Azerbaijan develops Islamic finance

BAKU, Azerbaijan: Azerbaijan may soon become a regional Islamic financing centre and play a significant role in boosting cooperation in Islamic banking with Persian Gulf and Central Asian countries.

Islamic financing is one of the fastest growing segments of the global financial services industry worldwide. At the same time, interest in Islamic finance as a source of investment is high in the country, reported Azerbaijan’s news agency, Trend.

Many countries’ interest in Islamic finance was associated with different factors, the foremost of which was the desire to attract liquid resources from the Middle East and Southeast Asia and a certain demand for financial products in accordance with syariah law by local Muslims.

Today, Azerbaijan actively introduced Islamic financing. The independent authority of the International Bank of Azerbaijan (IBA) on Islamic banking would start its work in March, which planned to present six Islamic banking products to the market during the first phase, it stated.

The Islamic Corporation for the Development of the Private Sector (ICD) was also in talks to create the first Islamic insurance company in Azerbaijan, takaful, which was popular in Europe, particularly in the UK. European and Central Asian countries were considered experts in Islamic financing.

Most of takaful’s customers were non-Muslims in countries where the Islamic insurance market was the most developed in the world.

Ansar Leasing, organised on Islamic principles and established by the ICD, had successfully operated in Azerbaijan for three years.

During this period, the company had formed a portfolio worth US$15 million and the company planned to draw about US$6 million to US$7 million from its founder to expand operations. Some Azerbaijani private banks were also starting to expand the range of Islamic financing tools, introducing Ijarah (leasing) and Murabahah.

One such bank was TuranBank, which plannned to introduce these tools with the financial support of the Islamic Corporation.

Another bank, Nikoil, was actively introducing deposit products, which include Wadia yad Daman. Evidently, Azerbaijani banks’ interest in Islamic products was growing gradually.

The amount of money that entered the market through this channel was very small in Azerbaijan, since many issues related to Islamic financing had not been yet addressed.

Therefore, the successful development of Islamic finance on the domestic market would depend on the further improvement of legislation, regulatory prudential norms, and supply and demand.

In the near future, it might become a subject of debate.

By developing Islamic financial infrastructure, Azerbaijan might indeed attract investments and financing from the Islamic capital market, not only from Arab countries.

Alternative financial tools could be provided for Azerbaijani investors in this way. Also, the number of practicing Muslims who could not and did not want to use traditional financial services was growing in Azerbaijan.

slamic financial tools could become the channel through which their assets could be involved in the economy. 

(Bernama/27-Jan-2012)

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Islamic banking: Kyrgyzstan, seize the hour!

Economic processes slow down across the world for recent half year. Debt crisis deepens embracing new European countries. Fitch, S&P and Moody's warn that not only banks of Spain, Greece, and Portugal are at risk but biggest backbone banks of Germany, Austria, Great Britain and France. Their bankruptcy is fraught with collapse of Eurozone.

China also concerns in a new wave of the crisis. Bloomberg Poll questioned 1,097 investors whereof 61 percent are waiting for collapse of the banking system. And only every tenth believes China will manage to escape problems.

A new world recession is looming. Some experts think that forthcoming crisis will be more amplitudinous than those which world survived in 2008. Best financial experts of Europe and America break their heads over how to elude the worst scenario.

Orients’ treasure

While they are reflection on the Islamic financing gathers pace. Islamic banks survived the crisis with minimal losses showing sufficient high growth at 15-20 percent per year. Experts believe that Islamic model of economy may become a decision of problems emerged from the global financial crisis. Today over 400 world financial institutions practice Islamic banking and their annual turnovers make up around $1 trillion. Deutsche Bank reports the volume of Islamic finances will almost double up to $1.8 trillion by 2016. Standard & Poor's expects increments of assets at the level of $2.8 trillion.

In a short, the system proves its value. Many countries of Old and New World realized this and the U.S. Switzerland, Great Britain and Germany have begun launching Islamic financing model.

Islamic financing is operating in Kyrgyzstan for 5 years and it demonstrates its value in practice. Share of Islamic financing in June 2011 reached 5 percent of all banks credit resources of the republic. And it will increase up to 10-12 percents by 2015 according to experts.

A lawyer never goes to law himself

“Islamic banks across the world successfully got over crisis as they rest upon other principles distinct from traditional credit activities,” an adviser on business development to the Board of Directors of EcoIslamicBank OJSC, Shamil Murtazaliev, tells.

He says that Islamic economic system bans profiteering, bank interest rates and any enrichment without creation of a real commodity or an actual cost service.

He notes money in Islamic economy is not a commodity but just means of exchange. A profit can be fairly earned only through trade or through partly risk-taking. “Islamic economic system pays special attention to human relations and moral principles of economic relationships that must contribute into prosperity of the society in whole, not separate individuals. A principle of social fairness is cornerstone of Islamic principles,” the banker says. He believes the world will realize the supremacy of Islamic economic system over economic model of speculative capital.

The difference of Islamic banking from traditional one is absence of loan interest. There are other financial and profit earning instruments.

“Murabahah, mudarabah, sharika”

These are major financial operations in Islamic banking. Murabahah means a particular kind of sale, where the seller expressly mentions the cost he has incurred on the commodities for sale and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. Mudarabah is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. Profits generated are shared between the parties according to a pre-agreed ratio. Sharika means partnership between a bank and a client and the profits are shared among the parties on the basis of their participation or on a pre-agreed ratio and the losses are shared on the basis of equity participation.

Besides, Islamic economy bans activity which is in conflict with Sharia: alcohol, drugs, gambling business as well as bonds, bank lending and investments into companies whose loan indebtedness is a major source of financing.

Golden rain

Kyrgyzstan has done a lot to launch Islamic banking but it is ahead to do more. Financiers plan to implement Islamic assurance, Islamic paper securities and other financial instruments. Improvement of legislation and political will of the Government are needed to do that.

“This will help to attract investments of richest countries of Arabia, Malaysia and other Muslim countries into economy of the republic,” Shamil Murtazaliev believes. “Representatives of 57 countries work in Islamic Development Bank (IDB) and there is a country competition among them where everybody lobbies interests of his state. Kyrgyzstan joined Islamic Development Bank recently and it is important to push forward interests of the republic for further development of Islamic banking”.

Dozen of largest IDB countries controls 70 percents of world energy resources and has accumulated substantial funds there. And now they are needed to make use of them including outside their countries within diversification of the economics.

In this context Islamic banking for Kyrgyzstan, having great potential for attraction of investments, must be considered as one of priorities in development of the banking sector of the country.

(24.kg news agency/25-Jan-2012)

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Malaysia: Infrastructure sukuk receives a major boost

Infrastructure sukuk has received a major boost when Projek Lebuhraya Usahasama Berhad (PLUS Berhad) last week closed a record landmark RM30.6 billion sukuk issuance program comprising both government guaranteed (GG) and non-government guaranteed AAA-rated (AAA) issuances of varying tenors, sizes and expected returns and yields to maturity (YTMs).

The issuance was through PLUS Malaysia Sdn Bh, which is a jointly-owned special purpose company of UEM Group Berhad and the Employees Provident Fund (EPF), which was set up to acquire the Malaysian business and undertakings including the assets and liabilities of PLUS Expressways Berhad, the major provider of expressway operation services in Malaysia, under a privatization exercise (proposed acquisition). Following the completion of the proposed acquisition, PLUS Malaysia's wholly-owned subsidiary, PLUS Berhad will acquire all the assets and liabilities of the respective concession companies via the issuance of the GG Sukuk and AAA Sukuk Musharaka.

The program, according to lead arranger and Principal Adviser, CIMB Investment Bank, comprised RM11 billion of GG issuances and RM19.6 billion of AAA issuances and are based on a bought deal and private placement basis. The non-government guarantee component could be increased to RM23.35 billion.

It is no secret that national road agencies from several countries, especially those in emerging countries, have been watching the PLUS offering closely with the hope of attracting investors to participate in their own road expansion and rehabilitation programs with the strong interest and therefore possibility of issuing Sukuk to do this against toll roads operated by these agencies.

Countries with huge areas such as Saudi Arabia, Turkey, India, South Africa, China, Pakistan, Iran, Egypt and do on, whose road infrastructure needs further development and rehabilitation, in particular could use competitive financing alternatives such as Sukuk to fund these needs based on innovative and fair revenue models.

Two national road agencies — one from a Muslim country and the other from a non-Muslim country — have in fact confirmed that they have initiated feasibility studies and preliminary discussions to issuing sukuk as part of their source of funding diversification strategies. The major problem is lack of familiarity about the structures of Sukuk; issues relating to prohibitive demands on collateral and guarantees; lack of legal infrastructure in the domicile of the potential new issuers; and concern over the Shariah compliance of such issuances. 

One of the national road agencies stressed that it has had discussions in the past with several potential lead managing suitors for a potential sukuk, but discussions did not progress because of legal limitations over asset ownership.

With the difficult global bond market conditions, there are signs that infrastructure companies are seeking to diversify to other funding sources in addition to the traditional equity and government budget financing. Sukuk is emerging as an attractive and viable alternative.

A few months ago, for instance, Syarikat Prasarana Negara Berhad, the Malaysian public infrastructure company wholly-owned by the Ministry of Finance, successfully closed its RM2 billion Sukuk Al-Ijarah offering under its RM4 billion nominal value sukuk program, whose proceeds will be used mainly to part finance the Kelana Jaya and Ampang LRT Line Extension Project and other infrastructure improvement initiatives by Prasarana. The issuance is guaranteed by the Malaysian government. 

Prasarana usually issues only conventional bonds to finance its activities. The company was set up to facilitate, undertake and expedite public infrastructure projects approved by the government and together with its group of companies are also asset-owners and operators of several public transport providers, namely the Ampang and Kelana Jaya lines, KL Monorail system, bus operations in Klang Valley and Penang, as well as the cable car services in Langkawi.

This RM2bn issuance was the first time that the company tapped the Islamic capital market with a sukuk issuance, and according to Prasarana Chief Executive Officer Shaipudin Shah Harun, there will be further finance raising forays in the future to fund the company's expansion plans, and Parasarana is committed to contribute to the further development of the Malaysian sukuk market. This issuance was actually structured in 2009 by joint lead managers and arrangers AmInvestment Bank and CIMB Investment Bank, with Bank Islam Malaysia acting as co-manager. But the issue was delayed due to the impact of the global financial crisis which badly affected pricing and yields in both the conventional bond and sukuk markets.

Sukuk and infrastructure should be a natural fit. While the sukuk market has flourished over the last four years, these have concentrated more on raising finance for balance sheet purposes; refinancing existing more expensive debt including very often conventional finance debt; overcoming the mismatch between short-term deposits and longer term liabilities by raising longer term financing; and providing working capital and funds for expansion.

Sukuk for development and infrastructure projects such as pure project sukuk have been hardly a feature of the sukuk landscape, although there have been a few exceptions. This is surprising given the estimated multi-trillion dollar infrastructure spend in the IDB member countries over the next decade or so.

The latest PLUS Sukuk Program, whose issuer and obligor is provides an ambitious financing conduit for the toll road services operator, which some observers stress would only be possible in a country such as Malaysia where the government is a proactive supporter of involving Islamic finance in the economy together with conventional financing options under its economic transformation program (ETP).

The GG issuances comprised two tranches of RM5.5 billion each — the one with a tenor of 26 years with a periodic distribution rate of 4.86 percent and the other with a tenor of 27 years and 353 days with a periodic distribution rate of 5 percent respectively.

The AAA issuances, which are Sukuk Al-Musharaka, comprised a total of 21 tranches with tenors ranging from 5 years to 25 years with a periodic distribution rate ranging from 3.9 percent to 5.75 percent respectively.

PLUS Expressways operates and maintains 973 kilometers of inter-urban toll expressways in Peninsular Malaysia, stretching from the border of Thailand in the north to the border of Singapore in the south, linking all major cities on the west coast of Peninsular Malaysia.

(Arab News/15-Jan-2012)

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Islamic financial, business & management events in Kuala Lumpur in 2012

21-22 February 2012: KL Conference on Islamic Wealth Management

20-21 March 2012: KL Conference on Islamic Finance

9-10 April 2012: Workshop on Islamic Trade Financing


To register or reserve a seat online, please go to:
http://www.alfalahconsulting.com/p/registration-form.html

Qatar Islamic banking directive to set example for other markets

The deadline of Dec. 31, 2011, as per the directive issued by the Central Bank of Qatar (CBQ) in January 2011 requiring the country's conventional banks which have opened Islamic banking windows to close them down, has passed almost unnoticed.

Despite the initial outcry at the time of the announcement of the directive stressing that it was too arbitrary and the grace period was too tight, there has been no upheaval of the Islamic finance industry in the emirate. Some Islamic bankers are now arguing that the move was required to stem the alleged rampant co-mingling of conventional and Islamic funds at some of the Islamic banking windows, and that the Qatari Islamic banking sector has been successfully re-aligned and consolidated.

The successful implementation of the directive in Qatar could well have implications for other markets in the region and beyond where Islamic banking windows are prevalent. The clear message of the directive is that dedicated standalone Islamic banks are preferable to half-way houses where co-mingling and all sorts of compromises are possible if not the norm. They also give greater legal, regulatory and Shariah compliance clarity and comfort to those depositors and investors interested in Islamic finance.

The affected banks included the Al-Islami window of Qatar National Bank (QNB), the largest bank in the emirate; Commercial Bank of Qatar; Doha Bank; HSBC Amanah; Ahli Bank; Al-Khaliji Bank and International Bank of Qatar (IBQ), which between them had 16 Islamic banking branches in Qatar.

On Jan. 1, 2012 it became clear that only one such window, Al-Yusr of International Bank of Qatar, was acquired by two local Islamic banks — the retail banking assets and business was acquired by Barwa Bank, the newest of the Qatari Islamic banks, while the corporate banking assets and portfolio was acquired by Qatar Islamic Bank (QIB), the largest Islamic bank in the emirate.

The other banks had wound down their Islamic banking window operations complete with removing all signage and of course not opening any new accounts or businesses. Existing Islamic banking customers were in some cases given the option of switching to the banks' conventional banking business or in other cases to continue payments until affected Islamic financing facilities matured.

An unrepentant CBQ Gov. Sheikh Abdullah bin Saud Al-Thani as late as mid December 2011 warned the affected banks that the directive was "irreversible" and that they must comply with its provisions. In his keynote speech to the 8th International Conference on Islamic Economics and Finance (ICIEF) which was held in Doha in December 2011, Al-Thani articulated the reasons behind the central bank's directive, which he confirmed is irreversible.

The Islamic Banking Windows, according to Gov. Al-Thani, made it difficult for the banking regulator to effectively implement its monitoring and supervision of these windows.

This issue could not have been highlighted more aptly during the acquisition of Al-Yusr's Islamic Retail Banking business. As the first such transaction to be closed in the region, albeit under Qatari law, there were some legal and other regulatory challenges which UK law firm, Eversheds, which acted for Barwa Bank, successfully navigated through within the provisions of existing Qatari legislation.

"The IBQ window was not a separate legal entity. As such, its assets and liabilities were a part of the conventional bank. We therefore had to consider how best to separate and then package and transfer these assets and liabilities. There were also challenges concerning transition services that were required post completion to serve the transferring customers," explained Amjad Hussain, partner and head of Islamic Finance at Eversheds, in a recent interview.

The central bank also found that the coupling of conventional and Islamic banking activities at the same institution, undermined competition and transparency in the affected banks. At the same time, there is much confusion over the balance sheet treatment of the assets and liabilities of the Islamic banking windows in the financial reports of the conventional banks, which are not separated. As such this has implications for the risk management process of the institution.

Al-Thani gave the thumbs up to the Qatari Islamic banking industry which boasts four Islamic banks — Qatar Islamic Bank, Qatar International Islamic Bank, Masraf Al-Rayan and Barwa Bank. These banks, he added, have a crucial role in the country's banking sector and economy, in compliance with the objectives of the Qatar Vision 2030 and its first application through the First Strategic National Development Project 2011-2016.

He reminded Qatari Islamic banks of their partnership role in financing economic development and projects in the country, and stressed that he was confident that the Qatari Islamic banks will rise to and are capable of taking up this challenge together with their conventional counterparts. The Islamic banking sector has a 20 percent market share of the total banking industry in Qatar, which has four dedicated standalone Islamic banks.

It was way back in 2005 that the CBQ allowed conventional banks to launch Islamic Banking Units (IBUs), which have contributed to the growth of the sector and to the profitability of the banks, and which have attracted an estimated customer base of just under 100,000.

Eversheds' Hussain rejects any notion of arbitrariness in the action of the CBQ in issuing the directive. The action, he contended, is "part of a wider process of supporting and shoring up the banking industry in Qatar. You have to look at it in the context of the proactive approach of the central bank during the recession when it helped a number of local banks to remove some of the toxic debts that they had exposure to. The CBQ is also making sure that there are enough opportunities for all the market players."

Previously, the Islamic banking windows were barely competing because of co-mingling issues and because they were able to offset overheads through the conventional banks. There was a feeling that the market was not as transparent as it could be. In addition to regulatory issues, the central bank had to deal with two separate businesses dealing with different banking activities - Islamic and conventional.

"I believe competition was an issue, because the pure Islamic banks were seen to be at a disadvantage. The Islamic banking windows at the conventional banks were able to use backroom services in their banks. There were also regulatory and corporate governance concerning how manage different banking platforms under one roof which is what the conventional banks were trying to do. This resulted in a culmination of issues which the CBQ is trying to address in its efforts to improve out the banking sector," explained Hussain.

(Arab News/22Jan2012)

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AAOIFI's Shari'a Board Resolutions on Sukuk-English version

In the name of Allah, the Beneficent, the Merciful. 

Praise be to Allah, and peace and blessings on His Noble Prophet and on his family and Companions 

As to what follows: 

The Shari'ah Board of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), in view of the increased use of Sukuk worldwide, the public interest in them, and the observations and questions raised about them, studied the subject of the issuance of Sukuk in three sessions; first, in al-Madinah al-Munawwarah, on 12 Jumada al-Akhirah 1428 AH (27 June, 2007), second, in Makkah alMukarramah, on 26 Sh'aban 1428 AH (8 September, 2007), and third in the Kingdom of Bahrain on 7 and 8 Safar 1429AH (13 and 14 February, 2008).  

Following the meeting of the working group, appointed by the Board, which met in Bahrain, on 6 Muharram 1429AH (15 January, 2007), which was also attended by a significant number of representatives from various Islamic banks and financial institutions, the working group presented its report to the Shari'ah Board. 

After taking into consideration the deliberations in these meetings and reviewing the papers and studies presented therein, the Shari'ah Board - while re-affirming the rules provided in the AAOIFI Shari'ah Standards concerning Sukuk - advises Islamic financial institutions and Shari'ah Supervisory Boards to adhere to the following matters when issuing Sukuk:

First: Sukuk, to be tradable, must be owned by Sukuk holders, with all rights and obligations of ownership, in real assets, whether tangible, usufructs or services, capable of being owned and sold legally as well as in accordance with the rules of Shari'ah, in accordance with Articles (2)1 and (5/1/2)2 of the AAOIFI Shari'ah Standard (17) on Investment Sukuk. The Manager issuing Sukuk must certify the transfer of ownership of such assets in its (Sukuk) books, and must not keep them as his own assets.

Second:  Sukuk, to be tradable, must  not represent receivables or debts, except in the case of a trading or financial entity selling all its assets, or a portfolio with a standing financial obligation, in which some debts, incidental to physical assets or usufruct, were included unintentionally, in accordance with the guidelines mentioned in AAOIFI Shari'ah Standard (21) on Financial Papers.


Third:  It is not permissible for the Manager of Sukuk, whether the manager acts as Mudarib (investment manager), or Sharik (partner), or Wakil (agent) for investment, to undertake to offer loans to Sukuk holders, when actual earnings fall short of expected earnings. It is permissible, however, to establish a reserve account for the purpose of covering such shortfalls to the extent possible, provided the same is mentioned in the prospectus. It is not objectionable to distribute expected earnings, on account, in accordance with Article (8/8)3 of the AAOIFI Shari'ah Standard (13) on Mudaraba, or to obtaining project financing on account of the Sukuk holders.

Fourth:  It is not permissible for the Mudarib (investment manager), sharik (partner), or wakil (agent) to undertake {now} to re-purchase the assets from Sukuk holders or from one who holds them, for its nominal value, when the Sukuk are extinguished, at the end of its maturity. It is, however, permissible to undertake the purchase on the basis of the net value of assets, its market value, fair value or a price to be agreed, at the time of their actual purchase, in accordance with Article (3/1/6/2)4of AAOIFI Shari'ah Standard (12) on Sharikah (Musharaka) and Modern Corporations, and Articles (2/2/1)5 and (2/2/2)6 of the AAOIFI Shari'ah Standard (5) on Guarantees. It is known that a Sukuk manager is a guarantor of the capital, at its nominal value, in case of his negligent acts or omissions or his non-compliance with the investor's conditions, whether the manager is a Mudarib (investment manager),  Sharik (partner) or Wakil (agent) for investments.  In case the assets of Sukuk of al-Musharaka, Mudarabah, or Wakalah for investment are of lesser value than the leased assets of "Lease to Own" contracts (Ijarah Muntahia Bittamleek), then it is permissible for the Sukuk manager to undertake to purchase those assets -  at the time the Sukuk are extinguished - for the remaining rental value of the remaining assets; since it actually represents its net value.

Fifth: It is permissible for a lessee in a Sukuk al-Ijarah to undertake to purchase the leased assets when the Sukuk are extinguished for its nominal value, provided he {lessee} is not also a partner, Mudarib, or investment agent. Sixth:  Shari'ah Supervisory Boards should not limit their role to the issuance of fatwa on the permissibility of the structure of Sukuk. All relevant contracts and documents related to the actual transaction
must be carefully reviewed {by them}, and then they should oversee the actual means of implementation, and then make sure that the operation complies, at every stage, with Shari'ah guidelines and requirements as specified in the Shari'ah Standards. The investment of Sukuk proceeds and the conversion of the proceeds into assets, using one of the Shari'ah compliant methods of investments, must conform to Article (5/1/8/5)7 of the AAOIFI Shari'ah Standard (17).  Furthermore, the Shari'ah Board advises Islamic Financial Institutions
to decrease their involvements in debt-related operations and to increase true partnerships based on profit and loss sharing in order to achieve the objectives of the Shari'ah.

In the end, all praise is due to Allah, Lord of all the Worlds!

Note:

1
2. Definition of Sukuk: Investment Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or special investment activity, however, this is true after the receipt of the value of the Sukuk, the closing of the subscription and employment of funds received for the purpose for which the Sukuk were issued.
2
5/1/2  It is permissible to issue certificates for (to securitize) assets that are tangible assets, usufruct and services by dividing them into equal shares and issuing certificates for their value. As for debts owed as a liability, it is nor permissible to securitize them for the purpose of trading.
3
 8/8 The Mudarib is entitled to a share of profit as soon as it is clear that the operations of the Mudaraba have led to the realization of a profit. However, this entitlement is not absolute, as it is subject to the retention of interim profits for the protection of the capital. It will be an absolute right only after distribution, i.e. when actual or constructive valuations take place. It is permissible to distribute the realized profit among the parties on account, in which case the distribution will be revised when actual or constructive valuation takes place. The final distribution of profit should be made based on the selling price of the Mudaraba assets, which is known as actual valuation. It is also permissible that the profit be distributed on the basis of constructive valuation, which is valuation of the assets on the basis of fair value. Receivables shall be measured at the cash
equivalent, or net realizable, value, i.e. after the deduction of a provision for doubtful debts. In measuring receivables, neither time value (interest rate) nor discount on current value for extension of period of payment
shall be taken into consideration
4
 3/1/6/2 It is permissible for a partner to issue a binding promise to buy, either within the period of operation or at the time of liquidation, all the assets of the Sharika as per their market value or as per agreement at the date of buying. It is not permissible, however, to promise to buy the assets of the Sharika on the basis of face value.
5
2/2 Guarantees in trust (fiduciary) contracts
2/2/1 It is not permissible to stipulate in trust (fiduciary) contracts, e.g. agency contracts or contracts of deposits, that a personal guarantee or pledge of security be produced, because such a stipulation is against the
nature of trust (fiduciary) contracts, unless such a  stipulation is intended to cover cases of misconduct, negligence or breach of contract. The prohibition against seeking a guarantee in trust contracts is more stringent in Musharaka and Mudaraba contracts, since it is not permitted to require from a manager in the Mudaraba or the Musharaka contract or an investment  agent or one of the partners in these contracts to guarantee the capital, or to promise a guaranteed profit. Moreover, it is not permissible for these contracts to
be marketed or operated as a guaranteed investment.
6
 2/2/2 It is not permissible to combine agency and personal guarantees in one contract at the same time (i.e. the same party acting in the capacity of an agent on one hand and acting as a guarantor on the other), because
such a combination conflicts with the nature of these contracts. In addition, a guarantee given by a party acting a an agent in respect of an investment turns the transaction into an interest-based loan, since the capital of the investment is guaranteed in addition to the proceeds of the investment, (i.e. as though the investment agent had taken a loan and repaid it with an additional sum which is tantamount to riba). But if a guarantee is not stipulated in the agency contract and the agent voluntarily provides a guarantee to  his clients independently of the agency contract, the agent becomes a guarantor in a different capacity from that of agent. In this case, such an agent will remain liable as guarantor even if he is discharged from acting as agent.
7
5/1/8/5 The prospectus must state that the investment of the realized funds and the assets into which the funds are converted will be undertaken through Shari’ah-compliant modes of investment.


(AAOIFI/Feb2008)

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Egypt May Sell Foreign-Currency Sukuk, Deposit Certificates

Egypt may issue an Islamic bond or alternatively certificates of deposit in foreign currency for Egyptians abroad, the finance minister said.

“We are studying issuing sukuk,” or Islamic bonds, Mumtaz el-Saeed said by telephone in Cairo. “We are comparing the benefits of issuing certificates of deposit with those of sukuk for Egyptians abroad,” adding that his preference is for the certificates. The government hopes to issue one or the other during the current fiscal year ending June 30, he said.

Egypt is struggling to recover from a year of unrest in the wake of the uprising that ousted President Hosni Mubarak last February. The economy grew 1.8 percent in the last fiscal year, the slowest pace in at least a decade, as income from tourism and foreign investment dried up. Tourist arrivals fell 33 percent in 2011, while international reserves are at the lowest level since March 2005.

The government formally requested a $3.2 billion loan from the International Monetary Fund on Jan. 16. An agreement is expected “within weeks,” Fayza Aboulnaga, minister of planning and international cooperation, told reporters.

Egypt turned down a similar arrangement with the fund in June, with officials saying they didn’t want to burden future governments with debt. Foreign currency reserves dropped 32 percent in the following six months while yields on all treasury-bill maturities rose this quarter to the highest since Bloomberg started tracking the data in 2006.

‘SOUND FUNDAMENTALS’

The economy “despite its solid and sound fundamentals,” faces challenges that have to be addressed by an economic program that safeguards stability and “creates conditions for a strong recovery,” the IMF’s mission said in an e-mailed statement yesterday.

A program drafted by the Egyptian authorities is being discussed “with emerging political parties to ensure broad political support,” the IMF said. The mission met with the economic committee of the Muslim Brotherhood’s Freedom and Justice Party, and also talked to members of other parties and with the civilian body advising the ruling military council, it said.

The Brotherhood’s party gained the most votes in elections for the lower house of parliament, which is due to convene on Jan. 23, two days before the anniversary of the start of the uprising that led to the ouster of Mubarak. It is still unclear what authority the assembly may have. Activists have called for mass rallies on Jan. 25 to call on the country’s ruling generals to hand over power to civilians immediately.

‘HISTORIC TRANSITION’

The IMF’s meetings this week “provided us with a cross- section of views about Egypt’s current economic and political situation, and possible avenues to address the challenges facing the economy,” the fund said. “It also gave us an opportunity to explain the role the IMF could play in support of Egypt’s historic transition.”

(Bloomberg/19Jan2012)
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HSBC Amanah expects global sukuk issuance to grow to US$44bil in 2012

KUALA LUMPUR: HSBC Amanah expects global sukuk issuance to grow to US$44 billion in 2012 from US$26.5 billion last year.

Malaysia was forecast to account for 60 per cent of the total while the Middle East and North Africa (MENA) region 32 per cent, the bank said in a statement today.

It also said governments and government-related entities were likely to account for 50 per cent while the finance and corporate sectors 25 per cent each.

In the statement, Mohammed Dawood, Managing Director of Islamic Global Markets for Europe Middle East and Africa at HSBC Amanah, said: "We expect a significant increase in sukuk issuance this year because it performed well against the financial crisis and liquidity crunch in 2011.

"The sukuk market is already off to a strong start in 2012. This January is the busiest we've seen in this market. Demand still outstrips supply."

He also said investors favour sukuk because it was less volatile than conventional issuances, especially in the last four months of 2011.

"Issuers on the other hand, like sukuk because it gives them access to a new investor base," he said.

Meanwhile, Rafe Haneef, HSBC Amanah Malaysia Bhd Chief Executive Officer and Managing Director of Islamic Global Markets for Asia at HSBC Amanah, said: "Infrastructure projects in Asia and the Middle East are likely to be the other driver of sukuk issuances in 2012.

"Malaysia's biggest toll expressway company has recently issued a US$10 billion sukuk. Sukuk is a viable tool but we need longer tenor ones that extend to 10 years and beyond for these long-term projects."

He also said Islamic finance was an ideal bridge for capital flows between Asia and the Middle East.

To encourage more Asian sukuk issuances, however, there was a need to help Middle Eastern investors understand Asian sukuk and capital markets better.

"If investors from the Middle East can become familiar with Asian sukuk, this can be a driving force for more of its issuance in Asia," he said.

"More can be done to strengthen the capital connectivity between Asia and the Middle East. We need to help increase Asian investors' appetite of for international sukuk beyond just local currency issuances," he said. - BERNAMA/16Jan2012

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Saudi budget implies growing role for Islamic finance

At first glance there is no direct mention of the role of Islamic banking and finance in the Kingdom's economy in the 2012 Saudi national budget announced last week in Riyadh.

But reading between the lines and judging by some of the initiatives launched by various agencies, banks and corporates in the Kingdom leading up to the budget announcement, it is clear that the Islamic finance industry is expected to contribute its fair share in crucial areas such as the financing of small-and-medium-sized enterprises (SMEs) primarily to generate employment especially for the youth; the provision of mortgage or housing finance and housing development finance; funding infrastructure and projects including through PFI (Public Private Financing); and helping Saudi corporates to diversify sources of funding away from bank finance to raising finance through the capital markets, predominantly through sukuk origination, which is expected to go viral in 2012 and beyond.

The involvement of Islamic finance in the Saudi economy is very real and potentially substantial, but in terms of government announcements it is more through nuances as opposed to official financial policy and financial inclusion measures.

For instance, the General Authority of Civil Aviation (GACA) in Saudi Arabia according to its director general, Prince Fahd bin Abdullah, has "agreed with the Saudi Finance Ministry and the Saudi Arabian Monetary Agency (SAMA) to launch sukuk to fund the new $7.2 billion Jeddah Airport project. The $7.2 billion sukuk program will be self-financing instruments of the General Authority of Civil Aviation, but if there is any shortage in the funding, the Ministry of Finance will cover it to curtail any delays in the project."

While this suggests that the issuance may carry Saudi government guarantees, with the Ministry of Finance being the issuer probably through a standalone special purpose vehicle (SPV) and the obligor, there was no reference to this in the 2012 national budget nor in any Ministry of Finance announcements. Nor was it mentioned in the 47th annual report of SAMA which was presented to Custodian of the Two Holy Mosques King Abdullah on Dec. 12 by the outgoing Gov. Muhammad Al-Jasser, who started his new promotion as minister of economy and planning on the next day on Dec. 13. The issuance in any case will be dependent on the restructuring of GACA into a stock-holding company with four separate constituent companies - one specializing in international airports, one in domestic airports, one in air navigation, and one in technology transfer and information services.

Another sign of the growing importance of Islamic finance in Saudi corporate fund raising is the announcement last week by the Capital Market Authority (CMA) that "in continuance with its efforts to develop and diversify investment channels in the capital markets via offers of securities," it has approved a request by Saudi Basic Industries Corp. (SABIC), the world's largest petrochemicals exporter, to issue and offer sukuk with a value that does not exceed SR5 billion. This would be SABIC's 4th sukuk issuance, easily the most proactive player in the oil and gas sector in the world to raise Shariah-compliant funds as part of a diversification of sources of funding strategy.

Several other Saudi issuers have reported interest in raising funds through sukuk including Saudi Electricity Company (SEC) and Saudi Aramco, the world's largest oil producer and exporter.

The fact that Al-Jasser is now the economy minister may turn out to be a blessing in disguise because he can leverage his experience acquired in Islamic finance when he was the SAMA governor from 2009 to 2011. This, especially to promote greater relevance of the banking sector, both conventional and Islamic, to the real economy and the sector to contribute a greater share to GDP. Al-Jasser's tenure at SAMA is relatively short and he did not even complete his full four-year term. On contrast, his predecessor, Hamad Al-Sayari, was governor for a staggering 26 years from 1983 to 2009. All eyes will be on the new SAMA governor, Fahad bin Abdullah Al-Mubarak, who assumed office on Dec. 13 for a four-year term.

The total 2012 budget amounts to SR1.392 trillion ($371.2 billion) of which total expenditure is projected at SR690 billion ($184 billion) and total revenues are projected at SR702 billion ($187.2 billion). This is based on an oil price of $74 per barrel. But in reality the actual budget expenditure and revenues can markedly differ especially for an economy such as Saudi Arabia's because of its dependence on oil exports and thus also the volatility in the price of crude oil. This in turn can have an impact on the prices of other commodities especially if transport costs increase sharply because of higher oil prices.

Not surprisingly the budget is conservative in that it is based on a relatively low price of oil at $74 per barrel given that only a few days after it was announced the actual price of crude oil was hovering at the $100 per barrel. The budget has also been characterized by no lesser person than King Abdullah as one for economic growth and jobs. The government also wants to see the nonoil public and private sector contribute more to real GDP.

New development projects are allocated SR265 billion with education, transport and health infrastructure getting the bulk of the expenditure.

The Kingdom has also earmarked the construction of 500,000 new housing units at a cost of SR250 billion. This was not allocated in the 2012 budget. Instead SR250 billion of the 2011 budget surplus was deposited in a special account at SAMA to fund the program starting in 2012. This is where Islamic finance has a main chance. Already five Islamic mortgage (home finance) companies have been established in Saudi Arabia, including Saudi Home Loans Company; Deutsche Gulf Finance, Tamweel, Amlak and the proposed mortgage company by the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IDB) Group. The limit of housing loans extended by the Real Estate Development Fund too was increased from SR300,000 to SR500,000 which will hopefully provide more houses for citizens and constrain the inflationary pressures stemming from the increase in house rents.

"I do not think the SAMA will give any more licenses in the Islamic mortgage finance market space. We will focus on the Saudi market. The housing sector is the big mover in the Kingdom. The government has announced that it will be spending SR250 billion on this sector over the next 10 years to build 500,000 units. The Kingdom's demography is also very young. The housing gap is 150,000 units a year. What would make the sector really flourish is the adoption of the Saudi mortgage law," explained Khaled Al-Aboodi, CEO of ICD.

Al-Aboodi, however, warned that ICD has hitherto not incorporated the company because it is waiting for the mortgage law to be adopted. But the corporation's board of directors recently took the decision to start the incorporation process of the mortgage finance company which will of course be Shariah-compliant. And which it is hoped will be finalized by the early part of 2012.

Another target group in the budget are SMEs especially funding them directly. In the past this was done through bank finance which would be extended financing to SMEs. "We are also using our Ijara companies to facilitate financing directly to the SMEs and through the creation of SME investment funds. We are establishing the first SME Investment Fund in Saudi Arabia which will be a SR1 billion Shariah-compliant SME fund, which will be the first of its kind. We will be financing companies that are not big enough to progress on their own. It will involve a lot of technical assistance in terms of business processes, financial reporting, ownership structures etc. The goal is once the companies are restructured and on a sound footing, ICD will exit the investment. We want to leave a sound company that would be able to attract future lines of financing from ICD or local banks, explained Al-Aboodi.

Even this fund will target the real estate and mortgage sector. "We are thinking of focusing on the small real estate developers who are building say 30 to 40 villas. They have a good business model but they are relaying on their own resources. It takes them a year to turnaround their projects. We want to support them, transform them and finance them as and when required. Real estate sector is important because it is also moving the other sectors such as the construction and the building materials industries. The demand for housing units is there. The annual gap for housing in Saudi Arabia is about 150,000 units," he added.

(Mustaq Parker/Arab News/1-Jan-2012)

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Consulting/training: www.alfalahconsulting.com

Consultant/trainer: www.ahmad-sanusi-husain.com

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