Syariah funding draws green projects

Financial products based on renewable energy and sustainable agriculture are emerging in Islamic finance as asset managers seek a crossover opportunity between ethical and syariah-compliant investing.

Islamic finance follows religious principles which forbid involvement in activities such as gambling, tobacco and alcohol, but the industry has only recently begun to stress themes of wider social responsibility, such as protecting the environment.

Last week, Malaysia announced guidelines for issuance of socially responsible sukuk (Islamic bonds), aimed at helping firms raise money for projects ranging from renewable energy to affordable housing.

In April, the Dubai Supreme Council of Energy, a government planning body, and the World Bank signed an agreement to develop funding for the emirate’s green investment programme, including “green” Islamic bonds.

Dubai aims to derive 5% of its energy from sustainable sources and retrofit buildings to reduce energy consumption.

Meanwhile, firms in Britain, Canada and Hong Kong are offering sharia-compliant investments in sustainable farming ventures, which may attract money from Islamic investors in the Gulf and southeast Asia as well as from local investors.

The reasoning is that green investment products can tap a wider range of demand if they are made syariah-compliant to appeal to Muslims.

At the same time, non-Muslims who might normally shy away from Islamic investments – because of concerns about pricing, complexity and lack of familiarity – may embrace them if they are green.

It is not yet clear how much success these efforts will have. In past years, Islamic mutual funds made forays into the market for socially responsible investments, but those efforts have struggled, partly because of limited distribution channels.

Fund houses from the Gulf and southeast Asia sought to distribute some of their Islamic funds to European investors using UCITS, a “common passport” for investment products, but they have had only mixed success, and a high-volume business has not developed.

The new crossover products are not mutual funds but instruments tailored specifically to invest in a certain type of asset in a specific country or region.

They combine Islamic screens – lists of criteria for syariah compliance – with other practices required by sustainable investment firms.

In June, Ontario-based AGInvest Properties developed a syariah-compliant investment product providing ownership of Canadian farmland, supervised by Bahrain-based advisory firm Shariyah Review Bureau (SRB).

The venture would buy prime agricultural land which the firm would manage to ensure sustainability through soil preservation, crop rotation and selection of farm operators, said Robbie Duncan, Dubai-based vice president of AGInvest.

The company, which currently manages C$70 million (RM203.47 million) worth of agricultural land, has begun marketing its syariah-compliant product to investors in the Gulf.

A Saudi firm has expressed interest in setting up a similar fund with AGInvest as adviser, said Duncan, without naming the Saudi firm.

“We have found that three main trends have promoted this agri-business: the need for a stable ethical investment, an investment which promotes and aids the betterment of a community, and the need for food security.”

It is the third agriculture-based investment screened by SRB since December, said Yasser Dahlawi, SRB’s chief executive.

“There are only finite amounts of agricultural resources available to the Islamic investor community,” Dahlawi said.

British-based SCS Farmland is offering a syariah-compliant investment programme for Argentinian farmland, while Hong-Kong based Treedom Group is offering Islamic investors an agarwood venture.

Success for all of these ventures is by no means guaranteed, and it is too early to say whether this form of crossover investing will have more success than the Islamic mutual funds previously marketed in Europe.

One environmentally friendly, syariah-compliant investment project in Britain failed to go through earlier this year.

British-based Islamic financial advisory firm Simply Sharia planned to raise £3 million (RM15.74 million) by the end of June to build a solar energy plant, using tax relief from the government’s Enterprise Investment Scheme to create a wakala funding structure.

But the project was unable to reach its funding target by the deadline, partly because as a syariah-compliant structure it could not use leverage like conventional financial products, which limited the returns that could be offered. The project was too small to be financed with sukuk.

“There was a performance differential between conventional solar EIS products (target return £1.15 per pound invested) and the syariah-compliant product (target return of £1.10 per pound invested),” said Anas Hassan, managing director of business finance at Simply Sharia.

“This differential was mainly due to the high level of debt in the structure of the conventional product, whereas the syariah-compliant version was a pure equity play.

(The Rakyat Post / 02 September 2014)

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

Gulf sovereigns continue to dominate dollar sukuk issuance

Dubai: Volumes of sovereign sukuk have increased significantly over the last three years as governments in Asia, the Gulf Cooperation Council (GCC), Europe and now Africa seek to tap increased demand for Sharia-compliant financial assets, however a large portion of these issuance is denominated in local currencies, according to Moody’s.

In the medium term, these international issuances will remain driven by sovereign and government-related issuers from the GCC countries because of their US dollar currency pegs.

Despite recent growth in cross-border sukuk issuance, most sovereign sukuk are issued in local currencies for domestic investors. Of the $105 billion (Dh385 billion) sovereign sukuk outstanding at July 2014, approximately $20 billion are foreign-currency, cross-border instruments of which are almost all denominated in US dollars.

“As global investors becoming increasingly at ease with Islamic instruments, we expect more issuance of cross-border instruments from other jurisdictions such as Indonesia, Malaysia and Turkey to tap this demand,” said Khalid Howladar, Moody’s Global Head for Islamic Finance.

Governments and government related entities (GREs) from the GCC region are expected to be a major supply source for sukuks this year.

According to Moody’s estimates global sukuk issuance this year will exceed the 2013 level to reach around $70 billion, with sovereign issuance increasing to around $30 billion this year. The share of sovereign sukuk in global sukuk markets is larger than in conventional bond markets. The amount of international debt securities reached close to $22.8 trillion in 2013, 7 per cent of which was issued by governments. In comparison, the amount of international sukuk outstanding at the same year-end 2013 was $65 billion, 29 per cent of which was issued by governments.

“The entrance of new issuers will support growth in sovereign sukuk, and increasing volumes — particularly from those of high credit quality governments — will help attract new investors to the sector and provide additional depth and liquidity to the sukuk markets,” said Christian De Guzman, a Moody’s Vice President and Senior Analyst.

In Saudi Arabia Quasi sovereign issuers drive strong domestic market growth. Corporations in Saudi Arabia issued a record 39.4 billion Saudi riyals ($10.5 billion) issuance of riyal-denominated (SAR) sukuk in 2013 following a sovereign-related benchmark sukuk issuance by the General Authority of Civil Aviation (GACA) in early 2012. This strong flow continued in 2014 with another $10.3 billion issued in January-July 2014.

“We expect the Saudi sukuk market to continue to grow, holding its place as the second largest sukuk market after Malaysia. The record issuance was driven by strong investor demand, strong demand from local banks deploying their excess liquidity, increased financing opportunities with respect to the country’s large-scale infrastructure projects and large quasi-sovereign benchmark issuances that have helped to set a yield curve in the country,” said Howladar.

Government-related borrowers

In the UAE, the governments of Dubai, Abu Dhabi and most recently Sharjah are active in the international sukuk market, driven by the US dollar currency peg, large financing needs and leverage appetite. However, given the state dominance of the economy, the majority of issuance has been from government-related borrowers. These issuers collectively lead international issuance globally with over $26.8 billion of sukuk outstanding and have attracted substantial global investor interest.

“While direct sovereign borrowing represents only $5.2 billion of the total, the proportion of sukuk versus conventional issuance is rising. And similar to other GCC sovereigns, this trend is likely to continue given the Dubai government’s explicit ambition to become the centre of the Islamic Economy” said Howladar.

In Qatar, the government has developed a sovereign sukuk yield curve by issuing large, long-term paper to support its Islamic finance policy goals and provide local Islamic banks with a liquid supply of Sharia compliant investments. Despite the small size of its domestic capital market, Qatar’s government is actively helping to deepen the sukuk portion of that market

Despite the relatively small size of its economy, Bahrain has a very deep, but fragmented base of around 24 Islamic financial institutions plus associated funds, takaful insurers, industry bodies and ancillary financial services that are commensurate with its pioneering hub status. While the country may be losing ground in recent years to its larger neighbours in terms of sukuk issuance and banking assets, the Central Bank of Bahrain (CBB, unrated) has indicated that it is focusing on a strong regulatory environment to support its status as key Islamic financial centre.

(Gulfnews.Com / 07 September 2014)

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

Islamic banks face challenge from Basel III deposit regulations

As banks around the world gear up to meet tough Basel III regulatory standards, Islamic lenders face a source of uncertainty that could prove expensive for them: how regulators will treat their deposits.

In most ways, Islamic banks look well-placed to cope with Basel III, which will be phased in across the globe over the next few years. Most of the banks are from the Persian Gulf and Southeast Asia, where economies are strong.

Since Islamic finance frowns on monetary speculation, their balance sheets are largely clear of the derivatives and complex, risky assets that sunk some of their conventional peers during the global financial crisis. They should therefore have little trouble in meeting Basel III's minimum capital standards.

But their deposit bases could become a headache. Because interest payments are not allowed by sharia principles, Islamic banks obtain deposits mostly through profit-sharing investment accounts (PSIAs), which are considered to be more volatile than conventional deposits.

Islamic banks are expected to be required to offset that volatility under Basel III by increasing the amount of high-quality liquid assets (HQLAs) they hold. But Islamic securities markets are younger, shallower and less developed so sharia-compliant HQLAs are in short supply - squeezing banks on two fronts.

"These are two of the more important challenges that Basel III is introducing to the Islamic finance industry," said Paris-based Mohamed Damak, primary credit analyst at credit rating agency Standard & Poor's.

Islamic commercial banks held about US$1.2 trillion worth of assets at the end of last year, according to Thomson Reuters. They account for roughly a quarter of deposits in Gulf Arab countries and over a fifth in Malaysia.

Basel III requires banks to hold enough HQLAs to cover net cash outflows for a 30-day period under a high-stress scenario. Outflows are calculated by applying different weights to funding sources, including PSIAs. The riskier the funding source, the larger the amount of HQLAs needed to cover it.

So a lot will depend on the weights or "run-off rates" which national regulators around the world, who will implement Basel III in their own jurisdictions, choose to assign to PSIAs.

Regulators have yet to give an indication of the likely weights. They are keen to develop their Islamic banking sectors, so they are unlikely to assign punitive weights. But they may not be able to treat PSIAs as benignly as conventional bank deposits.

The treatment of PSIAs will also depend on factors specific to the Islamic banking industry in each country, such as how it behaved in past stress situations, and the track record of Islamic banks in passing losses on to deposit holders under their contracts, Damak said. The uncertainty looks unlikely to be cleared up at least until early next year, when the Malaysia-based Islamic Financial Services Board (IFSB), a global standard-setting body, is expected to release a guidance note on the subject.

"Ultimately it is the regulator in each country that will decide what will be the treatment of PSIAs, and here the IFSB guidance note will be of significant value to help regulators decide how to treat PSIAs," Damak said.

(South China Morning Post Business / 08 September / 2014)

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