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Saturday, 25 October 2014

Islamic finance & management events in Kuala Lumpur Malaysia

Date: 25-26 November 2014
Event: Executive Workshop on Islamic Wealth Management & Financial Planning
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Date: 17-18 March 2015
Event: KL Conference on Islamic Finance
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Date: 21-22 April 2015
Event: KL Conference on Islamic Wealth Management
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Organizer: Alfalah Consulting

Islamic banking UK: Islamic Bank of Britain re-branded to Al Rayan Bank as number of non-Muslim investors grows

The Islamic Bank of Britain has unveiled plans to change its name to Al Rayan Bank, as it aims to increase its presence in London and acquire a wider range of customers.

It will also update its logo and all other aspects of its brand identity across its website and UK branches. As long as shareholders approve, the new identity will be introduced in December this year. 
The IBB, which was set up in 2004, remains the UK's only sharia-compliant retail bank and has developed the largest range of related retail financial products in the UK. Earlier this year, it was acquired by Masraf Al Rayan (MAR) – the fifth largest Islamic bank in the world and the second largest in Qatar. 
As it enters its second decade of existence, the bank hopes to see through ambitious expansion plans, particularly in London where its commercial and GCC operations will be based. It has £100m of capital investment from its new parent company.
It will focus on corporate and real estate finance, and hopes to continue attracting a wide range of customers. The bank estimates that nearly 83 per cent of customers who opened a deposit account the bank between January 2013 and August 2014 were non-Muslim. 
Sultan Choudhury, CEO of IBB said, “IBB has pioneered British retail Islamic banking over the last 10 years, achieving global recognition for its outstanding successes.  The change to Al Rayan Bank represents the latest chapter in the Bank’s history, in which it will expand its retail and commercial product offering to a wider audience, with the backing of a strong and successful parent.”
The Bank will continue to operate as a UK regulated bank, and customers’ deposits will remain protected by the Financial Services Compensation Scheme.

(City A.M / 23 October 2014)

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Morrocan bank ‘planning Islamic finance subsidiary with Gulf partner’

Brahim Benjelloun-Touimi said in an interview with Reuters that the proposed subsidiary “will take our partner’s name”, but he declined to reveal the identity of the financial institution.

Benjelloun-Touimi said he would give details after a bill to regulate Islamic banks and sukuk issues has been approved by Morocco’s parliament, which is expected before the end of this year. BMCE’s move would then need to be endorsed by Morocco’s central bank.

According to the Arab international newspaper Asharq Al-Awsat, Morocco’s lower house of parliament backed the bill last June. The paper said currently only the country’s leading bank, Attijariwafa, which is part-owned by Moroccan King Mohammed VI’s investment company Societe Nationale d’Investissement, has an Islamic banking subsidiary in the kingdom.
Morocco’s minister for general affairs and governance Najib Boulif said earlier this year that the Islamic finance bill was designed to allow “a gradual introduction of Islamic banks to preserve the competitiveness of existing, conventional, banks”.
Boulif said: “Local banks will be allowed to take at least 51% of the capital and as much as 49% will go to foreign Islamic lenders. There is a very strong demand from abroad for such a project.”
“We thought it is best to start with one Islamic finance institution as we wish to assess closely the experience to ensure its success,” Boulif said. “If it proves to be a success within six months, then nothing should stop us from authorising more Islamic lenders.”
A report published last February by international ratings agency Standard and Poor’s said Islamic finance could be a “good fit” for infrastructure and project finance in North Africa, because banks lack the long-term funding that these projects require. “After tremendous global success over the past decade, with total assets estimated at about $1.4 trillion, Islamic finance could make inroads in North Africa,” the report said.
Islamic finance expert Amir Ahmad of Pinsent Masons, the law firm behind, said at the time that the report “sets out the natural course of development of Islamic finance in the rest of the Islamic world”. “The demand for infrastructure in North Africa could be the ideal catalyst for this development and North Africa is likely to be an attractive market.
(Out-Law.Com / 23 October 2014)
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Thursday, 23 October 2014

Saudi Arabia's Advanced Petrochemical plans sukuk investor meetings

Saudi Arabia's Advanced Petrochemical Co. will begin meeting investors from Sunday ahead of a potential sale of a sukuk denominated in riyals, it said on Wednesday.

The pricing, tenor and size of the Islamic bond to be offered will be determined based on market conditions, Advanced said in a statement published on the kingdom's bourse.
Funds raised from the issue, to be arranged by HSBC Saudi Arabia and the investment banking arm of Riyad Bank , would be used for general business purposes, it added.
Should Advanced complete an issue, it would be a debut sukuk transaction from the petrochemicals firm.
In the past, Advanced has relied on bank loans, including Islamic equivalents, to fund itself; last year it raised 200 million riyals ($53.3 million) through a two-year murabaha, a common Islamic financing contract, for a housing project.
However, like many companies in the kingdom, it is turning to the debt capital markets to take advantage of high liquidity in the Saudi investor market which has made finance cheap, while the authorities have been encouraging firms to issue sukuk to diversify funding away from bank loans and develop the local debt market.

The company said on Sept. 4 it planned to invest in a project worth around $1 billion to produce propylene in South Korea. The joint venture with South Korea's SK Gas is due to start in the first half of 2016.
(Reuters / 22 October 2014)
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Pakistan central bank to phase in new Islamic finance rules

Pakistan's central bank will phase in new capital adequacy rules for Islamic banking subsidiaries and trade sharia-compliant government debt in the open market, addressing a lack of liquidity management tools in the sector.

The initiatives are part of an ambitious five-year plan by the regulator to promote Islamic finance through an array of proposed legislative changes, product incentives and instructions to market participants.
In April, the central bank said it was working on such tools as part of efforts to ensure a level playing field for Islamic banks in the majority-Muslim nation.
The central bank has revised the minimum paid-up capital requirement for Islamic bank subsidiaries to 6 billion rupees ($58.4 million), giving them a five-year period to raise it. The minimum paid-up capital requirement required for all other banks is 10 billion rupees.
The move would encourage conventional banks to establish subsidiaries rather than operate Islamic windows, a practice that allows lenders to offer Islamic financial services provided client money is segregated from the rest of the bank.

In a separate circular, the central bank said it would trade government-issued Islamic bonds (sukuk) with Islamic banks on a competitive basis, serving as a money market instrument and a monetary policy tool.
(Reuters / 20 October 2014)
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Wednesday, 22 October 2014

U.K. Dream of Becoming Islamic Hub Needs Corporate Assist

The U.K.’s ambition to become a global hub for Islamic finance, bolstered by a debut sovereign sukuk in June, needs corporate borrowers to take the baton.

There’s never been a publicly sold Islamic bond from a corporate in the country, according to data compiled by Bloomberg. The closest it has come was a $500 million issue by the Middle Eastern unit of London-based HSBC Holdings Plc in 2011. International Innovative Technologies Ltd., a clean energy company in Gateshead, privately placed the U.K.’s first corporate sukuk in 2010.
London is attempting to marry its status as one of the world’s financial hubs with an industry that’s poised to almost double in the four years through 2018 to be worth about $3.4 trillion, according to Ernst & Young LLP estimates. Even after the city’s former Lord Mayor, Roger Gifford, said Islamic finance should be as British as fish and chips, the U.K.’s debt office said in August it doesn’t have any current plans to sell further sukuk.
“We’re really looking for corporates to issue sukuk, to create a benchmark,” Farmida Bi, a London-based partner at law firm Norton Rose Fulbright, which advised Goldman Sachs Group Inc. on its debut sukuk sale, said by phone Oct. 9. The U.K.’s sukuk “was never just about fundraising for the government,” she said. “There’s definitely a desire to build the industry beyond the sukuk, to provide a framework.”


The U.K. sold Shariah-compliant notes maturing in July 2019 at a profit rate of 2.036 percent, receiving orders worth more than 10 times the 200 million pounds ($322 million) raised. The debt yielded 1.47 percent at 9:35 a.m. in London. The average rate of sukuk in the Middle East is 4.1 percent as of Oct. 17, according to JPMorgan Chase & Co. indexes.
“The demand seen for the U.K. sukuk should act as a catalyst for further issuances from the government or from U.K. corporates looking to access the liquidity in the Islamic market,” Humphrey Percy, London-based chief executive officer of the Bank of London and The Middle East, said by e-mail on Oct. 9. BLME is the largest Islamic bank in Europe, according to its website. “We welcome more participants here to further develop the market and increase its depth.”
The government will review its sukuk sale and consider how it can further develop its strategy for Islamic finance, Sarah Ellis, spokeswoman for the debt office, said in August. The office last week directed a request for comment to the Treasury, who didn’t respond to e-mailed questions.


A lack of issuance may not hold back the industry. The U.K. has six Shariah-compliant lenders, more than any European country, according to London-based Wayne Evans, a senior adviser of international strategy at TheCityUK, an independent company promoting financial services in the U.K.
The government last year set up an Islamic finance task force to cement London’s position as the leading “Western” center for Islamic finance, and TheCityUK was invited to be one of the practioner representatives, Evans said.
“Arguably, London already has this status,” Evans said by e-mail Oct. 16. Two London-based banks are among “the leading arrangers of global sukuk, around 25 law firms in the U.K. are supplying services in Islamic finance, and advisory services are provided by the largest four professional services companies,” he said.
Global Islamic bond sales jumped 16 percent so far this year to $37.2 billion, according to data compiled by Bloomberg. The U.K. was the first non-Muslim government to sell sovereign sukuk, and was followed by Hong Kong, South Africa and Luxembourg.
“There is energy, drive and focus on promoting Islamic finance across the economy,” Norton Rose’s Farmida Bi said. The government is “trying to make it clear to corporates that Islamic finance is a source of financing that they can tap into, it’s available,” she said.
(Bloomberg / 20 October 2014)
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Muslim world needs to develop revolutionary method in Islamic finance

KUALA LUMPUR: The Muslim world needs to develop a revolutionary method in Islamic finance to allow entrepreneurs and financiers to leverage each other to contribute to the nation’s economic growth sustainability, Datuk Seri Najib Tun Razak said.

The prime minister said Islamic countries had made remarkable progress and became a significant group in the global economy as the total gross domestic products of the Organisation of Islamic Cooperation (OIC) countries had grown to US$9.4 trillion in 2012 from US$7.5 trillion.

The numbers showed that the Muslim world has limitless potential, he said in a keynote address at the Association of National Development Finance Institutions in Member Countries of the Islamic Development Bank (ADFIMI) – SME Bank International Forum 2014 here yesterday.

“The Muslim world through organisations, such as ADFIMI, must continue to emphasise that Islamic nations are peaceful sovereigns and a source of prosperity for the world.

“Our potential is enormous if we are organised and get our act together,” he said.

The prime minister said as an Islamic finance pioneer, Malaysia could and must play an influential role in ensuring the sector’s future development.

“Ten years ago, Malaysia issued the world’s sovereign sukuk.

Today, Islamic finance is a US$1.2 trillion market; this is expected to rise to US$2.6 trillion by 2017.

Islamic finance is now growing at 50 per cent faster than conventional banking,” he said.

Hence, Najib called on small medium enterprises (SMEs) to make greater inroads in Islamic finance as one of the fastest growing sectors in a crowded financial marketplace.

Najib drove home the point that there were some issues that needed to be rectified by the industry, such as regulatory hurdles, lack of consumer education and the need for more business-friendly policies.

In Malaysian context, he said, the government aimed to increase the SME macroeconomic contribution to 41 per cent of the GDP, 62 per cent of employment and 25 per cent of exports by 2020.

“This is a tall order, but I believe this is achievable and attainable,” he said
Najib noted that RM12 billion was spent for 157 SME development programmes last year that supported nearly 890,000 projects across all economic sectors.

He said that this year the spending rose to RM13 billion and almost half of the funds came from the private sector.

Present were Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz, Khazanah Nasional Bhd Deputy Chairman Tan Sri Nor Mohamed Yakcop, SME Bank Group Managing Director Datuk Mohd Radzif Mohd Yunus, and ADFIMI Chairman Mehmet Emin Ozcan.

(Borneo Post Online / 22 October 2014)
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Sunday, 19 October 2014

Sukuk: An asset class goes mainstream

Dubai: Islamic finance, particularly fixed income instruments known as Sukuk, has come of age and is now an integral component of the mainstream global financial system. A decade ago, the Sukuk market was valued at $9.6 billion, issues were generally small in nature, and the market was concentrated amongst a handful of issuers; in 2013, the market topped US$269.4 billion, with an exponential growth in the number of large deals and increasing diversification of issuers. The Islamic finance industry is expected to continue growing at nearly 20 per cent per year, and the pool of investors interested in Shariah-compliant securities is expected to rise along with it. 

And while Islamic investors are the natural buyers of Sukuk, the appeal of Sukuk now extends far beyond the Islamic world. Some estimates suggest that conventional investors may account for as much as 40% to 60% of any individual Sukuk offering.

In our view, Sukuk may be attractive options for both Islamic and non-Islamic investors seeking to diversify their investment portfolios. Not only are the returns attractive relative to traditional fixed income assets, the volatility of Sukuk has historically been more subdued—something that could prove important in a rising interest-rate environment. Moreover, Sukuk provide exposure to some of the fast-growing and most financially sound economies in the Gulf Cooperation Council (GCC) and Southeast Asia, countries that are often underrepresented in many traditional bond indexes and funds. Due to their unique structure and market dynamics, Sukuk returns also tend to be less correlated with other parts of the global fixed income market. All of these factors, we believe, may make Sukuk an appropriate complement to investors’ existing equity or global bond allocations.
Innovation and Growth
In essence, Sukuk combine religious law dating back some 1,500 years with the latest developments in modern structured finance. Sukuk are fixed income securities that comply with Islamic law’s prohibition of paying or charging interest. Instead of basing payments on interest, payments are based on either profit sharing or rental or lease income—and they are typically backed by a tangible asset. The Sukuk market has surged from just US$121.5 billion outstanding in 2010 to US$247.6 billion in 2013, according to data from KFH Research. Impressive as that increase has been, it still pales in comparison to the demand for these investments.
New Sukuk issues are often many times oversubscribed, and given the growing acceptance of Sukuk outside of traditional Islamic markets and issuers, the asset class is reaching critical mass. Global consultants Ernst & Young predict that global demand for Sukuk will reach US$900 billion by 2017. The strong demand stems partly from the massive expansion in the assets of Islamic investors, and the relatively limited supply of Sharia-compliant investment alternatives. Islamic financial assets currently total more than US$1.8 trillion, and continue to grow at an annualised rate of nearly 20%. Furthermore, the strength of the asset class during the global financial crisis and Eurozone sovereign debt crisis, as well as the growth of the asset class beyond the Islamic world, is fuelling demand.
Sukuk market goes global
The bulk of Sukuk issuance still comes from Malaysia and the oil-rich Gulf States, but an increasingly wide array of countries and companies in other parts of Asia, Africa and Europe are seizing the opportunity to tap the Islamic debt markets to take advantage of the vigorous demand. Indeed, in June 2014, the United Kingdom (UK) became the first Western government to issue Islamic bonds. The yield offered was comparable to what the UK government pays on its conventional Gilts, with investors receiving rental income based on three government-owned properties.
We expect this trend to continue as a range of issuers looks to tap the large pools of Muslim wealth and liquidity around the world and policymakers see the benefits of complementing their financial architecture with Shariah-compliant securities and services.
Tangible progress is being made across the globe to support Islamic finance and further Sukuk issuance. Sixteen governments around the world have issued Sukuk since 2001, and more are likely to follow suit in the next few years. These deals, we believe, will further help to diversify primary market activity and improve secondary market liquidity.
(Gulfnews.Com / 18 October 2014)
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Saturday, 18 October 2014

Sukuk As A Tool For Infrastructural Development In Nigeria, Osun Blazing The Trail

Considering the huge infrastructural deficit facing Nigeria, and the challenges being faced by the Federal Government of Nigeria due to a decline in oil revenue amongst other related issues, it has become imperative for State Governments and corporates to access alternative financing techniques to meet their capital development needs.

Activities in the equities market in Nigeria have slowed down considerably from the levels seen during the equities boom of 2004 – 2008 which has compelled corporates and governments to embrace the debt market by floating bonds. From 1960 to November 2013, there have been 80 corporate bond issuances in Nigeria and 34 state and local bond issuances; with state bond issuances dominating the market in recent times.
This article examines the potentials for using sukuk as a tool for capital raising and infrastructural development in Nigeria and discusses the recent sukuk issuance by the Osun State of Nigeria under the State’s N60 Billion Debt Issuance Programme. The sukuk issuance attracted international acclaim by winning the IFN Africa Deal of the Year Award 2013.
Sukuk as a tool of Islamic Finance
Sukuk provides access to a vast and growing Islamic liquidity pool in addition to the conventional debt and are commonly referred to as Islamic Bonds. However, this representation is not entirely correct.
Sukuk is defined in the Rules and Regulations of the Securities and Exchange Commission (SEC Rules 2013) as investment certificates or notes of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or investments in the assets of particular projects or special investment activity using shariah principles and concepts approved by the Securities and Exchange Commission (“the Commission”). In simple terms, sukuk can best be called trust certificates.
In addition, under a sukuk structure, returns to sukuk holders (Investors) represent rights to receive payments from a trade transaction or ownership of a particular asset or business venture, while the returns to conventional bondholders represent the right to receive interest for borrowed monies.
Traditional bonds are not allowed in Shariah-compliant transactions due to their interest based nature as interest is prohibited in Islamic law as aforesaid. It is important to note that the underlying asset for a sukuk issuance must itself be Shariah-compliant. For example, a building does not qualify as an underlying asset for sukuk issuance if the major tenant will be a producer of alcohol.
The Commission explicitly recognizes the following sukuk structures under Rule 571 of the SEC Rules:
• Sukuk Ijarah – (lease contract)
• Sukuk Musharakah– (sharing contract)
• Sukuk Istisnah– (exchange contract)
• Sukuk Murabahah– (financing contract)
Legal Framework for the Issuance of Sukuk in Nigeria
Several Laws regulate the issuance of sukuk in Nigeria including the Investments and Securities Act 2007, the SEC Rules and the state law authorizing the sukuk issuance. The Commission in recognition of the development of Islamic finance introduced new rules on February 8, 2013 to regulate the issuance of sukuk in Nigeria. Rule 572 of the SEC Rules provides that all public companies (including SPV’s), state governments, local governments, and Government agencies as well as multilateral agencies are eligible to issue, offer or make an invitation of sukuk upon seeking the Commission’s approval.
The Rules apply to:
i. sukuk which are offered by local or foreign entities that are within the regulatory purview of the Commission;
ii. sukuk which are denominated in Naira or in foreign currencies; and
iii. sukuk which are listed, convertible, exchangeable, redeemable or otherwise.
From the wording of Rule 572, sukuk issued by private companies appear not to fall within the regulatory purview of the SEC. In a similar vein, a strict interpretation of Rule 567 will suggest that bonds issued by private companies will not be regulated by the SEC as this Rule specifically mentions only bonds issued by public companies, foreign public companies and supranational bodies. However, the SEC will exercise its supervisory powers over any instrument issued to the public by private or public companies.
In addition to the advisers who advise on bond issuances, an issuer of sukuk must appoint a Shariah adviser who shall inter alia advise on all aspects of the sukuk including documentation and structuring and who shall also issue shariah certification which outlines the basis and rationale of the structure and mechanism of the sukuk.
Osun Sukuk Company Plc.’s Sukuk Al –Ijarah – Blazing the Trail
The Government of Osun State (“OSG”) through a wholly owned Special Purpose Company, Osun Sukuk Company Plc issued on the 8th of October, 2013 the first sukuk in Sub-Saharan Africa worth N11.4 billion ($70.6 million) under the Osun State N60 Billion Debt Issuance Programme to fund the development of 20 High Schools, 2 Middle Schools and 2 Elementary Schools in Osun State.
The sukuk was issued at a rate of 14.75% per annum at N 1,000 per unit and matures on 8th of October, 2020. The issue which was rated A by Agusto & Co was successfully subscribed to by domestic investors with the price set through a book building process that lasted for 10 days.
Structure of the Osun Sukuk
The SPC, Osun Sukuk Company Plc is a wholly owned Special Purpose Company of the Osun State Government incorporated with an authorised share capital of N1, 000,000.00 (One Million Naira) with Ninety Nine Percent of the shares held by the Osun State Government and One percent held in trust by the Attorney General of Osun State on behalf of the State.
The sukuk was structured as an Al-Ijarah; with the Osun Sukuk Company Plc. issuing sukuk certificates to the investors.
In accordance with Islamic law principles, each certificate represents an undivided beneficial ownership interest in the sukuk assets (i.e. the Schools). The sukuk assets are however held in trust for the sukuk investors by the Issuer. The sukuk investors’ payment for the certificates represents the cost of construction of the schools. Holders of the Certificates have no recourse to any assets of the Issuer other than the sukuk assets. Since the sukuk holders are the owners of the assets (schools), they are free to trade the certificates in the secondary market. The land upon which the schools will be built was transferred by the OSG to the SPC and a Certificate of Title (Certificate of Occupancy) was issued to the SPC.
The Issuer under an Agency Agreement, appointed the OSG as its agent to inter alia engage a construction company to construct the schools, obtain all government approvals, manage the operational and financial aspects of the construction for a prescribed fee and transferred the agreed cost of construction to the OSG.
The SPC forward leased the schools to the State Government against rental payments which will be remitted to the Issuer to make distributions to the sukuk investors; thus earning income for the investors during the construction of the schools.
A Purchase Undertaking was executed by the OSG in favour of the Issuer to give assurances that at the end of the lease/maturity of the sukuk or upon the occurrence of an event of default or early termination of the lease under the Ijara Agreement, the OSG will purchase the sukuk assets; with the purchase price being used by the Issuer to redeem the sukuk certificates at maturity.
The Purchase Undertaking is essential in Islamic Finance as it creates a debt obligation on the part of the OSG which eliminates market risk on the part of the investors. A Sale Undertaking was also executed by the Issuer in favour of the OSG in like manner.
Sukuk – What Lies Ahead
The issuance of the first state sukuk by Osun Sukuk Company Plc attests to the huge potentials for Islamic Finance in Nigeria, while its subsequent international acclaim creates integrity within the market which has the propensity to promote foreign direct investment.
The Central Bank of Nigeria (CBN) has so far registered Jaiz Bank Plc. to provide full Islamic Banking Services and has licensed Stanbic IBTC Plc to operate an Islamic Banking Window. In addition, Sterling Bank Plc has also been given an approval in principle to operate an Islamic Banking Window.
With the right team of professional advisers, it is clear that focusing on substance over form can contribute significantly to the rapid development of the Nigerian economy through the issuance of Islamic Finance products. Nigeria should not miss out on this opportunity.
About the Author
Oladele is called to the Nigerian Bar and is a qualified solicitor in England and Wales. He currently heads the Banking and Finance law Practice of Kola Awodein & Co. Lagos, Nigeria. He obtained his Masters Degree (with Distinction) from the University of Warwick, UK. He has advised on several capital market transactions.
(Osun Defender / 18 October 2014)
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Islamic finance gets interest from African states

AFRICAN markets are gradually opening to Islamic finance, buoyed by governments’ debut sales of sovereign sukuk (Islamic bonds) and legislative efforts to make the sector more attractive for companies across the region.
Despite the strong growth of Islamic finance in its core markets of the Middle East and south-east Asia, the industry has lagged behind in Africa, which is home to one in four of the world’s Muslims. But this year a string of transactions is helping to broaden the sector.
Governments across the continent are using sukuk as a way to attract cash-rich Islamic investors, with South Africa making a $500 million (R5.6 billion) issue last month.
The Tunisian government could soon follow with a dollar-denominated deal that it hopes to place by year-end; Kenya is considering a sukuk issue.
Nigeria’s Osun State made a small local currency sukuk issue last year and Gambia has been issuing short-term Islamic paper in its own currency for years, but the region’s booming dollar-denominated bond market could hold the greatest promise.
The eurobond market in sub-Saharan Africa saw a record $14bn in issuance last year and the figure was $10bn so far this year, said Megan McDonald, the global head of debt primary markets at Standard Bank.
Eventually, 15 percent to 20 percent of such issues could be sukuk, as the market would develop over two to three years, McDonald said.
McDonald added: “We do expect to see others, firstly government-linked institutions in South Africa such as Transnet, Eskom and Sanral, which the Treasury is hoping can tap the market.”
South Africa attracted $2.2bn in orders for its sukuk and had not ruled out tapping the market again. Interest in making issues was also coming from other state and national governments, McDonald said.
“The Treasury is open to coming back to the market.”
Islamic finance follows religious principles including a ban on interest and gambling. To obey these rules, contracts often attract double or triple tax as they require multiple transfers of underlying assets. Countries are now studying tax treatment for sukuk.
(Business Report / 17 October 2014)
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Wednesday, 15 October 2014

Portfolios: GCC Sukuk Attractive Amid Rising Rates Prospects

While the ongoing conflict in the Middle East raises concern over the outlook for the sukuk market, the Islamic equivalent of bonds, portfolio managers remain positive both on fundamentals and technicals for sukuk, which also offer a potentially attractive alternative amid prospects of rising interest rates.

Issuers from the Gulf Cooperation Council emerge as the most popular.
As the Federal Reserve prepares to exit its zero interest rate policy, but with the "new normal" promising a still low-rate environment that could continue to starve investment managers for yield for some time, sukuk are considered as an attractive option for those whose mandate allows to test new boundaries.
At Franklin Templeton Investments, Mohieddine Kronfol, chief investment officer of Global Sukuk and MENA fixed income, told MNI that "the lower duration and persistent strong demand from Islamic financial institutions should continue to support the market and allow it to perform well relative to other fixed income sectors, particularly those that have higher average durations."
In a written commentary, he had also argued that "the volatility of Sukuk has historically been more subdued - something that could prove important in a rising interest-rate environment."
He added in his commentary that, "Sukuk provide exposure to some of the fast-growing and most financially sound economies in the Gulf Cooperation Council."
Similar to conventional bonds, the rising interest rate environment is definitely challenging the sukuk market, acknowledged Lim Say Cheong, Executive Vice President, Head of Investment Banking Group Al Hilal Bank.
"Escalation of interest rates/benchmarks over the next 12 to 18 months is inevitable but issuers will still need to borrow to diversify one's source of funding and investor base," he told MNI.
Besides, rates are unlikely to "go over the roof at a rapid pace."
At Azzad Asset Management, Ihab Salib, the lead portfolio manager for the firm's sukuk fund, the Azzad Wise Capital Fund (WISEX), argued that despite the prospects of rising interest rates, "due to the specifics of the sukuk market and the fact that most of the securities are closely held, one could argue the effects of rising rates may not be as pronounced in the sukuk world."
For mandates allowing portfolio managers to invest in sukuk, the GCC region is particularly in demand.
Konfrol is "constructive" for the sukuk market overall, "with the GCC serving as a strong anchor."
He told MNI that while all GCC countries are attractive, "we believe that the UAE, Saudi Arabia and Qatar present the most opportunities at the moment."
Developments in the Middle East, notably the coalition's bombings in Syria and the potential for a worsening of global geopolitical tensions have, however, put stress on the sukuk market.
Still, Kronfol expects a "very limited" impact overall.
"The unfortunate events in Syria have had very limited impact on financial securities in the region and this is expected to remain the case," he told MNI.
"Highlighting this insulation from regional geopolitical issues is the fact that at the height of the Syrian conflict in 2013, three of the worlds' best performing stock markets were in the GCC, led by the Dubai Financial Market," he argued.
Azzad Asset Management's Salib told MNI he particularly sees value in non-conventional issuers.
"As maiden issuers in the market, they need to price the sukuk generously so as to tempt investors," he commented.
Salib sees "some value in the Dubai complex" despite the spread tightening since the beginning of the year, especially the hospitality and retail sectors.
More generally, from a fundamental standpoint, the GCC, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, "offers the market the greatest support," he commented.
"Being a low population, hydrocarbon rich region whose governments run fiscal and current account surpluses, the economic backdrop is extremely conducive," said Salib, who also pointed out the solid balance sheets of individual issuers, many of them government owned.
Sukuk are increasingly catching global investors' attention, especially as non-Muslim countries - such as the UK government in June and Luxembourg at the beginning of October, which was the first EMU sovereign to issue in a sukuk structure - are joining the pool of issuers.
Going forward, investors are expecting both demand and supply to increase.
From a portfolio standpoint, GCC and Southeast Asian countries "are often underrepresented in many traditional bond indexes and funds," Franklin Templeton's Kronfol said.
He told MNI that in a global bond portfolio, depending on investors' objectives and risk tolerance, "a single digit percent allocation may be reasonable, complemented by improving emerging market allocations in South East Asia and an increasing selection of credits that are diversified by geography, sector and capital structure."
When surveying opportunities within the sukuk market, "broadly speaking, we envisage the primary sukuk supply pipelines as still very much originating from sovereigns - we may see one or two new names from Africa - government-related entities (GREs) and corporates," said Al Hilal Bank's Lim.
"We may still witness a selective range of issuers from the GCC," he predicted.
"From the GRE and corporate perspectives, it may encompass the transport, property development, construction, and utilities," he added.
Lim cited a range of factors supporting demand.
"From the buyer and investor perspectives, the abundance of liquidity resulting from, among others, upcoming maturities, heavy redemption profiles across loans, bonds and sukuk originating from 5 years ago across the GCC/MENA regions, certain geopolitical tensions that have encouraged further inflow of funds seeking relative safe havens, new investment homes, as well as declining loan-to-deposit ratios of local and regional banks - as opposed to 4-5 years ago - creates a stronger momentum among investors as they continue to search for new investment opportunities," he told MNI.
So clearly, new supply would be welcomed and likely absorbed.
In fact, Salib stressed the lack of issuance altogether.
"Compared to our colleagues in the conventional bond market, sukuk issuance is understandably much lower, and with issues such as the recent Indonesian sukuk issue being in the region of 8 times oversubscribed, this is another challenge managers face when constructing a portfolio," he said.
He said it is estimated that Islamic financial assets globally are expected to exceed $2 trillion by 2016.
"The Islamic finance industry is expected to continue growing at nearly 20% per year, and the pool of investors interested in Shariah-compliant securities is expected to rise along with it," Kronfol said in his Beyond Bulls & Bears commentary titled "Sukuk: An Asset Class Goes Mainstream."
Citing research from Kuwait Finance House, Kronfol said the sukuk market topped US$269.4 billion at the end of 2013.
Zooming in to the sovereign sector, Moody's estimated in a September report that sovereign sukuk issuance would rise by $30 billion by the end of this year to $115 billion, with both Islamic and non-Islamic governments tapping the market.
"Moreover, we expect demand and liquidity in the market will improve as the sector attracts more global investors," the rating agency said.
The arrival of major non-Islamic countries this year - the UK, Hong Kong, South Africa, Luxembourg - indicates "a significant change in the potential size, depth and liquidity of this market," it added.
By Moody's estimate, the total sovereign outstanding accounted for 36% of the $296 billion outstanding sukuk as of July 2014.
"Demand from global investors will grow as they become more comfortable with this asset class and it will support their search for yield and portfolio diversification," Moody's also predicted.
On the issuer's side, Al Hilal Bank's Lim pointed out the increasing level of sophistication in the market, citing senior secured and amortizing Sukuk-type transactions and perpetual/hybrid capital type Sukuk instruments issued or structured by "pure corporates" in addition to the more traditional financial institutions.
In fact, his own institution, Al Hilal Bank, issued "the first of its kind Basel III language-compliant Tier 1 Sukuk" that was largely oversubscribed.
Azzad Asset Management, for its part, hopes "to be given a green light soon to use profit rate swaps which swap a set of fixed profit rate cash flows into floating rate cash flows."
"We are also looking to introduce a whole new asset class into the fund in the not so distant future," Salib said.
While issuers and the investor base are diversifying, maturities are increasing, Lim noted, from the 5-year "sweet spot" to 7- to 10-year or even 15-year instruments.
(Deutsche Borse Group / 14 October 2014)
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