21-24 June: World National Oil Companies Congress, London
30 June-3 July: The 21st-Century Gulf: The Challenge of Identity, Exeter
7-10 July: First Gulf Research Meeting, Cambridge
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Islamic Finance – A GSN Special Report Published 29 June 2009
Extensively researched, featuring interviews and in-depth analysis, GSN's second Islamic Finance report addresses the key questions and challenges facing the sector.
• How has the financial crisis impacted on Islamic financial institutions and how are they responding?
• What does the future hold for the Islamic finance market?
• When will sukuk markets pick up and which markets will lead the way?
•Sharia compliant alternative investments - Hedge Funds and friends
• How Islamic is Islamic finance?
A Who's Who of the major players
GSN profiles the Gulf ruling families backing the industry and takes a look at the players behind the biggest banks, profiling key bankers and scholars.
Other features:
• An in-depth reference table listing issues and issuers of sukuks from 2007 to present.
• A map charting worldwide industry trends with key facts and figures.
• Detailed industry glossary.
The report also includes articles on Islamic trade and project finance, GCC and Asia market trends, the development of Islamic finance in new markets including Europe, Africa, and Brunei, and a look at the takaful and Islamic hedge fund industries.
GSN's Islamic Finance report is an essential reference tool for both newcomers, and well-established bankers and practitioners looking to stay in touch with market trends and developments.
Islamic Finance Report and A2 print:£150.00 - a £25 saving (includes map shipment by signed for airmail service)
VAT applicable on UK-based orders Email:subscriptions@cbi-publishing.com
Islamic finance poised to go global when market confidence returns
The Islamic financial system has not been immune to the effects of the global financial crisis, but industry players remain confident, and are positioning themselves for when markets regain momentum, writes Nadine Marroushi.
Islamic finance remains a small but growing part of the global finance industry, and one with huge potential according to its many advocates. McKinsey Global Institute calculated that the world’s financial assets rose to $196trn in 2007, but the Asian Development Bank calculated that it fell by $50trn last year. In this harsh global context, sharia-compliant finance is estimated to be approaching the $1trn mark, which is impressive for an industry that, in its modern form, is just over 30 years old.
In 2007, sharia-compliant assets world-wide amounted to around $640bn, according to a report published by the London School of Economics and Political Science (LSE), written by one of the pioneers of analysing the Islamic finance industry, Durham University’s Professor Rodney Wilson. While the global financial turmoil may have caused this figure to drop last year, “the market is clearly growing faster than conventional banking in select Muslim countries that have made a commitment to Islamic finance, such as the UAE and Malaysia,” said Rushdi Siddiqui, head of Islamic finance at Thomson Reuters, who has led the Dow Jones’ expansion into Islamic finance.
More countries are committing to the sharia way. One of the attractions is that Islamic banks are regarded as not having failed like too many of their celebrated western counterparts. Although they have made losses, and expansion plans have been cut back, few have required substantial government bail-outs. Islamic banks, which still hold significant assets, are seen as an alternative at a time when conventional lenders’ liquidity is tight. For example, Saudi-based Al-Rajhi Bank, the world’s largest Islamic bank, held assets worth $44bn at end-2008, up from $33.5bn at end-2007. In June, Bahrain-based Al-Salam Bank acquired a London property for more than $220m – testimony to the capital available among Islamic lenders.
Sukuk market picks up as issuers look for alternative sources of funding
With conventional bank funding drying up, sovereign and corporate issuers are tapping the Islamic bond market to fund expansion. Bahrain has just launched an issue that was eight times over-subscribed. But in the longer term, the sukuk industry’s credibility will depend on improving market transparency. GSN analyses the market and lists below some of the issues that have helped reinvigorate sukuk.
The success of the first sovereign sukuk to be issued this year by Indonesia and Bahrain, as well as the launch of a new market for sukuk on the Saudi Stock Exchange (Tadawul) this month, has set the tone for the industry’s expectations and appetite for Islamic bonds. As bank lending becomes increasingly tight, authorities and market players are being forced to tap sukuk as an alternative means of funding – and the strategy has so far been successful.
Ernst & Young is expecting new issues of sukuk to rise by 56% in 2009. They fell in 2008, largely due to difficult market conditions. The financial services company forecasts $27.5bn of new issues this year, up from $15.5bn in 2008 but down from the record issue of $47.1bn of sukuk in 2007. Analysts also expect new issues to be based on the ijara structure, which is more in line with Islamic finance’s central principle of sharing risks and rewards.
Consolidation and risk management are essential for growth, says AAOIFI head
In an interview with GSN, AAOIFI secretary general Mohammed Al-Chaar talks about the Bahrain-based institution’s role, the latest developments and industry trends.
The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is considered one of the most important and influential institutions in the Islamic finance industry, setting international standards on accounting, auditing, ethics, governance and sharia. “We have now issued 80 standards altogether,” AAOIFI’s secretary general Mohammed Nedal Al-Chaar told GSN. AAOFI was set up in Algeria in 1990 and moved to Bahrain the following year, shook the industry in February 2008 when the head of its sharia board, the well-known scholar Sheikh Taqi Usmani, said that two popular sukuk structures – mudaraba and murabaha – were not sharia-compliant because of their repurchase undertakings. Whether this contributed to the fall in sukuk markets is still a matter of heated debate – many believe it had more to do with the economic crisis – but it has caused a shift towards ijara-based sukuk structures.
Emerging markets: a country by country primer of Islamic financial activity
Some Muslim states remain resistant to opening to Islamic finance, while a number of OECD countries are actively encouraging sharia-compliant transactions, to appeal to their growing Muslim populations and widen their range of available financial instruments.
The market appeal and success of Islamic hedge funds have yet to be tested
An Islamic hedge fund appears to be a contradiction in terms. Conventional hedge funds are fundamentally associated with principles abhorred by sharia scholars, such as short selling or speculation. But after several years of hand wringing by sharia boards over what is halal (allowed) or haram (forbidden), under sharia law, real alternative investment vehicles claiming to be sharia-compliant are edging into the market, writes Mark Ford
In September 2007, an Islamic hedge fund platform, Al-Safi Trust, was launched. Developed by Barclays Capital and US-based, London Alternative Investment Market (AIM)-listed Sharia Capital, Al-Safi is targeted at hedge fund managers who want sharia-compliant offerings for Islamic investors. The developers also reckon the platform will appeal to conventional institutional investment managers convinced by their claim that Al-Safi would provide absolute returns and lower volatility.
The Al-Safi platform is conceptually simple. It vets all investments for sharia compliance. It will initially offer equity long-short and market neutral strategies in Al-Safi sub-trusts, each reporting its own performance. In June 2008, Barclays Capital and Dubai Multi Commodities Centre Authority (DMCCA) jointly launched the DSAM Kauthar Commodity Fund (DKCF), an equally-weighted fund-of-funds comprised of four individual DSAM Kauthar Sharia-compliant hedge funds on the Al-Safi platform (GSN 849/14 ). DKCF is open to institutional and individual investors on a monthly basis.
Opportunities opening further for Islamic financiers
The global credit crisis has posed questions over project and trade financing capacity, to which Islamic finance is supplying answers writes Kevin Godier.
The opportunity that the financial crisis has presented for Islamic banks based in the Gulf Co-operation Council (GCC) countries was flagged up by a new report from the London School of Economics and Political Science (LSE) released on 28 May.
The author, Durham University’s Islamic Finance Programme head Professor Rodney Wilson, pointed out that “no Islamic bank has failed in the crisis and required a substantial government bail-out.” The rapid expansion of the Islamic liquidity pool to an estimated $262bn across the GCC has made it an increasingly important source of finance during the current circumstances.
Wilson explained that because investment banking was arguably more compatible with sharia than retail banking, since much of its income was fee-based, “much of the Islamic investment activity in the GCC has involved syndicated financing of projects”, as governments and the largely autonomous state-owned companies have sought more sophisticated methods of financing than simply dipping into state budgets.
Abundant takaful opportunities in traditional and new markets
Limited investment options have exposed takaful operators to the global economic downturn. But many providers are optimistic, seeing huge potential in a still largely untapped global market.
As heavy losses hit major insurers worldwide, notably felling the giant American International Group (AIG), many see the Islamic takaful alternative – where investments are limited to ethical and non-interest-bearing products – as a more stable alternative. While takaful providers have not escaped the economic downturn, facing losses in equity, real estate and sukuk investments, the market has not been hit as hard and remains largely untapped. According to Ernst & Young’s 2009 World Takaful Report, “takaful markets now span much of the globe, with a particular concentration in underpenetrated Islamic markets, the largest of which are Saudi Arabia and Malaysia. Gross takaful contributions have grown from $1.4bn in 2004 to over $3.4bn in 2007.
There still exists a large, expanding and untapped Muslim population on almost every continent.” The accounting firm estimates that the global takaful market could be as high as $7.7bn by the end of 2012 – a more conservative estimate than HSBC’s forecast of $14.4bn by 2010.
So just how Islamic is Islamic finance?
It is a question often asked, the frequent subject of private conversations and regional chat show debates: how Islamic is Islamic finance? On a basic level, Islamic finance is Islamic; the idea behind this niche market is to apply the principles of the Quran to banking. There are five moral teachings in Islam, which should form the basis of every sharia-compliant financial transaction (see Glossary). To make sure these principles are followed, Islamic financial institutions (IFIs) employ a team of specialist scholars. These elements are what make Islamic finance Islamic. Critics, meanwhile, argue that when most transactions are analysed, the ethics and motivations of Islamic banking are no different to their conventional counterparts.
Sample Islamic finance articles from the GSN archives
Takaful companies need access to sovereign sukuk to aid growth
While it has so far been generally judged a success story, the takaful (Islamic insurance) market’s penetration rates remain low worldwide, and for it to continue growing more needs to be done.
There is no doubt that the takaful industry has witnessed significant growth over the last few years. According to Ernst & Young’s 2009 World Takaful Report, contributions rose from $1.4bn in 2004 to $3.4bn in 2007 and are forecast to rise to $8bn by 2012. There is some disagreement over the accuracy of these figures: Salah Malaikah, chief executive of the world’s largest takaful operator in terms of market capitalisation, Dubai’s Islamic Arab Insurance Company (Salama), thinks contributions are closer to $8bn today. But by all accounts the industry is growing rapidly, by as much as 20%/yr over the last decade. However, market players say a number of challenges remain, including facilitating takaful companies’ access to sovereign sukuk, developing the retakaful (reinsurance) market, and in the case of the UK’s only takaful operator, Principle Holdings’ Salaam Insurance, gaining market recognition and acceptance. Issue 857, 10 July 2009.Read the full article
Islamic finance: a real alternative to boom or bust?
it is not immune to the impacts of the global financial crisis, but scholars and financiers argue that this is a ‘golden opportunity’ to promote the Islamic finance industry as a more responsible alternative to conventional banking.
Just like conventional banks, Islamic financial institutions (IFIs) are suffering from tight liquidity, but if the principles of sharia-compliant financing were followed, we would not be in the current financial mire, scholars and financiers argued at Euromoney’s annual Islamic Finance Summit. With fewer bankers than last year attending the 24-25 February event in London, financiers and scholars present argued that an Islamic-based economy would offer a system that doesn’t practice or promote the weaknesses of capitalism – excessive leveraging, short selling, market manipulation, derivatives, options or swaps. The basic principles of sharia-compliant financing forbid usury and place high ethical standards on the type of investments permitted. In a neat argument to exempt Islamic financiers from any blame for the global crisis, it was argued that the Sharia industry exists within the context of a capitalist system and its market risks. Issue 848, 27 February 2009. Read the full article
In search of Islamic hedge funds – high margin holy grail
We are at the inferface where faith meets financial engineering. Bankers of all persuasions are ever in search of higher margins of the sort that hedge funds have generated for some of the globes sharpest-witted investors, at least before this summer’s markets melt-down. But so far one of the globe’s boom financial sectors has missed out: the quest to create a sharia-compliant hedge fund has proved elusive and controversial – opinions remain polarised.
Several players over recent years have claimed to have created a product that will deliver returns comparable to a successful hedge fund in a sharia-compliant way. However, the fundamental sticking point apparently remains: whether the fund’s underlying asset is halal (allowed) or haram (forbidden). Issue 813, 21 September 2007. Read the full article
London lures Islamic financiers, other Europeans will follow
The UK government is working hard to include Islamic finance in its regulatory framework as a means of attracting petro-dollars from the Gulf, as well as catering for Muslim domestic consumers. Other European countries have been slower to seize the opportunity, but this could change as Islamic markets go world-wide. GSN looks at the globalisation of Islamic finance – a trend the Gulf cannot ignore.
The promotion of Islamic finance as an asset class has been given a big push by the UK’s new Prime Minister Gordon Brown, who as a long-time chancellor of the exchequer knows all about global markets. According to Economic Secretary to the Treasury Kitty Ussher, speaking at a London Islamic finance conference in July, the rapid growth of Islamic finance world-wide made it inevitable that London, as a global centre, would respond. “This market has been growing at 10-15% a year, with Islamic finance assets world-wide now estimated to be worth over £250bn – and with 300 Islamic finance institutions in over 75 countries… “That presents real opportunities, which we want to make sure we seize.” Issue 813, 21 September 2007. Read the full article
