Islamic finance in bloom

Last week, the Islamic finance industry received another boost when Bloomberg launched its Malaysian Ringgit corporate sukuk index, a move that further cements Malaysia as a major player in the niche sector.

Investor demand for Shariah-compliant products, both corporate and sovereign, has grown significantly in recent months. In particular, sukuks (financial certificates seen as the equivalent of Islamic bonds) have been issued at record amounts on the back of cheap borrowing costs.

Bloomberg’s new index, developed with the Association of Islamic Banking Institutions Malaysia (AIBIM) and the stock exchange Bursa Malaysia, aims to offer a benchmark for investors in Ringgit-denominated sukuks in Malaysia, a country that has styled itself as a global hub for Islamic finance. Malaysia accounted for nearly 60% of global sukuk issuances in 2011, dwarfing its nearest rival Qatar by over a factor of six (see chart below).

Islamic finance promotes an economic order that conforms to Islamic scripture, namely the Koran. It prohibits interest on debt, which is deemed a form of exploitation under Shariah law, and promotes a close link to the real economy. Islamic financial contracts need be backed by (or at least tied to) real assets or transactions. Purely speculative investments are banned.

“Malaysia has become a centre for Islamic finance, in part because it has spent the last 30 years building (and providing incentives for) Islamic finance,” says Blake Goud, Principal of Sharing Risk, a website that provides analysis of current issues in Islamic finance.  “It has addressed some of the questions regarding the different Shariah standards with the Gulf Cooperation Council (GCC), which has encouraged issuers from that region to enter sukuk markets.  The launch of this index is probably just confirmation of this growth.”

“Sukuk issuance is still growing from a small base – compared to conventional bonds – and the growth will probably continue,” notes Goud.  “That is the main factor, but a withdrawal of European banks from lending in the GCC has probably contributed to growth in sukuk issuance and Malaysia's markets have become more attractive to issuers because it provides a more liquid secondary market than markets in the GCC (which have been improving).”

In a press statement, Bloomberg was keen to stress that it “will track and measure the performance of the most liquid and credit-worthy Islamic corporate bonds in Malaysia” – a comment perhaps placed to alleviate some investors’ uncertainty of Shariah-compliant products.

But the demand for sukuks, or Islamic bonds, is getting ever stronger.  Sukuk issuance in the first half of 2012 alone was over $67 billion, a record number for half-year issuances, according to the business information company Zawya.  Four decades ago, Islamic finance was usually the preserve of Muslim businesses wishing to tap the capital markets in accordance to religious principles.  Now sukuks are a practical funding alternative.  A Deutsche Bank report back in November 2011 estimated that Islamic finance industry could be worth $1.8 trillion in assets by 2016 as corporates continue to think outside the box and seek unconventional methods of funding.

Bloomberg’s initiative is one of several recent developments favouring the growth and acceptance of Shariah-compliant financial products.  Thomson Reuters has launched its own index to monitor the performance of the sukuk market in line with the Bloomberg release.  The Islamic financial sector also benefits from a growing Muslim population; more market players introducing degrees of competition and liquidity; and a recent commodity boom, which has generated large revenue surpluses in several Middle East economies.


http://treasurytoday.com/2012/09/islamic-finance-in-bloom

Bloomberg Launches New Corporate Sukuk Index for Islamic Finance

Bloomberg today announced further commitment to the Islamic finance market with the launch of a Malaysian Ringgit (MYR) corporate sukuk index, developed with the Association of Islamic Banking Institutions Malaysia (AIBIM) and Bursa Malaysia. The Bloomberg AIBIM Bursa Malaysia Corporate Sukuk Index will serve as a benchmark for investors of ringgit- denominated Islamic bonds in Malaysia, the world’s biggest sukuk market.

Global demand for corporate and sovereign sukuk has grown over the last decade and in Malaysia, as low borrowing costs continue to drive issuance. Malaysia is having a record year for sales of corporate sukuk, with potentially about 20 billion ringgit of Shariah-compliant debt in the pipeline, according to data compiled by Bloomberg.

The new corporate sukuk index will track and measure the performance of the most liquid and credit-worthy Islamic corporate bonds in Malaysia. Bloomberg will calculate the Index daily, with rates and prices contributed by member banks of AIBIM.

“Bloomberg has been investing in Islamic finance globally and this announcement reaffirms our commitment to Malaysia’s development as a global Islamic financial centre,” said Kamel Hajri, Bloomberg’s Business Manager for Islamic Finance. “This collaboration means we now have a complete portfolio of Islamic finance indices and tools for Malaysia. We look forward to expanding our joint efforts with key industry players to further enhance market transparency and liquidity, with the goal of fulfilling investor demand for more robust Shariah-compliant solutions.”

Dato’ Mohd Redza Shah Abdul Wahid, President of AIBIM, said, “With the diversification of the Islamic finance market, there is a growing need for access to accurate, timely and comprehensive data. Strategic collaboration to develop localized financial products will help stimulate the long-term growth, competitiveness and sustainability of Islamic finance services.”

“As a top global sukuk underwriter, we see domestic and foreign issuers actively tapping the Malaysian sukuk market,” said Dato’ Mohamad Zabidi Ahmad, CIMB Malaysia’s Head of Islamic Treasury. “By providing accurate pricing and benchmarking, this index will improve portfolio management and contribute to a more robust bond market.”

Deputy Governor Muhammad Ibrahim said, “Malaysia continues to develop and strengthen Islamic finance with increasingly sophisticated products and supportive infrastructure. The launch of the Bloomberg AIBIM Bursa Malaysia Corporate Sukuk Index is timely as it will contribute to better price transparency that enables investors to make informed investment decisions.”

This is the third sukuk index Bloomberg, in collaboration with Bank Negara, AIBIM and Bursa Malaysia, has developed for the Malaysian market. In 2011, Bloomberg launched the AIBIM Bursa Malaysia Sovereign Index (BMSSITR) and the Malaysia Sukuk Ex-MYR Index (BMSSUTR), as part of its Islamic Finance Platform (ISLM), a broad set of data, analytics and news dedicated to Shariah- compliant products and services.

This latest index was announced at the third Global Islamic Finance Forum (GIFF) in Kuala Lumpur held from 18-20 September, where global industry practitioners, regulators, Shariah scholars and business communities discuss prospects for the Islamic finance industry.

For more information on Bloomberg’s Islamic Finance Platform visit www.bloomberg.com/professional or go to ISLM on the Bloomberg Professional service. Customers and prospects can get more details from Bloomberg’s Head of ASEAN Sales, Nitin Jaiswal at njaiswal@bloomberg.net or             +65-6212-1520      .

The Rising Islamic Finance Industry

The Islamic finance and banking industry continues to rise in growth and is most definately expected to exceed $2 trillion dollars by the end of the year. On the surface, the Islamic finance industry in the Gulf has never been healthier. When Emirates Airline looked at the markets last year to secure financing for yet another tranche of new aircraft, it decided against its traditional option; the European banks. "We were kind of planning for finance from European banks, but it’s just a bit difficult now," Emirates president Tim Clark told Reuters in November. "We still have the Islamic finance market to go with, and other funding options are always open for us." That kind of approach is telling. As European finance houses wilt under the pressure of the continent’s sovereign debt crisis, fast-growing emerging markets firms are in dire need of liquidity that Islamic banking institutions apparently stand willing and ready to provide. Another example of the industry’s popularity was investment banking behemoth Goldman Sachs, which announced last October that it was planning to issue as much as $2bn through sukuk. Recent reports indicate that the Goldman sukuk could well be received positively, particularly by Saudi investors. And in November last year, the launch of the Islamic interbank benchmark rate (IIBR) was another sign of the growing maturity of the local industry. A result of the collaborative approach taken by Islamic finance institutions, industry associations and sharia scholars, the IIBR finally offers a proprietary benchmark that decouples the sector from more conventional pricing. Global sukuk issuance exceeded $85bn last year, more than 90 percent higher than the previous year, according to Kuwait Finance House Research Limited (KFHR). Its monthly report on the Islamic bond market also said issuance during December fell below the average, hitting $5bn. The report showed that sovereign issuance was the main catalyst for the sukuk market last year, making up $59bn, while companies' issuance reached $19bn. The 2011 total to $85.1bn represented a year-on-year increase of 90.2 percent compared to 2010, KFHR added. The global sukuk secondary market also reached an all-time high of $178.2bn by the year-end, a 24 percent increase on 2010, the report said. On a monthly basis, December was a quiet month for issuances outside of Malaysia. However, the primary market still recorded a year-on-year increase of 0.7 percent. The largest issuance for the month was the third issuance of the year for Pakistan Domestic Sukuk Company Limited which issues on behalf of the government. The $781.1m sukuk Ijarah was structured with a three-year tenure. The vast majority of primary market issuances were domiciled in Malaysia with only one sukuk each arising from Pakistan and Bahrain, the report added. However, while the sharia-compliant industry is clearly popular, it still faces plenty of criticism. Is the industry simply seeing success by default due to the problems being faced by more traditional sources of finance, or is the trend on merit alone. http://www.globalislamicfinancemagazine.com

Australia to Get First Islamic Index

• By Geoffrey Rogow

Thomson Reuters is on the brink of giving Australia its first Islamic index.

Starting in early February, Thomson Reuters and Australia’s Crescent Wealth are jointly launching Islamic Australia Index — a research-based index that will offer local and international investors a tool to help invest in accordance with Islamic investment principles in the local market.

The initiative comes ahead of an expected government proposal to change tax guidelines to help open up the local market for Islamic investment products, though there remains some concern about the market’s growth potential. 

Called the Thomson Reuters Crescent Wealth Islamic Australia Index, the measure will cover 143 stocks with combined market capitalization of 160 billion Australian dollars (US$168 billion). The companies are screened to ensure they adhere to Sharia law. Islamic finance prohibits the earning of interest, choosing to focus instead on the buying and selling of tangible assets such as property under the principles outlined within Sharia law.

“Creation of the index is a key step toward positioning Australia as an attractive destination for global Islamic investment funds. It is estimated Islamic banking assets globally now exceed US$1 trillion, and that there is US$50 billion in managed funds investing in equities according to Islamic principles,” said the firms in a joint statement.

http://blogs.wsj.com

S&P reviewing ratings of 50 MENA banks on new criteria

Standard & Poor’s reviewing credit ratings of 50 banks in MENA can results in higher funding costs for lenders. (File Photo)

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By MIRNA SLEIMAN
REUTERS DUBAI

Standard & Poor’s (S&P) is reviewing credit ratings on 50 banks in the Middle East and North Africa under a new set of criteria, a move that could result in higher funding costs for lenders already hit by the euro zone crisis and the Arab Spring revolts.

The agency, which last month classified Bahrain’s banks as the riskiest in the GCC (Gulf Cooperation Council), and saw a weak credit profile for United Arab Emirates lenders, expects more activity in debt capital markets as bank lending struggles, a senior S&P executive told Reuters in an interview.

“We look at 25 banks in the GCC region. We also rate banks in Tunisia, Egypt, Jordan, Lebanon so across the MENA, we look at 50 credits,” said Timucin Engin, associate director, financial institutions, at S&P, adding that he expected decisions by year-end.

The agency late last month cut its ratings on 15 big global banks, mostly in the Europe and the United States, as a result of the revamp of its ratings criteria.

JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, Goldman Sachs, Barclays Plc , and HSBC Holdings Plc were among the banks that had their ratings reduced by one notch each.

Engin said that S&P expected European banks to be less active in lending in the GCC area given the euro zone crisis and higher capital requirements under Basel III.

He said that given the funding and liquidity metrics of the GCC banks, excluding Saudi Arabia, S&P felt that the banking systems may lack the capacity to fill the potential funding gap.

“S&P believes we might see more lending activity through the debt capital markets ̶ sukuks, bonds et cetera. Particularly the sukuk space could be interesting,” he said.

Stuart Anderson, S&P Middle East’s managing director, said that there were many companies planning to grow and needed to fund this growth.

“Many companies in this region could do with additional capital. That probably will not be forthcoming. So it makes sense for them to consider more stable and longer maturity bond options,” he said.

Last month, S&P published its revised BICRA (Banking Industry Country Risk Assessment) methodology, designed to evaluate and compare global banking systems.

In the GCC, S&P affirmed the BICRA score on Qatar at 4, changed the BICRA score on Kuwait and Oman from 5 to 4, Saudi Arabia from 3 to 2, UAE from 4 to 5 and Bahrain from 5 to 6.

A BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10).

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Sharia investing leans to West

Islamic benchmarks have consistently outperformed conventional ones

• Image Credit: Supplied

To some observers of Islamic equity investing, Islamic or Sharia-compliant equity indexes seem to imply investing in publicly-listed companies in Muslim countries.

The end results contradict the assumptions. This also rebuts allegations by many from the anti-Sharia movement that Islamic investing is about investing in companies linked to terrorism or financing terrorism. The largest companies in the S&P Global BMI Sharia include ExxonMobil, IBM, Chevron, Nestle and Microsoft.

Today, there is a large stock count and market capitalisation weighting bias towards the non-Muslim G20 countries in all global Islamic equity indexes. We will look at country exposure of Sharia-compliant companies, the economic sector exposure and selected Muslim country Islamic indexes, and how to increase number of Sharia-compliant companies.

Conventional bias

The stock exchanges in Muslim countries have a bias towards the conventional financial sector, such as compromising mainly banks and financing companies, and therefore, also over-reliance on debt culture for corporate financing. Thus, many publicly listed non-financial companies in Muslim countries fail the debt-financial ratio for Islamic screening.

So where are the Sharia-compliant companies listed? And how does this contribute to local and regional economic and capital market development?

Today, we have Islamic equity indexes from all the six index providers from Dow Jones Indexes to S&P and Thomson Reuters IdealRatings. The Islamic indexes are about "doing good by avoiding the bad." Put differently, it's about negative screening much like Islamic finance, which is a prohibitive oriented industry way of funding and financing.

The Sharia universe

Table A shows the condensed universe of Sharia compliant companies, stock count and market capitalisation weighting of S&P Global BMI Sharia and S&P Global BMI as of October 31. Some of the observations on the S&P Global BMI Sharia index include:

- There is an obvious bias towards the developed countries where five countries, including the United Statesand the UK, account for 1,749 companies (50 per cent of stock count) and 74.34 per cent market capitalisation weighting. Is it because these developed countries have a robust equity culture, and hence the companies don't rely exclusively on banking (debt) financing, but also raise equity capital?

Does an equity capital market promote knowledge-based economies, as banks do not provide entrepreneurial capital? It's well-known and accepted that Islamic banks finance (exclusively) "old economy" companies.

- Sharia-compliant companies from Muslim countries include Turkey, Morocco, Malaysia, Indonesia and Egypt that account for 132 companies (3 per cent of stock count) and less than 1 per cent (0.86 per cent) market capitalisation weighting. Although there are 57 Muslim countries with 42 stock exchanges, the small representation is due to prohibitions against direct investing by all international investing such as in Saudi Arabia, small free float, that is, small shares of company available for trading, and illiquidity because stock does not trade the minimum amount according to the index provider's rule book.

- Interesting to note that there is larger market capitalisation weighting (0.44 per cent and 1.36 per cent) and total market capitalisation representation (of $60 billion (Dh220.35 billion) and $187 billion) in the index of Sharia-compliant companies from Israel and India, respectively, than any of the five Muslim countries. Thus, Islamic investing is not confined to Muslim countries.

Islamic equity indexes, especially at a global level, with a bias toward developed country compliant companies should then have a high correlation to conventional counter-part indexes.

Performance

Graph A shows the performance of the S&P Global BMI Sharia to S&P Global BMI since 2007 and we observe tracking market movement and outperformance by the Sharia index.

Thus, notwithstanding a smaller universe of Sharia-compliant companies, 32 per cent of total stock count (3,460) and 42 per cent of total market capitalisation ($13.813 trillion), Sharia-compliant indexes have consistently outperformed in Graph A. The underperformance of the S&P Global BMI is attributed to large exposure to the conventional financial sector, nearly 20 per cent of the index, and its impact by the credit crisis (sub-prime mortgages in the United States) and European sovereign debt situation.

Alpha strategy

There is nothing ‘Islamic' here; it's basically a style of investing and others have called it an ‘alpha strategy': low debt and non-financial and social-ethical investing. This may indeed be the need of the hour in these turbulent times.

Next week, we will look into a global Islamic equity index's economic sector exposure of Sharia-compliant companies. An early hint: the three of the largest sectors in today's global Islamic index are generally not present in Muslim countries.

The writer is Global Head, Islamic Finance and OIC Countries. Opinion expressed here is the writer's own and does not reflect that of his own organisation or that of Gulf News.

http://gulfnews.com