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Wednesday, 10 December 2008

How Brazil Can Profit from US$ 80 Billion-Rich Islamic Bonds

Papers of companies and governments issued according to Islamic financial systems - the Sukuk bonds - currently under negotiation on the foreign capital markets totaled around US$ 80 billion. This according to Alexei Remizov, of HSBC Amanah, the Islamic branch of bank HSBC, talking in Brazil.
Remizov was participating in the seminar promoted by the São Paulo Stock Exchange (Bovespa) "The financial and capital markets of the Islamic world: opportunities and challenges.".
He pointed out that, despite certain deceleration due to the international financial crisis and to the lower oil prices, perspectives for growth of this market are good, specially in the countries of the Gulf Cooperation Council (GCC).
Therese Rabieh, the representative of bank West LB, which also has strong operation in the region, pointed out that operations with sukuk bonds have been growing exponentially in recent years, rising from a volume of US$ 569 million in 2000 to US$ 18.8 billion from January to November 2007.
This year, despite the deceleration, the total volume of business with these papers reached US$ 13.4 billion by November. Rabieh pointed out that, despite the growth, the Islamic financial market represents just 1% of the global financial market, with the number of Muslims equivalent to 20% of the global population. "That is, there is great potential for growth," she said.
The possibility of expanding Islamic finance is not, however, restricted to the Muslim market. Companies in non-Islamic countries, like Brazil, may develop operations of the sort if their organization follows the Sharia, the set of rules and customs that guide the daily life of the Muslims. In the same way, investors do not need to follow the Islamic religion to invest their money in a transaction of the kind.
The seminar served to show the Brazilian market that it is possible to make use of instruments of the Islamic financial system to collect funds, especially in a moment of global credit crisis. To the specialists participating in the event, Brazilian companies may issue sukuk bonds abroad despite the financial and tax legislation in the country not being adapted to such operations.
"It is possible to seek investment abroad," said the director of bank ABC Brazil, Angela Martins, a specialist who has already published a book on Islamic finance. Rabieh pointed out, however, that institutions interested in the sector cannot be opportunist and expect immediate results, it is necessary to have patience to structure the business, await the return and maintain continued operations to grant market security.
"In Brazil this may be important, as the country is trying to explore new markets and has substantially expanded its trade relations with the Islamic countries," said Martins. "This is certainly a market with great potential for growth of Brazilian (bond) issues and for investors from Brazil, who may invest in Islamic products released in other countries," she added.
The representative of West LB declared that companies that operate in exports and imports of goods have advantages in this kind of business. According to Anthony Saint, an executive at Gatehouse Bank, an Islamic bank from the United Kingdom, this is due to the fact that Islamic financial contracts are greatly based on tangible assets.
The system does not allow, for example, the making of money on money, through interest. "A good Muslim must make money move for the good of the community," said Saint.
In this respect, Martins mentioned Petrobras as an example of a Brazilian company that may operate in the Islamic market, as the company buys and sells goods in Muslim countries, and these may be used to guarantee the business, and the company also has subsidiaries and assets abroad, which avoids operations having to be adapted to the rules of the Brazilian market.
To Nik Ramlah Mahmood, the representative of the Securities and Exchange Commission (SEC) of Malaysia, a country in which Muslims represent 60% of the population and which is very advanced in the Islamic financial system, the potential for Brazilian companies to issue papers "is tremendous". He added that "the quality, the name" of the issuer of the papers is essential.
In this respect, the director of the Bank of Brazil office in Dubai, Renato Gerundio de Azevedo, added that, during his experience in the United Arab Emirates, he has noticed that business with Brazilian companies is very welcome. "When I show them the companies and banks of Brazil, their satisfaction is very great," he said. "We have many opportunities to show," he added.
He pointed out, however, that Brazil is not as well known in the Middle East as are other emerging nations, like Russia, India, China and countries in Central Asia. In this respect, greater exhibition of the possibilities in the country is essential.
Azevedo added that, more than banks, sovereign funds from the Middle East hold great liquidity and are not restricted to contracts designed according to the Sharia, also doing business on the conventional system.
"These funds will play an important part in development of the global economy," he said. "There are interesting activities to be promoted in Brazil with regard to investment in the Middle East. Even after the crisis, in all the talks I have, a minimum limit is always mentioned, not a ceiling. So it is necessary to think big, to see what may be built here and to sell the projects abroad," he added.
Anthony Saint, of Gatehouse bank, said that the Islamic system represents a new source of resources and may coexist in parallel with the conventional market. That is what takes place in many Muslim countries. Offering operations that respect Sharia represents, in this sense, something more that the institution can offer its potential clients.
He pointed out that there is appetite for investment opportunities in the Gulf region, and that Brazil has good potential for attraction, as there is special interest in the areas of natural resources and foods, and also due to the need for these countries to supply their domestic markets.
"I would be surprised if these funds are not here in five years," he said. Fernando Iunes, of Itaú BBA, which has a brokerage office in Dubai, said that the bank has already attracted investors from the Gulf to public offers in Brazil.
Sharia is based on the Koran, the holy book of the Muslims, and on the Hadit, that which Mohammed did and said. That is, it is a kind of manual that guides the life of the faithful, in all aspects. The interpretation of the texts and their tradition and application to the daily life, in countries that adopt the Sharia, is done by Muslim scholars and legal consultants in the matter, and this often causes the rules to vary from country to country.
Islamic banks have a Sharia council, that informs the institutions what operations may or may not be accepted. According to Angela Martins, this results in no international standardization. Thus, Islamic contracts have to be custom made for each business. Gatehouse bank, for example, has a council that meets every quarter, but there is always a councilor at the organization to advise with regard to the everyday operations.
In Malaysia, according to Nik Ramlah Mahmood, there is a Sharia council that operates alongside regulators, guaranteeing national standardization. "It is made up of scholars, legal councilors and people who have technical knowledge of the market," he said. Malaysia, according to Alaxei Remizov, of HSBC, is responsible for two thirds of the sukuk bond issues in the world, but two thirds of the funds applied to the business come from the Middle East.
The Islamic financial system does not include just the issuing of sukuk bonds, but also a series of operations, like financing of purchase and sales, leasing and insurance. According to Therese Rabieh, all these transactions have a turnover of around US$ 700 billion worldwide.
José Alexandre Vasco, Investor Protection and Guidance supervisor at the SEC of Brazil, said that, in case there is market interest, the organization may take the theme of adoption of the Islamic system in the country to talks at the Committee for Regulation and Inspection of Financial, Capital, Insurance, Pension and Capitalization Markets (Coremec), which includes the SEC, the Central Bank, the Revenue Service, and other regulators.
"The committee may establish a workgroup, with the participation of the private sector, to evaluate possible adjustment of legislation in the country," he added.
ABC Maintains Liquidity
Bank ABC Brazil, a subsidiary of the Arab Banking Corporation (ABC), headquartered in Bahrain, is not having liquidity problems in these times of financial crisis, different from other medium sized financial institutions in the country.
"ABC Brazil has a great advantage in having a strong shareholder," said the director of the bank, Angela Martins, referring to the headquarters, controlled by the sovereign funds of Abu Dhabi and Kuwait and by the Central Bank of Libya.
According to her, ABC Bahrain has separated US$ 150 million for possible use in the Brazilian subsidiary, a value that may later be expanded to US$ 300 million, guaranteeing the irrigation of lines of credit in Brazil. "A crisis like this one clearly shows the solidity and support of our shareholders," she said.
Angela pointed out that the liquidity of the bank is so good that ABC Brazil should return the unused US$ 100 million to the head office before the end of the year. Despite not having loaned all the money, the asset portfolio in the "middle market" sector for financing to companies with revenues of between 30 million Brazilian reais and 250 million reais, has grown 27% in the third quarter of this year. Operations with the "upper-middle market", with revenues between 250 million reais and 2 billion reais, grew 3%.
According to the executive, the bank decided to leave the consigned credit market and concentrate on loans for business clients. In this area, the institution plans to strengthen its operations in the sector of medium companies, which currently represent 17% of assets. Angela pointed out that the participation of these companies should grow to something between 20% and 25%.
During the crisis, according to her, the bank should maintain its size, maintaining the current client portfolio. As the cost of capital has grown in recent months, the current base is enough to guarantee profitability to the institution without it needing to loan all funds available. This tendency should remain at least until 2010.
This means that new operations should be mainly with customers the bank already has. "Maybe with some growth in the 'middle market' sector and reduction in the 'upper-middle market' sector," she said.
ABC, according to her, does not have difficulties in offering loans to exporters in the Advances on Exchange Contracts (ACC), or in pre-shipment contracts, greatly used by foreign trade operators, which have become scarcer in recent months. "We have been receiving great demand for ACCs, and are renewing all the mature ones with our clients," she said. "We are not denying the renovation of contracts."
Islamic Banks
In a scenario of lack of international credit, according to Martins, ABC Brazil should seek greater volumes of funds on the Islamic financial system and should fight to convince Islamic banks to participate in operations that are not headed by the institution itself, but by third parties. She added that she has partners in this enterprise, like Gatehouse, an Islamic bank in the United Kingdom.
The executive pointed out that, in the crisis, financial institutions in general are becoming more conservative, but that there is still interest in Brazil. As the country's regulatory system is not yet adapted to the Islamic system, he now believes in the possibility of Brazilian companies launching operations of the sort on the foreign market.


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