Tag Archives: Finance

Sukuks: new finance era

Sukuks: new finance era

The Islamic financial services industry has witnessed a frenetic pace of growth during the last decade. Since its inception three decades ago, the number of Islamic financial institutions worldwide has risen to over 300 at present in more than 75 countries. They are concentrated in the Middle East and Southeast Asia, and they are also expanding into Europe and the United States. According to Standard and Poor’s, the Islamic finance industry is worth about $500bn in assets, and has been growing at about 10 percent a year for the last decade. Conservative sources put total assets of Islamic financial institutions at $230bn, and they are expected to grow by over 15 percent during the next 5 years. The fact remains that the industry is too small compared to the size of its potential market. The Sukuk market has emerged in 2002 where with the Malaysian government’s $600mn Sukuk issue; Sukuk issuance has been concentrated in parts of Asia and countries of the GCC. There, the development of the Sukuk market has been facilitated by sovereign benchmark issues that have been growing strongly (up 40 percent in the first 6 months of 2007 compared to 2006 as a whole). In value terms, about 36 percent of these issues originated in Asia, primarily Malaysia , Pakistan and Brunei, and 62.1 percent in the GCC during the period 2001-2007.

In terms of countries, the UAE was leading in terms of issues’ size during 2001 till 2007, where it contributed 36.2 percent of total world Sukuk issuance. Malaysia contributed 32.1 percent in the same period despite the fact that Malaysia had the largest number of Sukuks issued amounting to 137 issues, as compared to the total number of issues of 29 in the UAE. It is important to note that the UAE had a few huge Sukuk issues in 2006 and 2007 which helped the UAE surpass Malaysia in total Sukuk size. A few examples of these are the $3.52bn Nakheel Sukuk, the $3.5bn PCFC Sukuk, and the $2.5bn Aldar Properties Sukuk. The demand for sukuk has grown exponentially since 1988. Many sukuk offerings have been made by governments, notably in the Gulf States and Malaysia. Marking the first sukuk offering by a Western government, the German sukuk of Saxony Anhalt raised £100mn from both Middle Eastern and European investors through the issuance of a AAA-rated, five-year, Shari’ah-compliant bond backed by real estate assets held in a trust organized in the Netherlands.

Corporate issuance has expanded rapidly where they increased from $0.4bn in 2003 to $9.9bn in 2006. While Asia, specifically Malaysia, accounted for the bulk of all Sharia-compliant corporate issues in 2004 (close to 90 percent), issuance in the GCC has picked up rapidly. Most recently, sukuk offerings have been shifting to the utilization of musharaka- and wakala based structures as opposed to the more popular ijara-based structure. In terms of the types of Sukuks issued, Sukuk al Ijara was the most popular amongst corporate and governments wanting to raise funds in the Islamic debt markets. Sukuk al Ijara issues contributed 43.6 percent of total issues, followed by Sukuk al Musharaka at 27.5 percent, and then Sukuk al Mudaraba at 18.4 percent. The total number of Sukuks issued in the world during the last six years is close to 360 Sukuks. Industry experts predict Sukuk issuance will reach $100bn in the next five years. According to recent statistics, Islamic Sukuk issuance worldwide have reached $39bn in the first 10 months of 2007.

Despite the strong potential for the Sukuk market, as is the case with any evolving securitization market, a number of economic, legal, and regulatory challenges remain, irrespective of Shariah compliance. These include the substitution of standard structural features in conventional securities, such as credit enhancements, which are not normally contractually permissible in the Islamic context; legal uncertainty arising from the fact that the transaction structure needs to satisfy commercial as well as Islamic law, in particular in non-Islamic countries; and, regulatory differences between national regulators. Ongoing efforts by key Islamic regulators — notably the Accounting and Auditing Organization for Islamic Financial Institutions, the International Islamic Financial Market, and the Islamic Financial Services Board — to facilitate harmonization of standards and practices should help overcome some of these teething pains.

Ahli United Bank forays into Islamic banking

Ahli United Bank forays into Islamic banking

In the backdrop of a double digit growth in Islamic banking and growing appetite for Shariah compliant businesses in the market, a leading banking group Ahli United Bank (AUB) yesterday announced the launch of Islamic banking business under the name of Al Hilal Banking Services in Bahrain. AUB is looking at 50 per cent of its overall revenue stream coming from Islamic banking operations in few years time while doing business side by side with its conventional banking activities where it enjoys a distinctive position. AUB had reported a consolidated net profit of $225.9 million for the nine month period ended 30 September 2007, an increase of 37.5 per cent compared to the same period last year. As of 30 September 2007, total assets for AUB stood at $21.9 billion.

Bahrain has become the third country after the UK and Qatar for the AUB to launch Al Hilal Banking Services, an independent Islamic banking under the umbrella of AUB, a senior official at the bank said yesterday.

Abdulla Al Raeesi, Deputy Group CEO, AUB said that the decision was a result of the growing demand for Islamic banking and the trust that customers have placed on Al Hilal Islamic Banking products and services. “AUB will be expanding its Islamic Banking branch network in Bahrain. This is a testimony of the AUB’s commitment to foster Islamic Banking and to provide a comprehensive set of retail banking products and services”

The Deputy CEO said that the bank was also keen to enhance Islamic banking operations across the Gulf, Egypt, Iraq and Iran in addition to the other potential markets.
Al Raeesi said: “AUB met all the requirements of the Central Bank of Bahrain to enter into the business of offering Islamic banking products and services in Bahrain.”

The expansion of Islamic Banking operations in Bahrain is a result of the AUB Group’s strategy to provide greater Islamic product offerings across the different banks in the Group. The launch of Al Hilal Islamic Banking Services in Bahrain follows its successful launch in Qatar by Ahli Bank QSC and in the United Kingdom by Ahli United Bank UK. AUB, being a leading regional bank, has gained a wealth of knowledge operating in diverse markets across the region, helping it to offer a highly competitive product range across different countries. Al Hilal Islamic Banking Services currently has two branches in Bahrain in Arad and Sanad while third branch will be in Riffa area.
“Under the guidance from our esteemed shariah board, Al Hilal is geared to become one of the leading Islamic banking services providers in Bahrain,” added Al Raeesi. Following the launch of Al Hilal Islamic Banking Services in October 2007, Ahli United Bank (AUB) continues to enhance its Islamic banking offering to provide an unmatched range of products and services to its valued clients within Bahrain.

Professor Ali Al-Quradaghi, Chairman of the AUB shariah Board said: “We wish to acknowledge the efforts made by the Al Hilal Islamic Banking Division at AUB in going the extra mile to ensure that all contracts and financial products are in accordance with the principles and laws of the noble Islamic shariah. We wish to see Al-Hilal Islamic Banking Services grow to become one of the leading Islamic financial services providers in the region”.

The shariah supervisory board for AUB’s Al Hilal Islamic banking services include prominent scholars from around the Middle East comprising of Dr Ali Muhyealdin Al-Quradaghi, Chairman and members, Dr Fareed Hadi and Dr. Abdul Aziz Qassar. The shariah Supervisory Board works independently and is free to review and comment on all contracts and transactions. AUB strictly follows the required conditions of the shariah Board in order to ensure that all operations of Al Hilal Islamic Banking Services comply with shariah. AUB uses a modern and sophisticated operating system to maintain separate books and records for the Al Hilal Islamic Banking Division and ensure that funds and operations are fully segregated from the conventional banking operation.

Japan To Raise First Sovereign Islamic Bond In Malaysia Next Month

Japan To Raise First Sovereign Islamic Bond In Malaysia Next Month

Japan will issue its first sovereign Islamic bond or sukuk, of between US$300 million and US$500 million, in Malaysia next month, a senior official of the Japan Bank for International Cooperation (JBIC) said today.

“It will be issued after Chinese New Year and we hope it will be well-subscribed by the Gulf states,” said Tadashi Maeda, director-general for energy and natural resources finance department of the bank.

The government-backed JBIC is Japan’s biggest overseas lender.

The issue will be the first by a major economy to tap capital from the oil-rich Muslim Gulf states. It comes at a time when oil prices have soared to record highs.

Details of the issuance will be finalised close to a Feb 23 Islamic finance seminar in Japan to which Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz has been invited to make an address, Maeda told Bernama.

“We will finalise it around that time. We have studied this for a long time, as this is the first sovereign Islamic bond to be issued by Japan,” he said on the sidelines of a two-day Islamic finance seminar organised by the Hong Kong Monetary Authority and the Malaysia-based Islamic Financial Services Board (IFSB).

Maeda said the bond will have a maturity of five to seven years.

Malaysia, a pioneer in Islamic finance with three decades of history, is the world’s biggest sukuk issuance centre with over US$56 billion or 62 percent of global sukuk issues.

Sukuk is fast growing at an annual rate of 40 percent.

The global Islamic financial sector is estimated at between US$700 billion and US$1 trillion with total assets exceeding US$250 billion.

Dr Zeti, in her keynote address at the seminar here, said strong demand for sukuks have been spurred by the high levels of surplus savings and reserves in Asia and the Middle East.

The high demand was evidenced by oversubscription ranging from two to 13 times and this has pushed down the cost of issuance by at least 10 to 20 basis points, she said.

Islamic financing forbids any transactions that are not according to the tenets of the religion including a ban on interest, alcohol and gambling.

Islamic finance development underway in Hong Kong

Islamic finance development underway in Hong Kong

The Government is fully supportive of the development of Islamic finance in Hong Kong and is moving full-steam ahead, Financial Secretary John Tsang says. As a key step in this direction, the Monetary Authority will apply for Islamic Financial Services Board associate membership.

A closer relationship with the board will help keep Hong Kong’s financial markets abreast of the latest developments in Islamic finance, he added.

Speaking at a seminar on Islamic finance today, Mr Tsang said the Government has a responsibility to diversify Hong Kong’s financial markets to bolster the city’s status as the Mainland’s global financial centre.The Monetary Authority and the Treasury Market Association set up a team, in conjunction with other market players, to study the possible challenges and implications of the growth of Islamic finance in Hong Kong, as well as the development of a wholesale market for Islamic finance. The team concluded that there are no major legal and regulatory obstacles to transactions involving wholesale Shariah-compliant financial instruments in Hong Kong.

Tax law review

Mr Tsang said issues that are being tackled include changes and/or clarifications that may be needed to Hong Kong’s taxation regime to offer a level playing field for the issuance of Islamic bonds, as compared to other conventional bonds. A review is underway to see whether Hong Kong’s tax laws should be modified.

He pointed out the first Islamic retail fund for sale to retail investors in Hong Kong had already attracted about US$45 million worth of orders by December 10, mainly from local investors.

“Obviously, Islamic finance has become part of the global financial system and it offers huge potential for development and growth. To further consolidate Hong Kong’s position as an international financial centre, we should actively leverage on this new trend by developing an Islamic finance platform, and focus on, among other things, developing a wholesale Islamic finance market,” Mr Tsang said.

Unique opportunity

“Another reason is that Hong Kong remains the only jurisdiction outside of the Mainland where banks may transact business using the renminbi. This, I believe, provides Hong Kong with a unique opportunity to develop wholesale markets in Shariah-compliant instruments for Mainland-based issuers.

“I believe that Hong Kong possesses the required credentials to become an international centre for Islamic finance. And, as the global financial centre for the world’s fastest growing large economy, we have a ready-made marketplace for new investment opportunities,” he added.

Monetary Authority Chief Executive Joseph Yam said the importance of Islamic finance is rising in the global financial market.

“As an international financial centre, Hong Kong is stepping up its efforts to promote its financial services to major Islamic countries and regions, and developing an Islamic bond market,” he added.

Dow Jones launches new faith-based index

Dow Jones launches new faith-based index

After investments in stock market based on Islamic values, investors would now be able to park money in stocks of companies that operate in accordance with the principles of religions like Hinduism and Buddhism.

Global index developer Dow Jones Indexes, in partnership with Dharma Investments, today launched ‘Dharma Indexes’, which measure the performance of companies selected according to the value systems of religions especially Hinduism and Buddhism.

“The Down Jones Dharma Indexes bring together a combination of environmental, social, governance and traditional sin sector filters.

As such, the index is unique and will not just have appeal to the religious, but to a far broader audience as well,” Dharma Investments CEO Nitesh Gor told the media.

The first faith-based index was launched in 1999 when Dow Jones came out with an Islamic market index. Presently, there are many Shariah compliant indices with asset under management of over $500 billion.

The Dharma indices series includes Dow Jones Dharma Global Index, as well as four country indices for the US, UK, Japan and India. For inclusion in the index, a stock must pass a set of industry, environmental, corporate governance and qualitative screenings, Gor said.

Dow Jones will licence the index to mutual funds that may come out with products based on the index.

Dow Jones Indexes Senior Director, Asia Pacific, Sumeet Nihalani said 8-10 mutual funds have already approached the company for the index. The funds will be charged an annual licence fee or a small percentage of the assets under management, he added.

Canada: U.K. Paper On Regulation And Challenges Of Islamic Finance Has Relevance For Canada

Canada: U.K. Paper On Regulation And Challenges Of Islamic Finance Has Relevance For Canada

Late last year, the Financial Services Authority (FSA), the independent organization that regulates most financial services markets, exchanges and firms in the U.K., published a paper regarding Islamic finance, which considered the recent growth in this sector of the financial services industry and identified some of the challenges and opportunities specific to Islamic finance. The issues identified are consistent with those outlined in Stikeman Elliott’s April 2007 Financial Services Update in respect of Canada, and highlight the challenges to which Canadian regulators and financial institutions will need to respond in addressing this growing area of financial products and services.


Islamic finance consists of financial products and services structured to comply with Islamic law (Shari’ah), which covers all aspects of Muslim life. The Islamic economic model emphasizes fairness and shared risk and return, while forbidding transactions involving alcohol, pork-related products, armaments, gambling and other activities viewed as socially detrimental. Shari’ah law also prohibits transactions involving the paying or receiving of interest. As such, modern Islamic banking has initiated the development of products and services that replace interest income with cash flow tied to an underlying tangible asset, such as real estate. In the consumer area, while the nomenclature and certain underlying mechanics of financial products may vary from those with which consumers are familiar, the actual products offered, such as mortgages, insurance and investments, are similar to conventional products.What was once a niche area of financial services has recently seen spectacular institutional and, to a lesser extent, consumer, growth in the Middle East, Malaysia and the U.K. The market for Islamic finance has increased by 20% to 30% per year since 2001, and is currently the fastest growing segment of the financial services industry, worldwide. Many new Islamic financial institutions have recently been established, as have many Islamic “windows” within conventional institutions. The United Kingdom, meanwhile, has specifically sought to increase its ability to attract Islamic financial services businesses by reviewing and updating financial regulation in order to encourage growth in the sector.

Much like in the U.K., Canada’s Muslim population has recently enjoyed strong growth, and the potential market for Islamic financial services continues to expand. The number of Muslim Canadians has grown from an estimated 253,300 in 1991 to over 800,000 in 2006. By 2017, Canada’s Muslim population is expected to comprise between 3.7% and 4.9% of the country’s population. While some limited Shari’ah-compliant products are available in Canada, no major financial institution yet offers Islamic financial products or services. The relative youth and high level of education of this segment of the population, however, suggest that the demand for Islamic financial products and services in Canada will only increase in the coming years, providing a tremendous opportunity for financial firms prepared to serve this growing market. Investments in Canada by sovereign investment funds and other investors from Islamic nations also appear to be poised to accelerate in the short and medium term. Outside of Canada, certain of such investments have been structured to be Shari’ah compliant, and that also may become more typical.

Challenges And Opportunities

The FSA’s recently released paper demonstrates the initiative with which other jurisdictions are pursuing this area and the FSA’s review of the industry should provide a basis upon which Canadian financial institutions can accelerate accessing the Islamic financial market. The challenges identified by the FSA include:

  • Shari’ah ‘arbitrage’ – Currently, there is a diversity of opinion regarding whether certain products or practices comply with Shari’ah law. While regulators will not be in a position to assess the compliance of products with Islamic principles, regulators will need to ensure that transparency of the Shari’ah compliance process is appropriately communicated to the financial consumer. Further, the FSA believes that common Shari’ah standards would be beneficial, and it is currently supporting the development of such standards by various organizations, which would make it easier for bankers and investors to assess, and access, the market;

  • Shari’ah compliance throughout the product life cycle – While a product may be deemed Shari’ah compliant prior to its launch, firms must also be cognizant of the need to maintain compliance after launch by monitoring their products and services. Compliance must be considered an ongoing obligation, as a breach of Shari’ah rules could undermine investor confidence in the products and threaten the firm’s solvency;

  • Issues for Shari’ah scholars – As there is currently a shortage of Shari’ah scholars to certify that products conform to Islamic law, it is currently not uncommon for scholars to hold consulting positions within more than one financial firm. This raises concerns regarding the ability of scholars to apply a high level of oversight to the various products and services at different firms, as well as concerns of potential conflicts where scholars are both approving products and auditing existing products and processes within the same firm or at different firms;

  • Human resources – Like the shortage of Shari’ah scholars with relevant financial experience, there is also a shortage of experienced professionals in the Islamic finance field. Education and professional training programs will be required to address this ongoing need;

  • Contract and documentation risk – While the structures of such transactions are designed to comply with Islamic law, the agreements are governed by local law or, often, English or New York law. The U.K. courts have refused to apply Shari’ah law in disputes, and the debate regarding the interpretation of Shari’ah principles to certain financial products would add further uncertainty. Thus, particular consideration must be given to the drafting of contracts to minimize the potential for disputes, and to identify the governing law;

  • Risk of contagion – As the Islamic finance industry is relatively young and limited in breadth, its various business models remain untested on the scale enjoyed by more established financial products and services. The FSA recognized that a failure in this nascent industry could affect the future development of Islamic finance.

The FSA’s focus is indicative of the level of activity occurring in the area of Islamic finance. The Office of the Superintendent of Financial Institutions (Canada) (OSFI), meanwhile, together with other federal Canadian government departments and agencies, has recognized these recent developments and has also begun to assess the place of Islamic financial products within the Canadian system. The issues identified above are equally relevant to Canada and the Canadian financial services marketplace, and provide Canadian financial firms with a set of constructive points and risk management options to consider as they move into the Islamic finance sector. To this end, Canadian firms are moving forward, and there are currently a number of applications at various stages before OSFI and the Ministry of Finance for the licensing of new Canadian Islamic banks. While challenges are to be expected, the opportunity presented by Islamic finance in Canada is also becoming more readily apparent.

Bahrain’s AUB upbeat on Islamic banking drive

Bahrain’s AUB upbeat on Islamic banking drive

Bahrain’s Ahli United Bank (AUB) AUBB.BH AUBB.KW, the kingdom’s largest lender by market value, on Monday said it expected its new Islamic division to generate revenue equivalent to half its current total in as little as three years.

The bank, whose consolidated net profit was $207.5 million in 2006, also expects to increase to 50 from four its Al Hilal brand Islamic branches in two years. Founded in 2000, the bank has about 100 conventional branches.

“Globally you see the growth of Islamic banking is much faster than conventional … We have got a large customer base across the region and there’s strong demand,” AUB Deputy Group Chief Executive Abdulla Al-Raeesi told reporters.

The bank has operations in Britain, Kuwait, Qatar, Iraq, Oman and Egypt and is targeting Saudi Arabia, the United Arab Emirates, Iran and Switzerland for expansion.

The lender has four Islamic branches — two in Bahrain, one in Britain and another in Qatar — and aims to expand Al Hilal in territories where it is already present.

It is in talks with the Egyptian central bank for an Islamic licence and will open another branch in Bahrain within a month and four more in Qatar this year.

Islamic finance prohibits interest and operates on the principle of sharing risk and reward among all parties in a business venture. Islamic law bans investing in certain sectors, such as alcohol, pornography and gambling.

The industry is set to hit $1 trillion in assets by 2010, management consultants McKinsey & Co said in December, and experts say it is growing at a rate of about 15 percent a year.