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      .

Islamic finance taps into mobile phone airtime

The use of mobile phone airtime as an underlying asset in structuring financial products is making a comeback especially in the Islamic finance space. Malaysia’s Axiata Group Berhad, one of Asia’s largest telecoms operators, is setting the pace in using mobile phone airtime as one of the underlying assets to back its sukuk issuances. 

The Group launched a $1.5 billion Sukuk Al-Wakalah Issuance Program a few weeks ago, followed by a RM5 billion Sukuk Al-Murabaha offering last week by its mobile phone subsidiary, Celcom Axiata Berhad, which was issued through its unit Celcom Transmission (M) Sdn Bhd. 

But it was the Saudi telecoms operator Etihad Etisalat (Mobily) which was the pioneer of using mobile phone airtime in their financing requirements.

In March 2008, Mobily raised a $2.875 billion syndicated Islamic financing facility, which was based on mobile phone airtime, whereby Mobily was able to sell minutes of airtime to the financiers involved, and then taking on the role of agent to these banks and selling the minutes for a profit. 

The facility, whose proceeds were used to refinance the Saudi telecoms operator’s short-term debt and to fund its operations and infrastructure expansion, was arranged by a consortium of banks which included Samba Financial Group, National Commercial Bank, Saudi French Bank, Calyon Bank, Saudi Hollandi Bank, ABNAMRO and National Bank of Abu Dhabi. 

Similarly, in August 2009, Malaysia’s RHB Islamic Bank, pioneered the first tawarruq (Islamic cash management) product based on the use of mobile phone airtime, which the bank claims was the first commodity murabaha type product based on mobile phone airtime.

Tawarruq is used as a cash management instrument by some Islamic banks which allows customers to raise funds. Normally in a tawarruq transaction, according to RHB Islamic Bank, the purchaser will buy a commodity from the bank on a deferred payment plan and thereafter, sells it to the market to raise instant funds. In the past, commodities such as precious metals and crude palm oil have been used as the intermediary asset for tawarruq. 

Under the airtime-based RHB Islamic Bank tawarruq offering, the minimum financing was RM3,000 and the maximum financing was RM150,000. The bank bought the mobile phone airtime from a broker at cost price and sold it to the customer at the mark up price depending on the rate of the facility at the point of application and the customer then chose the payment period between 2 years up to the maximum of 10 years. RHB Islamic Bank signed an agreement with Sedania Media Group and E-Pay for the introduction of telecommunication airtime in its tawarruq offerings, with Sedania being the ready buyer and E-Pay the ready seller for the commodity.

With Asia and the Middle East seen as two of the largest growth areas for mobile phone ownership, the prospects for using airtime as an asset class for structuring various types of financing structures are both exciting and potentially big. 

In a statement, Jamaludin Ibrahim, Axiata Group President and CEO, emphasized that “both programs are in line with Axiata Group’s on-going group-wide initiative to optimize its balance sheet and improve its financial flexibility, while supporting the government’s vision of developing Malaysia into a major Islamic financial hub and reaffirming Malaysia’s position as a leader in the global Islamic capital market.”

In July, Axiata Group Berhad, through its wholly owned subsidiary, Axiata SPV2 Berhad, launched a $1.5 billion Sukuk Al-Wakalah Issuance Program, which the issuer stresses is the Asia Pacific Region’s first internationally rated multi-currency sukuk program and whose underlying is based, inter alia, on mobile phone airtime. 

Axiata is one of Asia’s largest telecommunications companies with controlling operations in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia and Thailand and minority operations in India and Singapore, and joins a growing number of companies using mobile-phone airtime to back Islamic transactions. In fact, airtime joins other non-tangible asset classes as underlying for Islamic finance transactions including sukuk issuances, which has been introduced into the market over the last few years. These include intellectual property, tariffs due on electricity meters, and receivables due on petrochemical marketing contracts.

This indicates the growing innovation in structuring sukuk and the increasing flexibility by Shariah advisories especially in recognizing the legitimate use of assets, which would have been non-existent and thus inconceivable during the last 1,430 years following the advent of Islam. It also signifies an important Ijtihad (discourse among the Muslim jurists) albeit in the context of modern finance which perhaps has been absent in other areas or sectors of life in Muslim countries. 

Airtime as an asset is set to flourish in debt financing deals, given that Asia is projected to see a massive increase in mobile phone ownership in the world over the next few years. ROA Holdings Inc. in Tokyo, for instance, estimates that Asia will account for a staggering 65 percent of 7 billion mobile phone owners by 2015. 

In the Islamic finance space, its use in tawarruq deals may proliferate in the short-term but given the uneasiness due to Shariah concerns over the use of certain tawarruq structures, its use could be more increasingly used to form a component of the asset pool to back sukuk transactions. 

The $1.5 billion Axiata Sukuk Issuance Programme, which was lead arranged by CIMB Bank (L) Limited, HSBC Amanah Malaysia Berhad and Merrill Lynch (Singapore) Pte. Ltd., and which was approved by the Shariah advisory board of HSBC Amanah, has an innovative structure which provides for the issuance of sukuk under the principle of wakalah (agency arrangement), which allows the use of assets comprising airtime vouchers (representing an entitlement to a specified number of airtime minutes on the mobile telecommunications network of subsidiaries of Axiata for on-net calls), Shariah compliant shares, lease assets and murabaha receivables arising from the sale of commodities as the underlying assets. The three banks also acted as dealers and bookrunners for the transaction. 

According to Jeremy Stoupas, Partner at Allen & Overy, the international law firm which acted for Axiata, “this transaction represents a significant development in the fast evolving market for Shariah compliant products in Asia Pacific. It is particularly pleasing to see this program come to market as it meets the challenge of trying to accommodate Shariah requirements without compromising on the robustness of the structure from an English law perspective.”

Axiata, which is not in urgent need of funds, will not immediately issue a sukuk tranche under the program, which is more a part of a future funding and development strategy. The multi-currency structure is also intended to attract investors from various parts of the world.

Equally importantly, according to a statement from Axiata, the sukuk program, “is in line with Axiata’s commitment to support the government’s ongoing initiatives and efforts in positioning Malaysia as an international Islamic finance center.”

At the same time, in August, Celcom Axiata Bhd successfully priced its RM5 billion sukuk in nominal value, of which RM3 billion attracted orders of RM10 billion via a bookbuilding process from asset management companies, financial institutions, insurance companies and corporates, and the remaining RM2 billion was privately placed with strategic investors comprising 8-year, 9-year and 10-year tranches respectively. 

 

The sukuk, which was lead managed by CIMB, HSBC Amanah Malaysia and Maybank Investment Bank, which also acted as bookrunners, has been assigned a rating of AAAIS with a stable outlook (the highest credit rating available from the Malaysian rating agencies) by the Malaysian Rating Corp. Bhd (MARC), which stressed in a statement that the rating reflected the credit strength of the Axiata Group.

Proceeds from the sukuk, with tenors ranging from 3 to 10 years, will be used to refinance Celcom Transmission’s existing debt of RM4.2 billion and the company’s capital expenditure and working capital requirements.

http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20120822133713

Sukuk’s global reach

Islamic finance industry has shown an impressive growth of 15-20 per cent per annum with assets under management valued at $1 trillion. The industry is projected to reach $2 trillion in the next three years.

Islamic finance has become a global phenomenon with a number of non-Muslim countries also showing keen interest in this area. United Kingdom intends to make London the hub of Islamic finance with plans to issue sovereign sukuk and amend tax laws on Islamic finance.

Hong Kong is working towards becoming the Islamic finance gateway to China. Governments in a number of other countries including France, Germany, Japan, Singapore and South Korea are also taking measures to promote Islamic finance.

The recent global financial crisis has given more credibility to Islamic banking and finance. A study conducted by some IMF officials in 2009 reveals that Islamic financial institutions have shown more resilience than their conventional counterparts (interest-based financial institutions) during the global financial crisis.

This excellent performance is attributed to the business model used by Islamic banks which ‘prohibits’ them from engaging in complex derivative financial instruments and other speculative activities.

It is interesting to point out the case of countries which have in operation a dual banking system (i.e. both the interest-based and non-interest banking systems). Malaysia, for instance, is one such country and it has fared extremely well during the global financial-crisis, whereby the effects of the crisis on the overall economy were neutralised by the good performance of the Islamic financial institutions.

Sukuk overview: Sukuk contracts signify sale and purchase of a Shari’ah compliant asset based on various Islamic contracts including Murabaha (deferred payment), Ijarah (leasing of specific assets), Mudaraba or Musharaka (different forms of participation in joint venture businesses). Therefore, the issuance of sukuk is not an exchange of paper money for interest but rather an exchange of Shari’ah compliant asset that allows the investors to earn profits from the transaction.

Malaysia pioneered the sukuk market with the issuance of the first such instrument in 1990. Since then the global sukuk market has surged to $169 billion in 2011. Malaysia led the way with 62 per cent share followed by Middle East with a 26 per cent contribution. A number of non-Muslim countries are also venturing in the sukuk market including United Kingdom, Germany, France, Turkey, Russia, Brazil, Jordan, Australia, Philippines, Sri Lanka, Nigeria, Senegal, Egypt, Korea and Sudan.

Excess liquidity from surplus savings in Asia and oil revenue countries across Middle East will be key divers for sukuk growth.

This opportunity can be capitalised by the governments as well as private sector in both Muslim and non-Muslim countries to issue sukuk as an attractive capital market instrument.

Malaysian experience: The maturity and depth of Malaysian sukuk market has ensured a thriving local secondary market, a goal that still most countries are struggling to achieve. A vibrant sukuk market in Malaysia has attracted a number of foreign issuers who are seeking to diversify funding options.

Shari’ah Advisory Council of Malaysia recognises Bai Dayn or debt trading as one of the acceptable principles for Sukuk issuances. This is not acceptable outside Malaysia, especially GCC and Pakistan, as such contracts are backed by debts/receivables rather than tangible assets. Malaysian sukuk issuers started using the participatory contracts of Musharaka and Mudaraba since 2004, following which sukuk market in the country has witnessed tremendous growth. Several measures have been put in place to develop the sukuk market in Malaysia. An important step was the launch of the Malaysia International Islamic Financial Center (MIFC) in 2006, with the aim of promoting Malaysia as the international Islamic financial hub and the centre for Sukuk origination globally. Another significant initiative was the liberalisation of regulations to allow foreign issuers to raise Islamic bonds in the Malaysian capital market. This has led to several issuances of Islamic bonds by multilateral agencies.

GCC approach: Huge government initiatives coupled with growing private sector activity have stimulated the GCC sukuk market, after a brief setback in 2010. The trend in the region indicates increasing role of sukuk in fund raising due to investor preference for Shari’ah compliant instruments.

With a strong regulatory framework, Bahrain has been the most active sukuk market in the GCC region and the first government to issue sukuk. Despite several sukuk issues, the market is not sizable due to small issue size. Furthermore, recent law and order issues in the country have tarnished Bahrain’s reputation as the Islamic finance hub. Nonetheless, the country issued $530 million sovereign sukuk in 2011.

Although Saudi Arabia and UAE have been relatively less active countries in the GCC, the two together claim a significant share of the GCC domestic issuance. They have a mix of sovereign, quasi-sovereign and corporate sukuk while all domestic sukuk from Bahrain has been sovereign. Sukuk market in Saudi Arabia is expected to show impressive growth with government inclination towards it for financing a major portion of infrastructure investment, estimated in excess of $750 billion. The government has already announced that the new King Abdul Aziz Airport project in Jeddah will be financed through sukuk.

Qatar is fast emerging as a key sukuk market in the region, with Qatar Central Bank issuance of $9 billion three-year sukuk in January 2011 to mop up liquidity. The kingdom has aggressive infrastructure development plan including a new downtown in Doha, a new Doha international airport, and facilities for the 2022 World Cup. Sukuk are likely to play an important role in financing these projects.

To enhance the role of sukuk in GCC project finance, tenors will have to be increased beyond five years and innovation will be required to satisfy the dynamic market needs. The sukuk market in the region also lacks standardisation resulting in added cost and complexity since underwriters need to hire their own Shari’ah scholars to obtain a verdict on Shari’ah compliance. On the contrary, Malaysia has standardised contracts.

The Hawkamah Institute for Corporate Governance in Dubai has announced plans to standardise Ijarah-based sukuk used in sale and lease agreements in real estate purchase. Another area that needs to be addressed in the GCC is the illiquidity of the sukuk market, unlike Malaysia. Secondary sukuk market trading platforms in GCC are limited, present only in Bahrain, Dubai and Saudi Arabia. GCC secondary sukuk market is also characterized by transparency issues.

Pakistan’s performance: Pakistan’s Islamic banking assets witnessed a compounded annualised growth (CAGR) of 28 per cent during the past five years; presently accounting for a market share of 7.3 per cent. The sector has attracted foreign investment despite political turmoil. Albaraka Banking Group BSC, Bahrain’s biggest publicly traded Islamic lender, extended its branch network to 90 after acquiring Emirates Global Islamic Bank in 2010. Meezan Bank, controlled by Kuwait’s Noor Financial Investment, plans to open 225 new outlets in the next four years.

In line with industry trends, sukuk market in the country has grown more than ten fold during the period 2006-11. The slowdown in domestic sukuk market in 2008, was a consequence of global financial turmoil. Subsequently, the government’s sukuk issuance has stimulated the market. Domestic sukuk market has emerged as an attractive avenue for placement of excess liquidity by Islamic financial institutions which have allocated almost 90 per cent of total investments towards sovereign sukuk.

Corporate sector accounted for a major share in sukuk issuances till March 2009. Subsequently, the situation has reversed with sovereign sukuk constituting more than 68 per cent of total value of sukuk issued in 2011. In line with global trends, the shift in sukuk contribution may be attributed to a general economic slowdown whereby corporate entities remained wary of raising funds through Sukuk issuances while investors were inclined towards safer sovereign sukuk issuances. Defaults in some local corporate sukuk have adversely affected investor sentiment making this avenue difficult for capital raising.

The sukuk instruments issued to date are concentrated in the short to medium-term tenor ranging between 3-7 years. Ijarah is the most commonly used sukuk structure in Pakistan followed by Diminishing Musharaka and Musharaka. The popularity of Ijarah sukuk is attributed to its simple structure, tradability and flexibility to monetize existing assets for raising funds.

Ijarah structure particularly suits governments as it can securitise infrastructure related assets including motorways, airports and power plants to finance budget deficits. All sukuk issuances by the government have been Ijarah based. The use of sukuk funds raised by the government for financing infrastructure projects is questionable. This suggests the need for Shari’ah scholars to effectively monitor the real purpose of financing to ensure the integrity of an Islamic financial system.

The issuance of sovereign sukuk has provided the long awaited benchmark to Islamic financial institutions, which previously

relied on interest rate benchmark such as KIBOR to determine profit rates. Furthermore, the development of government sukuk market has facilitated liquidity management for Islamic financial institutions in addition to improving their asset quality.

Attractive yields on sukuk have encouraged Islamic banks to reallocate assets from interbank placements (low return investment avenues) to Islamic bonds, resulting in enhanced profitability.

Conclusion: Sukuk market offers strong potential for raising funds required for infrastructure development in Pakistan, as reflected in the experience of other countries such as Malaysia and GCC. To develop a vibrant sukuk market, the country needs to address several challenges including dearth of short-term and long-term instruments, absence of secondary market for mitigating liquidity risk, identification of assets for sovereign sukuk and disclosure of actual financing purpose.

The government should consider establishing an institution on the lines MIFC to provide impetus to the sukuk market in addition to promoting Pakistan’s image in the local and international Islamic finance arena. However, real progress towards the advancement of sukuk market requires concerted efforts from all stake holders including regulators, corporate sector, Islamic financial institutions and asset management companies.

The writer is Assistant Professor, Accounting and Finance at the Institute of Business Management, Korangi Creek

shazia.farooq @iobm.edu.pk

http://dawn.com/2012/07/30/sukuks-global-reach/

Sukuk Market to Set New Record

The sukuk (Islamic bonds) market in the oil-rich Gulf and other countries is expected to exceed $100 billion this year to smash the record $85 billion achieved in 2011, Saudi Arabia’s largest bank said.

Despite an expected rise in the six-nation Gulf Cooperation Council (GCC), Malaysia is projected to remain the world’s dominant sukuk market this year, National Commercial Bank (NCB) said.

In contrast, the bond market in the GCC, which controls over 40 per cent of the world’s proven oil wealth, bounced down in the first quarter of 2012 after recording a sharp rise in the fourth quarter of 2011.

"Sukuk issuance this year appears on track for another all-time record with last year’s $85.4bn set to be comfortably exceeded even under the more cautious projects," NCB said in its 25-page study on GCC equity markets.

"In view of current trends it appears likely that aggregate issuance will clearly exceed $100bn this year. Market innovation looks set to continue."

The report noted that the Clean Energy Business Council of the Middle East and North Africa along with the Gulf Bond and Sukuk Association have launched a Green Sukuk Working Group with a view to better aligning the climate change and capital market development agendas in the region.

In Saudi Arabia, the largest Arab economy, sukuk issuance is expected to continue to grow markedly this year.Among the recurrent issuers, SABIC in December gained CMA approval for a sukuk issuance of up to USD5bn, it said.In the UAE, the second largest Arab economy, Abu Dhabi’s Al Hilal bank is issuing a $500mn sukuk this year, NCB said, noting that the unlisted bank is fully owned by the Abu Dhabi Investment Council.

State-run Qatar Petroleum is understood to be considering a corporate sukuk this year in a pioneering move by a regional national oil company, it said.This could potentially trigger issuance by other government-related entities, eg Industries Qatar, as a way of diversifying funding sources, it added.

"As much GCC sukuk issuance has rebounded impressively in recent months, Malaysia remains the undisputed leader in the sector, typically accounting for more than 70 per cent of the global total," the report said.

"This state of affairs has persisted in spite of the fact that, more generally, the GCC countries have generally established themselves as the second major global hub for Shariah-compliant financial solutions. Moreover, in purely GDP terms, Malaysia lags far behind the Gulf: just under $200mn as opposed to some $one trn for the Gulf countries taken together."

According to NCB, Malaysia’s population reached 28mn in 2011, whereas the GCC’s total is around 40mn. The discrepancy is particularly "striking" in view of the fact that the GCC economies are among the leading global spenders on infrastructure, which should in principle open important new opportunities for Shariah-compliant capital market development.

"Nonetheless, GCC sukuk issuance in 2011 totalled $19bn as opposed to $58.7bn in Malaysia. The corresponding figures in 1Q12 were around $30.7bn for Malaysia and nearly $ 8.6bn for the GCC."

Turning to bonds, the report said that after a bumper quarter closed an exceptionally volatile year in 2011, the first quarter of 2012 marked relative normalization for the GCC conventional bond markets with overall primary market activity roughly halving in value from 4Q11.

Its figures showed total issuance in Q1 reached $5.9bn and involved eight corporate issuers and a total of 14 different issues.This compares to aggregate issuance of $11.9bn in 4Q11 (issues with tenors in excess of a year) and $9.4bn a year earlier in 1Q11, the report showed."These figures were broadly consistent with the continued strength of emerging bond markets globally where overall issuance reached $464bn in the course of 2011 and $10bn in the first quarter of this year."

NCB said it expected growing refinancing requirements would likely to be a key driver of market activity during the year."In particular, regional banks are likely to remain active in the bond markets during the year," it said, adding that Commercial Bank of Qatar is meeting with investors having established a $5bn issuance programme in August.

A number of Omani banks have, similarly, indicated interest in tapping the bond markets while in Saudi Arabia, Kingdom Holding is planning a maiden bond issue. The company currently has bank loans of some SR1.5bn.Among the regional utilities, Dubai’s Dewa has ruled out a near-term bond issue, although the company has a Dh1.2bn syndication due this year, NCB said.

http://www.globalislamicfinancemagazine.com/?com=news_list&nid=2323

You're hired! Islamic finance seeks own Apprentice

 Islamic finance is on the hunt for an apprentice.

Dome Advisory, an international sharia advisory firm is launching a nationwide search for talented students at UK universities who can come up with a business plan or research idea that will aid the development of Islamic finance.

"I want the best brains...We need new blood in the industry and they don't have to be Muslim," Sheikh Bilal Khan, sharia scholar and non-executive director at London-based Dome said.

"I'm doing the Apprentice basically," he added.

The Apprentice is a reality television show, popular in the UK and the United States, in which aspiring young people compete to win a well-paid apprenticeship with successful business magnates - Alan Sugar in the UK version and Donald Trump in the U.S.

With Islamic finance a $1 trillion (632 billion pounds) industry globally - and expected by Deutsche Bank to nearly double by 2016 - students of sharia have more opportunities than before to take their skills beyond the mosque doors and into the boardroom.

But discovering young and fresh talent is seen by some in the industry as one of its biggest stumbling blocks, with no standard career paths and a shortage of financially literate scholars, seen as gatekeepers to the industry.

Knowledge of sharia law is undoubtedly essential in the industry, but other skills such as business acumen, technology and language skills are also seen as relevant.

Product development activity is returning to levels seen before the global financial crisis, ranging from complex structured products to new sectors such as the environment.

"The criteria for me is simple: it has to be cutting edge stuff, it has to be environmentally sustainable and socially responsible," said Khan.

Applicants don't need to have any specialist background in Islamic finance nor any religious alignments and their idea can span any sector from healthcare to the environment as long as it promotes sharia-compliant activities.

Islamic finance complies with religious principles, which includes a ban on interest and activities such as speculation and gambling.

The winner will be given a salaried position at Dome to develop their idea as well as gain experience of Islamic finance.

"Talent doesn't have a religion, talent doesn't have a race or a background, talent could be anywhere," said Khan.

(Reporting By Anjuli Davies; Additional reporting by Bernardo Vizcaino; Editing by Erica Billingham)

http://uk.reuters.com/article/2012/05/17/uk-islamic-finance-apprentices-idUKBRE84G0VY20120517

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

Ireland may be first EU state to sell Islamic bond

IRELAND plans to become the first European nation to sell sovereign sukuk — Islam-approved financial certificates — as its equal tax treatment for Islamic-finance products attracts investors.

The Government has agreements with more than 60 countries to avoid double taxation on Islamic transactions, Micheál Smith, the south-east Asia director of IDA Ireland, said. 

Islamic finance assets around the world may rise about 16% to €1,240 billion this year, Raj Mohamad, managing director at Five Pillars, a consulting firm based in Singapore, told Bloomberg Television yesterday. 

While plans to sell sukuk by Britain, France and Luxembourg have stalled, Mr Smith said Ireland will push ahead with a sale. 

"Ireland will be going back to the bond market and a sukuk is an option when conditions are right. We also hope to form more working groups with Muslim countries such as Malaysia to build up a critical mass of expertise as the objective is for Dublin to become a centre of excellence for Islamic finance." 

Ireland introduced tax legislation for products that comply with Islam’s ban on interest in 2010, Mr Smith, who is based in Singapore, said. 

The Central Bank has a Shariah team overseeing its Islamic funds, which total about €390m under management. 

The Irish Stock Exchange listed its first sukuk in 2005 and Ireland is a popular choice for sales because the nation offers a "relatively inexpensive" and timely listing process, he said. 

The Government last sold bonds in September 2010, the year it had a deficit that was the highest as a percentage of gross domestic product in the developed world. The Department of Finance estimates the ratio dropped to 10.1% of GDP in 2011 from 31% the previous year. 

CIMB Group Holdings, the world’s biggest sukuk arranger, said this week that it got approval to set up the first Shariah-compliant equity funds from Malaysia in Ireland. 

Ireland’s bid to become an Islamic finance hub received a boost in October when Goldman Sachs Group got approval from the nation’s central bank to list its $2bn (€1.55bn) sukuk programme. The planned sale has attracted criticism among Islamic scholars, with some saying the proceeds may not be used according to Shariah law. 

CIMB-Principal Islamic Asset Management, based in Kuala Lumpur, chose Ireland for its Islamic equity funds because there’s no double taxation and no withholding tax on interest payments, Jim McCaughan, chief executive of US-based venture partner Principal Global Investors, said on Monday. 

An initial investment of $20m (€15.5m) will be put into three funds that will open for subscription next month, he said. 

"We expect interest from Europe, Malaysia and more importantly the Persian Gulf and other Muslim countries," Mr McCaughan said. "People are getting wealthier and want to diversify their funds." 

Global sales of sukuk, which pay asset returns instead of interest, total €4.7bn this year, compared with €500m in the same period in 2011, according to data compiled by Bloomberg. Offerings reached a record $36.3bn last year, surpassing the $31bn raised in 2007. 

The difference between the average yield for sukuk and the London interbank offered rate, or Libor, narrowed two basis points to 299 basis points yesterday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. 

The average yield has climbed nine basis points, or 0.09% point, this year to 4.08%. 

Shariah-compliant bonds have dropped 0.1% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets declined 0.2%, JPMorgan Chase & Co’s EMBI Global Composite Index shows. 

The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign currency Islamic debt sold by companies in Malaysia rose 0.5% this year to 104.919 yesterday. The gauge increased 5.9% in 2011. 

Britain cancelled what would have been the first sukuk sale by a Western government last February, saying the debt didn’t offer value for money. Luxembourg ruled out a plan to sell Islamic bonds in 2011 because the government saw no need to raise additional funding. France has legislation in place to facilitate a sale and has yet to proceed with an issue. 

Ireland has a Muslim population of 30,000, according to a Department of Finance document covering the nation’s Islamic industry issued in March 2010. Roman Catholics make up 87% of Ireland’s population. 

The Islamic Cultural Centre for Ireland and the Immigrant Council of Ireland have all called for more Shariah-compliant initiatives, the report said. 

"There’s been no objection to Islamic products being sold in Ireland," said Mr Smith, who is also a director in charge of the 10-member Association of Southeast Asian Nations at the IDA. 

The European debt crisis provides an opportunity for Islamic finance to grow given it is rooted in ethics and religion, according to Nik Norzrul Thani, the chairman of Malaysian law firm Zaid Ibrahim & Co. 

"What Ireland is doing is a step in the right direction," Nik Norzrul said in an interview in Kuala Lumpur. 

"Ireland’s ambition to be a Shariah-compliant hub is a recognition that Islamic finance isn’t only for Muslims."

Read more: http://www.irishexaminer.com/business/ireland-may-be-first-eu-state-to-sell-islamic-bond-180837.html#ixzz1kG0kGOWi

Malaysia to continue global sukuk market domination

Malaysia is expected to continue its strong 60% contribution to global sukuk issuance next year, bolstered by projects under the Economic Transformation Programme (ETP).

HSBC Amanah said that this year had seen significant growth in sukuk, principally driven by issuance out of the country.

“This is by far the best year since 2002. Over 60% of total global sukuk issuance come from Malaysia,” HSBC Amanah chief executive Rafe Haneef said.He believes that the ETP and other projects would continue to drive the sukuk market.

“Most of (the projects) are funded by sukuk which is in the local currency and by the sheer size, I believe there will be around 60% coming from Malaysia for next year as well,” he said after launching the nation's 13th HSBC Amanah branch here.

HSBC Bank Malaysia Bhd chief executive and HSBC Amanah global chief executive Mukhtar Hussain said that the level of interest in the sukuk market remained high and the prospects of the industry overall was positive. He added that HSBC was currently the largest international sponsor of global sukuk and it was expected to hold that market position next year.

“The share of sukuk financing within the overall share of capital markets financing will continue to increase and you'll also see diversification not only in the issuance among sovereign community but also by corporations and banks,” he said.

Rafe also said that HSBC Amanah was looking to diversify its products.

“We need to look at diversifying our products to more investment products like real estate investment trusts and retail bonds next year.

“I think Malaysia is focused on opening up the retail bond market so that you can monetise the sukuk into smaller sizes and distribute throughout our retail branches,” he said.

He said that sukuk issuance had been mostly at the institutional level so far and that “the idea is to democratise sukuk so that it can be reached by the retail investors.”

On the contribution of the Islamic finance division to the HSBC group, Mukhtar said it “forms a larger component of our business” and was proportionate to the number of HSBC Amanah branches currently.

There are 13 HSBC Amanah branches of the bank's 55 branches nationwide. The bank aims to open another 13 Amanah branches by next year, two of which will be opened this month.

On outlook of the banking sector, Mukhtar said: “(It) will continue to grow but it is obviously moderated by global circumstances.

HSBC remained optimistic about the future over the medium term but expected some challenges in 2012, he said, adding that the bank continued to project a gross domestic product growth of 4.5% to 5% for Malaysia next year.

“For HSBC Amanah, we have grown around 12% to 13% this year and aim to grow within the 10% range next year. But it all depends on how the crises in Europe and elsewhere play out,” Mukhtar said.

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