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Tuesday, 10 April 2012

New IFSB guidelines focus on risks in Islamic banking

The Islamic Financial Services Board (IFSB) has published new guidelines on liquidity and stress-testing, seeking to reduce the balance sheet risk of Islamic financial institutions in line with a tightening of standards in conventional banking.

The guidelines are the first published by the Malaysia-based body, which sets global standards for Islamic finance, since December 2010. The guidelines are not mandatory — it is up to national regulators to decide whether to adopt them — but the IFSB said it expected regulators to begin using them in 2013.

Under one set of new guidelines, the IFSB calls for closer scrutiny of maturity mismatches, more attention to avoiding excessive concentration of funding sources, and better measurement of unencumbered assets, or assets on which there are no claims.

Over-concentration of funding sources has been a problem for some Gulf companies which have relied on a small number of debt issues without raising equity.

Kuwaiti investment firm International Investment Group said last month that it had agreed in principle with most creditors on the main terms of a plan to restructure a $200mn exchangeable sukuk which represents over 75% of its liabilities.

A second set of IFSB guidelines covers stress-testing of Islamic financial institutions, offering 29 principles that cover risks specific to Islamic banks; they are designed to complement international best practices.

The IFSB’s new standards are part of a series of initiatives in the last several months to address the issue of risk in the industry. Early this month the Accounting and Auditing Organisation for Islamic Financial Institutions, another standard-setting body based in Bahrain, proposed more detailed accounting standards for real estate while increasing disclosure for Islamic banks’ investment accounts.

Last month, the Bahrain-based International Islamic Financial Market and the International Swaps and Derivatives Association launched a standard contract template for Islamic profit rate swaps, which can be used to hedge risk.

The Malaysia-based International Islamic Liquidity Management Corp plans to issue a new set of liquidity management products this year, which it hopes will give banks a greater choice of instruments with which they can meet liquidity requirements.

The IFSB’s latest guidelines may indicate a shift of approach for the body. Founded in 2002, its standards were initially generic and criticised for lacking details, as the IFSB focused on winning wide support for its positions.

Now, however, the IFSB appears to be prepared to issue more detailed guidance in response to the global financial crisis, a trend towards tightening regulation of conventional financial markets, and the opening of North Africa to Islamic finance in the wake of last year’s Arab Spring uprisings.

In a statement on its latest guidelines, the IFSB said the “looming challenge is to attain scale and depth in financial markets through strengthened regulatory frameworks”.

The IFSB’s next annual summit, to be held in Turkey in May, will focus on “The Changing Regulatory Model and Islamic Finance”, the organisation has announced.

(Gulf Times / 10 April 2012)

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Sukuk Shortage Stymies Funds With $192 Billion in Malaysian & Indonesian Pension Funds

Malaysian and Indonesian pension funds, which have a combined $192 billion of assets, say plans to increase holdings of Islamic bonds are being hampered by a shortage of investment-grade sukuk.
Kuala Lumpur-based Employees Provident Fund and Kumpulan Wang Persaraan (Diperbadankan), Malaysia’s two biggest pension managers, and PT Jaminan Sosial Tenaga Kerja (JAMSOS), Indonesia’s largest retirement fund, say they want more Shariah-compliant debt in order to diversify portfolios that must hold investment- grade securities. Kumpulan Wang, which runs Malaysia’s civil service scheme, is looking offshore for sukuk because of local scarcity, fixed-income director Ahmad Norhisham said in an April 6 interview.
While global sales of sukuk have more than doubled to $11.8 billion this year, that accounts for about 1 percent of the $1 trillion of Shariah-complaint financial assets worldwide, the Kuala Lumpur-based Islamic Financial Services Board estimates. Malaysia, Indonesia, Qatar, Bahrain and United Arab Emirates’ governments, the only investment-grade sovereign issuers, have a combined population of 286 million and $308 billion of currency reserves, data compiled by Bloomberg show.
“The pension funds are getting money faster than sukuk sales,” Badlisyah Abdul Ghani, chief executive officer at CIMB Islamic Bank Bhd. in Kuala Lumpur, said in an interview yesterday. “Despite the prolific sukuk issuance in Malaysia, it’s still small compared to the invest-able funds out there.”

Investment-Grade Sales

Sales of investment-grade bonds that comply with Islam’s ban on interest in 2012 have included Riyadh-based Saudi Electricity Co. (SECO)’s $1.25 billion of 4.211 percent debt due April 2022. Dubai-based Emirates Islamic Bank PJSC, a unit of Emirates NBD PJSC, sold $500 million of 4.718 percent securities maturing in January 2017 and MAF Sukuk Ltd., a subsidiary of Dubai-based mall and hotel operator Majid Al Futtaim Holding LLC, sold $400 million of 5.85 percent notes due February 2017.
Employees Provident Fund, Malaysia’s biggest pension provider with $153 billion of assets, will boost holdings of non-ringgit denominated sukuk from $1.7 billion to $3 billion by 2013, Chief Executive Officer Azlan Zainol said in an interview in Kuala Lumpur last month.
Islamic bonds returned 2.5 percent this year, the HSBC/ Nasdaq Dubai U.S. Dollar Sukuk Index shows, while debt in developing markets rose 4.8 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.
Average yields on Shariah-compliant debt advanced seven basis points, or 0.07 percentage point, to 3.69 percent last week, according to the HSBC/Nasdaq index. The difference in yield with the London interbank offered rate, or Libor, narrowed 10 basis points to 238 basis points.

‘Liquidity Premium’

Islamic securities account for about 3 percent of Jaminan Sosial Tenaga Kerja’s, or Jamsostek’s, 105 trillion rupiah ($11.5 billion) portfolio, according to data supplied by the fund in June 2011.
“Ownership of sukuk will be increased in the future because it is a long-term investment instrument that is safe and gives a competitive return,” Jamsostek President Director Hotbonar Sinaga said in a statement on March 21.
Yields on Indonesia’s 4 percent Islamic bonds due November 2018 were at 3.65 percent on April 6, according to data compiled by Bloomberg. Malaysia’s 2.991 percent sukuk maturing 2016 yielded 2.43 percent on the same day, according to prices from Royal Bank of Scotland Plc.
“Because the sukuk market is relatively new in Indonesia, its availability and liquidity is still not as high as for conventional bonds,” Angky Hendra, who helps oversee 11.2 trillion rupiah of assets as head of fixed-income at Batavia Prosperindo Aset Manajemen, said in an April 4 interview from Jakarta. “So the sukuk usually needs a liquidity premium.”

‘Suppressed’ Yields

Yields on Malaysia’s 3.928 percent global Islamic securities due June 2015 were little changed at 1.99 percent yesterday, according to Royal Bank of Scotland prices. The yield premium demanded on Dubai’s 6.396 percent sukuk due November 2014 and Malaysia’s bonds narrowed two basis points to 206 basis points, according to data compiled by Bloomberg.
The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index (BMSSITR), which tracks the most-traded government bonds, rose 0.1 percent last week to 107.13. The gauge has advanced 1.4 percent in 2012.
Kumpulan Wang Persaraan wants to raise its holdings of Shariah-compliant securities, which now account for about 23 percent of its 84 billion-ringgit ($27 billion) portfolio, fixed-income director Norhisham said. The fund is seeking government approval to invest in Indonesian sukuk, he said.
Moody’s Investors Service and Fitch Ratings assign Indonesia an investment-grade ranking, while Standard & Poor’s rates it the highest junk level. At its last sale of global sukuk, Southeast Asia’s largest economy sold $1 billion of notes on Nov. 14 with bids exceeding the amount offered by 6.5 times.
“If you just depend on the local market, there is a short supply of paper and yields are suppressed due to too much liquidity,” Norhisham said. “Sukuk is not a buyer’s market. If you negotiate too much with the issuer for better returns, you might not be able to secure any of the paper.”
(Bloomberg / 10 April 2012)

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Philippine: Islamic Finance - what next?

Almost exactly one year ago, Noel Bonoan and Aaron Lim published an article entitled “Why not Islamic finance?” in this KPMG CORNER. The article summarizes the potential opportunities of Islamic finance while at the same time mindful of the hurdles currently in the Philippine fiscal and regulatory regime.

In trying to understand and flesh out some of these hurdles, Manabat Sanagustin and Co., CPAs (MS&Co.), the Philippine member firm of KPMG International, partnering with the British Embassy in Manila organized a forum on Islamic finance entitled “Enabling Islamic Finance in the Philippines” on March 8, 2012. The forum was well-attended by over 50 participants from diverse background including the banking industry, Muslim organizations, members of the academe, the Philippine government represented by the Department of Finance, Bureau of Internal Revenue (BIR) and the Bangko Sentral ng Pilipinas (BSP) as well as global experts in this arena.

The general consensus during the RTD was that now is a good time for the Philippines to start considering Islamic finance – and any necessary changes are achievable! Neil Miller, KPMG global head of Islamic finance and a UK national, emphasized that similar struggles existed when the UK attempted to introduce Islamic finance and it took the Bank of England over a period of more than six years to introduce Islamic finance – clearly not a short timeframe. Comparison with the UK is relevant as it was able to position itself as the global Islamic center without compromising on its state and religious identity – something the Philippines can aspire to, as well. Neil was one of the initial members of a working group tasked with establishing Islamic finance in the UK.

Being a member of the UK Treasury Committee of Islamic Finance Experts and Financial Services Authority Committee on Islamic Finance, Neil worked closely with the Muslim Council of Britain and other bodies to promote and develop Islamic finance in the UK. The message was clear – UK was able to successfully introduce Islamic finance because of the presence of a driving political will, most crucially demonstrated by the then governor of the Bank of England (the late) Sir Eddie George. Identifying such a person who embraces and understands Islamic finance will be key to achieving the same development in the Philippines.

Such person will also need to have a strong understanding of Philippine tax, often mentioned as one of the main hurdles to Islamic finance in the Philippines. Noel Bonoan, former undersecretary of Finance and current vice chair of MS&Co.’s tax division, compared the possible taxes likely to be incurred on conventional bonds and Sukuk bonds. As an example, consider a three-year conventional bond that pays interest at five percent annually, and a typical Ijarah or lease-type Sukuk with face value of P1 million. Other assumptions include a fair market value of P1 million for a real property and a three-year lease agreement with an annual payment of P50,000.

( / 10 April 2012)

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