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Thursday, 12 March 2015

Opportunities In Islamic Finance Grow

I am convinced that opportunities exist in Islamic, or Shariah-compliant, investment products to address the investment needs of the world’s 1.6 billion Muslim citizens. I recently attended a conference on Islamic investment that Franklin Templeton organized in Dubai, where H.R.H. Sultan Nazrin Muizzuddin Shah, Sultan of Perak Darul Ridzuan and Royal Patron for Malaysia’s Islamic Finance Initiative, delivered the keynote speech. He reflected on the progress made by Islamic finance in recent years, and the challenges that remain. I believe the presence at our conference of such a distinguished and respected member of the Islamic financial community reflects well on the efforts both of our team in Malaysia (a key center for Islamic finance) and those within our wider organization.
The presence of the Royal Patron for Malaysia’s Islamic Finance Initiative at our conference in Dubai was no accident, as Malaysia and Dubai are among the strongest proponents of Shariah finance globally. Both countries have been active in developing institutional structures opening the way to the international development of Shariah-compliant products, including both Shariah equities and Sukuk, commonly referred to as Islamic bonds. Malaysian authorities, in particular, have been proactive in encouraging the development of a wider range of Shariah-compliant financial products, while Dubai is the home of one of the first Islamic banks, set up in 1975, and is aiming to become a major global hub for Islamic finance.
The efforts of proponents of Shariah-compliant investment in Malaysia, Dubai and elsewhere were fruitful in 2014. Several Sukuk offerings from non-Muslim countries— including the United Kingdom, Hong Kong, South Africa and Luxembourg—represented a major breakthrough for a type of product that had previously been largely local in nature, with issuance restricted to a few Islamic nations. In the context of global financial markets, Shariah-compliant equity and Sukuk investments remain relatively small in scale. Islamic finance is still a young industry in comparison with its conventional counterpart, growing fast but still representing a small fraction of global financial assets. The bulk of industry assets are still accounted for by Islamic bank deposit accounts. Aspects of Islamic law affect investment, including the prohibition of the payment of interest, so-called “riba,” and on a range of activities and products forbidden to Muslims including alcohol, armaments and a number of foodstuffs and food-related activities. These prohibitions appear relatively simple in principle. In practice, the interpretation of what is Shariah-compliant and what is not can be complex, requiring the active involvement of Islamic scholars, especially as new investment products are developed to widen the range of the Islamic investment industry but that require considerable discussion. Furthermore, interpretation of Shariah principles differs from one Islamic scholar to another. Thus, creating uniform standards for products can be problematic, with differences from jurisdiction to jurisdiction, and with many products not adhering fully to those standards that are set.
With businesses looking to develop increasingly complex Shariah instruments, for example in the field of derivatives and currency hedging, issues of interpretation can be a barrier to market acceptance. However, I find that many of the ideas implicit in Islamic investment are gaining increasing acceptance within conventional markets through the concept of ethical or socially responsible investment, creating an obvious point of contact between the Shariah-compliant financial world and a growing area of conventional finance. In addition, Shariah-compliant investments emphasize a worthy function and social impact to help mankind. This aspect appears to potentially fit with the need for high levels of infrastructure investment across a wide range of emerging countries, both in the Islamic world and beyond: investments that will likely need to tap resources well beyond the capacities of individual governments.
With much work going into creating infrastructure Sukuk with international acceptability, I believe this pressing global need could represent a great opportunity, and one that we at Franklin Templeton could be well placed to participate in. With Islamic nations among the world’s most populous and fastest-growing economies, I strongly believe that Shariah investing could become increasingly important, as well as a thoroughly worthy endeavor in tune with the ideals of our mentor, Sir John Templeton.
Mark Mobius’ comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.
What Are the Risks?
All investments involve risks, including possible loss of principal. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets.
(ValueWalk / 11 March 2015)
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UAE set to be the first to offer green-energy sukuk

The UAE is expected to issue the world’s first Sharia-compliant bond aimed at financing green energy projects this year, possibly as early as next month, according to industry experts.
“We are going to get one, possibly two [green sukuk], in the UAE in April,” said Sean Kidney, the chief executive and co-founder of the London-based Climate Bonds Initiative (CBI).
Green bond issuance reached US$36.6 billion globally last year, more than triple the previous year’s total. Mr Kidney said that at least $50bn of green bonds are forecast to be issued this year, but he expects numbers to be even higher.
“We have a reasonable shot at seeing $100bn of [green bond] issuance this year,” he said.
CBI has helped to create international standards for this type of ethically responsible financial security, from which capital raised is used for projects such as solar and wind schemes as well as developing energy efficiency initiatives such as LED lighting.
“I am optimistic that we will see the first green issuance out of the region and into the region during this year,” said Andy Cairns, the managing director of debt origination and distribution at National Bank of Abu Dhabi (NBAD). The bank is currently in discussions with potential issuers, he said.
Mr Cairns said that there were multiple benefits to be gained from the rise of ethically responsible financing mechanisms such as the “halo effect of positive publicity and the associated feel-good factor”.
NBAD helped to issue an ethically responsible sukuk in November. The $500 million Vaccine Sukuk uses the funds raised to buy vaccines to deploy in the developing world.
“They are attractive to issuers by targeting dedicated socially responsible buyers, those funds with a specific mandate to put money to work in socially responsible projects, while also appealing to the broad universe of conventional investors,” said Mr Cairns.
Nasser Saidi, chairman of the Clean Energy Business Council, said that the council has been in discussions with the Dubai Supreme Council of Energy (DSCE) about the issuance of green sukuk, which oversees energy planning in Dubai. DSCE’s members include Dubai Electricity and Water Authority (Dewa).
“That’s why a Dewa sukuk would be a perfect opportunity, and it would be highly supported by the global financial market,” said Mr Saidi.
In January, Dewa said it would increase its target for solar power to account for 15 per cent of total capacity by 2030, up from 5 per cent previously.
Lee Irvine, an associate in the Latham & Watkins law office in Dubai, said the green sukuk first mover would have the greatest advantage to corner the market. The firm is working with the Clean Energy Business Council, the Gulf Sukuk and Bond Association and the Climate Bonds Initiative to promote green sukuk.
“[The first issuer of the green sukuk] will open up the market regionally, and that will allow smaller corporations and enterprises to pursue the financial vehicle,” he said.
(The National Business / 11 March 2015)
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