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Tuesday, 2 April 2013

Investing the Islamic Way



Amazon.com is the type of stock that most growth managers have loved the past several years. It's enjoyed stable growth, and yet the company has regularly reimagined its business model to keep pace with new technologies and innovations. Over the last five years, the shares soared an average of 32.6% a year.
Nicholas Kaiser, co-manager of the $2.2 billion Amana Growth Fund (AMAGX), was also a big fan of Amazon (AMZN). The retail pioneer had been a staple of his fund for years.

But last November, Kaiser decided to sell it all. What prompted Kaiser to call it quits was Amazon's expansion into a new business line that could actually help its stock price rise even more: beer and wine. That violated a core requirement of the Amana fund: its investments must be consistent with Islamic principles.
"We hated to sell that one," Kaiser concedes. "We'd owned it for about a decade, and it's one that we had done very well with."


RESTRICTED UNIVERSE

At first blush, Amana Growth looks much like any other large-cap growth fund. Its top holdings are sprinkled with high-quality growth names: Google, Oracle, Apple, IBM. But financial services are conspicuously absent. So, too, are some retailers like Amazon, Walmart and Target, because they violate the fund's mandate to avoid businesses that derive more than 5% of sales from alcohol, pornography, gambling or pork - activities and foods that are haram, or forbidden.

"Yes, it does restrict our universe in many ways," Kaiser acknowledges. "The good thing is that we probably know our companies quite well, and we try to make sure they're not doing something they shouldn't be."

In 1984, when Kaiser ran a midsize investment management firm in Indianapolis, he was approached by an Islamic investing club to put the group's money to work in accordance with the principles of Shariah, the Islamic moral code. Two years later, he launched the Amana Income Fund (AMANX) and, in 1994, the Growth Fund. His current firm - Bellingham, Wash.-based Saturna Capital Management, of which he is chairman - also manages the Amana Developing World Fund (AMDWX). Going by the last names of his investors, Kaiser estimates that only about 12% of his shareholders are Muslim.

In picking stocks, Kaiser is guided by a six-member advisory committee of academics and businesspeople. In addition to outright bans on certain types of activities, they have mandated that Kaiser avoid leverage, thereby bypassing any stocks whose debt-to-market-cap ratio exceeds 30%. The result is a portfolio of high-quality names with large piles of cash.

"We're very much focused on technology because this sector doesn't have a lot of debt," Kaiser says about the fund's 42% allocation to the sector. If the cash is a by-product of some other business and not an attempt to make profit, it passes muster.

FINANCIAL SECTOR
Investing the Islamic way seems to be working for Kaiser, an Episcopalian. For the 10 years ended Feb. 28, Amana was up 12.5% a year on an annualized basis, according to Morningstar; that puts it in the top 2% of large growth funds. For the last five years, the fund is up 5.6%, besting 68% of its competitors. Avoiding financial stocks helped Amana Growth avoid the brunt of the financial crisis.

While the cautious approach to balance sheet strength wins approval from Muslims, the strategy can sometimes falter. As financials have rallied, the fund has suffered. Over the last 12 months, it's up 6.8%, while the S&P 500 is up 13.5%. "The companies that have done well when we're printing money like crazy are financials and highly levered companies, and those are the ones we don't have," Kaiser says.

Amana also doesn't trade much, holding its stocks around five years on average. "We're not supposed to gamble with the fund," Kaiser says. "It's OK to invest for the long term, though."

As a result of the low turnover and other strategies, Amana Growth gets high marks for tax efficiency. Morningstar assigns a tax cost ratio of 0.03% to the fund over the last 10 years, meaning that 0.03% of the fund's performance goes to taxes. That places it in the top 2% of the category.

TECH JUGGERNAUTS
As with many other growth funds, Amana's top holding is Apple (AAPL). It's not hard to see why. Kaiser has been a strong supporter of the stock for a dozen years, as the company moved away from desktop computers into category-crushing mobile devices.

For years, Apple dominated the mobile device industry it helped create, with earnings soaring quarter after quarter. But the stock's recent plunge - a drop of roughly 37% since its September high - has many wondering whether the company's best days are behind it.




(Financial Planning / 01 April 2013)


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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Sukuk: A ‘new’ option of aircraft financing



LONDON – Several airlines have indicated that they are exploring the possibilities of financing new fleet acquisitions and expansion through the issuance of sukuk or other suitable Shariah-compliant financing instruments. 

This follows the issuance of sukuk in March by Emirates Airlines and Malaysia Airlines (MAS), who sought to raise funds to finance fleet acquisition and expansion. 

Turkish Airlines and Malaysia’s budget long-haul carrier, Air Asia, have confirmed that they are considering issuing sukuk to finance the purchase of new aircraft, although it will depend on the timing and market conditions. 

Emirates issued a $1 billion 10-year amortizing sukuk, which carries an average weighted life of five years and priced at the tighter end at 300 basis points over 5-year MS (Midswaps). 

Malaysia Airlines, on the other hand, used the proceeds of its 20-year RM5.3 billion sukuk under its Bai Bithaman Ajil (BBA) Notes Issuance Program, established in late 2012, to pay for the delivery of its final Airbus A380 aircraft out of a total order of eight Airbus aircraft, including six A380-800s, one A330-200F and one A330-300. This final aircraft (MSN 114) was Airbus’ 100th A380 delivery. 

So, why this new-found interest in sukuk as a form of aviation finance, and is there a possibility of international airlines from non-OIC countries will also start issuing sukuk for their acquisitions?

Bankers in the UAE and Malaysian suggest that airlines such as Emirates, MAS and possibly Air Asia favor sukuk over ijara (lease) financing and often more costly conventional loans. Sukuk, they stress, are ideal for the airline and aviation industry because of the excellent match between the long-term nature of the assets with a regular income stream from passenger traffic and the structure and tenor of the securities. Sukuk yields are currently also relatively more competitive than conventional loans. 

However, aviation finance industry experts such as Charles F Yeterian, Vice President of the Geneva-based Novus Aviation Capital, which has an established record in arranging Islamic aircraft leasing and other financing facilities, stresses that “sukuk is not necessarily a better option, it is simply a different option in that it affords airlines to find a “new” source of financing. Sukuk has the ability, like its “sister-product” in conventional banking, to go directly to the capital market, and not rely only on commercial bank financing; i.e. going directly to capital, after the uncertainty surrounding the role of commercial banking following the global financial crises. Sukuk represents a still un-tapped Islamic financing reservoir; this market is craving for new Shariah-compliant, well structured financing products and sukuk just seems to fit the bill.”

Both Emirates and MAS have issued Islamic papers in the past. An estimated 60 transactions valued at just under $10 billion have been closed for various airlines and airline leasing companies over the last three decades including Emirates, MAS, Garuda, Syrian Arab Airlines, Gulf Air, Turkish Airlines etc. and several of the major global aircraft leasing firms, all of which are very familiar and comfortable with documentation involving Shariah compliant structures related to purchasing, maintenance and insurance.

MAS itself confirmed in March that it is set to receive 17 new aircraft in 2013 alone.

Some bankers stress that airport infrastructure potentially holds out even more exciting opportunities for various types of Islamic finance instruments and solutions. Both the Kuala Lumpur International Airport (KLIA) and the International Terminal at Istanbul’s Ataturk Airport involved large Islamic financing tranches. 

Perhaps the largest such involvement was in 2012 when the state-owned General Authority of Civil Aviation (GACA) in Saudi Arabia issued a SR15 billion sukuk whose proceeds are being used to part finance the construction of the SR27.1 billion ($7.23 billion) new King Abdul Aziz International Airport in Jeddah. 

GACA since then also issued awarded a contract to Tibah Airport Development Company, a consortium of TAV Airports of Turkey, Al Rajhi Holding Group and Saudi Oger, to build the new $1.2 billion Prince Muhammad bin Abdulaziz International Airport in Madinah. The project is being built under a public-private partnership agreement involving a build-operate-transfer (BOT) structure, and the financing comprises Shariah-compliant equity participation, bridge and istisna (construction forward financing) facilities provided by National Commercial Bank of Saudi Arabia and a $750 million syndicated istisna facility arranged by Japan’s Sumitomo Mitsui Banking Corporation.

The $1 billion Sukuk Al Ijara issued by Emirates Airlines was well received and successfully soled to investors in MENA, Europe, Asia, and offshore US accounts.


(Saudi Gazette / 02 April 2013)


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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Turkey makes great strides with Islamic banking



KUALA LUMPUR: The Turkish Islamic banking and finance sector commands a 5% to 6% of the nation’s overall banking assets, much lower compared to Malaysia’s 20% or US$65.6 billion (RM202.7 billion) in assets in 2012.
The secular Turkey is making great strides with more progress expected in the coming years, though it conceded that Islamic banks are still dependent on interest rates as the core benchmark for Islamic banking business, according to a board member of the Turkey’s central bank.
“Turkey is a secular country, hence the government has no Syariah board like in Malaysia where there is a Syariah board, but the Islamic banks have their own consultation boards composed of Islamic experts,” Central Bank of Turkey board member Necdet Sensoy (photo) said at a forum on Islamic finance here last Friday.
“Islamic banks are not allowed to invest in government bonds, and this is a disadvantage for the Islamic banks compared to the conventional banks.”
The government bonds are not interest-free, whereas the Islamic banks are promoting free interest banking and financing.
Turkey has only four Islamic banks, and they are limited in their scope of business unlike Malaysia’s vibrant Islamic finance portfolio, said Sensoy.
The four Turkish Islamic banks are Bank Asya Alkatim, Al-Baraka Turk, Kuveyt Katilim Bankasi also known as Kuveyt Finans and the Turkiye Finance, majority-owned by Saudi Arabia’s National Commercial Bank, accordi ng to Muhammad Islami Onal, the economic counsellor of Turkey in Kuala Lumpur.
Islamic banking in Turkey dated back to 1985, when the government passed legislation for interest-free banking where Islamic banking is called “participation”.
Huge demand
Sensoy said one area where Islamic finance is experiencing growth and even edging conventional banks in Turkey is the provision of private pension via the Asya Pension Fund and in Islamic equity.
Turkish Islamic lender Bank Asya Alkatim has made inroads in its campaign to expand the number of private pension accounts in Turkey, where private retirement funds are still a novelty, said Sensoy.
The bank had opened over 39,000 private retirement accounts so far since the pension fund was created in mid-May 2012, and he added that by year-end the number of private pensioners covered by the bank is expected to be much higher.
The Turkish government has given incentives to encourage long-term deposit of the pension funds, offering 25% profit for funds stocked for at least 10 years, and this is one of the reasons why such funds are popular.
Another important aspect of the Turkish Islamic finance market was the launch in the last quarter of 2012 of the Sukuk al-Ijara, which is the only form of sukuk allowed in Turkey, and known as the lease certificate.
Another success story is Turkey’s Treasury Department’s launching of the sovereign sukuk intended to raise one billion lira (RM1.7 billion) from the market. Due to huge demand, the offering was increased to 1.5 billion lira. The orderbook hit eight billion lira and the offering was oversubscribed by five times.
Sensoy spoke at the 37th Islamic banking and finance discussion series organised by the International Islamic University Malaysia’s (IIUM) Institute of Islamic Banking and Finance.
(F.M.T News / 02 April 2013)



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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic finance as an economic tool



When I was a young man newly started in the Islamic banking industry, I was asked to join a business trip to Mindanao, the Philippines, sometime in the late 1990s. It was my first major business trip and naturally I was excited. It remained to this day as one of the most memorable, sobering and enriching experiences in my 16-year career.
The purpose of the trip was to explore how Islamic finance could assist in the redevelopment of Southern Philippines.
Early on, I had personally identified that Islamic finance was the natural partner and catalyst to bring about economic and infrastructure development.
It could support the then brokered peace process, after years of guerilla warfare by the majority Muslim locals who were seeking their own rights to govern.
I was also pretty nervous because I thought I was going into a war zone. At least that was what my young, inexperienced mind was concocting despite the assurance from my bosses that there was no danger to life or limb. The things I had to do for Islamic finance!
I spent a gruelling 20 hours travelling to Manila – yes it was 20 hours because I had to fly from Labuan to Kuala Lumpur, slept at the airport overnight on the bench (since I was not qualified to stay in the transit hotel then) and flew off to Manila the next day before taking a flight onwards to Mindanao. This was despite Labuan being located next door to Mindanao! I wished there was a direct flight to Mindanao from Labuan or Kota Kinabalu, but I digress.
The flight to Mindanao gave me the impression of how poorly connected it was from major business routes and how isolated it was from the rest of the world at that time, which highlighted the importance of the trip I was on. When we landed, all the nervousness that I was carrying dissipated and was replaced with a sense of excitement. Being the most junior in the entourage, I naturally had to carry the bags and sort out the logistics.
Everything about the trip was looking up until we reached our car and saw the armed guards that will be escorting us throughout our visit. There were a dozen of them armed to the teeth plus outriders. It brought back all the imagined danger to the fore especially when our host explained it was for our safety and we were not to travel alone without at least two guards escorting us.
Central tool
Since I was already there and didn’t want to be seen like someone really wet behind the ear, I pushed aside my worries and did what was expected of me. Backed by an allocation of funds from various parties including from supranational bodies, we set about to identify viable commercial projects.
We visited the local rebel leaders, local governments and businessmen. We looked at one of the largest fish ports in the world, fish canneries, sugar cane fields and many other potential projects that could be supported by way of Islamic finance.
The whole trip took about a week including the overnight stays in Manila to meet with government officials, that is, senior Philippine legislators keen to see peace in Southern Philippines. I was involved in all of the discussions since I was tasked with note-taking.
Although I did not fully understand everything that transpired in the discussion, the experience made it clear that Islamic finance was a central tool that could ensure lasting peace in Southern Philippines.
Unfortunately, nothing happened after the visit as the peace process envisaged did not materialise. We could not implement what could have been done under Islamic finance to help make it successful.
Many years have passed and I have fairly put aside any hope of seeing Islamic finance playing a role in the redevelopment of Southern Philippines.
That was until the recent announcement on the signing of the Framework Agreement between the Philippine Government and the Moro Islamic Liberation Front (MILF), successfully brokered by Malaysia.
I was excited again at the prospect of Islamic finance catalysing a lasting peace in the area and sat as a keen observer of the new peace process albeit from a distance.
The Lahad Datu incident was unfortunate but it showcased again the need to bring the people in Southern Philippines into the mainstream economic activities. To me, this can be achieved best through Islamic finance. Real peace cannot exist without economic empowerment.
Of course, this can only happen if Islamic finance is fully enabled and facilitated to operate on a level playing field with conventional finance in the Philippines.
In fact, considering that Islamic finance has proven to be the best tool for the democratisation of the financial market to promote a truly inclusive society in countries like Malaysia, I would even go so far as to recommend that special incentives be given to Islamic banks to operate at least in the Southern Philippines so that it can truly serve the peace agenda.
At the end of the day, Islamic finance is a public good and an economic tool created to benefit all mankind. Since this is the case, it should be the most natural tool to be employed for the peace process not just in Southern Philippines but anywhere else in the world.


(F.M.T News / 01 April 2013)


---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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