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Tuesday, 5 February 2013

What you need to know about Sukuk

Sak (singular), sukuk (plural): as stipulated in the project law endorsed by the Freedom and Justice Party (FJP) and Al-Nour Party, a financial instrument representing a common share in the property of assets, facilities or services pertaining to a certain project, specified in the offering bulletin and in compliance with Islamic Shari’a.
What is the difference between the sak and the stock?
Stocks give their owners managerial rights if they hold a certain percentage of the shares. They are issued for a lifetime. Sak doesn’t grant any managerial rights regardless of the shares percentage.
After the end of a certain time span, the value of the sakis returned to the owner.
What is the different between sukuk and bonds?
Bonds offer an interest rate while sukuk don’t. Fixed interest rates are prohibited under Islamic Shari’a.
Sukuk are offered under various Shari’a-compliant contracts that differ according to the nature of the project.
The first kind of sukuk is called beyou’, or sales. According to this type of contract, the investment manager can finance the purchase of an asset through sukuk, and then sell it to the borrower who will repay the debt over an agreed period of time. This kind of Sukuk is the only one that cannot be traded in the stock market because they consist of debts, and debts can’t be traded according to Islamic Shari’a.
Estesna’salam and morabha contracts fall under this category.
Estesna’:  derivate of the word sena’ (industry), sukuk issued with the objective of building a factory or an industrial unit.
Salam: a forward contract allowing the owner of a certain asset to sell a product expected to be available in the future in the present time. For example, if the government owns a petroleum well, it can sell in advance the oil barrels that are expected to be extracted from the well, with prices agreed upon beforehand.
Morabha: derivate of rebh (profit), contracts stipulating the purchase of a product, selling it to a certain entity, and then distributing the profits by the percentage of shares. For example, buying wheat from the international market and selling it to the government.
In the second type of sukuk, there are the mosharka and modarba . According to these contracts, the holder becomes a partner with the issuer of sukuk, whether the issuer is a government or a private entity.
Mosharka:  or partnership, Sukuk issued in the aim of expanding an already existing project, and result in the splitting of profits according to shares percentage.
Modarba (speculation): the investor gives money to an investment manager, to put it in one or more projects, and they split the profits.
The third type is the egara (rental) contracts, they are close to the traditional Build Operate Transfer (BOT) projects. Using this contract, an investor can issue Sukuk to finance the construction of a public utility and rent it to the state for a certain period.
The fourth type is related to investment funds. These sukuk are pooled together and invested by a fund manager for a defined period of time, after which the owner reimburses the investors.
The law:
The project law that is expected to be approved on Wednesday by the cabinet says sukuk can be issued by the government, corporations, companies, banks or international institutions.
There are equivalent projects in Arab and Islamic countries that have many similarities, the first being issued in Malaysia in 1983.
Criticism to the proposed project law is twofold. The jurisprudential studies committee in the Islamic studies congregation affiliated to Al-Azhar has repeatedly rejected the law describing it as harmful to the economy and the country’s national security.
The committee also considered the law to be detrimental to the rights of future generations because it would allow the ownership of sukuk by foreigners and would open the door for the manipulation of fixed assets without real regulation.
This argument has since compelled the supporters of the law to remove the word “Islamic” from the law’s title in order to escape Al-Azhar jurisdiction.
Galal Amin, a prominent economist, also criticised the law describing it as a gate to sell public utilities. He expressed his doubts over the hasty and sudden introduction of sukuk, suggesting that it may have been dictated by the International Monetary Fund (IMF) as a stipulation to receiving monetary aid.

(Daily News Egypt / 04 Feb 2013)

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Indonesia: Islamic Banking IPO

The Islamic banking market is growing in Indonesia, where 11 banks offer Shariah-compliant financial services. The market reached a combined total of Rp 199.7 trillion by the end of 2012, according to central bank data.
But Indonesia’s Shariah banking market still lags behind Malaysia, where Islamic lenders hold 23.1 percent of the assets deposited in Malaysian banks. In Indonesia, Shariah banking only totals 4.7 percent of the Rp 4,000 trillion market.
Bank Mandiri will channel an additional Rp 800 billion ($83 million) in funds to its Shariah banking arm as the unit prepares to expand its services after next year’s initial public offering, a bank official said on Monday.
The bank, Indonesia’s largest lender by assets, will inject a total of Rp 1.1 trillion in capital to Bank Syariah Mandiri ahead of the Islamic finance unit’s listing on the Indonesia Stock Exchange (IDX).
Bank Syariah Mandiri plans to raise enough funds in the IPO to meet the Rp 5 trillion requirement needed to provide a domestic trust service for Indonesian customers.
The bank plans to offer corporate customers Shariah-compliant investment and lending options, Sunarso, the bank’s director for commercial and business banking, said on Monday.

(Live Trading News / 04 Feb 2013)

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Islamic banking assets to surpass $1.8 trillion globally in 2013

RIYADH – Global Islamic banking assets are forecast to cross $1.8 trillion in 2013 up from $1.3 trillion in 2011, Ernst & Young said in its World Islamic Banking Competitiveness Report 2013.

It noted that the Islamic banking industry continues to record robust growth, with the top 20 Islamic banks registering a growth of 16 percent in the last three years.

The report said the Islamic banking industry in Saudi Arabia – with an estimated $207 billion of Islamic assets – was ranked first in 2011 followed by Malaysia with total assets of $106 billion and UAE third with total assets of $75 billion.

With the majority of the Muslim community being unbanked together with the need to attract foreign investment from Gulf Cooperation Council (GCC), the market appetite for these products continues to grow, said Merisha Kassie, Director of Financial Services at Ernst & Young.

This form of banking is also growing in new markets such as Indonesia, Egypt, Iraq and Libya and South Africa has made significant strides in the inclusion of Islamic finance into its tax legislation with the relevant amendments expected to be effective from 2013.

Across Africa, the need for government Islamic bond (sukuk) has become more pronounced as in some instances banks are required to hold a certain percentage of interest bearing instruments, the report said.

The strong global market growth forecast as outlined in the report, and the surge of activity in Africa with respect to the proposed issuance of sovereign sukuk in South Africa and other African countries support the growing momentum of Islamic banking in Africa.

Despite the projected asset growth and the introduction of new Islamic initiatives in a number of countries, the report noted that profitability continues to lag behind but with the implementation of transformation agendas over the next two to three years, Islamic banks will close the performance gap that currently exists with the overall banking industry.

The report noted though that successful transformation could see the profit pool of Islamic banks rise by an additional 25 percent by 2015.

However, the report anticipated also some challenges in the industry. The obvious challenge remains around ensuring that a proper regulatory framework exists to facilitate both sovereign sukuk and corporate sukuk, it said.

“The market currently has great interest in the sovereign sukuk. Sukuk are seen to be attractive as a result of the foreign direct investment (FDI) that it would attract particularly from the Middle East where investors will seek Shariah-compliant instruments,” said Emilio Pera, Financial Services Leader at Ernst & Young.

(Saudi Gazette / 04 Feb 2013)

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