Sukuk issuance still going strong

The wave of sukuk issuance continued to wash over the Dubai financial markets yesterday, even as some experts warned that future global demand for Islamic bonds might be limited.

Dewa, the Dubai utilities company owned by Investment Corporation of Dubai (ICD), listed a US$1 billion (Dh3.67bn) sukuk on the Nasdaq Dubai market, while Emirates Airline set off on an investor roadshow ahead of what is expected to be another big sukuk issue later this month.

That follows the news that Dubai Islamic Bank had hired banks to prepare for a high yield sukuk to raise in the region of $500 million.

Last week, Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, committed the emirate to become the global hub of the $300bn market in Islamic bonds.

However, investment banks including Bank of America Merrill Lynch, Société Générale and Coutts have called into question whether the gains made by sukuk during the rally of the past two years can continue. Inflation and interest rates, currently at record lows, are expected to rise as the global economy recovers from the financial crisis - making fixed income appear unattractive compared to equities. Total returns on the HSBC/Nasdaq Dubai GCC US dollar sukuk index have increased just 0.6 per cent this year, while global equities have rallied sharply.

The Dow Jones Industrial Average hit a record high on Tuesday, while European stocks are at a four-and-a-half year high.

So far, those doubts do not appear to have affected the Dubai market. The Dewa sukuk, which represented a return to debt markets by the utility company after an absence of more than two years, attracted orders of $5bn with most of that, around 65 per cent, coming from the Middle East.

The five-year debt carries a profit rate of 3 per cent for investors.

Some experts believe there is still substantial demand for sukuk, especially from Dubai and listed on local markets.

Ahsan Ali, the head of Islamic origination for Standard Chartered, said: "There has been a lot of activity recently, driven by the liquidity there is in the market and by the attractive pricing for issuers. With yields on a downwards trend, issuers can lock in low rates for the long term.

"And it makes increasing sense for those issuers to list on Dubai markets, the infrastructure is there.There is still plenty of demand out there, not just from the Middle East but from Europeans who are seeking a diversification strategy."

The Emirates sukuk will be the second time the airline has tapped fixed interest markets in the past few months. In January it raised $750m from a conventional bond listed in London.

It is not yet known where Emirates will chose to list, but given the recent official initiative it looks certain it will opt for a listing on either Nasdaq Dubai or the Dubai Financial Market.

ICD, the emirate's premier investment vehicle, was also recently reported to be considering a foray into the sukuk market.

Dubai itself raised $1.25bn in January, a mix of conventional fixed interest instruments with a $750m Islamic tranche.

Sukuk issuance has been the first part of the strategy announced in January by Sheikh Mohammed to develop Dubai as a hub of the global Islamic economy, along with other Islamic financial industries as well as halal food and cosmetic production.

Over the past couple of years, Dubai has slipped to third place in the global sukuk leagues, behind London and Malaysia.

Essa Kazim, the chairman of Borse Dubai, which owns the emirate's financial markets, said recently that if Dubai government and related companies issued debt in sukuk, and listed them on local rather than overseas markets, it would make the emirate the leader in word sukuk listing.

(The National / 07 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

The basics of Islamic banking and finance

A financial system based on principles of trust, ethics and partnership can become a partner in the development of your business.

The Islamic banking and finance industry has developed from what was once a niche exotic product to take its place as part of the mainstream in a matter of just 40 years. Naturally the curiosity associated with this alternative financial system has also intensified. In this article, we explain its basics.

Islamic banking and finance is intended to serve the same underlying purpose as any other conventional bank or financial institution: to intermediate funds from those who have capital (capital rich) to those who need it (capital deficient). However, as the saying goes, 'God is in the details'.

To put it simply, 'Islamic banking' refers to a system of banking that is consistent with the principles of Islamic law (sharia) and guided by an Islamic perspective on economics. Common with the three Abrahamic faiths, the principal prohibition relates to the giving or taking of interest (usury or riba). Other elements include avoiding investments in businesses that are considered unlawful or harmful to society (e.g. businesses dealing with alcohol, pork, gambling), avoidable ambiguity or uncertainty in the provisions of contracts.

Because a fixed or variable rate of interest on a loan is not allowed, Islamic financial institutions support companies and individuals in need of financing either through selling them the required equipment or property on a deferred installment basis, or by entering into some form of profit and loss sharing partnership. We define some of the key products used by Islamic banks below:

Funding the purchase of inventory or assets (such as trade finance): Islamic banks use themurabaha (mark-up or cost-plus) product to help companies purchase inventory or assets. Upon receiving a request from the customer, the Islamic bank will purchase the products or inventory from the supplier and then sell to the customer at a margin above cost, payable in specified installments in the future. The key difference here between Islamic finance and conventional bank lending is that the financing is always linked to the sale of an asset and the amount payable never increases beyond the amount agreed, as the cost plus price.

Expansion of business enterprise: When a company wants to expand its business (without necessarily purchasing a specified asset or inventory), Islamic banks help it grow by partnering with it on a profit and loss sharing basis. Two principle contracts are used, both of which are derivatives of a core partnership principles. In the musharaka financing approach, both the Islamic bank and the customer provide some contribution (cash or in kind) to the project. They then share profits according to whatever formula they agree upon and share losses according to their contribution. The mudaraba contract is similar, only that the bank is the sole contributor of capital, while the customer manages the investment project to receive a profit share as investment manager.

Assisting in purchase of homes: When customers want to purchase homes, Islamic banks can assist them with a 'lease-to-own' product under the general family of 'lease' or ijara instruments. After the customer has identified the house he wants to purchase and the necessary credit checks are completed, the Islamic bank will purchase the house in the bank's name, then lease it to the customer for a defined period of time. Upon the fulfillment of certain conditions (such as the payment of all rental payments), the Islamic bank will sell the house to the customer either for a token amount or based on a pre-agreed price.

From some of these examples, one may wonder what the real distinctions are between Islamic finance and conventional finance. Upon careful examination, you will notice that in each of these examples, the customer never just receives money that he would have to return with an additional amount of interest. Instead, all of the financing is either linked to the sale of asset, partnership in a project or the purchase and lease of an asset.

Hence, one of the key differences between Islamic finance and conventional finance is that sharia-based banking is tightly linked to the real economy. This means that all financing transactions are asset-based or asset-backed, manufacturing or producing real, tangible assets. One of the reasons why this industry was semi-impervious to the financial crisis was due to the requirement of asset-linkage to any sale or lease contracts. This concept of asset-backed transactions protects the financial rights of the institutions as the real asset is always present as collateral, and in most cases covers the financing transaction's obligations toward the parties involved.

Since most of the products of Islamic finance involve asset-based financing, direct investment or partnerships, there is a natural fit between Islamic finance and SME needs.

(Zawya / 06 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Turkish state to open two non-interest Islamic banks

The Turkish state will establish two new participation banks that offer interest-free services, using the names of Vakıfbank and Halkbank to benefit from their credibility in the market, sector players have said.

The new banks to be established will act as completely separate institutions from their eponyms with new banking permission licenses and fields of operation, but the brand popularity of Vakıfbank and Halkbank will help the banks be acknowledged in the market. 

Last week, Deputy Prime Minister Ali Babacan hinted that two state-owned banks may offer interest-free services, without giving specific names.

Turkey seeks to its share in the interest-free banking sector in light of the value and market presence of participation banks.

The banks, which operate in line with Islamic principles by not using interest, had raised the amount of their deposits two times more than deposit banks last year, according to data from Turkey’s banking regulation board.Currently there are four banks in Turkey that offer interest-free services to their customers, and only one of them, Bank Asya, is Turkish-capitalized.The major stakes of the other three, Albaraka Türk, Kuveyt Türk and Türkiye Finans, are held by Saudi Arabian, Bahraini and Kuwaiti capital owners.

The ratio of the amount of funds collected by participation banks versus the overall sector rose from 5.6 percent to 6.1 percent last year compared to 2011.

(Daily News / 07 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Egypt: Sukuk Bill Referred to Shura Council

Finance Minister al-Morsi Hegazi said the Sukuk bill was referred on Sunday 3/3/2013 to the Shura Council for discussion, noting that the bill has been probed by the Cabinet's the legislative and economic committee where a detailed memo was drafted on the draft law.

He asserted that the bill entails all guarantees that safeguard the state's rights and the Sukuk holders.

The Minister's statements came during the press conference he held for expounding the importance of Sukuk for the Egyptian economy during the current stage.

Hegazi denied the rumors circulated on offering Egypt's antiquities for lease, asserting that the Sukuk aim at bridging the financial gap between the rates of saving, which reached 11 per cent and the investment needed rates, ranging between 35 and 40 per cent of the Gross Domestic Product (GDP) so as to create new jobs, increase the exports and offer foreign cash.

The minister also underlined that the Sukuk mechanism will not add any further burdens on the state's budget or the public indebtedness, given that the risks will be shouldered by the Sukuk holders.

Sukuk are essentially Islamic bonds in which the creditors buy shares in an investment or project, meaning that the holder of a Sukuk bond is technically a partner in the enterprise and not a creditor.

(All Africa / 04 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Noor Awqaf formed to tap Islamic finance

A Memorandum of Understanding (MoU) has been signed to establish a new asset management firm, specialising in Awqaf (Islamic endownments), in Dubai’s bid to become a global centre for the business of Shariah-compliant in line with the emirate’s vision to position as the world’s capital for the Islamic economy.

Ahmed Kalim, Deputy Group chief executive officer, Noor Investment Group, and Tayeb Abdel Rahman Al Rayes, secretary-general of Awqaf and Minors Affairs Foundation (Amaf), have signed the MoU to set up Noor Awqaf LLC in the UAE. Noor Awqaf will complement the work of Amaf in offering enabling financial services to Awqaf entities around the world.

The initiative is in line with the recent announcement of His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, to transform the emirate into the world’s capital for Islamic finance and other businesses based on Islamic principles.

Noor Awqaf has been set up as an independent limited liability company, with an initial issued and paid-up share capital of Dh10 million. Noor Awqaf is 60 per cent owned by Noor Investment Group and 40 per cent by Amaf. It will manage Awqaf funds and provide other asset management services. It will also offer due diligence, financial analysis and assistance in the creation and implementation of strategic objectives for Amaf and other similar entities around the world. One of the Islamic economy sectors that will be targeted by Noor Awqaf is the $2.1 trillion Halal industry.

Noor Awqaf intends to build a business model to position Dubai as a Halal centre which facilitates and adds value to the globally expanding market force, in food, pharmaceutical, cosmetic, additives and ingredients, lifestyle and services sectors.

Dr Ahmed Al Janahi, deputy group chief executive officer, Noor Investment Group, said: “The cooperation with Amaf, which is aligned with Dubai’s vision to shape the future of the Islamic economy, is in line with our strategy to give back to the society through support for charities and foundations in the UAE. We will provide expertise with respect to the set-up and management of Noor Awqaf, including fund and asset management services, the creation of appropriate legal structures and the investment of funds under management.”

Al Rayes said: “The cooperation with Noor Investment Group, to establish an independent company, will ensure the enhanced management of the Awqaf fund, in addition to extending product and financial services to other funds. Amaf will on its part provide access to its relationship with other entities and expertise in Awqaf best practices, policies and procedures.” 

(Khaleej Times / 04 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

UK: Can Islamic Finance save us from the Banksters?

The governments of the world lurch from crisis to crisis as they try to prop up the corrupt, debt-based money system, but there is a positive alternative if they have the courage to take it.

PAY THE BANK TO HOLD YOUR CASH was the headline in the February 27 issue of City A.M. That may not sound like an attractive proposition, nor may the suggestion that we should adopt negative interest rates, but there is a positive side to it.

On page 17, the overpaid so-called experts disagreed: Ross Walker, an economist with the Royal Bank of Scotland voted yes; Philip Booth of the Institute of Economic Affairs voted no. We've been here before, but imagine you were diagnosed with a serious illness and half the doctors recommended antibiotics while the other half said you needed no treatment at all. What would that do for your opinion of the medical profession?

Today, it was reported that the banks were lending less, in spite of all the promises by Vince Cable and others of funding for lending and yet more Quantitative Easing. So should we have negative interest rates? No, we should have no interest rates at all.

The propaganda that is still peddled by mainstream economists to this day in the face of overwhelming evidence to the contrary is that people deposit money in the bank, which then lends it. The bank pays depositors X%, lends at X+Y% and makes its profit by the difference - ie Y% plus fees and so on. The truth is very different.

What happens is the money stays in the bank, the bank then creates credit out of thin air, lends it at interest to a businessman, company or whatever, and when this new money is deposited in another bank, it increases the money supply. When the borrower repays the loan, this new money is cancelled out of existence, but any interest remains as new money and new debt. This can be proven mathematically, and was by the great Major Douglas before any of you were born, but if you can't understand his equation (below), just remember this simple saying: "Every bank loan creates a deposit; every repayment of a loan destroys a deposit".

(Digital Journal / 04 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Standard & Poor's sees active year ahead for Islamic finance

Banks are expected to continue tapping Islamic debt facilities to keep sukuk markets active in the year ahead, according to a new report from Standard & Poor's, amid mounting cynicism that the asset class is falling out of favour with investors.

But the credit ratings agency warned that the pipeline of new bond sales could become jammed if investors' demands for higher yields on sukuk and longer-dated debts head too high.

"In view of supportive debt capital market conditions, we forecast banks' issuance levels to remain elevated in 2013," the report said. "We expect most of the impetus to come from banks in the United Arab Emirates, the largest issuers in 2012, and Qatar, where issuance has been steadily increasing."

There are some signs that 2013 will not scale the highs reached last year, when total Islamic bond sales reached US$21.2 billion (Dh77.8bn).

Arabian Gulf sukuk issuances have totalled $2.1bn this year. During the first quarter of last year, sukuk sales reached $8.3bn.

Meanwhile, Bank of America Merrill Lynch, Coutts and Société Générale have said the sukuk rally has run out of steam.

Total returns on the HSBC Nasdaq Dubai GCC US dollar sukuk index increased by 10.3 per cent. The banks believe sukuk and other emerging market debts will lag stocks this year.

So far this year, the index has returned just 0.6 per cent while global equities have rallied, with the MSCI World index up 4.7 per cent during the same period.

Others disagree, including HSBC, the biggest underwriter of sukuk debt.

Sales could total between $30bn and $35bn, Mohammed Dawood, the managing director of debt capital markets at HSBC Amanah, told Bloomberg News last month.

Standard & Poor's said it also expected more hybrid issuances by banks during the year as lenders seek out riskier structures to entice yield-hungry investors.

"We anticipate that the expected issuance will show dependence on pricing levels.

"If we were to see a change in the region's fixed-income investors' expectations, such as demands for higher yields on sukuk and longer-term bonds, this could curb issuance activity because regional banks are highly price sensitive," S&P's report said.

Bond yields move in the opposite direction from price.

Returns on safe assets have dwindled as a result of bond-buying programmes by central banks including the US Federal Reserve, the Bank of England and the Bank of Japan, which have pushed yields on many fixed-income assets to below prevailing inflation rates.

Investors have moved to protect themselves against rising inflation and an anticipated rise in interest rates as the global economy recovers, which could cause prices of fixed-income assets to fall. Equities have become more popular as a result.

Data released by BlackRock shows that globally, net inflows into fixed income mutual funds and exchange-traded products have fallen during four out of the past six consecutive months.

(The National / 05 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com