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Tuesday, 17 December 2013

Hong Kong's Islamic finance goal boosted by Basel III rules

Tougher international banking requirements should help the Hong Kong government achieve its goal of turning the city into an Islamic finance centre to capture a large slice of the US$1.3 trillion market.
The Hong Kong and the British governments next year plan to issue sukuks, bonds structured according to the tenets of Islam.

Bankers and lawyers said the sukuk market has been given a new lease of life by Basel III, under which Islamic banks must load up on sukuks as they are barred from buying conventional government bonds. This, they say, would mark a major difference from 2007, when the government tried but failed to make Hong Kong a centre of Islamic finance.
"The Hong Kong government's plan to issue sukuks comes at the right time as many Islamic banks would like to invest in government-issued sukuks to meet the tough Basel capital requirements," said Davide Barzilai, partner at international law firm Norton Rose Fulbright.
Barzilai said Basel III, which will be implemented this year, stipulates international banks should hold more high-quality equity, meaning they would need to invest more in highly rated government bonds. This has created a problem for Islamic banks as they cannot buy government bonds that do not comply with the sharia, or Islamic code.
The bonds need to be specially structured as payment of interest is unacceptable under sharia. In addition, the money raised through the bonds cannot be invested in gambling, derivative trading, pork or tobacco-related retail businesses.
"Sukuks to be issued by the Hong Kong or British government would thus meet the demand of Islamic banks and other investors from the Gulf," Barzilai told the South China Morning Post. The Hong Kong government had made the right choice in deciding to take the lead in issuing sukuks, he said.
"Sukuk is very complicated. It would be good for the government to take the lead so that others can follow it," he said.
Barzilai attributed the failure of the government's 2007 attempt for a sukuk market to the financial crisis that followed. Another reason was that the structure specified under sharia would subject these bonds to higher taxes than conventional bonds.
As interest payment is forbidden under sharia, Islamic bondholders are subject to stamp duty, income tax and profit tax. Ordinary interest-paying bonds are not taxable in Hong Kong.
The government changed the law in July to bring taxes for sukuks in line with those of other bonds. That, along with the Basel III regulation from this year, made this the perfect time for Hong Kong to reboot its Islamic finance development, Barzilai said.
However, Christopher Cheung Wah-fung, legislator for the financial services sector, said Hong Kong would find it hard to compete with Malaysia, which handles two-thirds of sukuk issues worldwide. "Malaysia has a much wider Muslim population than Hong Kong," Cheung said.
Barzilai countered that Malaysia's sukuk market is mostly domestic, unlike Hong Kong or London, which host international investors.
The Islamic finance market, which is expected to double to US$2.7 trillion by 2016, could support more than one international centre, Barzilai said.
Potential investors have mostly positive views about Hong Kong's sukuk thrust.
Badlisyah Abdul Ghani, executive director and chief executive of CIMB Islamic Bank, said the Hong Kong government sukuk would create a new benchmark as well as work as a lead for private issuers to follow.
Raja Teh Maimunah, chief executive of Hong Leong Islamic Bank, said the Hong Kong government sukuk would be popular if the pricing was right.
She said Hong Kong was suitable as an Islamic finance centre because it has a "huge cradle of potential issuers from both Hong Kong and mainland China and it has large flows of US dollars, the main Islamic market currency".
Tim Lo, managing director of French private bank CIC Investor Services, said that from a pure investment point of view, whether the bond was sukuk or not was irrelevant. "If the Hong Kong government issues a sovereign Islamic bond, investors will price it based on its probability to default, which is extremely low in Hong Kong given its top AAA credit rating," Lo said.
Daud Vicary Abdullah, president and chief executive of the International Centre for Education in Islamic Finance, said that "a lot of work is required in the areas of sharia governance, regulatory reform and human capital development".
(South China Morning Post / 16 Dec 2013)

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Tunisia Potential Islamic Finance Hub Fir French - Speaking Countries

JEDDAH – There are big opportunities to promote Islamic finance in Tunisia which can be the global hub of Islamic finance for French speaking countries, said Muhammad Zubair Mughal, Chief Executive Officer, AlHuda Centre of Islamic Banking and Economics (CIBE) in an international conference on “Finance and Enterprise” jointly organized by World Bank, International Monetary Fund (IMF), International Finance Corporation (IFC) and European Bank for Reconstruction and Development in Sousse, Tunisia.

The event was attended by the Prime Minister of Tunisia, including many government ministers, heads and senior delegates from central banks, World Bank, IMF, IFC, European Bank and other dignitaries from different international organizations. 

Mughal, during his address as guest of honor, said international financial crisis can be addressed in a better way through Islamic finance and such financial crisis could not have happened if Islamic financial system was followed and implemented at that time.

He said there are about 2000 Islamic financial institutions working globally as Islamic banks, Takaful (Islamic insurance), sukuk (Islamic bonds), Islamic fund and Islamic microfinance institutions, etc, in more than 100 countries.

Fortunately, he said no Islamic financial institution was effected by such global financial crisis, which ensures the strength and rationality behind the Islamic financial system. He added that international institutions such as Islamic Development Bank (IDB), Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI), Islamic Financial Services Board (IFSB) and International Islamic Liquidity Management (IILM) are working for Islamic finance around the globe which will further promote and strengthen the Islamic finance in future globally. Responding to a question related to the relationship between religion and Islamic finance, he said that Islamic banking and finance is a name of a system not religion so all other religions can get benefit from it and that is why Islamic banking and finance is growing in the Western world where non-Muslims are utilizing the Islamic financial products considerably, to fulfill their business, personal and financial needs.

America alone has has more than 20 Islamic financial institutions are working, which are actively providing the Islamic financial services to fulfill the financial needs of Muslims and non-Muslims equally.

During his stay in Tunisia, he met with Dr. Amel Amri, President – Tunisian Association for Islamic Finance (TAIF), Dr. Raza, President – Islamic Economic Association Tunisia and heads of some other Islamic financial institutions. He said that Tunisia has a good recognition in Islamic financial industry having 2 full-fledged Islamic banks, takaful companies, universities with Islamic finance program, sukuk laws and some other similar institutions which indicate the best future of Islamic finance in Tunisia.

Realizing the need of Islamic microfinance, he further said that Islamic microfinance is missing component of Islamic finance in Tunisia while socioeconomic development and poverty reduction can be done in better way through Islamic microfinance.

(Saudi Gazette / 16 Dec 2013)

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U.A.E. Nears Debt Listing Rules to Boost Sukuk Sales

The United Arab Emirates is in the final stages of creating debt issuance and listing regulations that will help develop a domestic credit market and encourage the sale of Islamic bonds, the market regulator said.
The Securities and Commodities Authority, or SCA, has circulated draft rules that for the first time treat sukuk and non-Shariah compliant debt separately. The regulator is seeking feedback from market participants by the end of the year and “hopes” to enact the regulations early in 2014, according to Obaid Al Zaabi, director of research and development at SCA.
The U.A.E., the second-biggest Arab economy, must develop local debt markets to help state-run and private companies find alternatives to bank loans, Central Bank Governor Sultan Al-Suwaidi said last month. The country is the only one in the six-nation Gulf Cooperation Council that doesn’t have a domestic, local-currency debt market.
“The new sukuk and bond regulations are built around giving more room for local issuance to be listed in local markets, instead of going abroad,” Al Zaabi, who is leading the team that developed the sukuk regulation, said by phone yesterday. “We’re opening the door for them and trying to make the regulations more durable and more feasible.”

Islamic Hub

Global issuance of Islamic bonds, which comply with the religion’s ban on interest, will climb to $60 billion next year, Moody’s Investors Service said in a report last month, up from about $51 billion in 2013. The rules will boost issuance and listing of sukuk in the U.A.E., Al Zaabi said.
“Sukuk essentially is not considered as a debt certificate, but rather a certificate of ownership,” Al Zaabi said. “The requirements, in terms of disclosure, listing, and trading, totally differ to conventional bonds. So the SCA management saw it was a good idea to make it separate.”
Dubai, one of seven sheikhdoms that make up the U.A.E. and home to the country’s second-largest stock market, announced a plan this year to become capital of the global Islamic economy. The emirate’s ambition is one of the incentives for the SCA to put the rules in place as soon as possible, Al Zaabi said.

Rival Malaysia

Dubai and the U.A.E. have a lot of catching up to do before domestic sukuk issuance rivals that of Malaysia or Saudi Arabia. The Asian country’s issuers have sold about $168 billion, or two-thirds of all outstanding Shariah-compliant bonds, while Saudi Arabia has about $22 billion of domestic sukuk outstanding, according to Moody’s.
The U.A.E.’s debt rules will bring listing and issuance in line with best practices, Al Zaabi said. Clifford Chance LLP was appointed to develop the sukuk regulations, while Bracewell & Giuliani LLP worked on the bond rules, he said.
“The upgraded rules for both bonds and sukuk will cover all aspects of industry requirements,” Al Zaabi said. “From the application onwards there will be continuous disclosure requirements.
(Bloomberg news / 16 Dec 2013)

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