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Monday, 28 November 2011

First Islamic Interbank Benchmark Rate Launched

Giving a boost to the booming Islamic finance, a consortium of banks and financial institutions launched Tuesday, November 22, the industry’s first international Islamic interbank rate.
"The establishment of the IIBR marks an important milestone in the maturation of Islamic money markets by providing an international reference rate for interbank transactions," Nasser Saidi, chairman of the committee which sets the rules for the new system, told Reuters.
The Islamic Interbank Benchmark Rate (IIBR) will be used as a basis for pricing a wide range of Islamic financial instruments, including sukuk (Islamic bonds), corporate financing and common Islamic treasury agreements.
It is based on rates contributed by 16 Islamic banks and Islamic sections of conventional banks.
Tenors for IIBR will range from overnight to one year.
The new system is based on the rate of return on capital used by Islamic banks, representing the average profit rate at which bids are made for Shari`ah-compliant interbank transactions, such as murabaha and wakala deals, between top Islamic financial institutions.
Murabaha is a cost-plus-profit structure used for funding, while wakala involves the use of an agency agreement in which one firm accepts funds from another to invest on its behalf in a Shari`ah-compliant manner.
The new system addresses a source of tension within the Islamic finance industry, which is estimated to have reached $1 trillion in assets.
Islam forbids the use of interest in any transaction, but the industry has long used the London Interbank Offered Rate (LIBOR), a system of interest rates, as a benchmark in the absence of Shari`ah-compliant alternatives.
Islamic banking, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.
With estimated 300 Islamic banks and financial institutions worldwide, the industry expands by 15-20 percent a year and entered recently new markets from Australia to South Africa.
Western financial institutions, including Citigroup, Deutsche Bank, HSBC and UBS, are increasingly offering Islamic products.
The new system would for now remain a guideline that banks could voluntarily choose to adopt.
"We don't have the regulatory authority to compel banks to use IIBR,” said Khairul Nizam, deputy secretary general of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which sets standards for the industry.
“But as the contributing banks are among the top Islamic institutions, we are hopeful that as they use it, it will set IIBR as a benchmark.
"Rather than this being something forced, we want non-contributing banks to want to start using it, and we are hopeful that they will."
Nizam added that the IIBR committee, which includes AAOIFI, was in discussions with Malaysian banks to have them contribute rates to the pool, to give IIBR a greater global reach beyond the Gulf.
Malaysia has its own Islamic interbank rate system based on contributions from local Islamic institutions in the local currency, the ringgit. IIBR is based on the US dollar.
Some bankers believe the launch of IIBR shows Islamic finance is finally maturing to a level at which it can compete broadly with conventional finance -- at a time when turmoil in global financial markets has raised questions about risks in the conventional system.
Because Islamic finance bans pure monetary speculation that is not based on an underlying asset, its proponents present it as a less risky, more stable alternative to conventional finance.
But it still faces big obstacles to widespread adoption, including a lack of tools that commercial banks and central banks can use to adjust liquidity.
Sheikh Muddassir Siddiqui, a scholar on the committee's board and partner at law firm SNR Denton in Dubai, believes that adoption of IIBR by a wide range of Islamic institutions may take some time as banks become comfortable with the new system.
"For a fixed-price contract, such as murabaha, I think we'll see people using IIBR immediately," he said.
"For floating-rate agreements, such as in some lease (ijara) contracts, the adoption may take a little longer as people would need to build the confidence and the comfort level for fixing the cost of financing on future dates. It is natural."

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Thursday, 17 November 2011

Indonesia Sells $1 Billion Sukuk at Half 2009 Yield Level

Nov. 15 (Bloomberg) -- Indonesia sold $1 billion of Islamic bonds at half the rate of its 2009 debut and more than two percentage points lower than a sale by Italy, supporting the Asian nation’s claim for an investment-grade rating.
The 2018 dollar securities were sold at 4 percent, data compiled by Bloomberg show. The nation issued $650 million worth of five-year sukuk in April 2009 at 8.8 percent. Italy auctioned 3 billion euros ($4 billion) of five-year bonds at 6.29 percent yesterday.
Indonesia’s currency reserves have more than doubled since 2009, while President Susilo Bambang Yudhoyono is targeting economic growth of 6.5 percent this year, the fastest since the Asian financial crisis in 1998. Standard & Poor’s raised Indonesia’s foreign-currency rating to BB+ in April, with a positive outlook, signaling a possible revision to investment grade. Moody’s investors Service cut Italy to A2, its sixth highest rank, from Aa2 last month.
“The global sukuk yield reflects the market’s view that Indonesia should have investment grade” credit rating, Rahmat Waluyanto, director general of the finance ministry’s debt management office, said in Jakarta today. “I expect the rating upgrade will happen soon, early or in the middle of next year.”
This week’s sale attracted $6.5 billion of orders from 250 investors, compared with $4.7 billion in the 2009 sale, said a person familiar with the matter, who asked not to be identified because the details are private. Investors in the Middle East or Islamic funds bought 30 percent of the issue, those in Asia 32 percent, Europe 18 percent and the U.S. 8 percent. Domestic buyers took up 12 percent. The sale targeted a rate of 4.25 percent, said a separate person familiar.
Investment Grade Target
“There is a lot of interest in Indonesian assets,” Mohd Noor Hj A Rahman, chief executive officer at OSK-UOB Islamic Fund Management Bhd. in Kuala Lumpur, said in an interview yesterday. “People believe Indonesia will be investment grade sometime in the near future. It will add to the overall liquidity and it will be good for the sukuk market.”
HSBC Holdings Plc, Citigroup Inc. and Standard Chartered Plc managed the issue of sukuk, which pay asset returns to comply with Islam’s ban on interest.
The yield on the 8.8 percent bonds due April 2014 rose five basis points to 3.40 percent as of 4 p.m. in Jakarta, according to Royal Bank of Scotland Group Plc prices. The new bond has a bid yield of 4.02 percent, according to RBS quotations.
Global sukuk sales reached $20.6 billion so far this year, up from $14.3 billion in the same period of 2010 and approaching the record $31 billion in 2007, data compiled by Bloomberg show. Average yields on the debt dropped 94 basis points in 2011 to 3.79 percent yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
Indonesia’s local-currency sukuk offerings dropped to 2.3 trillion rupiah ($255 million) since June 30, from 14 trillion rupiah in the first six months of the year, as Europe’s debt crisis damped demand for higher-yielding assets.

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Halal industry should work with Islamic finance

KUALA LUMPUR: Despite the halal industry’s rapid growth, it is missing out on opportunities to tap into Islamic finance, panel members said.

“There is a disconnect between the halal industry and Islamic financing, which is ironic since we’re working within the same religion, but are not talking to each other,” said Thomson Reuters head of Islamic finance (Asia) Rafiza Ghazali at a discussion on “Halal Economy” during the Islamic Financial Intelligence Summit.
She said in a study conducted by Reuters on 250 companies involved in halal production and with a combined market capitalisation of US$132bil, it found that only 50% of them passed the Aofi test, which meant that they are not syariah-complaint.
The Aofi test was a screening criteria used by Reuters to determine the syariah compliancy of stocks, she said.
“Why is it that they (companies in halal production) make sure their products can be consumed by Muslims, yet Muslims cannot invest in them?” Rafiza asked.
Fellow panelist, AmIslamic Funds Management Malaysia director Datin Maznah Mahbob, said: “There are so many opportunities for those companies to issue sukuk, short-term papers, and longer-term Islamic debt instruments of various tenures for fund managers to invest in.
“As a fund management firm, we invest in both sukuk and equities. If they structure their funding requirements in a syariah-compliant way, we can invest in them as they will be in my syariah-complaint universe.”
In a separate panel discussing the potential of Islamic funds, Aberdeen Islamic Asset Management CEO Abdul Jalil Rasheed cautioned against the popular belief that Islamic funds can outperform conventional funds at every turn.
“We don’t go out there saying it will outperform. I’ll be honest, we will guarantee a period of underperformance; that’s just how the market is. If you are outperforming consistently, you’re lying. Something’s wrong,” he said.
“No Islamic fund can claim they have a five to ten year track record. It will take some time to build critical mass and before we can tell clients that this fund can stand on its own merit against conventional funds.” (The Star, M'sia/16 Nov 2011)

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Tuesday, 15 November 2011

Islamic finance may double in assets by 2016 - Deutsche Bank

15 Nov 2011 (Reuters) - The global debt crisis may help Islamic finance nearly double to $1.8 trillion in assets by 2016 as stagnant corporate lending pushes institutions to seek alternative financing to traditional methods, according to a report by Deutsche Bank.

The bank forecasts that there is over $2 trillion of deleveraging in the United States and Europe, creating a financing glut for both struggling countries and countries in developed markets.

But the $50 billion Islamic bonds industry, which currently makes up only 1 percent overall debt issuance, is increasingly drawing issuers, providing significant fee income growth prospects for Islamic financial institutions.

Islamic bonds, or sukuk, issuances have dominated the Gulf region in recent months.

In November alone, Bahrain and Indonesia mandated banks to issue sovereign sukuk while lenders such as Abu Dhabi Commercial Bank and Al Hilal Bank, wholly-owned by the Abu Dhabi Investment Council, have also begun the process of issuing an Islamic bond.

Turkish banks have also emerged on the scene with sukuk issuances, providing Gulf investors with a means to diversify geographically.

Islamic liquidity has also drawn interest from international players such as Goldman Sachs to create a $2 billion sukuk programme, following the success of HSBC Middle East's benchmark issue.

Deutsche Bank said the pipeline for foreign corporate issuance of sukuk could be strong going forward, given the fact that many European bluechips, struggling with the European debt crisis, are owned in part by Gulf-based sovereign wealth funds, creating opportunity to tap alternative funding.

"The Islamic credit market may represent a more feasible and shorter-term reality for the corporate space than for the sovereign space," said the report, led by Deutsche Bank analyst Ryan Ayache.

But sukuk will not be the only driver of growth. Deutsche Bank expects that mortgage financing, particularly in Saudi Arabia which is facing a housing shortage, could provide $100 billion in assets to the overall industry.

Retail banking, project finance and Islamic trade finance are also expected to show significant growth as the global Muslim population grows and the gross domestic products (GDP) of Muslim countries outpace global GDP.  

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