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Friday, 8 March 2013

Sukuk issuance still going strong

The wave of sukuk issuance continued to wash over the Dubai financial markets yesterday, even as some experts warned that future global demand for Islamic bonds might be limited.

Dewa, the Dubai utilities company owned by Investment Corporation of Dubai (ICD), listed a US$1 billion (Dh3.67bn) sukuk on the Nasdaq Dubai market, while Emirates Airline set off on an investor roadshow ahead of what is expected to be another big sukuk issue later this month.

That follows the news that Dubai Islamic Bank had hired banks to prepare for a high yield sukuk to raise in the region of $500 million.

Last week, Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, committed the emirate to become the global hub of the $300bn market in Islamic bonds.

However, investment banks including Bank of America Merrill Lynch, Société Générale and Coutts have called into question whether the gains made by sukuk during the rally of the past two years can continue. Inflation and interest rates, currently at record lows, are expected to rise as the global economy recovers from the financial crisis - making fixed income appear unattractive compared to equities. Total returns on the HSBC/Nasdaq Dubai GCC US dollar sukuk index have increased just 0.6 per cent this year, while global equities have rallied sharply.

The Dow Jones Industrial Average hit a record high on Tuesday, while European stocks are at a four-and-a-half year high.

So far, those doubts do not appear to have affected the Dubai market. The Dewa sukuk, which represented a return to debt markets by the utility company after an absence of more than two years, attracted orders of $5bn with most of that, around 65 per cent, coming from the Middle East.

The five-year debt carries a profit rate of 3 per cent for investors.

Some experts believe there is still substantial demand for sukuk, especially from Dubai and listed on local markets.

Ahsan Ali, the head of Islamic origination for Standard Chartered, said: "There has been a lot of activity recently, driven by the liquidity there is in the market and by the attractive pricing for issuers. With yields on a downwards trend, issuers can lock in low rates for the long term.

"And it makes increasing sense for those issuers to list on Dubai markets, the infrastructure is there.There is still plenty of demand out there, not just from the Middle East but from Europeans who are seeking a diversification strategy."

The Emirates sukuk will be the second time the airline has tapped fixed interest markets in the past few months. In January it raised $750m from a conventional bond listed in London.
It is not yet known where Emirates will chose to list, but given the recent official initiative it looks certain it will opt for a listing on either Nasdaq Dubai or the Dubai Financial Market.
ICD, the emirate's premier investment vehicle, was also recently reported to be considering a foray into the sukuk market.

Dubai itself raised $1.25bn in January, a mix of conventional fixed interest instruments with a $750m Islamic tranche.

Sukuk issuance has been the first part of the strategy announced in January by Sheikh Mohammed to develop Dubai as a hub of the global Islamic economy, along with other Islamic financial industries as well as halal food and cosmetic production.
Over the past couple of years, Dubai has slipped to third place in the global sukuk leagues, behind London and Malaysia.

Essa Kazim, the chairman of Borse Dubai, which owns the emirate's financial markets, said recently that if Dubai government and related companies issued debt in sukuk, and listed them on local rather than overseas markets, it would make the emirate the leader in word sukuk listing.

(The National / 07 March 2013)

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The basics of Islamic banking and finance

A financial system based on principles of trust, ethics and partnership can become a partner in the development of your business.

The Islamic banking and finance industry has developed from what was once a niche exotic product to take its place as part of the mainstream in a matter of just 40 years. Naturally the curiosity associated with this alternative financial system has also intensified. In this article, we explain its basics.

Islamic banking and finance is intended to serve the same underlying purpose as any other conventional bank or financial institution: to intermediate funds from those who have capital (capital rich) to those who need it (capital deficient). However, as the saying goes, 'God is in the details'.
To put it simply, 'Islamic banking' refers to a system of banking that is consistent with the principles of Islamic law (sharia) and guided by an Islamic perspective on economics. Common with the three Abrahamic faiths, the principal prohibition relates to the giving or taking of interest (usury or riba). Other elements include avoiding investments in businesses that are considered unlawful or harmful to society (e.g. businesses dealing with alcohol, pork, gambling), avoidable ambiguity or uncertainty in the provisions of contracts.

Because a fixed or variable rate of interest on a loan is not allowed, Islamic financial institutions support companies and individuals in need of financing either through selling them the required equipment or property on a deferred installment basis, or by entering into some form of profit and loss sharing partnership. We define some of the key products used by Islamic banks below:
Funding the purchase of inventory or assets (such as trade finance): Islamic banks use themurabaha (mark-up or cost-plus) product to help companies purchase inventory or assets. Upon receiving a request from the customer, the Islamic bank will purchase the products or inventory from the supplier and then sell to the customer at a margin above cost, payable in specified installments in the future. The key difference here between Islamic finance and conventional bank lending is that the financing is always linked to the sale of an asset and the amount payable never increases beyond the amount agreed, as the cost plus price.
Expansion of business enterprise: When a company wants to expand its business (without necessarily purchasing a specified asset or inventory), Islamic banks help it grow by partnering with it on a profit and loss sharing basis. Two principle contracts are used, both of which are derivatives of a core partnership principles. In the musharaka financing approach, both the Islamic bank and the customer provide some contribution (cash or in kind) to the project. They then share profits according to whatever formula they agree upon and share losses according to their contribution. The mudaraba contract is similar, only that the bank is the sole contributor of capital, while the customer manages the investment project to receive a profit share as investment manager.
Assisting in purchase of homes: When customers want to purchase homes, Islamic banks can assist them with a 'lease-to-own' product under the general family of 'lease' or ijara instruments. After the customer has identified the house he wants to purchase and the necessary credit checks are completed, the Islamic bank will purchase the house in the bank's name, then lease it to the customer for a defined period of time. Upon the fulfillment of certain conditions (such as the payment of all rental payments), the Islamic bank will sell the house to the customer either for a token amount or based on a pre-agreed price.
From some of these examples, one may wonder what the real distinctions are between Islamic finance and conventional finance. Upon careful examination, you will notice that in each of these examples, the customer never just receives money that he would have to return with an additional amount of interest. Instead, all of the financing is either linked to the sale of asset, partnership in a project or the purchase and lease of an asset.
Hence, one of the key differences between Islamic finance and conventional finance is that sharia-based banking is tightly linked to the real economy. This means that all financing transactions are asset-based or asset-backed, manufacturing or producing real, tangible assets. One of the reasons why this industry was semi-impervious to the financial crisis was due to the requirement of asset-linkage to any sale or lease contracts. This concept of asset-backed transactions protects the financial rights of the institutions as the real asset is always present as collateral, and in most cases covers the financing transaction's obligations toward the parties involved.
Since most of the products of Islamic finance involve asset-based financing, direct investment or partnerships, there is a natural fit between Islamic finance and SME needs.

(Zawya / 06 March 2013)

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Turkish state to open two non-interest Islamic banks

The Turkish state will establish two new participation banks that offer interest-free services, using the names of Vakıfbank and Halkbank to benefit from their credibility in the market, sector players have said.

The new banks to be established will act as completely separate institutions from their eponyms with new banking permission licenses and fields of operation, but the brand popularity of Vakıfbank and Halkbank will help the banks be acknowledged in the market. 

Last week, Deputy Prime Minister Ali Babacan hinted that two state-owned banks may offer interest-free services, without giving specific names.

Turkey seeks to its share in the interest-free banking sector in light of the value and market presence of participation banks.

The banks, which operate in line with Islamic principles by not using interest, had raised the amount of their deposits two times more than deposit banks last year, according to data from Turkey’s banking regulation board.Currently there are four banks in Turkey that offer interest-free services to their customers, and only one of them, Bank Asya, is Turkish-capitalized.The major stakes of the other three, Albaraka Türk, Kuveyt Türk and Türkiye Finans, are held by Saudi Arabian, Bahraini and Kuwaiti capital owners.

The ratio of the amount of funds collected by participation banks versus the overall sector rose from 5.6 percent to 6.1 percent last year compared to 2011.

(Daily News / 07 March 2013)

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