Thursday, March 27, 2008

Innovation & Standaradization, Islamic Finance in the U.S., Africa, Malaysia & the U.K.

The focus of the International Islamic Capital Market Forum in Malaysia was how to get different "Shari'ah jurisdictions" to cooperate. The growth in Islamic finance, and particularly growth of GCC and Malaysian organizations into each other's region, has led to significant standardization of Shari'ah standards. The rapid growth of Islamic finance does necessitate some standardization to reduce the costs associated with Islamic financial products over and above conventional products. However, too much standardization in current products, most of which replicate conventional products in a Shari'ah-compliant way, could reduce the degree of innovation in Islamic finance. The Bank Negara Malaysia, the Malaysian central bank announced the establishment of the International Shari'ah Research Academy for Islamic Finance (ISRA) as a center of knowledge in Ilsamic finance.

USA Today profiles Devon Bank, a community bank in Chicago that offers Islamic finance. Another organization, SASSO, provides training and Islamic financing in the St. Cloud, Minnesota area.

The Islamic financial industry in Africa is growing rapidly as well as in places more commonly associated with Islamic finance like the CGG and Malaysia. Islamic finance accounts for over 15% of the total assest in the Malaysian banking system. The U.K. is quickly emerging as a center of activity in Islamic finance in the West, although the performance so far of Islamic banks have not been great.

Sunday, March 23, 2008

Islamic finance goes to Japan, U.K. becoming the center of sukuk

A member of Bahrain's parliament, Jasim Ali, describes a recent presentation he made in Japan urging the country to enter the Islamic financial industry. During the presentation, he noted that the industry is growing rapidly, but is still facing challenges in meeting demand and ensuring that standards are applied consistently across the different countries in which Islamic finance is offered. Another Bahraini MP, Jassim Hussain, was also on the trip to Japan. Bahrain, which issues regular sovereign sukuk, is now the first country to have a sovereign sukuk listed on the London Stock Exchange. The U.K. will likely be the first G8 country to issue a sovereign sukuk.

A financial advisor in the GCC discusses the differences between conventional banking and Islamic banking. An Islamic banking advisor suggests that Islamic financial institutions should highlight the differences with conventional banking as an avenue to promote greater understanding of Islam. Islamic finance continues to grow in non-majority-Muslim countries like the U.K.

The Toronto Star profiles the Ansar Co-operative Housing Corporation, which provides Shari'ah-compliant home financing. Although the model they use has been successful, the cooperative model is limited by the amount of capital available to the cooperative, which is not able to access conventional financial markets or sell of the home financing like a conventional home finance companies (and many Islamic home finance companies in the U.S.) can.

The American Public Media show Marketplace, which recently ran a number of stories on Islamic finance, takes an interesting perspective on the recent controversy about the comments on ijara sukuk by Sheikh Taqi Usmani. The report compares the ratings agencies with Shari'ah scholars--both are paid by the organizations they regulate and both depend on their opinions--and suggest that losing Shari'ah-compliance could force a crisis if Islamic banks are forced to quickly divest non-compliant sukuk, which Sheikh Usmani estimate at 80% of GCC-based ijara sukuk. Unlike the subprime crisis, which was caused by doubts around the AAA ratings, the non-compliance of ijara sukuk are not likely to have as great an impact because there is much demand for them by Western financial institutions and hedge funds not limited by the requirement that their holdings are Shari'ah-compliant.

The chairman of Investment Dar explains how the subprime mortgage crisis could not happen in Islamic finance because of the prohibitions that make mortgage-backed securities not possible (the trading of debt at values other than par is not permitted in Islamic finance).

Asian Investor, a magazine connected with Business Week, sits down with the head of Malaysia's Securities Commission to discuss the growth in sukuk in Malaysia since the first one was issued by Shell in 1990.

Shari'ah-compliant insurance products, takaful has a large growth potential, particularly since it is much more infrequently used than other Shari'ah-compliant financial products.

Asma Hanif has a good introductory article on Islamic finance.

Sunday, March 16, 2008

NY Times article on Shari'ah

The New York Times Magazine has a very interesting and balanced article by Harvard professor Noah Feldman called "Why Shari'ah," which describes the history of Shari'ah, fiqh and the interaction between the scholars who interpret Shari'ah and the executive government.

Friday, March 14, 2008

Islamic finance in the U.K. and the planned sukuk, AAOFI board issues guidance on ijara sukuk

Mixed signals are coming out of the U.K. regarding the potential issue of the first sovereign sukuk from a G8 country. The last year has seen a number of moves to make the U.K.'s regulatory environment more conducive to Islamic finance as the country sees great potential in the industry. However, recent news about the sukuk issue suggest that the government believes there are further regulatory changes needed to make the idea a reality. Although the sukuk issue may be delayed, Shari'ah-compliant home finance is growing rapidly. Other areas of Islamic finance are also growing rapidly in the U.K., which is seen as a gateway into Europe for many Islamic banks.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the standards-setting body based in Bahrain released its much anticipated clarification of guidelines on sukuk (available as a PDF from AAOIFI). Sheikh Taqi Usmani, the chairman of the Shari'ah board at AAOIFI made headlines in November 2007 when he made comments that up to 85% of GCC-based ijara sukuk might not be Shari'ah-compliant because they contained repurchase agreements that set a fixed repurchase price for the assets on which the sukuk were based. The AAOIFI release as expected said that the use of repurchase agreements with fixed repurchase price were not permissible except when the fixed price is set for a lessee who is not an investment partner. Instead of using a fixed price repurchase agreement, the AAOIFI Shari'ah board allowed repurchase agreements where the price was determined by the fair market value of the underlying asset at the time of repurchase. This was largely expected and should not cause too much disruption because most of the ijara structure was upheld. The article on the AAOIFI release from Bloomberg contains reactions from Islamic financial industry participants.

DePaul University, a university in Chicago, Illinois has begun offering classes on Islamic finance making it one of few in the United States where classes are taught on the subject. The NY Times also highlights University Islamic Finance Corporation as one of the banking companies catering to minority needs in the U.S.

Kenya changed its regulations of the banking industry to allow Islamic finance and began granting license to retail and commercial Islamic banks in early 2007, the growth has not yet been realized as the banks are just beginning to open.

Lawyers with experience in Islamic finance are added to the list of professionals in short supply as the Islamic finance industry sees growth in demand outstrip the supply of capable professionals.

The Guardian profiles 'sharia technician', Humayon Dar, currently with BMB Islamic, a Shari'ah advisory firm owned by the BMB Group. There are few details about the BMB Group, although it is thought to be based in Brunei. Another Shari'ah-compliant consulting organization, Yasaar Ltd, based in the U.K., is focusing some of its attention on achieving standardization of Shari'ah standards across the different schools of fiqh.

Saturday, March 08, 2008

Rising stars of the mutual fund industry

In a recent issue of Institutional Investor News (page 22), Monem Salam, the Director of Islamic Investing at the Amana Funds in Bellingham, Washington was named as one of the top 20 rising stars in the (entire) mutual fund industry. It is a credit both to him and to the Islamic mutual fund industry in the U.S. that the conventional mutual fund industry is beginning to take note of the growth in Islamic investing.

London & Islamic Finance, Shari'ah screens can mitigate risk, Marketplace looks at Islamic finance

The credit crisis has damaged London's reputation as a financial center, but the growth in Islamic finance, particularly sukuk has provided an alternative source of strength as the U.K. is fast becoming the largest hub for Islamic finance in the West. The growth of Islamic finance, aided by flexible regulators at the Financial Services Authority (FSA) who look to create an even playing field for both conventional and Shari'ah-compliant finance, has given the U.K. a significant edge in attracting Islamic finance. Other western countries like the U.S., and other European countries have not been as proactive in attracting Islamic finance and are now being forced to run to catch up with the U.K.

Oops, says the U.K. Treasury when the rules on the stamp tax to accommodate Shari'ah-compliant home financing are used by commercial builders to circumvent taxes. The Treasury says it will fix the problem while still maintaining the equal treatment of conventional and Shari'ah-compliant home financing products.

A freelance piece in Gulfnews posits that the Shari'ah screens, particularly those around debt and interest, remove the riskiest companies from the universe of Shari'ah-compliant investments. This is certainly the case for avoiding the subprime crisis and most of the leveraged private equity problems. A year or two ago, it was very tempting for private equity firms to borrow large amounts of money to purchase companies because the economy was working fine and interest rates were low, so interest payments were low, even for very highly leveraged companies. However, as a Wall Street Journal article (quoted in Seeking Alpha) points out, private equity firms "are pushing companies further out on a limb in the process. In some cases, this gives their newly private companies little breathing room to execute growth plans and stay afloat were economic and market conditions to turn sour." The last six months have seen "economic and market conditions turn sour" and now these highly leveraged firms are running into difficulty. If the investments adhered to the debt and interest limits required for them to be Shari'ah-compliant, some returns may have been sacrificed at the height of the market, but the downturn would not be nearly as harsh.

Sheikh Taqi Usmani's criticisms that 85 percent of GCC-based sukuk created a stir in the Islamic finance industry and the Accounting and Auditing Organization for Islamic financial institutions (AAOIFI) is receiving criticism for its handling of Sheikh Usmani's comments.

Sheikh Ahmed bin Mohammed al-Khalifa, Bahrain's minister of finance has suggested that the Islamic financial industry in the GCC is composed of too many smaller firms and needs larger Islamic banking firms to undertake 'megaprojects'.

The American Public Media show, Marketplace, has a few recent stories on Islamic finance, including an interview with Mahmoud El-Gamal and segments on Shari'ah compliant mortgages, student loans, mutual funds and finally a segment in which American Muslims are asked about what they think about Islamic finance.

Although this story is not specifically about Islamic finance, I thought it should be included because, in the current environment of misunderstandings and near-hysteria about the term 'shari'ah', it is heartening to see a magazine like US News & World Report sit down with an Egyptian mufti to learn about his efforts to educate people about Shari'ah.

Saturday, March 01, 2008

Sukuk, UAE to head council on Islamic finance, Islamic finance in Canada & the U.K. and growing interest in Islamic microfinance

The Islamic Development Bank is planning a $150 million sukuk issue in Malaysia that it expects to use within two years to finance projects in Malaysia, mostly relating to education, healthcare and basic infrastructure. The IDB also plans on another sukuk to be issued elsewhere to fund the bank's operations. Moody's expects the global sukuk market will reach $200 billion by 2010 (Moody's also expects to see significant growth in the number of Shari'ah-compliant funds). The GCC sukuk market has focused on larger sukuk issuance (like the $3.5 billion sukuk from DP World used to fund the purchase of UK-based P&O Ports), while small and medium sized companies have more luck issuing in Malaysia.

2008 will see first sovereign sukuk issuance from the U.K., Indonesia and Hong Kong.

The UAE will head a council with representatives of the Islamic financial industry as well as finance ministers, central bankers, the IDB, accounting and audition agencies the Islamic Financial Services Council, the World Bank and the IMF.

Further response to the Archbishop of Canterbury's comments about allowing some Shari'ah courts in the U.K. uses the example of how Islamic finance has incorporated Shari'ah principles into modern finance.

Ethical investing guided by faith is growing rapidly in Canada, with mutual funds that select investment based on religious principles. The most common faith-based funds appeal to Christians or Muslims. A range of additional services are available to Muslims in the U.K. including banking and home finance that have only limited availability in Canada.

Islamic microfinance is succeeding in Afghanistan where non-profits like FINCA offer Shari'ah-compliant microfinance. The success of Islamic microfinance has led to people like Joyce Lehman, a microfinance program officer for the Gates Foundation, to say that there should be greater availability of Shari'ah-compliant products: "Out in the field, MFIs are losing clients to other organisations that provide Shariah loans and it’s that type of market competition that is making MFIs look into providing Shariah products," she says.

Recently, a microfinance institution in Nigeria converted to only offer Shari'ah-compliant microfinance products.