Tag Archives: Islamic finance

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Global issuance of Islamic bonds will take another year to reach pre-crisis levels as new markets in Europe and Asia have yet to make up for the slump in the Gulf, said Deloitte’s head of Islamic Finance on Tuesday.

Underwritten issuance of Islamic bonds, or sukuk, reached $14.3 billion last year, according to Thomson Reuters estimates, well below the $20-30 billion in annual issuance before the global financial crisis.

Malaysia, the industry’s biggest market, held up well in 2010 but issuance in the Gulf Arab region has been hurt by some sukuk defaults and investor confidence has yet to return.

“I think it’s going to be another year or so before (sukuk issuance) gets back to pre-crisis levels,” said Daud Vicary Abdullah, head of Islamic finance at advisory firm Deloitte.

He said that new markets will help a come back in sukuk issuance, as governments in Brazil, Australia, Western Europe and Central Asia are considering issuing sukuk to tap the Muslim wealth pool and nurture their own Islamic financial industries.

He said that American re-insurers are considering entering Islamic re-insurance business, or re-takaful, which would also increase demand for Islamic bonds.

The global financial crisis popped a Gulf real estate bubble in 2008, severely hitting regional investors and pushing the region’s business hub Dubai to the brink of default.

Investors are still holding back their funds as the full extent of the damage took long to surface due to a lack of strong and transparent regulations in the region.

“This market is always much more sensitive to economic ups and downs…there is still some ground to make up and people are sort of nervous about what they have seen in Dubai,” said Abdullah.

The Gulf saw a modest revival in sukuk issuances in the last quarter of 2010 but market experts fear it could be a fragile recovery with investors fearful of any more bad news. [ID:nLDE69618P]

Sukuk issuance has also been hurt by a debate about the compliance of some of its structures with Islamic law. Sukuk are structured around underlying assets, from which returns to bondholders are derived.

Estimates of sukuk issuance can vary significantly depending on the methodology applied.

Experts polled by Reuters in October estimated that sukuk issuance will likely be less than $25 billion as Gulf debt restructurings and state deficit constraints dampen borrowing.

Source: http://sg.news.yahoo.com/rtrs/20110111/tbs-sp-islamicfinance-sukuk-7318940.html

Ernst & Young projects mixed outlook for the Islamic finance industry

Ernst & Young projects mixed outlook for the Islamic finance industry

Islamic financial institutions are at cross roads entering 2011, said Ernst & Young. The industry is expected to continue to show resilience in the face of a challenging economic scenario. This is despite the fact that growth levels of the Islamic finance industry, at more than 20 per cent per annum for the past several years, came under tremendous pressure in 2010.

Ashar Nazim, Executive Director and MENA Head of Islamic Financial Services Group at Ernst & Young says: “Having achieved the critical volume estimated at US$1 trillion in Islamic assets, the question reverberating across board rooms, and among users of Islamic financial services, is about differentiation, or the lack thereof, that Islamic financial institutions have on offer.  Effectiveness of the existing Shari’a governance framework, as well as synthetic product structures commonly in use are especially under discussion.”

No longer business as usual

Scarcity of data and under-investment in analytical tools means that Islamic banks’ focus remains limited to a handful of asset classes while their operating costs are, in many cases, higher than their conventional peers. Future opportunities may no longer come from traditional captive clientele. Instead, Islamic financial institutions urgently need to upgrade their business models to tap mainstream segments.

Ashar Nazim added: “Decision makers at Islamic financial institutions need research and tools to assist in making informed decisions on the future growth trajectory of their businesses. Implications of Shari’a rulings on governance, product structures and markets need to be appropriately incorporated at the planning phase itself.”

Ernst & Young was voted the Best Islamic Advisory Firm and also won the award for Best Islamic Research at the 2010 Islamic Business and Finance Awards organized by CPI Financial. Ernst & Young’s Islamic Financial Services team was acknowledged for its original thought leadership to help steer the industry through the difficult business environment.

Ernst & Young also recently joined hands with AAOIFI*, the leading standard-setting body for Islamic finance industry, to provide product and contract certification that would strengthen universal acceptability of Shari’a compliant products offered by Islamic financial institutions.

New direction for the industry

Ernst & Young’s World Takaful Report highlighted the fluid nature of the takaful industry, as well as tremendous growth potential. The industry is expected to grow three-fold from an estimated US$9 billion in 2009 to $25 billion by 2015. “The biggest challenge for the takaful operators is to bring out the differentiation, its unique Islamic proposition, for its stakeholders. This was the key message for the industry during 2010,” said Ashar.

Ernst & Young’s Islamic Funds and Investment Report 2010 confirmed that more than half the Islamic fund managers may be operating with less than the minimum assets under management needed to remain viable. The opportunity is for global fund managers as well as for consolidation within the industry. Islamic endowment, or Waqf, with an estimated US$105 billion wealth pool, was highlighted as a key emerging sector that could potentially stimulate strong liability generation for Islamic banks, as well as help revive the Islamic fund management industry.

Source: http://www.zawya.com/story.cfm/sidZAWYA20110109091715

What if the world had been following Islamic financial practices?

What if the world had been following Islamic financial practices?

Imagine a world without a financial crisis. No moral hazard, so brokers won’t sell mortgages without carrying out appropriate credit checks. Imagine banks not deliberately selling complex derivatives, knowing that they will be worthless. No short-selling speculation, so companies tinkering on the edge won’t be pushed over. Imagine a world with Islamic finance.

“The practices that caused the financial crisis would not have passed muster with sharia boards – committees of religiously inspired legal scholars who conduct a religious audit of a bank’s activities. Neither the securitisation of sub-prime loans nor credit-default swaps are acceptable in Islamic finance,” says Ibrahim Warde, author of Islamic Finance in the Global Economy and a professor at Tufts University.

“Similarly, negative Islamic attitudes towards short-selling were vindicated by the role short-selling played in many aspects of the crisis and subsequent limits placed on short-selling in London and New York. Some old-fashioned principles such as the distrust of excessive leverage and of open-ended innovation proved well founded. As for the systematic vetting of new products by sharia advisers, it could be looked at as a system of checks and balances, a useful corrective to the groupthink that had overtaken conventional finance.”

Islamic finance extends beyond its well-known characteristics: interest-free banking and the prohibition of investment in items or activities deemed un-Islamic, such as prostitution, gambling, pornography, pig farming and alcohol. In contrast to conventional loans, Islamic bank loans are confined to financing the purchase of physical assets, to which they have recourse in case of default.

Creditors and debtors alike must share business risk, Islamic finance prohibits speculation (such as was practised by AIG with credit default swaps) and similarly prohibits trades that are considered to have excessive risk due to uncertainty, such as naked short-selling, where there is uncertainty involved in the future delivery of the underlying asset. Arguably, Islamic finance also prohibits speculation that property prices will forever continue to rise, as well as bailouts, since they are only loss and not profit sharing for governments. (The UAE may disagree.)

Islamic banks largely mimic conventional commercial banks through profit- and loss-sharing contracts. The bank will buy goods on behalf of the borrower and then sell it on a deferred basis at a markup. The profit-sharing principle prevents Islamic banks from outsourcing debt origination to brokers who would have no incentive to perform thorough due diligence on prospective debtors.

Additionally, according to Warde, Islamic mortgages are attractive to customers because they are vetted by sharia advisers, and predatory practices, which are common practice with traditional mortgages, are forbidden. If customers are unable to keep up with their payments, banks are encouraged to show forbearance and are allowed to count such losses as part of their mandatory annual zakat payment, the Islamic equivalent of a charitable tax.

“This has a cost, but if you weigh the social benefit, it’s a worthwhile cost. The obligation can be handled in a prudential way. At the time of the Asian crisis, the Malaysian banks reasoned that they would have collapsed had they shown forbearance to all of their debtors. The socially desirable thing should not come at the expense of a bank’s ability to survive as a business,” says Warde.

Islamic finance has its limitations. It does not wave a magic wand to do away with inherent business risk, nor does it have a way of dictating that investors avoid correlated and fat-tail risks that lead to bubbles prone to bursting.

Auditing, too, remains a problem. Though standards are set by external bodies – the Islamic Financial Services Board and the Accounting and Auditing Organisation for Islamic Financial Institutions – it is the bank-employed sharia advisers who decide whether a financial institution is compliant with those standards or not. This maintains the inherent conflict of interest present in the relationship between traditional financial institutions and their auditors, such has been seen with KPMG and New Century Finance, a US sub-prime lender.

With Islam being the diverse religion that it is, there is some scope for hiring scholars who will interpret the standards liberally. Western banks, with their more liberal advisers, are increasingly responsible for innovations in Islamic finance. But there are no checks to stop banks from paying for fatwas. Islamic finance has, like its non-Islamic counterpart, yet to devise a system whereby auditors are paid for by an external body.

Would Islamic finance have allowed the world to realise the technologies that it has? Perhaps not. One spinal-repair researcher at University College London, Jacqueline Kueh, recalls how more research was funded during the boom times. Secondly, the elimination of interest that most sharia boards require would have created a highly inefficient debt market. Here, businesses would be at the mercy of Islamic bankers for the purchase of every asset they required as the banks contrived to stick to the form of their interpretation of Islamic requirements. Greater inefficiency in financing means slower growth.

Islamic finance is not necessarily an end in itself, but it does serve to remind of the need for humane banking, the elimination of moral hazard and the reassessment of assumptions that speculators and derivatives add more value than they destroy.

Source: http://www.guardian.co.uk/commentisfree/belief/2011/jan/07/islam-fairer-finance-moral-risk

Istanbul Stock Exchange launches Islamic index

Istanbul Stock Exchange launches Islamic index

 

 

 

 

 

 

 

 

 

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

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

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

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

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

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

Growing interest

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

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

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

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

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

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

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

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

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

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

Report: Islamic Finance and Global Financial Stability

Islamic Finance and Global Financial Stability: A joint report published by the Islamic Financial Services Board (IFSB), Islamic Research and Training Institute (IRTI) and Islamic Development Bank (IDB)

Report extract:

The global financial crisis of 2008-09 has brought to the forefront issues concerning the stability and resilience of financial systems.At the heart of the crisis is the near-breakdown of the functioning of the financial intermediation process, amid a generalised loss ofconfidence in the financial system.

Many factors have been cited as the cause of the crisis. They include a combination of misalignments in the incentive structure and unbridled financial innovation which led to indiscriminate lending and excessive risk-taking. Other contributory factors include the erosion of sound prudential practices, with banks compromising on underwriting and risk management standards in pursuit of short-term gains and market share. While the banking institutions had employed increasingly sophisticated financial engineering techniques to repackage mortgages into complex structured securities, such financial innovation was not supported by commensurate enhancements to their governance processes and risk management infrastructure and practices.

In the wake of the crisis, the global financial community has intensified efforts to reform the international financial architecture to ensure its stability and resilience in a more challenging environment.The challenge before us is to not only undertake the necessary regulatory reform that will minimise potential risks, but to also build a new financial architecture that will promote greater efficiency in the financial intermediation process, including across borders.

In the search for a new financial architecture, there is a general consensus on the need to return banking to its basic function – to provide financial services that add value to the real economy. This in fact represents the very essence of Islamic finance. These are the very elements found in the Shari’ah principles that form the foundation of Islamic finance. It is these inherent elements that contribute towards the overall stability and resilience of the Islamic financial system. This foundation is further reinforced by the values that are extolled in Islamic finance that are similar to those found in ethical finance and socially responsible investment. The key strength of the Shari’ah injunctions is its emphasis on a strong linkage to productive economic activity, its inbuilt checks and balances and its high level of transparency and disclosure. The Islamic financial services industry has thus been in a relatively stronger position to weather the global financial crisis, demonstrating its robustness as a stable form of financial intermediation. The inherent features of Islamic finance have the potential to serve as a basis to address several of the issues and challenges that have surfaced in the conventional financial system during the current crisis. As the role and relevance of Islamic finance in the global financial system gains significance, it has potential to contribute to greater global financial stability and towards strengthening global growth.

Read the full report here.