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Wednesday, 4 July 2012

Islamic finance treads fine political line in Kazakhstan

(Reuters) - In Kazakhstan, a farmer and an imam approach the Islamic Development Bank for a loan. The farmer, an Orthodox Christian, needs tractors to plough his fields. The imam wants to repair the roof of his mosque. Which one gets the loan?
Yerlan Baidaulet, a banker who is one of Kazakhstan's foremost proponents of Islamic finance, received both requests. He sent the imam away with a donation from his own pocket on the grounds that Islamic banking permits charity or grants, not loans, to religious institutions.
The farmer, an ethnic Russian, got the loan he needed. Long since repaid, it was the springboard to the growth of a major farming enterprise in the grain belt surrounding Kazakhstan's futuristic capital, Astana.
"Islamic finance isn't only for Muslims," said Baidaulet, executive director for the Commonwealth of Independent States and Eastern Europe at the IDB, a Saudi Arabia-based multilateral lender. "Even dollar bills are printed with the words: 'In God We Trust'."
Two decades after the collapse of the Soviet Union freed Kazakhstan from Marxist ideology, the country of 17 million people is making a bid to become a regional centre of Islamic finance, which is based on religious principles including bans on interest and pure monetary speculation.
Strongman President Nursultan Nazarbayev, in power since Soviet times, has declared he wants Almaty to become a hub for Islamic banking in the former Soviet Union, which includes other majority Muslim states and Russian republics such as Tatarstan.
While that reflects growing demand among a generation of practicing Muslims who grew up after the Soviet Union's collapse, it could also bring direct economic benefits to Kazakhstan by linking the country to big pools of Islamic investment money in the Gulf and southeast Asia.
On the face of it, the country is ideal for Islamic finance. About 70 percent of its population is nominally Muslim and, in the wake of the global financial crisis, people are more receptive to alternative forms of banking.
But Islamic finance also challenges taboos on overtly religious practices in a society which is run along secular lines. In order to keep the peace in a multi-ethnic state, the government declares itself to be uncompromisingly secular.
Three thousand copies of 'The Handbook on Islamic Banking' by Mervyn Lewis and M. Kabir Hassan, translated into Russian for the local market, have not sold well.
"Some bookstores - the kind of stores that sell economic textbooks - have told us: 'It's a religious book. We won't sell it'," said Baidaulet, who also advises the Kazakh Ministry of Industry and New Technologies.
Abu Dhabi-based Al Hilal Bank became the pioneer for Islamic banking in Kazakhstan by opening its doors there in March 2010. It employs nearly 50 people in the country and its investments to date are worth $90 million, said Prasad Abraham, the bank's local chief executive, adding that it had set a target of $200 million by the end of 2012.
So far, Al Hilal's business has been in the corporate sector and with state-owned companies such as postal firm KazPost, with which the bank signed a wakala or agency agreement worth 1.5 billion tenge ($10 million) in March.
Legislation was passed in 2009 that would in principle allow the government to issue a sovereign sukuk or Islamic bond, which would be a big step in creating a sharia-compliant debt market.
Zaratkazy Nurpiissov, chairman of the management board of Fattah Finance, the country's first brokerage to offer sharia-compliant services, said there was demand for Islamic consumer finance to buy cars and household goods.
Fattah Finance's Hajj fund, in which pilgrims set aside cash to visit Mecca, has accumulated $150,000 in its first year. Nurpiissov said such numbers were the tip of the iceberg.
"I would say there are more than 1 million people who wish to use Islamic finance services," he said. "That number is growing every year."
Proponents of Islamic finance cite Kazakhstan's painful recent experience with conventional finance to make their case; a crisis in 2007-2008 was triggered by banks' exposure to bloated real estate markets and reliance on foreign funding. Islamic finance claims to be less risky because transactions are supposed to be based on income from real assets.
"Why did so many real estate companies go bust?" said Nurpiissov. "Because they borrowed money to buy land next to their existing construction projects without having any cash flow. Then the price of that land fell. Islamic finance would only lend money to build that one block of apartments."
The industry has run up against some major obstacles, however. Crucially, the debut sovereign sukuk issue has not yet materialized.
With over $50 billion stowed in its National Fund, which collects windfall oil revenues, Kazakhstan has no pressing need to borrow abroad. Not only the sukuk was pulled; a $500 million sovereign eurobond planned for 2010 was also shelved.
"It's not a question of sukuk per se. It's simply that we have no need to borrow money on the external market to finance a budget deficit," Finance Minister Bolat Zhamishev told Reuters.
"If it becomes timely to fix a benchmark for our corporate sector, we will think about sukuk issuance. But it wouldn't be effective were it just a one-off."
That view is shared by Ana Lucia Coronel, head of the International Monetary Fund mission that visited Kazakhstan in April and May this year.
"This is not the right time for Kazakhstan to go ahead," she said in an interview in Astana in May. "The sukuk market cannot develop unless the traditional government bond market is sufficiently developed, so it will take a little time."
With a sovereign sukuk off the table for now, the state-owned Development Bank of Kazakhstan is to take the lead in Islamic bond issuance. In March, the bank said it planned a sukuk program worth up to $500 million, but it did not say when issues might take place.
At present, Al Hilal remains the only Islamic commercial bank in Kazakhstan. Rules for entry into the sector are strict; the minimum capital requirement to establish any new bank, whether Islamic or conventional, is 10 billion tenge. Kazakh law does not permit conventional banks to run "Islamic windows", sections that would operate on religious principles.
"A second or a third bank would bring opportunities for transactions between Islamic banks that I'm not in a position to engage in at the moment," said Abraham at Al Hilal.
According to Baidaulet, taxation is "the biggest trouble for Islamic finance in Kazakhstan". Deals based on the murabaha model, the most widely used Islamic financing structure, require bonds to be backed by assets that change hands more than once. In Kazakhstan, each sale of such commodities is subject to 11 percent value-added tax.
A 41-point government road map for Islamic finance, released in March, extends to the year 2020. It envisages the issue of Islamic securities for some industrial projects. Taxation rules would be amended and several Islamic banks created by 2014.
Implementing the road map, however, may yet require a shift in mindset within the government. While debating the sovereign sukuk issue, some members of parliament expressed horror at the prospect, however unlikely, of state-owned assets falling into foreign hands in the event of a default.
A tough new law on religion passed last year, which includes a ban on prayer rooms in state institutions, hasn't helped. The law has been interpreted as a means to curb religious radicalism after a series of Islamist-inspired attacks unprecedented in Kazakhstan. While there is no suggestion that Islamic finance is linked with militant activity, few in government wish to appear overtly religious.
"People, especially civil servants, are now trying to distance themselves from the word Islamic," said Baidaulet, co-chairman of the working group for the road map.
Abraham at Al Hilal said, "Islamic banking is not asking for special favors. We're just asking: make us equal to the conventional banks.
(Reuters / 02 July 2012)

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Dubai Emirates Islamic picks banks for potential benchmark-sized dollar sukuk

(Reuters) - Dubai's Emirates Islamic Bank, a unit of Emirates NBD, has picked banks for a potential benchmark-sized dollar sukuk, or Islamic bond, lead arrangers said on Tuesday.
The lender mandated Emirates NBD Capital, Credit Agricole , Dubai Islamic Bank, HSBC and Standard Chartered.
The initial price guidance for the issue was at a spread of 330 basis points over midswaps, maturing in 2018. Emirates NBD will underwrite it.
Arranging banks said books were now open and one banking source close to the deal said the sukuk could price on Wednesday.
Emirates Islamic, which last tapped the debt markets with a $500 million sukuk in January, is hoping to capitalise on a recent rally in Dubai names that has tightened spreads as regional Islamic liquidity seeks investment opportunities.
(Reuters / 03 July 2012)

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South Africa Names Six Companies to Advise on Sukuk Sale

South Africa’s National Treasury appointed six companies, including Standard Bank (SBK) Group Ltd., BNP Paribas SA (BNP) and Albaraka Banking Group (BARKA), to advise it on its debut Islamic bond issue.
Nova Capital Partners LLC, Liquidity Management House for Investment Co., and Regiments Capital (Pty) Ltd. were also appointed, Tshepiso Moahloli, a senior analyst in the Pretoria- based Treasury, said by phone today.
The Islamic bonds, or sukuk, may form part of the Treasury’s plan to raise $3 billion in international markets over the next three years, she said. South Africa, where less than 2 percent of the 49.1 million people are Muslim, is looking to tap the Islamic finance industry’s $1 trillion in assets.
“We’re engaging with the banks now; the amount, currency and timing will depend on the outcome of our discussions,” Moahloli said. “From what we have observed, issuance tends to be from $500 million to about $700 million and movement around the five-year sukuk area looks like it’s the most favored area.”
The structuring and issuance of the sukuk may be used as a benchmark for state-owned companies that also plan to issue Islamic bonds, Moahloli said.

Public Finance Law

Sukuk are usually backed by assets sold to a special- purpose company by the issuer, which then rents them back in lieu of paying interest. The debut Islamic bond issue was delayed after the government decided to review public finance law, which doesn’t provide for the government to issue asset- based securities, Thuto Shomang, head of asset and liability management at the Treasury, said on May 17.
Moody’s Investors Service rates South Africa A3, the second-highest investment grade on the continent, according to data compiled by Bloomberg.
The country should not limit itself to an international sukuk, Jay Henning, an executive at Cape Town-based money manager Oasis Group Holdings, said by phone.
“While we agree with an international issue, there is definitely demand for a South African issue as well,” Henning said. “We have capacity for it and I’m sure other Sharia- compliant asset managers do as well.

(Bloomberg Business Week / 03 July 2012)

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Indonesia’s corporate sukuk market has a bright outlook

Indonesia’s three best-performing Islamic bond funds say a rebound in corporate sukuk sales is failing to keep up with demand from investors chasing higher returns as government yields decline.    

Insight Investments Management’s top-ranked I-Hajj Syariah Fund wants to boost company holdings from 80 percent if more securities become available, President Director Tony Henri said in an interview in Jakarta last week. Akbar Syarief, fund manager at MNC Asset Management, overseeing the second-best performer, said his confidence in finding buyers is not matched by certainty there will be sufficient supply.    

“Right now the concern is that when money comes in, there may not be securities to invest in,” Jakarta-based Syarief, whose MNC Dana Syariah vehicle returned 3.8 percent this year, said in a June 26 interview. “Corporate sukuk will always be in high demand.”    

The yield on Indonesia’s Shariah-compliant rupiah bond due August 2018 fell 1.12 percentage points in the past year to 6.20 percent, compared with the 8.1 percent average return for Indonesia’s six sukuk funds over the same period. Bank Muamalat Indonesia lifted its June sale to Rp 800 billion ($85 million) from Rp 500 billion after investors sought 2.2 times the amount first offered, Finance Director Hendiarto said.     

Corporate sales have reached Rp 1.5 trillion so far this year, compared with just Rp 200 billion for the whole of 2011. Etty Retno Wulandari, a Jakarta-based director at the Capital Market and Financial Institution Supervisory Agency, said last month she expected 2012 offers to get to Rp 3 trillion. However, official data shows the 20 percent average growth in outstanding corporate sukuk over the past five years still trails the 40 percent expansion in Islamic banking assets.                     

‘Don’t actively trade’     

“Our fund could be much bigger but Islamic bond issuance isn’t growing as fast as banking assets,” Insight’s Henri said. “We don’t actively trade the company sukuk because once we sell it, it is difficult to look for new products to invest in.”     

Worldwide sales of bonds that comply with Islam’s ban on interest climbed to $21 billion in 2012 from $14 billion in the same period of 2011, according to data compiled by Bloomberg. Offerings reached a record $36.7 billion last year.     

Malaysia, the world’s largest sukuk market, has exempted investors from paying taxes on capital gains made on Shariah-compliant debt denominated in currencies other than the ringgit through 2014. Indonesia offers no similar incentive because it is committed to keeping Islamic products on an equal footing with non-Islamic securities, the Capital Market Agency’s Wulandari said last month.            
Tax benefits     

“There needs to be tax benefits for the Shariah-compliant capital market to grow,” Insight’s Henri said. “Issuing Islamic bonds requires more processing and there needs to be a pay-off to make them more or equally lucrative as conventional bonds.”     

The I-Hajj Syariah fund returned 4 percent this year and 10.3 percent in 2011, the most among the six Indonesian sukuk vehicles tracked by Bloomberg, which advanced by an average of 3.1 percent in 2012 and 8.8 percent last year.     

Assets held by Islamic bond and stock funds in Indonesia increased by an annual average of 96 percent over the last five years and account for 3 percent of the nation’s total managed funds, Capital Market Agency data show.     

“We plan to launch more sukuk funds going forward, if there are products,” MNC Asset’s Syarief said, adding that he would like to increase his allocation for corporate notes to 70 percent from 50 percent. “Government Islamic bonds tend to be more volatile and yield lower, so we need to balance our fund with corporate notes.”                        

‘Bright outlook’     

Global Shariah-compliant bonds returned 5.1 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets gained 7.8 percent, JPMorgan Chase & Co.’s EMBI Global Index shows.     

The average yield on Islamic bonds fell one basis point, or 0.01 percentage point, to 3.44 percent on June 29, the lowest since August, according to the HSBC/NASDAQ Sukuk index. The difference between the average yield and the London interbank offered rate, or Libor, narrowed three basis points to 240 basis points.     

Corporate Islamic debt sales in Indonesia this year amount to just 2 percent of Malaysia’s 23.4 billion ringgit ($7.4 billion) of issuance in the same period, even though the former nation’s Muslim population is twelve times as big as its neighbors.     

“Indonesia’s corporate sukuk market has a bright outlook,” Ruben Sukatendel, a Jakarta-based portfolio manager at BNI Asset Management, said in a June 27 interview. 

“It is possible that Indonesia’s Islamic capital market may catch up to Malaysia’s if we see synergy between market players and regulators,” said Sukatendel, who oversees BNI Dana Syariah, the country’s debut sukuk fund and the third-best performing this year.

(Jakarta Globe / 03 July 2012)

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