Malaysia is keen to enhance Islamic finance sector: Zeti

Malaysia has shortlisted two foreign banks to be licensed as mega-Islamic banks with a minimum capital of $1 billion each. At the same time the country currently has 14 wholly-owned foreign banks (both conventional and Islamic) and may give another five banking licenses by 2012. Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank, confirmed that the applications for the two mega-Islamic banks are still being processed and an announcement to this effect would be made by the end the first half of 2010.

The government of Prime Minister Najib Razak introduced new financial sector liberalization measures in April this year under which Bank Negara Malaysia would issue up to two new Islamic banking licenses in 2009 under the Islamic Banking Act 1983 to world class foreign players to establish new Islamic banks which would be 100 percent foreign owned and with a minimum paid-up capital of at least $1 billion; and up to two new family Takaful (Islamic insurance) licenses to players that could spur the development of the Malaysian Takaful industry. However, foreign investment in domestic banks remains restricted at a ceiling of 30 percent.

“We have liberalized other sectors such as insurance, Takaful and investment banking even more aggressively. One of the reasons why we have retained the 30 percent ceiling for foreign stakes in domestic banks is that we wish to have a strong core domestic banking sector. We want balanced growth in the financial services sector. Under our financial inclusion policy, we would like every part of the country to have access to banking products and services, because we see this as a catalyst for economic development. Fortunately, in Malaysia income disparity is not so great. In fact, the World Bank in a recent survey has ranked Malaysia No. 1 for financial inclusion,” explained Zeti.

Bankers in Kuala Lumpur stress that foreign banks have done very well in Malaysia over the last decade, repatriating massive profits as evidenced in the country’s balance of payments. Indeed Bank Negara Malaysia is now allowing foreign banks, including Islamic banks, to open eight additional new branches on top of the number originally agreed. These are conditional on the banks opening four in urban areas and four in non-urban areas. In addition, the central bank is also allowing these banks to open a further 10 microfinance branches.

The governor stressed that Malaysia is keen to enhance the international dimension of Islamic finance through linkages not only with the international financial centers, but also with those in the emerging countries of the Middle East, Africa, Central Asia and even Latin America. “It is in the latter areas we believe that economic recovery will be the fastest. Bilateral trade is still important, but we also need strategic alliances and Islamic finance can play an important role in this respect. Financial institutions all over the world can participate in this process,” she added.

The inherent features of Islamic finance also contribute to financial stability, and Malaysia is involved with the strengthening of the Islamic finance architecture to ensure the stability and resilience of the industry. Zeti ruled out capital controls and other such measures to contain the impact of the current financial crisis stressing that the Malaysian financial system is far more developed and less volatile than during the Asian financial crisis in 1998 and can adjust to the current crisis much better.

Gov. Zeti revealed that uptake of the guarantees introduced by the government of Prime Minister Razak in April 2009 has been limited in the Malaysian sukuk market. The RM15 billion of guarantees was part of the RM60 billion economic and financial stimulus package announced in April by the Malaysian government to the financial sector, which bankers stress has playing a key role in boosting confidence in the sukuk market and leading its recovery. Under the RM60 billion stimulus package, Kuala Lumpur hoped to stimulate the Islamic and conventional capital markets, especially the sukuk market, through the establishment of a financial guarantee institution to provide credit enhancement to companies that raise funds from the bond market including the sukuk market. Malaysia is the largest Islamic capital market in the world. Islamic bonds accounted for some 58 percent of total issuances in the market in 2008. “The guarantees were a pre-emptive measure. The fact that it has not been accessed much by the sukuk market is a sign of success of the market. The less it is used means that originators are going directly to the market without recourse to the guarantees. Where the guarantees have been utilized much more is in the SME (small-and-medium-enterprise) sector,” explained Zeti.

She defended the Malaysian government plans to introduce a tax on credit card transactions — whether conventional or Islamic credit cards. “The aim of the tax is to make households more efficient in their debt management. Of course it will generate revenues, but it is also aimed at facilitating customer migration from credit cards to debit cards. We want people to spend within their means.”

Malaysia is also encouraging a drive toward electronic payment, and Bank Negara Malaysia estimates that a move toward debit cards could mean a growth of 1 percent in electronic payments. According to Zeti, the government is driving electronic payments. All government payments are done electronically including tax and Zakah payments; road tax and even car insurance.

However, on the question of a banking transaction tax, the so-called Tobin Tax, aimed at curbing the excesses of investment bankers, especially of highly speculative and risky activities, Zeti is sanguine, stressing that it is worth looking at.

But she is not sure whether such a tax would materialize because it requires global cooperation and is only one measure out of several others that needed to be adopted. “I have seen many crises in my career. After each crisis, the major economies — both developed and emerging — come together and set up working groups to look at this and that measure. But not much gets implemented.

The latest is the Financial Services Working Group on capital flows. We need strong leadership to drive this transformation of the global financial services industry to pre-empt the crisis we have been experiencing,” she added.

Link: http://www.arabnews.com/?page=6&section=0&article=129199&d=7&m=12&y=2009

Simmons and Simmons wins 'Islamic Finance Law Firm of the Year'

Simmons and Simmons has been awarded "Islamic Finance Law Firm of the Year" at the Middle East Legal Awards 2009. Simmons and Simmons won the award by demonstrating that it has made a profoundly significant impact on the field of Shariah compliant business in the Middle East region over the previous 12 months. The commercial and social impact of relationships and deals brokered over the last 12 months was considered highly in the judging of the award by an independent panel of experts.

Muneer Khan, partner and Head of Islamic Finance at Simmons and Simmons, said:

"We are very happy to have received this award as it recognises the successful implementation of a different vision for the practice of Islamic finance by an international law firm."

Simmons & Simmons has demonstrated a unique strength in the breadth and depth of its practice of Islamic finance. Over the last 12 months, the firm has acted on a number of technically challenging and groundbreaking transactions and has advised on the development of a broad range of structured Islamic products and funds across the region.

Based on its many years of combined practical experience, the Islamic finance team has successfully integrated the practice of law, the ability to foresee and resolve complicated Shariah issues at the earliest opportunity and the application of best practice, leading to the creation of more robust products and structures, greater efficiencies, reduced costs and accelerated timelines for clients.
Link: http://www.ameinfo.com/217785.html

Dubai World's debt manageable: experts

British banks' exposure to the UAE has reached $49.9 billion (Dh183.13 billion), according to the Bank for International Settlements (BIS) data, including $29.3 billion owed to HSBC and Standard Chartered Bank.

HSBC's exposure, according to BIS data, stood at $17 billion while Standard Chartered Bank's claim is expected to be around $12.3 billion to Dubai World — a minuscule amount compared to their global businesses.

Dubai World is currently in discussions with the banks to restructure about $26 billion of its debts.

HSBC's Middle East business represents only two per cent of its global operations.

Michael Geoghegan, HSBC Group CEO, said in a recent statement, "Although our business on the ground in the Middle East represents only 2 per cent of the group's balance sheet, it's an important and high-potential part of HSBC's international business mix and a region we are completely committed to.

"I am confident that the leadership of Dubai and the UAE will overcome any short-term issues they face, which appear to have been somewhat sensationalised, and continue to lay the foundations for sustainable growth."

Interest in the exposure of British banks to UAE debt has been sparked by a request by Dubai World for a ‘standstill' on the repayment of $3.52 billion sukuk by nearly six months to May 30, 2010, while the company is restructured to ensure its future commercial success.

Dubai World, which is seeking to restructure $26 billion in debt, is preparing to meet its creditors this week once they have nominated a negotiator.

Better position

Analysts point out that at such levels, the global banks' exposures are easily manageable.

"The standstill period for negotiating the debt and restructuring of Dubai World and Nakheel could potentially leave the Dubai government in a better position to support its other government-related companies," John Tofarides, banking analyst at Moody's in Dubai, said earlier.

A strategy note by HC Securities and Investment said the global banks' exposures are "a drop in the ocean compared to the toxic assets wiped out during the global crisis".

"When liquidity was tight, the risk of default was high. However, with lots of liquidity in the market and a greater acceptance of the market to take risk, especially when loans can be secured against tangible assets, we find it very unlikely that the bond holders will vote to force a company into liquidation."

Debt holders will pocket fees for breach of covenants and agree to refinance on better terms for borrowers rather than engage in a lawsuit and receive assets that are worth less, it said.

Link: http://gulfnews.com/business/banking/dubai-world-s-debt-manageable-experts-1.547198

Qatar Islamic has $15m exposure to Dubai World

Qatar Islamic Bank said on Thursday it had exposure to a Dubai World Islamic bond maturing in 2017 worth QR54m ($14.84m).

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DUBAI DEBTS: Dubai's state-owned conglomerate is restructuring debts worth $26bn. (Getty Images - for illustrative purposes only)

The lender is the first Qatari bank to announce its exposure to the Dubai state-owned conglomerate, which is restructuring debts worth $26bn.

"The financial impact currently will affect the negative investment fair value reserve," it said. "QIB will keep observing the situation and its financial consequences which will be disclosed accordingly." ($1=3.638 Qatari Riyals)

Link: http://www.arabianbusiness.com/575170-qatar-islamic-has-15m-exposure-to-dubai-world

Oman banks have US$77m exposure to Dubai World

Oman's top banks said yesterday that they had a total exposure of US$77 million (US$1 = RM3.38) to troubled conglomerate Dubai World, sending their shares down nearly 6 per cent.

Government-owned Dubai World requested a payment standstill on November 25 for US$3.52 billion worth of Islamic bonds maturing this month as it looks to restructure US$26 billion worth of debt.

Bank Muscat, Oman's largest lender by market value, said it had US$50 million in exposure to a syndicated loan from the group, the biggest of three exposures, which was still fairly limited compared to other regional and international banks

Bank Muscat shares closed 6.2 per cent down at 0.77 rials a share, having traded as low as 0.75 riyals yesterday.
Bank Sohar declined 3.5 per cent after it said its exposure was US$4.3 million.

Both Bank Muscat and Bank Sohar said their loans were still being serviced.

National Bank of Oman, the country's third largest bank fell 5 per cent after it said it had US$22.6 million of exposure, while the fifth largest bank. Bank Dhofar, Oman's second largest bank, jumped 10 per cent on thin volume, after it said it had no exposure.

Oman International Bank and Ahli Bank also said they had no exposure.

Oman's central bank governor said yesterday there was no need to require local banks to book provisions for exposure to Dubai World debt as their exposure was not related to loans under restructuring.

The US$77 million exposure announced by the country's top three banks early yesterday represented "about the total" exposure of the sultanate's banking system, Hamood Sangour al-Zadjali told Al Arabiya television.

"There will be no surprises..." he said.

The debt was not part of the US$26 billion debt the group was restructuring, he added.

Link: http://www.btimes.com.my/Current_News/BTIMES/articles/omaex/Article/

Dubai debt crisis has limited impact on fund flows - EPFR

Risk aversion in the wake of Dubai's massive debt woes caused investors to slow their move into emerging market equity and riskier bond fund groups in the week ended Dec. 1, EPFR Global said on Thursday.

The Boston-based fund tracker said that investors did not completely run for safety after government-owned Dubai World requested a payment standstill on a maturing Islamic bond as it works out how to restructure $26 billion worth of debt.

Money market funds, the traditional safe-haven for cash, had a net outflow of $838 million, bringing its current outflow streak to eight weeks.

However, Middle East regional equity funds had net outflows for the sixth time in the past seven weeks with outflows hitting a 35-week high. Investors also pulled cash from Middle East and Africa regional equity funds, EPFR's statement said.

After the initial shock of the Dubai debt moratorium request, EPFR said investors looked to put cash into commodity and currency issues.

COMMODITY GAINS

Gold hit record highs during the reporting period and continues to do so while other precious and industrial metals gain ground as well.

EPFR-tracked commodity sector funds had net inflows of over $1 billion for the third straight week, with year-to-date inflows of $24 billion.

That helped EMEA (Europe, Middle East, and Africa), Latin America and the diversified global emerging markets equity fund groups to post inflows of $33 million, $34 million, and $687 million respectively.

"Daily flow numbers show some emerging markets funds groups regaining momentum towards the end of the week," said Cameron Brandt, senior global analyst at EPFR.

"Investors remain anxious to deploy money before the books close on 2009," he said.

Asia ex-Japan equity funds, however, had net outflows of $306 million.

"For this region, appreciating currencies raise questions about export competitiveness and increase the chances that governments will turn to capital controls," EPFR's statement said.

Dedicated BRIC (Brazil, Russia, India, China) funds had inflows for the 12th consecutive week.

Telecom sector funds had their best week since the second quarter of 2007. Healthcare/biotechnology stock funds recorded their first three-week inflow streak since September 2008.

DEVELOPED MARKET EQUITY

In the developed markets, U.S. equity funds were said to have a neutral week with safe-haven flows into large-cap exchange traded funds canceled out by redemptions from small and mid-cap funds.

European equity funds took in, on a net basis, over $2 billion for the third time this year.

But EPFR's Brandt offered the following caveat: "In both of the previous occasions the flows were reversed the following week, so we are viewing these flows as a tactical move by a few ETFs rather than a significant shift in sentiment."

Japanese equity funds suffered an 11th straight week of outflows, this time $271 million.

FIXED INCOME

Even though risk taking has helped push stock indexes up sharply this year, bond fund inflows have also proven robust.

U.S. bond funds had net inflows over $1 billion for the 21st week in a row and global bond funds have year-to-date inflows just shy of $30 billion, EPFR said.

Emerging market bond funds had inflows of $229 million, only a third of their previously weekly average for the fourth quarter of 2009. EPFR said local currency funds in the category "accounted for over two-thirds of all inflows into this fund group as the search for dollar hedges continued."

(Reporting by Daniel Bases; Editing by Phil Berlowitz)

Link: http://in.reuters.com/article/businessNews/idINIndia-44454220091204?pageNumber=3&virtualBrandChannel=0

Dubai World creditors await court definition of sukuk

Dubai World’s request to restructure its debt is likely to reshape the understanding among investors and issuers of who holds the upper hand when it comes to bond-like sukuk.

Like with so many other things, when Dubai's credit-crazed corporations decided to tap the global sukuk market to raise funds few investors thought twice about the Shar'iah-compliant bonds. It's taken the threat of default to shake investors out of their complacency with regard to these structures.

Dubai World property developer Nakheel, best known for its Palms development in the Gulf, has $5.25 billion in outstanding sukuk subject to the standstill agreement that the government asked creditors for on November 25, including $3.5 billion due on December 14. While the rest of the $26 billion debt restructuring looks to be contained, such a restructuring is unprecedented in the nascent Islamic finance industry.

"This will mark the first test of the legal framework underpinning sukuk in general, and it could therefore have implications for Islamic fundraising globally," said Fahd Iqbal, an analyst at Middle Eastern investment bank EFG Hermes, in a report.

According to Kuwait Finance House Research, the yield on the Nakheel Development Sukuk 2, which matures in 2011, spiked to 80% on November 30 from 22.3% on November 24, the day before markets closed for the Eid holiday. The instrument's price simultaneously fell 40% to Dh53 ($14.43).

At issue with Nakheel's sukuk is how a court will handle the restructuring, note observers familiar with Islamic finance. Much depends on the structure of the instrument. A court could declare the instrument the equivalent of a conventional bond with repayment terms comparable to international norms, or it could find the sukuk to be structured as either a mudharabah (profit-sharing) product or a musyarakah (a partnership involving profit- and loss-sharing) product, both of which would likely involve the creditors sharing some of the issuer's losses.

Creditors stand to benefit if a sukuk is declared essentially the same as a conventional bond, whereas the issuer stands to benefit if it is defined first and foremost as an instrument that is compliant with Shar'iah (Islamic law) -- and thus subject to the idea of profit-sharing.

"The whole presentation of the structure is one where investors are meant to receive a share of the profits and not interest on debts - two very different obligations," said Mohamed Damak, a senior analyst at Moody's. "It could be argued that, because an issuer is not generating profits, it should not have to pay sukuk investors."

Not everyone agrees: "This is a credit issue, not an Islamic issue," said Raja Teh Maimunah, global head of Islamic markets at Bursa Malaysia. "A sukuk is a bond and issuers need to pay back the money they borrowed."

She noted that this is not the first time an Islamic finance instrument has had to be restructured to avoid default. She would not discuss the details but said there were a few sukuk in Malaysia that had to be restructured during the 1997-1998 Asian financial crisis.

The full impact of Nakheel's debt restructuring on global sukuk issuance is unlikely to be known for some time, but at this point it looks minimal. During the first 10 months of the year, issuance was up 40% annually according to Moody's, and banks report robust pipelines. But investors may come out of this event wiser (if not wealthier) than before.

"Dubai World has created confusion over what a sukuk is," says one banker. "This will likely somewhat delay the revival of the market [after the decline in 2008] but it won't kill it. Demand won't change but people will be more cautious."

Maimunah agrees that investors will learn from Dubai World. "Cashflow was completely ignored in sukuk coming out of the Gulf. Markets will learn from this and they'll [know to] look at credit," she said.

Link: http://www.financeasia.com/article.aspx?CIaNID=118130

Introducing Sukuk: Islamic Loophole for Dubai Debt Debacle

Islamic followers can be capitalists too. Although oil prices (currently around $77 per barrel) have fallen from the peak near $150 per barrel in 2008, oil rich nations have gotten creative in how they raise debt-like financing. Critical to fueling the speculative expansion in some oil rich areas has been the growth in sukuk bonds, which have been created as a function of loophole exploitation in Islamic finance principles.

U.S. Does Not Have Monopoly on Debt Driven Greed

The pricked debt bubble that spanned the range of Icelandic banks to Donald Trump (read more) has now spread to Dubai commercial real estate, evidenced by the plastering of recent global headlines. At the center of the storm is Dubai World, a quasi-government owned conglomerate of Dubai, which is in the process of negotiating a $26 billion debt restructuring with the government and sukuk bondholders.

This overleveraged Dubai market ($80 billion in total debt) helped finance the tallest building in the world, largest man-made islands, and a ski-resort based in the desert, in the face of collapsing real estate prices. Critical to Dubai World’s debt restructuring is a $3.5 billion sukuk bond issued by its commercial real estate subsidiary Nakheel Development (“Nakheel”). So what exactly is a sukuk (plural of sakk)?

Investopedia lists the following definition for sukuk:

“An Islamic financial certificate, similar to a bond in Western finance, that complies with Sharia, Islamic religious law. Because the traditional Western interest paying bond structure is not permissible, the issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.”

Sukuk “No-No”s

The generation of money on top of money, interest payments or what’s called “Riba”, is strictly forbidden by Shari’ah law. As a result, issuers must issue and repurchase sukuk at par (original value), not at a discount or a premium. Shari’ah law encompasses more than Islamic law, it also covers the amorphous spiritual and moral obligations demanded from the religious practitioners. In order to ensure compliance with Islamic principles, many financial institutions and funds typically have a Shari’ah Board monitoring the details of the sukuk. Shari’ah law is very consistent with the teachings in the Quran (the Western version of the Bible). Mixing finance and religion may seem strange on the surface, but I guess if we use world history as a proxy, we shouldn’t be surprised that money and Muhammad somehow find a way to coexist.

Sukuk Structure & Market

The core Islamic finance principles underpinning the sukuk market have been around for more than 1,500 years, but the actual sukuk market was actually introduced in Malaysia around 1990. Since then, the market has been on an uptrend. What makes this $1 trillion Islamic debt market (HSBC estimate) even fuzzier is the scores of sukuk structures (See Ijara Sukuk chart below – very similar to a sale-leaseback arrangement), and the diverse geographic issuer / investor base.

For example, greater than 60% of Nakheel’s investors are based outside the Middle East (a large portion in Malaysia). Making matters as clear as mud, each geographic region and structure has its own interpretation of legal rights and Shari’ah law. Layer on issues such as derivatives, bankruptcy rights, and penalty fees and you end up with only more complexity. What’s more, many of these sukuk bonds involve Special Purpose Vehicles [SPVs], made famous by the off-balance sheet variety used by Enron Corp., in order to get around the Islamic issuance loopholes.

Source: Moody's Investor Service

Sukuk Liquidity

The illiquidity of sukuk market hasn’t made resolving the Dubai debt restructuring any easier. The sukuk market doesn’t come close to matching the liquidity of traditional corporate and sovereign debt markets. Little trading is done in secondary markets because most investors in sukuk bonds follow a buy and hold strategy. The lion’s share of trading in this immature market gets completed through inter-institution, over-the-counter transactions.

A recent $500 million sukuk deal issued by General Electric (GE) last month has only raised awareness for the financing structure (pre-Nakheel restructuring). As oil rich states strive to diversify their economic bases, I would expect more deals to get done, in spite of the recent Dubai mess. How severe the recent Dubai sukuk black eye will be depends on how Nakheel, the United Arab Emirates [UAE], Abu Dhabi, bondholders, and other constituents restructure the pending sukuk obligations by the December 14^th deadline.

The recent debt restructuring talks in Dubai highlight the complexity of this relatively new Islamic financing structure. With very few sukuk bankruptcy cases in existence, the structures remain largely untested and uncertain. How the Dubai debt debacle ultimately gets resolved will have a significant impact on this nascent, but rapidly growing market. Until the sukuk restructuring is settled, Dubai may just need to put the construction of that next man-made island on hold.

Link: http://seekingalpha.com/article/176572-introducing-sukuk-islamic-loophole-for-dubai-debt-debacle

IFIs less affected by recession: MTI

Islamic Financial Institutions (IFIs) have been less affected by the global recession, according to a survey carried out by MTI Consulting. Around 62 percent of the survey respondents cited they had experienced little or no impact from the recent crisis which has ravaged banks and financial institutions worldwide.

The survey was conducted as MTI prepares to present at the 16th Annual World Islamic Banking Conference 2009-10 for the fourth consecutive year opens at Gulf Hotel in Manama this week.

Islamic finance makes up only small part of the world finance industry currently, and is estimated to be worth around $700 billion globally. However the industry has been growing at 20-30 percent annually since 2000 and is set for continued strong growth despite the global slowdown. Industry experts and financial institutions predict Islamic assets will reach a whopping $1.6 trillion by 2012.

The survey was conducted to augment MTI’s study for the World Islamic Banking Conference. The survey respondents included CEO’s and managing directors of Islamic finance institutions from various countries in the Middle East and South Asia.

Speaking on the survey results MTI Consulting CEO Hilmy Cader said unlike conventional banks, Islamic banks are not permitted to have any direct exposure to financial derivatives or conventional financial institutions’ securities — which were hit most during the global crisis. Hilmy Cader’s views were reflected in the survey as 72 percent of the respondents said less exposure to derivative products was one of factors driving the demand for Islamic finance during the crisis.

According to findings of the survey IFIs still lag far behind in marketing, which is the theme of this year’s conference. Companies in this category still struggle to compete with their conventional counterparts in product development. Around 55 percent of the respondents stated Islamic finance product development has not gone beyond Islamization of conventional products. What is more alarming is the fact 57 percent of the respondents agreed Islamic finance product development is not backed by any consumer research. Like most companies around the globe today, Islamic financial institutions have also had their marketing and advertising budgets trimmed. Forty eight percent of the respondents stated the advertising budgets of their companies have been decreased over the last twelve months. Looking forward 87 percent of the respondents feel their companies will maintain or increase their advertising budget in the next two hours.

On other areas, 96 percent stated risk and governance gained prominence in the last 12 months. As for overall strategic initiatives 12 percent have pursued mergers and acquisition, 40 percent have ventured into new markets, 64 percent went into cost cutting initiatives, while 34 percent have done product rationalizations.

Link: http://www.arabnews.com/?page=6&section=0&article=129198&d=7&m=12&y=2009

Islamic banking growth strategy to be reviewed

More than 1,200 delegates from 50 countries will take part in the World Islamic Banking Conference (WIBC), which opens today at the Gulf Hotel.

Themed New Strategies for New Economic Realities, the event has attracted leading figures from the Islamic finance industry to debate the way forward following the credit crisis and the global economic downturn.

"As cautious optimism returns to the global economy and financial markets begin to move towards stabilisation and economic recovery WIBC 2009 will help to shape the future trajectory of the Islamic finance industry at this crucial time," said Mega Brand organiser and managing director David Mclean.

"WIBC will provide the platform as industry leaders grapple with the need to manage risk, seek new growth markets and deliver on market expectations as well as remain competitive."

He said a major highlight of the conference would be the launch of the 2009/2101 WIBC Competitiveness Report by McKinsey & Company.

Yesterday, the event got off to a start with a series of pre-conference workshops attended by more than 300 delegates covering areas from Islamic capital markets to the marketing challenges facing the industry.

Launched in 1994, the WIBC has become an iconic brand internationally recognised as the largest and most significant gathering of Islamic banking and finance leaders anywhere in the world.

Link: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=266066

Be more innovative in Islamic finance, says Bahrain banker

ISLAMIC finance can grow at a faster rate if industry players from this region and the Gulf get their act together and become more innovative, said a Bahrain banker.

Ithmaar Bank chairman Khalid Abdulla-Janahi said more "kitchen work" should come from countries like Malaysia in developing Islamic finance rather than the West.

"It is happening now albeit artificially. There needs to be more innovation for more financial instruments within Islamic financing," he told Business Times in an interview.

There are now several financial instruments in the system, but they have been developed from the Western ones, he said.

"The (Islamic finance) industry players are not doing enough...we got to look at ourselves and become the drivers of innovation."

Islamic banking has become a buzz word in recent times and countries such as France, Switzerland and the UK are endeavouring to be the hub of the industry.

"A lot of 'kitchen work' for Islamic banking including sukuk, has been undertaken in London.

"(This is because) the Islamic business community (in Asia and the Gulf) is not talking enough with each other to make things take off and become self-reliant," Khalid said, adding that it is the governments which are talking more now.

"Before, everyone wanted to claim to be the centre of Islamic finance, but this was more of the (respective) governments' wish.
Link: http://www.btimes.com.my/articles/rup05d1/Article/

"Industry people (in the private sector) need to bring their heads together as what is being done now among GCC countries like Bahrain, the United Arab Emirates and Saudi Arabia," he added.

Khalid believes that more can be achieved for the players if they complemented each other in banking, insurance as well as business at large.

On its part, Ithmaar Bank, which is listed on the Kuwait and Bahrain bourses, is undertaking some "kitchenwork" with MAA Holdings Bhd and MAA Takaful Bhd in Malaysia.

One of Ithmaar Bank's flagship units is Bahrain-based Solidarity Co BSC, an Islamic insurance company that has a 25 per cent stake in MAA Takaful. - By Rupa Damodaran

Link: http://www.btimes.com.my/articles/rup05d1/Article/

Delhi mulls Islamic banking

The government is considering changing banking law to introduce an interest-free Islamic banking system in the country, sources said.

The Shariat prohibits the collection and payment of interest, so many Muslims now avoid opening bank accounts or refuse to claim the interest, which goes to a suspended account.

Under the Islamic banking system, banks don’t pay interests on deposits; nor do they charge interest on loans. The money deposited is used to finance projects on ownership basis. The depositors share in the profit or loss of the projects financed through their deposits instead of getting interest.

For instance, in case of a housing loan, the bank buys the property and rents it out to the borrower for a specified period of time. The rent is calculated on the basis of the cost of the property plus a profit margin. After the lease term is over, the tenant gets ownership of the property.

Under the existing banking system, only current accounts comply with Islamic banking since these accounts don’t give any interest.

An Islamic bank, however, cannot invest the money just anywhere: the Shariat prohibits investment in businesses considered haraam, such as those related to alcohol, pork or pornography.

An Islamic banking system will benefit India’s 15 crore Muslims, and also the economy by helping unlock the huge sums that remain uninvested by the community.

Islamic banking is currently not allowed under India’s banking act, but it is allowed through the non-banking financial institution route.

The Centre plans to amend the act, adding to it a chapter exclusively dealing with all aspects of Islamic banking, sources said. It’s not clear if the amendment bill would be tabled in the current session of Parliament. The sources said the government would form a Shariat Supervisory Board to monitor the functioning of the Islamic banking system.

Finance minister Pranab Mukherjee has had discussions with the Reserve Bank of India on the subject and obtained its approval, they said.

Although an RBI study group had earlier rejected the concept of Islamic banking, the Raghuram Rajan Committee on banking reforms later gave a positive report on “interest-free banking”. The minority ministry too is understood to be in favour.

There has been a strong demand for Islamic banking in India from various groups and even the Gulf countries. The Muslim League has handed a memorandum to the Planning Commission urging it to promote interest-free, profit-based banking.

The concept is popular in West Asia and predominantly Muslim nations such as Malaysia and Indonesia. Leading international banks such as HSBC and Standard Chartered have exclusive Islamic banking windows.

The Kerala Industrial Development Corporation recently launched an Islamic banking company of sorts, which has been registered as a non-banking finance company and will be transformed into a full-fledged Shariat-compliant bank once the banking regulations allow it.

-Agencies

Link: http://www.siasat.com/english/news/delhi-mulls-islamic-banking

The Impact of the Dubai Crisis on Islamic Banking

The tsunami of the global financial crisis finally struck the coast of the Arab Gulf, after it managed to avoid this for more than one year, to the point that many believed that the region had emerged from the crisis without suffering any losses. However the world, and the Gulf States, woke up last Wednesday following the closure of the Dubai markets to the news that Dubai World had requested a six-month halt to debt payments that amount to around $3.5 billion, and this is in the framework of restructuring the company's debts that total around $59 billion. This led to a wave of aftershocks that struck the global financial markets that were in the process of recovering from the effects of the global financial crisis. This was due to the close links between these markets, in addition to the fact that Dubai is the financial and economic icon of the Gulf, and was the prime destination for Gulf investors until not long ago. However this was when Dubai was enjoying an attractive investment environment. This was because this emirate [Dubai] was managed with the mentality of a company, away from the complex governmental bureaucratic complications. This is with regards to the impact of the financial crisis being experienced by Dubai on the global and local financial markets, but I believe that this impact will also affect Islamic banking in the region.

Dubai was poised to become the financial centre for the Islamic banking industry, and a gateway for Islamic banking in the Middle East, as due to Dubai's position, the Gulf region was able for the first time in 2007 to surpass Malaysia in the issuance of Islamic Sukuk bonds. Dubai also sought to make the Dubai International Financial Centre [DIFC] the centre for Islamic finance as well, and last year DIFC sought to make Dubai Gold Securities compatible with the provisions of Islamic Sharia law, which was through cooperation between the World Gold Council, and Dubai Multi Commodities Centre.

DIFC was also planning to establish goods and services compatible with the provisions of Islamic Sharia law, launching a series of international Islamic share indexes in cooperation with the FTSE [The FTSE Shariah Global Equity Index Series], as well as an online platform for Islamic hedge funds. Dubai was planning on all of this in order to turn itself into an international financial hub for Islamic banking. Dubai also hosts many Islamic financial institutions, most notably the Dubai Islamic Bank, which was the first Islamic commercial bank in the world, as well as Noor Islamic Bank, and Dubai Bank which was a conventional bank that became an Islamic bank, in addition to a number of Islamic finance companies. There are also Islamic windows in a number of conventional banks, such as HSBC Amanah, and Saadiq Islamic Banking which is part of Standard Chartered Bank.

However I believe that this endeavour [to turn Dubai into a centre for Islamic banking] will be strongly affected by the results of the financial crisis that Dubai is suffering from today, and which is due to it's companies inability to pay their debts, such as Dubai World, and Nakheel Properties. This news [of inability to repay debts] shook Dubai's financial credibility, and raised many questions over Dubai's financial transparency, as many investors and creditors had received assurances over the past month from officials that Dubai would be able to meet its financial obligations. The announcement of the restructuring of this debt also did not include a lot of detail, leaving many questions unanswered.

There is no doubt that all of these factors will [eventually] help to transform Dubai into an international financial centre, as it must enjoy a high level of [financial] credibility and transparency to do so, in addition to its institutions enjoying an acceptable credit rating. This is something that I think Dubai is not close to achieving today until it addresses these concerns wisely and carefully, and takes into account the concerns of its investors and creditors. In addition to this the crisis demonstrated the fragility of the financial and economic system in Dubai, which is one based on excessive borrowing to finance excessively luxurious dream projects without considering the economic feasibility of such projects, and therefore Dubai must arrange its priorities.

In conclusion, in my opinion the most serious thing about the Dubai crisis is that this may be a prelude to a new financial crisis that arises due to the bubble of sovereign debt bursting, and if this happens only God knows what the extent [of its impact] will be.

Link: http://www.aawsat.com/english/news.asp?section=6&id=19053

Is the fate of Islamic finance at risk?

How the landscape has changed for Islamic finance, a sector once viewed as an asset-rich haven for risk-averse investors.

The global reverberations of Dubai World’s decision to seek a “standstill” on its financial obligations have thrown the spotlight on the most imminent and pressing of those commitments: the US$4 billion (Dh14.69bn) bill on a sukuk payable by Dubai World’s property company, Nakheel, in just seven days.

If, as many international investors now fear, Nakheel is unable to meet that deadline, it will raise doubts about the rest of the Islamic financial industry, which is worth about $720bn globally, the London Business School says.

“This has been an extraordinary crisis, but it is the first for the embryonic sukuk industry,” says Khalid Howladar of Moody’s Investors Service. “The youth of the market has meant that such funding instruments are untested as various sectors of regional economies contract or even collapse.”

The new doubts about the industry are in sharp contrast to the confident optimism it showed when the western financial system, or what might be called “secular” finance, was in the throes of the credit crisis last year.

Then, advocates of Islamic finance were adamant that their system, with its built-in restrictions on risk and leverage, would escape the worst of the West. Even the Vatican praised Islamic finance for its “ethical principles”.

But critics of Islamic finance pointed to significant difficulties still to be overcome before the industry could really be accepted as a viable alternative to western capitalism.

Chief among these was the lack of uniformity of interpretation, with wide differences of opinion among Islamic scholars operating in different social and cultural environments, in Asia and the Middle East. Those worries have been aggravated significantly by the Nakheel situation.

Doubts began to surface before the shock of the Dubai World “standstill”. Investment Dar of Kuwait, which owns half of the British car maker Aston Martin, defaulted on a $100 million sukuk last summer.

Then the $650m Golden Belt Islamic bond, controlled by the debt-laden Saad Group run by the Saudi financier Maan al Sanea, also got into trouble. The lawyers and Islamic experts began pouring over the issue documents to evaluate investors’ rights in distressed situations.

The issue goes to the heart of Islamic finance. Two basic principles of the industry are the avoidance of interest, for fear it may lead to the sin of usury; and avoidance of risk, which could be interpreted as gambling, which is also forbidden.

So Islamic financial instruments have to be constructed on the foundations of real physical assets, such as land, machinery and equipment, in which the participants are profit-sharing partners. There is nothing wrong in Islam with profit, but it must be profit from the income from tangible assets. Money cannot come just from money.

In the Saudi and Kuwaiti cases, the continuing debate has focused on whether the sukuk were “asset-backed” or “asset-based”. If the former, investors could expect priority in realising their investment when the sukuk got in trouble; if the latter, they would have to stand in line with the rest of the creditors, and maybe towards the end of the line.

Those issues are now at the forefront of investors’ thinking with regard to the Nakheel deadline. The sukuk gave investors security in the form of assets that could be realised in the case of non-payment, but it seems very few read the prospectus in detail.

The Nakheel sukuk is secured on vast swathes of development land south of Jebel Ali, outside Dubai, that Nakheel had set aside as a development “twice the size of Hong Kong Island”. Little work has been done on the project.

One American investor, who declined to be named because of his involvement in continuing negotiations ahead of the sukuk deadline of December 14, said: “Some of us just kind of assumed we had recourse to the Palm or some other real estate in the city, rather than just a big chunk of desert.”

Enforceability of any claim to those assets is a further confusion but it is mainly a legal issue, rather than an Islamic one.

To exacerbate things, the problems at Nakheel surfaced just as the sukuk industry was showing signs of recovering from the global crisis. New issues dropped to a three-year low last year as international demand dried up for all financial products, Islamic or not, but analysts had been expecting a boom in sukuk early next year.

Just before the Dubai World standstill request, the finance arm of the US conglomerate GE became the first major American corporation to launch a sukuk, in a $500m issue that was hailed as a sign that Islamic finance was firmly in the mainstream of world business.

That recovery is now in doubt. “If some sukuk are not found to be equivalent to conventional bonds in a default or restructuring, it will have a significant effect on the shape of the sukuk market to come,” Mr Howladar says.

Certainly, the medium-term ability of Dubai World entities to tap into the sukuk market looks impaired. The group had been one of the major players in the industry with four of the top 10 biggest issues made by one or another arm of the conglomerate.

Moreover, the UAE dominates the sukuk industry, with three of the top five bonds issued by Emirati corporates. The Nakheel sukuk is the second-largest ever, behind a Malaysian issue.

The other potential knock-on effect is on the Islamic banking industry, where again the UAE has been at the forefront. HSBC Amanah, the Islamic arm of the global banking giant, has based its business in the country. Demand for Islamic retail banking products, regarded as a huge potential market, is likely to be comparatively unaffected by the Nakheel affair.

The corporate banking business is more vulnerable. Big Islamic banks all have exposure both as investors in sukuk, and as creditors to Dubai World.

“Islamic banks … carry sukuk in their investment books and have funded as well as unfunded credit exposures to either Nakheel and/or Dubai World,” says Anouar Hassoune, also of Moody’s.

“Therefore, they will suffer directly from the economic provision and impairment charges attached to such exposures, irrespective of any such accounting treatment.”

Dubai Islamic Bank, the region’s oldest but also the most heavily exposed to Dubai World, is regarded as most vulnerable, and has been placed on review by Moody’s because of the risk of non-payment and its exposure to the ailing property sector.

Dubai Bank, highly concentrated on the UAE’s leading borrowers, is also likely to come under pressure, says Moody’s.

Underlying the potential gravity of the problem for the UAE’s banks, the Central Bank has provided further liquidity facilities after the Dubai World standstill request.
Link: http://www.thenational.ae/apps/pbcs.dll/article?AID=/20091206/BUSINESS/712069970/1005

interview: Islamic Finance can bring huge benefits to Malta

The managing director at the Malta Institute of Management, Reuben Buttigieg, talks to Gerald Fenech on how Islamic Finance works and the benefits it can bring to Malta if the country taps into the considerable commercial opportunities that are available.



The term Islamic Finance has been gaining currency recently but few know about the considerable opportunities of this system. What exactly is Islamic Finance?

Islamic Finance is based on Sharia law which to be fair are quite common to various religions. These include no investment in prostitution, immoral activities or companies which deal with the production of pork as obviously Muslims cannot eat pork. Money is not considered as a commodity in this system and speculation or charging of interest is not allowed. However even the Catholic religion speaks about the imposition of interest and this has now become accepted within reasonable limits. Similarly, both religions talk about social responsibility. In fact if one analysis the modus operandi practiced by APS Bank one finds that profit maximisation may not always be the prime objective. Islamic Finance is not actually linked to a religion but is a similar way of doing business to conventional methods with certain limitations.



What are the main pillars of Islamic Finance?

The main pillar is banking followed by insurance and capital markets. The main differences in banking may be explained through the fact that Islamic banks provide a house loan interest free as the property is initially purchased by the bank and then sold at a profit to the buyer who then pays back the loan over a period of time but interest free. One of the advantages in this type of transaction is that there is certainty as one does not have to worry about interest rate fluctuations. Banks also invest in projects directly with an equity stake instead of loaning out to individual companies so profit/loss sharing is carried out here. Banks also provide diverse methods to divest their holdings which may include a repayment programme as well as possible equity flotation.

The major part of Islamic banking is actually project financing and is not aimed at the individual.

Islamic banks also offer reasonable timeframes to pay back loans if an individual or a company goes bankrupt and profit maximisation is not an issue. But how does a bank survive with such methods?

First of all, Islamic banks are quite rigorous and cautious when lending money so the element of risk is considerably less than in other conventional situations. This is also a good thing as our society these days actually encourages credit beyond one’s means. An interesting study which has come to light recently shows that this method of financing is not new to the Mediterranean especially in Sicily and Malta. A typical example of banks investing directly in projects was the Valletta Investment Bank which had similar methods of financing. The other pillar is insurance where policyholders put their money into a fund which eventually covers costs but the money held is not owned by any insurance company but is actually owned by the policyholders. The fund will then appoint an operator to manage the fund. The operator is usually paid a fee or else a profit sharing arrangement on the returns of investments is agreed upon. The operator can actually be called to replenish the fund if the fund is at a deficit. Re-insurance has become an issue, with many Islamic Insurance companies turning to conventional re insurance to carry out certain transactions.

Malta actually had a similar method to Islamic insurance in the form of confraternities where the one dedicated to St Joseph eventually became a fully fledged investment fund which evolved into the APS Bank of today.



What about funds and capital markets?

Islamic companies cannot issue bonds strictly speaking as they cannot borrow money with interest. Furthermore, one cannot invest in companies which have a certain amount of debt – this is normally around 40/45 per cent depending on the screening process. The major stock indexes today such as Dow Jones and FTSE actually have Islamic indexes which are operated according to this method and this is growing considerably. Another controversy in the Islamic world is entertainment as one cannot invest in that sector although the rules have been relaxed somewhat for hotels and other similar areas.

An area of considerable interest and which is also growing considerably is the Islamic trust which can be beneficial to Malta as some countries are stalling to implement reforms with a taxation burden which is quite heavy. For example inheritance tax in Italy is quite heavy so the opportunity for Malta to attract some of these trusts here is substantial.



So what can Malta gain from Islamic Finance and is enough being done to raise awareness on the issue?

In most Mediterranean countries, Islamic Finance is basically nonexistent so these countries are using conventional banking methods. However in countries such as Morocco there is a fear that as soon as Islamic Finance is introduced, the conventional banks there could go bankrupt so this offers a window of opportunity for us as other countries dither. We can use Malta through Special Purpose Vehicles to take the opportunity to offer Islamic banking to those who wish to practice it. Another country where there are opportunities for this method is Libya where the possibility of Islamic Finance has only recently started to be discussed.

The Muslim religion is also the fastest growing religion in the world so opportunities will increase and not decrease. Countries such as Italy also face cultural problems to introduce Islamic Finance so we can start using Maltese financial institutions to tap into this sector.

I believe that an Islamic retail bank in Malta is a bit off the mark at least for the time being but there are considerable opportunities in project financing which we can start tapping into. To be fair, the Prime Minister has committed himself a number of times to this vision but so far nothing much has been done to move the concept forward. The MFSA had also published a consultation document on Islamic Finance and although I am aware that there was positive feedback from the industry, nothing has happened either. The direction we seem to be taking is also slightly misleading as we are trying to put a system of banking into another system of banking but this will not work out. We do have distinct parts of legislation which can be used but unfortunately nothing much is being done to advance the cause. A typical example is what is happening in Luxembourg which is flourishing considerably in the Islamic Funds sector and we have an advantage over this country as they only go for considerable large amounts in funds.

We can attract smaller funds here to Malta and this would not be in competition with larger financial centres. Insurance and Special Purpose Vehicles are other instruments which we can promote and we have advantages over other countries in the sense that we are onshore and EU members and not offshore destinations. Malta could issue what is called a ‘Sukuk’ or an Islamic bond which could finance say the Cirkewwa port which is sold to a group of investors who then rent out the port back to government and with a separate contract drawn up committing the owners to sell the port back to government after a fixed period of years. That way government will not pay interest but will only pay rent. This transaction will eventually put Malta on the Islamic finance map and this will definitely create substantial interest in the country as an investment destination.

There is considerable hunger for Sukuk investments so this is a window of opportunity waiting to be opened. Our stock exchange could also develop considerably in this area where transactions in Islamic equities and investment instruments could happen with even a possible Islamic Finance Mediterranean Stock Exchange in the offing. Why Malta is taking it easy, I fail to understand.

Link: http://www.maltabusinessweekly.com.mt/news.asp?newsitemid=7884

Islamic banking 'lags behind in marketing push'

Islamic financial institutions still lag far behind in marketing, with companies struggling to compete with their conventional counterparts in product development.

That is one of the conclusions of a survey by MTI Consulting which will be launched at the 16th World Islamic Banking Conference which opens in Bahrain on Sunday.

Some 55 per cent of the respondents said Islamic finance product development has not gone beyond Islamisation of conventional products.

"What is more alarming is the fact 57pc of the respondents agreed Islamic finance product development is not backed by any consumer research," said MTI Consulting chief executive officer Hilmy Cader.

"Like most companies around the globe today, Islamic financial institutions have also had their marketing and advertising budgets trimmed. Forty-eight per cent of respondents said the advertising budgets of their companies have been decreased over the last 12 months. Looking forward 87pc of the respondents feel their companies will maintain or increase their advertising budget in the next two years."

Link: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=265879

Islamic finance sector grows at 15pc globally

The branch network of Islamic banks in Pakistan expanded to 528 in June 2009 compared with around 326 branches in June 2008.

According to the State Bank recent document, over the last few years, the Islamic finance industry is reportedly growing at around 15 percent globally.

Considered a niche market-catering to financial needs of the Muslims-few years back, the Islamic finance (IF) has grown into a full-fledged financial market. Interestingly, the financial solutions provided by Islamic finance both on the asset and liability side are such that can reside on balance sheets of Islamic and conventional banks alike.

The public and private sectors and regional and global financial hubs are collaborating effectively to make investments, build partnerships and alliances and promote transfer of capital flow and knowledge sharing.

In Pakistan, total assets of Islamic banking industry reached Rs313 billion as at end of June 2009 compared with Rs230 billion on June 30 2008.

Similarly financing and investment portfolio of Islamic banks reached Rs194 billion at end June 2009 compared with Rs163 billion on June, 30 2008.

In terms of market share, total assets, financing and investment and deposits reached to 5.2 percent and 4.2 percent and 5.2 percent at end June 2009. Moreover, branch network of 6 full-fledged Islamic banks and 12 conventional banks (having dedicated Islamic banking branches-IBBs) increased to 528 branches in June 2009 compared with around 326 branches in June 2008.

Importantly, to promote IF in Pakistan, SBP has formulated a comprehensive strategic plan for Islamic banking industry. Accordingly, IBIs are envisioned to expand their existing business and explore some new sectors like SME, Microfinance and Agriculture.

Further strengthening of the regulatory and Shariah compliance regime is also planned, primarily through adaptation of standards developed by international Islamic standard setting bodies like Islamic Financial Services Board (IFSB) and Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

The aim is to align the industry with the international best practices so as to enhance the credibility and international stakeholders’ confidence in Islamic Banking efforts of SBP.

During the year under review SBP took major initiatives for promotion and development of the Islamic banking industry. SBP has put in place a comprehensive Shariah compliance framework for Islamic banking institutions. For its further strengthening, a number of initiatives have been taken.

For instance, phase wise adaptation of Shariah Standards of Accounting and Auditing Organisation for the Islamic Financial Institutions (AAOIFI) is already underway.

Moreover, a Shariah Advisory Forum (SAF) comprising Shariah Advisers IBIs is working to resolve various Shariah concerns related to Islamic banking industry. Accordingly, different SAF Sub-committees have been formed for the purpose of evaluating the current practices such as those of Commodity Murabaha/ Tawarruq, utilisation of charity and its related issues in IBIs, practice of Hiba, etc.

Furthermore, to strengthen risk management framework for IBIs, SBP has issued Risk Management Guidelines for Islamic Banking Institutions (IBIs) after customising IFSB Standard. These guidelines are in addition to the risk management guidelines already issued for all banking institutions.

These guidelines highlight the peculiar risks faced by the IBIs and recommends adequate risk management techniques. Similarly an impact study has been completed to facilitate the adaptation of IFSB Standard on Capital Adequacy. Moreover, SBP is also in the process of adapting IFSB Standard on ‘Corporate Governance’ in the light of feedback received from various stakeholders and available corporate governance structure.

Link: http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/01-Dec-2009/Islamic-finance-sector-grows-at-15pc-globally/1

Dubai 'strong and persistent' says ruler

The Ruler of Dubai said on Tuesday the emirate was 'strong and persistent', despite the global reaction to its plans to restructure a conglomerate that he said manifested a lack of understanding.

Dubai, one of seven members of the UAE federation, alarmed global markets last week when it asked for a six-month repayment freeze on debt issued by Dubai World and its unit Nakheel, two of its flagship developers.

'They do not understand anything,' Sheikh Mohammed bin Rashid Al-Maktoum said when asked about the global reaction to Dubai World's standstill request and restructuring plans.

The issue raised concern about the health of the emirate's economy as investors and creditors were assuming that the government would help Dubai World shoulder its obligations.

'We are strong and persistent,' Sheikh Mohammed told reporters. 'It is the fruit-bearing tree that becomes the target of (stone) throwers,' he added, in an apparent reference to criticism of the emirate over the issue.

The remarks by Sheikh Mohammed came after United Arab Emirates President Sheikh Khalifa bin Zayed Al Nahyan said the Opec member's economy was strong and will not slip due to the global financial crisis.

Sheikh Khalifa also voiced support for Dubai's ruler, who is also UAE vice president, prime minister and defence minister, saying Sheikh Mohammed and his cabinet 'face every morning challenges, but plan and remove all obstacles to score achievements'.

Sheikh Khalifa said the national economy was showing signs of gradual growth in the fourth quarter.
Link: http://www.tradearabia.com/news/newsdetails.asp?Sn=ECO&artid=171155

Does Islamic Banking Law Prohibit A Bailout Of Dubai World?

Islamic religious prohibitions on guaranteed debt may be complicating negotiations to bail out Dubai World.

The market has recovered from the initial panic over a possible default on debt issued by Dubai World, and many are assuming that the United Arab Emirates will stand behind the bonds.

But under Islamic financing rules, creditors may be required to take a haircut. Guarantees on debt are prohibited by the shariah, which requires investors to accept risk in exchange for profits. Indeed, there were already questions about the legality of Dubai World’s debt arising from the principal guarantee of the bonds.

In recent years, there has been something of a backlash against some of the more aggressive types of Islamic financing, many of which have been structured to mirror Western bonds to make them more attractive to Western investors. Abu Dhabi, the UAE state expected to bail out Dubai World, may be hesitant to do anything that would be seen as disrupting the profit and loss sharing required by shariah.

“In that case, can it be that Dubai — perhaps under pressure from Abu Dhabi — is keen on a little burden-sharing of its own? This is especially so if one assumes legal proceedings held in the UAE would likely side with the views of the AAOIFI, potentially rendering Nakheel’s certificates unlawful and unenforceable,” Izabella Kaminska wrote at FT ALphaville.

Over the weekend, we spoke to a Wall Streeter who specializes in Islamic financing. He said that bond holders shouldn’t be too confident that they will be made whole. Indeed, he expects that the potential unenforceability of the bonds will be used by Dubai negotiators as a way of winning concessions from Western bondholders.

"I expect eventually there will be a move to support the Dubai credit but it may be costly for the creditors," he said.

Link: http://www.businessinsider.com/does-islamic-banking-law-prohibit-a-bailout-of-dubai-world-2009-11

Two reasons for Islamic finance’s move into world financial system

The accelerated development of Islamic financial markets and increased liberalisation are the two important trends which have increased the integration of Islamic finance into the international financial system, according to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz.

In her keynote address entitled “Islamic Finance: A Central Bank’s Perspective” at a seminar on Islamic finance in Rome on Wednesday night, she said: “The development in the Islamic financial markets has contributed to the availability of a wide spectrum of Islamic financial instruments that ranged from instruments to manage liquidity, to structures for financing of mega investments.”

Her speech text was released to news organisations yesterday.

“The higher level of foreign participation in the Islamic financial markets has resulted in the increase in cross border flows in the international Islamic financial system thereby, enhancing international financial linkages between financial systems,” she said.

Liberalisation, Zeti added, had also brought greater foreign institutional presence in Islamic financial systems, resulting in greater diversity of players and strengthening further international financial linkages.

Malaysia had very much been part of this process, she noted.

In 2003, the Islamic financial system was liberalised to allow for increased foreign presence. In 2007, the sukuk market was liberalised to allow the raising of funds by eligible corporates from any part of the world in any currency.

This year, the first foreign currency sukuk of US$1.5bil was successfully issued by Petronas, which was significantly oversubscribed by investors from Europe, the Middle East and Asia.

As part of an international collaborative effort, Zeti said a Task Force on Liquidity Management was set up by the the Islamic Financial Services Board and the Islamic Development Bank early this year to develop solutions to enhance the efficiency of Islamic financial institutions in managing liquidity at both the national and international levels.

Another area of international collaboration is in the promotion of value-added investments in human capital to ensure the sustainable growth of the Islamic financial industry.

The International Centre for Education in Islamic Finance (INCEIF) in Malaysia was set up by the central bank with programmes for practitioners and post-graduate studies to ensure the continuous supply of talent in Islamic finance.

At present, INCEIF students come from more than 60 countries, including Britian, Canada, France and Japan, South Korea and the Middle East.

“Equally important to innovative development is a deeper understanding of syariah and knowledge of Islamic finance and for a greater convergence in the theoretical understanding and practical considerations in resolving the contemporary issues faced by Islamic financial industry players,” Zeti said
Link: http://biz.thestar.com.my/news/story.asp?file=/2009/11/13/business/5101869&sec=business

Swiss minaret ban may irk some Muslim bank clients

* Vote may send wrong signal to Muslim investors-analysts

* Sophisticated Muslim investors won't care much-analysts

By Lisa Jucca and Martin de Sa'Pinto

ZURICH, Nov 30 (Reuters) - A Swiss vote to ban new minarets could irk some Muslim investors at a time when Swiss private banks are hoping to replace dwindling growth in European and U.S. assets with fresh funds from emerging markets.

Switzerland has traditionally attracted wealth from the Middle East due to its political stability and proximity to the region. French-speaking Geneva has been the main Swiss hub for Arab clients, bankers say, although no there are no official figures available due to Swiss bank secrecy law.

Top Swiss bankers and politicians sought to reassure the Muslim community on Monday by saying that the ban on the constructions of new minarets in the country was not a vote against the right to profess the Muslim faith.[ID:nGEE5AS05E]

"We regret the outcome of the vote because it goes completely against the traditional Swiss values of openness and tolerance and it could send the wrong signal to the Muslim world," said James Nason, a spokesman for the Swiss Bankers Association.

He said Muslim clients were an increasingly important client segment for Swiss banks, many of which have been developing Islamic financial products.

Middle Eastern clients are a growth area for private banks as their investment choices are generally not driven by tax issues as is often the case with European and U.S. customers.

Attacks by the United States and European countries against Switzerland's bank secrecy has made it all the more important that Swiss private banks diversify their client base, with many rushing to open business operations in the Gulf region.

"The banks will say this is not a vote against the Muslim community, but this could be a hard sell," said Steve Bernard, a director at financial lobby Geneve Place Financiere. "The onus will be on the banks to explain this vote to customers who raise concerns."

GROWTH AMBITIONS

UBS (UBSN.VX)(UBS.N), Switzerland's biggest bank by assets, said recently that 109 billion Swiss francs ($109 billion) out of a total of 846 billion francs at its international wealth management division came from emerging markets, which includes the Middle East and the Gulf region.

It also said it aimed to grow its existing top position in Saudi Arabia, the United Arab Emirates, Kuwait and Egypt.

Credit Suisse (CSGN.VX), Switzerland's other main bank, has said it is targeting 15 to 20 billion francs of new assets from the Middle East and India by 2012.

Although the Swiss vote is expected to ruffle some feathers in the Muslim community, private bankers said the ultra rich were less concerned by religious issues when investing.

"Huge investors are really professionals and they are able to tell the difference between what is the direct democracy in the sense of a minaret and what is really religious freedom," said Hans-Ulrich Meister, head of Credit Suisse Switzerland.

"I don't think this will have a huge impact. But Switzerland has to give a political answer," he added.

Nason of the Swiss Bankers' Association said that the vast majority of clients choose their bank on quality and competence.

"We are convinced there will be a minimum negative impact following the vote," he said.

Although Swiss and other international private banks are increasingly focusing on Islamic banking, many investors continue to choose products that do not carry an Islamic tag.

"In times of crisis we tend to look for the bogeyman, usually a foreigner or someone of a different religion, and Islam ticks both boxes," said Toby Birch, founder of Guernsey-based Birch Assets and an expert on Islamic finance.

"But it might not make a huge difference. A lot of the Islam money invested in Switzerland is invested conventionally."

Link: http://www.reuters.com/article/swissMktRpt/idUSGEE5AT1OK20091130?pageNumber=2&virtualBrandChannel=0

HSBC Amanah’s new strategy in Asia

The imminent relocation of Mukhtar Hussain, the global head of HSBC Amanah, the Islamic banking division of the HSBC Group, to Kuala Lumpur, the Malaysian capital, raises perhaps more questions about the future direction of HSBC Group’s Islamic finance business.

Hussain has hitherto been located in Dubai, the traditional global headquarters of HSBC Amanah. Saudi Arabia, Malaysia and Dubai, stress Musa Abdul Malek, chief executive officer of HSBC Amanah Malaysia Berhad, a wholly-owned Islamic banking subsidiary of the HSBC Group and which was authorized as a stand-alone Islamic bank by Bank Negara Malaysia, the central bank, in 2007, are the core geographies for HSBC’s Islamic banking business.

Dubai, of course, has taken an economic and financial beating in the last year and the current turmoil in the emirates finances with a possible delay in servicing debt payments by six months has sent the share prices of financial institutions exposed to Dubai World and the other state investment corporations into a downward spiral. A senior Dubai financial sector source welcomed the changes made in the board of Dubai World and the DIFC, stressing that it was time for a change of senior personnel and advisers, some of whom have been managing Dubai Inc.’s investment activities for more than two decades. He cast doubt over the past appointment of young Dubai executives who had neither the experience nor the know-how of how to run these huge investment corporations.

It is not clear whether the HSBC Group has exposure to the Dubai government corporations and whether the relocation of Mukhtar Hussain to Malaysia has anything to do with the crisis in Dubai. But does his relocation to Kuala Lumpur signal that the Malaysian capital is set to become the headquarters for HSBC’s Islamic finance business?

Hussain, according to HSBC sources, will be the CEO of HSBC Malaysia Berhad in addition to being the global head of HSBC Amanah Bank and the chairman of HSBC Amanah Malaysia. How this scenario fits in with Musa Abdul Malek’s position as CEO of HSBC Amanah Malaysia is not clear. Abdul Malek is sanguine about this. “We will have to work our way through this and see how it develops. Hussain’s relocation to Kuala Lumpur is good for him and will further drive our business in Malaysia. It is also an recognition by the HSBC Group that the Malaysia International Islamic Financial Centre (MIFC) is one of the major hubs for Islamic finance and that Malaysia is an important promoter of the sector,” he explained. HSBC Amanah, he emphasized, is very serious about its business in its core markets and elsewhere. The rationale for Hussain’s relocation to Malaysia is also largely due to the systemic approach to Islamic finance by the Malaysian regulators and government.

The country has depth of expertise in Islamic finance structuring and product innovation; the latest technology including online banking; an ideal hub to allow the bank to work with different jurisdictions thus opening the way for market penetration in various countries in and close to the region; and is the benchmark for Islamic finance.

Indeed, HSBC Amanah uses the expertise at its Malaysia headquarters to assist its entities in neighboring Indonesia, Brunei and even Hong Kong. Abdul Malek believes that Asia has the potential to grow in terms of Islamic finance especially in sukuk issuances.

The demand for Islamic papers has started to grow and HSBC Amanah, he confirms, has quite a number of mandates — both from the region and the Middle East. However, it remains a question of timing, economic stability and pricing. However, whether it is Asia or the Middle East that will lead the sukuk sector recovery will depend on economic growth and the response of governments to this.

HSBC is also starting to introduce shared ownership diminishing Musharaka home financing in Malaysia, where the market is dominated by the deferred payment Bai Bithaman Ajil-based Islamic mortgage. This is a major first mover market decision and it would interesting to see how HSBC Amanah’s competitors respond to this move.

Malaysia has a strong Islamic finance sector because of market demand, which in turns resonates local economic dynamics. Malaysia has a population of about 27 million of which 60 percent is Muslim. The country also has a strong middle class, the most likely group to uptake Islamic finance products initially. Malaysia also has a supportive legal and regulatory framework, but with no compromise and dilution of risk management in terms of Basel II provisions. The country also has a strong investor base including the EPF (Employees Provident Fund), Tabung Haji (Pilgrims Management Fund), Insurance and Takaful companies, the Malaysian sovereign wealth funds such as Khazanah Nasional Berhad.

He warned that Islamic finance has to be equal or better than conventional finance in terms of services, product offerings and pricing. If Islamic finance cannot compete with conventional on the above, the sector will inevitably lose business and market penetration.

Malaysia, he contended has a developed and robust Islamic finance market with 17 Islamic banks with two more international banks shortlisted by Bank Negara Malaysia for licenses which should be approved by the first quarter 2010. These banks will be mega banks with a minimum capital of $1 billion.

Link: http://www.arabnews.com/?page=6&section=0&article=128948&d=30&m=11&y=2009

In Dubai Crisis, a Test of Law and Islamic Banking

The debt crisis in Dubai is about to test one of the fastest-growing areas in banking — Islamic finance — and put the emirate’s own opaque judicial system on trial, according to bankers and experts in finance, The New York Times’s Heather Timmons reports.

Issuance of loans and bonds that comply with Shariah, or Islamic law, has skyrocketed in recent years, as oil-rich Middle East nations ramped up spending and the global credit crunch led debt investors into emerging markets.

But the unique terms of these instruments, which technically make lenders partners with borrowers, have never been tested in a downturn.

“There have been very few major defaults in this market,” said Zaher Barakat, a professor of Islamic finance at Cass Business School in London. There are no consistent rules about who gets paid back first if a company defaults on Shariah-complaint debt, he said.

The Dubai government announced last week that it was asking creditors of Dubai World, the emirate’s flagship conglomerate, to grant a delay of up to six months on payments of Dubai World’s $59 billion in debt. The announcement took world markets by surprise and led briefly to fears of a ripple effect into other emerging markets.

Bankers and analysts estimate that approximately 10 percent of Dubai’s total $80 billion debt load complies with Shariah, which prohibits lenders from earning interest.

Most urgent, the $3.5 billion bond owed by Dubai World’s real estate subsidiary, Nakheel, is a Shariah-compliant bond. Nakheel is due to pay the bond back on Dec. 14. If it does not make the payment, it will be in default, which traditionally kicks off legal proceedings against a borrower. But no one really knows for sure what could happen next.

Lawyers and bankers who helped to issue some of Dubai’s Shariah-complaint debt declined to be interviewed for this article and spoke only on condition that they not be identified. Most of Dubai’s government offices are closed until Thursday for the Id al-Adha holiday.

“No one has tested the legal system or the documentation,” said one lawyer who formerly was a top executive at a Dubai company.

Holders of Nakheel bonds probably “are going to argue that they are in the secured position on the underlying asset,” said one bank investor, who did not want to be identified. That means that bondholders could insist on being repaid before bank lenders, who traditionally would come first in a bankruptcy.

Abdulrahman al-Saleh, director general of Dubai’s Finance Department, said Monday that Dubai World was not guaranteed by the government, and the creditors would need to “bear some of the responsibility” for the company’s debt.

The Nakheel bond’s prospectus does not provide much clarity. In the case of a bankruptcy by Dubai World or Nakheel, bondholders have no guarantee of “repayment of their claims in full or at all,” the 237-page prospectus says in its section on risks. Under Dubai law, it says, no debt owed by the ruler or government can be recovered by taking possession of the government’s assets.

Bloomberg News reported Monday that Nakheel bondholders have formed a creditor group that represents more than 25 percent of the debt due Dec. 14, according to Ashurst, a London law firm that has been appointed legal adviser. The group is in the “process of considering its options,” Jo Shepherd, a spokeswoman for Ashurst, told Bloomberg News.

Global issuance of Shariah-compliant bonds and loans grew 40 percent in the first 10 months of 2009 from a year earlier, according to Moody’s Investors Services. The total amount of Shariah-compliant debt outstanding is estimated at about $1 trillion, more than doubling in 10 years.

The surge in Islamic finance has spawned hiring sprees at banks, a series of new financial indicators like the Dow Jones Islamic market index, and filled classrooms at schools that teach bankers how to structure these loans and bonds.

Hoping to appeal the Middle East’s huge sovereign wealth funds, even non-Islamic institutions have started to raise money using Islamic finance. In October, the British Treasury released regulatory guidance that analysts say will allow Britain to issue Shariah-compliant government debt in the near future. The same month, the World Bank became the first non-Islamic entity to issue Shariah-compliant bonds with a $100 million deal.

While Malaysia was traditionally the hub of Islamic finance, much of this new activity has been centered around Dubai, and foreign and local law firms and banks there helped the emirate raise much of its debt. Dubai even has a school that promises to turn students into trademarked “C.I.F.E.’s,” or “Certified Islamic Finance Executives.”

The uncertainty hanging over the Nakheel bond is exacerbated by the fact that Dubai’s courts have never handled a major bankruptcy of one of the government’s own companies. Unlike most of the other seven emirates, Dubai maintains a judiciary system that is separate from the United Arab Emirates Federal Judiciary Authority. The decisions of the Dubai courts, which are controlled by the emirate’s ruling family, can be fickle, say lawyers in the region.

Most important, in order to bring a court case against a government-owned or government-run entity, a corporation or individual needs to get permission — from the government.

The risk section of the Nakheel prospectus offers scant guidance here, as well. “Judicial precedents in Dubai have no binding effect on subsequent decisions,” it says, and court decision in Dubai are “generally not recorded.”

Perhaps unnecessarily, the document adds: “These factors create greater judicial uncertainty.”

Link: http://dealbook.blogs.nytimes.com/2009/11/30/in-dubai-crisis-a-test-of-law-and-islamic-banking/