Sunday, May 25, 2008

Sukuk to absorb excess liquidity, murabaha and musharaka

Sukuk could prove to be just the liquidity management tool GCC countries need to absorb surplus liquidity and help keep inflation low. However, since investing in sukuk creates spending and investment which would help to stoke inflation if they are just a way of recycling liquidity within the GCC, encouraging foreign governments and private companies to issue sukuk outside of the GCC could provide a way to absorb the liquidity without contributing to inflation and provide for badly needed funds for infrastructure projects.

Hong Kong companies may issue sukuk in the fourth quarter of 2008.

With the transfer from Tony Blair's government to one led by former Chancellor of the Exchequer Gordon Brown leaves questions about the government's continued support of the Islamic finance industry.

Is musharaka Shari'ah-based or merely Shari'ah-compliant? Although most people view musharaka as the most Shari'ah-based product available to Islamic banks there are a few who disagree including well-known Shari'ah scholar Sheikh Nizam Yaquby. When he spoke at the Islamic Finance World North America conference last week in New York City, he repeated something I have heard him say in other appearances (I apologize if I am misunderstanding his argument). He said that murabaha is just as acceptable as musharaka. In his recent appearance, he provided an interesting analysis of murabaha relating to the prohibition of riba arguing that although murabaha and riba are similar, one was allowed and the other was prohibited. Whether or not I one agrees with him, it is an interesting argument that has not been well articulated in the discussion about the Shari'ah-compliance of various Islamic financial products.

Saturday, May 17, 2008

Islamic finance globalizes, receives growing attention as a 'safer' alternative to conventional finance

The governor of the Central Bank of Bahrain met with his counterpart from the Monetary Authority of Singapore, the city-state's central bank, to discuss ways that Bahrain can help Singapore develop its Islamic finance industry. Singapore is planning to issue a sukuk soon. Meanwhile, Dubai will work with Hong Kong to develop Islamic finance in China. A Shari'ah-compliant ETF will be launched in the second half of 2008 on the Taiwan stock exchange. The Financial Times discusses new efforts from policymakers in Paris to rival London as the European center of Islamic finance.

The most recent article I wrote is in the current issue of Islamic Business & Finance. The article focused on Islamic microfinance.

Islamic finance is becoming viewed as a 'safer' alternative to conventional finance in the wake of the subprime crisis. The Islamic Bank of Asia is seeing similar growth in demand for Islamic finance from both Muslims and non-Muslims because of its perceived status as 'safer'. The same idea is one of a number discussed in a Washington Post article on the growth in Islamic home finance in the United States, even as the mortgage market shrinks.

The African Development Center in Minneapolis has been providing small business loans with the city's Community Planning and Economic Development agency. The loans provided through ADC are the first in the U.S. to be provided from a public agency and also be Shari'ah-compliant. The CPED description does not provide a description of the structure of the finance that makes it Shari'ah-compliant.

An interview with the head of Praesidium Consulting covers continuing fall out from the questions over Shari'ah-compliance of sukuk.

A paper in Sri Lanka discusses the differences in treatment of Islamic finance by the country's tax authorities.

An article from Reuters highlights the continued push for 'standardization' of Islamic finance.

Toyota plans to issue its first sukuk in Malaysia.

Saturday, May 10, 2008

Indonesia, Africa have potential for growth in Islamic finance, IIFM standardized commodity murabaha contract near completion

A Bloomberg columnist argues in an editorial piece that the slow development of Islamic finance in Indonesia compared with Malaysia is in part due to the change in control from the British to the Dutch in 1816 which led the country to be governed under civil rather than common law. The impediment caused by civil law is that Special Purpose Vehicles (SPVs), a mainstay of the Islamic finance industry, particularly for sukuk are not recognized under the law. Qatar, also a country governed under civil law, has gotten around this difficulty by establishing the common law Qatar Financial Center (QFC) whereas Indonesia is working towards changing the civil laws to allow the development of Islamic finance, a long process. Three banks in Indonesia are now opening Shari'ah-compliant units.

The Economist discusses the potential for growth in Islamic finance in Africa, particularly in the northern half of the continent where most Muslims live. However, the lack of development of the financial sector in general have hampered the growth of Islamic finance. However, the article does point to the continent's need for infrastructure projects for which it will need to attract foreign capital to finance and Islamic finance could be a vehicle to finance these projects using money from the Middle East where the coffers are filling rapidly as the price of oil rises over $125 per barrel.

The Bahrain-based International Islamic Finance Market (IIFM), a standard-setting body, announced it was in the final stages of Shari'ah review on a standardized contract for Islamic treasury management using commodity murabaha. The February 2008 issue of the Institute of Halal Investing (available as a pdf) discusses some of the controversy surrounding commodity murabaha which involves trading commodities to provide cash in exchange for a liability of cost plus markup.

Malaysia's Security Commission recently released guidelines on Islamic venture capital.

Sukuk could grow up to 20 percent a year according to bankers despite the credit crunch.

Citigroup announced a new head of their Islamic finance division, Citi Islamic Investment Bank, which has operated since 1986 (Citigroup has been involved in Islamic finance since 1981).

Hong Kong continues to work on developing its Islamic financial sector, but PriceWaterhouseCoopers recommends that it follow the model of Malaysia rather than the U.K.

Fitch says that the tightening of Shari'ah standards could hamper the development of asset backed sukuk.

The head of Emirates Islamic Bank answers questions on the regulation of Islamic finance and the difference between Islamic financial institutions aiming to provide Shari'ah-compliant products versus those he describes as "those who have found Islamic financial services a profitable business and are just trying to benefit from this trend for commercial reasons".

US News & World Report published a list of mutual funds in which stimulus checks could be invested because they have low minimum investments which includes the Amana Funds which invest in a Shari'ah-compliant way. FTSE predicts that Islamic equity funds and ETFs will see significant growth over the next few years.

Sunday, May 04, 2008

First takaful institution approved for the U.K.

The first takaful company received approval from the Financial Services authority. The U.K. has 5 Islamic banks already approved by the FSA, making it the country with the most well developed Islamic financial services market in the West. The FSA published a description of its approach to regulating Islamic financial institutions, described as 'no obstacles, no special favors'. I covered the FSA description in the December 2007 issue of the IHI newsletter, available as a PDF.

Reliance Money will begin to offer Shari'ah-compliant portfolio management in India. Despite having a large Muslim population (13.4% according to the CIA World Factbook), Islamic finance has been slow to develop in the country.

Brazil, a country without a significant Muslim population, is interested in beginning to become involved in Islamic finance.

The Nigerian Central Bank is expected to issue a decision about the regulation of Islamic finance & banking in the country.

Ibrahim Warde, an adjunct professor at Tufts University, recently provided an explanation of Islamic finance to the newspaper at Dartmouth University in southern New Hampshire.