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Monday, 20 January 2014

New rules for syariah banking soon

KUALA LUMPUR: Syariah standardisation to ensure stronger financial stability will improve by 2015, thanks to efforts by standard-setting bodies to provide stricter guidelines for the better running of Islamic banking and finance sectors, an industry expert said.
The need to ensure the capability of the financial system to withstand economic and financial shocks are the core objectives of such financial stability, International Islamic Finance Market (IIFM) CEO Ijlal Ahmed Alvi said in an interview with The
Malaysian Reserve.

“A clear standardisation and regularisation is needed, in order for Islamic banking and finance to stay competitive,” said Ijlal.
Ijlal said credit support agreement and cross currency swaps are among the key aspects to be addressed as soon as possible.
“In the next two years we can expect at least four to five new standards in Islamic finance of which the currency side is one of them.
“We are currently working on the currency side, drafting standards and clauses related. It is half-way done,” he said.
Ijlal said for example Islamic banks’ retail product offerings tend to be usually fixed rate murabaha-based pro-ducts to customers, while the corporate customers are offered facilities based on floating benchmarks.
“Thus from the banks’ point of view there is a liquidity mismatch with Islamic deposits being much shorter tenure (3-6 months) compared with Islamic investments of longer maturity, and also fixed versus floating rate exposure.
“Corporate clients also require a more sophisticated product set to manage their own risk-positions through the banks.
“Therefore, Islamic banks require Islamic tools to manage interest rate risk and foreign-exchange (FX) risk. Hence the development of the profit rate swap and the Islamic forward FX contract,” Ijlal said.
Ijlal said there are a number of financial institutions that offer Syariah-compliant hedging solutions for the mentioned risks, however, the standardisation of the documentation is still not complete compared to conventional contracts which has resulted in syariah-compliant hedging remaining unattractively priced as compared to conventional hedging products.
Besides, he said there is an urgent need for a regulatory, supervisory and Syariah framework to be put in place across all markets in order for the sector to realise its fullest potential.
“Stronger standards for corporate governance, transparency, disclosure , accountability , market discipline, risk management and customer protection are crucial to increase market penetration and confidence,” he said.
Moreover, over-reliance on murabaha also needs to be addressed, Ijlal said.
“This is a big challenge indeed. We have to work to create an alternative to murabaha. We are in an evolving nature and this is something that needs to be addressed which involves quite a number of contractual obligations,” he added.
Murabaha is one of the most common modes used by Islamic banks. It refers to a sale where the seller discloses the cost of the commodity and amount of profit charged.
The mechanism of Murabaha is that the bank purchases the commodity as per requisition of the client and sells to him on a cost-plus-profit basis.
“Going forward, Islamic real estate investment trust (REIT) is another product that we are looking at in coming years.
“At the moment IIFM have only a few in Malaysia, Singapore and Dubai. We are looking to expand it further,” he said.

(Free And Independent News / 20 Jan 2014)
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Fitch Joins HSBC Seeing Record 2014 Sukuk Sale

Persian Gulf government spending will help drive what may be a record year for Islamic bond sales,Fitch Ratings said, echoing HSBC Holdings Plc (HSBA) forecasts.
Sales will probably match the 2012 high, the rating company said in a note last week even amid the slowest start to issuance since 2010. Mohammed Dawood, global head of sukuk financing at HSBC, said last month that sales will rebound from a decline last year. Borrowers sold $133 million of syndicated sukuk to Jan. 19, the least since $47 million in the same period four years ago, according to data compiled by Bloomberg.
Economic growth in the oil-rich Gulf Cooperation Council countries and possible debut Islamic debt sales from the U.K. and Hong Kong will help the long-term outlook for sukuk sales, Fitch said. Qatar’s plans for the 2022 soccer world cup, Dubai’s preparations for the Expo world fair in 2020, and Saudi Arabia and Abu Dhabi’s spending commitments should boost issuance, according to the rating company.
“There has been preparation work done, issuers just haven’t gone to market yet,” Rizwan Kanji, Dubai-based partner at King & Spalding LLP, said by phone yesterday. “Everyone is taking a breather after the record close to last year. We expect an active, fruitful year.”

Global Sentiment

GCC issuers sold $5.8 billion of sukuk in the fourth quarter, the most in an year-end period, according to data compiled by Bloomberg, as they locked in lower-cost funding before the U.S. Federal Reserve started cutting its stimulus program. The Fed begins reducing its bond buying this month.
The average yield to maturity for sukuk in the Middle East was little changed at 4.6 percent in the fourth quarter, according to JPMorgan indexes. Benchmark 10-year Treasuries rose 42 basis points to 3 percent in the same period.
“We expect low yields at least until the end of the month, so we should see some issuance soon,” Montasser Khelifi, a Dubai-based senior manager for global markets at Quantum Investment Bank Ltd., said by phone yesterday. “We could see total sales matching 2012. Though macro conditions or any political turmoil in the Middle East region could increase costs” and reduce deal flow, he said.
Sales in 2013 started strong, and the first quarter was the busiest on record in the GCC, which includes Saudi Arabia and Qatar, with $8.5 billion of securities sold. Issuance slowed after Fed Chairman Ben S Bernanke said in May the central bank may reduce asset purchases, pushing up borrowing costs.

Sukuk Debut

Growth of Islamic bonds, which comply with the religion’s ban on interest, is still directly linked to global sentiment, according to Fitch. Sukuk sales fell 7.4 percent last year to $43 billion after reaching a record $46.4 billion in 2012, according to data compiled by Bloomberg.
Dubai will spend $8.1 billion on infrastructure before the Expo in six years. The emirate last year unveiled a plan to be a center of the Shariah-compliant economy. Qatar plans investments of about $200 billion building hotels, roads and stadiums preparing to host the soccer championship, the world’s most-watched sporting event.
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.
“It’s irrelevant whether or not we have a record year,” Kanji said. “As long as we are better than last year on a consistency basis, that would be great.
(Bloomberg News / 20 Jan 2014)
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