Tag Archives: Sukuk

Push for asset-backed Sukuk framework lifting demand

Push for asset-backed Sukuk framework lifting demand

 

 

 

 

 

It’s good to see a move towards asset-backed Sukuk rather than asset-based Sukuk, which are obviously more close to the spirit of the Shariah. In asset-backed Sukuk, investors become owners of the underlying assets in case of default, whereas asset-based Sukuk give no such recourse.

DUBAI, Jan 10 – Investor worries over the impact of defaults in Islamic bonds is driving a push for a better structure for asset-backed instruments that should help alleviate concerns, bankers and lawyers said.

Islamic finance industry body IIFM is looking to develop a template in 12 to 18 months that will help reduce some of the legal and operational complexities surrounding asset-backed Islamic bonds, or sukuk, said its chief executive Ijlal Alvi.

The Nakheel property arm of Dubai’s state-owned conglomerate Dubai World [DBWLD.UL] staved off default on a $4.1 billion Islamic bond after a last-minute bailout from Abu Dhabi in 2009, after Dubai World announced plans for repayment on $26 billion in debt, spooking global markets.

Also still ongoing is Kuwait Investment Dar’s <TIDK.KW> discussions with creditors over a $100 million sukuk it defaulted on in 2009.

Asset-backed sukuk are seen closer to the spirit of Islamic law as they involve a transfer of tangible assets — investors become the legal owners of these in the case of default.

Investors were taken aback as they realised the majority of sukuk were asset-based and that these could not be accessed directly by sukuk holders following a default.

“People didn’t really talk about asset-backed sukuk until the stress tests were applied,” said Tim Ross, partner at Latham & Watkins in Dubai. “Some investors were caught off guard — they had an unsecured payment claim.”

As investors cried foul, market watchers hoped the industry would shift toward a securitised model, but that has yet to happen, as more than 90 percent of transactions are still structured as asset-based sukuk.

“While asset-backed transactions, both conventional and Islamic, have been done in the Gulf, they are more difficult and costly for companies to undertake,” said Gregory Man, senior associate at Clifford Chance in Dubai.

He added that such transactions also face tougher legal and analytical requirements imposed by rating agencies and many companies in the region lack sufficiently robust internal systems to service and report on the assets to investors and agencies.

A master agreement would aim to provide a standardised base from which issuers could structure the sukuk in line with their own jurisdictions and increase awareness about the product.

“In this credit environment, creditors would prefer direct recourse to the assets,” Alvi said. “Although asset-based is a valid structure as well, I think it is preferable to encourage increase in asset-backed sukuk over the medium to long-term.”

Despite the challenges, companies would look to issue more asset-backed sukuk if investors demanded it, bankers said.

“Among investors, there is still no real drive to do it,” said one Gulf-based Islamic banker. “Much of the corporate world comes from a conventional background so asset-based sukuk is closer to the debt model they are used to working with.

“Most investors simply don’t care enough, despite all the frenzy following defaults.”

Source: http://sg.news.yahoo.com/rtrs/20110110/tbs-assetbacked-sukuk-7318940.html

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

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

Controlling Fatwa would harm Islamic Finance (Reuters)

Controlling Fatwa would harm Islamic Finance (Reuters) — Straightway Ethical Advisory Blog

 

 

Recent developments in the Islamic finance market prompted the industry to rethink the role of Shariah scholars.

Most Islamic financial institutions appoint a supervisory board or committee of religious scholars who are tasked with reviewing their transactions in order to ensure that they comply with the principles of Islamic Shariah in their business and financial dealings.

A Shariah supervisory board or committee approves or rejects a transaction through the issuance of a fatwa (an opinion or proclamation about the Shariah compliance of such a transaction).

The question of the day in the Islamic finance industry is whether Shariah scholars should be subject to some sort of supervision themselves.
In our opinion, the answer to this question depends on what is meant by ‘supervision’.

Industry practitioners should oppose supervision if it means that Shariah scholars would have to adhere to strict criteria or methodology before issuing a fatwa. Such supervision would in our opinion curtail innovation and transform the industry, prematurely, to a commoditised industry, since Shariah scholars would in their attempt to check all the boxes and stay within the accepted norms, refrain from covering new ground and developing new structures that would allow new transactions and thus the development of the industry.

The industry should not lose sight of the fact that Shariah scholars are our current day mujtahid (jurist). Throughout the history of Islamic jurisprudence, the use of human reasoning (ra’y) has played an important part in the development of Islamic Shariah.

When issuing fatwa, Shariah scholars are practising ijtihad and they should enjoy complete freedom in their practice of ijtihad; their guidance and limitations should only come from the five sources of Islamic Shariah being: the Qur’an; Sunna (the practice and traditions of the Prophet Muhammad (peace be upon him); Qiyas (a comparison, used to make a judgement on issues which have no clear-cut ruling in the Qur’an or the Sunna, by consideration of similar issues which do have clear ruling); Ijtehad (the diligent judgement of the scholars through reasoning and logic); and Ijmaa (a consensus or agreement used for issues which require Ijtehad).

Therefore, in our opinion, Shariah scholars should not be restricted or limited in their practice of ijtihad by any regulator. Such regulation would neither benefit the Shariah -compliance of the industry nor its further development.

However, we would support supervision of Shariah scholars such as the new proposed rules of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) to reduce the risks of conflicts of interest or improper disclosure.

This type of supervision may lead to more transparency and benefit the authenticity and credibility of both the industry and the Shariah scholars. Organisations such as the AAOIFI should run training and continuing education programs for would-be Shariah scholars. Such programmes should aim to provide Shariah scholars with an understanding of various financial and business transactions and the legal framework in which such transactions are being consummated.

Most importantly, these training and continuing education courses should train Shariah scholars to be inquisitorial of the intention (niyya’) behind the transaction.