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.

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.

from MediaFile:

Islamic Banking & Finance set to attract more 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.

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.

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.