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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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