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market. Speaking to Islamic Finance
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148.822, the HSBC/NASDAQ Dubai US
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issues over recent months.”
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(US$1.65 billion) for Islamic funds. As
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companies looking to expand into the
Middle East.
University tie-up
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Al Khaleej Takaful Group
QATAR: Al Khaleej Takaful Group has
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MALAYSIA: According to Kenanga
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Last week a New York bankruptcy
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Azzad Asset Management is a
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LEBANON
Legal and regulatory: Lebanon has
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One of the cornerstones of Islamic
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Islamic banking is gaining momentum
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modern day technology. According to
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new regulations is already placing
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CASE STUDY
Saudi Binladin Group recently issued
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Sukuk Murabahah whic...
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)
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Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)

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More and more educational institutions, around the world, are offering degree programs and diplomas in Islamic Finance and banking. This is a good sign as it indicates that the growing global Islamic finance industry has a rising demand for competent and trained talent. Why, therefore, are graduates struggling to find jobs after qualifying?
Is Talent Development needed or not?

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Talent Development in the Islamic Finance Industry--Is It Really Necessary? (pg30-31)

  1. 1. The World’s Leading Islamic Finance News Provider www.islamicfinancenews.com As we pass the midpoint of the year we seem stuck in the doldrums, with Sukuk issuance slowing right down amid a tense market girding itself up to face the impact of a withdrawal of US quantitative easing measures and a plethora of economic challenges. As the market drags itself through the lazy last days of the summer slowdown and Ramadan draws to a close, we talk to market leaders around the world to find out their opinions on the story so far, and what we can expect from the Sukuk sector in the second half of the year. Market slowdown Neil Miller, the global head of Islamic finance for Linklaters, confirms that: “The issuance market has become much quieter over the last few weeks.” The reasons for this might be obvious - including the combined effect of recent turmoil in global bond markets after the US federal reserve’s announcement that quantitative easing would be tapered down, in addition to the standard seasonal impact of summer, exaggerated by the effect of Ramadan – but they have no less impact for that. As of last week the market has gone seven consecutive weeks without an international issuance, with the last US dollar issuance placed by the IDB in May, and governments and state entities appear to have all but withdrawn from the market. Total issuances the week of the 23rd July were US$1.7 billion according to KFH Research – well below the year’s weekly average of US$2.2 billion, and bringing total issuance for 2013 to US$66 billion. In June the market slumped still further, recording the lowest monthly Sukuk issuance in 18 months. Anzal Mohammed, a partner at Allen & Overy, warns that we can’t expect much better for at least another few months. “Like the conventional bond markets, the Sukuk market has been affected by the volatility in the global capital markets since June and, with Ramadan and the summer, which is traditionally a quieter period for new issuance, we are unlikely to see new issuance until early September at the earliest assuming market conditions are conducive.” Market volatility While the current period of Ramadan has seen no deals being brought to market, Paul Bateman, the assistant director of Islamic capital markets at Bank of London and The Middle East (BLME), points out this is not unusual or unexpected, based upon previous market behavior. However, the run-up to this year’s Ramadan was differentiated by a period of market volatility, principally driven by differing views on the expected pace of change in monetary policy in the US. “In addition to the effect this had on the interest rate swap market, there was a re- pricing of credit risk which had previously appeared to exhibit credit spreads which had become too tight,” explains Bateman. “When volatility levels subside, debt issuers will have greater confidence to meet with investors with new transaction proposals which are deemed to be priced fairly, and issuance volume should rise.” US tapering However for now, a number of factors continue to inhibit the market, the most significant of which is of course the US withdrawal of quantitative easing, which has contributed to the tumbling yields which have spooked investors and sparked a Sukuk sell-off, resulting in heightened risk aversion and a nervous Halfway there: Sukuk so far continued on page 3 Powered by: IdealRatings® 31st July 2013 (All Cap) 954.59 900 925 950 975 1000 TMSSFTW 958.66 0.42% Volume 10 Issue 30 IFN Rapids .........................................................2 Islamic Finance news.........................................6 Shariah Pronouncement.................................12 IFN Reports: Arcapita continues its steps towards recovery; Global Sukuk market: Truly resilient?; Up to US$516 million in real estate projects slated for the GCC; US asset management firm sets sights on South Africa.............................................. 13 IFN Research Report: Mediterranean catapult............................. 15 A new lease of life...........................................16 Special Report: IT in Islamic banking: Boom imminent...... 17 Case study: Aerodome Sukuk protects investors with its bank facility............................................... 20 IFN Country Correspondents: Turkey; Indonesia; Bahrain ....................... 21 IFN Sector Correspondents: Asset Management; Microfinance (Africa); Private Equity & Venture Capital ............ 24 Features: UAE: Exciting growth opportunities................ 26 UAE: A silver lining in clearing clouds ............ 27 A regulatory perspective on Shariah governance. 28 Talent development in the Islamic finance industry — is it really necessary?................................ 30 Deal Tracker.....................................................32 REDmoney Indexes ........................................33 Eurekahedge data ...........................................35 Performance League Tables...........................37 Events Diary.....................................................41 Company Index...............................................42 Subscription Form...........................................42
  2. 2. 2© 31st July 2013 IFN RAPIDS Disclaimer: Islamic Finance news invites leading practitioners and academics to contribute short reports each week. Whilst we have used our best endeavors and efforts to ensure the accuracy of the contents we do not hold out or represent that the respective opinions are accurate and therefore shall not be held responsible for any inaccuracies. Contents and copyright remain with REDmoney. DEALS DanaInfra Nasional to pay out profits on its retail Sukuk in mid-August Tamweel to issue US$235 million Sukuk Ijarah in earlyAugust Almarai Company appoints arrangers for hybrid Sukuk offering Masraf Al Rayan to issue US$1 billion Sukuk in August Government of Senegal to debut sovereign Sukuk in August Genting Plantations to issue US$468.62 million Sukuk International Methanol Company secures US$86.64 million Islamic financing from Riyad Bank Zain Saudi’s outstanding US$2.3 billion Murabahah facility receives five-year extension NEWS Malaysia offers boost to Japan’s Islamic finance efforts NAEEM Holding rolls out the first real-time Shariah index for Egyptian stocks Head of BancABC’s corporate services encourages Tanzanian banks to adopt Islamic banking Sukuk’s role in the economy yet to be determined, says Egypt’s finance minister Absa Islamic Banking restructures Shariah compliant cheque account US bankruptcy court approves first Shariah compliant debtor-in- possession financing Deputy prime minister of Turkey calls for better performance of participation banks Maybank Islamic to expand across ASEAN nations EXIM Bank looks to increase its Shariah financing by 30% in the next two years The IDB incorporates Bangladesh into its Member Country Partnership Strategy program Bank Negara intervenes to absorb excess liquidity from the financial system World’s tallest office building to be part-funded in a Shariah compliant manner The IDB approves US$137 million irrigation project in Azerbaijan MCB Bank to open new branches across the country iSfin makes ILG its exclusive partner for Liechtenstein Masraf Al Rayan’s takeover deadline for the Islamic Bank of Britain extended to August The IDB lends support to Yemen and Sierra Leone Sukuk sales in the GCC falls 29% this year Qatar, Kuwait and Singapore eye stake in Lloyd’s Bank Emirates NBD Capital looks to offer Islamic products to Sri Lankan corporates Qatar National Bank sets foot in Shanghai Startup Village to benefit from Shariah compliant financing Hamdan Bin Mohammed e-University partners with Open University of Catalonia to offer Islamic banking and finance courses Abu Dhabi Islamic Bank provides Dubai Education Zone with exclusive products and services Al Hilal Bank implements Shariah compliant technology solution Bank Nizwa and Al Hilal Islamic Banking Services sign agreement towards enhancing Oman’s Islamic banking industry Bank Nizwa procures investment banking license Resurgence in Dubai’s property market offset by lack of financing for new projects Industry and commerce minister reiterates government’s support for Bahrain investment initiatives ABC Islamic Bank net profit hits US$6 million in the first half of 2013 Abu Dhabi Islamic Bank’s second quarter profit grows to AED371.4 million (US$101.09 million) Ahlibank’s net profit up by 6% for the first half Emirate aims high with the launch of the Dubai Center for Excellence in Islamic Banking & Finance Al Khaleej Takaful Group posts lower profits in the first six months of 2013 Arab Bank’s profit up 7.5% to reach US$387 million Impressive 85% hike in half year profits for Barwa Bank Commercial Bank of Dubai’s half year profits up by 2.3% ASSET MANAGEMENT CIMB-Mapletree Management successfully closes the nation’s first Islamic private real estate fund Shariah compliant private retirement growth fund is Hwang Investment Management’s top performer Azzad Asset Management discusses Islamic finance opportunities with South African ambassador Sedco Capital to distribute Islamic funds via private banks in Switzerland TAKAFUL Malaysian Deposit Insurance Corporation’s Takaful and insurance benefits protection funds accrue by 9% in 2012 Al Baraka Turk looks to establish an Islamic insurance company Prudential BSN Takaful distributes US$5.9 million in surplus profits to certificate holders Wataniya Insurance Company commissions Shariyah Review Bureau as Shariah advisor Malaysia’s Khazanah Nasional buys 90% stake in Turkey’s second-biggest health insurer RATINGS MARC downgrades KNM Capital’s Murabahah program and maintains its MARCWatch Negative status Capital Intelligence reaffirms rating on Sharjah Islamic Bank Moody’s affirms its ‘Caa1’ rating on Egypt’s government bond rating RAM downgrades Binariang GSM’s Sukuk program and places rating on negative watch’ MOVES Yakub Bobat appointed as head of corporate banking at Emirates Islamic Bank
  3. 3. 3© 31st July 2013 COVER STORY market. Speaking to Islamic Finance news, Malaysian Rating Corporation (MARC) notes that in its view the slowdown is primarily a result of the rising cost of funds, driven by the US scaling back bond purchases in view of the improved macroeconomic outlook. A source based in the Gulf suggests that the market may have overreacted to this, and we might be able to expect strong issuance once the market comes back in September after the summer holiday slowdown and the end of Ramadan. Mohieddine Kronfol, the chief investment officer of Franklin Templeton Investments, confirms that: “We expect by the time liquidity comes back, the market should have a more rational outlook for US federal reserve monetary policy and emerging markets economic growth.” However Malek Khodr Temsah, the vice-president of treasury and investments at Al Baraka Banking Group in Bahrain, warns that investors are not only concerned by the impact of US tapering, but are equally worried by the implications of these actions on emerging markets, which have been the primary beneficiaries of capital outflows. “The recent acute sell-off in emerging market dollar debt in the second quarter of 2013 sheds light on these pent-up jitters, which are weighing down on market sentiment and which in turn is keeping Sukuk issuers at bay,” he explains. Price premium Another reason for the general slowdown, suggests a source, is that there has actually been little need for issuers to tap the market. “With the premium between Sukuk and conventional eliminated, there is less incentive for non-Islamic issuers to tap the Islamic investors from a price perspective, and up until May, there has been no need to tap the Islamic investors either from a liquidity perspective, as you could raise as much as you wanted from the convention investors.” Basel III Jeroen Thijs, the chief risk officer at Bank Islam Malaysia, also points out that the Basel III requirements have had a significant impact. “At least in Malaysia, the enforcement of Basel III requirements, especially the mandatory write-off or conversion requirement, is holding the market back. Central banks are unwilling to specify the trigger levels at what point a Sukuk needs to be written down or converted into equity.” Another issue is that the exercise price of equity conversion cannot be set at the outset. This becomes even a bigger issue for banks that are not listed, as there is no trading benchmark for their equity. “All this will make issuance of Sukuk a lot more expensive given these added uncertainties,” predicts Thijs, warning that: “Also at the moment there are not enough Basel III compliant issues in the market that provide an adequate price benchmark.” However, given that banks will have to issue sooner or later, there is still the likelihood that market activity will pick up towards the end of the year. Malaysia moving ahead MARC notes that Malaysia’s Sukuk market has been somewhat affected with uncertainties surrounding the 13th general elections, and suggests that: “Slower growth in private investment in 2013 will also be another factor for the slowdown in bond issuance in Malaysia this year.” However, it must be noted that Malaysia’s Sukuk market has seen little slowdown compared with the rest of the world. According to Meor Amri bin Meor Ayob of the Bond Pricing Agency Malaysia, the market is “moving along nicely” with total Sukuk outstanding for the first half of 2013 (as at the 28th July) at RM492.6 billion (US$152.5 billion) – up from RM478.1 billion (US$148.2 billion) at the end of 2012 and an increase of 40% from 2011. Malek of Al Baraka also points out that: “Moreover, as industry-wide bodies between both regions gradually converge from a regulatory and Shariah point of view in light of increased coordination and cooperation, we do expect additional cross-border Sukuk sales such as GCC issuers looking to tap the depth and breadth of liquidity in the Malaysian ringgit Sukuk market.” Bouncing back Most players still expect that the market will recover after Ramadan. Miller predicts that: “We anticipate a pick up from September onwards,” while Ng Kit Ho, the head of debt capital markets in Malaysia for RBS, points out that the market as a whole has been slow, not just the Sukuk market. “We expect the market to rebound in line with the rest of global liquidity,” he notes. In fact Bateman believes that it is happening already. “Arguably, the US dollar Sukuk market has already rebounded strongly,” he suggests. Having peaked in May 2013 at a level of Halfway there: Sukuk so far Continued from page 1 continued... Figure 1: Evolution of Sukuk yields in the GCC January 2012 to mid-February 2013 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 (%) Jan25,2012 Feb25,2012 Mar25,2012 Apr25,2012 May25,2012 Jun25,2012 Jul25,2012 Aug25,2012 Sep25,2012 Oct25,2012 Nov25,2012 Dec25,2012 Jan25,2013 Sukuk yield
  4. 4. 4© 31st July 2013 COVER STORY 148.822, the HSBC/NASDAQ Dubai US Dollar Sukuk Index fell to a 10-month low of 142.144 in June 2013, before rebounding to a recent level of 146.212, suggesting that the market is already on its way back up. Malek is equally positive. “Sukuk issuance volumes will really start to pick up steam again in the first quarter of 2014. With US$35 billion in GCC bonds and Sukuk maturing in 2014, the refinancing needs of regional borrowers will ensure that the supply-side dynamics remain supportive of issuance.” Moreover, entering into 2014, the Sukuk market remains buoyed by sound fundamentals such as expansionary fiscal policies by GCC governments and massive infrastructure spending which will provide an impetus for state-linked borrowers to tap the Sukuk market and mobilize the significant liquidity parked on the balance sheets of Islamic financial institutions. However, Abradat Kamalpour, a partner at Ashurst in London, is less optimistic: “I think the market is at least a good six to 12 months away from starting to rebound... One issue is that a lot of the international banks (who take the lead on many deals) are restructuring themselves, and this inevitably leads to delays on transactions.” A healthy pipeline This might be true, but according to most market players the pipeline of deals coming to market is looking good, suggesting that all is not as black as it’s painted. Miller confirms a “reasonably healthy pipeline,” noting that: “We have more than half a dozen transactions at varying stages of progress. It is always difficult to predict the markets and unanticipated extraneous events are always a possibility; but that aside we think it ought to be quite easy for the taps to be turned on again once we get through summer and Ramadan.” Anzal of Allen & Overy agrees: “We are advising on a number of transactions which are in the execution phase and we expect the last quarter of this year to be particularly busy.” Ben Moylan, a partner in the Qatar office of Eversheds, notes that for the Qatar market too: “There are deals in the pipeline, with issuers ranging from financial institutions to large corporates, and we expect many of these to come to market in the coming quarters.” MARC is also optimistic on the future for the market, particularly in the Gulf region. “The long-term prospects of global Sukuk issuance remain promising as there is a significant amount of investment taking place in GCC countries over the next few years following government intentions to diversify their economies away from the oil and gas sector,” said a spokeperson to Islamic Finance news. Overall economic growth looks resilient in the GCC area and there are reportedly projects worth more than US$900 billion at various stages of development throughout the region, including several mega infrastructure projects that are being planned or executed, particularly in the real estate segment. “We believe that the implementation of these mega projects would revitalize bond issuances from these countries,” MARC confirms. Upcoming sectors Sukuk activity is also likely to continue in the Islamic institutional sector and Miller predicts that it may include further Tier 1 and Tier 2 issues. “We also anticipate more regional sovereign and GRE issuances which have of course been the staple for several years. We may also see the start of an interesting niche with some corporate hybrid issuances in the offing,” he explains. Ng of RBS identifies a number of other key areas to watch: “Some interesting deals in the pipeline include EXIM Malaysia, Genting Plantations, Turkish banks and corporates, Saudi Arabian banks and utility companies and Malaysian utility companies.” New markets Saudi Arabia is in fact causing considerable excitement in the market, as people believe that 2013-14 could be the year that its Sukuk sector really takes off. Adulkader Thomas, CEO of SHAPE Knowledge Services, highlights that: “Saudi Arabia is a key market to watch.” Malek agrees: “In light of the recent successful debut Sukuk by the Saudi Arabia dairy corporate, Almarai, we anticipate 2014 to be the year where Saudi corporates will increasingly emerge from the shadows and issue local-currency Sukuk.” Qatar is another promising market with impressively strong domestic growth and expanding domestic credit, which grew by almost 25% between 2011-12 on the back of robust public sector lending. S&P expects credit growth in Qatar to stay above 20% in 2013, pushing up the demand for funding by Qatari banks and, consequently, the level of debt capital market issuances. Moylan comments that: “As far as I am concerned, there is no Sukuk specific slowdown here and the lack of Sukuk issuances is really part of a more general ‘wait and see’ attitude to both debt and equity capital markets Halfway there: Sukuk so far Continued from page 3 continued... Figure 2: Total ringgit Sukuk outstanding, 2005-13 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Islamic
  5. 5. 5© 31st July 2013 COVER STORY issues over recent months.” Qatar is embarking upon several major infrastructure projects over the coming years and it is accepted that banks in particular will need to undergo capital raising in one form or another in order to fund many of these projects, leading to an inevitable boost for the Sukuk market. Moylan however warns that: “As of now, not all of the contracts associated with the projects have not been awarded, and institutions seem to be awaiting the outcome of these awards and a consequent clarification of their likely funding needs, before entering in the markets, through Islamic instruments or otherwise.” Sovereign push But while these markets are making strides forward, other new entrants have a little more work to do. Ng points out that: “Some of the jurisdictions that have an interest in issuing Sukuk still have not or have only just harmonized their legal framework, e.g. Hong Kong. It will take time for a first mover to issue a benchmark and set up a curve. If these countries are interested and serious about issuing Sukuk, they will need to set a curve, which means that the sovereign or proxy to the sovereign needs to make the first issuance so that the rest can follow.” The coming year is also expected to see a lot of new markets arriving to tap the Sukuk sector. Malek notes that: “We’ve seen a plethora of new sovereigns either jump on the bandwagon and amend tax laws and regulatory frameworks to facilitate the issuance of Sukuk or indicate a keenness to make their jurisdictions more Sukuk-friendly. Oman, Tunisia, Morocco, Kazakhstan, and Nigeria are amongst a pool of governments that are expected to explore Sukuk issuance.” It is not just in new markets that sovereigns need to take a stand though. One other reason for the slowdown in Sukuk issuance has been the absence of governments and sovereigns from the market. Timucin Engen, an associate director of S&P in Dubai, notes that: “Looking at the breakdown of global issuance to date, there was a slowdown in the sovereign and quasi-sovereign issuance which drove the overall relatively lower issuance this year, whereas the corporate issuance (which also includes banks) was strong.” A Dubai-based source agrees that: “We need to see much more push from government and government-related entities to issue Islamic paper. We see that from Dubai, and we see it in Saudi Arabia - although Saudi is still very domestic. I think we will see bonds moving back towards US dollars as well, with very little local currency issuance, and in Saudi, a declining proportion.” However, the future looks positive and governments are hoped to move back into the market towards the end of the year. Kronfol confirms that: “We expect sovereigns, quasi-sovereigns and banks to tap the markets relatively soon.” Banks drive forward In fact financial institutions have been a driving force behind the Sukuk market this year. Specifically in terms of GCC deals (both conventional and Sukuk), issuance over the past 12 months has been very healthy as banks attempt to capitalize on the low interest rate environment. “One particularly interesting development in the same period was the emergence of first Tier I issuance structures in the GCC region by the banks,” notes Engen, “and these structures were in the form of Sukuk.” According to S&P, 45% of all GCC bank debt issued in 2012 was in the form of Sukuk, and last year GCC banks issued a total of US$6.7 billion in Sukuk - representing a year-on-year increase of 136%. Although long-term interest rates recently went up which could increase the cost of funding, this is likely to have a limited impact on bank activity as investors continue to search for higher yields, allowing bond and Sukuk issuers to secure long-term funds at relatively low cost. Institutional interest combined with rapid growth in the GCC banking sector is expected to continue pushing this growth forward, and banks will remain key players in the Sukuk market in the coming months as they attempt to replace more expensive issuances with lower cost Sukuk sources, retiring high- cost notes. For example, the National Bank of Abu Dhabi retired a certain portion of its Tier 2 notes in 2012, while in January this year the bank used its option to retire its AED2 billion subordinated convertible note first issued in February 2008. S&P confirms that: “Given the need to manage costs in an environment of limited revenue growth, UAE banks will likely maintain their focus on reducing funding costs. We believe this will keep fueling issuance in the Gulf.” A positive end to the year Despite all this positivity, until there is a clearer picture of where global economic growth is heading, investor appetite is likely to remain remain fragile. However, the supply-demand imbalance in the Sukuk market remains, and should provide something of a cushion from this global uncertainty and therefore will continue to underpin appetite from Sukuk investors. And there is still hope that 2013 will finish on a strong note. Although the year-to-date issuance figures are relatively lower than last year, S&P still expects to see a healthy level of issuance for the remaining period of 2013. Engen notes that: “We still expect the total issuance to reach over the US$100 billion mark this year. We do not see any change in the positive long-term drivers for the Sukuk market.” Halfway there: Sukuk so far Continued from page 4 Some interesting deals in the pipeline include EXIM Malaysia, Genting Plantations, Turkish banks and corporates, Saudi Arabian banks and utility companies and Malaysian utility companies
  6. 6. 6© 31st July 2013 NEWS DEALS Profit payment MALAYSIA: DanaInfra Nasional has announced that it will be making the first profit payment to investors of its retail Sukuk on the 13th August for the period from the 8th February to the 12th August. The rate is fixed at 4% a year. Upcoming Sukuk SAUDI ARABIA: Tamweel has announced its plans to issue a corporate Sukuk Ijarah worth US$235 million on the 1st August this year. The issuance will be made through its SPV, Tamweel Funding. Rare structure SAUDI ARABIA: Dairy company Almarai has selected the investment banking arm of Banque Saudi Fransi, BNP Paribas, HSBC Saudi Arabia and Standard Chartered to arrange the sale of its upcoming hybrid Sukuk, reported Reuters. Corporate Sukuk QATAR: Masraf Al Rayan will be issuing a US$1 billion corporate Sukuk in August, as announced on the IdealRatings portal. Sovereign Sukuk SENEGAL: The Republic of Senegal will be issuing a sovereign Sukuk domiciled in the country, amounting to US$200 million, on the 1st August, according to sources. Sukuk in the pipeline MALAYSIA: Palm oil producer Genting Plantations is planning to issue a 15-year Sukuk program worth RM1.5 billion (US$468.62 million) via its SPV Benih Restu, which has been rated ‘AA2(s)’ with a stable outlook by RAM Ratings. The rating agency also reaffirmed Genting Plantation’s long and short-term corporate credit ratings at ‘AA2/stable/ P1’. The deal will be advised by Maybank and OCBC Bank. Financing secured SAUDI ARABIA: International Methanol Company, an affiliate of Saudi International Petrochemical Company (Sipchem), has procured a SAR325 million (US$86.64 million) Islamic facility from Riyad Bank which will mature in 2023. Final extension? SAUDI ARABIA: Telecom operator Zain Saudi’s outstanding US$2.3 billion Murabahah facility, which was initially due in 2011, has been extended by five years; with 25% of the financing due in the final two years of the extension period and the remaining 75% on the 31st July 2018, according to a bourse filing. The new facility has an 18% deduction in profit margin with the possibility of a further reduction in the future. Malaysia offers boost to Japan’s Islamic finance efforts GLOBAL: Malaysian prime minister Najib Razak and the Japanese premier Shinzo Abe met in the political capital of Malaysia, Putrajaya, on the 25th July, to discuss their intentions to renew a bilateral swap agreement which expired in October 2007. Also on the agenda was the topic of Islamic finance, and Najib commented that Malaysia is looking forward to receiving inward investment from Japanese enterprises, financial institutions and investors to engage in Islamic finance-related activities. He also added that Malaysia would like to offer technical assistance to Japan in relation to this sector. On the sidelines of the event, Malaysian government investment arm 1MDB signed an agreement with the Japan Bank for International Cooperation (JBIC) to open opportunities for both countries to benefit from Samurai bonds under the Guarantee and Acquisition toward Tokyo market Enhancement (GATE) facility. JBIC has since 2006 expressed its intention to issue a Sukuk, but has yet to come to market. Speaking to Islamic Finance news, a Japan-based lawyer commented on the latest initiative between the two governments, saying: “Although we have not seen significant activities in the Islamic issuance market in Japan following the amendments to the laws on securitization, it is hoped that such initiatives will increase the chances of Japan issuing a Sukuk in the country. We have been considering this, and the Japanese government has been keen to accept Islamic money in Japan. The environment, following the amendments to the law, has already been primed for such issuances.” Although there have not been any domestic Islamic issuances within the Japanese market itself, several Japanese corporations have raised Sukuk outside of the country, including AEON Credit, Toyota Corporation and Nomura Holdings. The Bank of Tokyo Mitsubishi- UFJ’s Malaysian operations also recently affirmed that it will be rolling out more Islamic financing products in the coming year to satisfy rising demand from consumers and investors. DEAL TRACKER Full Deal Tracker on page 32 ISSUER ISSUING CURRENCY SIZE (US$) DATE ANNOUNCED Genting Plantations RM 465.31 million 26th July 2013 Republic of Senegal US$ 200 million 25th July 2013 Masraf Al Rayan US$ 1 billion 25th July 2013 Tamweel US$ 235 million 25th July 2013 Bank Asya TRY 519.23 million 23rd July 2013 Are you reading us on your iPad / iPhone?
  7. 7. 7© 31st July 2013 NEWS AFRICA Debut index EGYPT: Investment firm NAEEM Holding and IdealRatings have teamed up to establish the first real-time Shariah compliant index for Egyptian stocks, the NISE25. The index will comprise of the top 25 Shariah compliant stocks in the republic that fulfil the criteria set by NAEEM’s Shariah board. Shariah banking for all TANZANIA: Zulfikar Chando, the head of BancABC Tanzania’s corporate services, has urged other banks in the East African country to offer Islamic banking products, while highlighting the significance of Islamic finance to the republic’s economy. Sukuk hangs in the balance EGYPT: In his first press conference, newly-appointed finance minister Ahmed Galal revealed that US$9 billion in aid by Saudi Arabia, the UAE and Kuwait will be used to strengthen the republic’s foreign currency reserves while another US$3 billion will be used to procure strategic commodities. The minister also said that the role of Sukuk in the republic’s economy has yet to be determined. Product improvement SOUTH AFRICA: Absa Islamic Banking has revamped its Shariah compliant cheque account to include services which allow customers to recover some of their monthly bank fees. The bank’s Islamic cheque value bundle is the first Shariah compliant product of its kind to be introduced globally. AMERICAS Legal breakthrough US: The US bankruptcy court for the southern district of New York has recently approved the country’s first Shariah compliant debtor-in-possession financing and exit financing package in Arcapita Bank’s bankruptcy cases. The court’s decision bears testament to the permissibility of Shariah compliant financing in the US Bankruptcy Code as well as the adaptability of the US bankruptcy system to alternate forms of financing. ASIA Heightened concerns TURKEY: Ali Babaçan, the deputy prime minister of Turkey, has expressed concerns over the low market share of participation banks in Turkey. “The participation banks’ share in assets and funds is 5% and 6%, respectively. These figures are below our desires,” he said during an Islamic finance conference in the republic. Regional expansion MALAYSIA: In line with the central bank’s ambitions to internationalize Islamic finance, Maybank Islamic intends to strengthen its presence in neighboring ASEAN countries after solidifying its position in Singapore and Indonesia, according to Muzaffar Hisham, the bank’s CEO. Maybank Islamic currently has four million depositors with a deposit value of RM70 billion (US$21.86 billion). Seeking improvement MALAYSIA: EXIM Bank (Export-Import Bank) of Malaysia intends to boost its Islamic financing portfolio from its current 20% share to reach approximately 30% of its total financing disbursements by 2015, according to Adissadikin Ali, the bank’s managing director and CEO. He also said that the bank is anticipating a lower non-performing financing rate this year from the current 10%, due to improved financial vigilance. Special assistance scheme BANGLADESH: The IDB has decided to admit Bangladesh into its four-year Member Country Partnership Strategy program in September. Under the program, the IDB will provide significant financial assistance of up to US$17.6 billion for the country’s infrastructure, agriculture, education and import- export sector, through its subsidiaries including the International Islamic Trade Finance Corporation (ITFC) and the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC). Managing the flood MALAYSIA: The Malaysian central bank, Bank Negara Malaysia, has intervened to absorb excess liquidity from the financial system. The bank estimated liquidity as at the 29th July to stand at RM5.32 billion World’s tallest office building to be part-funded in a Shariah compliant manner UAE: Standing at an estimated 520 meters high, the upcoming commercial building project — which will involve the Dubai Multi Commodities Center (DMCC) — is expected to draw upon Shariah compliant funding as part of its financing package, said the chairman of the DMCC Ahmed Sulayem in a recent interview with a Gulf daily. The construction, which is estimated to cost US$1 billion, is expected to be completed by 2018 — five years from the commencement of the project. The DMCC was set up as a government initiative to facilitate the trade flow of commodities through Dubai, and runs the Jumeirah Lake Towers Free Zone, which is a free-zone commercial, residential and retail space available for leasing and sale. According to the DMCC chairman, since the center’s set- up in 2002, the value of gold traded has increased from US$6 billion in 2003 to reach US$70 billion in 2012 — making up 25% of the world’s physical gold trade. As at June 2013, there were 6,890 companies registered under the DMCC, with more than 1,200 signing up in the first half of this year alone — exceeding the entire total number of new registrations in 2011. continued... Want to join IFN? is building its team and is now seeking budding journalists. So if you’d rather write the news than read it… drop us a line. We’re currently open to applications from senior and junior journalists with excellent writing skills and a strong background in finance. Please submit applications to Andrew.Morgan@REDmoneygroup.com
  8. 8. 8© 31st July 2013 NEWS (US$1.65 billion) for Islamic funds. As part of its RM6 billion (US$1.86 billion) range maturity program, it will be announcing three Wadiah tenders worth RM900 million (US$280.31 million) for seven days, RM500 million (US$155.73 million) for 14 days and RM400 million (US$124.58 million) for 28 days. Financing approved AZERBAIJAN: The board of directors of the IDB has given its preliminary consent to commence the US$137 million agricultural irrigation project in the landlocked enclave of the Nakhchivan Autonomous Republic. The Azerbaijani government’s next move would be to complete the development of the project. Reaching the masses PAKISTAN: Speaking to a local daily Mujeeb Baig, the head of product development at Karachi-based MCB Bank, has revealed plans to enhance its Shariah banking network. The bank will be opening new branches and sub- branches in different cities across the country. EUROPE Europe focus LIECHTENSTEIN: Islamic finance legal network iSfin has partnered with business and tax law firm ILG, making the latter its exclusive representative for Liechtenstein. GLOBAL Delayed takeover GLOBAL: Due to ongoing negotiations since late 2012, Masraf Al Rayan has exceeded the previous deadline to extend a takeover offer to the Islamic Bank of Britain. As a result, the time limit for the buyout has been extended to the end of August this year. Socio-economic support GLOBAL: The IDB has signed an agreement with the Yemeni government to provide up to US$18.3 million for the financing of rural and industrial projects in Yemen. An amount of US$15 million will be allocated to develop several infrastructure projects in rural areas of Yemen, while another US$3.3 million will be given to the Deauville Partnership’s Transition Fund, to be invested in comprehensive research for the development of the Al-Hudaydah industrial area. The IDB has also pledged support towards development projects to be carried out by Sierra Leone’s Ministry of State for Finance and Economic Development, and National Commission for Social Action. Sukuk decline GLOBAL: According to data compiled by Bloomberg, the number of Sukuk auctions in the GCC has decreased by 29% in 2013 compared to 17% last year. The drop in the GCC, the newswire said, follows the US Federal Reserve’s action of scaling back on its quantitative easing program. British auction GLOBAL: Sovereign wealth funds from Qatar, Kuwait and Singapore are believed to be interested in acquiring a stake in Lloyd’s Banking Group. In the coming weeks, the UK government will be selling 39% of the bank’s holding, worth approximately GBP20 billion (US$30.75 billion), in three tranches. The first tranche will be offered to existing institutional investors at a 5-10% discount, followed by the second tranche in spring, also to institutional investors and the retail offering to be debuted in summer 2014. New territory GLOBAL: Emirates NBD Capital intends to provide Sri Lankan banks with Islamic-structured financing, as it looks to find its niche in the South Asian republic’s corporate sector, according to its CEO, Mohammad Wajid Kamran. He also highlighted the suitability of Sukuk to fund Sri Lanka’s upcoming infrastructure products. Eastern footing GLOBAL: Qatar National Bank, which has an Islamic banking unit, has opened a representative office in the Shanghai World Financial Center. The bank aims to extend intermediary services to Middle Eastern companies seeking to establish their business or investments in China while acting as a liaison for Chinese continued... continued... Startup Village to benefit from Shariah compliant financing INDIA: India’s answer to Silicon Valley, the Startup Village in Kerala, will receive INR150 million (US$2.53 million) from Cheraman Financial Services’Alternative Investment Fund. The fund, which received approval from the Securities and Exchange Board of India in April this year, targets Shariah compliant investments in the service and manufacturing sectors. The Startup Village is India’s first technology business incubator based on the model of public-private partnerships. The initiative is supported by the government of India, the Department of Science and Technology, Technopark Trivandrum and MobME Wireless. The village, which was launched early last year, aims to incubate 1,000 product start-ups over the next 10 years and will focus primarily on student start- ups from college campuses. It aims to provide a platform for start-ups to create breakthrough technologies for the global telecommunications industry. The incentives afforded to new companies include a three-year tax exemption from the government and funding of up to INR10 million (US$168,782), as well as subsidized fees for tax consultations, infrastructure and IP services. Cheraman Financial Services, which is also known as Al Barakah Financial Services, was established under an equity participation with the Kerala State Industrial Development Corporation and private investors; the majority of which are from the Gulf. As at the 22nd April 2013, the fund was listed under Category II of the Securities and Exchange Board of India which includes private equity funds, debt funds and funds of funds. According to the regulator’s website, funds registered under this category are not allowed any specific incentives or concessions from the government or regulator. Cheraman Premium Fund I is the first scheme from the company which aims to carry out private equity investments totaling INR250 million (US$4.21 million).
  9. 9. 9© 31st July 2013 NEWS companies looking to expand into the Middle East. University tie-up GLOBAL: Hamdan Bin Mohammed e-University entered into a cooperation agreement with the Open University of Catalonia for the development of customized Islamic banking and finance courses for the Spanish university. MIDDLE EAST Tailored services UAE: Abu Dhabi Islamic Bank has partnered with the Dubai Education Zone to provide customized banking services and products — including discounts to the latter’s employees, while also designing Islamic banking educational courses for its working professionals. Successful deployment UAE: Al Hilal Bank has integrated ETHIX-Profit Computation and Distribution Islamic banking system from International Turnkey Systems. Mutual cooperation OMAN: Shariah compliant Bank Nizwa and Ahlibank’s Al Hilal Islamic Banking Services have signed into a Wakalah agreement to facilitate the banks’ interbank placement. License approved OMAN: Shariah compliant Bank Nizwa has obtained an investment banking license after six months in operation, allowing the bank to manage funds and issue Islamic financial instruments. Lack of financing for new projects UAE: Improved sentiment in the UAE property market, which has been pegged to an overall improvement in the Dubai economy, and a return to the market by major developers, has spurred demand for residential property across Abu Dhabi, Dubai and Sharjah. In the first half of the year rental prices continued to grow at an upward trend, and while prices are not expected to fall due to strong demand, a lack of financing for new development projects is expected to stall growth to some extent. A recent report by property consultants Asteco expects the Dubai residential market to continue to see new project launches, recommencements of stalled projects and handovers. However, it said that although a number of previously stalled projects have recommenced construction, other developments have been put on hold due to lack of available finance. Government backing BAHRAIN: The minister for industry and commerce in Bahrain, Dr Hassan Fakhro, has said that the government will support all Bahraini investment initiatives undertaken in the kingdom and overseas in a bid to enhance its economy. Bahraini businesses were hit hard following the 2009 credit crisis and are still struggling to find their footing four years on. RESULTS ABC Islamic Bank BAHRAIN: ABC Islamic Bank reported a net profit of US$6 million for the first six months of 2013, recording an increase of 49% compared to the same period last year. The bank’s total operating income rose to US$8.3 million in the first half, compared to US$7.4 million in the corresponding period last year, while its operating expenses decreased to US$2.2 million compared to US$2.7 million in the same period last year. Abu Dhabi Islamic Bank UAE: Abu Dhabi Islamic Bank has recorded a net profit of AED371.4 million (US$101.09 million) in the second quarter compared to AED322.6 million (US$87.8 million) in the corresponding period last year. Ahlibank OMAN: Ahlibank, which operates Al Hilal Islamic Banking, announced a 6% increase in net profit for the first half of the year to OMR12.5 million (US$32.37 million) against OMR11.8 million (US$30.56 million) from the corresponding period last year; while its operating income grew by 7% to OMR24.3 million (US$62.93 million). The bank’s total assets stood at OMR1.3 billion (US$3.37 billion) as of the 30th June, marking a 23% accretion. Emirate aims high with the launch of the Dubai Center for Excellence in Islamic Banking & Finance UAE: The 24th July saw the launch of a groundbreaking initiative by Hamdan Bin Mohammed e-University (HBMeU), in line with the Dubai government’s aspirations of becoming the world’s leading Islamic economy. Sheikh Hamdan Mohammed Rashid Al Maktoum, the crown prince of Dubai and the chairman of the Dubai Executive Council and president of HBMeU, launched the Dubai Center for Excellence in Islamic Banking & Finance, which aims to support human capital development in the Islamic banking and finance sector in the emirate and on a global scale through the implementation of a comprehensive curriculum encompassing human capital development, research and community service. The research aspect of the center will include the advancement of the professional and theoretical foundation for Islamic banking and finance, while on the community side, the center will aim to provide Islamic banking and finance education to a wider audience within the Middle East and overseas. Adopting a four-tier approach in its academic system, the learning center seeks to enhance human capital development in stages subject to a learner’s commitment and competency level. The initiative is part of the Dubai government’s plan, unveiled in February this year, to become the world’s premier Islamic economy. According to officials, the center represents an integral part of this plan which includes the creation of an arbitration center for dispute resolution in Islamic finance, as well as the creation of a Shariah council to oversee standards on Islamic finance. The center’s advisory board consists of an impressive lineup of industry stalwarts, including Dr Yusuf DeLorenzo, the chief Shariah officer and board member at Shariah Capital; Professor Dr Syed Othman Al Habshi, the chief academic officer of INCEIF; Rodney Wilson, Emeritus Professor at Durham University UK & INCEIF; Neil Miller, the global head of Islamic finance at Linklaters; Dr Fahim Khan, the chairman of Riphah Center of Islamic Business; and Dr Khaled Al Fakih, the secretary-general of AAOIFI. continued...
  10. 10. 10© 31st July 2013 NEWS Al Khaleej Takaful Group QATAR: Al Khaleej Takaful Group has registered a decrease in first half net profits to QAR28.3 million (US$7.76 million) from QAR59 million (US$16.19 million) in the same period last year. Arab Bank JORDAN: Amman-based Arab Bank, which provides Islamic banking services, reported a 7.5% increase in profits to US$387 million for the first six months of 2013. The bank also foresees a double-digit growth this year based on the steady growth in its net operating income. Barwa Bank QATAR: Barwa Bank has witnessed an increase of 85% in half-year profits to QAR303.6 million (US$83.3 million), compared to QAR162.9 million (US$44.7 million) in the corresponding period last year. The bank saw a 10% increase in total assets to QAR27.8 billion (US$7.62 billion) while its earnings per share rose from QAR0.55 (US$0.15) to QAR1.01 (US$0.27). Commercial Bank of Dubai UAE: Commercial Bank of Dubai, which operates Shariah compliant Attijari Al Islami, reported a 2.3% increase in net profit to AED497 million (US$135.28 million) in the first half of the year from the same period in 2012; while its operating income grew by 4.6% to AED983 million (US$267.57 million). The bank’s total assets stood at AED42.4 billion (US$11.54 billion) as at the 30th June, marking a 7.7% growth from the corresponding period last year. Finance House UAE: Independent financial and investment firm Finance House recorded a consolidated net profit of AED56.5 million (US$15.38 million) for the first half of the year while its net interest income increased by 7.5% to AED64 million (US$17.42 million), compared to the first six months of 2012. The company’s Islamic financing and investing assets stood at AED100 million (US$27.22 million) as of the 30th June, marking a 54% growth against the corresponding period last year. First Gulf Bank UAE: First Gulf Bank, which has an Islamic window, reported an increase of 15% in profits to AED1.17 billion (US$318.45 million) in the second quarter of this year. Jordan Islamic Bank JORDAN: Jordan Islamic Bank recorded a profit of JOD14.7 million (US$20.68 million) in the second quarter, marking a 21% growth from the corresponding period last year. National Bank of Kuwait KUWAIT: National Bank of Kuwait registered a 6.4% year-on-year increase in net profits to US$450.3 million for the first six months of 2013 and a 25.3% growth in total assets totaling to US$62.8 billion as of the 30th June 2013. The bank’s operating income grew by 18.3%, due in part to the bank’s increased stake in Shariah compliant Boubyan Bank. Masraf Al Rayan QATAR: Masraf Al Rayan recorded a 13% accretion in net income for the three months ended the 30th June totaling to QAR421 million (US$115.6 million) from the last quarter. The bank’s shares reached QAR28.1 (US$7.7), marking a 1.3% increase on the 23rd July. The bank is Qatar’s largest Shariah compliant bank by market value. Mashreq Bank UAE: Mashreq Bank, the parent company of Mashreq Al Islami, announced a 40.1% rise in net profit for the first half of the year totaling to AED828 million (US$225.38 million) against the corresponding period in 2012 while second quarter earnings grew by 24.7% to AED402.6 million (US$109.59 million) from the same period last year. National Bank of Abu Dhabi’s second quarter profit up by 16% UAE: As the UAE’s real estate market sees a gradual recovery in average property prices in Abu Dhabi and Dubai, as well as an improvement in liquidity in the banking system, the National Bank of Abu Dhabi (NBAD) has recorded an increase of 16% in second quarter profits. The bank’s net income rose to AED1.21 billion (US$329.34 million) from AED1.05 billion (US$285.79 million) in the same period last year, while its net income from Islamic financing contracts as at the 30th June stood at AED149.09 million (US$40.58 million). Its net interest and Islamic financing income grew by 7.5% from the corresponding period last year to AED3.2 billion (US$870.99 million). NBAD also reported a 21.8% rise in operating profits to AED3.3 billion (US$898.21 million) from the first half of 2012, with a 3% growth in its Islamic banking business. With regards to its Egyptian operations, the bank, which is rated ‘Aa3’ by Moody’s, said that it will continue to closely monitor the situation in the republic, and does not anticipate any material impact to its overall business. Overall growth in the UAE is expected to dampen this year, mainly due to slower growth in hydrocarbon production. However, analysts at NBAD believe that this will be mitigated by increased non-oil activity in the region. Net loan to deposit ratios in the UAE are currently at their lowest levels of the last few years, contributing to improved liquidity, while lending growth, although so far modest, is seen to be picking up. KPMG has 218 subscribers to Islamic Finance news, and pays less than US$24 per subscription. IFN is for everyone, not just the CEOs Contact us now and see how we can help your entire team Call: +603 2162 7800 or Email: musfaizal.mustafa@redmoneygroup.comneyeygggrog upup.comm
  11. 11. 11© 31st July 2013 NEWS Public Bank MALAYSIA: According to Kenanga Research, Public Bank’s Islamic banking business saw a small increase of 1.3% quarter-on-quarter and a slight decline of 0.5% year-on-year. The bank’s total income, however, grew 6.5% in the second quarter compared to the corresponding period last year. ASSET MANAGEMENT Inaugural closing MALAYSIA: CIMB-Mapletree Management, a joint venture between Malaysia’s CIMB Group and Singapore- based Mapletree Investments, recently closed its Islamic private real estate fund, the CMREF 2 Shariah Fund, said to be the first of its kind in Malaysia. The Malaysia-domiciled fund has a size of approximately RM450 million (US$141.57 million) and invests in Shariah compliant core assets. Top of the table MALAYSIA: Hwang AIIMAN PRS Shariah Growth Fund, managed by Hwang Investment Management, has recorded a 19% growth to become the fund manager’s number one performing fund. The local Islamic private retirement scheme fund, along with Hwang Investment’s other three funds, declared a 2-4% interim income distribution for the nine-month period ended the 31st July. Opening doors GLOBAL: US-based Azzad Asset Management has approached the South African ambassador to the US to discuss potential Halal investment opportunities in the African republic, under the former’s Shariah compliant Azzad Wise Capital Fund. Widening reach SAUDI ARABIA: With a plan to source two-thirds of its assets under management from outside Saudi Arabia within four to five years in order to widen its client base outside traditional Islamic regions of the Middle East and Southeast Asia, investment firm Sedco Capital intends to register its Shariah compliant funds — which are also environmental, social and governance (ESG) compliant funds — in Switzerland and create distribution channels via private banks. The firm will be entering into two strategic agreements with established private banks by the end of the year, according to its CEO Hasan Al Jabri. TAKAFUL Takaful protection MALAYSIA: Malaysian Deposit Insurance Corporation, also known as Perbadanan Insurans Deposit Malaysia (PIDM), has reported an increase of 9% in its Takaful and insurance benefits protection funds to RM1.08 billion (US$339.75 million) from RM991.2 million (US$311.82 million) at the end of 2011. The fund proceeds are collected from levies paid by Takaful and insurance operators. Legislative will TURKEY: Subject to legislative endorsements, Al Baraka Turk has notified Turkish authorities of its intention to found an Islamic insurance company in the republic. Turkey currently lacks the legal basis for the formation of Takaful firms. Profit distribution MALAYSIA: Almost 300,000 certificate holders of Prudential BSN Takaful’s Ordinary Family Takaful Plan will receive a proportionate rate of the surplus from the plan’s Tabarru’ funds amounting to RM7.5 million (US$2.35 million). At the same time, the company will also distribute RM11.3 million (US$3.54 million) in investment profits to 486,000 eligible participants. Outsourcing service SAUDI ARABIA: Cooperative insurance operator Wataniya Insurance Company has engaged Shariyah Review Bureau to act as the firm’s Shariah advisor, whereby the latter will oversee the Shariah compliance needs of the operator. Turkish venture GLOBAL: Khazanah Nasional’s insurance arm, Avicennia Capital, has purchased a 90% stake in Acibadem Sigorta, Turkey’s second-largest health insurance provider. Avicenna Capital’s portfolio includes CIMB Aviva Takaful, CIMB Aviva Assurance and Singapore’s Takaful reinsurer, ACR Capital Holdings. RATINGS Negative outlook MALAYSIA: KNM Capital’s RM300 million (US$94.15 million) Murabahah underwritten notes issuance facility/ Islamic medium-term notes program has been downgraded by MARC to ‘MARC- 2ID/A-ID’ from ‘MARC-1ID/A+ID’ while its outlook remains on MARCWatch Negative. KNM Capital is the SPV of investment holding company KNM. Ratings assigned UAE: Sharjah Islamic Bank’s financial strength rating has been reaffirmed at ‘BBB+’ by Capital Intelligence while its long and short-term foreign currency ratings have been rated ‘A-’ and ‘A2’, respectively. All ratings carry a stable outlook. Egypt affirmed negative EGYPT: Moody’s has affirmed the government bond rating of Egypt at ‘Caa1’, with a negative outlook. Weak ratings MALAYSIA: Binariang GSM (BGSM)’s RM2 billion (US$622.92 million) Islamic commercial papers program, RM19 billion (US$5.92 billion) Islamic medium- term notes program and US$900 million junior Sukuk have been downgraded by RAM from ‘P1’, ‘AA3’ and ‘A2’, respectively, to ‘P2’, ‘A2’ and ‘BB1’. The downgrades reflect the weak performance of Aircel, a subsidiary of Maxis Communications, of which BGSM is the immediate holding company. The ratings have also been placed on negative watch. MOVES Emirates Islamic Bank UAE: Yakub Bobat has been appointed as the head of corporate banking at Emirates Islamic Bank. He brings with him 25 years of experience in both Islamic and conventional finance, and was previously the global head of HSBC Amanah Commercial Banking.
  12. 12. 12© 31st July 2013 SHARIAH PRONOUNCEMENT Query: A customer has approached an Islamic bank seeking finance to purchase a property which is mortgaged to a conventional bank against conventional loan payable by the owner of the property. Shariah guidance is sought on how the Islamic bank can finance the purchase of the mortgaged property for its customer. Pronouncement: The property may be financed through various modes such as Ijarah, Murabahah or Musharakah. However, we shall discuss the Murabahah mode of financing as a solution, whereby the bank will purchase the property from the existing owner and will sell the same to its customer on deferred price, after adding agreed profit to the cost. As explained in the query, the owner of the property is not in a position to pay the bank’s debt from his own sources to get the mortgage released so that he could sell it to the Islamic bank. The sale price of the property is higher than the outstanding mortgage amount. On the other hand, the conventional bank will not agree to release the mortgage before full settlement of its outstanding loan. In the above scenario, Shariah permits the Islamic bank to purchase the mortgaged property from the owner by entering into purchase agreement with him, subject to the seller first obtaining written confirmation from the conventional bank addressed to the Islamic bank that it will release the mortgage upon full payment of the outstanding mortgage amount. The seller will request the Islamic bank to disburse the sale proceeds in two parts: with the first payment to be made to his account with the conventional bank so that he can use it to settle his liability with the conventional bank, and the balance released to the seller by way of manager’s cheque. For avoidance of doubt, in the given scenario the Islamic bank will not pay to the mortgagee bank any interest- bearing loan payable by the seller. Rather it will simply pay part of the purchase price to the seller’s account with the conventional bank, which shall then be used by the conventional bank to settle the seller’s outstanding mortgage amount, while the balance purchase price of the property will be paid directly to the seller. Once the clear title and constructive possession has passed to the Islamic bank pursuant to the release of the mortgage by the conventional bank, the Islamic bank will sell the property to its customer on a Murabahah basis. The Islamic bank will have the right to get the property mortgaged to it until full payment of the Murabahah amount by the customer. Dr Hussain Hamed Hassan Chairman of the DIB Shariah Board Managing director, Dar Al Sharia Legal & Financial Consultancy Dubai, UAE This Fatwa is brought to you exclusively by IFN in collaboration with Dar Al Sharia Legal & Financial Consultancy-Dubai. The Fatwa appearing in this space are those which were obtained by Dar Al Sharia for their client institutions and depict issues faced. This Fatwa was compiled by Dr Muhiuddin Ghazi. www.daralsharia.com SHARIAH PRONOUNCEMENT
  13. 13. 13© 31st July 2013 IFN REPORTS Last week a New York bankruptcy judge approved the sale of 3PD, a subsidiary of the bankrupt Arcapita, to Atlanta-based XPO Logistics for a reported US$365 million, in its continued progress back from bankruptcy with a new multi-million loan package from Goldman Sachs. Arcapita, a leading Islamic investment company with widespread private equity holdings and investments in the US, filed for Chapter 11 bankruptcy in March 2012 after it failed to obtain the 100% lender consent it needed to restructure a US$1.1 billion syndicated facility set to mature the same month. At the start of its bankruptcy the firm had interests in 39 companies and US$7 billion in assets under management, with minority interests in 80% of its investments. However, it commenced proceedings with just US$120.1 million in available funds, which primarily went to fund existing deals in order to preserve its portfolio’s asset value. In order to complete its restructuring Arcapita entered into a US$150 million Murabahah financing agreement with Fortress Credit, a New York-based investment management firm. Only around 40% of this debtor-in-possession (DIP) package, which accrued profit at a rate equal to one-month LIBOR plus a 10% margin per year on the unpaid principal as well as a 3% upfront fee, was repaid; with an outstanding amount of around US$105 million maturing on the 14th June. In May this year, therefore, Arcapita negotiated a new US$150 million Murabahah bankruptcy loan with Goldman Sachs in order to meet its obligations to Fortress, along with a US$350 million exit financing package to steer it out of bankruptcy. The replacement DIP facility is reportedly almost identical to the original Fortress structure, with an annual profit rate of 8% in cash plus 1.75% payable in kind. In fact Fortress also made Arcapita a loan offer of US$350 million, which the company decided to reject in favor of Goldman Sachs, despite claims by Fortress that its offer would fund Arcapita’s exit at a better price, as well as excluding administrative fees. Fortress also would allow Arcapita keep up to US$30 million in sale proceeds in order to protect its portfolio investments, according to papers filed at the US Bankruptcy Court in New York. In comparison, Goldman Sachs’ loan was thought to be less generous, including placing restrictions on collateral sales, forcing Arcapita to rely heavily on lender funds and giving it less control. “Fortress’s initial disappointment regarding the debtors’ selection of GSI as exit lender soon gave way to confusion,” the firm said in its filing. “Fortress’ proposal is objectively more favorable to the debtors in nearly every respect ... so it is unclear why both the debtors and the committee have lent their support to the Goldman Sachs proposal.” In April this year Arcapita filed a new restructuring plan aimed to steer it out of bankruptcy, including the sale of a number of portfolio investments and the setting up of new firms to be managed by a Cayman Islands holding company. This most recent 3PD sale is the latest in a series of divestments which have been notable for their orderly pace and focus on maximizing the recovery of funds for Arcapita creditors and investors. Despite the in-fighting and scandal that have dogged the firm since its filing last year, it looks as though a way out of the woods might finally be in sight. — LM Arcapita continues its steps towards recovery This past year has seen a rather capricious international capital market due in part to optimistic economic growth prospects worldwide coupled with concerns over monetary policy in the US, which has inevitably caused cross-border effects. However, from an Islamic finance perspective, the global Sukuk market has been relatively shielded from such volatility with the continued momentum in issuances amounting to US$26.6 billion in the second quarter of 2013, according to a report released by the Malaysia International Islamic Financial Center (MIFC). In the primary market, three main players dominate the Sukuk issuance arena commanding a collective market share of 91% — Malaysia at US$18.4 billion, Saudi Arabia at US$4.5 billion and the UAE at US$1.4 billion, according to KFH Research. Issuances of Islamic bonds in the Southeast Asian nation have outperformed the previous year every month since January, with the exception of a considerable decline in June. Nonetheless, Malaysian ringgit issuances continue to outperform US dollar-denominated offerings at a volume of US$17.8 billion against the latter’s US$14.4 billion, as revealed by data from Dealogic for the past 12 months (rolling). The first half slump in US dollar issuances in most domiciles, except the UAE, is attributed to lower sovereign issuances. In the secondary market, Malaysia still accounts as the largest Sukuk market with a 60.4% share at US$148.2 billion in the first half of 2013 while global outstanding Sukuk stands at US$245.3 billion, marking a 7% accretion from the end of last year. While it may seem that the overall Islamic debt market is set for continued expansion, it is nonetheless anticipated that following its 25-month high in yields, which was in tandem with the rise in overall emerging market debt, Sukuk issuances will slow down in the coming months taking into account the US Federal Reserve’s move to scale down its quantitative easing program, according to MIFC. — VT Global Sukuk market: Truly resilient? Have you joined the leading Islamic finance Linked-In Group yet? Come and join thousands of other like-minded industry practitioners now.
  14. 14. 14© 31st July 2013 IFN REPORTS Azzad Asset Management is a Shariah compliant investment firm incorporated in the US where the American Muslim community represents more than US$200 billion in spending power. Last week, the firm approached Ebrahim Rasool, the South African ambassador to the US to discuss potential investments in republic through the Azzad Wise Capital Fund. The fund primarily invests in notes and certificates issued for payment by international financial institutions, foreign governments, and agencies of foreign governments in transactions tailored to the fund’s ethical investment guidelines. South Africa has one fully-fledged Islamic bank and four conventional banks that offer Islamic financial products such as vehicle and asset financing as well as pension funds. Azzad is reportedly in the initial stages of research for possible investments in profit and loss sharing accounts at these banks, and similar to the fund’s investment schemes in Turkish banks, the firm is looking to diversify the Islamic banking portion of its Azzad Wise Capital Fund portfolio. According to Joshua Brockwell, the firm’s investment communications director, in his conversation with the South African ambassador, he noted that the country has made significant progress in Islamic finance in the recent years. The growth is mainly attributed to the partnership between the local Muslim community and their business interests. Apart from South Africa, the firm has also visited several Islamic institutions in Indonesia with an eye to venture into microfinancing projects in rural areas of the republic. — NA US asset management firm sets sights on South Africa A recent report by the Kuwait Financial Center (Markaz) states that currently more than US$900 billion in construction projects are at various stages of development throughout the GCC, with real estate accounting for over half of that, with US$516 million in deals in the pipeline. The main contributing factor to this real estate boom is urbanization, an influx of expatriate labor and the relaxation of foreign ownership rules on GCC real estate. There has also been a shift in focus from high income groups to lower and middle income groups, while there are still many untapped opportunities in the public-private partnership projects avenue. It seems, through recent ongoing initiatives, that the GCC is striving — rather successfully — to diversify its economy away from the oil and gas sector. Efforts include increasing government surpluses, enhanced spending measures and higher budgetary allocations to infrastructure development, Markaz wrote. Despite the abundant opportunities in the construction sector, there are still lingering challenges within the GCC region, with lower growth forecasts attributed to the slow recovery of the EU region which could result in fluctuating oil prices on a global level. Luring in foreign investments could also be a challenge due to the weak regulatory environment in terms of dissemination and availability of information, shaky investor protection and poor enforcement of legal contracts. Stricter lending requirements that have been enforced by regulators in the GCC towards banks however have not put a dent on their balance sheets, with the chairman of the Arab Banks Union, Adnan Yousuf, expecting GCC banks to record an increase of 20-25% in net earnings for the first half of this year, on the back of a 12% growth in credit in the first quarter, to reach AED2.18 trillion (US$594 billion). Qatari banks ranked highest in terms of credit growth at 25%, followed by Saudi Arabian banks at 12.7%. — NH Up to US$516 million in real estate projects slated for the GCC th rd nd nd Register NOW to secure your FREE seat! www.redmoneyevents.com 25th November 201321st - 22nd October 2013 18th - 19th November 2013
  15. 15. 15© 31st July 2013 IFN RESEARCH REPORT LEBANON Legal and regulatory: Lebanon has a highly regulated and streamlined banking sector. With its long-standing secrecy and fiduciary laws, the country has witnessed tremendous growth in the banking sector. Laws relating to Islamic banking were introduced in 2004. The absence of controls on the movement of capital and foreign exchange has attracted many foreign financial institutions to Lebanon. Islamic banks in Lebanon can undertake all banking services and transactions including without limitation, forming companies and participating in projects, as well as acquiring real property for the purposes of investment projects. Banque Du Liban (BDL), the central bank, requires half of all Islamic banks’ assets be invested in Lebanon. They also must have a three-member Shariah consultative body to approve and monitor Shariah compliance. With the formation of the Capital Markets Authority, there is also a possibility of Sukuk and other Islamic liquidity management instruments being introduced which will in turn help develop the Islamic banking and Takaful industries. Business environment: Lebanon was a banking hub in the pre-civil war era. Even with the current challenging political scenario, it has managed to keep its economy on track. It has been successful in significantly reducing its debt-to-GDP ratio from 175.05% in 2007 to 139.5% in 2013. The human capital element is also well equipped to further promote the economy given the average adult literacy rate of more than 85%. Controls on the movement of capital and foreign exchange are fairly relaxed and the country follows a relatively laissez- faire economic model. Products and services: BDL has promulgated laws under various Shariah principles that allow investment and financing to the customers. Lebanese Islamic banks have developed a wide range of retail, corporate, SME, private banking and investment products. These product lines reflect the breadth in the already well-developed conventional banking market. Most products are based on the Murabahah model but Musharakah, Mudarabah and Ijarah models are also applied. Education and awareness: The Lebanese education sector has recognized the need for developing the human capital for the growing Islamic finance industry in the country. An Islamic finance qualification is offered by École Supérieure des Affaires (ESA) in collaboration with the Chartered Institute for Securities and Investment (CISI), London. Lebanese American University (LAU) has also formulated a fully-fledged Islamic banking curriculum in its MBA program. Opportunities: Lebanon’s close business ties with other regional Islamic finance markets such as Saudi Arabia and Bahrain could prove supportive in developing its domestic Islamic finance market. The partially dollarized economy can help attract foreign investment, as is the case with conventional markets. Lebanese fiduciary and banking secrecy laws can also play a major role in attracting Islamic wealth and fund managers. There is also a strong demand for Islamic financial products from the Muslim population, which represents over 60% of the total population of the country. Challenges: The laws and regulations supporting the Islamic finance regime need to be made more welcoming to allow more penetration and depth required by the players in the industry. BDL’s restriction on allowing Islamic window operations by conventional banks may hinder the growth of Islamic finance in the country. A lack of awareness among the people with regard to Islamic financial products and services is also a clear challenge. The call for of Shariah compliant liquidity management instruments also needs to be addressed. Initiatives: BDL has promulgated laws and issued various circulars to regulate the Islamic finance industry in Lebanon. It has jointly organized the Beirut Islamic Financial Institutions Forum that brought together various stakeholders of the Islamic finance industry including the IDB, AAOIFI, central banks and other industry players. Outlook: The Lebanese Islamic financial industry is well positioned to play a major role in the Islamic finance industry in the Middle East. With abundant liquidity, cash resources and robust banking regulations it can leverage its position to consolidate its Islamic finance infrastructure. The Islamic subsidiary of one of the largest banks in Lebanon, Blom Development Bank, saw growth of 42% as at December 2012 over the same period the previous year. Notwithstanding the political turmoil in 2006 which resulted in a huge financial setback, with an estimated fall in growth from 6% to 2% and US$5 billion (22% of GDP), Lebanon has attempted to recover. The influx of large numbers of refugees from Syria due to the ongoing conflict is also a matter of concern for the economy. However, with its strategic location Lebanon, which was once a banking hub, has all it takes to regain its past glory and become a regional Islamic finance hub. Mediterranean catapult This secular Middle Eastern country has the potential to become one of the most sought-after destinations for Islamic finance in the region, SYED SIDDIQ AHMED explores.. Chart 2: Islamic finance industry No. of Islamic banks 5 No. of Takaful operators 1 No. of Islamic funds 0 Islamic banking assets US$452 million* *estimated data for top three Islamic banks for 2013 128.27 140 120 100 80 60 40 20 0 53.67 64.78 90.31 2009 2010 2011 2012 US$million Chart 1: Total assets of Blom Development Bank
  16. 16. 16© 31st July 2013 One of the cornerstones of Islamic finance is the presence of assets in its transactions. Leasing provides just that, making it a readily adoptable proposition for Shariah compliant businesses. Market developments: While the global leasing market leaders are the US, China, Japan and several European countries, other Asian and MENA jurisdictions are yet to catch up to compete with these industry giants. In the list of 50 countries that top annual leasing volumes, only four countries appear that have Islamic financial markets. Turkey, which has been at the forefront in facilitating Shariah compliant business, last year enacted a new law on financial leasing which gives benefits in terms of withholding tax, stamp tax and other duties for leasing transactions. The new law, besides spelling clarity in leasing transactions, also has specific incentives for cross-border aircraft vessels and related lease transactions. With Shariah compliant leasing being offered by an increasing number of financial institutions in Sri Lanka, the Islamic leasing market is poised for further growth; due in part to the budgetary concessions and depreciation benefits afforded to this sector. The leasing industry in Sri Lanka is however dependent on short-term financing sources for funding its long- term obligations. This might raise an opportunity to make available medium to long-term Shariah compliant instruments for the industry to develop further. In the Islamic Republic of Iran, the leasing market has shown considerable growth: with the two largest sectors, transport and construction, accounting for 67% and 11% of new business, respectively. Although there are standalone leasing companies in the MENA region, the majority of leasing operations are carried out by banks and related entities. This is due to their easier access to funding, while standalone leasing companies have to rely on other less accessible sources of funds for their operations. There are also certain issues that need to be tackled such as inefficient repossession procedures that affect the quality of Islamic leasing portfolios and the income of the leasing companies at large. At present, there are an estimated 19 Islamic leasing companies in the Middle East. Regulations: The current international accounting standards for leasing, under the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), have issued an Exposure Draft (ED) calling for public comments on the proposed new accounting standards for leasing. The deadline for the comments is the 13th September 2013. It may be too early to conclude the repercussions but if these changes are made as explained in the ED, it may prove favorable to the real estate lessees but may not be so for the equipment counterparts. New regulatory standards under Basel III which impact conventional and Islamic financial institutions alike can have an indirect effect on the leasing market and may increase the cost of obtaining funding from bank-regulated entities and may reduce the volume of assets deployed by banks to the leasing industry. Consequently, there might be an opportunity for non-bank players when the banks increase their rates to reduce their exposure to leasing activities. AAOIFI standards require both operating Ijarah and Ijarah Muntahia Bittamleek (lease ending with ownership) to be treated similar to operating leases. AAOIFI has issued a standard (FAS 8) to regulate these transactions. Opportunities for players: Since leasing plays an important role in sustainable private-sector, small and medium-sized enterprises (SMEs) make substantial use of leasing to support, develop and make finance available to the industry. In countries such as Malaysia and Indonesia where SMEs play a significant role in the economy, and coupled with governmental assistance to Islamic finance, Shariah compliant leasing holds much growth potential. Here, Ijarah leasing remains one of most popular means of financing for Islamic financial institutions for automobiles, equipment and machinery among others; especially in Malaysia where SMEs account for more than 90% of all establishments in the manufacturing, services and agricultural sectors. The fact that leased assets require insurance means that the development of leasing industry should be concurrent with growth in the insurance and Takaful industries, both quantitatively and qualitatively. Overall the Islamic leasing industry holds great potential as it ties in closely with other growing markets such as trade finance, asset management and Takaful. IFN RESEARCH REPORT LEASING Significant deals: • Novus Aviation Capital, which has a Shariah compliant aircraft leasing business in its product range, held that more than US$5 billion worth of Shariah compliant leasing and financing transactions have taken place globally as of February this year. • Bahrain-based Ithmaar Bank in February 2013 merged with its associate First Leasing Bank to consolidate its position as one of the leading banks offering Islamic leasing products in the country. • Japanese Orix Group, which has a major presence in the leasing industry, offers Islamic leasing facilities through local collaborations in Sri Lanka and Pakistan. • Shuaa Capital set up a subsidiary, Gulf Installments, to provide Shariah compliant installment and lease financing mainly to focus on SME financing. A new lease of life With huge investments in infrastructure and construction lined up in the emerging markets there is little doubt that Islamic leasing will be one of the fastest-growing segments in the Islamic finance industry, SYED SIDDIQ AHMED discusses.
  17. 17. 17© 31st July 2013 SPECIAL REPORT Islamic banking is gaining momentum in traditional as well as in non- traditional markets and the industry is likely to maintain the current trajectory in the foreseeable future. In many regions, Islamic banking has evolved from being an emerging ethical niche market into being a part of the mainstream financial services landscape. According to a 2012 survey, there are more than 716 institutions across the world that are registered as Shariah compliant. Of these, 511 are fully-fledged and 205 operate Shariah compliant windows within a conventional institution or are partially separated from their conventional counterpart. While Islamic banks have managed to maintain good revenue levels in recent years, mostly due to a strong focus on retail banking, they have struggled with profitability due to rising costs and operational inefficiencies. A recent analysis by Ernst & Young (E&Y) indicates that Islamic banks have experienced a decline in profitability and their average return on equity (ROE) lags behind that of conventional banks by 20%. ROE for both Islamic and conventional banks has deteriorated since 2008 in the wake of the financial crisis, but this has dropped to 12% in 2011 for Islamic banks, compared with 15% for conventional banks. The return on assets (ROA) for Islamic banks dropped to 1.3% in 2011 from 1.7% in 2008, while it has risen for conventional banks to 1.7% in 2011 from 1.5% in 2008. Struggling for profitability According to ‘The Future of Islamic Banking’ report by AT Kearney, while there are a number of factors that contribute towards this struggle for profitability, achieving operational efficiency is a major problem. A more sophisticated leveraging of the Islamic banking potential — much of which has not yet been tapped — is required. E&Y’s report states that operating expenses are 50% higher for Islamic banks. The report shows that wide- ranging transformation programs could potentially increase the profit pool of Islamic banks by 25% by 2015. The effective use of modern, flexible technology is key to achieving this. To compete successfully in an industry known for its IT aptitude, Islamic banks are expected to make appropriate investments in best-in-class core banking software systems with components covering business process modeling, compliance and risk management tools, and multi-channel delivery gateways that would enhance banks’ profitability, performance and ability to innovate. Winning in a highly promising industry In an attempt to meet the demands of a growing Islamic financial sector, the industry needs to effectively implement conventional banks’ use of IT in Islamic banking: Boom imminent Technology developments are profoundly influencing the distribution of retail financial services. Day after day, reformatted branches and alternative channels such as online banking, mobile banking and social media are gaining widespread adoption. ROSIE KMEID discusses the current situation and looks at what we can expect for the future. continued... 400 1,000 800 600 400 200 0 221 280 302 348 345 317 372 391 426 429 457 2007 2008 2009 2010 2011 2012 800 600 400 200 0 2007 2008 2009 2010 2011 2012 163 194 191 199 205205 362 420 435 456 470 511 Source: the banker database.com/Maris strategies Figure 1: Institutions registered for Shariah compliant products Institutions reporting Shariah compliant assets Institutions reporting assets Number of conventional banks with Shariah windows Number of Shariah compliant institutions proportion of their overall income, lower range leverage and are behind the curve technology enablement Equity vs. ROE Islamic Conventional Indonesia Turkey Saudi Arabia UAE Malaysia Pakistan Qatar Malaysia Qatar Saudi Arabia UAE Bahrain Bahrain Kuwait Kuwait Jordan Jordan Egypt Bangladesh Indonesia Turkey Pakistan 25% 20% 15% 10% 5% 0% 0 5,000 10,000 15,000 20,000 25,000 30,000 35,00 40,000 Equity US$ million (2011) AverageROE(2008–11) Source: Company reports. Ernst & Young Analysis, EY Universe Figure 2: Average banking ROE/equity by country, 2011
  18. 18. 18© 31st July 2013 SPECIAL REPORT modern day technology. According to Muath Mubarak, the head of finance and corporate strategy at First Global Academy: “The emerging and niche Islamic finance market has to stay highly technology driven in order to maintain a competitive edge over others and deliver fast and quality customer service within Shariah parameters. “Advanced technology will reduce cost significantly, as well as manual workload, inefficiencies, transaction processing time and so on while enhancing customer satisfaction with sophisticated facilities,” he added. In a recent financial services survey conducted jointly by the CBI and PwC, the authors noted that technology can play a huge role in helping any organization to transform and modernize itself. The quest for operational efficiency and cost reduction becomes a key focal point for Islamic banks worldwide. Indeed, in line with the trend, IDC Financial Insights spoke about Islamic banks’ willingness to capitalize on technology innovations and adopt cutting-edge software to improve business agility and remain competitive, and to ensure proper risk management and regulatory compliance. Financial experts believe that the latest technological developments, if incorporated into Islamic banking, will be able to provide the convenience offered by conventional banking. For example, the development of internet and mobile banking has proved to be a dramatic shift in the way people conduct their banking needs in the conventional banking system. Thus, Islamic banks will have to incorporate these ideas into their product portfolio to attract additional interest in the system and to offer convenience to the various customers. An interesting finding of E&Y’s ‘Time for Bold Action’ survey, and one that may deserve further study, is that as banking becomes more reliant on technology, the implications of failure are magnified. E&Y explains that tinkering with existing systems or merging multiple legacy platforms will not satisfy increasingly vigilant regulators, and that approach is not likely to deliver what the financial institution needs. The multitude of Continued Source: Company reports. Ernst & Young Analysis, EY Universe higher for Islamic banks. For mid to smaller-sized banks, this proportion would be higher still Islamic banks Conventional banks 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% 2.9% 1.4% 1.3% 2.6% 1.4% 1% 2.7% 2.7% 2.9% -2.1% -1.8% -1.8% -0.3% -0.9% -0.8% 2007 2010 2011 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% 2.2% 1.8% 1.7% 1.4% 1.2% 1.1% 2.1% 2.4% 2.5% -0.8% -1% -1.2% -0.2% -0.7% -0.6% 2007 2010 2011 Other income Net income Operating Provisions Returns on assets E&Y World Islamic Banking Competitiveness Report 2012/13 Figure 3: ROA for Islamic and conventional banks, 2007-11 will need to become more data intensive. The quality and the level of risk assessment and the speed of delivery will prompt organization-wide change programs. collection, management and mining customer data. Although some security concerns remain, technology will play an increasing role in the interaction between bank and customer via multiple channels. Increasing importance of smartphones in Islamic banking markets can no longer be ignored. Technology to comply Technology to understand Technology to deliver Figure 4: Relevance of technology to Islamic banking continued... In an attempt to meet the demands of a growing Islamic financial sector, the industry needs to effectively implement conventional banks’ use of modern day technology
  19. 19. 19© 31st July 2013 SPECIAL REPORT new regulations is already placing considerable stress on banks’ data and reporting platforms. The Basel Committee’s recent guidance on data aggregation and reporting will require conventional and Islamic banks to fundamentally upgrade their capabilities in this area by early 2016. While the competitive financial landscape is being redrawn by the evolving international regulatory reforms, financial innovation continues at breathtaking pace. With much achievement behind it, the industry is now looking forward to a crucial and challenging stage in its development. Ensuring that new technology is flexible enough to support more sophisticated requests from regulators will benefit both the bank and its customers. Shariah compliance, IT modernization and product innovation top the industry’s priority list Growth over the past several years continues to generate optimism for the future of Islamic banking. The industry stands out on its own demonstrating remarkable development, expansion, and growing demand. Nonetheless, financial institutions are facing vastly different market conditions and need to develop new sources of differentiation to compete and remain successful in the long-run. Indeed, as a new industry predicated on originality and creativity, it must explore potential sources of differentiation for sustained competitive advantage. These ambitious yet realistic targets can only be achieved through partnering with a leading Islamic banking software provider with the expertise to help them transform their business quickly, safely and cost effectively. There are more than 35 global and regional information technology vendors that offer Islamic banking systems and services for banks and Islamic financial institutions, but there is just one vendor out there that is truly Shariah compliant, certified by a global standard-setting body AAOIFI. The time has come for financial institutions to consider strategic choices and address operational fundamentals and regulatory and Shariah compliance to capture untapped market opportunities and master the changing dynamics of the massive industry that is Islamic banking. Rosie Kmeid is the global head of corporate communications & marketing at PATH Solutions. She can be contacted at rmunim@ path-solutions.com Continued Optimizing the value of digital channels Understand the real needs of your target customers and keep as possible Partner with innovative companies to fuel creative channel design Use champion challenger testing to improve channel performance Build online capabilities once, for use by all products and brandsservices, to understand full costs and operating implications Instigate fast track approval & changes processes to Develop joint sales & marketing strategy optimizing sales capture Reassure customers with robust but simple security measures Develop integrated channel development plan with cost – Mass market HNW SME Retail marketing Branches Contact centers RMs Intermediarie Internet Direct sales forces ATM/self Joint venture Consumer products and propositions HNW products & prepositions SME products & prepositions Strategy & planning Change Operational Credit policy & risk Shariah support Prod service Customer servicing Technology Credit operation Payment HR Legal Risk & compliance Credit Key segment Marketing Sales & distribution management Customer & product management Divisional supports Group manufacturing Group supports Figure 5: Winning in a highly promising industry Tinkering with existing systems or merging multiple legacy platforms will not satisfy increasingly vigilant regulators, and that approach is not likely to deliver what the financial institution needs
  20. 20. 20© 31st July 2013 CASE STUDY Saudi Binladin Group recently issued a SAR1 billion (US$266.59 million) Sukuk Murabahah which was listed on the Tadawul via its SPV, SBG Sukuk. The issuance represents a phase of the company’s SAR12 billion (US$3.19 billion) program for the ongoing construction and development of the King Abdulaziz International Airport. Issued in Saudi riyals and backed by the commodities, the papers hold a short tenor of 364 days, due for maturity on the 9th July 2014. Based on a well-known structure to its investors in the Saudi market, the Murabahah structure constructed did not come without its challenges. The key difficulty faced by the arrangers was to ensure that the certificates would have the benefit of a shared security with the SAR12 billion (US$3.19 billion) financing provided. This feature serves as a unique facet of the deal as it is fairly rare for a Saudi Arabian issuance to have an exclusive benefit of a shared security with the bank facility. The commitment of the bank facility in comparison to the size of Sukuk issuance was resolved through inter-creditor arrangements. According to Stuart Ure, a partner at Clifford Chance, although the financing was readily procured, due to an upsize and a pre-approved draft inter-creditor arrangement, the papers needed to be commented on and negotiated to maintain adequate protection for the certificate holders. One of the arrangements to ensure the protection of the Sukukholders included sophisticated valuation mechanisms incorporated into the transaction documentation to ensure that the land cannot be sold at an undervalue. On the issuer’s side, the facility provides the Saudi Binladin Group with the flexibility of developing the prime land bank, to allow the group to develop and sell the land, which is the underlying asset of the Sukuk, throughout its lifetime. In comparison to the SAR1.3 billion (US$346.57 million) Sukuk Al Ijarah due 2015 the company previously issued, the primary cashflows from the papers are derived from lease rental payments. Unlike classic Ijarah structures, this structure is quasi-asset-backed, with Sukukholders having recourse to both the credit of the company as well as a prime landmark located in Jeddah. Payment for the Sukuk Murabahah is done through bank transfer and carries a return of 2.5% per annum. The lead managers and bookrunners are BNP Paribas Investment Company and Gulf International Bank Capital whilst the advisors are Walkers, Baker & McKenzie, Clifford Chance LLP and Al-Jadaan & Partners Law Firm. Governed by the laws of the Kingdom of Saudi Arabia, the Sukuk are in theory tradable but may suffer from lack of liquidity if traded. Nevertheless, the papers were indeed structured with comprehensive precision and creativity. — NA Aerodome Sukuk protects investors with its bank facility Summary of Terms and Conditions Issuer SBG Sukuk Obligor Saudi Binladin Group Limited (SBLG) Issuance Price SAR1 billion Purpose of issuance SAR12 billion of one of the phases of construction and development of the King Abdulaziz International Airport Trustee N/A Tenor 364 days Coupon rate / return 2.5 % per annum Payment Bank Transfer Currency Saudi riyals Maturity date 9th July 2014 Lead manager(s) BNP Paribas Investment Company KSA; Gulf International Bank Capital Principal advisor(s) Clifford Chance, Al- Jadaan & Partners, Bakers & McKenzie Bookrunner(s) BNP Paribas Investment Company KSA; Gulf International Bank Capital Governing Law Kingdom of Saudi Arabia Legal Advisor(s) / Counsel Walkers (to the Issuer); Baker & McKenzie Limited (to the obligor); Clifford Chance and Al- Jadaan & Partners (to the joint lead managers) Listing Cleared and settled through Tadawul. Underlying Assets The commodities Rating No rating Shariah Advisor(s) BNP Paribas Shariah Supervisory Committee; Gulf International Bank Global Shariah Supervisory Board Structure Issuance of Sukuk under the Shariah principle of Murabahah. Tradability The Sukuk are tradable, but in practice may suffer from a lack of liquidity. Investor breakdown Currently undetermined Face value / minimum investment SAR1 billion / SAR1 million The papers were structured with comprehensive precision and creativity

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