Category Archives: Sukuk

Islamic Bonds

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

First French Islamic bond seen early 2011

First French Islamic bond seen early 2011

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The first Islamic bond issue out of France could happen early next year, the chief executive of the French Deposits Guarantee Fund said on Wednesday.

Thierry Dissaux, also a former special adviser for financial affairs at the French Treasury, said at a conference in Dubai: "At the beginning of 2011 we could see the first sukuk under French law."

Dissaux said guidelines for certain financing structures including sukuk, ijara and murabaha were approved in August by the tax regulators. Approvals for other structures, such as the investment agency, wakala, and limited partnerships known as mudaraba should be passed in the coming weeks, Dissaux added.

He said once the legal framework was approved, it would open the door for corporates to issue sukuk in France.

Declining to be more specific, Dissaux said: "These issuers could be corporations already active here in the GCC."

Dissaux said sharia scholars at the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the industry’s regulatory body, had approved the French sukuk issuance model in November, with minor adjustments.

France and Britain are keen to take a lead on sukuk issuance in Europe, although appetite on the continent has been dampened in the wake of wranglings over debt in Dubai.

Dissaux said while Britain had been far ahead, the gap had closed in recent months.

Source: http://www.arabianbusiness.com/first-french-islamic-bond-seen-early-2011-367637.html

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

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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

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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

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

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

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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.

Scholars and bankers invited at George Washington University to discuss nuances of Islamic finance

Scholars and bankers invited at George Washington University to discuss nuances of Islamic finance

The event featured five distinguished scholars and experts in the field of Islamic finance. They included Prof. Frank Vogel, senior fellow and head of Muslim World Law and Islamic Finance, Institution Quraysh for Law and Policy and Umar Moghul, Partner at Murtha Cullina LLP and co-chair of the firm’s Islamic Finance and Investments Group.

Yusuf Talal deLorenzo, chief Shariah officer at Shariah Capital, Aamir Rehman, managing director at Fajr Capital Limited and Ibrahim Warde, adjunct professor of International Business at the Fletcher School of Law and Diplomacy, Tufts University, were the others.

The panelists addressed a several hundred attendees on the various aspects of contemporary Islamic finance such as its historical legacy, the compatibility of Shariah-compliant institutions with US law, derivative instruments and the development of sukuk in the Gulf, Shariah financial regulation and practice in the GCC (Gulf Cooperation Council) and Islamic finance in the light of the recent financial crisis.

It also addressed Shariah financial regulation, how the rise of Gulf capital is affecting financial markets and how it should be regulated, as well as the compatibility of Shariah institutions with US law and regulation and the objections of Shariah scholars challenging the permissibility of derivatives under Islamic Law.

The discussions were moderated by Jean-Francois Seznec, visiting associate professor at Georgetown University’s Center for Contemporary Arab Studies.

Regarding the question of sukuk in the Gulf, DeLorenzo said ownership is an important issue for Shariah scholars to understand.

“Ownership is always a sticky subject and it is not always a failure of the Shariah advisers when ownership and sukuk is questioned,” he said.

DeLorenzo, wrote the introduction to Islamic bonds, a book that introduced sukuk to the world’s Islamic capital markets as well as a three volume Compendium of Legal Opinions on the operations of Islamic banks, the first English/Arabic reference on fatwas issued by Shariah boards.

One clear lesson, he said, “is the need for more and more diligence on the business side.”

Questioned on whether sukuk is a sound investment, he said there are serious Shariah issues that need to be addressed. “There are tensions between GCC investors and Malaysian investors who have different philosophies in the jurisprudence.”

He said that sukuk need to have a viable trading market.

“We need to confront these issues. The tensions need to be resolved before real trading can take place.

“Sukuk are hybrids, some look like equity, others like debt. They need to be traded and exchanged, and unless everyone understands the rules there will be a lot of confusion in the marketplace and people will leave. There is a need to deal with this sooner than later.”

DeLorenzo’s 30-year career as a scholar of Islamic Transactional Law was a front-page story in the Wall Street Journal in 2007.

“It’s a rules-based business; people need to understand that, whether they’re in Hong Kong or Chicago, and the way to do this is through an exchange of information,” he said.

“Many of the high profile sukuk defaults have taken place as the result of poor business decisions, not Shariah.”

He said the problem was that the “press picks up on a sukuk default and then blames it on Shariah. We need to explain it better.”

The expert said a new generation of sukuk coming to the market also needs to be closely examined.

“My feeling is that the issuers need to be more transparent to investors, and feel the same way about Shariah boards. We need to be careful about managing perceptions.”

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