Latest from GIFC

Friday, 19 September 2014

Islamic finance & management events in Kuala Lumpur Malaysia in 2014

Date: 24-25 September 2014
Event: KL Conference on Islamic Finance
Event site:

To register or reserve a seat online, please go to:

Organizer: Alfalah Consulting

Goldman Learns From Debut Flop in Islamic Finance Market

Three years after its first foray into the Islamic capital markets ended without a sale, investors piled in to buy sukuk debt from Goldman Sachs Group Inc. (GS) yesterday as the bank joined the governments of Hong Kong and the U.K. in selling debut Shariah-compliant bonds this year.

The New York-based lender attracted bids for three times the $500 million of sukuk it sold yesterday, according to two people familiar with the deal, who asked not to be identified because the information is private. The five-year sukuk was priced to yield 90 basis points, or 0.9 percentage point, over the benchmark midswap rate, according to the people.
After failing to sell sukuk bonds in 2011 amid criticism the deal didn’t ensure debt would be traded at par, as required by Islamic law, Goldman adjusted the structure this time in a bid to appeal to more investors. The new issue is a Sukuk al Wakala, a Shariah-compliant format in which one party entrusts another to act on its behalf.
Islamic financial assets globally will double to $3.4 trillion in the five years through 2018, according to forecasts from Ernst & Young LLP. The U.K. became the first non-Muslim country to issue sovereign Islamic bonds in June with a sale that lured orders for 10 times the amount offered. Hong Kong raised $1 billion in a debut sukuk last week, with a bid-to-offer ratio of 4.7.


“You’re starting to see a lot of new entrants coming into the sukuk market,” Damian White, a treasurer at Dubai-based Noor Bank, said in an interview yesterday. “The hope is that they will not be one-time visitors, and that it will encourage others.”
David Wells, a spokesman for Goldman in New York, declined to comment on the firm’s issuance of Islamic bonds.
The pricing “seems pretty aggressive at first glance, although we don’t see paper like this very often,” Ahmed Shehada, the Abu Dhabi-based head of advisory and institutions at NBAD Securities LLC, said by e-mail yesterday. “This will attract a different institutional base, mostly sovereign wealth funds and banks looking to manage liquidity and cash.”
Global sales of Islamic bonds have surged 39 percent this year to $33 billion, according to data compiled by Bloomberg, as investors have tapped the expanding pool of liquidity. Issuers from Malaysia are the biggest sellers of sukuk this year, having raised about $14 billion, according to data compiled by Bloomberg.
Abu Dhabi Islamic Bank PJSC (ADIB), National Bank of Abu Dhabi PJSC, Emirates NBD Capital Ltd. and NCB Capital also managed the offering, the people said. Standard & Poor’s rated the issue A-, the seventh-highest investment grade, it said in a statement this month.
(Bloomberg / 17 September 2014)

Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Takaful is not just for Muslims -Hassan Bashir

Hassan Bashir, Founder of Takaful Insurance of Africa, says the Kenya-based company's products can bring possibilities to many and are not exclusively for people of the Muslim faith.

The Africa Report: Why did you launch Takaful Insurance of Africa in 2011?
What is the difference between conventional insurance and Takaful?There was a need for the service. I have been involved in the insurance industry since 1997, and it was something that I had become aware of. For my MBA I researched customer behaviour across the Kenyan insurance industry, and what came out was evidence of dissatisfaction and a need for honesty and ethics in the insurance products and services. I came across a lot of people who did not have insurance, or if they did they only had the basic statutory amount. They said that they did not feel comfortable with some aspects of insurance – that it did not accommodate their religious beliefs – and some people said they felt conventional insurance was a bit like gambling.
The big difference is that conventional insurance is a risk-transfer model, whereas takaful is a risk-sharing model. In the case of takaful, it's more like a joint fund, where the company and shareholders are paid a portion of the premiums. The risk remains partly shared and collectively based on all those taking part in the scheme. At the end of the insurance period there is a payout, not a 'no-claims bonus', more of a dividend.
Why did you choose Kenya, which has a relatively small Muslim population?
I started in Kenya because I am Kenyan. This is the market I know – and because I saw there was a gap in the market here. I agree there are bigger markets, like Nigeria or Ethiopia, but that means there is potential to grow. Six months ago we opened an office in Somalia. We have made expressions of interest in Uganda, Djibouti and Tanzania, so we have big plans.
Is takaful only for Muslims?
No, not at all. Our products are not exclusively for people of the Muslim faith. We can serve anyone, and we do. Initially, people thought it was only for Muslims, but now around 15% of our client base is non-Muslim and we are growing.
Are people put off Islamic finance solutions by negative connotations of Islamism? 
Some people in our community are ill-informed, it is true. I've been asked – directly to my face – "If someone defaults on payments, will their hands be chopped off?" People are only like this because they do not know all the information, so it is our job to educate them. There are sensitivities, which I can understand, but I believe economic development will help change minds. Extremism thrives in spaces where there is poverty and a lack of education, and where people are desperate and have nothing to do and no means of earning a livelihood. But I believe that Islamic finance can bring possibilities to many people by helping them get employment and access to finance. Look at what we are achieving with the index-based livestock takaful. We are continuously educating [pastoralists] so that they understand that the cover is in line with their religious sensitivities and this is to cushion them against the harsh weather so that they sustain their livelihoods despite the droughts that may occur from time to time. In the long run, this will answer the question you asked about the negative perceptions about Islamic finance.
Do you think Kenya will launch a sukuk this year?
I am not sure if it will be this year, but I have no doubt it will happen soon. Kenya wants to become an Islamic finance hub in the East and Central Africa region, and it is well placed to do so. ●
(The Africa Report / 18 September 2014)
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Indonesia preps Islamic pension rules as Islamic banking growth slows

Indonesia's capital market regulator is projecting a drop in the growth rate of Islamic banking assets and is developing an array of initiatives to boost the sector, including much-awaited rules governing Islamic pension funds.

Indonesia's financial services authority, Otoritas Jasa Keuangan (OJK), said in a report that it is preparing a five-year blueprint aimed at industry issues such as sector consolidation, a lack of scale and foreign ownership limits.
OJK said it was now preparing draft regulations for Islamic pension funds, after Indonesia's national sharia council issued a ruling approving the overall concept in November last year. It has been under study since 2009.
"There is demand from the public to participate. With this, it is hoped that the number of sharia products increase and the public's wish for a pension fund on the basis of sharia principles is fulfilled."
Countries such as Pakistan and Malaysia have made efforts to develop Islamic pension systems of their own, where fund managers screen their portfolios according to religious guidelines such as bans on tobacco, alcohol and gambling.
Under a "moderate" scenario, the OJK projects Islamic banking assets will grow by 14.4 percent in 2014, down from 24.2 percent in 2013 and 34 percent in 2012, although these figures would remain above those for conventional banks.
As of December, Indonesia's Islamic banking industry - which included full-fledged lenders, Islamic windows and Islamic rural banks - had a combined 248.1 trillion rupiah ($20.6 billion) in assets, or 4.9 percent of the country's total banking assets.
That means Indonesia, which has the world's biggest Muslim population, remains well below neighbouring Malaysia, where Islamic banks hold more than 20 percent of all banking assets.
The OJK said challenges faced by Islamic banks were mainly internal, rather than related to external pressures such as falling commodity prices or lower export demand, as the sector's foreign currency funding stood at about 5.9 percent.
In particular, competition for third-party funds is a factor affecting growth, given the small scale of Islamic banks which makes it difficult for them to compete with large-scale conventional banks in attracting liquidity, the OJK said.
Despite this, the sector welcomed its 12th full-fledged Islamic bank last year, Bank BTPN Syariah, which was spun-off from its parent Bank BTPN (BTPN.JK). The Islamic lender also absorbed conventional peer PT Bank Sahabat Purba Danarta.
The industry has also seen growth in other areas such as Islamic mutual funds: As of December, there were 65 Islamic mutual funds in the country which saw a 12.1 percent increase in assets in 2013.

In addition, there were 10 corporate Islamic bonds issued last year, worth a combined 2.2 trillion rupiah, with total sukuk outstanding representing 9.4 percent of total debt issuance.
(Reuters / 18 September 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Tuesday, 16 September 2014

Big gains to be had in insurance and takaful for SMEs

The wheel of fortune turned for Dubai when Sheikh Rashid bin Saeed Al Maktoum took over the reins in 1958. Dubai took its fledgling steps towards success with the dredging of the Deira Creek, which had seen rapid silting-up during the early 1950s limiting the number of vessels it could harbour. Construction work was completed in 1960.

The rest, as they say, is history. Dubai set about creating for itself a prime position on the global map.

Today, the UAE in general and specifically Dubai, has firmly established itself as the trading and logistical hub of the Middle East, bridging trade routes between the East and the West with the expansion of its ports infrastructure. The emirate is an undisputed destination of choice as Middle East headquarters for multinational companies across diverse sectors including technology, food and beverages, consumer goods, and electronics. Dubai also hosts leading manufacturing and financial institutions and outsourcing services providers.

Somewhere along the line, these multinational companies in their race to gain from economies of scale have forgotten the smaller players who have been the real drivers of growth and catapulted Dubai and the UAE to great heights.
Interestingly enough, even in today’s technology-driven world, the small and medium enterprises (SMEs) remain the growth engines of the economy.

According to the UAE Ministry of Economy, SMEs currently account for 92 per cent of the country’s total registered companies, 86 per cent of the workforce in the private sector and 40 per cent of the GDP.

Sadly, the insurance and takaful industries have proved least effective in terms of penetrating the SME sector with appropriate coverage leaving it vulnerable to loss and closure.

The situation is indeed ironic. A service industry that began as a practice which was started by small groups of traders is today offering them ill-suited coverage at disproportionate costs in the very region of its birth. We must perhaps pause to remember that Babylonian (Iraqi) traders were among the first to begin the culture of distributing risks as far back as the second millennium BC.

For takaful and insurance providers the push towards big-ticket corporates has been a natural choice – as they provide tastier fare in terms of marketing effort – preferring to clinch and service one big client rather than closing deals for and servicing a multitude of smaller clients.

However, choosing this easy way out has cost the insurance and takaful sector dearly — it has missed out on a core segment of clients.

There is a dire need to rectify the situation, and with some innovation and practical thinking, insurance op
erators could be opening up a new market while supporting the small businesses to manage their risks more effectively.
Such products could include tailored coverage options for each trade class, sensitive but relevant pricing, as well as flexible financial limits to ensure the provision of adequate cover right through the seasons. Ultimately sales and policy maintenance automation is central to value creation for both parties, so wordings will need to be clearly laid out and highly adaptable.

Takaful and insurance operators would also need to step away from the conventional methods for marketing their services to small traders. The campaign should prioritise ease of understanding of the decision-makers, while taking up as little of their time as possible.

Circumstances today demand that the takaful and insurance industries step up and stay true to their raison d’être – to protect the most crucial part of the economy. With the future vision placing significant emphasis on the establishment of a globally dominant Islamic financial services hub, takaful providers must strive harder to offer appropriate products to SME businesses.

(The National Business / 14 September 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Payment of Zakat Through Branchless Banking

Monday, September 15, 2014 - Lahore—Provincial Minister for Zakat & Ushr Nadeem Kamran has said that payment of Zakat fund will be made to the Mustahkeen through branchless banking and Telenor Easypaisa has been selected for this purpose. 

This decision has been taken to save deserving people from the problems in opening bank account and encashment of cheques, he added. Initially a pilot project will be started in this regard in three districts including Lahore, Sheikhupura and Hafizabad while later scope of this scheme will be extended to all districts.

He was speaking at the signing ceremony of MoU between Provincial Zakat & Ushr Department and Telenor regarding distribution of Zakat through Easypaisa among Mustahkeen at a local hotel here today. Secretary Zakat & Ushr Habib ur Rehman Gillani, Administrator Zakat Muhammad Yousaf Butt, Director Business Services Telenor Shahzad Najam, Vice President Mr. Yahya Khan CEO Tameer Bank Nadeem Hussain, Vice President Aslam Hayat and a large number of people were present. The Minister said that branchless banking will help in speedy and easy distribution of Zakat among the deserving persons and they would be able to collect this amount from their nearest Easypaisa shops. He said that a new process of Zakat distribution will be ensured transparency and elimination of corruption.

Nadeem Kamran further said that department has decided to enhance the amount of subsistence allowance from 500 to 1000 rupees per person while Zakat will be paid to Mustahkeen after every three months in lump sum. He said that it has also been decided to increase marriage grant for the deserving girls from 10000 to 20000 rupees. 

He said that Zakat and Usher Department provides financial help of billions of rupees to Mustahkeen and lakhs of people benefit from it every year. The Minister said that under the old procedure Zakat was paid through cross cheque by local Zakat committees and sometimes this process was delayed due to different reasons whereas under the new system, Zakat will be paid timely and the deserving persons will not have to go to local chairman of Zakat committee.

Earlier, Secretary Zakat & Usher Habib ur Rehman Gillani and officials of Telenor Easypaisa also addressed the ceremony and assured the Minister of their complete coopera.

(Pakistan Observer / 15 September 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Monday, 15 September 2014

MIDEAST DEBT-Conventional banks' sukuk to push limits of Islamic finance

Sept 14 (Reuters) - Islamic bond programmes from a trio of big conventional banks are set to expand the boundaries of Islamic finance, helping open the market to first-time issuers while testing the banks' ability to win over industry purists.

Since June, France's Societe Generale, Bank of Tokyo-Mitsubishi UFJ (BTMU) and Goldman Sachs have set up sukuk programmes, aiming to tap the pool of cash-rich Islamic investors.
They are treading a fine line, having to reconcile the fact that their businesses mostly depend on conventional banking practices - interest payments, and to some degree monetary speculation - which Islamic principles forbid.
An abortive plan by Goldman to issue sukuk in 2011 showed the obstacles which conventional banks can face in the market. Some in the industry accused Goldman of failing to follow Islamic principles, and it never went ahead with that issue.
But if the three banks are successful and become regular sukuk issuers, they could help to widen Islamic finance beyond its core markets in the Middle East and southeast Asia.
Governments in non-Muslim countries are already issuing sukuk; Britain and Hong Kong made debut issues earlier this year, while South Africa and Luxembourg are next in line. The entry of conventional banks into the market may be needed to prompt significant numbers of Western companies to issue.
"It builds credibility in an industry that is attracting many new participants," said Khalid Howladar, Moody's Investors Service's global head of Islamic finance.
"Key financial institutions represent volume issuers in mature markets. They will improve liquidity and encourage more global investor participation."
Year-to-date, sukuk issuance totals $88.9 billion through 475 deals globally, up from $76.4 billion through 574 deals a year earlier, according to Zawya, a Thomson Reuters company.
But the market remains stubbornly reliant on sovereign and quasi-sovereign issuers, who represent a combined 77 percent of the total; most corporate sukuk come from Malaysia.
Only a few companies from non-Muslim countries have so far issued sukuk, including GE Capital, which in 2009 raised $500 million through five-year Islamic bonds backed by interests in a portfolio of aircraft, and Japanese brokerage Nomura Holdings, which in 2010 issued $100 million of two-year sukuk in Malaysia.
HSBC is the only non-Islamic bank to have issued sukuk, through a $500 million deal in 2011. Market acceptance of that deal was ensured in part by the fact that HSBC operates a major Islamic retail brand, HSBC Amanah.
SocGen and BTMU, Japan's largest lender, do not have Islamic retail banking brands. So they have been building their Islamic credentials by establishing strategic relationships with heavyweight Islamic financial institutions.
BTMU, which set up its $500 million multi-currency sukuk programme in Malaysia in June, signed in April a cooperation agreement with the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the Islamic Development Bank.
Last week, BTMU extended $100 million in murabaha financing to the ICD, marking the first time that the ICD had raised cash from a non-Islamic financial institution. Murabaha is a common cost-plus sale arrangement in Islamic finance.
The participation of conventional banks in Islamic finance is positive as long as they ensure adherence to sharia principles in a way that is acceptable to the market, the ICD said in a statement to Reuters.
"The recent murabaha agreement marks the first step along this path and we fully expect the relationship to grow, develop and strengthen over the coming years."
SocGen, which also set up a sukuk programme in Malaysia in June, offers sharia-compliant commodity hedging tools to corporate clients. Last year, it helped Dubai-based cable manufacturer Ducab migrate most of its commodity hedging needs into Islamic equivalents.
"We know there are many similar companies to Ducab within the region and we do hope they will gradually move into sharia-compliant programmes," said Dubai-based Mohamed Virani, SocGen's head of Islamic products.
"It's a natural progress in the evolution of the Islamic finance market as it develops and matures."
The biggest leap could be for Goldman, which is viewed by some in Islamic finance as a symbol of Western financial engineering. Though it insisted that its 2011 sukuk plan obeyed sharia principles and had enough certification from Islamic scholars, it is taking a different tack with this year's plan.
While the 2011 plan was a $2 billion programme of one-year sukuk, the current plan appears smaller; lead managers said the issue would be benchmark-sized, meaning at least $500 million, and the tenor would be longer, at five years.
Goldman sought advice for its latest plan from two of the same scholars whom it cited for its 2011 scheme, Abdul Sattar Abu Ghuddah and Mohammed Elgari, a source familiar with the plan said. This time, however, Goldman has also revealed the banks arranging the issue: Abu Dhabi Islamic Bank (ADIB), Emirates NBD, National Bank of Abu Dhabi and Saudi Arabia's National Commercial Bank.
The involvement of four top Gulf banks, including ADIB which has a sharia board led by the prominent scholar Taqi Usmani, may go a long way towards removing the misgivings which dogged Goldman's 2011 plan.
Goldman has also changed the structure of its sukuk plan. While its 2011 scheme was based on murabaha, its current plan has a hybrid structure and envisages operating only 49 percent though murabaha and 51 percent through a structure called wakala.
Under wakala, certificates are issued by an originator to buy assets which are given to an agent, who charges a fee for managing the assets, Some scholars favour wakala over murabaha because of its clearer link to the assets backing the sukuk; the HSBC issue in 2011 was wakala, as are the issuance plans of SocGen and BTMU.
The fact that the Goldman sukuk is predominantly wakala may remove one objection to its 2011 plan: that the sukuk might be traded at prices other than par value. Trading wakala structures is relatively uncontroversial, according to scholars.
Hybrid formats have been used in the past by the likes of the Islamic Development Bank, Abu Dhabi Commercial Bank and Qatar International Islamic Bank, combining different Islamic structures among which at least one is tradeable to ensure the sukuk can be bought and sold in the secondary market.
Another objection to Goldman's 2011 sukuk, which the U.S. bank said was unfounded, was that the proceeds might be used in interest-bearing finance. Documentation for the current sukuk plan, seen by Reuters, does not appear to address that issue directly, though it says proceeds would be used in the commodities business of J. Aron & Co, a Goldman unit.

"The thing they have to be most careful with is the use of the proceeds. They are a conventional bank, so they need to show that the proceeds are going to sharia-compliant purposes," said Shamsiah Mohamad, senior researcher at the Malaysia-based International Shari'ah Research Academy. 
(Reuters / 14 September 2014)
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City sukuk opens door to more Islamic finance in Hong Kong

The launch of the Hong Kong government's first sukuk last week is seen as paving the way for private firms to follow suit in promoting the city as a centre for Islamic finance, now a global business worth US$1.3 trillion and expected to double by 2017.

The government's US$1 billion, five-year sukuk offered on Thursday was oversubscribed 3.7 times with US$4.7 billion in orders received. It attracted a mix of mainly international institutional investors, with 36 per cent from the Middle East, 47 per cent from Asia, 6 per cent from Europe and 11 per cent from the US. The bonds will be listed in Hong Kong, Malaysia and Dubai.
Amir Ahmad, a Dubai-based partner with international law firm Pinsent Masons, said the Hong Kong government-issued sukuk was popular with Middle East investors because of its high credit rating.
"This is the first time to have a government entity with AAA credit rating issue a sukuk in US dollars," Ahmad told the South China Morning Post.
"Many Islamic investors have strong demand for high credit rating sovereign bonds which comply with the Islamic religious investment law but the supply is limited. This is why the Hong Kong government issue is popular."
He said the buyers from the Middle East are mainly institutional investors such as banks, fund managers and pension fund companies.
"The Hong Kong government issue is a milestone as the successful launch of the first Islamic bonds in Hong Kong would help encourage other companies to follow suit," Ahmad said.
"We are looking forward to seeing more Islamic bonds issued by other Hong Kong and mainland companies in future."
While other issuers may not have Hong Kong's high credit rating, he said other Islamic bonds could still attract buyers as long as they offered good pricing for investors.
Ahmad added that although Hong Kong is far from the Middle East, it still could be an ideal global Islamic finance centre due to its active market and sound banking and legal system.
A change to the tax laws last year to provide fair tax treatment for Islamic bonds and conventional bonds was an important step for the city to promote Islamic finance.
In 2007, Financial Secretary John Tsang Chun-wah announced a plan to secure part of the Islamic finance pie. However, the city had no sukuk issue until the government offering last week, largely due to the tax issue.
Taxation had been the obstacle in Hong Kong because the special structure of sukuk, which must conform to sharia law, does not allow Muslims to accept interest payments, so the bonds were structured as assets or property.
That meant they were subject to stamp duty, income tax and profit tax. Ordinary bonds pay interest, which is not taxable in Hong Kong.
"The tax law change in 2013 has allowed the sukuk to be treated as conventional bonds in terms of tax payment. This has provided a level playing field for sukuk issuance in Hong Kong," Ahmad said.
"If the Hong Kong government and other companies continue to issue Islamic products, Muslim investors will come," Ahmad said.
A banker involved in the deal said the offering showed that the city has the ability to be an Islamic finance centre.
"Hong Kong does not have many Muslim followers but if the city can attract Islamic followers to trade here, we can also be an Islamic finance centre. The government bond issue has taken the first successful step," he said.
The challenges ahead, the banker said, include whether there would be enough issuers in Hong Kong willing to deal in Islamic bonds.
"The Islamic religions have restrictions which exclude some companies from issuing sukuk, including supermarkets and retailers who sell pork or related products as well as those involved in the entertainment business," the banker said.
"Even if the companies are qualified to issue sukuk, they may prefer to issue conventional bonds which do not have any restrictions."
Ben Kwong Man-bun, a director of brokerage firm KGI Asia, said the sukuk would have difficulty attracting local retail investors.
"For many retail investors in Hong Kong, it is much easier to buy in the stock market than trade in bonds," Kwong said.
"The timing is also not good for bond offerings as interest rates could go up and this would hurt bond prices. Sukuk are not likely to attract many retail investors to trade even after they are listed on the local stock market."
(South China Morning Post / 15 September 2014)
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Saturday, 13 September 2014

Hong Kong to list $1b sukuk on Nasdaq Dubai

Dubai: The Government of Hong Kong has announced plans to list its first offering of $1 billion (Dh3.68 billion) sukuk on Nasdaq Dubai.

Dubai Crown Prince and Chairman of the Executive Council Shaikh Hamdan Bin Mohammad Bin Rashid Al Maktoum welcomed the decision to list the Hong Kong sukuk on Nasdaq Dubai.
“Choosing Nasdaq Dubai as a platform to list the world’s first US dollar sukuk issued by a AAA-rated government falls in line with the initiative launched by UAE Vice-President, Prime Minister and Ruler of Dubai His Highness Shaikh Mohammad Bin Rashid Al Maktoum to position Dubai as the centre of the Islamic Economy,” Shaikh Hamdan said.
The Dubai Crown Prince welcomed the successful launch of the sukuk. “We are also pleased to have worked with Hong Kong on this important issue and delighted that it has attracted such strong demand. We look forward to closer working relations with Hong Kong in developing global Islamic financial products,” Shaikh Hamdan added.
The step further highlights Dubai as one of the most important platforms for trading Sharia-compliant financial products.
By the end of the first half of 2014, the total value of Sukuk listed on Dubai’s exchanges was close to $22 billion, out of this Nasdaq Dubai alone accounted for more than $18 billion. Currently Dubai is the world’s third largest venue for sukuk listings by value.
Sovereign issuance
Credit rating agency 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.
According to Standard & Poor’s, although corporate and infrastructure issuance has faltered so far this year, a healthy increase in government and financial institution issuance has more than compensated for the drop.
Majority of recent sukuk issuances from the GCC region have been from government-related borrowers. The UAE issuers collectively lead international issuance globally with over $26.8 billion.
“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 Khalid Howladar, Moody’s Global Head for Islamic Finance.
(Gulf News.Com / 12 September 2014)
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The market for Islamic financial products is growing fast

AFTER morning coffee but before the keynote speaker came the muezzin’s recitation from the Koran: “Those who consume interest cannot stand except as one stands who is being beaten by Satan into insanity.” But those attending the Global Islamic Financial Forum needed no reminders that Muslims are supposed to eschew interest: the industry based on that premise is booming. Ernst & Young, a consultancy and accounting firm, estimates that Islamic banking assets grew at an annual rate of 17.6% between 2009 and 2013, and will grow by an average of 19.7% a year to 2018. Khalid Howladar of Moody’s, a rating agency, calls this “a landmark year” for Islamic finance, in that it is moving from “a very esoteric asset class to one that’s more… global.”

Most of the world’s Muslims are not so devout that they completely abjure conventional finance: even in Saudi Arabia, the assets of Islamic banks account for barely half of all banking assets. Muslim account-holders, Mr Howladar explains, tend to be more concerned with the products and service on offer than with the strictures of sharia (rules based on Muslim scripture). But Islamic finance, he says, has become sophisticated enough to appeal on both counts. Humphrey Percy, who heads the eight-year-old Bank of London and the Middle East, believes that most of his customers came not out of fierce piety, but “purely as a value proposition”.
Though the principles underlying Islamic finance are as old as the religion itself, modern banks did not start offeringsharia-compliant products until the mid-1970s. Since then it has grown into a global industry, with total assets of around $2 trillion. Most of that (nearly 80%, according to Malaysia’s central bank) is entrusted either to Islamic banks or to the Islamic units of conventional banks. The rest takes the form of sukuk, Islam’s answer to bonds (15%); Islamic investment funds (4%) and takaful, the Islamic version of insurance (1%). In 2012 Iran accounted for 43% of the world’s Islamic banking assets, with Saudi Arabia (12%) and Malaysia (10%) ranking second and third.
The demand created by this rapidly growing pool of Islamic capital has spurred the growth of sharia-compliant products. These take many forms, but none may pay or charge interest, nor can they invest in things that Islam forbids (so no alcohol, pork, gambling or pornography). In an Islamic mortgage, for instance, a bank does not lend money to an individual who buys a property; instead, it buys the property itself. The customer can then either buy it back from the bank at a higher price paid in instalments (murabahah) or make monthly payments to the bank comprising both a repayment of the purchase price and rent until he owns the property outright (ijara).
By the same token, a holder of sukuk has not technically lent the issuer money; instead, he owns a nominal share of whatever the money was spent on and derives income not from interest but either from the profit generated by that asset or from rental payments made by the issuer. At the end of the sukuk’s term the issuer returns the principal to the investor by buying his share of the asset. Cynics may point out that the difference between these structures and a conventional bond or mortgage is, in practice, rather slight: both provide predictable income to those who make their capital available.
But that does not seem to have dampened their appeal. Bahrain’s central bank issued the first sovereign sukuk in 2001; from 2002 to 2012, annual issuance grew at an average rate of 35%, from $4 billion to $83 billion (see chart), dwarfing even the healthy growth of Islamic banking assets. Most sukuk are denominated in the currency of the issuer and intended for local investors, but international issuance is growing, from 10% of the sovereign sukuk issued in 2010 to 20% in 2014. Of the $296 billion of sukuk outstanding as of July, Moody’s estimates that sovereigns account for 36%, with Malaysia the leading issuer. In June Britain became the first western country to issue sovereign sukuk; its £200m ($322m) sale attracted orders of £2.3 billion.
Western firms are also beginning to usesukuk to raise money. Société Générale and Bank of Tokyo-Mitsubishi UFJ, a French and a Japanese bank respectively, have issues in the works; Goldman Sachs is reportedly considering a $500m offer.
Despite strong recent growth for Islamic financial products, there still is room for further expansion, both in relatively unbanked Muslim countries in the developing world and in the West. As the orders for Britain’s issue showed, demand for sovereign sukuk is strong. Hong Kong and South Africa are scheduled to issue dollar-denominated sukuk later this month. Luxembourg, Russia, Australia, the Philippines and South Korea have also shown interest.
There are potential pitfalls. Goldman’s previous attempt to enter the market foundered amid claims its proposed sukuk did not comply with sharia. Indonesia has scaled back its issuance of one type of sukuk due to similar complaints. Malaysian scholars approved an Islamic credit card based on a transaction known as baya al-ina, which Arab scholars have rejected as being too close to interest-based lending.
Such rows have led to calls for greater international standardisation—hence the creation by national regulators of such entities as the Islamic Financial Services Board, which issues both religious and prudential guidance, playing the same role as the Basel Committee does for conventional banks. Zeti Akhtar Aziz, governor of Malaysia’s central bank, believes it will foster “harmonisation in how institutions are regulated”. But since Islam has no overarching authority that can approve its rulings, there will always be disputes.
(The Economist / 13 September 2014)
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Friday, 12 September 2014

Turkey’s Aktif Bank gets approval for $91m in sukuk

Turkey's largest privately owned investment bank, has received regulatory approval to issue 200 million lira ($91 million) in Islamic bonds, the Capital Markets Board said.

The lender will sell the sukuk to qualified investors through its asset leasing company, Aktif Bank Sukuk Varlk Kiralama. It gave no time frame for the deal.
The emergence of corporate sukuk in Turkey is seen as a litmus test for efforts to develop Islamic finance by the government, which issued a maiden $1.5 billion sovereign sukuk in 2012 to encourage the industry's development.
The global sukuk market is growing fast, with year-to-date issuance up 16.3 percent from last year at $88.9 billion, according to Zawya, a Thomson Reuters company.
But the market remains reliant on sovereign and quasi-sovereign issuers, which represent a combined 77 percent of the total. Most corporate sukuk come from Malaysia, so issuers from Turkey could help deepen the market.
Last month, Turkish conglomerate Dogus Group received regulatory approval to raise $370 million via sukuk in what would be the first dollar-denominated corporate transaction of the kind in the country.
Until now, Turkey has only seen significant issuance of sukuk from the government and the country's four Islamic banks, known as participation banks.
Last year, Aktif Bank helped raise a small one-year 100 million lira sukuk for construction-to-energy firm Agaoglu Group using a sukuk structure known as mudaraba. 
The Capital Markets Board has outlined new regulations to allow a wider range of sukuk structures, as the initial rules focused on ijara, an Islamic sale-and-lease-back contract.
Ijara requires the issuer to have income from a leased asset such as real estate, a limiting factor for many companies.
(Al-Arabiya News / 12 September 2014)
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GCC gross takaful contribution seen reaching $8.9bn in 2014

GCC gross takaful contribution is estimated to reach around $8.9bn in 2014 from an estimated $7.9bn in 2013, according to EY’s latest report, ‘Global takaful insights 2014’.

The report forecasts a continued double-digit growth momentum in the global takaful market of approximately 14% from 2013 to 2016 and expects the industry to reach $20bn by 2017. This is against a backdrop of continued buoyancy in the estimated $2tn global Islamic finance markets.

The Gulf Co-operation Council (GCC) countries and Association of Southeast Asian Nations (Asean) markets are likely to maintain their current growth path in the next five years, subject to their economic growth.

The global takaful industry continues to gain market share across several high-value, rapid-growth markets, which still show significant untapped potential. Within the Gulf region, Saudi Arabia accounts for the majority of the total gross takaful contribution at 77%, followed by UAE, which accounts for 15%. The rest of the Gulf countries account for just 8% of gross takaful contributions, the report said.

Saudi Arabia will likely remain the core market of Islamic insurance business, commanding approximately half (48%) of the global contributions, while UAE, Qatar and more recently, Oman, continue to set the pace for the development of takaful products in the Middle East and West Asian markets.

Turkey and Oman are new entrants to the takaful industry, offering strong first mover advantage to takaful operators, whereas established takaful markets in Africa like Sudan, offer great prospects for efficient replication across new African markets endorsing Islamic finance.

Abid Shakeel, senior director, EY’s Global Islamic Banking Centre said, “The continued strong growth of the much larger Islamic banking sector will help sustain the progress of the takaful industry. The rapid-growth markets, particularly UAE, Malaysia and Indonesia, are key markets to watch as they improve on market practices, widen distribution channels and strengthen the regulatory front. The low insurance penetration rates, on average just 2%, across key Muslim rapid-growth markets signify a huge opportunity and growth potential for takaful products, particularly in the areas of family takaful and medical insurance.”

Given the strong underlying market opportunities, a competitive market environment and strategic regulatory reforms, it is vital that the takaful industry addresses key challenges to achieve a sustainable takaful ecosystem.

Among the GCC countries, competition, operational issues and the lack of qualified talent continue to be impediments. Profitability of takaful companies has been threatened not just by undifferentiated strategies but also by the lack of uniform regulations that will allow them to operate across different models. Undifferentiated business strategies mean most takaful operators are competing intensely and this is likely to squeeze out the under-performers.

With strong competition from conventional incumbents, takaful operators are likely to continue their struggle in the medium term, although some will look at alternative customer segments and explore merger options. In striving for scale and profitability, operators are looking at structural transformation around risk, pricing and cost efficiencies.
The industry needs to re-examine its strategies, operations and regulations in order to gear itself up for further growth and a sustainable ecosystem. Success needs to be measured in profit, not market share and those who continue to do what they’ve been doing in the past will struggle with profitability, the report said.

Sukuk issuance likely to rise over next few years: S&P
Corporate and infrastructure sukuk issuance is likely to rise over the next few years, despite the dip in issues over the past eight months compared to the same period of 2013, Standard & Poor’s Ratings Services has said in a report.

In its report “Why corporate and infrastructure sukuk issuance is declining, despite healthy prospects” S&P said issuance has trended downward this year in the Gulf Co-operation Council (GCC) region and Malaysia, dropping 33% and 7%, respectively.

By contrast, total sukuk issuance (including financial institutions and sovereigns) grew by 19% in the GCC and by 6% in Malaysia over the same period.

“We attribute the decline in corporate and infrastructure sukuk in large part to cheap and ample bank liquidity, which has made issuers less reliant on the capital markets,” said S&P’s credit analyst Karim Nassif. “The overall small pool of sukuk issuers, and seasonal factors such as the early Ramadan this year, have also played a role.

“We nevertheless believe corporate and infrastructure sukuk issuance will increase again over the next few years as companies’ refinancing needs grow and as entities establish themselves as sukuk issuers.”

The report says corporate and infrastructure issuance is likely to remain more volatile and difficult to predict than total sukuk issuance. It will likely remain largely a function of the specific needs of the corporate and infrastructure entities that comprise the pool of sukuk issuers in the GCC and Malaysia.

Continued high levels of bank liquidity and uncertainty among investors about compliance standards continue to hold back growth of the corporate and infrastructure sukuk market, the report said.

“The creation of local or regional institutional investment frameworks-for example, to enable pension or insurance funds to invest in sukuk-would go some way, we believe, toward creating a deeper and more liquid sukuk market,” Nassif added.

(Gulf Times / 09 September / 2014)
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