South Africa poised to launch debut sukuk-Islamic bond

* Would be first of its kind in sub-Saharan Africa

* Sukuk likely to be five-year ijara issue

* Looking at both international and domestic markets

* Kenya, Nigeria, Tanzania could follow

JOHANNESBURG, July 4 (Reuters) - South Africa is preparing to launch sub-Saharan Africa's first Islamic bond, paving the way for issues by other countries in the region, officials said on Wednesday.

Thuto Shomang and Monale Ratsoma of the South African Treasury's government borrowing department told Reuters that South Africa was leaning towards a dollar-denominated, five-year sukuk, using an ijara structure.

"It's the one that seems to attract investors' interest. That's the one that the recommendations have been on so far," said Ratsoma, adding that first-time issuers usually chose five-year tenors so that was what South Africa was considering.

The bond would be marketed to Middle Eastern countries. There are large pools of Islamic investment money in the Gulf, which have been buying sukuk eagerly this year as the global financial crisis hurts many other investments.

"On this deal we really have to go out and talk to them because we don't know what their response will be and we don't want to have a failed transaction the first time around," said Shomang.

The Treasury put out a request for proposals in December and has appointed two consortiums led by Standard Bank and BNP Paribas to make the issue. Bahrain's Al Baraka Banking Group, Kuwait's Liquidity Management House, Nova Capital Partners and Regiments Capital are also involved, banking sources said.

Islamic finance prohibits interest payments so sukuk are structured to provide returns to investors in other ways. In a common form of ijara deal, the originator sells assets to a special-purpose vehicle and then rents them back at a price which gives investors in the sukuk a profit.

OTHER COUNTRIES

The South African Treasury is still deciding the precise timing of the issue, and is also considering a sukuk sale to domestic investors.

Kenya, Nigeria and Tanzania have also been planning sukuk issues, and a successful sale by South Africa could encourage them to put those plans into operation.

Muslims make up only 2 percent of the population of South Africa, which has a BBB+ foreign currency credit rating from Standard & Poor's, so the country seemed an outside contender to be the region's leader in Islamic finance. But it has been seeking to diversify its investor base, and its Treasury has the financial sophistication to explore new funding methods.

"I know there's jostling between Kenya, Nigeria and South Africa on who wants to take the lead, but I think the country that actually issues sukuk and attracts investment into the sukuk market is going to determine the key infrastructure for the development of Islamic finance," said Amman Muhammad, an Islamic banker in South Africa.

In its 2012/2013 budget, announced in February, South Africa's Treasury said it intended to borrow $3 billion in global markets over the medium term to maintain benchmarks in major currencies and meet part of its foreign currency commitments.

Finance Minister Pravin Gordhan has said developing Islamic finance and issuing sukuk would encourage new forms of foreign investment beyond traditional Western funding.

"The dollar sukuk is directly linked to and intended to attract FDI (foreign direct investment) into South Africa. When you create a sukuk you promise a sharia-compliant return, and immediately the Muslim countries sit up and notice - the petrodollar countries," Muhammad added.

"When you marry the sharia-compliant return with an emerging market economy like South Africa...it actually becomes quite an attractive proposition in your investment portfolio, to be able to invest in a country like this."

Meanwhile, issuing a domestic sukuk could help to develop a local sukuk market and resolve a problem faced by South Africa's Islamic financial institutions.

They have to hold certain amounts of government securities to satisfy central bank reserve rules; since they have been restricted to buying conventional securities, they have obtained interest which they have then had to give away to charity, bankers and Treasury officials said.

If they were able to satisfy reserve requirements by holding sukuk, they could avoid the financial loss.

(By Xola Potelwa / Reuters / 04 July 2012)

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India: RBI should look at Islamic banking afresh: Khurshid

The Law Minister, Mr Salman Khurshid, said on Thursday that he had written to the Planning Commission and the Reserve Bank of India (RBI) on the issue of Islamic banking.

He said he was quite hopeful that the RBI would look at the issue afresh and soon come up with its views after deciding on the technical issues.

Mr Khurshid said it was difficult to fit in Islamic banking with the existing regulations, as the very concept of debt and equity was very different in Islamic banking.

Non-banking financial institutions are prevalent now and are accepted, but some ambiguities have to be addressed before they can take up Islamic finance, he said.

INTERESTING, ATTRACTIVE

“Sooner or later, the RBI will come up with a final view. Let me say at this point of time that Islamic banking is an interesting idea, compelling idea, if you look at what France, Germany and UK the are doing. It’s an attractive idea if you look at the sovereign wealth funds of the Gulf region and the fact that we need much more money to finance our infrastructure needs,” he said.

On whether it was doable or feasible in the Indian scheme of things, he said only experts and the RBI had to say. He was speaking to newspersons on the sidelines of an event organised by World Islamic Economic Forum (WIEF) Foundation here. For the first time ever, the international advisory panel of WIEF Foundation met in India.

This meeting discussed the agenda and action plans for the forthcoming 8{+t}{+h} World Islamic Economic Forum slated to be held at Johor Bahru Malaysia on December 4-6, said Mr Ahmad Fuzi Abdul Razak, Secretary-General of WIEF Foundation.

Mr Razak had on Tuesday met the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, to discuss WIEF Foundation and its initiatives.

The issue of Islamic banking also came up for discussion at the meeting, Mr Razak said, indicating that Indian policymakers may look at a policy decision on allowing Islamic banking in India.

(Business Times 04 July 2012)

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StanChart makes KL hub for Islamic banking

Standard Chartered Bank is making Kuala Lumpur its global business hub for Islamic consumer banking. 

This is part of a strategy to grow its Islamic banking business in Malaysia and across its global footprint. 

In this regard, Standard Chartered's Global Head of Islamic Banking and a new team of experts, will be based at its head office in the capital by year-end to further drive business momentum in the country. 

It will also continue working with other new markets to build and strengthen its Islamic banking proposition under the Standard Chartered Saadiq brand. 

In a statement today, Standard Chartered said the new hub underscores the strategic importance of the Malaysian market for the bank's overall strategy and ambitions for the Saadiq franchise. 

"Malaysia has established itself as a leading international Islamic financial centre. 

"With Kuala Lumpur as our global hub for Islamic consumer banking, we look forward to capitalising on Malaysia's long-standing experience and expertise in Islamic Banking, and further contribute to the scale of Islamic finance activities in the country," said Standard Chartered Saadiq chairman, Shayne 

Nelson. 

The new global hub will managed by Wasim Saifi as the new chief executive officer of Standard Chartered Saadiq Bhd, in addition to his role as Global Head, Islamic Consumer Banking. 

Standard Chartered Bank was the first international bank in Malaysia to offer Islamic banking products in 1993. 

In 2008, Standard Chartered Saadiq Bhd was established as a full-fledged Islamic banking subsidiary, and has launched several first-to-market Islamic products.

(Business Times / 05 July 2012)

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Malaysia: Danainfra issues RM8b sukuk for MRT’s SBK Blue Line

KUALA LUMPUR (July 4, 2012): The government is issuing an RM8 billion sukuk financing programme to partly finance the Mass Rapid Transit (MRT) project which is developed and managed by Mass Rapid Transit Corp Sdn Bhd (MRT Corp).

The sukuk will be issued via Danainfra Nasional Bhd, a wholly-owned subsidiary of Minister of Finance Inc. Danainfra is a special funding vehicle for the government to source for funds to finance its infrastructure projects, with the MRT project being the first.

Yesterday, Danainfra signed the agreement for the Islamic commercial papers and medium term notes programme with four banks.

Minister of Finance II Datuk Seri Ahmad Husni Hanadzlah, who witnessed the signing, said: "It is expected that around RM30 billion worth of funds will have to be sourced to finance the completion of the Sungai Buloh-Kajang line, also known as the SBK Blue Line, which is the first line to be constructed under the MRT project.

"It is hoped that with more good quality sukuk being issued to the market, this may create further depth and drive further activity and liquidity through higher volumes being traded on a day-to-day basis."

The RM8 billion is the first tranche of financing for the MRT project's SBK Blue Line. The entire MRT project is scheduled to be operational by July 2017 and to date, 33 out of 85 work packages have been awarded to the value of RM15.5 billion.

The maiden issuance will be the Islamic medium term notes of up to RM2.4 billion which is targeted for July 20, with book-building expected to be held on July 9 or 10.

To date, Danainfra has provided total financing of up to RM1 billion for the MRT project.

Danainfra principal officer Fazlur Rahman Ebrahim said of the RM2.4 billion, RM1 billion will be for bridging loans and the rest to finance the project.

He said the subsequent issuance is expected in October, to the value of RM5.6 billion and the total RM8 billion will be fully exhausted by June 30 next year.

All the tender packages are expected to be awarded by year-end and the actual cost of the entire project will be determined in the first quarter of 2013.

Husni said a way to increase investor base is by tapping the retail market and introducing longer-dated bonds.

"The retail bonds will allow members of the public to invest in bonds or sukuk in lower denominations of RM1,000 and above. The longer-dated bonds will have tenors beyond the normal tenor of 10, 12 and 15 years currently available in the market.

"We would like to see bonds or sukuk with tenor of maturity of 25 years and above. The introduction of retail bonds or sukuk and longer-dated bonds will further spur the Malaysian capital markets and the country's economy as a whole,

(The Sun Daily / o4 July 2012)

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Islamic finance treads fine political line in Kazakhstan

(Reuters) - In Kazakhstan, a farmer and an imam approach the Islamic Development Bank for a loan. The farmer, an Orthodox Christian, needs tractors to plough his fields. The imam wants to repair the roof of his mosque. Which one gets the loan?

Yerlan Baidaulet, a banker who is one of Kazakhstan's foremost proponents of Islamic finance, received both requests. He sent the imam away with a donation from his own pocket on the grounds that Islamic banking permits charity or grants, not loans, to religious institutions.

The farmer, an ethnic Russian, got the loan he needed. Long since repaid, it was the springboard to the growth of a major farming enterprise in the grain belt surrounding Kazakhstan's futuristic capital, Astana.

"Islamic finance isn't only for Muslims," said Baidaulet, executive director for the Commonwealth of Independent States and Eastern Europe at the IDB, a Saudi Arabia-based multilateral lender. "Even dollar bills are printed with the words: 'In God We Trust'."

Two decades after the collapse of the Soviet Union freed Kazakhstan from Marxist ideology, the country of 17 million people is making a bid to become a regional centre of Islamic finance, which is based on religious principles including bans on interest and pure monetary speculation.

Strongman President Nursultan Nazarbayev, in power since Soviet times, has declared he wants Almaty to become a hub for Islamic banking in the former Soviet Union, which includes other majority Muslim states and Russian republics such as Tatarstan.

While that reflects growing demand among a generation of practicing Muslims who grew up after the Soviet Union's collapse, it could also bring direct economic benefits to Kazakhstan by linking the country to big pools of Islamic investment money in the Gulf and southeast Asia.

On the face of it, the country is ideal for Islamic finance. About 70 percent of its population is nominally Muslim and, in the wake of the global financial crisis, people are more receptive to alternative forms of banking.

But Islamic finance also challenges taboos on overtly religious practices in a society which is run along secular lines. In order to keep the peace in a multi-ethnic state, the government declares itself to be uncompromisingly secular.

Three thousand copies of 'The Handbook on Islamic Banking' by Mervyn Lewis and M. Kabir Hassan, translated into Russian for the local market, have not sold well.

"Some bookstores - the kind of stores that sell economic textbooks - have told us: 'It's a religious book. We won't sell it'," said Baidaulet, who also advises the Kazakh Ministry of Industry and New Technologies.

PIONEER

Abu Dhabi-based Al Hilal Bank became the pioneer for Islamic banking in Kazakhstan by opening its doors there in March 2010. It employs nearly 50 people in the country and its investments to date are worth $90 million, said Prasad Abraham, the bank's local chief executive, adding that it had set a target of $200 million by the end of 2012.

So far, Al Hilal's business has been in the corporate sector and with state-owned companies such as postal firm KazPost, with which the bank signed a wakala or agency agreement worth 1.5 billion tenge ($10 million) in March.

Legislation was passed in 2009 that would in principle allow the government to issue a sovereign sukuk or Islamic bond, which would be a big step in creating a sharia-compliant debt market.

Zaratkazy Nurpiissov, chairman of the management board of Fattah Finance, the country's first brokerage to offer sharia-compliant services, said there was demand for Islamic consumer finance to buy cars and household goods.

Fattah Finance's Hajj fund, in which pilgrims set aside cash to visit Mecca, has accumulated $150,000 in its first year. Nurpiissov said such numbers were the tip of the iceberg.

"I would say there are more than 1 million people who wish to use Islamic finance services," he said. "That number is growing every year."

Proponents of Islamic finance cite Kazakhstan's painful recent experience with conventional finance to make their case; a crisis in 2007-2008 was triggered by banks' exposure to bloated real estate markets and reliance on foreign funding. Islamic finance claims to be less risky because transactions are supposed to be based on income from real assets.

"Why did so many real estate companies go bust?" said Nurpiissov. "Because they borrowed money to buy land next to their existing construction projects without having any cash flow. Then the price of that land fell. Islamic finance would only lend money to build that one block of apartments."

OBSTACLES

The industry has run up against some major obstacles, however. Crucially, the debut sovereign sukuk issue has not yet materialized.

With over $50 billion stowed in its National Fund, which collects windfall oil revenues, Kazakhstan has no pressing need to borrow abroad. Not only the sukuk was pulled; a $500 million sovereign eurobond planned for 2010 was also shelved.

"It's not a question of sukuk per se. It's simply that we have no need to borrow money on the external market to finance a budget deficit," Finance Minister Bolat Zhamishev told Reuters.

"If it becomes timely to fix a benchmark for our corporate sector, we will think about sukuk issuance. But it wouldn't be effective were it just a one-off."

That view is shared by Ana Lucia Coronel, head of the International Monetary Fund mission that visited Kazakhstan in April and May this year.

"This is not the right time for Kazakhstan to go ahead," she said in an interview in Astana in May. "The sukuk market cannot develop unless the traditional government bond market is sufficiently developed, so it will take a little time."

With a sovereign sukuk off the table for now, the state-owned Development Bank of Kazakhstan is to take the lead in Islamic bond issuance. In March, the bank said it planned a sukuk program worth up to $500 million, but it did not say when issues might take place.

At present, Al Hilal remains the only Islamic commercial bank in Kazakhstan. Rules for entry into the sector are strict; the minimum capital requirement to establish any new bank, whether Islamic or conventional, is 10 billion tenge. Kazakh law does not permit conventional banks to run "Islamic windows", sections that would operate on religious principles.

"A second or a third bank would bring opportunities for transactions between Islamic banks that I'm not in a position to engage in at the moment," said Abraham at Al Hilal.

According to Baidaulet, taxation is "the biggest trouble for Islamic finance in Kazakhstan". Deals based on the murabaha model, the most widely used Islamic financing structure, require bonds to be backed by assets that change hands more than once. In Kazakhstan, each sale of such commodities is subject to 11 percent value-added tax.

A 41-point government road map for Islamic finance, released in March, extends to the year 2020. It envisages the issue of Islamic securities for some industrial projects. Taxation rules would be amended and several Islamic banks created by 2014.

Implementing the road map, however, may yet require a shift in mindset within the government. While debating the sovereign sukuk issue, some members of parliament expressed horror at the prospect, however unlikely, of state-owned assets falling into foreign hands in the event of a default.

A tough new law on religion passed last year, which includes a ban on prayer rooms in state institutions, hasn't helped. The law has been interpreted as a means to curb religious radicalism after a series of Islamist-inspired attacks unprecedented in Kazakhstan. While there is no suggestion that Islamic finance is linked with militant activity, few in government wish to appear overtly religious.

"People, especially civil servants, are now trying to distance themselves from the word Islamic," said Baidaulet, co-chairman of the working group for the road map.

Abraham at Al Hilal said, "Islamic banking is not asking for special favors. We're just asking: make us equal to the conventional banks.

(Reuters / 02 July 2012)

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Dubai Emirates Islamic picks banks for potential benchmark-sized dollar sukuk

(Reuters) - Dubai's Emirates Islamic Bank, a unit of Emirates NBD, has picked banks for a potential benchmark-sized dollar sukuk, or Islamic bond, lead arrangers said on Tuesday.

The lender mandated Emirates NBD Capital, Credit Agricole , Dubai Islamic Bank, HSBC and Standard Chartered.

The initial price guidance for the issue was at a spread of 330 basis points over midswaps, maturing in 2018. Emirates NBD will underwrite it.

Arranging banks said books were now open and one banking source close to the deal said the sukuk could price on Wednesday.

Emirates Islamic, which last tapped the debt markets with a $500 million sukuk in January, is hoping to capitalise on a recent rally in Dubai names that has tightened spreads as regional Islamic liquidity seeks investment opportunities.

(Reuters / 03 July 2012)

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South Africa Names Six Companies to Advise on Sukuk Sale

South Africa’s National Treasury appointed six companies, including Standard Bank (SBK) Group Ltd., BNP Paribas SA (BNP) and Albaraka Banking Group (BARKA), to advise it on its debut Islamic bond issue.

Nova Capital Partners LLC, Liquidity Management House for Investment Co., and Regiments Capital (Pty) Ltd. were also appointed, Tshepiso Moahloli, a senior analyst in the Pretoria- based Treasury, said by phone today.

The Islamic bonds, or sukuk, may form part of the Treasury’s plan to raise $3 billion in international markets over the next three years, she said. South Africa, where less than 2 percent of the 49.1 million people are Muslim, is looking to tap the Islamic finance industry’s $1 trillion in assets.

“We’re engaging with the banks now; the amount, currency and timing will depend on the outcome of our discussions,” Moahloli said. “From what we have observed, issuance tends to be from $500 million to about $700 million and movement around the five-year sukuk area looks like it’s the most favored area.”

The structuring and issuance of the sukuk may be used as a benchmark for state-owned companies that also plan to issue Islamic bonds, Moahloli said.

Public Finance Law

Sukuk are usually backed by assets sold to a special- purpose company by the issuer, which then rents them back in lieu of paying interest. The debut Islamic bond issue was delayed after the government decided to review public finance law, which doesn’t provide for the government to issue asset- based securities, Thuto Shomang, head of asset and liability management at the Treasury, said on May 17.

Moody’s Investors Service rates South Africa A3, the second-highest investment grade on the continent, according to data compiled by Bloomberg.

The country should not limit itself to an international sukuk, Jay Henning, an executive at Cape Town-based money manager Oasis Group Holdings, said by phone.

“While we agree with an international issue, there is definitely demand for a South African issue as well,” Henning said. “We have capacity for it and I’m sure other Sharia- compliant asset managers do as well.

(Bloomberg Business Week / 03 July 2012)

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