Morocco is satisfied with a $750 million bond reopening even though the U.S. market imposed discretionary rules until the subscription process is completed, Finance Minister Nizar Baraka said on Thursday.

The North African kingdom raised $750 million on Wednesday in a two-part reopening of its $1.5 billion bond, with $500 million for the $1 billion 4.25 percent (Dec 2022) and $250 million for the $500 million 5.5 percent (Dec 2042).

"We are satisfied," Baraka told Reuters.

Following loan agreements with the African Development Bank, the Islamic Development Bank and the World Bank, among others, Morocco is preparing to issue its first sukuk bonds.

"It will be the same amount as the reopening of the bond, maybe more if the market is favourable," a finance ministry source said.

Last January, parliament approved legislation allowing the government and companies to issue sukuk, in a move interpreted by analysts as a break with the sensitivity of the Moroccan government about resorting to Islamic finance.

"If there is no current conventional bond, we would raise the whole need in sukuk," the source said.

Cash-strapped Morocco is considering several reforms in the pension and taxation systems, provoking fears of instability while the government is facing the euro crisis and the continuing ripples in the region of the Arab Spring.

The second government party is threatening to quit the coalition unless the Islamist-led government moderates plans for sweeping cuts to subsidies on food and energy.

The political circles around King Mohammed want to avoid a drop in living standards and prevent a return to protests that he brought under control in 2011 with social spending, robust policing and constitutional reforms that paved the way for the PJD (Justice and Development Party) to come to power.

Communication Minister Mustapha Khalfi said the cabinet will continue to make reforms despite resistances.

"I want to underline the government's determination to pursue reforms and assume its responsibilities," he was quoted as saying by the state news agency.

Egypt aims to issue a sukuk to international and domestic markets at the beginning of 2014, the country said in its new USD12bn euro medium term note programme.

The Arab nation, rated Caa1/CCC+/B, wants to use Islamic bonds as a diversification tool to broaden the investor base and has been "targeting financing infrastructure and development projects with sukuk issuances", it said.

The remarks come just weeks after President Mohamed Mursi approved a law allowing the state to issue Islamic bonds.

The Egyptian parliament signed off on a sukuk law in March this year after more than a year of deliberations.

The deal was originally planned for November 2012 but was shelved as the law had not been established.

In addition, political and economic difficulties have seen spreads on the country's outstanding debt widen significantly.

A 5.75% 2020 bond was trading at a bid yield of 5.7% in January this year; it is now trading at 7.8%, according to Tradeweb data.

"They probably need to get the IMF programme out of the way before they come to market. Though I think the level of [Egypt's] ratings are a bit mean, they do need to do what the IMF is suggesting," said Gabriel Sterne, an economist at Exotix, a brokerage.

The country is currently in talks with the IMF on a USD4.8bn loan; the fund wants Egypt to tackle the fiscal gap by introducing austerity measures.

QNB Capital and HSBC are joint lead arrangers and dealers.


source: Reuters

The Islamic Development Bank (IDB), a Jeddah-based multilateral institution, has called for the creation of a global sharia advisory board that can offer greater uniformity for the Islamic finance industry, its president said on Thursday.

A centralised format to the supervision of sharia-compliant banking products is gaining favour across the globe, as regulators seek to standardise industry practices and improve consumer perceptions.

"IDB and IFSB (Islamic Financial Services Board) should study ways for creating globally acceptable references for the industry for the benefit of all," IDB president Ahmad Mohamed Ali said at a conference in Kuala Lumpur.

"This could include striving for the concept of a globally accepted sharia committee or body, which would be able to assist all Islamic financial institutions and bring them in line with a uniform standard."

Malaysia pioneered the country-level sharia board and in recent months several countries have introduced central boards of their own, including Dubai, Oman, Pakistan and Nigeria.

Countries like Oman have gone as far as imposing term limits on the sharia scholars who are members of these boards, while also requiring they abide by a code of conduct.

Islamic scholars are experts in financial and religious law, but they are not certified or accredited like other professions, so regulators are increasingly developing ways to ensure the hiring of experienced and financially literate scholars.

A global sharia board would also allow the industry to address low penetration rates in majority Muslim countries such as Pakistan, Indonesia, Turkey and Egypt where the industry's share of banking assets remains below 10 percent.

A global sharia board would provide a more structured approach to the industry, which has its core markets in the Gulf and Southeast Asia.

"This is very important as it gives a much needed structure to the industry, thus enabling it to be more stable and allowing it to grow further," Ali added.

Ali also called for the IFSB to assist the IDB and its member countries in providing technical assistance, while urging the industry to focus on Islamic microfinance and youth employment.

The IFSB is one of the main bodies setting standards globally for Islamic finance, although national financial regulators have the final say on their implementation and enforcement.


source: Reuters

The suggestion can easily be made these days that sukuk as a borrowing and investing instrument is well and truly coming of age.

Certainly, there are many voices denoting that the Islamic variant on conventional fixed-income is establishing itself in the financial marketplace, tapping not only into the supposed relative safe-haven appeal of bond-related assets but also the regional and demographic drivers pertaining to the Sharia-compliant counterpart.

Notwithstanding that benchmark US Treasuries are beset by the vulnerability of the Fed’s quantitative easing strategy, there is a story behind the sukuk phenomenon that has gained traction.

As Malaysia’s starring role has faded somewhat this year in this respect, owing to the recent general election and surrounding political tensions, the Gulf seems by contrast to be straining at the leash.

As Michael Grifferty, President of the Gulf Bond and Sukuk Association, affirmed to me last week, “Supply is building, but still not quickly enough to keep up with demand in the region and elsewhere.”

Earlier this year Standard & Poor’s (S&P) documented the impressive global trend of last year, and predicted better things ahead, subject to the resolution of certain structural factors.

It told how sukuk has become mainstream, though still of modest dimension. Global issuance had grown for the fourth year running in 2012, by 64 per cent to about $138 billion. “We expect another strong few years,” the rating agency said. “Funding needs and infrastructural investments, combined with investor sentiment, are behind today’s momentum.”

In an update for Lancaster University’s Islamic Finance Bulletin last month, Paul-Henri Pruvost, analyst for S&P in Dubai, reiterated the message, despite the intervening uptick in bond yields, with the idea that “sukuk yields may now have reached a trough”.

Supportive GCC-Asian trade policies and the international search for yield will reinforce the attraction of GCC sukuk, he said, most notably to Asian investors. Cross-border transactions have grown, and the Malaysian ringitt has become a preferred currency, including for Gulf entities.

Banks needing to refinance existing debt and match the needs of corporate clients, particularly in project finance, will provide a further boost regionally, said S&P’s Pruvost. Sovereign and sovereign-related issuance will continue to shape the sukuk market, which will also see increased participation from frontier markets, notably in Africa.

Still, despite its greater acceptance, the future growth of the sukuk market might require assistance in terms of liquidity and price formation, he ventures. “Most sukuk globally are not listed and remain over-the-counter; and rated ones are the exception rather than the rule.” His pitch is that the industry must still answer questions as to Sharia interpretation, standardization of structures, and creditworthiness.

As for investors, economic research and strategy firm Arabia Monitor has offered “themes to ponder” from the experience of sukuk in recent years, noting that they have outperformed Mena conventional bonds this year to April.

Using detailed analysis, over the course of different market cycles and risk appetites, “sukuk have consistently showcased less volatile price movements than [have] emerging market bonds”.

The lesson from turbulent times is that “versatility pays”, and sukuk’s resilience is proven. Consequently, “we believe their performance offers opportunities under all market conditions, and especially in times of volatility.”

Clearly, sukuk are making a sizable impression, as doubtless will be restated at this week’s Islamic finance conference in Dubai, organized by Fleming Gulf.

As keynote speaker Harun Kapetanovic, adviser at Dubai’s Department of Economic Development, told me, “Islamic finance is consistently recording exponential growth figures. Strong sukuk growth in primary markets, with a globally diversified investor and issuer base, is one of the main drivers of [its] proliferation. This is testimony of the industry’s growing relevance in global financial markets.”

“Vibrant secondary markets will not only allow sukuk markets to develop further, but also play a key role in developing Islamic asset and fund management industries,” he asserts.

Given the apparent opportunities for market development, it’s no surprise that Dubai aspires to be at the forefront, whether by its institutions tapping international markets using sukuk structures, or the government seeking to furnish a welcoming, enabling environment.

The difference in sukuk in 2013

Sukuk issuance is down by some 20 per cent so far this year. Malaysia’s outturn declined by around one-third, year-on-year, through April. Yet the GCC’s was up 10 per cent.

The financial sector has been prominent, owing to the difficulty of raising capital from equity, and pending Basel III regulations, says Arabia Monitor. The Gulf’s pipeline, in the power & utilities sector especially, reflects robust government programmes and historically tight spreads, making financing “extremely attractive”.

As reported by Zawya, Paul Bateman, senior risk manager at Bank of London & Middle East, says that gently rising yields in sukuk this year have partly reflected the extension of durations as well as the use of subordinated issues.

“We are now seeing issuers easily place 10+ year paper in a market where a 5-year tenor used to be the norm,” itself a positive sign, he indicated.

Meanwhile, investors’ pursuit of yield has allowed banks to issue certificates benefiting capital adequacy ratios, such as Dubai Islamic Bank’s $1 billion perpetual sukuk in March, at 6.25 per cent, boosting Tier-1 capital.

source: Gulf News

International Islamic Liquidity Management Corp (IILM) faces a delicate task as it designs its maiden sukuk: it must make the issue attractive enough for investors to buy, but not so attractive that most of them buy to hold.

Whether it gets the balance right will affect the development of Islamic money market trading in the Gulf and South-East Asia over the coming year.

Malaysia-based IILM, backed by nine central banks and monetary agencies as well as the Jeddah-based Islamic Development Bank, has said it planned to issue up to US$500mil of dollar-denominated sukuk in the second quarter of this year, and eventually expand the programme to as much as US$3bil.

Its issues will be based on a very different premise than other sukuk. Other issuers design their sukuk merely to attract investors and raise money cheaply; IILM's mission is to create a highly liquid tool which Islamic banks will trade to manage their short-term funds.

To ensure trading of the sukuk around the world, IILM had signed agreements with eight primary dealer banks, said Ayhan Keser, executive vice president at Turkey's Albaraka Turk , one of the market-making banks.

“These primary dealers are given the right to purchase the issued sukuk in the primary market, have the responsibility to set the secondary market and actually buy and sell the bonds to form a market price,” Keser said.

Standard Chartered is another primary dealer, according to Standard and Poor's. The bank declined to comment on its role.

The participation of other banks in the primary dealer network appears less certain, however. Qatar Islamic Bank, the Gulf state's largest syariah-compliant lender by assets, is still considering whether to take part, according to its chief executive.

“We will probably be. It's still under discussion,” group chief executive Baseel Gamal said in Doha earlier this month.

Bank Islam Malaysia Bhd is awaiting internal approval from its syariah board, according to a source at the bank who declined to be named as he is not authorised to speak to the media.

A second Malaysian lender was also considering its participation, with the country's central bank pushing for decisions to be made soon, the source said.

Luxembourg, where the sukuk will be domiciled, has one confirmed primary dealer while another is still working on the paperwork, according to a banking source familiar with the discussions, who declined to be named because of the sensitive nature of the issue.

No specific date has been given for the first or subsequent sukuk issues, and the IILM did not respond to Reuters questions.

Another key issue for the IILM sukuk, which are expected to have maturities of up to one year, will be their bid-ask spreads in the secondary market.

If the issues are too small relative to demand, many investors may end up buying and holding them rather than trading them, making price discovery difficult and resulting in wide bid-ask spreads that hurt their function as a store of value.

Other international sukuk often trade with bid-ask spreads ranging from 80-100 basis points (bps), so the IILM paper will need to demonstrate it is much tighter than that.

Spreads above 50 bps could affect the IILM's effectiveness and credibility, said the head of treasury at a Bahrain-based Islamic lender. “Below 50 is good a quarter (0.25 percentage point) would be great.” 

source: Reuters

It may be an unusual career move, but becoming a shariah scholar for an Islamic bank is nice work if you can get it. A quick poll of bankers, lawyers and academics working in Islamic finance revealed unanimous agreement that shariah scholars — who approve every new Islamic banking transaction to certify its compliance to Islamic shariah law — are paid ‘a lot’, but few volunteered figures. Welcome to the opaque world of Islamic finance, and the fledgling industry’s ‘scholar problem’.

Among those who did give figures on shariah scholar salaries, there was considerable variation. Professor Rodney Wilson, a member of the Durham Centre for Islamic Economics and Finance, says that the most in-demand shariah scholars are paid $2,000 a day. Reuters has quoted an unnamed banker as saying that some scholars charge around $1,000-$1,500 per hour of consultation — in addition to an annual bonus of between $10,000 and $20,000 per board seat.

Dr Murat Ünal, CEO of Funds@Work, an investment consultancy and Islamic finance specialist, says that remuneration for a fixed shariah board membership can exceed $200,000 a year plus fees, while advising on a large transaction such as a sukuk (Islamic bond) can generate commission running into millions of dollars. If this still doesn’t sound generous enough, consider that Funds@Work’s pioneering research into shariah scholars and their networks has found that the top twenty shariah scholars in the world hold between fourteen and 85 board memberships each.

There’s a reason for the inconsistency of these accounts: shariah scholar payments don’t have to be made public. And while conventional bankers have found themselves the target of a forceful backlash against bonuses, the quieter but equally insistent voices calling for limits to the influence and payment of shariah scholars struggle to find a platform.

The concerns of those campaigning for changes to the current shariah scholar system are critical to a fast-growing industry, which has the potential to bring millions of Muslims into banking for the first time and which offers a thoughtful critique of mainstream finance. The Islamic finance industry is predicted by Deutsche Bank almost to double to $1.8 trillion by 2016, but its economic potential may never be fulfilled because of its serious governance problems, with power concentrated in a small, ageing and reticent elite.

Islamic finance differs from conventional finance because of its prohibition on the charging of interest, speculation, investing in haram industries such as alcohol, pork products and gambling, and gharar — loosely translated as ‘uncertainty’ in contracts, including selling items you don’t yet own. All Islamic banks or mainstream banks offering Islamic services have to appoint their own shariah board, which determines whether transactions are Islamic — and, in the absence of a powerful central regulatory authority, this places a huge amount of power with the board members.

Goldman Sachs’ registering of a sukuk last October has the distinction of illustrating both the increasingly broad appeal of Islamic finance and its fundamental flaws. The banking giant’s $2 billion sukuk programme met with early controversy after several Islamic scholars said it was not shariah-compliant. This problem became much bigger after it was reported — following a monumental mistake that has spawned many competing explanations — that at least three of the eight scholars quoted in Goldman’s provisional prospectus as endorsing the transaction said they had never even seen the document.

The incident flagged up one of the major pitfalls with the current shariah board system: when one group of scholars declares a transaction shariah-compliant and another group disagrees, there is no higher authority to appeal to. Such disagreement hasn’t only happened during sukuk issuance; it has also been a line taken by defaulting parties. A famous example of this was when Kuwaiti investment firm Investment Dar argued over repaying a debt to Blom Bank on the basis that it was not shariah-compliant, and an English court surprised many by saying that Investment Dar had an ‘arguable case’ (it did nevertheless lose).

These disputes are something ‘that unfortunately happens quite a lot’, says Paul Holland, a partner at SNR Denton, although he says the defaulting party is unlikely to succeed. ‘It’s not an argument that the industry is happy with, and thankfully as far as I’m aware, all those arguments to date have failed,’ he adds. However, he does believe that arguments over shariah-compliance are inevitable, and not necessarily a bad thing. ‘Islamic finance has a large degree of subjectivity — that’s an occupational hazard. Scholars will take different views from one another, as will shariah boards and different schools,’ he says, but this illustrates that Islamic finance is a ‘thoughtful process’ where scholars ‘look at the merits of each case and take a view on a case-by-case basis’. Many today will welcome a more considerate, personalised finance industry, but the absence of any higher authority to appeal to in case of a dispute increases the power of individual scholars.

It hasn’t increased the power of all scholars equally — rather it has benefited a select handful as banks compete to appoint the most famous and established shariah scholars to their boards to increase their Islamic credibility and reduce the chances that their boards’ verdicts will be challenged. As a result, the top ten scholars in the world make up 40 per cent of all board memberships, sharing 450 board positions between them, according to research by Funds@Work. 
  
  
   
All this has not only helped inflate the salaries of a small coterie of scholars, it has also given these individuals tremendous influence over an industry. ‘Take the top five scholars, who make up around 25 per cent of the entire boards across the globe — we’re talking about 350-plus boards. Just imagine if they flew in one plane together and that plane crashes. Of course we hope this will never be the case, but can you imagine what impact that would have on the system as a whole, on succession and stability?’ says Ünal of his research. It doesn’t help that there are no formal accession plans in place, or apprenticeship programmes for aspiring young scholars, or even any formal recruitment procedures: once a chairman is appointed, he will usually appoint the rest of the scholars on the board. As a result, scholars often come to boards in groups. Funds@Work research shows that the top two scholars share 51 per cent of their board memberships.

Although not accountable to shareholders, the decisions of the shariah board can overrule those of the executive committee and have a decisive impact on an organisation’s strategy. ‘Shariah scholars are still perceived by many market participants — and this has been indicated in research from Malaysia — to be more influential than the CEO,’ explains Ünal. ‘You can have a situation where the shariah scholar can take a decision which is entirely negative to the development of the organisation, and where management can’t do anything about it.’ Shareholders may consequently be concerned that fewer than ten of the top 100 Islamic scholars have degrees in finance.

Unlike the decisions of the executive board, it’s also difficult to scrutinise shariah decisions because they’re not made public: minutes are rarely kept, and if they are they’re not shared. Even in widely reported disputes, scholars tend not to discuss their personal opinions publicly, for reputational reasons. ‘All the arguments around the Goldman Sachs sukuk haven’t been the scholars arguing, it’s been various commentators,’ says Nigel Denison, director and head of markets and wealth management at Bank of London and the Middle East (BLME). ‘The scholars themselves try not to get into that situation. There’s a relatively small group of scholars, so often you would find yourself criticising the board that has one of the top scholars on it.’ 
  
There have been moves towards strengthening Islamic standard setters and regulatory authorities (note the plural) — and all those interviewed felt optimistic that the industry was making considerable strides in the right direction, even as they disagreed as to which authorities were most relevant. Professor Wilson of Durham University says global standards existed to ‘some extent’ because of the Islamic Financial Services Board (IFSB), which advises central banks and other regulatory authorities about the regulation of Islamic finance. Paul Holland of SNR Denton, on the other hand, drew attention to AAOIFI, the Bahrain-based body whose standards he said are ‘now fairly well recognised within the industry’.

More important, however, is whether their recommendations are binding or independent. Here the ‘scholar problem’ looms again, because, according to Funds@Work, the seventeen scholars who are linked to AAOIFI make up around half of all board members around the world. ‘The reputation that comes with being on the standards-setting boards, as a substitute for the lack of sufficient governance standards in an emerging sector, basically is reason enough for many market participants to say, “We definitely need this guy,”’ says Ünal.

Similarly, the recommendations of AOOIFI and the IFSB are not binding in the case of a dispute between two bodies over shariah compliance. Malaysia has broken new ground in appointing a national shariah board with the power to make binding recommendations — but at present there has been little indication that other countries will follow suit. A national shariah board may be more practical in Islamic countries, but it’s hard to imagine the UK government, for instance, endorsing a national shariah committee.

There are further proposed reforms designed to overcome Islamic finance’s scholar problem — and Malaysia has pioneered most of them. They include opening up shariah boards to include other Islamic finance experts and limiting the number of boards that scholars can sit on. Ensuring that boards appoint one or two junior scholars, to introduce fresh blood into the industry, would help too. And greater transparency — whether it’s publishing minutes of shariah board meetings, setting up a central database of scholars or making scholars’ salaries public — would be welcome.
  
In many ways
IN MANY WAYS the Islamic finance industry has reached a crossroads. It has expanded sufficiently to attract the interest of corporate giants — but if the industry is to increase its market share now, it will need serious reform. And not everyone will agree that it ought to expand: there is a tension within the industry because the larger it becomes, the more it interacts with non-Islamic financial institutions, and the more it’s structured to mimic conventional financial products, the less it will appeal to purists.

One of the reasons that Goldman Sachs’ sukuk was opposed by several scholars was a concern that Goldman would use the proceeds to fund interest-based activities (which the bank denies) and a feeling that the bank’s vampire squid reputation didn’t fit with Islamic finance’s ethos. At an Islamic finance conference in London in February, much of the discussion was devoted to whether Western banks’ involvement in Islamic finance is undermining the industry. In Qatar, authorities have taken the landmark step of banning conventional banks from offering Islamic services; conventional and Islamic financial services now have to be offered by separate entities.

That said, for Muslims and non-Muslims alike, there are grounds for hoping that Islamic finance is able to expand its horizons and overcome its scholar problem. At root, Islamic finance’s rulings on interest rates, gharar and halal investments reflect an overriding concern with ensuring that the financial sector is just and non-exploitative. And while Islamic products are not risk-free, the prohibitions on investing in over-leveraged companies, on short-selling or on complex derivatives have all proved financially shrewd.

Denison of BLME says that ‘the majority’ of the bank’s customers are non-Muslims, who are disaffected with mainstream finance. BLME’s model, he says, is ‘not dissimilar to an old-style merchant bank’ — and already offers the kind of high-street bank model that the Independent Commission on Banking is hoping to revive through its proposed ‘ring-fence’.

A forgiving critic would conclude that Islamic finance’s governance problem is inevitable in a relatively new industry, but this doesn’t mean it isn’t in critical need of reform. Like many of the Middle Eastern countries that are its natural home, Islamic finance’s economic potential is at serious risk of being lost because of its inability to distribute power beyond a small and ageing elite. 

Nigeria has issued new guidelines to oversee the operation of its takaful (Islamic insurance) industry, favoring a centralised format that is gaining favour across the Islamic finance world.

Africa's top oil producer and second biggest economy is trying to establish itself as the African hub for Islamic finance, having approved rules for issuing sukuk in March.

Nigeria, home to the largest Muslim population in sub-Saharan Africa, hopes the guidelines will boost insurance penetration. Its insurance sector had total assets of 621 billion naira ($3.9 billion) as of December 2011, according to official data.

The guidelines, issued last month, require each takaful firm to establish an advisory council of experts; at least two of the experts must be sharia scholars appointed to four-year terms, which are subject to renewal.

Nigeria's insurance commission will in turn establish a takaful advisory council of its own to oversee industry products and practices, mirroring the centralised approach favoured by countries such as Malaysia and Oman.

Advisory council members must comply with eligibility criteria and an internal code of conduct, and attend a minimum 75 percent of meetings or face disqualification.

Under the guidelines, sharia scholars can only be members of one advisory council at a time and must undergo a formal assessment to ensure appropriate training and experience.

Islamic scholars are experts in financial and religious law, but they are not certified or accredited like other professions, so regulators are increasingly developing ways to ensure the hiring of experienced and financially literate scholars.

MODELS

Conventional insurers in Nigeria will also be allowed to offer services through takaful windows, as long as operations are ring-fenced to avoid leakage and comingling with funds that are not sharia-compliant.

The use of takaful windows has been limited to a few countries such as Indonesia, Kenya and Pakistan. The latter prompted a legal challenge from full-fledged takaful firms against Pakistan's efforts to encourage competition.

Nigeria currently has a total of 58 insurance companies which posted gross premiums of 233 billion naira in 2011, a 16.6 percent increase from a year earlier.

A separate circular sets a relatively low minimum capital requirement for takaful firms, which need to place a deposit of 100 million naira with the central bank.

Regulators opted to allow three takaful operating models under the new guidelines: mudaraba, wakala and hybrid.

Under the mudaraba model, a takaful firm acts as a managing partner for a policyholder's money, working under a profit-sharing contract with any losses borne by participants.

In wakala, the firm operates under an agency agreement, managing funds on behalf of policyholders in exchange for a management fee, which can also include a performance fee.

The hybrid model uses the mudaraba format for investing and the wakala format for underwriting.

All takaful investments must be in sharia-compliant assets but if these are limited, firms may engage with conventional instruments subject to approval by their advisory councils.

Firms are also encouraged to consider guidelines issued by the Malaysian-based Islamic Board and the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions, though they are not legally binding. 


source: Reuters

Indonesian corporate sukuk sales are off to their best ever start and the top underwriter predicts a full-year record as $92 billion of state-backed development projects buoy issuance.

Bank Muamalat Indonesia and Adira Dinamika Multi Finance were among issuers of Rp 1.5 trillion ($154 million) of securities, Financial Services Authority data show. That compares with Rp 1.9 trillion for the whole of 2012 and a record Rp 2.3 trillion in 2008. The market is still just a fraction of Malaysia’s, where companies sold 95.8 billion ringgit ($32 billion) of sukuk last year.

President Susilo Bambang Yudhoyono is seeking to reduce fuel subsidies to set aside more funds for roads, railways and power stations to spur growth from the slowest pace since 2010 last quarter. Finance companies have accounted for 72 percent of sales this year, while state-owned construction company Hutama Karya and electricity producer Perusahaan Listrik Negara may sell Islamic bonds in 2013, according to Danareksa Sekuritas, the top underwriter last year.

“The other sectors with the biggest potential to actively tap into the sukuk market will be those involved in infrastructure-related projects and utilities,” Alhami Mohd Abdan, head of international finance and capital markets at OCBC Al-Amin Bank Bhd. in Kuala Lumpur, said in a May 3 interview. Sales will reach Rp 2.5 trillion to Rp 3 trillion this year, he forecast.

State-owned companies

State-owned enterprises have committed about Rp 900 trillion through the end of 2014 for infrastructure and real- sector projects, Coordinating Minister for the Economy Hatta Rajasa said on Dec. 18. Listrik Negara last sold Rp 500 billion of Islamic securities in 2010, while Hutama Karya would be issuing Shariah-compliant notes for the first time, data compiled by Bloomberg show.

Construction company Adhi Karya sold Rp 125 billion of sukuk in March, after Pefindo Credit Rating Indonesia raised it to five steps above investment grade from four last June, citing strong cash flow. Property companies Bumi Serpong Damai and Lippo Karawaci have also been upgraded by Pefindo in the past year. Indonesia’s non-Islamic corporate debt market will triple in five years, Mandiri Sekuritas forecast last month.

‘Great demand’

“Property and construction companies will boost debt sales as their ratings rise, reducing borrowing costs and brightening the option to sell debt,” Yudistira Slamet, head of debt research at Danareksa, said in a May 3 interview from Jakarta. “We recommend our clients tap the sukuk market because of the great demand, which will further suppress coupons,” he said, adding that he was forecasting Rp 2.5 trillion to Rp 3 trillion of company issuance this year.

The average yield on global Shariah-compliant debt fell one basis point, or 0.01 percentage point, to 3.12 percent on May 2, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows, after reaching an all-time low of 2.67 percent on Jan. 10. The premium over the London interbank offered rate, or Libor, declined one basis point to 188 basis points.

Indonesia’s finance ministry plans to sell Rp 53 trillion of Islamic bonds this year, compared with Rp 57.1 trillion in 2012, as it seeks to boost trading volumes by selling less to the national Hajj fund, which holds the notes until maturity, Dahlan Siamat, director of Islamic financing at the debt management office, said Jan.

Tax Rules

Indonesia’s 8.8 percent dollar sukuk due April 2014 yielded  six basis points less than Malaysia’s 3.928 percent Islamic notes due June 2015, even though the former country is rated four levels lower by Standard & Poor’s. The yield on the Indonesian securities was 96 basis points higher on Jan. 11, the biggest gap in seven months, data compiled by Bloomberg show.

There is no specific rule on how sukuk should be taxed in Indonesia, although the Financial Services Authority has made sure that no corporate Islamic bonds have been double-taxed, Etty Retno Wulandari, a director at the regulator, said in July 2012. Bank Indonesia asked the taxation department in 2009 to issue a circular to clarify equal treatment for Shariah- compliant debt, Executive Director Edy Setiadi said last September, but this still hasn’t happened.

“The country is well-positioned to become a global center of Islamic finance and one of the key ingredients in achieving this is having clear tax laws,” Mohamad Safri Shahul Hamid, the Kuala Lumpur-based deputy chief executive officer of CIMB Islamic Bank Bhd., a unit of CIMB Group Holdings Bhd., said in a May 3 e-mail. “The first step is to formalize a tax neutrality provision for Islamic finance transactions, including sukuk.”

Bigger Market  

Islamic bonds have returned 1.5 percent this year, according to the HSBC/Nasdaq index, while debt from emerging markets gained 0.9 percent, JPMorgan Chase & Co.’s EMBI Global Index shows.

Worldwide sales of Shariah-compliant notes, which pay returns on assets to comply with the religion’s ban on interest, increased 3.8 percent to $14.8 billion in 2013 from the same period last year, data compiled by Bloomberg show. Issuance amounted to an all-time high of $46.5 billion in 2012.

There will be $950 billion of worldwide demand for Islamic bonds by 2017, according to a December report by Ernst & Young LLP. That compares with $267.6 billion of outstanding sukuk at the end of June 2012, according to Malaysia’s Securities Commission. Indonesia sold $3 billion of non-Islamic global bonds on April 8 at the country’s lowest-ever yield for dollar notes, with investors bidding for more than four times the amount offered.

“Supply is beginning to increase and catch up to ever- growing demand,” Akbar Syarief, a fund manager overseeing about Rp 3.3 trillion at MNC Asset Management in Jakarta, said in a May 3 interview.

“We hope a bigger corporate sukuk market will mean better liquidity and more efficient pricing, and therefore greater demand for the instruments.”

source: Bloomberg

Prime Minister David Cameron is looking to Southeast Asia to boost the UK’s role in Islamic finance. It is the Bank of England he needs to convince first, say Shariah-compliant lenders based in Britain.

Central bank rules require lenders to hold easy-to-sell assets as protection against short-term funding shocks. Most are off-limits for Islamic banks because they pay interest.

Islamic lenders are “disadvantaged,” Sultan Choudhury, managing director of Islamic Bank of Britain, said in a phone interview from Birmingham, England, on April 22. “We want the ability to operate without the restrictions that we are facing. The biggest example of that is in the liquidity rules.”

Cameron visited Malaysia, the biggest centre for the more than $1tn-a-year market, last year to build on a pact to promote bilateral engagement in the industry and created an Islamic Finance Task Force in March. Britain’s six Shariah-compliant lenders will struggle to grow unless regulators adapt bank liquidity rules or highly rated borrowers issue sukuk in pounds, according to Choudhury and Bank of London & the Middle East’s Nigel Denison.

“For an Islamic bank, there is a lack of liquid assets available,” Denison, the London-based lender’s head of markets, said by phone. “If there were a liquid sukuk, particularly in sterling - because we report in sterling - that would make our lives a lot easier.”

The UK announced plans five years ago to become the first western government to issue sukuk, only to disband the initiative in 2011 when the Debt Management Office said they don’t “provide value for money.”

The average yield on Shariah-compliant debt has climbed 16 basis points this year to 2.8% on April 24, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The yield on 10- year gilts fell 14 basis points to 1.69%, data compiled by Bloomberg show.

“The cost of funding via conventional sovereign bonds - gilts - is still more advantageous than the cost of funding via sukuk,” Haissam Saleh, Qatar Islamic Bank UK’s London- based head of Middle East and North Africa treasury structuring and sales, said by e-mail on April 17.

A Treasury spokesman said on March 11 there are no immediate plans to issue sukuk. The press service didn’t respond last week to requests for comment.

“The UK’s liquidity regime applies to all firms equally,” Liam Parker, a spokesman for the Bank of England, said in an e-mailed response on April 24. “An allowance is made for Shariah-compliant firms with regard to the instruments they are required to hold to meet their liquidity requirements, but not to the quantity of liquidity.”

The overhaul of bank rules known as Basel III may take account of Shariah lenders in the European Union, Parker said.

“The UK is actively engaged with international regulatory counterparts both in Basel and within the EU on this issue,” Parker said. “We would expect that EU implementation will make suitable allowance for Shariah-compliant firms.”

The only sukuk currently meeting Bank of England criteria are dollar notes from Islamic Development Bank, a Saudi-based multilateral lender, according to Choudhury and Denison. The bonds rank AAA at Fitch Ratings, one above the UK. The lender may issue sukuk in pounds, Wayne Evans, an adviser to TheCityUK, a group representing financial services companies, said by phone on April 2. IDB “is not yet in a position” to comment, Abdul Aziz Al Hinai, vice president for finance, said by e-mail on April 22.

Global Islamic debt sales jumped to $7.23bn in March, the third-highest monthly total, data compiled by Bloomberg show. The debt avoids interest through contracts such as Murabahah, where lenders own an asset and sell it back at a mark-up.

Borrowers are put off selling sukuk in the UK in part because the holder would be liable for value added tax, Gary Campbell, a partner at Deloitte in London, said by phone on March 25. The underlying assets would need to be based outside of the UK for exemption, he said.

“We understand that the UK government is very sympathetic and is keen to eliminate any kind of discrepancies,” Campbell said. “Whilst they are sympathetic, they haven’t issued anything formally in writing on the VAT treatment of sukuk.”

Only one Shariah-compliant lender has set up in the UK in the past five years - Abu Dhabi Islamic Bank, according to TheCityUK. HSBC Holdings stopped offering Shariah-compliant services in the UK last year.

The Islamic Finance Task Force will look at ways to encourage sukuk, Richard Thomas, a member of the working group and chief executive officer at Gatehouse Bank, said in a March 14 interview from Dubai.

“We need to have appropriate liquidity instruments,” Mansur Mannan, executive director of DAR Capital, a London-based financial adviser, said in a phone interview on March 21. “If regulations can be changed somewhat, that would be a step in the right direction.”


source: Bloomberg

The prospect of higher yield in Australia is driving Islamic investors Down Under just as it is the broader global investment community, but the focus on capital-intensive industries is adding to its appeal for this source of funds.

Managers of two fledging Islamic funds set up in Australia in the past 18 months say they knew these factors presented opportunities, but they were still surprised by the level of interest from Islamic investors.

Amanie Advisors’ Melbourne-based representative, Mark Darras, says he was virtually mobbed by Islamic banks and sovereign wealth funds on a trip to the Middle East in November.

The Advisor has identified asset leasing as the best entry into the Australian market for Islamic investors as it is “very sharia compliant”, says Darras.

The founder and chairman of Amanie, Mohd Daud Bakar, visited Australia on Tuesday to host the firm’s first Islamic investment forum in Australia which brought together Middle Eastern and Malaysian investors with Australian companies to discuss opportunities and what Australian companies would have to do to create the appropriate structures for investment.

A private meeting between about 20 investors, primarily from the Gulf States, and about eight representatives of Australian companies was scheduled for Wednesday.

SUKUK YIELDS NEAR RECORD LOWS

Samar Madini, vice-president of fixed income and islamic finance products at Dubai-based SJS Markets, said a shortage of “safe” investment instruments and the growth in cash liquidity globally have pushed yields on Islamic bonds to near-record lows of less than 3 per cent for five years tenure.

As a result, he expects more Western firms issue sukuk (Islamic bonds) to take advantage of the demand and the low rates. “We are already seeing Western institutions issuing sukuk, such as GE and Nomura and I expect more Western institutions are going to issue sukuk to attract the islamic banks, and other institutional investors.”

Australian companies are also considering issuing sukuk in Malaysia.

As well as prohibiting the payment of interest, sharia law doesn’t allow Islamic investors to put money into anything connected with gambling, alcohol, tobacco and pork products.

To avoid interest payments, the Islamic finance structures favour physical assets that are often effectively bought by the investors, which then collect a lease off the issuers in lieu of interest payments.

CLEAR GUARANTEES ON CASH FLOW WANTED

Bakar says the funds being targeted in the Middle East needed to invest a minimum of $50 million and the primary areas in Australia that would be suitable would be financing asset leasing in aviation, infrastructure, mining, power plants and in the medical and pharmaceutical industries.

He says they only have “soft commitments” from investors at the moment, but it is understood the first foray will be into aircraft leasing, with a possible $US107 million investment being discussed.

“We help co-fund the purchase and then lease the aircraft on,” explained Darras.

They are keen to invest in assets linked to companies with clear guarantees on cash flow, such as mining offtake agreements in India and China. “Investors are looking at the underlying economy, and production of this kind of assets in this country,” said Bakar.

Sydney-based Crescent Wealth, meanwhile, is accelerating its push into introducing offshore Islamic institutional investors to Australian companies.

Managing director Talal Yassine says both investors and issuers have shown interest, prompting the fund to accelerate plans beyond their present super fund directed at Australian Islamic investors, with their first official trip to see investors in the Middle East and Malaysia in May.

SELF-MANAGED ACCOUNTS FAVOURED

Bakar says his fund is “targeting a few sovereign funds and a few other dedicated funds”.

Some want to put their money into a managed fund, but many favour a self-managed account because they want to show they are the direct owner of the asset, Bakar says.

Bernie Ripoll, federal parliamentary secretary to the Treasurer, told the forum in Melbourne on Tuesday that the Labor government wants to reduce any barriers to Islamic finance in the country but that it was still considering the recommendations of a Board of Taxation review handed to the government last July.

He said there were no “substantive” barriers at the Commonwealth level. One of the biggest impediments is state-based stamp duty on property transfers, which affects Islamic investments as they involve a transfer of assets into and out of special purpose vehicles in order to avoid interest payments.

source: Australian Financial Review