Tag Archives: Islam

Credit Rating and Islamic Bonds (Sukuk)

Credit Rating and Islamic Bonds (Sukuk)

According to a report published by the Saudi ‘Al-Eqtisadiah’ newspaper, credit rating agencies have unanimously agreed that when assessing sukuk (Islamic bonds), they do not take into account whether the bond is Shariah-compliant or not. This is because agencies believe that the decision regarding whether the Islamic bonds in question are Shariaa-compliant or not is a matter that fatwa committees should deal with.

The truth is; I believe that this is an unacceptable deficiency in the principle of rating in view of the fact that risks related to Shariaa should be taken into account when rating Islamic bonds. This is because declaring sukuk as non-Shariaa compliant, because they are based on fatwas that flout resolutions issued by the jurisprudential academies and the concerned ‘ijtihad jamaei’ (collective interpretation) institutions or because they are based on opinions that are contentious among scholars will affect bond underwriting and buying among investors. This, in turn, will result in a decline in the liquidity of these bonds (meaning its ability to circulate).

Raymond Hill of Fitch Ratings agrees with this last fact. Undoubtedly the liquidity aspect of Islamic bonds is an important factor in the decision made by investors to buy the bond or not. Additionally, it has proven that upon finding out that bonds were not Shariaa-compliant, after having bought them, investors then sell them at a lower price so as to get rid of them but end up losing a portion of their investment – and that is if they can find someone to buy them in the first place.

We may also add to this the legal risks entailed in the case of disputes over these bonds or which result as the outcome of sentences that declare them non-Shariaa compliant, which then makes them susceptible to invalidation or diminishes the rights of their holders by nullifying some of their conditions in accordance with the judiciary’s discretion.

Therefore, the regulation of these bonds using Islamic Shariaa law and the prevalent known jurisprudential opinions is required of credit rating agencies, and the impact of rating must be reflected on these bonds. This is so as to reassure investors with regards to the outcome of such rating.

All credit rating does not take into account the jurisprudential views on which the Islamic bonds are based since the strength of the jurisprudential view or its deviance is not considered a rating capable of expressing with utmost clarity and transparency the risks involved in this type of investment.

My assessment of the fact that credit rating agencies do not take Islamic jurisprudential opinions into consideration in the rating process could be summed as follows:

First: Credit rating institutions deal with Islamic bonds in the same way they deal with debt bonds without considering the particularity that sukuk have over the traditional debt bonds, which is that the former represent a share of ownership while the latter entail no ownership.

Second: The absence of competent jurisprudential expertise within these institutions [credit rating agencies], which could help clarify this dimension [Islamic bonds], which means that these institutions avoid delving into this field.

Third: The lack of a legitimate, clear and consensually agreed upon criterion with regards to Islamic bonds that credit rating agencies could implement and use as a reference and for arbitration.

This deficiency may be treated by uniting the efforts of the credit rating agencies and the supporting Islamic banking institutions, such as the committees for auditing and accountability within Islamic financial institutions and the Islamic financial services councils and international Islamic rating agencies, to set the criteria for rating Islamic bonds so that the controversial jurisprudential dispute inherent within sukuk can be taken into account.

These institutions should also employ the expertise of Shariaa law scholars so as to clarify this field, thus enabling the establishment of a legitimate and united Shariaa-compliant criterion for Islamic bonds.

Kuwait Finance House posts $1 billion profit

Kuwait Finance House posts $1 billion profit

Kuwait Finance House (KFH) group achieved a record net profit of $1 billion last year, it was announced yesterday. The results takes account of overseas operations including KFH – Bahrain. KFH’s chairman and chief executive Bader Abdul Mohsen Al Mukhaizeem announced that KFH has achieved total profits worth $1.917bn last year, with an increase of $667.7 million, equal to 53 per cent compared to the previous year.

This includes the profits for investment depositors that reached $881.92m, distributed to shareholders of stock listed in Kuwait Stock Market as follows: 8.632pc for investment deposits, 6.714pc for Al Sedra deposit and 5.755pc for investment saving accounts.

The net profits for shareholders reached $1bn, with an increase of $411.861m, equal to an increase of 70pc compared to 2006.

Profit per share increased to 166 fils compared to 102 fils in 2006 – a 63pc rise.

Assuming the capital increase since the beginning of the year, profit per share was 161 fils compared to 102 fils in 2006 with an increase of 58pc.

The board of directors recommended granting the shareholders cash distributions with a rate of 65pc compared to 57pc for 2006, and bonus shares with a rate of 20pc compared to 15pc in the previous year, after the approval of the general assembly and concerned authorities.

Volume of assets increased in the balance to reach $32bn with a rise of $9.03bn compared to 2006 and an increased rate of 39pc.

The volume of deposits increased to $19.414bn with an increase of $5.93bn equal to 44pc compared to the last year.

The total shareholders’ equity reached $4.4bn with an increase of $1.847bn, equal to 72pc compared to the previous year.

Mr Al Mukhaizeem said these results were the fruits of the extended success that KFH has achieved during the previous years.

“This success is based on KFH’s awareness of the market and economical sectors where it operates, in addition to the policy that KFH follows in varying the assets, which it uses for investment,” he said.

“This policy focuses on distinguished qualitative investments that have an increasing value and high return on investment.”

KFH-Bahrain general manager Abdulhakeem Alkhayyat said KFH-Bahrain witnessed several milestones last year terms of its products, services and banking activities.

“This success is mainly due to the bank’s well planned strategies which includes not only Bahrain, but the countries we operate within,” he added.

“We are looking forward to continue this success in 2008 and beyond and to achieve our optimum goal of customer satisfaction.

“At KFH-Bahrain we look at the Kingdom’s economy with positive consideration, and we are committed to invest in the country as part of our long term vision.”

A fine example is the recently announced industrial holding company established in Bahrain, said Mr Abdulhakeem.

“We expect that our projects in the next few years will amount to $12bn,” he added.

“KFH-Bahrain is very proud that more than 95pc of its human power are young Bahraini professionals working with very high efficiency.”

Mr Al Mukhaizeem said KFH’s achievements last year were the pillars that supported KFH as a pioneer in the Islamic banking industry .

“Last year, which marked KFH’s 30th anniversary, the group won several global awards,” he revealed.

“KFH took seven awards from high profile specialised authorities. The most prestigious awards are Best Bank in Kuwait 2007 award from The Banker Magazine and The Distinguished Establishment by the 14th International Conference for Islamic Banks.

“In addition to that, KFH is soaring towards global expansion, new markets and countries, while reinforcing its status in the current markets.”

KFH established a company in Morocco and it is considering establishing an Islamic bank in Algeria. In Saudi Arabia, KFH is considering establishing a bank to reap the benefits of the booming economical development.

As result of KFH’s success in Malaysia, studies are going on to establish banks in countries in south East Asia. An exchange rate of 0.275 was used to convert every Kuwaiti dinar to the dollar.

International Bar Association’s (IBA) “Islamic Finance In The Middle East” Conference Argues The Need For Standardized Regulation Of Islamic Finance

International Bar Association’s (IBA) “Islamic Finance In The Middle East” Conference Argues The Need For Standardized Regulation Of Islamic Finance

Speakers at International Bar Association’s (IBA) ‘Islamic Finance in the Middle East’ conference were nearly unanimous about the need to apply some level of consistency in Islamic Finance laws across the GCC countries in order to establish regionally-accepted regulatory standards.

The IBA conference, which attracted close to 70 banking professionals and legal experts, focused on the latest developments of Islamic finance in the Middle East. The conference which was co-chaired by Al Tamimi & Company Advocates and Legal Consultants, one of the leading law firms in the Arabian Gulf region, and Allen & Overy, a leading London-based international law firm.

In his opening remarks, Mr. Husam Hourani, Partner and Head of the Banking and Finance department at Al Tamimi & Company highlighted the increasing interest in Islamic finance: “Today, the Islamic finance sector is playing a significant role in the financial systems in the Middle East as it offers an attractive alternative to conventional finance and a way to diversify investment portfolios and manage risks. Over the last 10 years, we have seen a growth in Islamic product innovation, and an expansion beyond the Islamic countries to Asia, Europe and the United States. Now, global Islamic finance assets are in the range of AED735 billion (US$200 billion) and is estimated to grow by 33 percent to AED4 trillion (US$1 trillion) by 2010.”

“With these developments, there is an urgent need to deepen our understanding and awareness of Islamic finance and ensure that sound regulatory frameworks are implemented on the ground for efficient financial intermediation. The IBA’s conference provided a valuable opportunity for specialists in the Islamic finance industry to exchange ideas and debate ways of broadening this sector to appeal to and attract more investors around the world,” Hourani added.

Moderated by Mr. Essam Al Tamimi, Founder and Managing Partner of Al Tamimi & Company in addition to Hourani, the one day conference agenda included speeches and panel discussions that covered a number of issues included: Islamic banking techniques and their conformity with Sharia Laws, derivatives and Sharia complications; securisation and Sharia compliance; Islamic financing techniques underpinning sukuk structures and GCC laws versus Sharia Law.

“First we are proud to co-chair this prestigious conference which provided an excellent opportunity to keep abreast of new developments in Islamic finance,” said Al-Tamimi. “One of the main topics that we discussed in this conference was the development in the sukuk market in the UAE. While this market is still small compared to the conventional debt market, we believe that there is enormous potential for growth from both local investors and international markets.”

According to a recent study, “The global sukuk bonds market – sukuk bonds are those that comply with Sharia law and are similar to securitized loans – has maintained its climbing pattern in 2007, with total sukuk issuances aggregating to AED137 billion (US$37.3 billion), a growth of 110.7 percent over the previous year. (It is worth noting that the largest sukuk in history – worth AED13 billion (USD$3.5 billion) – was issued in 2007 by Dubai Ports).

Speakers also brought to light the need to design a regional regulatory framework for Islamic finance. They also recognized the need for standardized interpretations in order to raise the sophistication of the industry and make it more attractive to a wider pool of investors.

“Speakers agreed on the pressing need for a proactive regulatory framework to pave the way for enhanced and innovative offerings by Islamic finance. In this respect, proactive dialogue between regulators and practitioners from GCC countries is of utmost importance in order to formulate a visionary framework for the industry in compliance with Sharia principles,” added Al-Tamimi.

The Islamic financial model is based upon risk-sharing between financial institutions and customers. Under Sharia law, charging interest, whether ‘nominal’ or ‘excessive’ simple or compound, fixed or floating is not permitted.

“We believe that the IBA’s conference succeeded in setting the stage for a lively exchange of many important issues in Islamic Finance, although we think that there is much that remains to be accomplished. We hope that those discussions will contribute to the overall effort to raise awareness and promote action among key policy makers in the near future,” he concluded.

Islamic finance industry plays key housing role

Islamic finance industry plays key housing role

The increasing and sustained interest in Islamic housing finance and the success of many young and established institutions across the Middle East and North Africa (Mena) region was highlighted during a housing finance forum.

The Mena Housing Finance Forum was organised by the Arab Monetary Fund and the World Bank.

“The Islamic mortgage finance industry is receptive to the changing needs of buyers and the GCC’s evolving market conditions,” said Sakana Holistic Housing Solutions chief executive R Lakshmanan, who was a guest speaker at the event.

“It is clear that in a competitive property market, we have to offer a comprehensive portfolio of flexible Sharia-compliant instruments perfectly suited to today’s dynamic situation and the increasingly financially sophisticated consumer.”

He talked about how Islamic finance instruments can assist buyers across the spectrum of property purchases from ready property, to ones under construction or yet to be constructed, whether it is to be used as a home, business or investment.

It was made clear during the conference that the GCC real estate sector is changing dramatically and rapidly and that financiers must keep abreast of the trends and offer the appropriate services and products.

Affin appointed principal adviser for sukuk

Affin appointed principal adviser for sukuk

Affin Investment Bank Bhd said yesterday it has been appointed principal adviser and lead arranger for the proposed RM752.24mil Sukuk Mudharabah to be issued by Manfaat Tetap Sdn Bhd.

In a statement, Affin Investment said Manfaat Tetap, a wholly owned subsidiary of Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd (SILK), was a special purpose vehicle set up to refinance SILK’s existing RM2.01bil Al-Bai Bithaman Ajil Islamic debt securities (BaIDS).

SILK is a wholly owned subsidiary of Sunway Infrastructure Bhd, which was granted the 36-year concession to design, construct, manage, operate and maintain the SILK Highway.

A signing ceremony was held last Thursday between the principal parties and primary subscribers of the Sukuk, the statement added.

Affin Investment managing director Maimoonah Hussain said in the statement: “The proposed Sukuk Mudharabah represents an innovative and possibly the first of its kind, refinancing proposal structured by Affin Investment.

“It allows the repayment obligations of SILK to vary with the actual traffic volume generated by the SILK Highway and provides for a profit rate payable to the investors in a manner which allows investors to share in the excess revenue of the highway.”

Pursuant to the refinancing proposal, some of the existing BaIDS holders would be offered the option of subscribing to Sukuk Mudharabah totalling about RM541.5mil after receiving part cash settlement, Affin Investment said.

The remaining BaIDS holders would be paid in cash, with the settlement amount of about RM210.7mil after netting, among others, the cash from the existing designated accounts under the BaIDS, it added.

The proposed sukuk , which will be issued at par, has a tenure of up to 21 years from the date of issuance. The primary source of redemption of the proposed sukuk shall be “from the periodic Ijarah rental payments payable by SILK to Manfaat Tetap pursuant to the sale and leaseback agreement between SILK and Manfaat Tetap,” the statement said.