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Sunday, 3 March 2013

Sukuk Lure Eyes of Westerners

CAIRO – Proving more stable during financial crises, Islamic bonds (sukuk) are increasingly luring the interest of investors in the West as an alternative vehicle for investment.
“European problems helped fuel demand for alternative products like sukuk in emerging markets, which is why we’re seeing a strong wave of interest coming in from Western investors lately,” Mohammed Dawood, managing director of debt capital markets for HSBC’s Islamic banking division, told The New York Times on Thursday, February 28.
Sukuk have lured the interest of many investors in several Western countries, whose economies have been shrinking in recent months.
Sukuk, which conforms to Islam's prohibition of usury, typically work as profit-sharing vehicles.According to a research by Standard & Poor’s nearly 38 percent of a $500 million, 10-year sovereign sukuk issued by Dubai were swiftly obtained by Western investors.
Firms that issue sukuk make payments to investors using profits from the underlying business, instead of paying interest.
The money, however, can’t be invested in alcohol, gambling, tobacco, weapons or pork.
Muslims-majority Malaysia is the hub of the sukuk market, accounting for 74 percent of the $135 billion Islamic bond issuance in 2012.
Sukuk have often proved to be more stable than conventional bonds during the global financial crisis.
The sukuk market has reached $111.9 billion in the eight years to 2008, according to the International Islamic Financial Market.
Global sales of sukuk have reached $6.6bn in 2012, from $2bn a year earlier, according to data compiled by Bloomberg.
Booming Sukuk
Economists agree that the sukuk market has been gaining more demand among investors.
“The developing global Islamic asset management industry is also creating further demand for sukuk,” said Paul-Henri Pruvost, a credit analyst at Standard & Poor’s.
Experts predict more growth in the sukuk market, especially in the Gulf area and North Africa.
“What drives sovereign issuances is the same as any business — if they see an opportunity to get a good amount of money from the market at an attractive rate, they will turn to the market to raise funds,” said Ahsan Ali, global head of Standard Chartered Bank’s Islamic banking division, based in Dubai.
“Corporate entities will begin to access the market, as well.”
Countries facing economic troubles as Egypt and Tunisia are also expected to tap the sukuk market as a new avenue of financing for large-scale infrastructure projects, including airports and roads.
“We’re seeing that there’s a big push to develop capital markets in this part of the world, to increase the investor pool and encourage more issuers,” said Dawood.
“Places like Kuwait and Oman opening up the sukuk market contributes to that development.
Saudi Arabia, which was a major issuer of Islamic bonds last year, “is poised to become one of the largest Islamic markets in the world,” he added.
Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.
A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.
Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

( On Islam / 28 Feb 2013)

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The International Monetary Fund (IMF): Malaysia economy resilient

PETALING JAYA: The International Monetary Fund (IMF) praised local policy makers for successfully mitigating the harsh external economic climate, bringing about sustained growth in the first three quarters of 2012 and bringing headline inflation down to a welcome low of 1.3% last September.
Growth was primarily driven by domestic demand supported by improved sentiment and fiscal transfers to low-income households, as well as investment growth in the private and public sectors.
The IMF, in its Malaysia: Financial Sector Stability Assessment report, forecast that improving exports would help the economy expand 5% this year, in spite of the uncertainties of the coming general election.
The report highlighted the capitalisation and profitability of banking institutions, evidenced by significant improvements of asset quality in the last five years.
The IMF relied on stress tests indicators to determine the banking system's resilience to economic and market shocks, and concluded that smaller banks and liquidity would be a potential vulnerability, given banks' reliance on demand deposits.
The report also stated that pre-emptive measures taken by Bank Negara included reductions in the Policy Rate, extension of access to the central bank's standing facility to insurance companies, a temporary reduction of the Reserve Requirement and the extension of a Government Deposit Guarantee (GDG) on all local and foreign currency deposits.
Although total government debt as at December 2011 stood at RM456bil (52% of gross domestic product), IMF credited the Government for the development of its bond market, which had a market turnover of 2.5 times a year comparable to regional peers.
Concerns over the household debt were raised, as it was now the highest in the region. House prices in urban areas had also spiked.
Bank Negara took recovery measures, revising eligibility requirements for credit cards in 2010, and tightening its lending conditions based on the loan-to-value or LTV ratios on mortgages.
The Federal Government also reintroduced the Real Property Gains Tax for housing disposals within five years of purchase, which was further raised in January 2011.
Additional increases are contained in the 2013 Budget.
New blueprints such as the Financial Services Act and the Islamic Financial Services Act enacted last December would serve to address shortfalls in oversight of financial holding companies.
IMF recognised that Bank Negara and the Securities Commission practised effective risk-based supervision for the range of banks, insurance companies and securities firms operating in Malaysia.
It proposed that the effectiveness of supervision, however, could be enhanced by addressing existing gaps in enabling legislation and regulatory policy.
Moving forward, further development of the domestic Islamic financial system would present opportunities and challenges.
Malaysia is a global centre for Islamic finance, and as products with new features such as a greater degree of risk-sharing are developed, it would be important that users both domestic and foreign are clear about the changes involved, the IMF said.
The authorities published a Financial Sector Blueprint and a Capital Market Masterplan Two covering this decade, while a Corporate Governance Blueprint covers the first half of it.
These aim to support Malaysia's transition into a developed nation by 2020, integrate Islamic finance in the region and progressively reduce the direct role of the state in the financial markets.
The report pointed out that the Labuan International Business and Financial Centre (IBFC), which does bank lending, reinsurance, leasing and trust company business, needed a substantial review for its legislative framework for regulation.
This bodes well with the IBFC's plan to change its business model to focus on traditional offshore business, Islamic finance and service for high net-worth individuals.
“New legislation enacted in 2010 gives stronger enforcement powers and enhances the ability of the Labuan Financial Services Authority (LFSA) to cooperate with foreign authorities. However, the new laws should be revised to further meet international standards, including strengthening the governance of the LFSA. Some key aspects of the regulatory reforms in 2010 should also be revised in order to meet international standards.
“For instance, Labuan could focus on serving as a back office centre for financial services business carried out in Kuala Lumpur (such as wealth and fund management for those wishing to use Islamic products) and trust company business using the network of double taxation treaties and location as strategic advantages.”

(The Star Online / 02 March 2013)

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