support," said the African Development Bank in a report on Islamic Banking and Finance in North Africa published late last year.

So with governments across North Africa now openly supporting Islamic Finance, this is likely to change.

Away from retail and commercial banking, one opportunity could come from the development in Islamic microfinance offerings, Hameed notes, as institutions will have to serve demand from rural communities and micro-enterprises.

"The same institution could also provide the community with Islamic micro-insurance (micro-Takaful) to help low-income families to protect against health risks and micro enterprises to protect against property risks," Hameed adds.

Islamic finance could also provide an answer to the need for infrastructure projects, with successful Islamic financing of infrastructure projects already in existence in Bahrain, Saudi Arabia and Bangladesh, Hameed notes.

"Islamic finance can play a prime role in financing big projects in North Africa that require large investments and significant borrowing volumes," said Tunisia's former finance minister, Jalloul Ayed, during a July 2011 summit on Islamic finance opportunities in North Africa. 

Tunisia itself has financing needs of around USD 40 billion over the next five years, Ayed said, and could soon create a sovereign fund called "Fund for the Generations".

There is a substantial need for project finance in North Africa given the poor state of much of the region's infrastructure. Existing Islamic project financing covering 24 schemes in North Africa worth over USD 2.4 billion has already been approved, according to the African Bank for Development. 

The newly elected governments of Arab Spring countries know too well that investing in infrastructure and real estate - in particular, affordable housing, of which there is a severe shortage in North Africa, thus fueling growth and creating jobs - is the only to stabilize the region politically and enhance social cohesion.

Many experts believe Egypt will pave the way for the industry's expansion in the region.

"Egypt will be a great force in steering Islamic finance in a different direction. We will see the development of new products as the market which Islamic finance will serve is a different clientele, and will be needed to solve different problems. Al Azhar University in Cairo should play a role in developing Islamic finance in the country," argues Sahar Ata, a senior lecturer in Islamic finance at the London School of Business and Finance. 

Egypt, the most populous state in the region, already has the highest proportion of Shariah-compliant assets in relation to total bank assets (around 5%). The country is "where Islamic finance has the greatest potential", the African Development Bank said.

However, despite promising prospects, there remain challenges for the Islamic finance industry before the potential of these markets can be reaped, Hameed believes. Strengthening of consumer protection laws, clarifying governance, and establishing central Shariah boards for finance will have to be addressed, he argues. 

(Zawya / 22 March 2012)

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