Summit Notebook
Exclusive outtakes from industry leaders
Awaiting the alternative energy sukuk: Innovation vs conservatism
MANAMA, Feb 18 (Reuters) – Dubai’s debt fiasco and real estate bubble bust pushes investors to look out for alternative assets underlying Islamic finance products – could renewable energy provide a way-out?
Predominantly, Islamic finance and investment products have been backed by infrastructure or commodities assets. But executives at the 2010 Reuters Islamic Banking and Finance Summit said product diversification was needed to cut the over-reliance on real estate in the Gulf.
“Sharia scholars are eager to support the renewable energy initiative, but the Islamic banking industry (in the Gulf) does not seem to be overly interested in this area although I am aware of a couple of deals involving acquisitions of clean tech companies in the U.S. and wind farms in the UK,” said Ayman Khaleq, partner at the Vinson & Elkins law firm in Dubai.
“The big banks have teams that focus on renewable energy as an asset class. However, the problem is that Islamic banks are not big enough to be able to cover specific sectors such as alternative energy,” he added.
In order to launch an alternative energy sukuk, the Gulf’s small local banks would need to team up with bigger international players such as Deutsche Bank, Barclays, or BNP Paribas, which have been active on the renewable horizon.
But some experts have warned more originality in the Islamic finance industry could alienate investors, who are reluctant to take on fresh risk in the wake of Dubai’s debt crisis and recent sukuk defaults in the region.
WAITING FOR THE GREEN PUSH
Fatwa shopping? Not for Barclays
The limited number of Sharia scholars has meant the same group of men are on various advisory boards which has led to criticism that people can go “fatwa shopping” and that scholars are in it for the money.
Not so, says Harris Irfan, head of Islamic products at Barclays Capital.
“We’re not out fatwa shopping,” he said at the Reuters Islamic Banking and Finance Summit. “We want to work with the scholar who’s willing to say ‘no’ (to non-Sharia products)”
A study last year by Funds at Work, a consultant for the fund industry, looked at scholars’ engagement by financial firms in the Gulf Arab region. It found the top 10 scholars hold about 46 percent of all available positions in the region.
Internationally, excluding the Gulf, the top 10 scholars – out of 70 active outside the region — hold 58 percent of board positions.
Scholars can earn up to $150,000 per project and it can take four to six months for a Sharia-compliant project to be developed. For the scholar, that can mean between four to six weeks of work on a project.
It may look cushy but often these same scholars will work for nothing to help develop standards for the industry.
Skeletons in the closet, sprawling ownership stymie Gulf bank consolidation
Anyone waiting for Gulf banks to consolidate — a long talked about prospect — can forget about it for now.
With debt markets shut, leaving only pricey equity financing, budding suitors are standing frozen, unable to make a commitment.
But the lack of reasonable financing for mergers is not the only obstacle, according to Frederick Stonehouse, head of strategic mergers and acquisitions at Bahrain’s Unicorn Investment Bank .
Valuing the assets of privately-owned banks, the best candidates for consolidation, is no easy task.
“Many of the banks which I feel should be looking for consolidation are unlisted, so how do you value those?” he says.
And then there is the old, familiar issue of transparency — as in, the lack of it in the region.
“You think everything may have come out of the woodwork but maybe it hasn’t. You could be going into an institution and paying quite a price for it and then finding that the problems are a lot deeper than you imagined,” he says.
Is Islamic banking truly sharia-compliant?
Manama, Bahrain Feb. 16 - The Islamic finance industry has a problem. Its main selling point is that it is sharia-compliant, meaning it adheres to Islam’s prohibition of interest and avoids dealing with forbidden sectors such as alcohol and gambling.
But in the eyes of many, much of the industry is actually not sharia-compliant at all.
For one, the industry’s benchmark is LIBOR, which is an interest-based concept and critics say it should develop its own. In addition, many scholars complain that the most popular of structures are, if not in direct breech of Islamic law, then widely abused.
“If you believe in Islamic finance and you believe money is just a medium of exchange then a lot of going on is not acceptable, because it’s making money off money,” says Simon Eedle, managing of Islamic banking at Credit Agricole CIB.
So what will it take for the Islamic finance industry to clean up its act? Just your ordinary punter, it seems.
“I think the man on the street wants to do genuine Islamic banking,” Eedle says.
“I think the problem is the business is not yet developed enough to be able to offer anything other than conventional banking in a sharia-compliant format,” he says.
from Global Investing:
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.
Islamic Banking & Finance to attract new attention in 2010
Islamic banking is one of the world’s fastest growing financial sectors, according to industry estimates. It has attracted more attention in the aftermath of the global financial crisis as investors are increasingly looking for alternative, ethical ways of investing. This has also intensified a debate within the industry on whether it should move further away from conventional banking, designing products based more directly on Islamic principles.
Global issuance of Islamic bonds, or sukuk, is expected to fall this year from 2009 levels, a recent Reuters poll showed, as the Dubai debt crisis and an expected rise in borrowing costs weigh on market sentiment. In the Gulf Arab region, a funding crunch at Bahrain-based Islamic investment house Gulf Finance House shows that the financial crisis is far from over in the region and that the industry urgently needs to develop new products and business lines to generate revenues.
CEOs and other top names will discuss these and other topics in a series of closed on-the-record interviews at the Reuters Islamic Banking and Finance Summit, to be held in Dubai, Manama, Kuala Lumpur, London, Geneva and Jakarta on February 15-18, 2010.
Islamic finance just one more crisis victim?
It’s not just traditional western banks that are hurting — the recession is hitting Islamic finance hard, too.
The industry, which operates according to Islamic law and hence has an in-built conservative investment strategy, is seen as relatively insulated from the financial crisis. But some executives at the Reuters Islamic Banking and Finance Summit are not so sure.
Islamic finance should still be able to combat the crisis better than conventional banks but big problems loom if liquidity remains tight. In fact Sohail Zubairi, head of consultancy Dar Al Sharia, reckons they’re facing up to a crisis scenario that could include forced consolidation and layoffs.
“There is a real threat to the business of Islamic banking,” Zubairi told Reuters reporters at the summit in Dubai. “If the liquidity does not return, we will not be able to continue doing our business.”
Yousif Khalaf, head of Ajman Bank, thinks the situation is so bad that growth and profitability are off the menu for this year.
“What is more important is survival and, to some extent, continuity,” he said. “People want to make sure they survive.”
PHOTO CREDIT: A labourer walks inside Sheikh Zayed mosque in Abu Dhabi April 7, 2009. The mosque, one of the world’s largest, is named after Sheikh Zayed bin Sultan al-Nahayan the founder and first president of the UAE who is also buried there. REUTERS/Ahmed Jadallah
Islamic economies may get effected less if they follow Islamic rules because there won’t be a huge debt/credit bubble due to ‘no interest’ rules.
Video – Islamic bank growth continues
Despite the global slowdown Islamic banking will continue to grow as multinational banks trim investments and sovereign wealth funds inject cash.
Professor Mahmoud El-Gamal, Chair of Islamic Economics at Rice University, says that despite the global economic slowdown Islamic banks will likely continue to see good growth because multinational financial institutions have had to cut back on lending in the Middle East and Sovereign Wealth Funds, eager to advocate Islamic financial growth, will likely inject the sector with cash.
Speaker: Mahmoud El-Gamal Chair of Islamic Economics, Rice University Presenter: Ruben Ramirez New York
Stands to reason! Banks used to in the 1970′s pay up to seven percent interest on savings. On loans in the same period the going rate for a car loan was about ten percent. Now savings accounts pay a ludicrously small quarter of ONE percent….nothing!; and loans cost up to eight hundred percent. If a Muslim bank came to my town, I would hasten to establish an account in it, and I would not care if the profits went to whoever as long as they did not come for MY head on a stick. There is no morality in business any more; maybe the Muslims will bring some. I do not care how many wives they have or how young they are or how they can flaunt both in the face of our laws as long as they are honest with MY money. I’ll even pray five times a day, wash my feet in the river, marry ugly women, drink bad coffee, and study how to read backwards if that is what it takes to defeat the usurers now in charge in this country. And I do not think that I am alone. How would our bankers like the idea that mass coversions took place here because of them?
Is Dubai real estate downturn reason for sukuk slump?
This week we had the opportunity to speak with Mohsin Khan, Senior Fellow at the Peterson Institute for International Economics and the former head of the Middle East department at the International Monetary Fund, ahead of the 2009 Reuters Islamic Banking and Finance Summit. I asked him why he thought that the once red-hot market for Islamic bonds had slowed to a trickle. Khan says some of the largest issuers of Islamic bonds, or sukuk, were real estate developers and the reason corporations are reluctant to buy or issue sukuk these days is due in large part to the continuing decline in the value of real estate in Dubai. Click below to listen:Kahn on sukuk issues from Reuters TV on Vimeo.
Could Islamic banking consolidation bring more uniformity?
Mohsin Khan, former head of the Middle East department at the International Monetary Fund, says the Islamic banking industry could benefit from consolidation by reducing the number of sharia boards, or groups of Islamic scholars, that each bank employs in the Middle East to decide whether or not investments comply with Islamic law. I spoke with Khan earlier this week ahead of the 2009 Reuters Islamic Banking and Finance Summit that kicks-off on April 13th in Dubai, Bahrain, Kuala Lumpur and London. Click here to listen:Kahn on consolidation from Reuters TV on Vimeo.
