Islamic finance natural fit for Australia

SYDNEY - Australia's wealth of natural resources and financial landscape provide a natural platform for Islamic finance, with potential to attract a new type of global investors, an official with Malaysia's stock exchange said.

Trailing Muslim neighbours such as Malaysia and Indonesia, Australia is looking at developing Islamic finance to attract wealth and create jobs.

The Australian and Malaysian governments held talks this week to cooperate in shariah finance to help Australia crack into the $1 trillion Islamic finance industry.

"Infrastructure funds and a lot of leasing funds are by nature attracted to acceptable shariah principles and real estate investment trusts (REITS) can be quite easily converted as well," said Raja Teh Maimunah, global head of Islamic markets at stock exxchange operator Bursa Malaysia.

Islamic finance, derived from sharia, or Islamic law, forbids charging interest and favours profit-sharing arrangements or structures that resemble rental agreements.

Islamic financing is usually underpinned by physical assets. More countries have been exploring Islamic banking since the global financial crisis, which was fueled largely by poor asset quality and complex financial derivatives.

But there is also some scepticism about the system, with critics dismissing it as conventional banking cloaked in religious language.

Raja Teh said in an interview on Wednesday, during a visit to Australia, that there were sharia finance opportunities in Australia's mature asset-backed securitisation market.

Australia's residential mortgage-backed securities is the third largest in the world with A$176 billion on issue. Moreover, Australia's abundance of natural resources, such as gold, iron ore, copper, gas would also provide a suitable fit to sharia commodity sale contracts, called murabaha.

"Australia has a lot of supply of natural resources which can quite easily be used for the concept of commodity murabaha," Raja Teh said.

Under a murabaha deal, an Islamic bank buys an asset from a third party and sells it to its customer at a cost-plus profit. This allows the bank to extend financing without charging interest, which the religion forbids.

The Australian government has expressed interest in Islamic finance but so far it is limited to small entities such as the Muslim Community Cooperative (Australia) Ltd and Iskan Finance which offer home loans.

One of the biggest obstacles to the development of Australia's Islamic finance market is tax law.

"Anything from (capital) gain tax, stamp duty, withholding taxes (would need to be changed) because typically an Islamic transaction would involve, say, a sale-and-lease-back and that would attract gain tax and stamp duty," said Raja Teh.

She sees potential demand from global investors keen on shariah compliant products to diversify their portfolios.

"For emerging Asian investors, this is an opportunity to get into a first world market within Asia Pacific," Raja Teh said.
Link: http://business.maktoob.com/20090000405370/Islamic_finance_natural_fit_for_Australia/Article.htm

UK Islamic finance leaders talk up growth beyond challenging times

At the 16th annual World Islamic Banking Conference 2009 in Bahrain, UK Islamic finance leaders shared their insights on the future of Islamic finance at a dedicated UK Roundtable discussion. They called for a positive outlook in the coming year despite the adverse economic climate. The challenging issues and themes presented in the discussion showcased thought leadership held by UK firms in the Islamic finance industry.

Organised and hosted by UK Trade & Investment the discussion was led by the BBC World's Nima Abu Wardeh with speakers from the London Stock Exchange, Simmons & Simmons, Bank of London and the Middle East, Gatehouse Bank and KMPG.

The session was opened by British Ambassador to Bahrain, Jamie Bowden who said: "I am confident that the UK as a global centre of financial activity, has the right level of expertise and a proven track record of developing UK Islamic financial products and services that can be utilized more than ever."

Presenter, Nima Abu Wardeh posed the challenging questions of risk management in the midst of recent market developments in the Gulf laying the foundations for a dynamically charged debate among the panellists about the level of credit risk and exposure for Islamic financial providers globally.

Darshan Bijur, Director, KPMG said, "London is the international centre of excellence for Islamic finance. The professional services and advisory services sector is highly developed and can help the global Islamic banking and finance centres address current challenges and position themselves for the future."

Humphrey Percy, Chief Executive of Bank of London and The Middle East, addressed the issue of liquidity management and pricing in Islamic finance commenting, "Liquidity problems exist in both the short and long term maturities, but when it comes to pricing, Islamic Finance is price competitive when compared to conventional finance, and is well regarded as an alternative form of financing."

Richard Thomas, Chief Executive of Gatehouse Bank reaffirmed the strengths of Islamic finance and its relevance and growing importance particularly in a tight financial market, " The development of financial instruments in conventional terms has cost the consumer, and the perception that pricing in Islamic finance products is higher is wrong- products need to be structured well, with care of due diligence and detail, often that is not in place with conventional instruments and now the costs are being borne by the public."

With industry leaders debating the issues impacting the growth of the industry, it was clear that the UK Islamic finance industry was looking positively at its growth and its competitiveness against its conventional counterparts and importantly the opportunities that remain in the year ahead.

When Ms Abu Wardeh asked, "Why the UK?" and what its position may be at the height of the crisis, to now when market developments and uncertainty loomed in the Gulf markets, the panel reiterated the same positive sentiments -- UK organisations have the robustness and adaptability to deal with and respond to challenging issues.

Muneer Khan, Partner at Simmons & Simmons, "I think there are always opportunities to be found through adversity and we have gained a lot from the range of expertise and knowledge. We have a supportive Government policy that is well admired in international markets. I am confident that we will see the growth of this sector continue."

Gillian Walmsley, Debt & Securities Product Manager at London Stock Exchange said, "Those that come to London, and the UK should look at the capital market infrastructure, international pool of liquidity they can have access to."
Humphrey continued, "The establishment of other financial centres of excellence in Islamic finance and also other successful Islamic banks should be encouraged; we welcome that. We have built bridges to the Gulf and to South East Asia. As a whole we want to grow the industry and we are happy to work with these centres and strengthen our partnerships to continue that progress."

Moderated by BBC World Middle East Business Report Nima Abu Wardeh, the speakers were: -
• Muneer Kahn, Partner, Simmons & Simmons
• Darshan Bijur, Director Islamic Finance and Investments, KPMG
• Gillian Walmsley, Debt & Securities Product Manager, London Stock Exchange
• Richard Thomas, Chief Executive Officer, Gatehouse Bank
• Humphrey Percy, Chief Executive Officer, Bank of London and The Middle East

Link: http://www.ameinfo.com/218113.html

Islamic banking firm opposed

Legal recourse: Janata Party president Subramanian Swamy coming out of the Kerala High Court in Kochi on Tuesday after presenting his case against the proposed Islamic banking company.

Janata Party president Subramanian Swamy on Tuesday criticised the LDF government’s decision to accord sanction for formation of an Islamic banking company by the Kerala State Industrial Development Corporation (KSIDC).

Talking to reporters here, he said that the proposed banking company had to follow Islamic law. The decision was “scandalous and dangerous” for the country.

He said it was regrettable that the CPI (M)-led government was promoting a particular religion.

If secularism was scrapped to favour a particular religion, it would set a dangerous trend. It would be like a separate electorate system introduced during the British rule, he said.

Against banking laws

He said that the decision also went against the provisions of the Banking Regulation Act 1949 because no interest could be charged under the Islamic law.

The decision also violated the guidelines of the Reserve Bank of India. He pointed out that a seven-judge bench of the Supreme Court had held that no money of the tax payers shall be used to promote an institution of a particular religion.

Link: http://www.hindu.com/2009/12/09/stories/2009120954180400.htm

Islamic finance can cash in on demand for infrastructure

There is tremendous potential for Shariah-compliant financing of infrastructure projects in the GCC and globally, said a study.

Increasing the Shariah-compliant share of such projects would help meet an infrastructure funding demand that ranges from $535 billion (Dh1.93 trillion) over the next decade to as much as $2trn by 2020, said the study.

The Dubai International Financial Centre Authority yesterday released the latest in its series of whitepapers called: "Islamic Financing for Infrastructure Projects".

The whitepaper highlighted that infrastructure projects are ideal for Islamic financing, in part because of Islamic finance's preference for equity-based and asset-backed projects, as well as because many infrastructure schemes benefit the wider community, which fits well with the moral underpinnings of Islamic finance.

An example is the recently listed $100 million International Finance Corporation Hilal Sukuk on Nasdaq Dubai and the Bahrain Stock Exchange, the proceeds of which will fund infrastructure and health projects in Yemen and Egypt.

Farhan Al Bastaki, Executive Director Islamic Finance at the DIFC Authority, said: "The paper comes at a time when governments are increasingly looking to the market – through public-private partnerships and otherwise – to help fund enormous infrastructure requirements. At the same time, Islamic finance continues to grow at double-digit rates and increasingly entering the mainstream global financial sector as an important asset class."

The potential for Shariah-compliant sources of infrastructure financing also is driven by its low share in overall Islamic financing. Only 22 per cent of the $40bn in Shariah-compatible financing within the GCC has gone into infrastructure projects, while 11 per cent of the $14.9bn in sukuks issued in the GCC during 2008 was used for infrastructure.

The study provides a summary of the various Shariah-compliant financing structures; it examines challenges to increased Islamic financing of infrastructure projects; and it offers possible solutions.

The report also identified a number of hurdles to the increased adoption of Shariah-compliant structures.

These include a lack of regional and global standardisation, and legal regimes that do not directly address Islamic project finance structures, thereby creating uncertainty in the case of default or other contingencies. And the majority of Islamic financing is debt-based and short-term focused, therefore making them inappropriate for long-term infrastructure financing.

International Monetary Fund's Director for the Middle East and Central Asia, Masood Ahmed, yesterday said global investors' interest in Islamic bonds will depend on the evolution of the legal framework surrounding the securities.

In 2009, nearly all sukuk issues were made by states and quasi-sovereign entities, and ratings agency Moody's has said this helped issuance rise 40 per cent during the first 10 months of the year compared with 2008.

"There is a big move going on in the sukuk market towards more highly rated sukuk, and credit risk is becoming more an issue because some of the sukuk that have defaulted were unrated," said Simon Eedle, Managing Director at Global Islamic Banking at Calyon. (With inputs from agencies)

Link: http://www.business24-7.ae/Articles/2009/12/Pages/08122009/12092009_b1755f42f0684babbf35df6848b5b6b1.aspx

GUEST COMMENT: Why Scotland is primed for Islamic finance

Regardless of what has happened within the banking sector over the 18 months, Scotland still boasts an impressive financial services industry, comprising insurance, fund management, and wealth management.

The Edinburgh financial industry differentiates itself from London in a number of ways – it avoids much of the noise and short-term investment thinking that can be found in the City. The Scottish capital has a history of long-term asset management based on sound investment principles across different investment products: institutional pension funds, unit trusts, investment trusts. The Scottish asset management industry now controls around £550bn of assets invested across a global landscape.

In short, Scottish financial services firms are well-placed to benefit and play a part in the global Islamic Finance growth story.

For the uninitiated, Islamic Finance refers to a system of finance that conforms with the principles of Islamic law (or Sharia). On a basic level, in Islamic finance the payment or acceptance of interest is prohibited, as well as investing in businesses that provide goods or services considered contrary to its principles, which we would recognise as being ethical and socially responsible. It's worth around $1 trillion globally and is growing at estimated rate of 15%-20% per year. What's more the UK is recognised as the leading western country for Islamic Finance.

Scotland can increasingly take advantage of this opportunity and also attract the 'Islamic dollar'. Areas such as banking, asset management, wealth management and even insurance could move into Islamic Finance. The Scottish financial services industry and the government in Scotland are taking note of this short and long-term changing financial landscape, and are looking to attract such Islamic funds and investment into Scotland. This also has the added benefit of further diversifying Scotland’s financial services industry.

A number of the Scottish fund managers now manage funds that are 'shariah compliant', aimed at a more international investor base. Scottish fund managers have also won some recent Middle Eastern investment mandates and in due course there may well be an Islamic finance element to that. Away from the investment side, with the growth in Scottish expertise in technology, fund administration and custody of assets there are other opportunities in these areas for Islamic Finance.

This creates new job opportunities for people with the right skills, experience and flexibility to further develop the growth of Islamic Finance in Scotland. Scotland also has a sizeable indigenous Muslim population, estimated at 50,000. Interest in Islamic Finance in this area is also growing to the extent many young Muslim graduates are keen to break into the sector. The opportunities it creates are open to all, though, not just of the Muslim faith.

It is worth noting that Scotland has a proven track record in innovation and pioneering development within new market segments. Islamic Finance could also be one area that Scotland takes the lead in many areas specifically around asset management and fund administration. For the ambitious the opportunities are certainly there to be taken.

Link: http://news.scotland.efinancialcareers.co.uk/newsandviews_item/newsItemId-22674

Partnering to create a stronger Islamic financial sector

UK Trade and Investment is leading an 18 strong delegation of UK Islamic finance organisations to the 16th Annual The World Islamic Banking Conference. While financial markets have been tested this year UK Islamic financial organisations remain positive that business continues and they remain committed to strengthening their partnerships with the Gulf region more than ever.

The UK's relationship with the Gulf is well regarded, given its historical trade relationship and the depth of experience found in its financial centre. In 2009, a Lord Mayor of London's visit to the United Arab Emirates discussed the pressing topic of regulation during the financial crisis, in addition to public-private partnerships.

At a time when the Islamic finance world is working towards global co-operation in establishing frameworks for regulation and dialogue on harmonising Islamic rules and structures, UK firms are deeply involved.

UK-based lawyers are playing a valuable role in helping to re-establish the legal frameworks for some Gulf sukuk bond structures, for example, following the frailties revealed by the economic crisis. English Common Law's flexibility has made it more suited to use in Islamic finance than some more prescriptive forms of law. Such work is reinforcing sukuks' legal and regulatory foundations.

"Modern-day sukuk are based on traditional Islamic principles and they have re-emerged as financial instruments only relatively recently. It is still a young industry and therefore it is all the more important that those structuring sukuk properly consider the legal consequences of what happens when things go wrong,"

says Muneer Khan, Head of Islamic finance at international law firm Simmons & Simmons.

The UK is also at the forefront of education when it comes to Islamic finance. Since the London-based Chartered Institute for Securities & Investment (CISI) launched its Islamic Finance Qualification two years ago, more than 700 students have achieved this global benchmark qualification.

The Chartered Institute of Management Accountants (CIMA) have also recently completed a groundbreaking education initiative by signing a contract with the Jordan-based organisation TAGI Training to translate and deliver the CIMA Certificate in Islamic Finance in Arabic and English throughout the Arab speaking world.

"There is a lot of enthusiasm for more of these sorts of partnerships," says Richard Thomas, Chief Executive of Gatehouse Bank. "Quite a lot of new institutions in the Gulf are looking to do more business with Western markets. Their domestic markets are relatively small and it is through strategic partnerships that their next stage of growth will be reached."

Link: http://www.ameinfo.com/217927.html

Bahrain Islamic Bank launches first Islamic youth account 'Vevo'

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

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

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

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

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

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

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

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

Sharia bank industry to continue accelerating

The central bank is optimistic that Islamic banking in the country will continue to accelerate in 2010 as the economy gears toward recovery and new policies support the industry.

"The growth of Islamic banking in 2010 is expected to increase further ," Bank Indonesia (BI) acting governor Darmin Nasution said, delivered by BI deputy governor Budi Mulya, in a seminar on the prospect of Indonesia's Islamic banking Monday.

Darmin said the industry would develop because of an organic growth from the existing players, and also the increased number of new banks.

As of September the total assets of Islamic banks grew by 26.6 percent from a year earlier. It grew by 17.1 percent in the first nine months this year.

"I believe, after considering the future economic development, nationally as well as internationally, that Indonesian Islamic banking can maintain its growth," he said.

BI estimated the economy to expand between 5 percent and 5.5 percent in 2010, up from about 4.3 percent this year, due to higher growth of private consumption and exports.

Link: http://www.thejakartapost.com/news/2009/12/07/sharia-bank-industry-continue-accelerating.html

Partnering to create a stronger Islamic financial sector

UK Trade and Investment is leading an 18 strong delegation of UK Islamic finance organisations to the 16th Annual The World Islamic Banking Conference. While financial markets have been tested this year UK Islamic financial organisations remain positive that business continues and they remain committed to strengthening their partnerships with the Gulf region more than ever.

Note: For the third year running, UK Trade & Investment is leading a high-powered delegation of decision-makers representing key banks and institutions from the UK who will be showcasing the UK's Islamic finance capabilities at the 16th Annual World Islamic Banking Conference (WIBC) in Bahrain on the 6th, 7th and 8th of December 2009. About UK Trade & Investment (UKTI): UK Trade & Investment (UKTI) is the government organisation that helps UK- based companies succeed in the global economy. We also help overseas companies bring their high quality investment to the UK's economy - acknowledged as Europe's best place from which to succeed in global business. UKTI offers expertise and contacts through its extensive network of specialists in the UK, and in British embassies and other diplomatic offices around the world. We provide companies with the tools they require to be competitive on the world stage.

Link: http://www.istockanalyst.com/article/viewiStockNews/articleid/3691085

ADIB plans expansion throughout Asia

Abu Dhabi Islamic Bank plans to develop Sharia wealth management opportunities in Asia, with Malaysia, Indonesia and Singapore seen as the fastest-growing markets, a top official said on Monday.

Speaking on the sidelines of an Islamic banking conference in Bahrain, Malik Sarwar, the bank’s executive vice president for global wealth management said: "Ethical investing has now become a norm and Islamic banking and wealth management to us is the next level of ethical because there is a spiritual element to that."

"The segment that's growing the fastest is asset management or investments business and especially targeted towards the affluent and high net-worth customers."
He declined to give details on the bank's expansion plans.

Globally Islamic banks are expected to seek new growth from asset management and personal finance after profitability took a hit this year, due in part to a wide exposure to the real estate sector, especially in the Middle East.

"Islamic banks' profitability has declined at a steeper pace, narrowing the gap with conventional banks," consultancy McKinsey & Company said in a report issued on Monday.

"Revenues have declined significantly from 2008, particularly driven by a drop in income from investing activity. In these market conditions, Islamic banks must now determine their future course of action by exploring four important areas," it said, adding that asset management was one of those areas.

Link: http://www.arabianbusiness.com/575493-adib-plans-expansion-throughout-asia

Positve outlook urged despite economic downturn

UK Islamic finance leaders have called for a positive outlook in the coming year despite the adverse economic climate. They made their case yesterday at the 16th WIBC which is being held at the Gulf Convention and Exhibition Centre at a UK Roundtable discussion organised and hosted by UK Trade & Investment.

"I am confident that the UK as a global centre of financial activity, has the right level of expertise and a proven track record of developing UK Islamic financial products and services that can be utilised more than ever," said British Ambassador Jamie Bowden at the opening of the event.

He said that the UK had a proven record of delivering retail domestic and wholesale international Islamic financial services and products.

He said the UK had seven Sharia-compliant exchange traded funds, 18 major law firms in the field and five of the largest professional services firms with Islamic teams.

It also boasted five stand alone Sharia-compliant banks and was a major provider of education for Islamic finance.

"London is the international centre of excellence for Islamic finance," said KPMG director Darshan Bijur.

"The professional services and advisory services sector is highly developed and can help the global Islamic banking and finance centres address current challenges and position themselves for the future."

"Liquidity problems exist in both the short and long term maturities, but when it comes to pricing, Islamic finance is price competitive when compared to conventional finance, and is well regarded as an alternative form of financing," Bank of London and the Middle East chief executive Humphrey Percy said.

"The establishment of other financial centres of excellence in Islamic finance and also other successful Islamic banks should be encouraged. "We welcome that. We have built bridges to the Gulf and to South East Asia. As a whole we want to grow the industry and we are happy to work with these centres and strengthen our partnerships to continue that progress."

"The development of financial instruments in conventional terms has cost the consumer, and the perception that pricing in Islamic finance products is higher is wrong products need to be structured well, with care of due diligence and detail, often that is not in place with conventional instruments and now the costs are being borne by the public," said Gatehouse Bank chief executive Richard Thomas.

Link: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=266106

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