Has sukuk missed the boat?
The Islamic finance industry waited in vain for a sukuk issue from a Western sovereign in 2009. Will 2010 be any different?
Gilles Saint Marc, a member of the Islamic Committee at trade body Paris Europlace, said on Wednesday at the Reuters Islamic Banking and Finance Summit that there had to be some sukuk issuance in France in 2010 if it was to retain its reputation as being at the forefront of Islamic finance.
However, David Testa, former CEO of Gatehouse Bank, a sharia wholesale bank in the City of London, was sceptical any Western sovereign issuance would be forthcoming.
“I do see some UK corporate sukuk issuance this year – there are deals ongoing, and some of those names would be sellable in the Gulf,” he said at the Summit on Thursday.
But with the UK facing a general election this year, he expected the government to fight shy of anything that could allow certain right-wing tabloids to whip themselves into a frenzy.
And although corporates have been actively seeking funding in the bond markets for the past 18 months, he pointed out that the Islamic finance industry was not exactly ready to support them.
Banks still provide a large portion of the underwriting of any bond issue, and the local banks in the Gulf have been told to look to their own. “International deals are off the agenda,” he said. “It is not so much a case of them missing the boat as the jetty not even being finished.”
Dubai World crisis dispels wishful thinking
The Dubai World crisis has forced sukuk bond investors to wake up to the reality that sukuk isn’t completely straightforward, said Farmida Bi, a partner at Norton Rose, speaking at the Reuters Islamic Banking and Finance Summit in London on Monday.
“There seems to have been a lot of wishful thinking around implied (sovereign) guarantees and enforcement, which isn’t straightforward in this region,” she said.
In Dubai, for example, there are several distinct secular legal systems to grapple with, as well as Sharia law. “No one has worked out how these interact – it remains an untested legal system,” Bi said.
Bondholders of a $3.5 billion sukuk issued by Dubai World’s Nakheel subsidiary, a property developer, were forced to consider a debt repayment standstill request late last year. Wrangling around the restructuring continues.
Bi said that some investors had failed to understand where their recourse lies in the event of a default. “Many don’t seem to have done their homework – some of them thought they had recourse to the underlying asset and they don’t,” she said. “It seems to be a sort of willful blindness.”
She pointed out that the prospectus clearly explained what investors were buying in to, and Norton Rose has floated the idea of putting a friendly warning that investors don’t have recourse to the assets on the cover of the prospectuses in bold.
“The whole Dubai World crisis showed that investors need to be careful about what they are buying,” she said.
from Cecilia Valente:
Bentleys, extremism and olive branches
"We Muslim breed and breed well", he said laying down his expectations for future demand of Islamic products.
Jokes aside, Mohamad Alchaar , secretary general of AAOIFI, delivered a message today in London. There is "absolutely no way" that Islamic finance could replace conventional banking in spite of growth potential. Given that a financial product depends on scholars' approval and scholars tend to disagree about what complies with Islamic law, Dr. Alchaar may have a point.
"The fact that the system broke down does not make us better. We have plenty to offer to raise on our own rather than on the demise of others," he said at a briefing organised by accounting company BDO.
One thing Islamic finance can do: it can fight extremism, he reckons.
from FaithWorld:
France opts for legislative juggling to allow Islamic finance
Eager to attract Middle East investment but uneasy about linking faith and finance, the French parliament has opted for some legislative sleight-of-hand to pass a law allowing the issuance of interest-free Islamic "sukuk" bonds. The move is part of France's two-year drive to create a new European hub for Islamic finance, whose value globally is estimated at $1 trillion. But instead of introducing a separate bill, which would attract attention to it, the governing UMP party tucked the proposed change of French trust law into a larger bill on financing reform for small and medium-sized companies. And it chose to do this by introducing it as an amendment in the second reading of the bill -- the one that usually gets fewer headlines.
Sounds confusing? That seems to be exactly what the legislators wanted. As my colleague Tamora Vidaillet wrote here in an earlier post entitled "France courts Islamic finance, as long as it’s not too obvious," bankers, politicians and goverment officials are clearly uneasy about promoting Islamic finance in France. "There is a clear sense of apprehension over how Islamic finance would fit into French society, where the policy of laïcité – the strict separation of church and state — tries to keep anything religious out of the public sphere as much as possible," she wrote. "Many admit that French companies and banks may hesitate to do anything that uses the label Islamic as this could highlight sensitivities over social and cultural divides."
The opposition Socialist Party opposed and attacked the change. "We are introducing Islamic law into the French legal framework. This deeply shocks us, it is unacceptable." said Socialist MP Henri Emmanuelli. "When Muslims are rich, we try to attract them. When they're poor, we expel them."
Another Socialist deputy, Jérôme Cahuzac, said: "We don't create fiduciary regimes for Jews, Catholics or Buddhists. France sends soldiers to Afghanistan to prevent people from dying under sharia law. But when big money is involved, we forget all that ... In the second reading, we discovered an amendment we cannot accept. This subject is too delicate to be voted furtively."
On the far-right, the anti-immigrant National Front party denounced the law as the latest "communitarian peril" it said threatened the French Republic, along with approvals for construction of mosques, the serving of pork-free school lunches, the introduction of women-only hours at municipal swimming pools and the officially sponsored creation of a Muslim Council.
The idea behind this law is that investors from the Middle East might be more inclined to invest in French projects and companies, especially small and medium-sized ones, now that they can do this in ways that are sharia-compliant.
France's first sukuk bond, originally expected in October, has been delayed but should be issued later this year or early in 2010, according to Mohammad Farrukh Raza, managing director of Islamic Finance Advisory & Assurance Services (IFAAS). He said the delay was caused by a "a number of challenges from the sharia and legal point of view" but gave no details.
Islamic finance faces diversity crossroads
Is diversity of opinion boon or bane for Islamic finance?
Market participants gathered for a conference at Thomson Reuters’ London headquarters earlier this week discussed the need for more convergence in the industry estimated to be worth $1 trillion.
Of particular focus was the role of sharia scholars who rule on whether investment products are in line with Islamic teachings.
“Sharia scholars who sit as advisers have a crucial role to play in retaining public confidence,” Rifaat Ahmed Abdel Karim, secretary general of the Islamic Financial Services Board, an international standards-setting body for the industry, told the forum.
Beyond commonly agreed principles such as the emphasis on shared profit and the prohibition on usury, divergent opinion has emerged among these scholars on issues ranging from financial derivatives and deferred payment contracts.
Last year, the issuance of sukuk or Islamic bonds was hit when the top scholar of an influential industry body declared that about 85 percent of sukuk was un-Islamic.
The best of both worlds?
Combined Shariah and ethical/SRI products could be the way forwards for Islamic finance investing, according to Dr Humayon Dar, CEO at BMB Islamic, the Shariah consultancy at BMG Group.
Speaking at the Reuters Islamic Finance Summit today, Dar highlighted the development of an upcoming F&C fund that will meet both ethical and Shariah investing criteria, and can be sold to both Muslims and non-Muslims. “I see this as the way forward in markets such as Malaysia, where a significant proportion of the population is non-Muslim,” he said, adding that once such products have established a track record, it should appeal to a broader audience, and encourage other launches.
Marrying the Western and Islamic traditions of investing could help Shariah surmount a number of hurdles that have so far limited its appeal. A recent Oliver Wyman survey found that only half of the 1.4 billion Muslims worldwide would opt for Islamic finance if given a competitive alternative to conventional products. Dar said he had conducted his own survey which found that no more than 25 percent of UK Muslims was interested in Islamic banking and finance. “The vast majority prefer competitive quotes from non-Shariah providers,” he said – this is particularly the case in the mortgage sector.
In other countries he said the problem is twofold. Where Arabic is not the dominant language, the severity of the prohibition on earning interest on financial products is not recognised by the majority of Muslims. In other countries it is a question of poverty: “This technicality is not relevant to their thinking,” he said.
Despite this, he was optimistic about the prospects for growth in the next decade: “By 2020, Islamic financial products will account for 40 percent of the total in the top six Islamic finance markets,” he said. These markets include Saudi Arabia, Malaysia, Bahrain and Kuwait.
In the short term he also predicted a bumper year for sukuk – the Islamic equivalent of a bond. The last six months of 2009 should see an increase in sukuk activity, and in 2010 he predicted increases in activity of up to 200 percent.
“This is an asset class that could grow very quickly as the fall in oil prices has consequences for governmental budgets – it’s likely that we will see some sovereign issuance,” he said.
Islamic finance has already gotten attention from non-Muslims in terms of its relative immunity to toxic debt–most notably, from the Vatican: http://www.findingdulcinea.com/news/busi ness/2009/march/Western-Interest-in-Isla mic-Finance-Increasing.html
