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Wednesday, 25 December 2013

Best of 2013: Understanding SRI and Islamic Finance

Recent years have seen increasing interest in sustainable and responsible investing (SRI) and Islamic finance. In fact, growth in SRI assets has outpaced professionally managed assets as a whole, and more than 10% of the total assets under management in the United States are now invested following SRI practices. Similarly, according to a special report on Islamic finance in The Banker, a frequently cited resource in Islamic finance statistics, the compound annual growth rate in global Shari’a-complaint assets since 2006 remains in double digits at 16.02%. Nonetheless, many investment professionals still know little about SRI and Islamic finance.
Here are my top picks for content from the past year that help explain these topics.
Impact Investing Explained Simply and Clearly (Video): This was one of the most popular video interviews on our blog this year, and given how little investment professionals know about impact investing, it’s not surprising that readers were interested in this primer. Harry Hummels, an academic and a practitioner in impact investing, explains how impact investing is similar to and different from traditional investing.
Why Isn’t There More Collaboration between Islamic Finance and SRI?: Islamic finance and the forms of finance generally referred to as SRI have yet to actively collaborate with each other. It’s an opportunity that is waiting to be seized upon by industry leaders.
The Church of England as an Institutional Investor (Video): Did you know that the Church of England has a portfolio as large as GBP 8 billion? With so much money comes a lot of responsibility. The ethical expectations from the Church are much higher than for regular institutional investors. Edward Mason, secretary of the Church of England’s Ethical Investment Advisory Group, shares his views on how the Church of England reflects its moral values in its investments.
Enhanced ESG Disclosure and Long-Term Investing in Europe (Video): Steve Waygood, chief responsible investment officer at Aviva Investors, explains the European Commission’s adoption of a proposal to enhance transparency of environmental and social issues, and the implications for long-term investing.
Recommended Reading: The Best Books on Islamic Finance: A frequent question on the minds of those interested in learning about Islamic finance is, “What’s the best book that I should read?” To answer this question, I spoke with Rodney Wilson, a professor at the University of Durham and a well-known commentator on Islamic finance. His office seemed to have every known title on Islamic finance nicely stacked into his book shelves.
The Best Learning Resources on Corporate Governance: Robert A. G. Monks Shares His Picks: For whom is a corporation run? Is corporate governance a legal topic? An economic one? Or does it just boil down to ethics? CFA Institute interviewed Robert A. G. Monks, a pioneer of corporate governance, to get his picks for the best learning resources to help answer these important questions.
(Enterprising Invester / 25 Dec 2013)
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Top Sukuk Manager Sees New Issuers Aiding Sales: Islamic Finance

Debut Islamic bonds from governments and companies seeking to cut financing costs will drive sukuk sales next year, according to HSBC Holdings Plc (HSBA), with issuance probably rebounding to a record.
Growth will be boosted as borrowers follow governments from Dubai to Malaysia, which are seeking to promote Shariah-compliant bonds and become centers for Islamic finance, said Mohammed Dawood, global head of sukuk financing at HSBC, the bank that managed the most sukuk sales in 2013. The London-based lender is also working to introduce new instruments to help the securities compete with conventional bonds, he said by phone Dec. 22.
Islamic bond sales fell 9.5 percent in 2013 to $42 billion after reaching a record $46.4 billion last year, according to data compiled by Bloomberg, in a market dominated by repeat borrowers. About $60 billion of sukuk will be sold in 2014, primarily by Malaysia and the Gulf countries, Moody’s Investors Service said in a report last month.
“In 2014, we will see a shift to new issuers,” Dawood said from Dubai. “We will see a lot more coming out of Asia and a lot more issuance from outside of the traditional markets.”
Financial centers around the world have announced plans to sell Islamic bonds as part of efforts to grab a greater share of an industry whose assets will more than double to $2.7 trillion by 2017, according toPricewaterhouseCoopers LLP. Hong Kong, the world’s fifth-largest currency-trading center, said in November it will offer a debut sukuk to spur capital markets. In October, U.K. Prime Minister David Cameron said the country planned to sell Islamic notes.

Maturing Debt

“You have more debt maturities in 2014, especially in Dubai, so this will drive issuance,” Montasser Khelifi, a Dubai-based senior manager for global markets at Quantum Investment Bank Ltd., said by e-mail yesterday.
Issuers in the Gulf Cooperation Council have about $32 billion of bonds and syndicated loans maturing next year, according to data compiled by Bloomberg. Among the debt is a $500-million note from Dubai due in November while Abu Dhabi’s Tourism Development & Investment Co., which is building museums in the U.A.E. capital, has to pay a $1 billion bond in July.
Dubai, one of seven sheikhdoms that make up the United Arab Emirates, said this year it’s seeking to become the capital of the global Islamic economy.

Greater Awareness

“The announcements that we have seen from the likes of Dubai and the region have really given the product a lot more awareness, particularly among international markets,” Dawood said. “That has led to a whole series of enquiries and interest from countries, from issuers who otherwise would be not so obvious targets for sukuk issuance.”
HSBC has helped manage 110 sales this year, giving it a 17 percent share of the global sukuk market, according to data compiled by Bloomberg. Kuala Lumpur’s CIMB Group Holdings Bhd (CIMB) and Malayan Banking Bhd (MAY), which mainly deal with sales in Malaysia, the largest sukuk market, were the second- and third-biggest, respectively. HSBC was a manager of the 15.2 billion riyals ($4.06 billion) issue of Saudi Arabia’s General Authority of Civil Aviation in September in the biggest sale of such securities this year, according to data compiled by Bloomberg.
“In 2014 you will see continued development toward new instruments,” Dawood said. We are “looking at what is available on the conventional product offering, looking to see how that can be structured for the Islamic market” such as the perpetual sukuk, he said.

Growing Popularity

Perpetual sukuk, which don’t mature, have grown in popularity since the first such issue in dollars by Abu Dhabi Islamic Bank PJSC in November 2012. Four perpetual sukuk have since been sold in the GCC as companies have used them to shore up capital without hurting their creditworthiness since the instruments are treated as equity on the balance sheet.
Within the six-nation GCC, which includes the two biggest Arab economies of Saudi Arabia and the United Arab Emirates, $21.1 billion of sukuk have been sold this year, about the same as in 2012, data compiled by Bloomberg show.
Sukuk are designed to comply with Shariah law’s ban on interest. The average yield on the Islamic bonds sold by GCC issuers was at 3.77 percent yesterday, according to HSBC/NASDAQ Dubai indexes. That compares with an average yield of 4.17 percent on non-Shariah-compliant bonds for council issuers, according to the data.
Possible volatility in global interest rates caused by a cut in monetary stimulus by the U.S. may influence the timing of new issues, although the pool of Islamic liquidity remains “very strong,” Dawood said. It may also push issuers to use local currencies such as the Malaysian ringgit or the Saudi riyal, he said.
(Bloomberg News / 25 Dec 2013)
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