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Tuesday, 12 June 2012

Afghanistan Planning Sukuk as Foreign Aid Ends

Afghanistan plans to sell Islamic bills for the first time early next year, as it prepares for a reduction in international aid after the withdrawal of foreign troops in 2014.
Draft laws will be submitted to the government “soon” and an offering of longer-maturity sukuk will take place at the end of 2013, Noorullah Delawari, the head of Da Afghanistan Bank, said in an interview yesterday. Progress stalled in 2011 following the resignation of his predecessor in June over the disappearance of funds from Kabul Bank, which was the largest commercial lender.
The nation, invaded twice in the past four decades and riven by civil war, is looking for alternative financing as it prepares to become self-sufficient by 2025, Wahid Tawhidi, a Finance Ministry spokesman, said in a June 10 interview from Kabul. Total banking assets have increased to $4 billion from $100 million a decade ago, with 10 percent complying with Islamic principles, according to data from the central bank.
“Sukuk will offer the first light to the Afghan debt market,” Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt, said in an e-mail on June 9. “The good thing will certainly be that dependence on foreign grants will be lowered, and a new market will appear on the map for sukuk investors that will provide interesting diversification opportunities.”

Funding Gap

The South Asian country currently sells short-term securities that don’t comply with Islamic tenets to help local banks manage their funds, and these will be replaced by the new Shariah-compliant notes, Khan Afzal Hadawal, the first deputy governor of the central bank, said in a May 28 interview.
The monarchy was deposed in a coup in 1973 and the Soviet Union invaded to support the communists’ claim to power. The nation has been ravaged by civil war ever since, with the Taliban rising to prominence in the mid-1990s until the U.S.-led invasion in 2001. Some U.S. troops will remain in Afghanistan after the 2014 withdrawal as agreed by President Barack Obama and his counterpart Hamid Karzai during the signing of a strategic partnership pact in Kabul in May.
Former central bank Governor Abdul Qadir Fitrat quit and fled to the U.S. last year after investigators called him in for questioning over Kabul Bank.
Siamak Herawy, a spokesman for President Karzai, said at the time that Fitrat left the country following a letter from the attorney general asking for an explanation over the scandal. Fitrat said he had resigned because he received threats from officials he had implicated, the Ariana Television channel reported.
The international community has provided $56.8 billion in aid to help rebuild the country since 2001, Tawhidi said. Natural resources such as copper and coal will lift government revenue and fill the funding gap, he added.
Afghanistan has 17 banks, with seven providing Islamic services at booths, Emal Hashoor, the central bank’s spokesman, said in a June 10 interview. About 99 percent of the 30 million people are Muslim, according to the CIA World Factbook.

‘Stabilize’ Markets

“Selling Islamic bonds will help stabilize Afghanistan’s capital market,” the central bank’s Hadawal said. “Sukuk is important to develop the country’s financial market because it complies with Shariah law.”
Global sales of Islamic bonds, which pay returns on assets in accordance with the religion’s ban on interest, almost doubled to $16.6 billion in 2012 from a year earlier, after reaching a record of $36.7 billion in 2011, data compiled by Bloomberg show.
The securities returned 3.8 percent this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets gained 5.6 percent, JPMorgan Chase & Co.’s EMBI Global Index shows.
Average yields on Shariah-compliant notes fell four basis points to 3.69 percent last week, according to HSBC. That’s 194 basis points, or 1.94 percentage points, less than developing- market bonds, a separate JPMorgan index shows. The difference between average yields on Islamic debt and the London interbank offered rate narrowed five basis points to 263 basis points.

‘Cautious’ Banking

The yield on Malaysia’s 3.928 percent dollar-denominated sukuk due in April 2015 was little changed at 1.95 percent yesterday, according to data compiled by Bloomberg. The difference in yields between Malaysia’s debt and the Dubai Department of Finance’s securities maturing in 2014 shrank three basis points to 179 and has declined 33 basis points since the end of May.
Afghanistan’s introduction of Shariah-compliant banking laws should draw local investors who shun lending that doesn’t comply with Islamic tenets, Malek Khodr Temsah, vice-president of treasury and investment at Albaraka Banking Group (BARKA) BSC in Manama, Bahrain, said in an e-mail on June 10.
“A government sukuk has the potential to attract considerable sums from Afghan citizens cautious of the country’s traditional and conventional banking system,” he said.
The economy expanded 7.1 percent last year, slowing from 8.2 percent in 2010 and 20.9 percent in 2009, according to the CIA World Factbook. The country isn’t rated by Moody’s Investors Service or Standard & Poor’s. Afghanistan is ranked the 13th poorest country in the world by the CIA, with gross domestic product per capita income of $1,000 in 2011, compared with an estimated $2,800 for neighboring Pakistan.

‘Stability Issues’

U.S. Defense Secretary Leon Panetta visited Kabul last week to assess troop pullout plans as attacks on coalition forces by the Taliban and the Pakistan-based Haqqani network escalated. Four French soldiers were killed in the northeastern province of Kapisa at the weekend, the office of President Francois Hollande said in a statement, as the country also prepares to withdraw.
U.S. Marine Corps General John Allen, the top coalition commander in the nation, has “expressed concern at the renewed level of attacks,” said Panetta.
“It’s very hard for mutual funds to invest in Afghanistan,” Anas El Maizi, an Abu Dhabi-based fund manager at Royal Capital PJSC, said in a June 5 interview. “There are so many political uncertainties and stability issues that investors won’t be keen on. It will be local investors or international bodies such as the World Bank that will invest.”
(Bloomberg Business Week / 11 June 2012)

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Egypt's Muslim Brotherhood drafts code to boost Islamic banks

The political party of Egypt’s Muslim Brotherhood, which has the biggest bloc in parliament, is proposing changes to the banking law with the goal of boosting the market share of Islamic banks to 35 percent in five years from 5 percent now, a party member said.

Ahmed al-Najjar, a member of the Freedom and Justice Party’s economic committee, told Reuters that the proposals envisaged a new Islamic banking section being added to the law, which now has no specific regulations covering Islamic banks.

Draft amendments to the law have been presented to parliament but no date has been set to discuss them, he said.

Bankers say last year’s revolt which toppled President Hosni Mubarak, whose regime neglected or discouraged Islamic finance for ideological reasons, has cleared the way for growth of Islamic finance in the Arab world’s most populous nation.

They say the business needs a regulatory framework before it can grow but that the nation of 82 million people, who are overwhelmingly Muslim, offers an attractive market. Islamic finance obeys religious principles such as bans on the payment of interest and pure monetary speculation.


According to a copy of the proposals obtained by Reuters, each Islamic bank would be required “to form an independent sharia (Islamic law) authority” with no less than three sharia experts who were registered with the central bank. Each expert would be allowed to serve with a maximum of two banks in Egypt. These sharia boards would supervise the banks’ activities.

Islamic banks would be requested to create sharia-compliant instruments and a money market for surplus cash, according to the draft amendments.
One article states that Islamic banks must “insure customer deposits according to takaful Islamic insurance while not violating Islamic sharia rules”.

The proposals also outline steps which conventional banks would need to take in order to open Islamic banking windows, keeping those accounts separate from their conventional accounts.

More than two decades ago, Egypt was a pioneer in Islamic finance, before development was slowed by a scandal over money management firms that touted Islamic investments at returns above prevailing interest rates.

Egypt now has 14 Islamic banking licenses. Operators include three full-fledged Islamic banks, such as Faisal Islamic Bank of Egypt, and several with Islamic windows, including National Bank of Egypt and Ahli United Bank, part of Bahrain’s Ahli United Bank group, experts say.

The roughly 200 branches and 120 billion Egyptian pounds ($19.9 billion) of assets in Egypt’s Islamic banking industry are dwarfed by Egypt’s conventional banks. Total assets of the entire banking sector are about 1.3 trillion pounds, the latest central bank data show.

By comparison, Islamic banks account for over a quarter of assets in the Gulf’s commercial banking market, according to an estimate by consultants Ernst & Young.

(Reuters / 11 June 2012)

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$214 billion sukuk industry posting growth

MANAMA: The $214 billion global sukuk industry is witnessing unprecedented growth, complemented and triggered by diversification.
That was the message from Zawya fixed income team leader Adnan Halawi at the sixth London Sukuk Summit yesterday. The summit, at the Jumeriah Carlton Hotel, is the premier conference in the Islamic capital markets industry.
It specialises in the latest developments and provides an ideal platform for experts and those interested in accessing the industry to discuss key issues, highlight and identify new opportunities and forge new business relationships.
In his presentation 'Sukuk Market: Growth and Diversification', Mr Halawi discussed key growth factors leading to a current outstanding sukuk despite obstacles hindering growth.
He also provided insights into recent developments that have shaped the industry, one of which is diversification as a trend and need in the Islamic bond market.
Other findings include geographical expansion, a wider choice of currencies, stock exchange listings, regulatory support measures, structural innovation and increased cross-border issuance.
"Large pools of Muslim wealth and abundant liquidity have ensured that demand for sukuk exceeds supply," he said, adding Islamic finance's safe haven, asset-backed nature had led to more investors globally opting for sukuk to diversify portfolios and meet financing and refinancing requirements.
He said the Middle East and North Africa region witnessed a retreat in conventional issuance in favour of sukuk, a trend that is expected to persist should North African states start selling sukuk.
(Gulf Daily News / 08 June 2012)

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