Swiss-Saudi tie-up targets $500 billion Islamic charity market

* Islamic endowment returns have typically been poor

* Safa says first to offer Islamic asset allocation

* Sharia investing has outshone conventional peers-Sandwick

ZURICH, July 24 (Reuters) - Veteran Geneva-based banker and Islamic finance expert John Sandwick has teamed up with Saudi adviser Wafi International to target the Islamic endowment market, a $500 billion capital pool he said had been poorly served to date.

Waqf, or charitable endowments invested according to Islamic principles, are often used to fund schools and hospitals, but the charitable trusts that generally manage them tend to produce poor returns.

Because of the largely informal nature of the market, estimates of its size vary widely. USAID, the United States' international aid body, said philanthropic giving in Muslim communities worldwide was between $250 billion and $1 trillion a year.

In late July, Ahmed al-Najjar of Egypt's Freedom and Justice Party said waqf endowments in the country totalled about half a trillion Egyptian pounds ($82.25 billion) but, citing a report by the Ministry of Religious Endowment, said they only yielded 0.3 percent a year.

"This market is just too big to ignore, but conventional asset managers have spent their time selling derivatives and hedge funds rather than make efforts to unlock this sleeping giant," said Sandwick, who will launch Safa Investment Services, an Islamic wealth and asset manager, next month.

Traditionally this money has been invested locally in illiquid real estate or real-estate linked financial products, causing lopsided returns, particularly after the regional property price collapse that began in 2008, Sandwick said.

"Today the sharia-compliant mutual fund and exchange-traded fund markets reach $100 billion in assets under management," he said.

Sandwick said when Safa is launched it will be the first to actually perform Islamic asset allocation, rather than selling individual products.

Some investment analysts have said the costs associated with investing in sharia-compliant assets make them more expensive than traditional assets like stocks and bonds, ensuring they will always underperform, but Sandwick refuted this.

"The costs of investing in sharia-compliant assets is a rounding error, they are so insignificant as to be barely measurable thanks to the commercialization of reputable services that certify sharia compliance," he said.

"But, as we have repeatedly shown, the performance of sharia-compliant investing has outshone conventional peers by a long shot, especially during the financial crisis, which showed it was very risky owning derivative-rich, overleveraged securities, and securities without true underlying assets."

Safa is joining forces with Bank of London and the Middle East (BLME) and Riyadh-based Wafi, a waqf adviser, to carry out the first-ever research on Saudi Arabia's waqf market, estimated at between $100 billion and more than $250 billion.

The research results will be published in March 2013, and are expected to underpin further expansion of waqf asset management, Sandwick said. 

(Reuter / 09 August 2012)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

UAE: Abu Dhabi airport contractors near $1.1 billion mainly sharia-compliant finance deal

* Mashreq, First Gulf Bank, Al Hilal among banks on deal

* Financing to be 80 pct sharia-compliant, 20 pct conventional

* Deal is second big sharia-compliant regional project finance deal in Aug

* Islamic financing facility for Medina Airport signed in Aug (Adds details, interview with TAV Airport)

By Bernardo Vizcaino and Praveen Menon

DUBAI, Aug 8 (Reuters) - The consortium building Abu Dhabi's new airport terminal is close to securing a 4-billion dirhams ($1.1 billion) financing deal, which will be mainly sharia-compliant, banking sources said on Wednesday.

A deal would mark the second major regional project finance venture to rely on Islamic financing facilities this month.

Turkey's TAV Insaat, Dubai's Arabtec Holding and Athens-based Consolidated Contractors Co. were awarded a $2.9-billion contract in June to build a mid-field terminal in the emirate.

Dubai lender Mashreq is leading the financing deal which includes First Gulf Bank, Union National Bank , Al Hilal Bank, all from Abu Dhabi, and Jordan's Arab Bank, said two banking sources close to the deal who declined to be identified.

The financing will be 80-percent sharia-compliant with the remainder secured via a conventional loan, the sources said. The four-year contractor finance facility will see all banks provide roughly equal amounts.

An official at Tav Airports confirmed the use of Islamic financing but declined to give further details on the deal.

"We are indeed using Islamic finance for our Abu Dhabi project. Details of the financing are to be released later," Burcu Geris, Project and Structured Finance Coordinator at TAV Airports, said in an emailed statement.

TAV Insaat is a unit of Turkish builder Akfen Holding , which holds a stake in airport operator TAV Havalimanlari.

It marks the second time this month that TAV has turned to Islamic finance to fund its joint projects in the region.

Last week, a consortium including TAV said it had secured a $1.2 billion sharia-compliant facility for Saudi Arabia's Medina Airport project.

"Islamic finance through Saudi banks was our first option for financing in Medina Airport," Geris said. "It only came as a natural choice since Saudi banks are both very liquid and very much experienced in structuring and providing Islamic finance facilities.

Saudi British Bank, National Commercial Bank and Arab National Bank were lead arrangers, with National Commercial Bank serving as the Islamic structuring bank.

The Medina Airport project, which also includes Saudi Oger and Al Rajhi Holding Group, is slated to be completed in the first half of 2015.

Islamic project financing in the Gulf Arab region can be complicated because foreign ownership rules can restrict assets being pledged for such deals.

In the Medina Airport transaction, the largest of the three tranches, worth $719 million, used intangible assets in the form of contractual rights which were transferred to the lead arrangers instead of physical assets.

(Reuter / 08 August 2012)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Pakistan takaful rules to attract new players

* New rules to let conventional firms open takaful windows

* Four to five conventional firms said to be interested

* Rules may boost takaful's market share to double digits

DUBAI, Aug 7 (Reuters) - Pakistan's regulator has introduced new takaful (Islamic insurance) rules designed to boost competition and lift the sector's market share by allowing the entry of conventional players, prompting a legal challenge from takaful providers.

The rules, launched last month, make Pakistan the second country after Indonesia to officially allow takaful windows, which enable firms to offer sharia-compliant and conventional products side by side, provided client money is segregated.

Takaful has operated without conventional competitors in Pakistan since the first rules were introduced in 2005, but those rules said windows could be allowed after a five-year period.

Conventional insurance firms could serve a broader share of the takaful market "with their larger sales force and vast branch network", the securities commission said in a statement last month.

Takaful is seen as a bellwether of consumer appetite for Islamic finance products. It is based on the concept of mutuality; the takaful company oversees a pool of funds contributed by all policy holders, but does not necessarily bear risk itself.

In their investments, takaful firms must follow religious guidelines, including bans on interest and pure monetary speculation. Global takaful contributions are forecast to reach $12 billion this year, according to consultants Ernst & Young.

Although Pakistan is the world's second most populous Muslim nation, takaful's share of the total insurance market there is only 2 to 3 percent, said Omar Mustafa Ansari, Karachi-based partner at Ernst & Young Ford Rhodes Sidat Hyder.

In contrast, the average takaful share in Muslim countries stood at 5 percent in 2010 and is expected to reach 7 percent by 2015, according to a report last September by Swiss Re.

The overall share of takaful in Pakistan could reach 25 to 30 percent for general coverage and 15 to 20 percent in family/life coverage within five to seven years, Ansari said, with much of that growth being captured by windows.

"Takaful companies did not have the capacity to serve the Islamic banks, let alone the overall corporate and personal needs for insurance," Ansari said, noting that no new takaful firms had entered the market in the last four years.

"While I am considered to be a purist (or at times critic of the weaknesses in the present system), I feel that for the purpose of growth of the industry, it is necessary to allow windows." Ansari added that his comments were his personal views and not made on behalf of any company or institution.

VOLUMES

Conventional players appear keen to enter the market to increase their business volumes. "At least four to five companies have prepared working papers," Ansari said.

Incumbents face "fierce competition on pricing and service quality. They will have to increase their capital bases and might need to look for mergers and acquisitions," he added.

New entrants into the takaful market could also increase overall insurance coverage in the country by reaching out to untapped market segments.

Pakistan's insurance penetration, measured as total premiums to gross domestic product, was the third-lowest in Asia last year at 0.7 percent, against 4.1 percent for India, another report by Swiss Re showed.

Opportunity lies in Pakistan's rural belts where there are high growth prospects, said Muhammad Ashfaq Ur Rehman, a Dubai-based management consultant. "It depends how conventional insurers having windows devise their marketing strategy."

But Pakistan's five takaful operators last week filed a petition in a court in Sindh province, the country's second-largest Islamic banking market, to challenge the new rules.

"Criticism is against the window concept (seen as diluting the sharia)," wrote Tarik Rashid, Karachi-based insurance consultant and associate fellow of the Institute of Islamic Banking & Insurance, a British-based body which offers education in Islamic finance.

However, the new rules include requirements for external auditors and internal compliance officers, and the regulator said further requirements might be included.

If authorities decide to introduce a minimum capital requirement for takaful windows, that could create a level playing field for pure takaful and conventional insurance companies, Ansari said.

The takaful industry's lobby may not be powerful enough to persuade the authorities to cancel the reforms entirely. "I do not think there is a real forceful takaful representation" that could make the regulator reverse its decision, Rehman said.

Any reversal might be hard to justify because Pakistan's conventional banks operate Islamic windows under the same methodology, a source at one of the takaful firms said.

The petition may delay the opening of takaful windows or prompt the regulator to make some amendments to the rules, but the decision to open windows is "guaranteed" to go ahead, the source acknowledged.

(Reuter / 07 August 2012)

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Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Role of professional real estate firms in Islamic banking

In the region there have been challenges to Islamic banking due to the slump in real estate, however, advocates say the system has built- in protection when compared with the conventional financial institutions as excessive risk taking is banned

The decision to licence the operation of Islamic banking in the Sultanate has opened up windows of opportunities for the banking sector in Oman. The successful launch of “Bank Nizwa”, an exclusive Islamic bank and the opening of Islamic banking operations windows within conventional banks is evidence that the banks plan to capitalize on the opportunities presented by the new industry and meeting the increasing demand for Sharia-compliant finance.

Over the past two decades, Islamic finance has burgeoned into a $1 trillion global industry that, among other things, has served as a vital source of funding for real estate projects and developments around the world.  Several modes of Islamic financing have been developed based on the primary tenet of Islamic financial intermediation that mandates the sharing of risk between the lender and the borrower.

Islamic banks have focused on real estate because it fits with Islamic principles, which require an underlying physical asset in all transactions. Many other investment classes are also off-bounds due to prohibition on gambling and interest.

Some institutions have relied heavily on real estate as the primary business model, investing in real estate, developing real estate and lending to activity around real estate. The real estate investment and finance products could involve the purchase of land, buying and selling, build and sell, build and lease and re-development.

In Oman, Islamic finance has the potential to, among other things, help the revival of the domestic real estate sector. This impending resurgence will help investor confidence in the local market and accelerate national economic growth as well.

In the region there have been challenges to Islamic banking due to the slump in real estate. However, advocates say the system has built- in protection when compared to the conventional financial institutions as excessive risk taking is banned. In addition to the market risks there are areas such as competencies and expertise to supervise risks effectively.

Islamic commercial banks have been conservative in lending and collateral valuations. Investors are being very cautious and asset prices are going down, so it is more challenging. The challenges are in identifying the quality of asset, asset price risk, rate of return risk, displaced commercial risk and equity investment risk.

The bank’s exposure for Islamic banks typically takes the form of a profit sharing contract; whereby the Islamic bank puts its own money at risk in the form, effectively, of an equity stake. The bank’s exposure depends on both the skill and honesty of its partner.

This potent mix of high risk and moral hazard is an area which needs greater scrutiny. In fact, as the real estate assets which banks are financing continue to be owned by their clients, much Islamic bank exposure to real estate risk may not appear on the sector’s balance sheets.

An experienced property management firm such as Cluttons has in-depth knowledge and experience to assist with critical risk management activities on individual opportunities such as condition surveys, purchase reports, valuations, and appraisals as well as strategic guidance on market opportunities and determinants of value of real estate income for investment decisions.

(Kippreport / 07 August 2012)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Indonesia to Allow Currency Hedging for Islamic Banks

Indonesia will let Shariah-compliant banks hedge against exchange-rate movements to spur growth in Islamic financial assets and narrow the gap with Malaysia’s industry, which is seven

times larger.     

Bank Indonesia, the National Shariah Board and the Indonesia Institute of Accountants have approved the instruments, available in Malaysia since 2006, Adiwarman Azwar Karim, Jakarta-based vice chairman of the board’s Islamic capital market working committee, said in an Aug. 3 interview. The central bank said it is working on regulations, declining to say when they would be finished.     

Bank Muamalat Indonesia, the nation’s second-largest Islamic lender, will be able to hold more global bonds and issue more dollar loans once it can hedge, Finance Director Hendiarto said in an Aug. 2 interview in Jakarta, adding that it expected to increase foreign-currency lending by 50 percent this year. The rule change will help Indonesia reach its target of lifting Shariah-compliant financial assets to 10 percent of the total by 2015 from 4 percent, Edy Setiadi, executive director of Islamic banking at the monetary authority, said in a July 30 interview.     

“With this product, Islamic banks will be more comfortable with increasing their foreign-currency portfolios and managing the mismatch between financing and funding,” said the National Shariah Board’s Karim. “It will also open up the possibility for foreign banks to supply dollars to local banks and multifinance companies, who can then disburse loans in rupiah.”                         

Lending growth     

Investors and companies take out hedges to protect themselves from exchange-rate swings that may erode the value of earnings or investments denominated in foreign currencies.     

Indonesia’s Islamic banking assets total Rp 147.9 trillion ($15.7 billion), trailing Malaysia’s 355 billion ringgit ($114 billion), central bank data show, even though the former nation has 12 times as many Muslims. Shariah lending in Indonesia increased by an average of 38 percent each year over the last five, compared with 21 percent in Malaysia.     

Worldwide sales of bonds that comply with Islam’s ban on interest reached $28.9 billion in 2012 from $17.4 billion in the same period last year, data compiled by Bloomberg show. Offerings totaled a record $36.7 billion in 2011.     

The average yield on worldwide Islamic notes declined two basis points, or 0.02 percentage point, to a record low of 3.14 percent on Aug. 3, the HSBC/Nasdaq Dubai US Dollar Sukuk Index show. The spread between the average and the London interbank offered rate, or Libor, narrowed six basis points to 208 basis points.                        

Foreign requests     

Indonesian authorities started looking at allowing hedging after receiving requests from overseas Islamic banks, including CIMB Group Holdings Ltd. and HSBC Holdings Plc, that wanted to tap higher returns on loans in Southeast Asia’s largest economy, Karim said. The average financing rate offered by Indonesian Shariah lenders was 10.38 percent in June, compared with 6.24 percent in Malaysia, central bank data show.     

“It is important to develop new products to be able to compete with the conventional banks,” Mohamad Safri Shahul Hamid, the deputy chief executive officer at Kuala Lumpur-based CIMB Islamic Bank Bhd., a unit of CIMB Group, wrote in an emailed response to questions on Aug. 3. “Through hedging, Islamic banks could reduce potential losses arising from sudden shocks and might be able to pass on some of the savings to the investors.”                        

Religious decrees     

The introduction of hedging requires two religious decrees, or fatwas, from the National Shariah Board. The first will allow Islamic banks to do Murabaha transactions, sale contracts with deferred payments, in different currencies at exchange rates previously agreed on by both parties, Karim said. The second will prescribe a swap based on the Waad scheme, a promise to undertake a certain action that is binding for both banks, he said, adding the decrees would take about two months to draft.     

Malaysian lenders held 5.32 billion ringgit of Shariah- compliant deposits in currencies other than the ringgit at the end of June, amounting to 2 percent of total Islamic deposits, data from Bank Negara Malaysia show. They had 7 billion ringgit of foreign-currency financing outstanding, representing 3.2 percent of the total.     

“Islamic banks are not living in isolation and they conduct cross-border transactions which would naturally be exposed to currency risks,” Asyraf Wajdi Dusuki, chairman of Kuala Lumpur-based Affin Islamic Bank Bhd.’s Shariah Committee, said in a Aug. 2 phone interview. “This is also in line with the objective of Shariah to preserve and protect wealth.”                         

‘More prudent’     

Global Islamic bonds returned 6.5 percent this year, according to the HSBC/Nasdaq Index, while emerging-market debt gained 12.6 percent, according to the JPMorgan Chase & Co.’s EMBI Global Composite Index.     

The premium investors demand to hold Indonesia’s dollar-denominated 8.8 percent sukuk due April 2014 over Malaysia’s 3.928 percent global Islamic bonds due June 2015 narrowed one basis point to 50 basis points, data compiled by Bloomberg show.     

HSBC Amanah, the Shariah-compliant unit of HSBC Holdings, will offer cross-currency hedging and foreign-exchange forwards after receiving central bank approval, Herwin Bustaman, the Islamic lender’s Indonesia head, said in June. The new rules will help Indonesia achieve 50 percent annual growth in Islamic loans through 2015, Bank Indonesia’s Setiadi said.     

“If banks were cars, conventional lenders are running at full speed with all the hedging products at their disposal while Islamic banks are not growing optimally,” Bank Muamalat’s Hendiarto said. “This product will make us more prudent and reduce our risk in conducting multicurrency transactions.

(Jakarta Globe / 07 August 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com