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Tuesday, 15 January 2013

Fitch: Sukuk 2013 issuance outlook positive following solid 2012

Fitch Ratings says strong demand will ensure that sukuk issuance will grow in 2013, mainly in originator-backed (also called asset-based) sukuk structures. The sukuk market is growing rapidly. 2012 global sukuk issuances are expected to hit USD121b according to Thomson Reuters.

This follows a strong year in 2011 where issuance was USD84.4bn, a 62% increase on 2010, according to Zawya Sukuk Monitor. 

Confidence and investor sentiment toward Islamic bonds have contributed to growth, however, limitations remain.

One of the main limitations is the legal precedents in terms of effective enforcement in many jurisdictions where sukuk issuance is prevalent. As such, it remains uncertain whether certificate holders will be able to enforce their contractual rights in local courts.

Fitch also believes that sukuk do not have a standard structure and each structure may involve differing underlying contractual arrangements. As a result, each structure has to be reviewed individually to assess whether it fits within these criteria.

Currently a rating is only mandatory in Malaysia but not in the GCC, however there is no doubt that sukuk rating is an important element of improving the confidence in this growing instrument. Fitch is of the view that the majority of sukuk will continue to come from originator-backed (also called asset-based) in which investors rely upon direct support features (i.e., the repurchase agreement and liquidity arrangements), as well as upon the originator/issuer's ability to generate profits with the assets. 

Fitch also expects that there is an opportunity to see shariah-compliant debt in sovereigns that have not yet tapped the sukuk market, such as Egypt, Libya, Oman and Tunisia, and this would be likely to generate strong investor appetite. In 2012 the Turkish government entered the Islamic capital market in September 2012 with a $1.5bn Eurobond issuance, considered a key driver to establish a benchmark and to encourage the development of the sukuk market in Turkey. Jordan passed a law paving the way for sovereign issues in mid-September 2012. 

Additionally, France, South Korea and South Africa have stated their interest in tapping the sukuk market. Fitch still sees that issuers from outside the Islamic world could contribute more eventually to the increase in supply as they diversify their investor base. 

Sovereigns would be well placed to tap demand, as they are unlikely to have to struggle to find assets that qualify to back shariah-compliant bond issuance.

(Ameinfo.Com / 15 Jan 2013)

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Qatari Islamic bank targets construction SMEs

The Islamic bank is launching a new programme aimed specifically at providing special services to the country's small and medium sized enterprises (SMEs), and offering them exclusive financial benefits, guidance and advice.

The programme, to be known as Aamaly, aims at supporting SMEs, who are recognised as one of the main contributors in innovation and job creation within Qatar, and their key role in creating a sustainable economy for the country's future generations, as laid out in Qatar's National Vision 2030.

QIB has created a special department for Aamaly, with  experienced executives to run the scheme. Benefits for SMEs will include the provision of dedicated relationship managers, a wide branch network including special SME-centric banking centres, 24-hour banking, including a dedicated call-centre line, payroll services, cash and cheque collection and overnight vaulting and time deposits, together with flexible financing options tailored to SMEs.

Additional benefits that SME clients will enjoy include free debit and credit cards, complimentary cheque books and discounted fees on transfers.
Bert de Ruiter, GM of QIB's wholesale banking group, said that the bank has been at the forefront in its support of the local economy by financing SMEs, which are becoming the engine of the economy.

"A significant part of QIB's strategy is to provide Islamic financing solutions for all our customers, and now we are proud to introduce a unique programme dedicated to serving the different sectors by offering them tailored made packages to meet their different needs," said de Ruiter.

"Now, with the services and products QIB will be providing under Aamaly, small- and medium-sized enterprises and their entrepreneurs can be sure that they will get unprecedented attention, so they can concentrate on their businesses, rather than worry about their financial requirements.

In December, QIB received two awards at the Global Entrepreneurship Week 2012 for its engagement with Qatar Development Bank's 'Al Dhameen' programme, which supports and encourages SMEs in their start-up and early development phases. Recognising its potential, QIB was the first Islamic bank to sign up for the programme in 2011.

(Constructionweekonline.Com / 13 Jan 2013)

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Iraq's Islamic Bank and the Islamicity of Interest

Just last month, Iraqi President Jalal Talibani approved a law, No. 95 of 2012, that establishes a state-owned Islamic bank given the name "The Islamic Bank of Mesopotamia." 

The initial working capital of the bank is, under Article 3 of the law, 50 billion Iraqi dinars (roughly $43 million), and it can be raised from time to time from resources that the bank itself develops. The purpose of the bank, under Article 2 of the law, is to "provide financial and banking services consonant with the rulings of the Islamic shari'a and the development of the Iraqi economy." In a concluding paragraph offering reasons for enacting the legislation, it is said that it stems in part from a "desire of a broad slice of citizens in obtaining banking services that accord with the Islamic shari'a." The law is, thus, the first, major, public effort of the Iraqi government to enter into the rising field of Islamic finance.

On the surface, there is nothing particularly surprising about this. Article 2 of the Iraqi Constitution [PDF] does provide for a robust role for Islam in the legal order of the state after all, declaring it not only the religion of the state, but also "a foundational source of legislation." The same Article further obligates the state to guarantee the sustainment of the Islamic identity of Iraq's Muslim majority population. The creation of the Islamic bank is certainly very much in line with these commitments.

Yet, two interesting questions arise from the law that created the bank. The first of these becomes apparent when one compares the language of Article 2 of the new law with Article 2 of the constitution. The latter not only establishes Islam as foundational source of legislation, but it also prohibits the enactment of any law that violates the "settled rulings" of Islam. The former calls for the establishment of a bank whose services are "consonant with the rulings of the Islamic shari'a[.]" If the purpose of the new bank is to create an institution which operates in a manner that is consonant with shari'a, would that not mean that existing banks operate by rules that are not consonant with the rules of the Islamic shari'a? Indeed, this would be the conclusion of the majority of Iraq's authoritative juristic and scholarly authorities on Islam, given that conventional Iraqi banks routinely take and pay interest. Moreover, the only sensible reason to establish an Islamic bank would be if other, existing banks were not Islamic.

Yet if this is so, how can the laws within Iraq that specifically authorize the taking and paying of interest on the part of institutions and individuals alike be permitted to stand? If the state may enact the law establishing the Islamic Bank of Mesopotamia under the Islamizing provisions of Article 2, must the Federal Supreme Court of Iraq also strike down the laws authorizing any other non-Islamic banking institutions?

If the life of the law were driven by logic rather than experience, the answer would surely be "yes" — there is no basis upon which to conclude that one part of Article 2 of the Constitution is somehow more effective than any other part of it. But it is hard to imagine that the Federal Supreme Court would, or could, ever take such a step given the almost certain disastrous effect on the Iraqi economy if it did. The major constitutional court in the region to have heard a claim on the Islamicity of interest — the Supreme Constitutional Court of Egypt — managed to avoid the problem of declaring interest void by an artful dodge, effectively indicating that any laws that were un-Islamic were immunized from the effect of a subsequent amendment requiring the law to conform to Islamic dictate. There is no indication from its current case law that suggests that the Iraqi Federal Supreme Court finds such strained reasoning particularly appealing. It is also apparent, as I have indicated in an earlier piece, that the Federal Supreme Court has always found ways to uphold older legislation as against an Islamicity test, often by avoiding the issue rather than actually evaluating the law on the basis of its consistency with Islam. It seems almost certain that the court would do the same in this instance, either not dealing with any case that sought to challenge interest or finding a way to dispose of the case without deciding that issue. Certainly it is rather noteworthy that none of Iraq's premier Islamist parties have made an interest ban a noticeable part of their legislative agenda, making it all the easier for the Court not to deal with the problem.

The second interesting point in the law is the tangential role that religious scholars and religious institutions play in the operation of the bank. Article 1(3) requires the director general of the bank to have a college degree and experience in banking, but not necessarily Islamic jurisprudence generally or Islamic finance specifically. The same is true for four of the six members of the board of directors. Even as to the other two members, where some experience in Islamic finance is necessary, the reference is remarkably ecumenical. These individuals do not need to be graduates of any particular seminary or have any particular level of religious knowledge, they merely need to have "experience and specialization in Islamic economics," broadly speaking. Moreover, they are appointed by the director general, who might know next to nothing about theshari'a.

One may contrast this against the recently enacted laws administering the waqfs, or Islamic charitable trusts. There are two such laws for Muslims — one for the Shi'a and one for the Sunnis. The head of the bureaus administering Sunni and Shi'a waqfs respectively cannot even be appointed unless approved the relevant non-state religious authorities. In the case of the Shi'a Waqf Bureau, this gives Grand Ayatollah Ali al-Sistani formal veto power over the appointment of a state official. Each law moreover requires three other members of the board of the relevant Bureau to be jurists of sound reputation selected by the head of the Bureau, who is, as noted, already vetted by the highest relevant religious authorities.

The contrast between the operation of these Islamic institutions and the Islamic Bank of Mesopotamia is rather surprising. Indeed, the level of representation of Islamic experts on the Islamic bank is less than the level of representation of such experts that some Islamist parties seek on the Federal Supreme Court, despite the fact that the latter is not an Islamic institution at all.

Ultimately, the reasons have to do with legislative awareness of the manner in which Islamic finance operates, relative to the methods used to organize Islamic institutions and projects elsewhere in Iraqi society. Generally speaking, when Shi'a Islamists in particular are interested in rendering the shari'a more prominent in the lives of Iraqis, this is done through calling for more deference to the rulings of the authoritative jurists who preside over the Shi'a seminaries in Najaf. In the case of family law, such deference is achieved through a (as yet unimplemented) call to permit Iraqis to follow juristic rulings rather than state law in the area. In the case of the waqfs, it is achieved through formalizing a role for these non-state actors in state administration.

Yet Islamic finance does not in fact organize itself in this manner, and deference to the rules of any single jurist would simply not be in keeping with the practices of this now global autonomously functioning industry. Instead, the industry adopts a patchwork of rules and regulations derived from the rulings of medieval and modern jurists of various schools of thought. Indeed, it must do this to preserve the flexibility necessary to function in a modern economic setting. Even with such flexibility, derogation from some Islamic rules is almost inevitable. The Iraqi legislators were merely recognizing this reality by having ecumenical experts appointed, and rendering them a clear minority and therefore unable to impede the bank's activities even if they did find a particular practice un-Islamic.

As with the failure of the state to ban interest, there is very little that is logical, or coherent, in the state's sanctioned approach to operation of the Islamic Bank of Mesopotamia. It makes little sense for Shi'a Islamists to support the creation of a bank that operates through an amalgam of rules of different jurists from different schools of thought while describing as un-Islamic a Personal Status Code [PDF] organizing the law of the family and inheritance that does precisely the same thing in a different area of law. Yet this is precisely what has been done. It is another demonstration of the deep levels of nuance, complexity and, indeed, self-contradiction that color the issue of the role of Islam in the Iraq's legal and constitutional infrastructure.

Haider Ala Hamoudi is a Professor of Law at the University of Pittsburgh School of Law. His scholarship focuses on Middle Eastern and Islamic Law, particularly as it pertains to matters of commerce. Hamoudi spent most of 2009 in Baghdad advising the Constitutional Review Committee of the Iraqi Parliament, responsible for developing amendments to the Iraqi Constitution aimed at national reconciliation, on behalf of the US Embassy in Baghdad. He is currently preparing a book on the drafting and subsequent evolution of the Iraqi Constitution to be published with the University of Chicago Press. He maintains a blog on Islamic Law.

(Jurist / 14 Jan 2013)

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Bank Muscat Gets Oman Islamic Banking License as Industry Grows

BankMuscat SAOG (BKMB), Oman’s biggest bank by assets, received a license to offer services complying with Shariah as it seeks to benefit from the industry’s growth prospects.
The bank will open seven so-called Islamic windows this year operating under the brand “Meethaq Islamic Banking,” according to a regulatory filing today.
The move comes after the Persian Gulf country approved licenses for two Islamic banks last year. Islamic banking assets in Oman may account for a 10th of the total within a year of the lenders starting services, Hilal Al Barwani, vice president of banking supervision at the central bank, said in October. National Bank of Oman SAOG said in June its shareholders approved starting Islamic banking.
Global Islamic financial assets may double to $3 trillion by 2015, according to Standard & Poor’s. BankMuscat shares have gained 6.1 percent this year. The shares dropped 11 percent in 2012.
A study released in 2011 by the U.K.-based Islamic Finance Advisory & Assurance Services found that of the 86 percent of Omanis who bank with non-Islamic lenders, 60 percent are “bothered” by using products based on interest. Islamic law bans the payment and receipt of interest as well as investments in businesses such as those involving tobacco, alcohol, pork and gambling.

(Bloomberg / 14 Jan 2013)

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Use of derivatives as hedging instruments in Islamic finance

Given the increasing importance of Islamic banking and finance in Pakistan, it is important to deepen the Islamic financial market in the country. One way of doing so is by developing a market for Islamic hedging instruments, which are known as derivative contracts in conventional finance. It is, however, important to understand the difference between Islamic derivatives and their conventional counterparts.

Financial engineering in Islamic banking and finance has resulted in a number of Islamic options, forward and futures contracts that may be used for risk management and hedging. It must, however, be emphasised that trading in options (rights to buy and sell), forwards and futures contracts is not permissible under Shariah. The use of such contracts is permissible solely for hedging purposes, and not for pure speculative reasons. Consider the following example:
Party A is a Pakistan-based commodity broker who has bought soya beans from a US-based commodity broker for a price of $3 million, to be paid in thirty days, ie, T30. Party A would like to hedge against this foreign exchange (dollar) exposure in a Shariah-compliant manner. This can be done in various Shariah-compliant ways including the following structure:
This structure is based on two promissory arrangements:
Promise 1 is given by the bank to Party A at time T0 to buy Rs300 million for a price of 1 cent per rupee on a future date T30.
Promise 2 is given by Party A to the bank at time T0 to sell Rs300m for a price of Rs99 per dollar (or a price of Rs1 for $0.0101) on a future date T30.
The following are important Shariah considerations for promises:
Firstly, promises in Islamic law are not like contracts – ie, while contracts are binding on both the transacting parties, promises are binding only on the promisor if the promisee decides to call upon it.
Secondly, only unilateral promises (or two or more unequal and non-diagonal promises) are binding.
Thirdly, two equal and diagonal promises are considered as a contract, and if such an arrangement gives rise to a binding forward sale contract, this is deemed not in compliance with Shariah.
Two promises are considered as equal and diagonal (also known as opposite) if they are given by the same two parties on the same object for the same price exercisable at the same time (or during the same period) – but one of them is a promise to purchase and the other is a promise to sell. Thus if Party A gives a promise to Party B to buy from it a stock X for a price of $1 on a future date T1, and at the same time Party B gives a promise to Party A to sell to it a stock X for a price of $1 on a future date, the two promises will be considered as equal and diagonal. In such a case, they will be considered as equal to a binding forward contract, which is not in compliance with Shariah.
Two promises are considered not equal and diagonal if at least one of the following conditions is not met: the two promises are given by the same two parties; the two promises are given on the same object; the two promises are given for the same price; the two promises are given for the same date (or period); and one promise is to purchase and the other promise is to sell.
In the above example, the two promises are not given for the same price, as the agreed exchange rates differ (Rs1 = 1 cent versus Rs1 = 1.01 cent). Hence, they are not equal and diagonal, and are therefore not considered together as a binding forward sale contract.
A contract in Shariah is not considered as a binding forward sale contract if it can be established that, in some cases, it will not be in the best interest of at least one of the transacting parties to execute a deal voluntarily. In the context of the above example, consider the following scenarios:
The future exchange rate can see the rupee strengthen, in which case the bank will call on Party A to enforce its promise. On the contrary, the rupee may weaken in the future, in which case Party A will want the bank to enforce its promise. Finally, the rupee may be valued in a band between 1.01 cents per rupee and 1 cent per rupee, in which case neither party will seek to enforce the promise. In the last case, therefore, no promise will be called upon – leading to a situation in which there is no possibility of a certain forward sale taking place pursuant to one of the promises being called upon.
This is one example of structuring derivatives (or foreign exchange hedging instruments) in conformity with Shariah. It is important to stress that such instruments must strictly be used in conjunction with some real trades in goods and services and not merely speculative tools, which have brought down a number of financial institutions in the west in the recent past.


(The Express Tribune / 14 Jan 2013)

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