Summit Notebook

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.

from Global Investing:

101 ways with halal

The technicalities of Islamic finance may seem arcane to outsiders but participants of the Reuters Summit on Islamic Banking and Finance have been keen to take it to a broader audience.

On Tuesday Mahesh Jayanarayan, CEO of Halal Industries, unveiled his ambitious plans for a halal park in Wales, whilst stressing the industrial site could also house Welsh cottage industries. Halal is simply an Arabic term that means “permissible” but in the West it is largely associated with the preparation of meat and poultry.

Jayanarayan acknowledged that battling preconceived notions is part of the struggle, but pointed out that sharia investing had an ethical dimension that could appeal to a broader audience.

Gilles Saint Marc, a member of the Islamic Committee at Paris Europlace, added that many of the principles of Islamic finance were similar to those of the Franciscan order.

Few would wish to venture into that theological thicket but in the 13th century St Francis of Assisi, patron saint of animals and the environment, did go on a pilgrimage to Egypt to attempt a rapprochement with the Muslim world and it was the Franciscans who were allowed to stay on in the Holy Land after the Crusaders were finally run out of town.

Paris is still bidding to be an Islamic finance hub, but Saint Marc admitted that adapting the legal, tax and accounting frameworks had proved more difficult than originally anticipated. The Dubai World crisis hasn’t helped either.

“In terms of promoting Islamic finance in France this raised a number of questions… it has had a significant impact on its development,” he said. “People have seen that there is speculation everywhere and Islamic institutions are not necessarily more resilient.”

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.

from Global Investing:

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.