Sunday, December 6, 2009

Dubai's Debt Crisis May Hurt Islamic Finance

Dubai's debt woes are bringing the world's attention to the Islamic finance, particularly the Islamic bonds known as sukuk. Sukuk are Sharia-compliant bonds that do not pay interest. Instead, the sukuk sellers pay the debt holders a share of the rent or capital gains from non-cash physical assets or share of the profits earned from businesses purchased with the money raised. Unfortunately for the Nakheel sukuk holders, the real estate bubble in Dubai that promised big gains from rents and sales has collapsed. And the Islamic bond holders are facing the possibility of a major default, resulting in a dramatic sell-off of sukuk in the last few weeks. According to Data Explorers, a company that tracks how much of a company's stock or bonds are out on loan, about 75% of institutions holding the sukuk sold their position between the end of August and the end of November. "It's an extraordinary sell-off in a bond so close to maturity, when there was no indication of a problem refinancing. The data suggests they had some information that it was a good time to sell," said Data Explorers managing director Julian Pittam.

Dubai's recent request for a debt standstill for Nakheel, one of its biggest state-owned companies, has raised the possibility of the largest Islamic bond or "sukuk" default on record, raising alarms in the global Islamic debt markets.

Nakheel, the Dubai developer behind many of the Emirate's high-profile projects, has to find $4bn to repay sukuk by the middle of this month, according to a report in Financial Times.

If Nakheel doesn't get creditors to agree to a stay on their claims, the Dubai company could be declared in default after Dec. 14, 2009. A group of the sukuk holders, including New York-based hedge-fund firm QVT Financial LP, have appointed London-based law firm Ashurst to represent them in the matter, says the Wall Street Journal.

A December 2006 report on the Nakheel sukuk sale in Euroweek, a trade publication for capital markets, said about 100 accounts bought the notes. Of those, more than half were banks. By geography, about 40% of the issue was placed in the Middle East and 40% in Europe.


Beginning modestly in 2000 with three sukuk issuers collectively worth US$336 million, the Sukuk bonds exceeded $75 billion last year. Issuance of sukuk - both in domestic and foreign currencies - has been quite common in some countries. The most active issuers of sukuk in the past year include Malaysia, the UAE, Saudi Arabia, Pakistan, Kuwait and Bahrain.

The potential Dubai default is likely to negatively affect nations in Asia and the Pacific region planning to raise money by offering sukuk. Indonesia, Pakistan and South Korea are planning to sell Islamic bonds offshore in separate offerings. Jakarta plans to sell up to $1 billion of global sukuk by the second quarter of 2010, according to people familiar with the situation. Pakistan, the only other Asian nation to have issued offshore Islamic bonds, has just $600 million outstanding from its 2005 sale. It is looking to raise $500 million in Islamic bonds next year.

The Karachi city government is preparing to issue $500 million in municipal sukuk by February, 2010, a Pakistan finance ministry official said in September this year.

South Korea is looking to sell what would be its first ever sukuk as it continues to refine its tax laws to facilitate issuance. It wants to attract capital from Islamic nations to diversify its funding sources and reduce its refinancing risks. The Korean government has been planning a road show in Malaysia and the United Arab Emirates.

Since the start of this year, $8.1 billion of Islamic bonds out of the Asian-Pacific region have priced, exceeding the $6.4 billion volume in the same period last year, according to data provider Dealogic.

Last year's global economic crisis brought attention to Islamic finance as an alternative for both Muslim and non-Muslim customers. In an article, the Vatican newspaper Osservatore Romano voiced its approval of Islamic finance. The Vatican paper wrote that banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Osservatore Romano said. “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”. Sukuk may be used to fund the "car industry or the next Olympic Games in London,” the article said.

Investors have been attracted by Islamic banking's more conservative approach: Islamic law forbids banks from charging interest (though customers pay fees) and many scholars discourage investment in excessively leveraged companies. Though it currently accounts for just 1% of the global market, the Islamic finance industry's value is growing at around 15% a year, and could reach $4 trillion in five years, up from $500 billion today, according to a 2008 report from Moody's Investors Service.

The unfolding debt crisis in Dubai is the severest test yet of the short life of the Islamic debt markets. The process and the outcome of the ultimate resolution of the debt crisis in the tiny Gulf Emirate will have a lasting impact on the future of the entire global Islamic finance.

Related Links:

Trillion Dollar Halal Business

Sukuk.me

South Asians Flee Dubai

Nakheel Saw Unusual Selling

Islamic Finance Structures 101: Mudarabah

Pessimism is the Ultimate Kufr

Nakheel Sukuk Saw Unusual Selling

July in Dubai

24 comments:

Anonymous said...

Islamic finance is something which has around maximum of 100 billion worth of bonds where as the whole debt market is worth trillion dollar world wide.

There are practical problems in the issuance of the bonds as the bond holder invariably seek the return of interest in the form of share of profit.

Coming to the dubai's real estate arm, the demand for the property has come down heavily. the price has fallen by atleast 50% across. Retrenchment has made many property vacant in dubai and the interest payment out of the rents become impossible. The rents has fallen minimum by 50%.

Unfortunate that the rich abu dhabi emirate having 800 billion usd as swf is not keen to buy out and bail out dubai as they are not coming in agreement on the pricing. So this will effect the interest rate of the company which seek international finance including companies based out of uae as dubai and abu dhabi is part of the uae

In fact i casually over heard that the lending cost are much higher for uae based companies in the international market compared to other countries.

In a lighter sesne dubai has learnt a lessoon from america and is trying to replay the same. That is allowing the companies to go defaulters and distance the government from the companies.

We have to watch to see whether dubai has the same muscle of usa.

Anonymous said...

You cannot look at this phenomena in isolation. Islam is not to be implemented so selectively (that is interest free bonds but no control on expenditures). Its therefore to relate Dubai crisis with Sharia compliant bonds when the emirate as a whole was violating all other norms of Sharia.

Anonymous said...

Islamic finance is basically a deception.It states that there is no interest but functions in a very similar way to address the basic issue of rewarding an investor to temporarily part with his money.

Basically I will only deposit rs 100 in a bank if after 1 year I'll get Rs 100+x, x being the amount to hedge against inflation and a small profit for postponing expenditure.
x is also known as interest rates which is simple,straight forward easily understandable and given the success of US,EU,Japan etc effective.

Islamic finance is basically complicated juggling to get around this 'we don't pay interest'dictum to come up with an investment vehicle which works exactly like interest i.e at the end of the year you are still getting x even though you don't call it interest.

Riaz Haq said...

AFP is reporting that Dubai and Abu Dhabi stock markets recovered on Sunday, Dec 5, amid an apparent return of confidence, closing up more than one and almost four percent respectively, after heavy losses over Dubai’s debt woes.

Riaz Haq said...

Here's some welcome news from Dubai in today's Wall Street Journal:

Dubai World's promise to repay Nakheel's debt (including sukuk) and a separate move by the emirate to set out a legal framework for future talks may not be enough to repair the damage to Dubai's reputationamong international investors over the handling of its debt restructuring, investors and observers said.

While Dubai's moves go a long way toward restoring confidence, they aren't "a magical pill that will clear the air and erase the confusion," said Jawad Ali, a partner at law firm King & Spalding in Dubai, which represents at least one Dubai World creditor.

Sheik Ahmed bin Saaed Al Maktoum, chairman of the Dubai Supreme Fiscal Committee, in a statement said that Monday's actions were taken to reassure investors and others that "our government will act at all times in accordance with market principles and internationally accepted business practices."

On Monday, Abu Dhabi agreed to provide Dubai $10 billion to settle some of Dubai's obligations, including a $4.1 billion debt payment related to an Islamic bond, or sukuk, that matured Monday. (Abu Dhabi and Dubai are the two biggest emirates of the United Arab Emirates. Abu Dhabi, one of the world's biggest oil producers, serves as the federation's capital.)

Mayraj said...

Islamic Finances uses as a tool what is known in US as lease financing. of course, the property bubble has hurt investors in it. But, lease finance can be used as a vehicle for financing in other ways as well. US reveals that in spades and the state of your location is a major user of this financing technique.

Ahmed said...

Riaz Sahib, It seems like a default on Islamic financing should, by definition, be impossible. it is basically equity participation, and so if the investment goes under both partners lose.

would you care to shed some light?

Riaz Haq said...

Ahmed: "It seems like a default on Islamic financing should, by definition, be impossible"

Ahmed Sahib, You are raising a very good issue. It is the subject of debate among Islamic scholars and financiers today.

When defaults in market sukuk structures result from contractual covenants imported from conventional bonds, such defaults would not necessarily be enforceable in a Shari’ah adjudication, regardless of decisions made in foreign courts.

Islamic finance continues to develop as a viable form of investment, not only for Muslims but also as an alternative for non-Muslims. It would seem logical that as the products evolve – while holding true to their philosophical underpinning of risk-sharing and not risk transfer – both Muslim and non-Muslim investors will continue to invest in them. Blaming Islamic finance for sukuk defaults is both simplistic and misinformed. The ‘defaults’ occurring in instruments today would not necessarily qualify as genuine Islamic defaults because such provisions effect the kind of risk-transfer that is inimical to Islamic finance.

Condemning Islamic finance for provisions already identified as problematic by leading authorities, and which contravene the Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI) Shari’ah guidelines, is actually an incrimination of disingenuous structures rather than Islamic finance itself. Islamic finance will continue to grow if it develops products that are genuine and offer the ethical foundation of risk-sharing rather than risk transfer.

http://www.risk.net/credit/analysis/1565919/sukuk-default-default

Riaz Haq said...

Unfortunately, Dubai's recent request for a debt standstill for Nakheel, one of its biggest state-owned companies, has raised the possibility of the largest Islamic bond or "sukuk" default on record, raising alarms in the global Islamic debt markets. It's likely to hurt a lot of investors, particularly Muslim investors who bought sukuk and invested in property there.

The flip side is that many of these gulf investors will look at Pakistan where real estate investments have always been winners, regardless of the political or economic environment. The supply has continued to lag demand for housing, retail and office properties.

According to BMI research, several major projects are being funded by risk-tolerant developers from regions such as the Gulf Cooperation Council(GCC) and government or government-linked landowners in Pakistan, but there is still a solid backlog. In a recent development, however, it appears that to the GCC players can now perhaps be added Malaysian developers, several of which are, according to Malaysian news agency Bernama in August 2009,negotiating to build some 500,000 low-cost houses annually in various parts of Pakistan.

http://www.marketresearch.com/map/prod/2466767.html

Riaz Haq said...

The corruption of Pakistani politicians is exceeded only by their incompetence. With economy in virtual recession, the FDI is dropping as reported by The News:

Thursday, December 17, 2009
KARACHI: Net foreign investment in Pakistan fell 25.6 per cent to $1.08 billion in the first five months of the 2009/10 fiscal year compared with $1.45 billion in the same period a year earlier, the central bank said on Wednesday.

Out of total foreign investment, foreign direct investment fell 52.2 per cent to $774.0 million in the first five months of the fiscal year which began on July 1 from $1.62 billion for the same months last year, the State Bank of Pakistan said.

But foreign portfolio investment flows reversed, with a $311.3 million inflow in the July to November period compared with an outflow of $162.9 million in the same period last year.

Authorities imposed a floor on the Karachi Stock Exchange benchmark index in August last year as political uncertainty and economic and security worries drained investor confidence.

The floor discouraged new investment and also led to a sharp outflow of funds, as foreign investors sold holdings in off-market trade.

The floor was removed in December. The International Monetary Fund (IMF) saved Pakistan from a balance of payments crisis with a $7.6 billion emergency loan package in November last year. The loan was increased to $11.3 billion on July 31.

Pakistan’s economy is in virtual recession as gross domestic product growth in the 2008/09 fiscal year of 2 per cent is about the same as population growth. The IMF has projected GDP growth flat at 2 per cent this fiscal year.

Security concerns over a Taliban insurgency based in the country’s northwest and chronic power shortages have also put off investors.

Riaz Haq said...

Here's a ranking of ease of doing business in South Asia that puts Pakistan well ahead of India:

Bangalore: The business environment in Pakistan and Bangladesh is far better than in India. According to the latest 'Doing Business Index', India's business environment has become tougher during the years compared to other nations.

Economies are ranked from one to 183 on the basis of their regulatory environment being conducive to business operations. All of India's neighbors except Afghanistan have been ranked better. While India is ranked 133, Pakistan is ranked 85th followed by Sri Lanka (105), Bangladesh (119) and Nepal (123).

"India is a consistent reformer for the past many years. A country's rank in the index is an average of 10 indicators, each with 10 percent weight in the index. India increased the number of judges in the specialized debt recovery tribunals, which led to a major removal of blockages. While India reformed in the area of insolvency, other countries reformed in more than one area," World Bank's Senior Strategy Advisor, Dahlia Khalifa told Economic Times explaining why India has been overtaken by other nations.

The 2010 Doing Business Report prepared by World Bank and the International Finance Corporation averages a country's percentile ranking on 10 topics, made up of a variety of indicators. This includes examining a country's business environment in terms of starting a business, dealing with construction permit, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business.

The first place is occupied by Singapore, which is followed by New Zealand, Hong Kong and the U.S.

To see complete rankings and report, click here: http://www.doingbusiness.org/EconomyRankings/"

Riaz Haq said...

The BBC is reporting that Dubai crisis is impacting a remote village in Bihar:

In August 2008, Bharat Bhushan Tiwari - from Akhopur village in eastern Indian Bihar - took a loan of 71,000 rupees ($1,500) from a village moneylender to pay a local agent who had arranged a job for his son in Dubai.

Mr Tiwari - who runs a small shop - was hoping for better days for his family of five by sending his second son, Jay Kumar Tiwari, to the Gulf country.

Jay Kumar had got a job as a carpenter in a Dubai-based construction company and had big dreams - he wanted to earn a lot of money to pull his family out of grinding poverty.

But last month, their dreams came crashing down when Jay Kumar was asked by the company officials to quit by 6 March 2010.

'Cruel joke'

Dubai has been hit by an unprecedented financial crisis and the tremors are being felt in far away Bihar.

"This has been a cruel joke on our fate," Bharat Bhushan Tiwari told the BBC, trying to fight back his tears.

His other two sons are also unemployed and the Tiwari family now prays that the situation improves in Dubai.

Riaz Haq said...

Pakistan govt is planning to sell Islamic bonds or sukuk this year to raise money and resolve circular debt in power sector, according to Dawn:

ISLAMABAD: The finance ministry has finalised plans to issue Rs100 billion Sukuk bonds before the end of current fiscal year to retire the circular debt that has been a major concern for the power generation companies, oil suppliers, refineries and exploration companies.

“The Rs100 billion denominated Sukuk bounds will be floated in May this year and the target investors are religious-minded people with cash in hand,” said a senior official of the finance ministry.

Initially the finance ministry proposed to float Islamic papers with one year maturity period, but the State bank objected saying the central bank had already floated one year Treasury Bills.

“The ministry is now considering other options for the non-interest based bond to be launched on the pattern of Pakistan Investment Bonds (PIBs), the official said. The cut-off yield on the proposed Sukuk bonds would be around 12.7 per cent as is on the PIBs.

“The Government of Pakistan will be the sovereign guarantor of the sukuk bond issue,” the official said and added that the government needed additional liquidity to check further increase in the circular debt. The circular debt has again reached to Rs150 billion mainly due to limited collections by the eight electricity distribution companies.

The official said that the sukuk bond was expected to be heavily oversubscribed due to availability of liquidity in the Islamic banking system.

“As the Islamic banks have limited options to invest in Sharia-compliant modes, these bonds would offer an attraction to them,” he added.

It is estimated that around Rs50 billion are available with the Islamic banks, but their lending ratio is low compared to the deposit ratio.

PIBs and Sukuk bond are permanent debt and this time the government wants to raise money from Islamic banks to settle the circular debt of power sector once for all. Under the IMF conditionality which requires zero borrowing from the State Bank, the government is now heavily borrowing from commercial banks.

The government had shifted Rs85 billion circular debts to the Power Holding Company through issuance of Term Finance Certificates (TFCs) last year, which were bought by the commercial banks.

Riaz Haq said...

Here's an interesting Op Ed by George Fulton in Pakistan's edition of International Herald Tribune:

We haven’t got a lot to be thankful for these days in Pakistan.

But at least we are not Dubai.

Fed up with loadshedding, bombs, and TV cynicism pervading Pakistan, I recently escaped to Dubai for a holiday. Big mistake. Huge. Ten days later I returned, gasping for Karachi’s polluted, but far sweeter, air. Dubai may have the world’s tallest building and the world’s largest shopping mall, but it also has the world’s tiniest soul. It’s a plastic city built in steel and glass.

It has imported all the worst aspects of western culture (excessive consumption, environmental defilement) without importing any of its benefits (democracy, art). This is a city designed for instant gratification a hedonistic paradise for gluttons to indulge in fast food, fast living and fast women. It’s Las Vegas in a dish dash. You want to eat a gold leaf date? Munch away.

You want to drink a Dhs 3,000 bottle of champagne? Bottoms up. You want a UN selection of hookers at your fingertips? Tres bien. Let’s start with the malls. These cathedrals of capitalism, these mosques of materialism are mausoleums of the living dead. Slack jawed zombies roam around consuming food, clothes and electronics in a desperate attempt to fill the emptiness of their existence.

Whilst at the Mall of the Emirates the azan goes off. Nobody appears to move to the prayer room; everyone’s too busy performing sajda before Stella McCartney, genuflecting before Gucci, and prostrating themselves at Prada. With Dubai, one recalls F Scott Fitzgerald’s The Great Gatsby.

The people are modern day Gatsbys, buying shirts that they will never wear and books they will never read. Like Fitzgerald’s roaring 20s America, Dubai is a moral failure a society obsessed with wealth and status. Everyone is trying to keep up with the Jones’ or the Javaids. You see the goras with their perma-tans, streaked highlights and their flabby cleavages.

http://tribune.com.pk/story/7950/at-least-we-are-not-dubai

Riaz Haq said...

"America’s economy is set to shift away from consumption and debt and towards exports and saving", says a story in the Economist magazine. Here are some excerpts:

STEVE HILTON remembers months of despair after the collapse of Lehman Brothers in 2008. Customers rushed to the sales offices of Meritage Homes, the property firm Mr Hilton runs, not to buy houses but to cancel contracts they had already signed. “I thought for a moment the world was coming to an end,” he recalls.

In the following months Mr Hilton stepped up efforts to save his company. He gave up options to buy thousands of lots that the firm had snapped up across Arizona, Florida, Nevada and California during the boom, taking massive losses. He eventually laid off three-quarters of its 2,300 employees. He also had its houses completely redesigned to cut construction cost almost in half: simpler roofs, standardised window sizes, fewer options. Gone were the 12-foot ceilings, sweeping staircases and granite countertops everyone wanted when money was free. Meritage is now catering to the only customers able to get credit: first-time buyers with federally guaranteed loans. It is clawing its way back to health as a leaner, humbler company.

The same could be said for America. Virtually every industry has shed jobs in the past two years, but those that cater mostly to consumers have suffered most. Employment in residential construction and carmaking is down by almost a third, in retailing and banking by 8%. As the economy recovers, some of those jobs will come back, but many of them will not, because this was no ordinary recession. The bubbly asset prices, ever easier credit and cheap oil that fuelled America’s age of consumerism are not about to return.

America’s economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. This special report will describe that transformation, and explain why it will be tricky.

The crisis and then the recession put an abrupt end to the old economic model. Despite a small rebound recently, house prices have fallen by 29% and share prices by a similar amount since their peak. Households’ wealth has shrunk by $12 trillion, or 18%, since 2007. As a share of disposable income it is back to its level in 1995. And if consumers feel less rich, they are less inclined to spend. Banks are also less willing to lend: they have tightened loan standards, with a push from regulators who now wish they had taken a dimmer view of exotic mortgages and lax lending during the boom.

Riaz Haq said...

Here's a BBC report on Islamic finance in India:

The Bombay Stock Exchange (BSE) in the Indian city of Mumbai has launched a new index which consists of companies that meet the Islamic legal code.

The Tasis Shariah 50 was formed using guidelines from an Indian Shariah advisory board.

Studies have found that most Muslims in India are excluded from the country's formal financial sector.

That is because Islamic law does not allow investment in companies that sell goods like alcohol, tobacco or weapons.

Neither does it allow investment in companies that derive significant profit from interest.

The index is intended to be the basis for other Shariah-compliant financial products.

'Come and invest'

BSE Managing Director and Chief Executive Madhu Kannan said that the new index would attract Islamic and other "socially responsible" investors both in India and overseas.

Continue reading the main story “Start QuoteAll Muslim countries of the Middle East and Pakistan put together do not have as many listed Sharia-compliant stocks as are available on the BSE”
End Quote Tasis Director of Research and Operations Shariq Nisar
"This index will create increased awareness of financial investments among the masses and help enhance financial inclusion," he said in a statement.

Companies included in the index have been screened by Tasis, which is based in Mumbai and whose board members include Islamic scholars and legal experts.

"Before anyone can attract investors, we need to put in place institutional infrastructure, and having an index to track Shariah-compliant stock is important," MH Khatkhatay, senior adviser to Tasis, told the Reuters news agency.

"If you have an ETF (exchange traded fund), for example, you need an index, or if overseas investors want to invest in Shariah index in India, this is an invitation for people to come and invest."

Tasis said the index would "unlock the potential for Sharia investments in India".

"The BSE has the largest number of listed Sharia-compliant stocks in the world," said Shariq Nisar, director of research and operations at Tasis.

"All Muslim countries of the Middle East and Pakistan put together do not have as many listed Sharia-complaint stocks as are available on the BSE."

Stocks will be reviewed every month to ensure they continue to meet the criteria - any which do not will be removed, officials say

Riaz Haq said...

Pakistan, bidding to nearly double Islamic banking in the South Asian state by 2015, is focusing on poor, conservative villages to drive growth and has ordered Islamic lenders to open 20 percent of all new branches in rural areas, according to Reuters:

Islamic banking will help draw the funds of rural customers, a less sophisticated client base who also traditionally shun conventional banks due to concerns over interest which is forbidden under Islam, said Saleem Ullah, director of the Islamic banking department at the State Bank.

"Islamic banking, primarily being a faith-driven industry, has a significant potential in Pakistan as the concept directly appeals to the religiously sensitive segment of the society," Ullah said. "The share of the industry in the banking system has risen to over 7 percent from just 0.5 percent in 2002."

Pakistan's plan is to raise that figure to 12 percent from 7 percent currently by 2015.

Islamic finance growth has faced challenges due to the worsening geopolitical and security situation in Pakistan. But with a population of around 180 million Muslims, the small South Asian nation is still considered as one of the hottest growth areas for the industry.

Pakistan has five fully-fledged sharia-compliant banks and twelve conventional banks with Islamic operations, creating a network of 800 branches in Pakistan. Ullah anticipates that 150 new branches will open by the end of the year.

Islamic banking currently accounts for 497 billion rupees ($5.74 billion), or 7.3 percent of the country's overall banking system.

"Historically, the poor and oppressed in a society are more inclined to follow the norms of their religion than the affluent," said Muddassir Siddiqui, an Islamic scholar and partner at law firm SNR Denton in Dubai.

The combination of aggressive advertising and more Islamic branches in rural areas should drive the industry, Zahid Mansoor, treasurer at DIB Pakistan, a unit of Dubai Islamic Bank , said.

"The new regulatory requirements are a good first step by the government to reaching those in rural areas, where there is little trust for banks and people prefer to keep money under their pillows," he said.

"If you create awareness in the minds of these people, there is significant potential to take Islamic finance beyond a niche market and make it the main choice for banking."

DIB Pakistan, which currently has 59 branches throughout the country, should have 80 branches by the end of the year, Mansoor said.

The prospects for growth is already attracting interest from both the conventional banks in Pakistan and foreign institutions, primarily out of the Gulf region.

Both Dubai Islamic Bank and Bahrain's Al Baraka Bank have subsidiaries in Pakistan and Standard Chartered Saadiq, the Islamic arm of UK-based Standard Chartered , also launched operations in the country.

"We currently have 100 branches in Pakistan and consider it to be a growth area for us," said Adnan Ahmed Yousif, chief executive of Al Baraka Bank. "At our bank, we are looking to get to 200 branches over time. The country definitely has a lot of potential within Islamic finance."


http://uk.reuters.com/article/2011/08/14/pakistan-islamic-idUKL5E7JE02720110814

Riaz Haq said...

Here's an excerpt from a recent Washington Post report on Islamic banking in Pakistan:

Business experts say the burgeoning popularity of Pakistan’s Islamic banks — where deposits have gone from about $3 billion to nearly $4 billion in the past year — reflects both a reaction to the turmoil afflicting Western financial systems in recent years and a surge of religious feeling in an overwhelmingly Muslim society in which many people believe their faith is under assault from the West.

“Islamic banks have existed on the fringes of the banking industry for many years, but the global financial crisis has brought them into the limelight,” said a recent report in the Business Recorder, Pakistan’s daily financial newspaper. Today, it said, Islamic banking is “in fashion” and has “earned a shine that continues to attract funds.”

Meezan Bank, the largest of a half-dozen Islamic banks in Pakistan, draws Muslim consumers to its 54 branches by promising “the best of both worlds.” Its brochures advertise quick car loans that are “halal,” or in accordance with religious rules, and new-home mortgages that are “riba-free,” meaning that no interest is charged.

“Interest is a curse that must be eliminated from society,” said Irfan Zulqernain, a Meezan officer who has an MBA and a vision of Islam as a socially transformative force. “We don’t treat money as a commodity, which just makes a few people richer and everyone else poorer. Our way generates economic activity and spreads money throughout society.”

Islamic finance is based on a system of asset leasing and partnerships rather than outright moneylending, which Islam bans. The bank is allowed to turn a profit, but it does so by charging extra fees rather than interest — a distinction that critics say is virtually meaningless and intended solely to make Muslim customers think they are doing the right thing.

Religion as selling point

Banks are not the only businesses to capitalize on the new religious mood among consumers. More and more products are labeled “halal” even when there is no religious blessing involved. At a leading bookstore here in the capital, one of the hottest-selling items is a digitalized miniature version of the Koran that sells for $80.

“This is a precious object for us, and now it as easy to use as a mobile phone. You can just press a button and listen to any verse,” said Samira Imran, a customer who was buying one for her mother. “Our parents like to recite the Koran all the time, but this is a way to connect the new generation as well.”


http://www.washingtonpost.com/world/in-pakistan-islamic-banking-is-a-fast-growing-trend/2011/04/29/AFlF2iMF_story.html

Riaz Haq said...

Here's Islamic News Agency on IDB/ADB financing of wind farms in Pakistan:

JEDDAH, 27 Jumada Al-Thani/19 May (IINA)- The Islamic Development Bank (IDB) in partnership with the Asian Development Bank (ADB) has signed a US$133 million agreement for long-term lease finance (Ijara) facility for the development of two wind power projects in the Sindh province of Pakistan.

A consortium of local financial institutions comprising National Bank of Pakistan, Faysal Bank, United Bank Limited, Allied Bank and Meezan Bank are also participating in the transaction. Under an innovative risk participation structure between IDB and ADB, the project companies were able to raise 100% Islamic financing for these important infrastructure projects.

The projects are sponsored by the Fauji Foundation and Tapal Group in Pakistan. Once complete, the projects shall add generation capacity of 100MW to the national grid under long term Energy Purchase Agreement with the National Transmission and Distribution Company (NTDC) of Pakistan and thereby make a significant contribution to improving the power supply situation in the country.

These projects are the first generation wind energy projects that Pakistan has embarked on. “Pakistan has enormous potential to tap wind energy, and successful implementation of these projects is expected to bring in further investment in developing more wind projects in Pakistan.” said Walid Abdelwahab, Director, Infrastructure Dept at IDB.

IDB has been a long term development partner of Pakistan and has been involved in both public and private sector projects. Since its inception, IDB’s cumulative operations in Pakistan have reached to almost US$7.5 billion.


http://iina.me/wp_en/?p=1008446

Riaz Haq said...

Here's a report on Dubai's dangerous exposure to Iran and India policies:

Dubai needs to adjust its economic policies in order to reduce a “perilous” dependence on trade with India and Iran, according to a report by the government-backed Dubai Economic Council.

In an assessment of the emirate’s trade policies published on Monday, the DEC said other regional centers such as Qatar, Abu Dhabi and Bahrain could grab a share of Dubai’s lucrative export and re-export trade unless the emirate diversifies its trading partners and reduces its dependence on trading in gold and jewellery.

“Dubai’s concentrated trade activities with India and Iran are perilous,” the report said. “In the event of changes in trade regulations, regime or preferences in these countries, it has the potential of undermining the future sustainability of Dubai as a regional trading hub.”

Dubai has since the 1990s positioned itself as one of the Middle East’s largest trading hubs, with total non-oil trade rising 13% in 2012 to 1.235tn dirhams ($336.25bn). Yet 70%, nearly two-thirds, of its trade is done with India and Iran, and the bulk of its trade by value is in gold and jewellery, making Dubai vulnerable to tightening global sanctions on Iran and any changes in India’s policies on gold imports, the report said.

Aside from diversifying its trade partners, Dubai must prioritise exports of manufactured goods and machinery, which currently make up a “negligible” amount of its total trade, the DEC said. It also suggested that Dubai should follow the lead of Hong Kong and Singapore in their transition from low-tech exporters to exporters of technology-rich products such as electronics, biotechnology, pharmaceuticals and precision engineering.

The DEC is the economic consultancy arm of the Dubai government.

The report noted that Abu Dhabi, Qatar and Bahrain are taking steps to improve their ports and trading infrastructure, and could easily grab a greater share of Dubai’s re-export trade unless the emirate adjusts its policies.

“Evidently, Dubai ports and airports have the advantage of being already in place and competitive for international standards. However, if not supported by adequate trade policies, such advantage may erode,” the DEC warned.


http://www.gulf-times.com/business/191/details/347003/dubai-needs-to-cut-%E2%80%98perilous%E2%80%99-dependence-on-iran,-india-trade

Riaz Haq said...

Pakistan ranks 8th in the world of Islamic Finance, according to a Guardian story. Here's an excerpt:

How it works

Islamic finance is all about sharing risk between financial institutions and the individuals that use them. To do that, the two parties are tied into a longer-term relationship with each other that is supposed to shift incentives and avoid cut and run financial deals.

So, for example, sharia-compliant mortgages mean that the bank and the borrower share the risks of repayment rather than charging any form of interest. Similarly, Islamic bonds like the one announced by David Cameron today involve both parties owning the debt, rather than a simple promise to repay a loan.

Since it's Islamic, that also means that financial trading is off-limits for things that are forbidden even if no interest is charged - so investments can't be made in alcohol, tobacco, non-halal meat products such as pork, pornography or gambling companies.

You don't have to be Muslim to use Islamic financial services - a fact which has stimulated further interest in the sector. The Islamic Bank of Britain reported a 55% increase in applications for its savings accounts by non-Muslims last year after the Barclays rate-fixing scandal.

In numbers

275: The number of Islamic financial institutions in the world.
75: The number of countries where they have a presence.
US$1.357 trillion: The value of the global Islamic finance services industry by the end of 2011.
US$4 trillion: The projected value of the global Islamic finance services industry by 2020.
£200m: The value of the planned Islamic bond being unveiled by David Cameron today.
11th: The ranking of the UK (up 4 places from 2011) in the Global Islamic Finance Report which weighs up variables like the number of institutions involved in Islamic finance industry, the size of Islamic financial assets and the regulatory and legal infrastructure.

Glossary

bay 'al-mu'ajjal: Instant sale of an asset in return for a payment of money (made in full or by instalments) at a future date
gharar: Describes a risky or hazardous sale, where the details of the sale contract are unknown or uncertain
ijarah: Leasing contract
istisna': Refers to an agreement to sell a non-existent asset, which is to be manufactured or built according to the buyer's specifications and is to be delivered on a specified future date at a predetermined selling price.
mudarabah: Profit and loss-sharing
musharakah: Joint partnership
qard hasan: Interest-free financing
riba' : Usury
sharikat al-'aqd: Contractual partnership
sharika al-milk: Proprietary partnership
sukuk: Islamic bonds
tahawwut: Hedging
takaful: Islamic insurance
wadiah: Safe custody
wakala: Investor entrusts an agent to act on his behalf
zanniyyat: probabilistic evidence


http://www.theguardian.com/news/datablog/2013/oct/29/islamic-finance-for-beginners

Riaz Haq said...

A rally in Pakistan bonds bodes well for the world’s second-biggest Muslim nation as it prepares to sell global sukuk for the first time since 2005.

The government may issue $500 million of dollar Islamic notes by month-end, Finance Minister Ishaq Dar told reporters in Dubai on Nov. 8, reviving the sale initially scheduled for September. The yield on the nation’s conventional five-year U.S. currency debt sold in April dropped to a five-month low of 6.16 percent and Union Investment Privatfonds GmbH is predicting 6 percent for a similar-maturity sukuk.

Investors have sent the benchmark stock index to a record and the rupee to its strongest in more than two months as they focus back on the economy as Prime Minister Nawaz Sharif overcame pressure from opposition members to step down in August. Global sales of sukuk are heading for the worst fourth quarter since 2008, aggravating a shortage of Islamic securities that may support demand for Pakistan’s offering.

“The macroeconomic outlook of the country has vastly improved,” Vasseh Ahmed, chief investment officer of Faysal Asset Management Ltd., which oversees $85 million in Karachi, said in a Nov. 11 e-mail. “There is expected to be substantial interest owing to the lack of investment avenues for Islamic investors.”

Shrinking Sales

Worldwide sales of Islamic bonds dropped 81 percent this quarter to $2 billion from the previous three months, data compiled by Bloomberg show. Issuance climbed 11 percent in 2014 to $38.9 billion, trailing 2012’s record $46.8 billion total.

Pakistan tapped the international debt market in April for the first time since 2007. It sold $2 billion in total of 7.25 percent non-Shariah-compliant notes due in 2019 and 10-year 8.25 percent bonds whose yield was at a three-month low of 7.46 percent, data compiled by Bloomberg show. Demand exceeded the amount on offer by 14 times.

The nation has no global sukuk outstanding, only local-currency Shariah-compliant notes that were last issued in June.


A five-year note will pay from 6 percent to 6.5 percent and 10-year securities 7 percent to 7.5 percent, Mohammed Sohail, Karachi-based chief executive officer at Topline Securities Pakistan Ltd., said in a Nov. 11 e-mail.


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The South Asian nation’s foreign-exchange reserves totaled $14 billion in September, compared with $8.7 billion at end-2013, central bank data show. The fiscal deficit narrowed to 5.8 percent of gross domestic product in the 12 months through June, from 8.2 percent the previous year, according to official data on June 3.

‘Attractive Yield’

“The key factor will be the domestic political situation,” Sajjad Anwar, chief investment officer at NBP Fullerton Asset Management Ltd., which manages $456 million, said by phone on Nov. 11 from Karachi. “The economy is in better shape now and the response to the sukuk will be very encouraging.”

The nation, which is rated below investment grade at B- by Standard & Poor’s, is still likely to attract investor interest because of its higher yields. Qatar’s global Shariah-compliant debt due in 2023 yields 2.99 percent, while Malaysia’s 2021 sukuk pay 2.93 percent, according to data compiled by Bloomberg.

Pakistan has engaged in economic reforms to meet conditions of an International Monetary Fund bailout. The Washington-based lender said in a Nov. 8 statement that it will seek board approval to release $1.1 billion in loans in December. The reforms are “broadly on track” with growth forecast at 4.3 percent in the fiscal year ending June 2015, the fund said. GDP increased 4.1 percent in the last financial year.

“Pakistan is a very well known name to the sukuk investor community,” Union Investment’s Dergachev said in a Nov. 11 e-mail. “It still offers a very attractive yield compared to other sukuk issuers both in the sovereign and corporate space and that matters in a low-yield environment.”

http://www.bloomberg.com/news/2014-11-13/sharif-weathering-protest-revives-pakistan-plan-islamic-finance.html

Riaz Haq said...

Pakistan regulators merging three Islamic investment firms

Nov 17 (Reuters) - Pakistan regulators are merging three small Islamic investment firms after the central bank took control of Karachi-based KASB Bank Limited, accelerating efforts to strenghten financing by investment partnerships.

Last week, the government directed the central bank to reorganize or amalgamate KASB Bank in the next six months, after the lender failed to meet minimum capital requirements.

On Friday, KASB Modaraba said it had taken management control of First Pak Modaraba and First Prudential Modaraba, three of a total 26 modarabas active in the country.

Modarabas are a form of Islamic investment partnership where assets are managed on behalf of clients, with income and expenses shared under a pre-agreed ratio.

The sector remains a tiny part of the country's Islamic finance industry, with several firms lacking scale to compete.

Last week, First Habib Bank Modaraba, a unit of Pakistan's largest lender HBL Bank, liquidated its business.

As of March, the three modarabas held a combined 1.9 billion rupees ($18.7 million) worth of assets, dwarfed by larger peers such as Standard Chartered Modaraba with 5.3 billion rupees in assets.

The Securities and Exchange Commission of Pakistan (SECP) has also developed risk management guidelines for modarabas, last year introducing sharia compliance and sharia audit mechanisms to strengthen the sector.

http://www.reuters.com/article/2014/11/17/pakistan-modarabas-idUSL6N0T701320141117

Riaz Haq said...

From Wall Street Journal:

ISLAMABAD—Pakistan raised $1 billion through an Islamic bond issue on Wednesday, its first such issue in nearly a decade, in a bid to boost the country’s economy, finance ministry officials said.

The government initially planned to raise $500 million from the issue, but the bond was oversubscribed, with requests totaling $2.3 billion, the finance ministry said. Offers of $1 billion were accepted for a five-year maturity at a so-called profit rate, which is similar to a yield, of 6.75%.

The issue was part of Prime Minister Nawaz Sharif ’s ambitious plans to boost Pakistan’s economy, which include divestments and privatization of as many as 31 state-owned enterprises.

Finance Minister Ishaq Dar called the bond issue “a reflection of [the] international investor community’s [confidence] in the leadership of Prime Minister Nawaz Sharif and his economic policies.”

Officials on Thursday said the issue had added significance because of the abandoned sale of a part of the government’s stake in the country’s largest oil and gas business, due to poor investor response. That sale had been expected to raise $800 million, but investors tendered bids for only 52% of the shares on offer.

An Islamic bond, or Sukuk, doesn’t rely on interest, which is forbidden in Islam. Instead, the bonds are linked to assets and profits paid to investors based on revenue generated by the assets, or based on the investor’s part-ownership of the asset, depending on the bond’s arrangement.

“This [bond] issue has been very successful; It’s a big boost and a statement of trust from investors,” a senior finance ministry official said, requesting anonymity because he wasn’t authorized to speak to the media. “Our assessments proved correct: that investors were hungry for an Islamic bond.”

In a statement issued after the issue, Pakistan’s finance ministry said the profit rate of the $1 billion Islamic bond “compares favorably with the average weighted cost of comparable domestic debt of about 11%” and will result in annual savings worth 5 billion Pakistani rupees, or nearly $50 million, in debt servicing.

The ministry said the $1 billion proceeds from the bond issue will immediately go to the country’s central bank, which will help boost foreign exchange reserves. Pakistan had liquid foreign exchange reserves of $13.2 billion as of November 21, according to the State Bank of Pakistan. The government wants to increase reserves to $15 billion by the end of this year.

The International Monetary Fund is expected, pending a review by its executive board next month, to release a $1.1 billion tranche of a $6.6 billion loan to Pakistan.

http://online.wsj.com/articles/pakistan-issues-1-billion-of-bonds-1417113745