Category Archives: Around the world

French Banks Plan to Develop Islamic Finance

French banks plan to develop Islamic finance

France plans to develop Islamic finance and attract investment from the Gulf to its economy, State Secretary for Foreign Trade Pierre Lellouche said.

“We’ve had some delay, compared to the British particularly,” Lellouche said in an interview inAbu Dhabi today. “The legal mechanisms are getting in place and French banks are very capable and they are at it.”

The first Islamic bond from France may be sold in early 2011 after the government introduces guidelines for sukuk offerings, Thierry Dissaux, chief executive officer of the French Deposit Guarantee Fund said in an interview Dec. 15.

France is seeking to increase investment in its high-tech industry from Gulf states includingKuwait, Qatar and the United Arab Emirates, and aims to boost exports to the region by coordinating them with small- and medium-sized enterprises, Lellouche said.

“We should better organize the association between the large groups and small and medium enterprises” when seeking contracts, he said. “We are less efficient than the Germans who hunt in groups, and the Italians too; they are more cohesive.”

The total wealth of the Middle East’s more than 400,000 millionaires grew 5.1 percent in 2009 to $1.5 trillion, Cap Gemini SA and Bank of America Corp. Merrill Lynch said in June 2010.

Source: http://www.bloomberg.com/news/2011-01-17/french-banks-plan-to-develop-islamic-finance-lellouche-says.html

To contact the reporter on this story: Maher Chmaytelli in Dubai atMchmaytelli@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

Pakistan Mutual Funds Push for More Sukuk Issues to Invest Cash

Pakistan Mutual Funds Push for More Sukuk Issues to Invest Cash

Fund managers in Pakistan are urging the government to increase offerings of Islamic debt, saying a 13-fold rise in sukuk sales this year isn’t enough for them to invest inflows of cash.

The central bank plans to auction 45 billion rupees ($525 million) of three-year sukuk in the domestic market on March 1 and another 55 billion rupees in the three months ending June 30. The sales will take the total for the fiscal year to 189 billion rupees, compared with 14.4 billion rupees in the previous 12 months.

Pakistan’s Islamic banking assets climbed an average 30 percent annually in the past four years to 411 billion rupees as of June 2010, 6 percent of the financial industry’s total, according to a central bank estimate in October. Pakistan aims to double that share to 12 percent by 2012 and plans to issue two more Shariah banking licenses that will take the total to seven, the monetary authority said in October.

“The government has relied too much on the conventional debt market without realizing how much liquidity is in the Shariah-compliant industry,” Sajjad Anwar, who helps manage the equivalent of $187 million at NBP Fullerton Asset Management Ltd., a unit of the nation’s biggest lender National Bank of Pakistan, said in a Jan. 11 interview from Karachi. “Islamic funds and banks are just waiting.”

Banking Licenses

Pakistan needs to finance a budget deficit that may reach 6 percent of gross domestic product, or 1 trillion rupees this fiscal year, exceeding the government’s target of 4 percent, according to a report from the State Bank of Pakistan on Oct. 25. The shortfall was 6.3 percent last year, according to data on the Finance Ministry’s website.

The yield on the three-year debt will rise to 13.89 percent from 13.39 percent at the prior offering on Dec. 13 as the central bank may increase interest rates to temper inflation, said Karachi-based Abdullah Ahmed, treasurer at Meezan Bank Ltd., the nation’s biggest Shariah-compliant lender.

“In an environment when everyone is expecting a hike in interest rates, the demand for such paper will remain high,” Ahmed said in an interview on Jan. 12. “Islamic banks are desperate to deploy their funds.”

Inflation stayed above 15 percent for a fourth month in December after unprecedented floods in August destroyed roads and damaged crops worth $3.3 billion.

Inflation to Slow

“The inflation rate will start falling from next fiscal year to average 13 percent as the government aims to reduce borrowing and impose additional tax measures,” Mohammed Sohail, chief executive officer at Topline Securities Ltd., said in an interview yesterday from Karachi.

The State Bank of Pakistan increased its discount rate by half a percentage point to 14 percent on Nov. 29, the third policy tightening since July. The central bank has raised borrowing costs from a record low 7.5 percent in 2005. Policy makers will increase the rate by 50 basis points to 14.5 percent at the Jan. 29 meeting, according to Meezan Bank’s Ahmed, who said he will buy sukuk at the next auction.

Pakistan’s central bank uses the yield on its six-month non-Islamic treasury bills as a benchmark for pricing debt. The yield rose to 13.55 percent at a sale on Jan. 12, nine basis points more than the previous offering. The rate was 12.05 percent a year ago, Bloomberg data shows.

Global sales of sukuk, which pay asset returns to comply with the religion’s ban on interest, fell 15 percent to $17.1 billion in 2010, according to data compiled by Bloomberg. Issuance reached a record $31 billion in 2007.

Islamic Debt Returns

Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in developing markets gained 12.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate shrank eight basis points this month to 281, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Average yields dropped 13 basis points to 4.61 percent.

The yield on Malaysia’s 3.928 percent sukuk maturing in June 2015 rose two basis points to 2.8 percent today, according to prices from Royal Bank of Scotland Group. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed one basis point to 330 today, Bloomberg data show.

Government Debt Sale

The government sold 37.2 billion rupees of Islamic securities on Dec. 13 and got orders for 57.7 billion rupees. At the previous sale on Nov. 8, it raised 51.8 billion rupees after receiving offers of 64.7 billion rupees. Pakistan had local- currency debt of 5.35 trillion rupees outstanding, including 94 billion rupees of sukuk as of November 2010, according to the central bank’s website.

Pakistan is attracting investors even as the country battles an eight-year insurgency with militants in its border region with Afghanistan. The U.S., a major financial donor, is pushing President Asif Ali Zardari to intensify that crackdown. A policeman assassinated secular politician Salman Taseer on Jan. 4 for opposing an Islamic blasphemy law.

Albaraka Banking Group BSC, Bahrain’s biggest publicly traded Islamic lender, boosted its branch network to 90 after acquiring Pakistan’s Emirates Global Islamic Bank Ltd. in 2010. Meezan Bank, controlled by Kuwait’s Noor Financial Investment Co., plans to open 225 new outlets in the next four years.

The central bank predicts the economy will expand 2.5 percent this fiscal year, faster than last year’s 1.2 percent. The Karachi Stock Exchange KSE100 share index reached a 2 1/2- year high today. The gauge rallied 28 percent last year after soaring 60 percent in 2009.

“For Islamic banks, sukuk will remain attractive because the sovereign notes offer the least risk and high returns,” Pervez Said, chief executive officer of Dawood Islamic Bank, 35 percent owned by Bahrain’s Unicorn Investment Bank BSC., said in an interview yesterday from Karachi. “Political and security problems have always been associated with Pakistan. The issue is where do we invest?”

Source: http://www.bloomberg.com/news/2011-01-17/pakistan-funds-push-for-sukuk-to-invest-cash-islamic-finance.html

To contact the reporter on this story: Khalid Qayum in Singapore kqayum@bloomberg.net; Haris Anwar in Islamabad at Hanwar2@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

India’s first Shariah compliant stock index could boost Islamic mutual fund industry

India’s first Shariah compliant stock index could boost Islamic mutual fund industry

The Bombay Stock Exchange (BSE), Asia’s oldest bourse, launched its first Sharia-compliant stock index in December in a move that could boost offerings of exchange traded funds (ETFs) and mutual funds to tap into India’s fast-expanding economy.

Islamic finance in India, home to the world’s second-largest Muslim population after Indonesia, is still in its infancy and the new benchmark should help channel socially-conscious investor savings of more than $1 trillion in the coming years, including from the cash-rich Gulf.

The BSE TASIS Sharia 50 Index includes blue chips like energy conglomerate Reliance Industries, top software services exporter Tata Consultancy Services, leading mobile phone operator Bharti Airtel, carmaker Maruti Suzuki and engineering and construction giant Larsen & Toubro.

There has been a Sharia-based ETF in operation since 2007 in India, and also many Islamic-compliant brokerage houses like Parsoli and Idafa, but this is yet to pick up in a big way.

“The BSE has the largest number of Sharia-compliant companies in the world, more than the whole of the Middle East and Pakistan,” said Sharique Nisar, director of Taqwaa Advisory and Sharia Investment Solutions or TASIS which corroborated with the BSE on the index.

Missed opportunity

If the Sharia 50 had been launched in early 2008, it would have given better returns than the top-30 Sensex and the wider BSE-500 index, according to the BSE.

“The Sharia 50 has outperformed the Sensex by nearly 25 per cent and the BSE 500 by over 30 per cent over our back-test horizon (beginning 1-1-2008),” the exchange said. “Over this period, annualised volatility for the Sharia 50 was also less than both Sensex and the BSE 500 by nearly five per centage points.”

The 30-share Sensex, India’s mostly widely tracked index, was one of the world’s best performers in 2010, rising 17.4 per cent. India’s $1.3 trillion economy, Asia’s third-largest after China and Japan, is expanding at around 9 per cent annually and the government aims to push growth to double digits in the years ahead.

With about three-quarters of India’s 1.2 billion people below the age of 25 years, the country is destined to reap a demographic dividend as the productive younger population boosts consumer spending and pays for massive investment in large infrastructure projects such as highways, power, airports, flyovers and townships.

“The long-term outlook for the Indian economy is very bullish and the Sharia-compliant index will be a huge booster to attract a new class of investors,” said Biju Dominic, who advises retail clients in Mumbai.

He said pension funds from Saudi Arabia to the UAE, and from Malaysia to Indonesia, that have strict religious rules for investment could use the index to pour funds into socially responsible sectors in a region which is growing rapidly.

The BSE’s Sharia 50 comes four years after the Standard & Poor’s launched similar indices elsewhere, spawning a series of ETFs and mutual funds.

S&P had also partnered the National Stock Exchange, India’s biggest bourse and the main market for derivatives, to launch S&P CNX Nifty Sharia and S&P CNX 500 Sharia index. However, only one ETF — the Sharia BeES by Benchmark Mutual Fund — based on the CNX Nifty Sharia has been launched so far.

New investor class

Still, with India’s pace of economic expansion expected to overtake China’s growth rate in the coming years global investors would increasingly look to grab a slice of the market With more Sharia-compliant benchmarks and greater awareness, the prospect for attracting a new class of investors is upbeat.

Madhu Kannan, managing director and chief executive of the BSE, said the Sharia 50 index could give Islamic and other socially responsible investors from the Gulf, Europe and South-east Asia another means to access the Indian market.

Foreign portfolio investment in Indian companies has exceeded $1 trillion since the market was opened up in 1993, and there is another $18 billion in debt instruments.

Domestic investors, especially from the Muslim community, will also find the index handy.

“The creation of the index will help promote financial inclusion of the Muslim population in India and attract investment flows from international funds that must adhere to Sharia norms,” the BSE said.

Oil and gas companies account for almost 30 per cent of the market capitalization stocks in the Sharia 50, followed by capital goods at 19.4 per cent and information technologies at nearly 12 per cent.

The BSE, which started operations in 1875, says the Sharia 50 is the first Indian index to cap the weighting of stocks at eight per cent, which increases diversification and makes related products more attractive to global investors.

Some Sharia-compliant schemes in India

Ambit QInvest
Ambit Capital in collaboration with QInvest, Qatar’s leading investment bank, launched a $150 million open-ended Ambit QInvest India Fund in 2010, which has been touted as the largest Sharia-compliant India fund.

“The fund’s performance in the last three months since inception is 10.4 per cent,” QInvest’s Chief Executive Shahzad Shahbaz said in December. “The Indian equity market provides investors with a highly attractive opportunity to invest in a diversified range of Sharia-compliant equities. The market capitalisation of Sharia-compliant companies within the Nifty stock market index is nearly 60 per cent.”

QInvest had acquired a 25 per cent holding in Ambit Corporate Finance last February for Rs2.5 billion, and recently bought 28 per cent stake in Asian Business Exhibition and Conferences, India’s leading exhibitions and conferences organiser.

Sharia BeES
Sharia BeES, an exchange traded fund, was launched by Benchmark Mutual Fund more than two years ago and mimics the S&P CNX Nifty Sharia Index, which comprises companies in energy, software services, automobiles, engineering, metals, health care, construction, telecom and consumer goods. The passively-managed fund has assets under management of Rs9 million, with annual returns of 10.4 per cent. Minimum investment is Rs10,000.

Taurus Ethical
Taurus Mutual Fund collected about Rs50 million for its Sharia-compliant Taurus Ethical Fund when it was launched in February 2009. It invests in the companies that are part of the S&P CNX 500, with a preference to more mid-cap firms. Being an actively managed diversified fund, it has outperformed the benchmark with annual returns of 23.8 per cent. It has assets worth Rs254 million.

Brokerages
Parsoli Corporation is one of the few Islamic finance firms in India to be involved in equity brokerage and Sharia compliant investment activities. Others include Hidaaya Consultancy Services, Bearys Amanah and Idafa Investments.

Source: http://gulfnews.com/business/markets/india-woos-islamic-funds-1.746388

Malaysian Shariah Governance Framework can be blueprint for industry: Arabnews interview with Dr. M. Elgari

Malaysian Shariah Governance Framework can be blueprint for industry: Arabnews interview with Dr. M. Elgari
by Mushtak Parker| Arab News

At a time when the global Islamic finance industry is debating whether Shariah advisory should be regulated and scholars restricted to advising only a small number of institutions, Malaysia almost in passing adopted on Jan. 1 a new Shariah Governance Framework (SGF) for Islamic financial institutions (IFIs) that supersedes the Guidelines on the Governance of Shariah Committees of IFIs introduced by Bank Negara Malaysia (BNM), the central bank, in 2004.

According to the Malaysian central bank, the primary objective of the SGF is to enhance “the role of the board, the Shariah committee and the management in relation to Shariah matters, including enhancing the relevant key organs having the responsibility to execute the Shariah compliance and research functions aimed at the attainment of a Shariah-based operating environment.”

One prominent international Shariah advisory to the Islamic finance industry, Muhammed Elgari of Saudi Arabia, who sits on several Shariah committees of such organizations as the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Dow Jones Islamic Market Indexes, and a number of banks, agrees that Malaysia’s Shariah Governance Framework for IFIs could become a blueprint for other countries to follow.

In an exclusive interview with the author, Elgari stressed that he can see the need for such a framework, which “most certainly” can be developed into a blueprint, even though he has yet to study the full details of the SGF.

Shariah advisory has been in the news in recent weeks following reports that the AAOIFI is in the process of drafting rules to regulate the shareholdings and the number of supervisory boards individual Shariah advisories can sit on. Market players have long been concerned by the small pool of experienced Shariah advisers serving the Islamic finance industry and that an elite few sit on multiple Shariah advisory boards, a practice which they claim could lead to conflicts of interest and is not consistent with best practice in terms of advisory.

Research by entities such as Funds@Work have added fuel to the fire, although the methodology of the research is not very detailed and transparent. According to Funds@Work, there are 1,141 overall Shariah advisory board positions available in 28 countries. The average board size is 3.33 scholars per board, across the entire universe. Perhaps more importantly, the Top 10 scholars hold 450 out of 1,141 board positions that are available and represent 39.44 percent of the universe. Two Shariah advisories sit on a staggering 85 boards while another on 79 boards.

Some of the top Shariah advisers, not surprisingly, have reportedly spoken out against any efforts to restrict their trade by restricting the number of boards on which they can sit.

“There is no justification in my mind to single out a profession to set rules that are not applied to any other. There is no dispute about the fact that a human being does have a limited capacity or let us say a finite one. But this can’t be measured by the number of boards. The real test is quality of work and ability to meet the expectations of the other party. It should be self evident that if one lacks both, it will not help him to have a limited number of boards,” said Elgari.

Elgari, who also has a doctorate in economics from the prestigious University of California in Berkeley, dismisses any suggestions that Shariah advisories “make too much money” and “they are monopolizing the trade” which he maintains are both lies and naive.

In his experience, none of the banks and organizations he serves as an advisory have expressed any concerns to him about the above issues. In fact, his relationship with his clients remains cordial and commands the utmost professionalism. As such, these supposed concerns are a smokescreen and are really serving the agenda of certain groups who are keen to get a slice of the Shariah advisory business in Islamic finance.

“What is being observed lately is that certain groups want to intermediate between banks and Shariah scholars. In other words they would like to ‘broker’ the Shariah advisory and they believe, correctly, that their negotiating power with the banks is much stronger than individual scholars. Hence they can extract much more from banks. They tell us why should you be concerned, you will not suffer any reduced income (negating the very argument that we make too much). But in principle we do not see it fitting to create an exchange where we sell our services to someone to sell them to a third party at a higher price,” he said.

Elgari, who is one of a very few number of foreign Shariah advisories registered with the Securities Commission Malaysia to give Shariah advisory to the Islamic finance industry in the south east Asian country, maintains that nobody is more concerned about bringing up the second generation of Shariah scholars in the global Islamic finance industry than the current scholars. As such, it is wrong to think that they are threatened by the thought of restrictions and regulation.

“On the contrary our nightmare is for Shariah boards to disappear when we cease to exist. We always request institutions to include in their Shariah board a younger scholar so that the next generation is brought up by the current generation. Recently, we met with the officials from the Waqf Fund (set up by Central Bank of Bahrain) to try to design a program that can be adopted by an academic institution for this purpose,” he said.

Some observers, including regulators, invoke the “conflict of interest” argument to support their desire to restrict the number of boards Shariah scholars can sit on. Elgari in fact believes this is a fair concern and in several instances he has emphasized that Shariah board members should be conscious of it and try to avoid it. He confirms that in several instances he was offered shares in companies he was giving Shariah advisory but he has always declined because he was always aware of a potential conflict of interest. He suggests greater transparency by fellow Shariah advisories, especially in showing their awareness of the issue of potential conflict of interest.

For Elgari, who has also been an economics don at King Abdul Aziz University in Jeddah for many years, the contemporary Islamic finance industry has witnessed over the last three decades the emergence the birth of a new discipline, which combines Shariah, economics and law. “Unless universities recognize this as a new discipline, not much will be done by them. If these professors themselves can’t do it, how can they teach it? The most effective way is apprenticeship, or a program for study designed by the current Shariah scholars,” he said.

The fact remains that the Shariah governance process in Islamic finance has been steadily evolving and gaining maturity. Last year, for instance, Elgari was the first prominent scholar to emphatically call for a scientific approach to Shariah compliance. This follows a similar call by another prominent Shariah scholar, Sheikh Esam Ishaq of Bahrain, that Shariah advisories serving the Islamic finance industry should be regulated.

Elgari then called on fellow Shariah advisories to adopt a scientific methodology in reaching their deliberations on Islamic finance. “To be respected,” said Elgari, “Shariah scholars should follow scientific methods to reach their conclusions. We have seen many mistakes where declarations have been issued. Only the correct resolutions will prevail. Shariah is not a group of infallible people. It is a science. It requires methodology, and resolutions require peer review and market consultation.”

He is also a big supporter of the codification of Fiqh Al-Muamalat, which could contribute immensely to clarifying the rubrics and the contentious issues relating to products and services in the nascent Islamic finance industry. Similarly, he believes that greater transparency in the Shariah governance process; more professional articulation of the resolutions and statements; and prior debate and consultation between scholars and other stakeholders in the industry, could go a long way in mitigating the misconceptions and confusion that has arisen as a result of some recent Shariah rulings.

Source: http://arabnews.com/economy/islamicfinance/article236465.ece

Japan eyes sukuk tax breaks to draw Islamic investors

Japan eyes sukuk tax breaks to draw Islamic investors

 

 

 

 

 

 

Japan will alter regulations to give foreign investors tax breaks on sharia bond dividends, the latest country to pursue Islamic finance to woo investors demanding sharia-compliant assets. Islamic bond dividends received by foreign investors may be declared tax-free as early as end-2011. As neighboring countries had already changed or been changing tax systems to exclude Islamic bonds from taxation, “Japan also has understood the necessity of enhancing the attractiveness as an investment destination,” a Japanese FSA official said. Japanese regulations do not forbid the issuance of Islamic bonds but these funding instruments are often not commercially viable without tax breaks on dividends received.

The transfer of assets tends to attract tax, which can make Islamic finance transactions more costly than conventional deals.

Japanese brokerage Nomura Holdings sold $100 million of Islamic leasing bonds in Malaysia in July and Sumitomo Corp is said to be arranging the first Islamic funding deal in Japan.

Islamic finance practitioners expect the regulatory change to encourage more interest and drive sukuk issuance.

“The range of investors’ portfolio variation can be expanded and the underlying demand may be stimulated,” said Etsuaki Yoshida, a deputy chief of Africa office at Japan Bank of International Cooperation.

The $1 trillion Islamic finance sector saw a burst of interest about two years ago after the global financial crisis prompted a search for alternative sources of funding but interest has since cooled slightly as conventional debt markets reopened. Non-Muslim countries such as Singapore, Australia, France and Hong Kong have either amended or are working on changes to their regulatory framework to accommodate Islamic finance, which avoids interest payments in favour of asset sales or rentals to underpin financial transactions.

But efforts to develop Islamic financial markets have met resistance in South Korea and India.

Source: http://www.reuters.com/article/idUSL3E7CD0OZ20110114

Istanbul Stock Exchange launches Islamic index

Istanbul Stock Exchange launches Islamic index

 

 

 

 

 

 

 

 

 

In an effort to tap the growing area of Islamic banking, the Istanbul Stock Exchange launches a participation index in a ceremony. The index, comprised of 30 companies, includes giants such as Türk Telekom, BİM, Enka İnşaat, Ford Otosan and Petkim. Hüseyin Erkan, chairman of the bourse, says the exchange may also establish separate indexes for groups such as holding companies

The Istanbul Stock Exchange, or ISE, launched a participation index, made up of equities that adhere to the principles of Islamic lending, at a ceremony Thursday.

The main reason for the creation of the participation index is to offer a special Islamic and domestic index “suited to the customer profile of participation banks,” according to exchange officials who spoke at the ceremony.

Pointing to the rapid and steady growth of Islamic banking in Turkey since 2004, Fahrettin Yahşi, chairman of Turkey’s Participation Banks Association, or TKBB, said the participation index will be an important service to provide standardization in the sector. Yahşi is also the general manager of Albaraka Türk, majority-owned by the Albaraka Banking Group.

The new index was established according to the “customer profile” of participation banks, Yahşi said, implying an approach to financial affairs that adheres to Islamic rules. “Such a service has never been offered before in Turkey,” he said.

The index includes companies that have financial operations on a non-interest basis, as Islam forbids interest. It also has incorporated various companies that do not produce alcoholic drinks and are not involved in gambling, pork meat, tobacco products, tourism,entertainment, media, advertisements, weapons, interest on gold and foreign currency trade.

Growing interest

The participation index has become a necessity as the volume of interest-free investments and the purchase and sale of securities compatible with participation banking principles have surged, according to Avşar Sungurlu, deputy director of Bizim Securities.

Companies that become part of the index are also over a certain size, according to Sungurlu.

Bizim Securities has taken the responsibility for updating the index, adding or taking out companies if it becomes necessary.

ISE Chairman Hüseyin Erkan said the bourse might also establish separate indexes for groups such as holding companies. “After this index, an Exchange Investment Fund will be established,” he said.

Birleşik Mağazalar, or BİM, a discount retail chain, is leading the new index, which comprises 30 companies. Other companies in the index include Türk Telekom, Enka İnşaat, Bank Asya, Emlak Konut Real Estate Investment Trust, Ford Otosan, Petkim, Koza Altın, Aygaz, Trakya Cam, Çimsa, Sinpaş REIT, Doğuş Otomotiv, Gübre Fabrikaları, Albaraka Türk, Türk Traktör, Bagfaş, Mardin Çimento, Akçansa, Adana Çimento and Pınar Süt.

In regards to sectors, the trade sector makes up 21.3 percent of the index, followed by communications with 16.6 percent.

“We aim to be a domestic participation index. But at the same time we want foreign investors to benefit from this index,” Sungurlu said.

The index will be traded on the stock exchange under the KATLM ticker.

Bekir Boydak, board chairman of Bizim Securities, Ufuk Uyan, the general manager of Kuveyt Türk, and Cemil Özdemir, the general manager of Bank Asya, signed the protocol on the participation index during the ceremony.

Source: http://www.hurriyetdailynews.com/n.php?n=istanbul-bourse-launches-participation-index-2011-01-06

Yemen Plans First Sukuk Offering to Fund Budget Deficit

Yemen Plans First Sukuk Offering to Fund Budget Deficit

Yemen, the poorest country in the Middle East, plans to sell $500 million of local currency Islamic bonds for the first time to fund the budget deficit and spur the Shariah-compliant finance industry.

The central bank may offer sukuk in the domestic market from the first quarter, Deputy Finance Minister Jalal Yaqoub said in a telephone interview Dec. 29 from Sanaa, the capital. The government is seeking technical assistance on the sale from the International Monetary Fund.Tadhamon International Islamic Bank, the largest Islamic bank in Yemen, and Cooperative & Agricultural Credit Bank said they will participate in the sale.

“The issuance of the sukuk will create investment opportunities and diversify banks’ portfolios, both Islamic and conventional banks,” Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, said in a telephone interview from Washington Jan. 4. “It will help the government to diversify the sources of budget financing.”

Yemen, which is battling al-Qaeda, an uprising in the north and a secessionist movement in the south, needs funds to bridge its fiscal gap, the biggest on the Arabian Peninsula. Muslims make up the majority of the population of 23.5 million, according to the Central Intelligence Agency World Factbook. Growth in the $30 billion economy will slow to 4.1 percent this year, from 8 percent in 2010, the IMF said in its October Regional Economic Outlook report.

Financing Deficits

The government’s 1.84 trillion-rial ($8.6 billion) budget for 2011 forecasts a deficit of 316.4 billion rials, state-run news agency Saba said Dec. 29. The government plans to fund the gap through domestic borrowing including sales of Islamic bonds and from external loans such as a three-year, $369.8-million credit facility from the IMF, according to the organization.

Foreign debt rose to $6.49 billion last September from about $6 billion a year earlier, Saba news agency reported Dec. 29, citing a central bank report. Yemen received a total of $808 million in loans from the Arab Monetary Fund, a unit of the 22- member Arab League, the fund said Dec. 26 on its website.

Yemen’s proposed Islamic notes will target individual investors and local banks, the Finance Ministry’s Yaqoub said. The government will determine sale details by the end of the first week of February, he said. The central bank currently sells 91-day, 182-day and 364-day treasury bills, according to data on its website.

Savings

“Yemeni citizens have a reasonable amount of savings, but the funds haven’t been used in projects,” Yaqoub said. “We want the savings that go to the Islamic banks to go to big development projects like electricity, roads, water and schools.”

Other governments are also seeking to benefit from growing interest in Islamic finance.Afghanistan drafted an Islamic banking law to permit standalone Shariah-compliant banks,Sudan sold Islamic bonds to local banks last month and the Palestinian Authority plans to sell its first sukuk this year. Global assets held by Islamic financial institutions may climb to $1.6 trillion in 2012 from about $1 trillion, the body said in April.

Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 12.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

Global sales of sukuk, which pay returns based on asset flows, dropped 15 percent to $17.1 billion in 2010, according to data compiled by Bloomberg.

Sukuk Investments

The yield on Malaysia’s 3.928 percent Islamic note due June 2015 fell 9 basis points to 3.02 percent today, according to Royal Bank of Scotland Plc prices. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s was little changed at 319 basis points, according to data compiled by Bloomberg.

The difference between the average yield for emerging market sukuk and the London interbank offered rate narrowed six basis points to 284 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

Yemen has 17 banks, including three Islamic banks, Saba Islamic Bank, Tadhamon International Islamic Bank and Islamic Bank of Yemen for Finance and Investment, according to central bank data. Islamic banks in the country have “ample liquidity for an instrument like a sukuk,” which will help spur demand, the IMF’s Ahmed said.

Needing Sukuk

Sanaa-based Cooperative & Agricultural Credit Bank will buy the bonds to diversify holdings, economic and investment adviser Moneer Saif said in a telephone interview Jan. 5 from the capital. The bank’s Shariah-compliant unit CAC Islamic is seeking a license from the central bank, he said.

“Of course we will buy,” Saif said. “It will be one of our priorities. Islamic banks need Islamic products as an alternative to achieve good profits and compete with conventional banks.”

Oil accounts for 60 percent of government revenue and 90 percent of exports, the IMF said in a report on Aug. 19. Oil reserves are expected to be depleted within a decade, the Washington-based lender said.

U.S. pressure on Yemen to crack down on al-Qaeda has intensified since the local wing of the group claimed responsibility for a failed attempt to blow up a U.S. airliner on Dec. 25, 2009. In October, two parcel bombs sent from the country to U.S. synagogues were seized in the U.K. and Dubai.

The country’s economic “challenges are compounded by a difficult security situation and civil unrest, a rapidly growing population, poor infrastructure, and weak institutional capacity,” the IMF said.

‘Failure’

The government’s plan to finance infrastructure with Shariah-compliant funds may not succeed because existing electricity and water projects are “already a failure,” Rasheed al-Sakkaf, head of treasury at Tadhamon International Islamic Bank, said in a telephone interview Jan. 3.

Al-Sakkaf said his bank would only buy if the project is economically viable. “If the profit is good, we will buy more.”

Islamic bonds are typically backed by assets or cash flow because of the ban on interest. Investors earn any profit from the assets instead.

Yemen delayed the sukuk sale from last year because the government had difficulties “getting well-skilled staff to run the sukuk project,” Yaqoub said.

The 15 percent increase in oil prices last year, economic growth and a recovery in the rial have set the stage for a sukuk offering this year, the IMF’s Ahmed said. The currency has gained 12 percent since reaching a 2010 low of 239.98 on Aug. 4, according to data compiled by Bloomberg.

“The conditions should be there for them to be able to diversify their domestic debt instruments by introducing their sukuk in the market,” he said.

Source: http://www.bloomberg.com/news/2011-01-05/yemen-plans-first-sukuk-offering-to-fund-budget-deficit-islamic-finance.html

To contact the reporter on this story: Dana El Baltaji in Dubai delbaltaji@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net