Bahraini body endorses Malaysian derivatives

Bahraini regulators are for the first time endorsing a derivatives market started in Malaysia to hedge movements in Islamic borrowing costs, removing an obstacle to growth in the US$1 trillion industry.

The International Islamic Financial Market in Manama will issue a global standard on so-called profit-rate swaps in the first quarter, backing an effort by some Malaysian lenders who introduced the product as early as 2004. The contracts, the syariah-compliant equivalent of an interest-rate swap, will make the market more efficient, Ijlal Alvi, chief executive officer of the standardisation body, said yesterday in an interview.

While some Islamic scholars have argued that the swaps may conflict with syariah law, which prohibits the payment and receipt of interest, the lack of tools for investors to hedge risk is raising costs and leaving businesses exposed to market swings, according to Kuala Lumpur-based CIMB Islamic Bank Bhd.

“It’s scary to think that the Islamic financial market is not effectively managing risk,” Badlisyah Abdul Ghani, the chief executive officer of CIMB Islamic, a unit of CIMB Group Holdings Bhd, said in a November 9 interview. “This means that players are having open positions that may have a negative impact on their business and the industry as a whole.” 

Malaysia’s CIMB Islamic, RHB Islamic Bank Bhd and Bank Islam Malaysia Bhd are already offering profit-rate swaps in the Southeast Asian nation to their own specifications, which are approved by the central bank. The fragmented market makes it difficult for investors and lenders to decide on which contracts to adopt, Hang Tuah Amin Tajudin, vice-president of Kuala Lumpur-based OCBC Al-Amin Bank Bhd, said in an interview yesterday. 

“An internationally recognised agreement will be of great help as the lack of such a document has been a drag on the Islamic derivatives market,” said Hang Tuah. “It will make it easier for banks to manage counterparty risk.” 

The swaps provide protection from fluctuations in prices of assets that back Islamic bonds, or sukuk, which pay a profit rate rather than interest. The contracts are only for hedging and cannot be used for speculative investment, which is forbidden under syariah law. Derivatives are products whose value is derived from stocks, bonds, loans, commodities and currencies, or linked to specific events such as changes in weather or interest rates. 

“In Islamic finance, the risk isn’t detached and traded separately as is the case in conventional derivatives,” said the International Financial Market’s Alvi. 

Some scholars say it’s difficult to ensure the swaps aren’t used for speculation, Asyraf Wajdi Dusuki, head of research affairs at the Kuala Lumpur-based International Syariah Research Academy, said in an interview yesterday. The agency was set up by Bank Negara Malaysia in 2008 to promote growth in finance that complies with Islam’s ban on interest. 

The Kuala Lumpur-based Islamic Financial Services Board, a global standards-setting body, estimates that the syariah- compliant industry has grown 20 per cent annually since 2000 and will reach US$2.8 trillion by 2015. 

Global sales of sukuk climbed 44 per cent to US$20.6 billion this year, compared with US$14.3 billion in the same period of 2010, according to data compiled by Bloomberg. The bonds have returned 6.8 per cent in 2011, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets gained 8.3 percent, JPMorgan Chase & Co’s EMBI Global Diversified Index shows. 

Average yields on Islamic bonds were little changed at 3.79 per cent yesterday, 41 basis points off a six-year low reached on August 4, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. 

Indonesia sold US$1 billion of Islamic bonds yesterday at half the rate of its 2009 debut. The 2018 dollar securities were sold at 4 per cent, data compiled by Bloomberg show. The nation issued US$650 million of five-year sukuk in April 2009 at 8.8 per cent. 

The yield on the 8.8 per cent notes due April 2014 rose four basis points to 3.40 per cent today, according to Royal Bank of Scotland Group Plc prices. 

The Bloomberg Malaysian Sukuk Ex-MYR Index, which tracks government and corporate foreign-currency bonds listed in Malaysia, the world’s biggest market for sukuk, dropped to 104.3680 yesterday. The gauge has gained 5.9 per cent this year. 

Demand for profit-rate swaps is growing, especially in the more advanced Islamic markets such as those in the Middle East, said Abdul Kadir Hussain, chief executive officer at Mashreq Capital DIFC Ltd in Dubai. 

“It is still a very nascent sort of idea,” Hussain said in an interview yesterday. “As you get more and more of these fixed-rate securities come out, it makes sense for both issuers and investors to potentially look at swapping into floating rates or vice-versa. It is just an outgrowth of the fact that the underlying basic issuance market is increasing.” 

The Asia-Pacific region was the biggest market for derivatives in the first half of this year and accounted for 40 per cent of the global total, according to data from the Washington-based Futures Industry Association published in September. That compares with North America’s 33 per cent market share. The instruments contributed to the global financial crisis, which resulted in US$1.6 trillion of credit losses and write downs. 

London-based Standard Chartered plc started offering Islamic swaps based on commodities in the Persian Gulf in March 2010, Azrulnizam Abd Aziz, chief executive officer of the lender’s unit in Kuala Lumpur, said by e-mail yesterday. The bank introduced the instruments in Malaysia in April. 

The new standard for Islamic swaps from the International Islamic Financial Market will encourage the development of more Shariah-compliant derivatives such as cross-currency swaps, according to Suzaizi Mohd Morshid, head of treasury at RHB Islamic Bank in Kuala Lumpur. 

“They are a natural requirement for hedging and it’s more relevant when Islamic assets and liabilities grow,” Suzaizi said in an interview yesterday. 

CIMB’s Badlisyah said documentation isn’t the main hurdle to growth in Islamic hedging instruments. 

“Misconceptions of hedging and the lack of an internal framework to facilitate hedging transactions are the main deterrents,” he said. “There’s still a barrier to acceptance.” -- Bloomberg
 
http://www.btimes.com.my

Islamic finance industry launches derivatives standard

A template for an over-the-counter Islamic derivative contract was launched on Monday, offering a channel for the emerging industry to better hedge itself against risks.

FINANCIALS

The contract, in the making for three years, is expected to pave the way for quicker and cheaper Islamic risk management and more frequent cross-currency transactions by offering a template that is accepted by Islamic scholars.

The young Islamic finance industry has not yet developed all of the products used by conventional banks, and its banks are seen as at a disadvantage on making cross-border investments as they can not hedge against currency risks.

It is one of its principles of sharia, or Islamic law, that every transaction needs to be underpinned by tangible assets, which has made it difficult for the industry to develope hedging instruments.

"A few years ago, derivatives were not allowed, and not even allowed to be talked about because it was felt that this was not sharia-compliant," said Khalid Hamad, executive director at the Central Bank of Bahrain (CBB) during a news conference in Manama.

Bahrain is a regional banking centre in particular for Islamic banks catering to the Gulf Arab region.

The contract was developed by the IIFM, an Islamic finance industry body, and the International Swaps and Derivatives Association (ISDA) and is also backed by banks such as Bahrain's Arab Banking Corporation ABCB.BH, Credit Agricole CIB (CAGR.PA) and Standard Chartered (STAN.L).

It will create a standard legal framework for derivatives in the Islamic market, while currently contracts are arranged on an ad hoc basis, which can take between six to nine months. Ijlal Alvi, chief executive of the IIFM, said the standard was expected to be mostly used for profit rate and currency swaps.

Link: http://www.reuters.com/article/idUSLDE62018K20100301

Global Islamic hedging agreement is launched

MANAMA: The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association, (ISDA) yesterday launched the ISDA/IIFM Tahawwut (Hedging) Master Agreement at a meeting in Bahrain.

The development is a breakthrough in Islamic finance and risk management, and marks the introduction of the first globally standardised documentation for privately negotiated Islamic hedging products.

The agreement is the first financial industry framework document that is applicable across all jurisdictions where Islamic finance is practised.

The launch of the agreement was officially announced at an event in Bahrain hosted by IIFM and ISDA under the patronage of Central bank of Bahrain Governor Rasheed Al Maraj.

"Given the growing nature of the Islamic finance industry, the institutions operating on Sharia principles can no longer afford to leave their positions un-hedged," said IIFM chairman and CBB executive director of banking supervision Khalid Hamad.

"Hence, some key hedging products are now becoming common across jurisdictions to mitigate risk.

"The ISDA/IIFM Tahawwut Master Agreement gives the industry access to a truly global framework document which is neutral in terms of treatment to both the transacting parties and at the same time strictly conforms to Sharia principles.

"IIFM is honoured to have achieved this milestone in collaboration with ISDA and I am confident that such joint efforts will continue in the future," he added.

"Demand for customised, privately negotiated hedging tools that conform to the principles of Islamic finance has increased in momentum," said ISDA chairman and managing director and head of fixed income for the EMEA region for Credit Suisse Eraj Shirvani.

The agreement provides the structure under which institutions can undertake Islamic hedging transactions such as profit-rate and currency swaps, which are estimated to represent most of today's Islamic hedging transactions.

It is designed to be used between two principal counterparties as a master agreement. Parties understand that no interest shall be payable or receivable and no settlement based on valuation or without tangible assets is allowed.

Moreover, the counterparties to the agreement make representations as to the fact that they enter into Sharia-compliant transactions only.

Link: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=271971

Bahrain Islamic Bank launches first Islamic youth account 'Vevo'

With its continuous interest in offering all the appropriate banking services and products to its customers of various age groups, Bahrain Islamic Bank (BisB), the first Islamic bank in Bahrain, has announced the launch of the new Vevo savings account for youngsters in the 15-25 years age group. The account was launched under the slogan "Your Account. Your future. Vevo. It's all yours."

Speaking about the benefits and services offered by this account, Mr. Abdul Rahman Mohamed Turki, BisB Retail Services General Manager, said:

"We are pleased to offer the new Vevo youth account. It is an account that highlights our support to young members of the community who are the focus of attention from both the local authorities and social organizations in the Kingdom."

BisB General Manager said, "We seek through the launch of this account to educate and enhance the awareness of our young people about how to take the responsibility of the financial aspects of their lives. It is understood that most young people need guidance and support when it comes to their knowledge of financial issues, which the BIsB Vevo account would help them with. In addition, this account will provide them with many services and offers that we hope will meet with their expectations."

Commenting about the choice of the name "Vevo" for this account, Mr. Turki said, "Vevo comes from the word "vivo" which is Latin for "within the living" and since youngsters are the pulse of life, Vevo was created to fit into the lives of young people."

Turki spoke about the details and benefits of this account by saying that Vevo account gives youngsters more offers from leading stores and commercial companies that focus their products and services on the youth group such as Zain, Bahrain International Circuit (BIC), Adhari Park, Wahoo! Water Park and Maya Chocolaterie. In addition, the account offers customers up to 50% off at more than 100 stores on many items such as fashion, electronic appliances, automotive, restaurants, games outlets and many more.

Turki further said opening a Vevo account is easy for the Bank's young customers. All they have to do is to visit any BisB branch and show that they are in the 15 to 25 years age group by providing two official identification documents.

Concluding, Mr. Abdul Rahman Turki urged young people to enjoy the benefits of this new account and stressed that the Bank welcomes all their inquiries upon calling the Call Centre.
Link: http://www.ameinfo.com/217940.html

Shariah-compliant gold funds offer better returns

Shariah-compliant gold funds are offering better returns than the other funds as investment in the yellow metal has lifted its price by "multiples of a thousand dollars," according to the managers of Shariah-compliant funds.

Eric Meyer the Chairman and CEO of US-based Shariah Capital Inc., said: "That's (gold) one commodity everyone has confidence in. And if it's a Shariah-compliant fund investing into gold the confidence levels of investors are all the more higher."

Meyer along with the Dubai Government formed the Dubai Shariah Asset Management that launched four funds in Dubai early this year. The funds include DSAM Kauthar Gold Fund (DKGF), DSAM Kauthar Energy Fund, DSAM Global Resources and Mining Fund Limited and DSAM Kauthar Natural Resources Fund Limited.

All these funds are Shariah compliant that compliment their strengths. "The transactions and investments need to be based on assets and that makes the investors feel confident. These funds are performing better than the other funds that we had " Meyer said.

The DSAM Kauthar Gold Fund now records a year-to-date (YTD) return of 5.63 per cent. "Gold investments have contributed to the cumulative performance of the four funds," Meyer said.

Currency devaluations have particularly shifted the focus to gold. Meyer said. "Printing more paper is eroding confidence in it. So, not only gold, but every hard asset is becoming more reliable. Gold especially has attracted a lot of investments."

The DKGF Manager John Hathaway said besides gold emerging as a safe haven for investors, jewellery demand has been a key contributor for driving up the prices. "Gold is in a long term bull market and the demand for jewellery is driving it. I am sure the gold ETF (exchange traded fund) that was launched recently will ensure a significant flow of capital," he said.

"Gold occupied five per cent of above ground financial asset in 2008. It occupied 22 per cent of it in 1982. In the depression of 1930s, the value of share of a company increased from $4 (Dh15) to $45 in a few years. It (gold), therefore, has a way to go," Hathaway said. Besides, gold the fund managers were also bullish on the other commodity funds. "Even in these circumstances the demand for gasoline in the US has increased 1.6 per cent year on year. One can invest in energy companies that have less than 15 per cent debt in balance sheets," said Ashton Lee the portfolio of DSAM Kauthar Energy Fund.

Meyer said decision by fund managers to increase investments in gold by 1.2 per cent may lead to 40,000 tonnes of gold being pulled off markets increasing the price of the metal by "multiples of a thousand dollars."

(Emirates Business)

Bursa Malaysia To Launch Commodity Murabahah House By Mid-2009

KUALA LUMPUR, March 12 (Bernama) -- Bursa Malaysia Bhd plans to launch the Commodity Murabahah House (CMH), an international spot commodity platform which operates under Syariah requirements, by middle of this year.

"Currently, Islamic financial institutions are using commodities which are traded on the London Metal Exchange (LME). So, we are creating an alternative platform for Islamic banks," Bursa's chief executive officer Datuk Yusli Mohamed Yusoff said Thursday.

He was speaking at a press conference at the 20th Annual Palm and Lauric Oils Conference and Exhibition 2009: Price Outlook 2009/2010 which ended here.

The CMH infrastructure will be developed as a spot commodity market that uses crude palm oil (CPO) as the underlying commodity to facilitate Islamic financing based on the Murabahah concept.

Yusli said the commodity-based Murabahah transactions would be the first for Malaysia that used CPO-based contracts.

"It has never been done and we are creating it here. We are combining Islamic finance and commodity which are our areas of strength in Malaysia," he said.

According to Yusli, CMH has received good support from palm oil producers who have committed substantial value of crude palm oil to be used as the underlying commodity.

"Palm oil producers will have an avenue to make additional money because they will earn some charges when they supply their palm oil to CMH," he said.

On another development, Yusli said Bursa Malaysia was still in talks with the Chicago Mercantile Exchange (CME), the world's biggest futures exchange, on potential collaborations.

"We cannot disclose anything but I can confirm that discussions are still ongoing," he said.

In December 2007, Bursa Malaysia and CME were in discussions at the preliminary stage as the local stock exchange explored potential collaborations with strategic business partners to assist the growth of its different businesses.

First takaful product launched in US

Risk Specialists Companies, a subsidiary of AIG Commercial Insurance, announced that it is introducing a takaful homeowners policy, the first installment in Lexington Takaful Solutions, which will be a number of Islamic product offerings for the US.

The product has been released in conjunction with AIG Takaful Enaya, a Bahrain-based outfit. Its Shari’ah supervisory board includes well-known names such as Sheikh Nizam Yaquby, who also sits on the supervisory board of UK-based takaful operator, Principle Insurance.

The takaful offering for homeowners will be the first Islamic insurance product to be marketed in the US. Abdallah Kubursi, global head of AIG Takaful Enaya, described the undertaking as ‘truly a global effort’ and emphasised the commitment of the participants to offer consumers wider choice ‘based not only on need but also social preference’.

Source;
http://www.newhorizon-islamicbanking.com/index.cfm?section=news&id=10722&action=view&return=home