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Monday, 31 December 2012

Islamic finance industry enters 2013 with new strength

DUBAI, Dec. 29 (Xinhua) -- The year 2012 marked a turning point for banking on Islamic principles as new markets and new regulations in the Mideast helped the sector to flourish.

According to Ernst and Young, globally assets managed in line with Shari'ah will reach in 2013 an all-time high, amounting to 1. 8 trillion U.S. dollars, up from 1.2 trillion U.S. dollars in 2012.

Neither the ongoing turmoil in the Middle East nor the Euro zone debt crisis could prevent Islamic banks in the Middle East from reaching out to new markets and more business. While issuances of Islamic bonds, known as sukuk, flourished and new markets like Egypt and Oman embraced the banking in line with Shari'ah by setting up new laws and regulations to remove legal hurdles for Islamic banks.

Run on Islamic bonds

News issuances of Islamic bonds reached 40 billion U.S. dollars globally in 2012, up from 36 billion dollars last year, according to Malaysian Bank CIMB. In July, the Gulf state of Qatar launched one of the largest sukuk with a volume of four billion dollars. The issuance attracted bids worth a whopping 25 billion dollars. The proceeds will be used to revamp the country's infrastructure in order to be ready to host the FIFA 2022 football world cup.

But the sector suffered a setback when Dana Gas from the Gulf sheikhdom of Sharjah failed to settle a one billion dollar sukuk which was due on Oct. 31 since payment delays from clients in Egypt and in Kurdistan. However, Dana agreed with creditors to restructure the sukuk on Dec. 1.

Crossover markets

Meanwhile, the Egyptian cabinet approved on Dec. 23 draft law on the issuances of sukuk. Under the draft law, new sectors such as individual and investment funds, will now be able to finance government projects through Islamic bonds. The draft law was referred to parliament for debate to be passed and enacted.

The Sultanate of Oman is the latest country which legalized Islamic finance in May 2011. Meanwhile, Oman has amended its national law in order to regulate Islamic banking transactions in order to abide to the royal decree number 69/2012.

As the first Islamic bank in Oman, Bank Nizwa said it would launch operations at the start of 2013. Listed on the Muscat Securities Market on July 5, Bank Nizwa shares have been traded sideways since then.

In addition, "Iraq is contemplating Islamic banking legislation while Libya prepares to implement its Islamic banking framework," said Ashar Nazim, partner for global Islamic banking at Ernst and Young.

Gulf region leads

Although Islamic finance, which forbids interest and trading in shares of "un-ethical" businesses (like producers of weapons of alcohol), is a global phenomenon, the Middle East remains the industry's nucleus. Saudi Arabia is the biggest market for Islamic banking followed by Malaysia and UAE, Nazim said.

According to the report, the Islamic banking industry in Saudi Arabia, with an estimated 207 billion dollars of Shari'ah- compliant assets, was ranked first in 2011. Malaysia ranked second with total assets of 106 billion dollars and the third was United Arab Emirates (UAE) with 75 billion dollars.

Due to the industry's bullish outlook, investors also sent shares of Islamic financial institutions higher. UAE-based Ajman Bank whose shares were listed on the Dubai Financial Market DFM gained 68 percent in value in 2012, outperforming the DFM general index which climbed 17 percent higher.

Al Salam Bank Bahrain shares which were traded in Manama and Dubai rose by 39 percent since Jan. 1. In the third quarter of 2012, the bank's net profit rose five-fold year on year to hit of 6.8 million Bahraini dinars (18.04 million dollars).

Looking abroad

Other Islamic banks prepare to expand abroad. Masraf Al-Rayan from Doha, Qatar, expressed interest in buying troubled Islamic Bank of Britain, known as IBB, but the deadline looms as IBB's largest shareholder Qatar International Islamic Bank wat to have clearity over a possible deal until January, according to sources. "That the Qatar Central Bank separated Islamic banking from conventional banking in 2012 by law helped the Shari'ah-finance industry a lot," said Syed Hasan, general manager wholesale banking at Masraf Al-Rayan.

Frascesco Pavoni, head of financial services at German consultancy Roland Berger, said that all Gulf states shall follow Qatar's example. By separating Islamic finance from conventional banking, Islamic banks, often younger and smaller in size that their conventional counterparts, gain a higher radius to expand and reach out to potential clients, said Pavoni.

Islamic finance is not only about the prohibition of interest. Because risky asset management strategies like short-selling, trading naked options or futures are banned under Shari'ah, banks and investors increasingly choose for Islamic financing strategies. "God has permitted trade, but forbidden interest," says the Holy Koran in sura 2, verse 275.

(Shanghai Daily.Com / 29 Dec 2012)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Solar guys shine light on Islamic debt structures

Solar panel and heating installer The Solar Guys have been marketing its first Islamic bond – or sukuk – raising, due in the first half of 2013, to fund a 250MW solar power plant in Indonesia. Commercial director Dane Muldoon is not alone in Australia in being a novice in Islamic finance, let alone Islamic financing in an Asian market. He is sometimes caught off guard by how quickly things are moving for the family-owned Brisbane operation founded by his father and the connections of his joint venture partner at Mitabu Australia.
Rusydi Mitabu (known as Dody), director of Mitabu Australia, is the mastermind of the financing structure. The Solar Guys and Mitabu have formed a joint venture – SGI-Mitabu - to raise $500 million to build and finance the power plant.
“Just as an example,” Muldoon says. “I was saying to him, ‘you have told me we have this land allocation that’s been given to us by one of these [Indonesian] provinces. I asked him ‘where is this field, I want to know more about this field’. He says ‘you know I don’t know’. So he pulls out his mobile phone and rings the secretary of the governor of the province and says, where is that field again?”
Muldoon says Mitabu has a deep knowledge of Islamic finance structures. An Islamic scholar or sometimes a whole board of them are indispensable advisers for any company trying to tap Islamic finance. Mitabu also has the all important relationships with financiers and the right levels of government in Indonesia.
At a seemingly random meeting in Sydney he also discovered Mitabu was talking to microfinancers, which funnel private funds into development projects that might suit this project as it could bring electricity to some regions in Indonesia for the first time.
To avoid the Australian tax issues that have stymied Australian companies tapping Islamic finance they are raising the money via the Malaysian island of Labuan, which has been set up as tax-free to attract foreign capital.
“We like it because it is being treated as an offshore location for tax purposes and any corporate can raise sukuk in any currency so we won’t have a problem with a currency swap,” says Mitabu.
When raising capital offshore, companies typically face exchange rate risk, especially with recent volatility in the Australian dollar, unless they can raise the money in Australian dollars. Only a few companies can do this in selected markets.
The tax barriers in Australia to sukuk include state-based stamp duty and federal capital gains tax due to the transfer of assets into an out of special purpose vehicles under some sukuk structures to avoid the payment of interest, which is banned under Shariah law.
In SGI-Mitabu’s raising, investors will share ownership and profits with the joint venture in the form of rent instead of receiving interest. As in a normal debt raising, the venture uses Commonwealth government bond rates to price the issue as what they receive is in Australian dollars. Mitabu says pricing is the equivalent of somewhere between a 6 per cent and 7.5 per cent interest rate.
Initially SGI-Mitabu is raising about $100 million to fund the first 50 megawatts (MW). They are building it 50MW at a time because it is important to quickly build an income-producing asset, as investors don’t get a return until the asset they own begins making money.
“We expect to complete the first phase of the project in 10 months [of receiving finance],” says Mitabu. “You can start the project on 50MW. So you might produce 2MW in the first month and start paying the investor.”
Muldoon believes they are only just scratching the surface of the potential for their company in Indonesia. Demand for energy there is rising fast in tandem with a target of 25 per cent renewable energy by 2025 from 5 per cent now.
“250 MW – we could be doing that per annum for the next decade without a great deal of stress,” he says. “We’re talking to some provincial governments about undertaking our projects in their region and they are saying our own projected demand is hundreds of times higher [than this].”
Until recently solar was not a priority for the Indonesian government with abundant geothermal and hydro resources. But a big drop in solar panel prices globally is changing that.
“You have a big population base and a very high rate of industry growth, and simultaneously 25 per cent or so of their population don’t have electricity yet,” adds Muldoon.
“When you match those conditions with a couple of other facts, including that Indonesia is an archipelago of 14,000 islands that is not a good fit for a centralised power network, there is a real opportunity.

(Financial Review / 31 Dec 2012)

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