Category Archives: Islamic products

Palestinians Lure Banks With First Sukuk Bills

Palestinians Lure Banks With First Sukuk Bills

The Palestinian central bank is attracting local banks to its first sale of Islamic bills, part of a plan to jumpstart the Shariah-compliant finance industry.

Palestine Islamic Bank, the largest Shariah-compliant bank in the territories with $364 million of assets, will submit a bid for as much as $10 million, and Arab Islamic Bank said it probably will participate. The Palestine Monetary Authority is seeking to sell as much as $50 million of sukuk maturing in about 18 months to local banks next year in what would be the central bank’s first debt offering, Governor Jihad al-Wazir said in an interview in Ramallah on Nov. 25.

“There is strong demand for such an instrument because Palestine is a mainly Muslim area and many individuals hesitate to deal with conventional banking,” Mahmoud Al-Ram’ah, general manager of Palestine Islamic Bank, said in a telephone interview from Ramallah on Dec. 2. “Our liquidity is high. We have been pushing to invest in a government sukuk.”

Palestinian Authority Prime Minister Salam Fayyad is seeking to expand Islamic finance to reduce reliance on aid from the U.S., Europe, Saudi Arabia and others as the territory starts building institutions for a future state. These contributions have kept the $7 billion Palestinian economy afloat since the Oslo peace accords introduced limited self-rule to the West Bank and Gaza Strip in 1993.

The plan is to use as much as $20 million from the sale for the construction of a new headquarters, al-Wazir said.

Dependence on Aid

The economies of the West Bank and Gaza are heading for 8 percent growth this year, Oussama Kanaan, the head of the International Monetary Fund’s mission to the area, said on Sept. 14. That’s up from 7.2 percent in the West Bank in 2009 and 5.4 percent in Gaza, he said. While some of the growth in the territories, which have a population of 4.1 million, stems from improved investor confidence and the partial easing of restrictions by Israel, the main driver remains foreign donations, the World Bank said in a report to donor countries on Sept. 16.

The Palestinian Authority received $525 million of international aid to support its budget in the first half of 2010, following $1.4 billion last year and $1.8 billion in 2008, according to World Bank estimates.

Peace Talks

The U.S. has been trying to coax Israel and the Palestinian Authority back to peace talks that stalled in September when a 10-month partial Israeli freeze on West Bank settlement building expired. Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas agreed in early September to try to reach an agreement on the framework for a comprehensive peace accord within a year.

The economy has the potential for annual growth of at least 10 percent for several years, provided Israel eases access restrictions, Palestinian Authority National Economy Minister Hasan Abu-Libdeh said in an Oct. 27 interview on Bloomberg Television in Marrakesh, Morocco.

“We are restructuring our economy,” al-Wazir said. “We are creating the instruments that will allow us to develop monetary policy, to build a yield curve and to stabilize the banking sector.”

Global sales of sukuk, which pay returns based on asset flows to comply with the religion’s ban on interest, fell 31 percent this year to $13.8 billion, Bloomberg data show. Issuance reached a record $31 billion in 2007.

‘Charitable Aspect’

The Islamic notes will probably be dollar-denominated because the territories don’t have a single currency, the monetary authority’s al-Wazir said. The Palestinian pound last circulated as legal tender in 1948, when the U.K. gave up its mandate over the territory.

“There could be a charitable aspect attached to investors’ interest” in a possible issue from the territories but it would be “very limited,” Ahmed Talhaoui, the Abu Dhabi-based head of investment at Royal Capital, which is 44 percent-owned by United Gulf Bank BSC, an investment bank in Bahrain, said in an interview Dec. 6. “The issue will have to be very competitive. A lot of political uncertainty which we are seeing in Palestine should be reflected in spreads.”

The difference between the average yield for emerging- market sukuk and the London interbank offered rate shrank 13 basis points, or 0.13 percentage point, to 334 points yesterday and has narrowed 39 basis points since Sept. 30, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows.

Local Banks

The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 was little changed at 3.05 percent today, according to prices provided by Royal Bank of Scotland Group Plc. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s widened 8 basis points to 364, according to data compiled by Bloomberg.

Shariah-compliant bonds returned 12 percent this year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 14 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The Palestinian Authority owes local banks about $880 million, according to al-Wazir. There are 17 commercial banks in the territories.

The sukuk “will just be a more secure way to make our investments because it will be backed by a performing asset which makes it less risky,” Ibrahim Abu Raidah, manager of the syndicated finance department at Arab Islamic Bank, with about $360 million in assets, said in a telephone interview from Ramallah Dec. 1. “Most of the local banks are already lending to the government.”

The Palestinian territories don’t have a credit rating and any such rating won’t be favorable because of the political risk, al-Wazir said. “The thing that investors should look at is that we were able to make so many achievements in overhauling the economy and financial system despite the political overhang.”

–With assistance from Haris Anwar in Dubai Editors: Shanthy Nambiar, Claudia Maedler

To contact the reporter on this story: David Wainer in Tel Aviv at dwainer1@bloomberg.net

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

Source: http://www.businessweek.com/news/2010-12-08/palestinians-lure-banks-with-first-sukuk-bills-islamic-finance.html

Airport, Utility Sukuk Favored by Funds Over Real Estate

Airport, Utility Sukuk Favored by Funds Over Real Estate

Airport

Islamic bonds that pay returns based on cash flows from airports and utilities rather than income from property may stay in favor in the coming year after a drop in Persian Gulf real-estate prices shook investor confidence.

Saudi Electricity Co.’s 7 billion-riyal ($1.9 billion) sukuk sold in May was underwritten by income from fees such as connection charges, according to its prospectus. Nomura Holdings Inc., Japan’s largest brokerage, sold Islamic debt in Malaysia in July using aircraft as the underlying asset. Pakistan raised 51.8 billion rupees ($605 million) in a Nov. 8 Islamic bond sale linked to the Jinnah Terminal at Karachi’s Quaid-e-Azam International Airport.

The 50 percent decline in real-estate prices in Dubai from their peak in mid-2008 contributed to a 31 percent retreat this year in global sales of Islamic debt that pay asset returns to comply with the religion’s ban on interest. Offerings are picking up following an agreement by Dubai World, one of the emirate’s three main state-owned holding companies, in September to reschedule debt payments.

“With new bonds coming after debt restructuring in the Gulf, investors will be keen to know the quality of businesses and what kind of cash flows they generate,” Esther Teo, who helps manage the equivalent of $2.9 billion of Islamic and non- Islamic funds at Kuala Lumpur-based HwangDBS Investment Management Bhd., said in an interview yesterday. “The asset linked to a sukuk is important given the way it is structured and after the default concerns in the Middle East.”

Upcoming Issues

Saudi Arabian Oil Co. and Total SA, Europe’s third-biggest oil company, plan to sell $1 billion of sukuk this year in a joint issue, Simon Eedle, global head of Islamic banking at Credit Agricole SA, the lead arranger, said in Abu Dhabi in October. Nakheel PJSC, the developer of palm-shaped islands off Dubai’s coast, may issue sukuk to its trade creditors in the first quarter, Faisal Mikou, executive vice president at the Investment Corp. of Dubai, said in the emirate on Nov. 28.

The Palestine Monetary Authority will offer Islamic debt for the first time in 2011. The central bank may sell as much as $50 million of notes to jump-start the territory’s Shariah- compliant finance industry and raise funds to construct its headquarters, Governor Jihad al-Wazir said in an interview in Ramallah on Nov. 25.

Sukuk sales dropped to $13.7 billion this year, according to data compiled by Bloomberg. Offerings from the Gulf Cooperation Council, which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, declined 40 percent to $4 billion in 2010 from the same period last year.

‘Out of Favor’

“Real estate continues to be out of favor, particularly in the Gulf Cooperation Council countries,”Rafael Martinez Dalmau, the Singapore-based head of Shariah-compliant portfolio management at BNP Paribas SA, said in an interview in Kuala Lumpur yesterday.

KPJ Healthcare Bhd., a Malaysian healthcare provider, plans to sell as much as 500 million ringgit ($159 million) of sukuk to refinance debt and fund its capital spending needs, according to a company statement on Nov. 12. The debt is linked to funds from its Real Estate Industrial Trust, Alvin Lee Swee Hee, the chief financial officer, wrote in an e-mail today.

Malaysia Airports Capital Bhd. plans to sell as much as 1 billion ringgit of 12-year Islamic notes to yield around 4.6 percent to 4.8 percent as soon as tomorrow, according to a person familiar with the matter. The offering may grow in size to be more than 1 billion ringgit, another person requesting not to be identified said Nov. 23.

“We want issuers to meet their liabilities from cash flows they generate from their businesses rather than by selling that asset,” Sajjad Anwar, who helps manage the equivalent of $160 million of Islamic and non-Islamic funds at NBP Fullerton Asset Management Ltd., said in a Nov. 30 phone interview from Karachi. “Collateral based on real estate or a piece of land was popular, but it was not likely to be a long-term solution.”

Valuation Concerns

Shariah-compliant bonds returned 11.1 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in emerging markets gained 13.1 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed 11 basis points yesterday to 350 points, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The yield on Malaysia’s 3.928 percent Islamic note due June 2015 was little changed today after rising 11 basis points yesterday, according to prices from Royal Bank of Scotland Group. It has climbed from a record low of 2.33 percent on Nov. 4. The yield on Dubai’s 6.396 percent sukuk due November 2014 rose four basis points this week to 6.78 percent, data compiled by Bloomberg show.

‘Adversely Affected’

The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s was little changed today at 384, according to data compiled by Bloomberg.

“In asset-backed sukuk, or sukuk that is secured with assets either through a true sale or as collateral, if that asset has reduced in value by so much percent, irrespective of what nature of instrument you have, that instrument will be adversely affected,” Yavar Moini, senior adviser for global capital markets at Morgan Stanley in Dubai, said in an interview in Kuala Lumpur yesterday.

Source: http://www.bloomberg.com/news/2010-12-01/sukuk-backed-by-airport-utility-revenue-favored-by-funds-islamic-finance.html

To contact the reporters on this story: Khalid Qayum in Singapore kqayum@bloomberg.net;Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net.

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

Islamic finance liquidity body to issue Sukuk in 2011

Islamic finance liquidity body to issue Sukuk in 2011

coin2

A new global Islamic liquidity management corporation backed by central banks will start issuing Islamic bonds next year to help Islamic banks manage their liquidity, a board member said on Tuesday.

Liquidity management is seen as the weak point of the emerging Islamic finance industry as it currently relies on the use of commodity murabaha, a money market instrument only grudgingly accepted by Islamic scholars for lack of alternatives.

The Islamic capital market is in its infancy and there is a dearth of highly rated Islamic bond issues, or sukuk, which Islamic banks can use to place their surplus liquidity.

The Islamic Financial Services Board (IFSB), an association of regulators in Muslim countries, said in October it would set up the International Islamic Liquidity Management Corporation to issue sharia compliant instruments.

Khaled Al Aboodi, chief executive of the private sector unit of the Islamic Development Bank (IDB) and a board member of the new company, said it would start operations at the beginning of next year and could issue the first Islamic bonds, or sukuk, by the middle of 2011.

He said that while the sukuk will be issued by the company itself, individual central banks will act as custodian for the assets that underpin the sukuk.

"You move the asset to the central bank because that will raise confidence of the buyers of the sukuk," he said, adding that this would help the issues to obtain top credit ratings that qualify them to be used in banks’ liquidity management.

Islamic bonds need to be underpinned by physical assets from which returns to bondholders are derived.

The liquidity management company will be backed by 11 central banks, including Malaysia, Iran and Turkey and some Gulf states and is expected to have up to $1 billion in authorised capital.

Source: http://thedailynewsegypt.com/banking-a-finance/islamic-finance-liquidity-body-to-issue-sukuk-in-2011.html

SWIFT goes Shariah compliant for interbank Murabaha transactions

SWIFT goes Shariah compliant for interbank Murabaha transactions

SWIFT

SWIFT has announced that ISO 15022 message standards for the processing of treasury murabaha transactions have been certified compliant with the international Islamic finance standards issued by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions). This certification paves the way towards the automated processing of murabaha treasury transactions, said to represent 60 percent of all Islamic financing.

Murabaha includes money transfer and commodity trade. While SWIFT has carried the money transfer for many years, commodity trade has been completed manually, usually by fax without any globally agreed standard. SWIFT’s solution uses the ISO 15022 message standards within the guidelines of a murabaha standards rulebook (the guidelines can be downloaded from http://www.swift.com/IslamicFinance).

“AAOIFI is responsible for global Islamic finance industry standards and we establish best practices for the industry”, says Mohamad Nedal Alchaar, AAOIFI secretary general. “Our collaboration with SWIFT aims to build a well-structured and well-regulated international Islamic finance infrastructure.”

Alain Raes, SWIFT’s chief executive for Europe, the Middle East and Africa, who accepted the compliance certificate on SWIFT’s behalf at the recent Sibos conference in Amsterdam, adds: “Murabaha automation is the first step on a long journey of collaboration with the Islamic financial community.”

The use of ISO 15022 messages over SWIFT does not change the current process between banks, their customers and brokers. However, the data defined in the schedules under the terms of the master murabaha agreement is now exchanged using standardized messages via SWIFT as opposed to bilaterally agreed confirmations exchanged manually. Participants involved in murabahawill benefit from a globally agreed electronic standard, automation which will lead to a reduction in costs and risk, and an audit trail for Sharia compliance.

More than 240 Islamic banks representing 84 percent of global Sharia compliant assets are members of SWIFT.  Islamic finance is growing at more than 20 percent per annum, and the demand for Shariacompliant messaging standards is increasing as a result. SWIFT is working with the Islamic financial community to address this demand, both at the level of individual banks, and with organizations such as AAOIFI and AIBIM (the Association of Islamic Banking Institutions Malaysia).

Source: http://www.theasset.com/article/18683.html

Middle East Sukuk bond returns increase by six times over last quarter

Middle East Sukuk bond returns increase by six times over last quarter

coin2

Islamic bonds in the Persian Gulf are returning six times more this quarter than in the previous three months as Dubai-based companies restructure debt and economic growth in the region accelerates.

Sukuk sold by the six-country Gulf Cooperation Council have returned 2.9 percent since June 30, compared with a 0.5 percent gain in the second quarter, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The average yield on the debt narrowed 83 basis points, or 0.83 percentage point, in the past six weeks to 6.65 percent and reached an eight-month low of 6.49 percent on Aug. 3, according to the HSBC/NASDAQ GCC Index.

Bonds in the region that comply with Shariah law may extend gains after the International Monetary Fund said in a report on July 7 that gross domestic product growth in the Middle East will quicken to 4.5 percent this year from 2.4 percent in 2009. State-owned Dubai World said on July 22 it will complete a restructuring of its $23.5 billion of liabilities in “coming months,” while real-estate unit Nakheel PJSC said a group of creditors supported a proposal to alter the terms on $10.5 billion of loans and unpaid bills.

“The Middle East may be coming out of its economic woes, so there is a better chance that its debt will be attractive for the region’s investors,” Muhammad Asad, who oversees the equivalent of $210 million as chief investment officer at Al Meezan Investment Management Ltd., the largest Shariah-compliant fund in Pakistan, said in an interview yesterday in Karachi. “The restructuring and economic recovery are positive signs.”

DP World Sukuk

A rally in the 6.25 percent dollar-denominated sukuk due 2017 issued by DP World Ltd., the world’s fourth-biggest container port operator, pushed the yield down 131 basis points since June 30 to 7.33 percent, according to data compiled by Bloomberg. The yield on the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 declined 56 basis points to 7.13 percent in the same period, prices from Royal Bank of Scotland Group Plc show.

Transactions in the Islamic financial services industry are based on the exchange of asset flows rather than interest to comply with the religion’s principles. The majority of sukuk are of the Ijarah type, which are based on a sale and lease agreement as in real estate.

Property prices in Dubai, the Persian Gulf’s financial hub, retreated more than 50 percent from their peak in 2008 as the global credit crisis led to a cut in mortgage lending and pushed companies to slow expansion, according to estimates from Colliers International. The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Rally ‘Impressive’

“The rally in GCC sukuks has been impressive so far but stabilization of the real-estate sector, which is usually a big component of sukuk structures, is needed,” Ahmed Talhaoui, the head of portfolio management at Bahrain-based Royal Capital PJSC, which is 44 percent owned by United Gulf Bank BSC, an investment bank in Bahrain, wrote in an e-mail yesterday.

Global sales of sukuk dropped 28 percent to $7.85 billion so far in 2010, according to data compiled by Bloomberg. Persian Gulf issuers sold $2.5 billion, compared with $3.2 billion a year earlier.

Islamic bonds sold by Middle Eastern borrowers have returned 9.4 percent this year, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. Shariah-compliant notes that include issues from the Persian Gulf to Southeast Asia and the U.S. gained 9.1 percent in the period, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in developing markets increased 12 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

Attract Investors

The difference between the average yield for emerging- market sukuk and the London interbank offered rate widened five basis points yesterday to 401, the highest level in more than two weeks, according to HSBC/NASDAQ index. The spread has narrowed 66 basis points this year.

Higher sukuk yields in the Persian Gulf relative to Asia make the bonds more attractive, according to Abu Dhabi Islamic Bank PJSC, the United Arab Emirates’ second-biggest Shariah- compliant lender.

The yield on Malaysia’s $1.25 billion of 3.928 percent Islamic notes due 2015 sold in May dropped two basis points today to 2.84 percent and reached a record-low 2.82 percent on Aug. 11, RBS prices show. The rate has dropped 100 basis points since the notes were issued.

“The return is likely to be higher in the GCC not because of their performance, but because it’s the only way to attract investors to this market,” Naeem Ishaque, senior manager of the international division at Abu Dhabi Islamic Bank, said in an interview yesterday. New issuers will have to offer higher returns, said Ishaque, whose bank had 68.3 billion dirhams ($18.6 billion) of assets in the second quarter.