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Thursday, 20 September 2012

Egypt-based Islamic finance firm eyes $100 mln investment

The firm was launched on Wednesday after Dubai-based regional investment company Ridge Solutions International Holdings, which is providing the $100 million, acquired Egyptian investment banking and asset management firm El Rashad.

El Rashad operated on conventional financial lines but Ridge said assets that it managed would now be converted to be sharia compliant, according to a timeline set by a sharia compliancy board, likely to be about two years. Future investments would all meet Islamic principles.

"With a population that exceeds 83 million and the government-set target to increase Islamic and Sharia compliant finance, Egypt represents an attractive proposition for us to present and differentiate our products from modern and traditional Islamic banking," Miguel Henriques, chief executive of Ridge Solutions, said in a statement.

The parent company for the Ridge group of companies, Ridge Solutions Group, is based in Angola. 

The Egyptian firm now has paid-in capital of 22.5 million Egyptian pounds ($3.69 million), and manages a fund and portfolio investments worth about 20 million pounds in total.

"We are going to increase it (the capital). We don't know yet by how much because we are bringing in $100 million and we are going to put that $100 million either into capital or in funds that we are establishing here," he said at the launch.

He added that this decision would depend on how best it could leverage its investment and attract other investors.

One of the first initiatives by Ridge Islamic Capital is to set up a $150 million Islamic fund of funds, possibly for launch by the end of this year or the start of 2013, covering the Middle East and North Africa.

Henriques said Cairo would be the base to expand into the Middle East and North Africa. In Egypt, where an Islamist president now rules, he noted opportunities in real estate.

Officials from Egypt's Islamist Freedom and Justice Party have said they aim to boost the market share of Islamic banks in Egypt to 35 percent in five years from roughly 5 percent now. They say they will do this by increasing the total size of the banking sector, not by penalising conventional banks.

The FJP is the political party of the Muslim Brotherhood, the group the propelled President Mohamed Mursi to power after the overthrow last year of Hosni Mubarak, whose govermment neglected or discouraged Islamic finance.
(Reuters / 19 Sep 2012)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Strengthening the Islamic banking platform

KUALA LUMPUR: Indonesian Islamic banks like Bank Mandiri have offered strategic partnerships with foreign investors in its plantation projects, saying this would strengthen the Islamic banking platform. 

“Foreign companies can join us in loan syndication to (jointly) finance the medium and large scale projects,”said Bank Syariah Mandiri CEO Yuslam Fauzi during one of the GIFF industry specific dialogues held yesterday. 

Such cooperation would not only increase the efficiency and better manage risk but it would also strengthen Islamic banking. 

Indonesian banks have a great appetite for the rosy palm oil industry what with Indonesia having a 43 per cent market share of the global production plus a 7.8 per cent annual growth. 

Other crops which are enjoying strong growths in Indonesia are rubber with the strong demand from its automotive sector and cocoa. 

In the case of Malaysia, financing for downstream activities are limited as SMEs have less access to finance especially those in the timber sector. This was unlike the upstream side where the government extends financial assistance to smallholders in replanting and mechanisation 

Mohamed Sanuri Shahid from the Plantation Industries and Commodities ministry said financing opportunities are plentiful in large estates, forest plantations, agarwood as well as export credit financing. 

Meanwhile Bursa Malaysia Bhd head of Islamic and Alternative market Jamaluddin Nor Mohamad said the world's first end-to-end Syariah-compliant commodity trading platform, Bursa Suq Al-Sila' is working on expanding the number to attract higher transactions. 

The platform now has crude palm oil, plastic resin and RBD palm olein. 

After a successful joint sukuk issuance for TH Plantation Bhd, Hong Leong Islamic Bank is on an aggressive drive to have more such issues by the end of next year. 

Hong Leong Islamic Bank head of Islamic Institutions and corporates Syamsul Azuan Ahmad Fauzi said these are benchmark issues valued at between RM500 million and RM1billion. 

Other plantation companies which have issued Islamic bonds to raise funds for capital expenditure are Kuala Lumpur Kepong Bhd which sold RM1 billion of 10-year Islamic bonds while Sime Darby Bhd is also planning its first multi-currency sukuk programme of as much as US$1.5 billion. 

In the case of the construction sector, large infrastructure players like UEM have been heavily dependent on sukuk to finance their projects. 

UEM Group Bhd group managing director Datuk Izzaddin Idris said the company is likely to tap the sukuk market when it embarks on a hospital project in Kuala Lumpur. 

UEM is still eyeing projects in the Middle East as long as there are infrastructure construction opportunities such as World Cup 2020 in Qatar or affordable housing project in Saudi Arabia. 

UEM and WCT and Gamuda are among the top Malaysian players in the region.

(Business Times / 20 Sep 2012)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Turkey embraces Islamic finance with sovereign sukuk

Turkey's issue of its first sovereign sukuk this week paves the way for Turkish companies to raise money through Islamic bonds, and may help the country become a major market for Islamic investors from the Gulf and southeast Asia.
After coming to power a decade ago, Prime Minister Tayyip Erdogan's government, which espouses Islamic values, largely shied away from Islamic finance for fear of opening itself to charges that it was trying to roll back state secularism.
This prevented the world's eighth most populous Muslim nation from participating fully in rapid growth of the industry. Islamic financial assets globally hit $1.3 trillion in 2011, a 150 percent increase over five years, according to an estimate by lobby group TheCityUK's UK Islamic Finance Secretariat.
The Turkish government's issue of a $1.5 billion Islamic bond this week, which drew heavy bids totalling about $7.5 billion from global investors, is a step towards bringing Turkey into the mainstream of Islamic finance, potentially giving it more access to tens of billions of dollars of Islamic investment funds from other Muslim nations.
The sukuk is expected to serve as a benchmark for the pricing of future Islamic bond issues in the Turkish private sector. Other Islamic financial practices, such as takaful or Islamic insurance, may also attract more demand in Turkey after the government's shift.
"This is a landmark for Islamic finance in Turkey. Sukuk would help to deepen capital markets in Turkey," said Ibrahim Oguducu, head of the financial institutions business at Bank Asya, the country's largest Islamic bank.
Islamic finance, which operates according to religious principles such as bans on interest and pure monetary speculation, has been growing during the global financial crisis partly because it can draw on a huge pool of religiously- oriented investment funds from the oil-rich Gulf.
But Turkey has only four Islamic banks, which held a combined 61 billion lira ($33.9 billion) of assets in June, only 4.8 percent of the country's banking assets, according to Turkish brokerage IS Investment. In the Gulf Arab states, Islamic institutions hold roughly a quarter of the market, according to an estimate by consultants Ernst & Young.
Because of political sensitivities in Turkey, and to adhere to local law, Islamic banks in the country do not describe themselves as such but use the label "participation banks". Sukuk are described as "participation certificates", a reference to the fact that instead of paying investors interest, they pay returns on a pool of assets.
This week's sukuk issue suggests Turkey is moving away from such squeamishness about Islamic finance. Another sign of this is the government's 2007-2013 economic development plan, which refers in general terms to "asset-based" and "interest-free" financial instruments as part of efforts to develop the country as a regional financial centre.
"We have strong expectation for the Turkish treasury to continue sukuk issuances in the following years," said Yavuz Yeter, group manager for investment banking, treasury product development and marketing at Kuveyt Turk, one of the Islamic banks.
One reason for the policy shift appears to be the growing confidence in power of Turkey's ruling AK Party, which in the last several years has succeeded in reducing the political power of the secularist military.
A bigger reason may be economic trends. The Middle East and North Africa are becoming increasingly important to Turkish companies as growth in Europe and the United States stagnates.
"In this year, 34 percent of Turkish exports went to the MENA, so we need a similar kind of story for financials, foreign direct investment and any kind of debt issuance," Melis Metiner, senior economist at HSBC Turkey, said at the bank's MENA-Turkey forum, held in Dubai this week.
"In terms of debt issuance I think that would be a very attractive market."
Turkey's Islamic banks have so far issued only two sukuk. Both were issued by Kuveyt Turk, 62 percent owned by Kuwait Finance House, which raised a total of $450 million in 2010 and 2011.
The sovereign sukuk is expected to stimulate more issuance by the banks, by giving investors a benchmark off which to calculate yields they will accept. Kuveyt Turk has said it plans to sell a lira-denominated sukuk this year.
Last November Bank Asya shelved a plan for a $300 million, five-year sukuk issue, citing "adverse developments in international markets", but it may eventually revive the plan. Al Baraka Turk, a unit of Bahraini lender Al Baraka, has been talking about a possible $200 million sukuk issue.
Current market conditions for Turkish sukuk issuance appear excellent. Because of a big overhang of unsatisfied investor demand for sukuk in the Gulf and elsewhere - Ernst & Young estimates outstanding demand globally is over twice this year's expected supply of sukuk - many borrowers have been able to issue Islamic bonds more cheaply than conventional bonds.
"In the current context, where Turkish banks have been able to obtain international financing via Eurobonds at relatively cheap rates, there is room for advantageous pricing," said Ugursel Onder, senior associate at IS Investment.
Turkey's Islamic banks have so far been depending largely on retail deposits and short-term syndicated loans for funding, and have had limited access to international markets. So borrowing longer-term money via sukuk could improve their funding structures, Yeter said.
Onder said sukuk might help Turkey's Islamic banks meet minimum capital adequacy ratios as regulators tighten standards around the world. Since sukuk are asset-based instruments, they may in some cases be treated as a form of capital on banks' balance sheets, unlike conventional bonds which are pure debt, she said.
"Participation banks can issue sukuk as capital-like loans. In that way, these can be considered as Tier 2 capital and be treated like equity, which will in return boost their capital adequacy ratios."
Once Islamic banks issue their own sukuk, they may shift their attention to underwriting sukuk for Turkish companies seeking to raise money.
"The first non-financial sukuk could come as early as 2013. I think corporates will closely watch the sovereign issuance first," Onder said.
"As the know-how improves in the market, big corporates, holding companies and commercial firms would be much more interested," said Oguducu. "A number of corporates are interested in issuing sukuk, especially in the domestic market."
Since many international investors would require companies to have investment-grade credit ratings before buying their sukuk, some companies will focus on attracting domestic investors with lira-denominated sukuk, analysts said.
Turkey's sovereign sukuk uses an ijara structure, a leasing contract in which investors acquire partial ownership of an underlying asset and share in returns on renting it out. Broadening the types of sukuk in the market to include structures such as musharaka and mudaraba, which resemble partnerships or asset management contracts, would encourage corporate issuance, Yeter said - though the necessary expertise would take time to develop in Turkey.
Another important issue is tax policy. Because sukuk can involve two or more transfers of their underlying assets - one at the time of issue, and a second when the sukuk matures - they can be taxed more than once, making them less attractive. The Turkish government currently exempts ijara sukuk from multiple taxation but not other structures, Yeter said.
In addition to demand for Turkish sukuk from international investors, significant interest is expected from Turkish pension funds, some of which offer Islamic products, and from other investment funds keen to diversify their fixed-income holdings, Oguducu said.
Sukuk could eventually hold a share of the lira corporate bond market that exceeds the roughly 5 percent share which Islamic lenders have in the banking sector, Ibrahim Turhan, chairman and chief executive of the Istanbul Stock Exchange, told Reuters. "In sukuk, I expect a better performance."
(Reuters / 19 Sep 2012)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Indonesia's missing ingredient in Islamic finance

Islamic finance in Asia is a distinctly Malaysian affair. Indonesia, an emerging regional powerhouse with the world's biggest Muslim population, does not even figure. Indonesia needs to address this shortcoming. Islamic finance could help it solve two of its biggest financing challenges: funding infrastructure and reducing its dependency on foreign borrowing.

The prospect is especially tantalising because Indonesia is in a position to learn from Malaysia's experience and develop its own Islamic capital markets much more quickly. It could even exploit the deep liquidity pool that Malaysia has built.

Take infrastructure. Indonesia plans to spend US$200bn on infrastructure between now and 2014. Progress, however, has been slow.

Indonesia has been clearing the legal obstacles. It was a long time coming, but the country recently passed laws that allow the government to acquire forcibly land that has been earmarked for infrastructure projects - long thought to be the biggest legal hurdle to the infrastructure build-out.

The other hurdle is figuring out where the money is going to come from. Infrastructure finance requires long tenors, and Indonesia's banks - though very well capitalised - are facing strong regulatory pressure to shorten lending maturities in accordance with Basel III requirements. Foreign banks are facing the same issue, on top of lending crises in their home markets, so are in no position to fill in that gap.

Islamic finance, however, could step into the breach. Like project financing, Islamic bonds - or sukuk - are asset-backed or asset-based structures, making them well-suited to financing infrastructure.

Malaysia has used sukuk to fund infrastructure projects ranging from ports and airports to roads and bridges. More than 40% of all sukuk originated in Malaysia are destined for infrastructure finance.

Indonesia has been building a regulatory framework for Islamic finance but is yet to make the key change required for sukuk to become a viable project financing tool - the distinction between beneficial and legal ownership.

Beneficial ownership is when a person or entity enjoys some of the benefits of property rights without actually holding legal title to the property. Beneficial ownership is essential in Islamic structures where investors, instead of earning interest, gain income derived from an asset - even when they do not hold that asset's legal title.

Indonesia clearly understands the importance of recognising beneficial ownership, because the sovereign's two global sukuk have involved selling the beneficial interests to certain properties. It now needs to pass laws that will allow domestic issuers to use the same beneficial ownership framework.

As well as financing infrastructure, a domestic sukuk market would also help Indonesian corporates reduce their dependency on foreign borrowing.

Ever since borrowing too much short-term dollar debt in the run-up to the Asian financial crisis 15 years ago, Indonesia has worked hard to develop a local currency debt market. The rupiah bond market has had one of its busiest markets ever this year, printing Rp45.5trn (US$4.8bn) of bonds so far. But that still pales in comparison to Indonesian bond issuance offshore, which stands at US$9.2bn year to date. The development of a sukuk market could help address this imbalance.

About 210m of Indonesia's 240m people are Muslims, creating a large pool of natural demand for Islamic finance products. It is the government, however, that needs to provide the top-down part of the equation in the form of the necessary regulations and tax incentives that will ensure Islamic finance becomes a viable option.

Indonesia also lacks the large pool of liquidity that Malaysia's pension funds provide, and that is another area for government action. But Indonesian sukuk issuers would at least be able to tap Malaysia's pool of money almost immediately - much as Middle Eastern issuers are already doing.

Malaysia is the world leader in Islamic bonds, and its geographic, cultural and linguistic proximity to Indonesia - the very thing that leads to arguments over the heritage of traditional dances and costumes - is something that should make replicating its Islamic finance prowess easier. If it becomes a success, no one will care whether it was home-grown or not.
(Reuters / 19 Sep 2012)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Islamic finance must be dynamic, innovative - Governor Zeti

KUALA LUMPUR: The rapid internationalisation of Islamic finance will hinge on three key factors including the wide range of global supply of high-quality Islamic financial products and services, said Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz.
Speaking at the Global Islamic Finance Forum 2012 on Wednesday, she said Islamic finance needed to be dynamic and innovative, and hence the second factor was a diverse and dynamic intermediaries and market participants with a global focus. The third factor was the required talent to steer the Islamic financial sector towards increased internationalisation, she said.
Zeti said these factors were crucial to ensure the sustainability of Islamic finance, which was undergoing rapid internationalisation.
Commenting on the first factor, she said there must be a wide range of global supply of high-quality Islamic financial products and services to meet the requirements of international businesses.
"In this phase of growing international transactions, Islamic finance needs to be dynamic and innovative, with an emphasis on the development of diversified and comprehensive Shariah-compliant financial solutions to meet the differentiated needs of various businesses, including the requirements of international businesses and thus facilitate cross-border investments," she pointed out.
Secondly, Zeti said there was a need for a diverse and dynamic intermediaries and market participants with a global focus.
"This includes having Islamic banking, takaful and capital market players that venture beyond domestic boundaries to tap global opportunities. Global ancillary services that are proficient in the Shariah, also have an important role in providing supportive professional services for such intermediaries and market players to effectively embark on such cross-border activities," she added.
The required talent was also crucial to steer the Islamic financial sector towards increased internationalisation.
She said the new financial landscape would require world-class business talent and boards with knowledge of the risks associated with internationalisation.
Zeti pointed out greater collaboration between the industry and education service providers would be important to support the talent requirements of the industry in its new phase of development.

(The Star Online / 19 Sep 2012)

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