Looking towards a new Mecca - Islamic banking

CIOL: The growth rate is nothing less than 15 to 30 per cent a year. From about 30 to 40 Islamic banks in 2005 the last three years have seen 400 financial companies registered and even more companies are now recreating financial instruments for the special genre.

Looks like Islamic Banking could be new oasis of growth in the deserts of slowdown if one goes by the prospects that Hanuman Tripathi, managing director, InfrasoftTech is banking upon.

Apart from obvious markets like Malaysia, and a big Middle East focus, there are surprisingly equal opportunities in Europe, UK, France as well, he avers.

"The trading levels have grown from $70 to 80 billion in 2005 to $300 billion in 2008 worldwide. Major countries like America and even South Africa are taking it up and India would also be looking into it with permissions expected next year," he hopes.

Islamic banking is a different species in the global financial ecosystem and draws its distinctive silhouette from the halo of ethics. As Tripathi sees it, it's a new business model emerging from people who follow Islam and its tenets, leading to certain common practices which are permissible under Shariah law and keeping firm about certain practices that are not permissible.

"The consequent banking and technology solutions are hence different from commercial banking ones. Calculations are more complex. In this genre of banking, contracts need to highlight where is the money being applied," he says.

"It's a positive way of banking with no negative trade, no speculation, no belief in interest, no investment allowed in negative industries like Alcohol, Tobacco, no lending allowed for speculative purposes." "We are targeting a top position as a supplier of Islamic Finance Solutions in the world market."

For Infrasoft Technologies that has been dealing in technology solutions to banking and financial institutions for ten years, this market segment is a big opportunity and the company would be investing in respective solutions, market geographies increasingly.

Yet, as the Institute of Islamic Banking and Insurance reckons Islamic Banking is not something entirely novel. According to this Institute, Islamic banks appeared on the world scene as active players over two decades ago, and many of the principles upon which Islamic banking is based have been commonly accepted all over the world, for centuries rather than decades.

As the Institute site further explains, the basic principle of Islamic banking is the prohibition of Riba- (Usury - or interest). "Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organizations have opted for ethical operations.

"Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Speculation can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions."

Sakana Wins ‘Best Islamic Mortgage Provider’ Award

Khaleej Times- Bahrain-based Sakana Holistic Housing Solutions, the innovative Islamic mortgage finance provider, has won the ‘Best Islamic Mortgage Provider of the Middle East’ award at the International Real Estate Finance Summit in London.

Organised by ICG Events, the summit, with backgrounds in finance, development, regulation, consulting and investing among others, highlighted the potential synergy that exists between the GCC and UK. While the global real estate sector and conventional banking face extremely challenging times, delegates heard that the GCC and Islamic mortgage finance, in particular, offer opportunities for sustainable real estate sector growth. The summit was attended by over 150 professionals from around the world.

R. Lakshmanan, CEO of Sakana, accepted the award in person, having delivered a well-received presentation on the GCC real estate sector to the summit.He said, “This award reflects the unstinting efforts of our dedicated team, our focus on innovation, simplicity and a holistic approach to real estate solutions. As one of the first stand-alone Islamic mortgage providers in Bahrain, we have successfully introduced new concepts to a market that had little previous exposure to mortgages. ”

Unique range of 'Halal approved' vitamins launched at Arab Health

AME Info:A unique range of vitamin and mineral supplements, which have been specially approved by the Halal Food Authority, will be launched at Arab Health 2009, the world's largest healthcare event in the Middle East.

At the event, UK based Principle Healthcare will be showcasing their new Halal supplement range, which comes in four different types - Omega 3, Vitamin C, Calcium and Vitamin D, and Iron.

Omega 3 fatty acids belong to the group termed Essential Fatty Acids (EFAs). They are considered essential to human health. They are believed to help improve concentration, blood pressure, brain function and many other general and specific health conditions such as ADHA.

As their name suggests EFAs are essential in the diet, however unfortunately they are often lacking in processed and convenience foods which instead are rich in less beneficial fats.

EFAs are necessary due to their specific structures that the body uses to help build up cell membranes, EFAs therefore help maintain normal skin, healthy eyes and proper brain development, as well as having a role to play in the regulation inflammation and hormone balance and are needed for calcium absorption therefore assist in bone maintenance.

The body cannot make or store Vitamin C, so you need to get your supply from your diet on a daily basis. This chewable tablet provides your body with a daily dose of Vitamin C to help maintain a healthy immune system, and healthy teeth, gums and skin. It also acts as an antioxidant in the body protecting the cells from damage caused by free radicals.

Calcium plays a role in muscle contractions, blood-clotting and nerve functioning. Vitamin D assists in maintaining a healthy immune system.

About 99% of the calcium in the body is in the bones and teeth and 1% is in the blood, muscles, and other soft tissues (such as nerves, organs, etc.) This 1% plays a major role in our health.

Vitamin D, the sunlight vitamin, helps the body to absorb and utilise the calcium, however, some people find it difficult to absorb sufficient vitamin D from being outdoors, especially if there is limited skin contact.

Iron has an important role as an oxygen carrier to the blood and also assists in the formation of the blood cells. As well as aiding the normal functioning of the immune system, it is also essential for blood and cognitive development and function.

Principle Healthcare, one of the world leaders in vitamin and supplements, will also be showcasing their 'Lifestyle' range which, available in eight different varieties, has been formulated to meet specific lifestyle requirements, such as pregnancy, vegetarians and jointcare.

Included in the supplements is BioCalth - a clinically proven, patented calcium formulation, which through its unique ingredient - L-threonate - has a superior absorption rate to other calcium supplements. It also encourages the formation of collagen and cartilage, strengthening bones and increasing bone density.

Martin Hendron, Export Manager of Principle Healthcare, said:

'We have worked closely with the Halal Food Authority to develop this range of vitamins and we are delighted to be able to launch these unique supplements at Arab Health. Taking supplements can help people in many ways including preventing vitamin and mineral deficiencies, providing amounts of nutrients larger than the diet can provide and also protecting against future disease. We are aware that different people have different needs are therefore continually developing our range to reflect this.'

Arab Health 2009 will take place at the Dubai International Convention and Exhibition Centre from 26th to 29th January.

Aseambankers deals

Business Times:A few financial conglomerates from Japan have expressed interest to work with Aseambankers Malaysia Bhd in developing Islamic capital market products, its chief executive officer Mohammed Rashdan Mohammed Yusof said.

Without naming the conglomerates because of confidentiality requirements, he said that they were seeking two-way cooperation with Aseambankers.

While Aseambankers plans to enhance the sukuk market in Japan, the conglomerates, through the Malaysia Inter-national Islamic Finance Centre (MIFC), are keen to invest in the region.

"We are seriously looking into this (Japanese) market," Mohammed Rashdan said in an interview with Business Times in Kuala Lumpur.

He did not specify when the deals would be sealed since "the global financial market is still highly volatile and stressed (so) that even the most optimistic of these investors would really want to pick the best time".

According to Mohammed Rashdan, Islamic finance has attracted interest not only in Japan but also South Korea of late, partly because of the general collapse of the conventional financial system across the world.

He pointed out that Islamic finance does not encourage excessive leverage or use of derivatives and is viewed as safe in terms of having underlying asset values backing the financial instruments.

"There is ample global liquidity resident in the Gulf. Greater participation from Japanese and Korean institutions will attract that liquidity into this region, and we hope to be right there in that playing field," he said.

Apart from this, Aseambankers is also working on "a significant mandate" with a party from Saudi Arabia, despite the challenges posed by the current financial crisis.

The Malayan Banking Bhd (Maybank) group's key outpost in the Gulf is in Bahrain. It is also looking at other potential locations, especially Saudi Arabia and the United Arab Emirates, specifically Abu Dhabi.

"Through Bahrain we have done several smaller mandates in the Gulf, but the one we are working on now is significant," Mohamed Rashdan said, without elaborating.

He also said that Maybank's recent completion of its acquisition of Bank Internasional Indonesia (BII) would provide Aseambankers an opportunity to expand its reach. Aseambankers is Maybank's investment banking arm.

"There is great potential there, especially Islamic banking opportunities which are still nascent.

"Furthermore, Aseambankers can leverage on the BII platform to launch investment banking and brokerage services in Indonesia," Mohamed Rashdan said.

Aseambankers is also looking at setting up key offices in Singapore and Hong Kong, he added.

Islamic Banking Set to Emerge as a $4 Trillion Industry

Khaleej Times:Islamic banking, which is predicted to become a $4 trillion global industry over the next five years, is the least affected sector in the current global economic meltdown triggered by subprime tsunami in the United States, experts said.

Khaled Al Aboodi, CEO and general manager of Islamic Corporation for the Development of the Private Sector (ICD), was quoted as saying that since Shariah did not allow Islamic banks to invest in subprime product, they were safer from the toxic subprime assets when compared to conventional banks.

“Most conventional banks worldwide were in trouble because they don’t deal with Shariah products. Islamic banks are very strict in their policies which are monitored closely by Shariah boards at various stages,” Al Aboodi was quoted by a Saudi paper.

According to Qatar Islamic Bank (QIB), Islamic banking is set to become a $4 trillion global phenomenon over the next five years.

Quoting the international ratings agency Standard & Poor’s, QIB said its newsletter that sukuk, or Islamic bonds, was one of the fastest growing segments of Islamic banking along with mutual funds.

Islamic finance experts say global sukuk market stands at $82 billion. The International Monetary Fund (IMF) estimates the market to reach $150 billion over the next three years. The ever-increasing demand for financing infrastructure development and other mega projects in the private sector will continue to be major driver of demand for sukuk.

A recent report by Moody’s shows that Islamic banks have been fairly resilient.

No Islamic financial institution has acknowledged investing in Bernard Madoff’s $50 billion Ponzi scheme, and Saleh Al Tayar, Secretary General of the Franco-Arab Chamber of Commerce, said the $4.9 billion hit taken by Societe Generale SA from what it calls unauthorised trading by Jerome Kerviel couldn’t have happened in an Islamic institution.

“If global banking practices were based on Islamic practices then we wouldn’t be seeing the kind of crisis we are living through now,” he said.

Islamic financial institutions work on a philosophy of prohibiting transactions considered immoral and promoting greater social justice by sharing risk and reward.

Interest payments, short selling and contracts considered excessively risky are also prohibited. That rules out some of the products that got Western finance into so much trouble such as subprime mortgages, collateralised debt obligations or credit default swaps, experts explained.

“Islamic finance does demonstrate good banking behaviour that has been perhaps lost over the last 10 years or so,” said Neil Miller, head of Islamic finance at Norton Rose.

According to Aboodi, the mandate of ICD is to support economic development of its 48 member countries through provision of finance to projects promoting private sector as a vehicle for economic growth and prosperity.

The projects financed by ICD are selected on the basis of their contribution to economic development taking into account factors such as creation of employment opportunities and contribution to exports.

“The global financial crisis is creating some kind of uncertainty but we will try to meet demands from the private sector and we expect same growth next year,” he was quoted by the paper.

“So far none of ICD projects is affected by the global crisis,” Al Aboodi said after visiting various countries and taking the first hand information of the ongoing ICD projects. Al Aboodi recently visited Azerbaijan, Kazakhstan, Uzbekistan, Russia, Turkey and Bosnia where ICD has financed private sector projects. In Azerbaijan, ICD has established Caspian International Investment Company (CIIC), which has started operations after reaching the projected capital of $70 million.

What is Sukuk?

muamalah.com:Sukuk is an Arabic term صكوك, plural of صك sakk, “legal instrument, deed, check” for a financial certificate or termed as an Islamic equivalent of bond.

In Islam, fixed income or termed as interest (riba’) bearing bonds are not permissible. Hence, Sukuk is considered as securities that comply with the Islamic law. Its investment principles prohibits the charging, or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets. It is estimated that over RM3,500 billion of assets are managed according to Islamic investment principles.

Such principles form part of ‘Syari’ah’ (Islamic Law), but it is actually broader than its concept that it also encompasses the general body of spiritual and moral obligations and duties in Islam. Shariah-compliant assets worldwide are worth an estimated more than RM1,750 billion and have grown at more between 8-12 per cent per year over the past decade, and in the Gulf and Asia, Standard & Poor’s estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.

In classical period Islam sakk (sukuk) – which is cognate with the European root ‘cheque’- meant any document representing a contract or conveyance of rights, obligations or monies done in conformity with the Shariah. Empirical evidence shows that sukuk were a product extensively used during medieval Islam for the transferring of financial obligations originating from trade and other commercial activities.

On the other hand, the essence of sukuk, in the modern Islamic perspective, lies in the concept of asset monetisation - the so called securitisation - that is achieved through the process of issuance of sukuk (taskeek). Its great potential is in transforming an asset’s future cash flow into present cash flow. Sukuk may be issued on existing as well as specific assets that may become available at a future date.

The sukuk market valued for more than RM175 billion (at the end of 2006) is due for an exponential rise in 2007 with every issue likely to be oversubscribed 5 to 6 times amid a fast growing interest in the western countries.

One point to note here that Shari’ah requires that financing should only be raised for trading in, or construction of, specific and identifiable assets. Trading in ‘indebtedness’ is prohibited and so the issuance of conventional bonds would not be compliant. Thus all Sukuk returns and cashflows will be linked to assets purchased or those generated from an asset once constructed and not simply be income that is interest based. For borrowers to raise compliant financing they will need to utilise assets in the structure (which could be equity in a ‘tangible’ company). It is worth noting that Equity financing is Shari’ah compliant and fits well with the risk/return precepts of Islam.

In the eyes of Islamic Jurisprudence or As Shari’ah, money is a measuring tool for value and not an ‘asset’ in itself, it requires that one should not take or receive income from money (or anything that has the genus of money) alone or in other words “if money generates money per say” it will tantamount to riba’. This generation of money from money (simplistically interest) is ‘Riba’, and is forbidden. The implications for Islamic financial institutions is that the trading/selling of debts, receivables (for anything other than par), conventional loan lending and credit cards are not permissible.

Now come the question of uncertainty or ‘Gharar’ principle. It is widely understood to mean the uncertainty in the existence of an underlying asset in a contract and/or uncertainty in the contractual terms and this is an issues for Islamic scholars to address when considering the application of derivatives. Syari’ah also incorporates the concept of ‘Maslahah’ (Public interest), denoting that, if something is overwhelmingly in the public good, it may yet be transacted – and so hedging or mitigation of avoidable business risks, may fall into this category but there is still much discussion yet to come.

Sukuk are widely regarded as controversial due to their perceived purpose of evading the restrictions on Riba. Conservative scholars do not believe that this is effective, citing the fact that a sukuk effectively requires payment for the time-value of money. This can be regarded as the fundamental test of interest. Sukuk offer investors fixed return on their investments which is also similar in appearance to interest in that the investor’s return is not necessarily dependent on the risks of that particular venture.

This seems to be similar but the fact is that it is not the same as the reality is that banks invest in assets and the return from these such as rent is evenly spread over the rental period and it is this stream of income which forms the basis of the “fixed” income stream and return to investors. Furthermore, given that there is an asset in the background, there is more security for the investor which makes sukuk increasingly appealing to global investors including both Muslims and non-Muslims.

Sukuk financing can be quite mystifying for the outsider. A good analogy is one of ethical or ‘Green’ investing. Here the universe of investable securities is limited by certain criteria based on moral and ethical considerations. Islamic Finance is also a subset of the global market and there is nothing that prevents the ‘conventional’ investor from participating in the Islamic market.

An overview of Sukuk

Dar Al Istithmar:Basics of Sukuk
Sukuk is popularly known as an Islamic or Sharia compliant ‘Bond’ whilst in actual fact, it is an asset-backed trust certificate.

In its simplest form Sukuk is a certificate evidencing ownership of an asset or its usufruct.

The Sukuk structures rely on the creation of a Special Purpose Vehicle (SPV).

SPV would issue Sukuk certificates which represent for example the ownership of an asset, entitlement to a debt or to rental incomes or even accumulation of returns from various Sukuk (a hybrid Sukuk).

The return provided to Sukuk holders therefore come in the form of profit from a sale, rental or a combination of both.

Sukuk could be based on Mudaraba, Musharaka, Murabaha, Salam, Istisna, Ijara or hybrid of these.

Difference between conventional bond and Sukuk:

In its simplest form, a bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal.

In comparison, under Sukuk structure the Sukuk holders each hold an undivided beneficial ownership in the underlying assets. Consequently, Sukuk holders are entitled to share in the revenues generated by the Sukuk assets as well as being entitled to share in the proceeds of the realization of the Sukuk assets.

Similarities between conventional bond and Sukuk:

Marketability: Sukuk are monetised real assets that are liquid, easily transferred and traded in the financial markets

Rateability: Sukuk can be easily rated

Enhanceability: Different Sukuk structures may allow for credit enhancements

Versatility: the variety of Sukuk structures (as many as over 27 possibilities)allow for: structuring across legal and fiscal domains, fixed and variable income options etc.

Issuing of Sukuk involves a number of steps like:

Preparing a detailed feasibility study (stating clear objectives to be achieved from the proposed Sharia-compliant business) and setting up of general framework and organisational structure to support the issuance process;

Working out an appropriate Sharia structure to achieve the set objectives in compliance with Sharia;

Arranging lead manager (s) to underwrite the Sukuk issue;

Arranging legal documentation around the agreed Sharia structure (both from the Issuer’s as well as arranger’s perspective);

Setting up the SPV to represent the investors (Sukuk holders); and
Putting the Sukuk into circulation.

Role of Sharia Advisors in Sukuk:

Sharia advisor (Sharia scholars or Sharia advisory firms with recourse to Sharia scholars) have a significant role to play. Amongst others, following may be listed as examples:

Advising on proposed Sukuk structure and suggest a Sharia structure which otherwise fulfils the set economic aims;

Working closely with legal counsel of the issuer to ensure that the legal documents are in line with

Sharia requirements;

Working closely with legal counsel of the arranger to ensure that the legal documents are in line with Sharia requirements;

Issuing Fatwa on the whole Sukuk deal before the same can be put into circulation.

Sukuk in the context of UK and Europe:

UK is all set to introduce new framework to support the issuance of Sukuk, through parliamentary legislation. Treasury minister, Ed Balls, has been quoted in media recently: “We are looking to place domestic Sukuk on the same footing as conventional products”

It is indeed an encouraging step by the UK. But it is important that such a framework is designed involving industry practitioners with experience in Sukuk issues.

In sum, future of Islamic finance (including Sukuk) is becoming more and more viable in the UK and wider europe.

Model of a classic Sukuk structure

Practical Law Company:Over the last few years there has been a dramatic growth in the use of Islamic finance techniques in raising capital that complies with the requirements of Shari'a law.

According to recent reports assets invested in an Islamic, Shari'a compliant, manner are now estimated to exceed US$250 billion with the pool of money held by Muslim investors estimated at US$1.5 trillion (and growing rapidly with high oil prices).

The growth of the Sukuk market, which only opened in 2002 with the Malaysian government US$600 million Sukuk issue, is a prime indicator of this trend. By 2004, US$6.7 billion of capital was raised through the issue of Sukuks and in the first six months of 2005 the total raised reached US$6.2 billion.

Under the Koran, interest (riba) earned on money (for example, a loan) is forbidden, but many other types of finance are allowed. The basic principle behind the Sukuk is that the holder has an undivided ownership interest in a particular asset and is therefore entitled to the return generated by that asset. The classic Sukuk structure involves an acquisition of a property asset by a special purpose company (SPC) established in a tax neutral jurisdiction. The company funds itself by the issue of Sukuk, declaring a trust in favour of the Sukuk holders. The Sukuk holders receive a return based on the rental income of the asset, taking the credit risk of the underlying lessee (see box "Classic structure").

There are a number of accounting and tax consequences which can arise when a UK property is transferred to a UK based SPC but these are beyond the scope of this article.

Increasing interest

The growth in the Sukuk market is due to the confluence of a number of factors ranging from the geopolitical impact of the 9/11 atrocities to a more general interest in developing Shari'a compliant products and structures. The fundamental drivers behind the Sukuk market are the same as those for the conventional securities market as it aims to:
-Broaden the pool of investors.

- Spread risk away from financial institutions.

- Dis-intermediate the link between investors and borrowers.

Although the market is relatively small, the excess liquidity currently being pumped into Gulf economies means that another pool of investment funds is becoming available to corporate treasurers. As the market is developing rapidly and the jurisprudence from the Islamic scholars is becoming more settled, the issue costs for a Sukuk structure continue to fall. The TCIP (Trust Certificate Issuance Programme) established by the Islamic Development Bank (IDB) in May 2005 marks a further step in the development of the Sukuk market with the IDB able to use some of the financial assets on its balance sheet to underpin Sukuk issues under a medium term note (MTN) like programme structure. The TCIP structure is similar to that outlined above with the underlying assets being a mixture of ijara (lease), murabaha (instalment sale) and istisna'a (conditional sale) contracts.

Eligible assets

The main stumbling block for accessing the Sukuk market is the availability of underlying assets that generate a Shari'a compliant income stream. An interest-derived income stream will not be eligible for inclusion in a Sukuk, but a rental-based income stream (whether from real estate or movable property) is ideal. The most popular asset class to date is real estate where rental income can be generated to provide cash flow returns to holders and repurchase obligations can be entered into to ensure principal repayments on the scheduled maturity dates. Other eligible assets have included aircraft, car fleets, pipelines and large air conditioning units.

Enforceability

Before being brought to market any Sukuk will need a declaration or opinion from Shari'a scholars that the relevant transaction complies with Shari'a law. There has been a degree of confusion as to the interplay between compliance with Shari'a law and with the enforceability of the relevant contracts. Recently, in Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd & Ors, the Court of Appeal held that an Islamic financing agreement which was expressed to be governed by both English and Shari'a law was governed by English law (www.practicallaw.com/5-102-6474). The court held that the question of whether or not a contract was Shari'a compliant does not have a bearing on its enforceability. This confusion can of course be minimised by clear drafting.

The future

It is expected that there will be continued strong growth in the Sukuk market. There is increasing standardisation of Sukuk documents in the marketplace which will drive costs down and improve the competitiveness of these instruments.
Andrew Roberts is a partner and Katsumasa Suzuki is an associate at Linklaters.

Classic structure

Examples of Sukuk issuances and their structures

World Services Group:Standard and Poor’s estimates that 20 per cent of those investors, with billions to invest, would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.

That has led to the increased use of the Sukuk, especially in the Gulf countries and Malaysia. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), defines Sukuks as “certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity.”

Introduced in varied structures and sizes, Sukuks worth $20 billion hit the market in 2006 and are expected to surpass $50 billion in 2007 as the companies seek to diversify their sources of financing. Although companies in Kuwait, Bahrain, Saudi Arabia and Qatar have all been actively using Sukuk financings over the years, Malaysia led the Sukuk issue market in 2006 with a share of about 60 per cent. That year also witnessed the first Sukuk that originated in the United States. The trends in 2007 clearly suggest that the United Arab Emirates, especially Dubai, have most likely taken over the lead.

Sukuk structures are being used for a variety of purposes and have evolved rapidly in response to the demands of issuers and investors. Sukuk issues have ranged from the simple sale and leaseback (Ijara) structures, such as the $1 billion Dubai Department of Civil Aviation Sukuk issued in November 2004, to the $2.53 billion trust finance Sukuk structure issued by Aldar Properties in March 2007, demonstrating the flexibility of Islamic finance principles.

Below are examples of some recent Sukuk issues that show and emphasise that Sukuk has matured into a diversified, internationally-acceptable instrument to raise corporate finance for acquisitions or working capital purposes, or to re-finance existing debt, or use in the transportation sector (especially in the shipping and aircraft sectors), real estate, construction and petrochemical projects in several countries.


German Sukuk (Saxony-Anhalt Sukuk)

In 2004, a €100 million Sukuk, structured as a Sukuk Al Ijara, was issued in the federal state of Saxony-Anhalt in Germany. The Federal Republic of Germany guarantees the debts of Saxony-Anhalt. The underlying transactions are a certain number of specified buildings owned by the Ministry of Finance. The master lease was sold for 100 years to a special purpose vehicle, incorporated in the Netherlands for tax reasons, which in turn rented it back for five years to the Ministry of Finance. The certificate holders receive a variable rent benchmarked to the EURIBOR over the rented period. The Sukuk is listed on the Luxembourg Stock Exchange. Incidentally, as of July 2007, the Saxony-Anhalt Sukuk remains the only sovereign Sukuk from a non-Islamic country to have tapped the market.

Sukuks by the Governments of Bahrain, Qatar and Malaysia

The Central Bank of Bahrain, on behalf of the Government of Bahrain, regularly issues Sukuk-Al-Ijara and Sukuk Al-Salam to finance various infrastructure projects in Bahrain. Malaysia’s Global Sukuk, launched in June 2002, was similarly backed by an Ijara lease on a single piece of government property. The money raised by the Government of Qatar through the $700 million Qatar Global Sukuk is being used partly to finance the construction of the Hamad Medical City.

First Airlines Sukuk - Emirates Airlines Sukuk

The first Sukuk issued by Dubai’s national airlines, Emirates, closed in July 2005. At $550 million, this was the single largest corporate Sukuk issuance at that time. The Sukuk has a seven-year tenor and is structured as a Musharaka. The proceeds of the issue, which is listed on the Luxembourg Stock Exchange, will be used to finance the new Emirates Engineering Centre and their headquarters building in Dubai.

First Ship Finance Sukuk – MT Venus Glory Sukuk/Al Safeena Sukuk

In 2005, ABC International Bank jointly with Abu Dhabi Commercial Bank arranged, structured and jointly underwrote a pioneering Islamic ship finance transaction through the issuance of a $26 million Al-Safeena Ijara Sukuk. At that time, Al-Safeena Sukuk was the first issue that combined Islamic equity with conventional debt for the same asset, which in this case was VLCC (called “Venus Glory”), owned by Pacific Star (Pac Star) International Holding Corporation, which in turn is owned by Saudi Aramco, the world’s largest oil exporting company.

Dubai Civil Aviation Authority Sukuk

The Dubai Civil Aviation Authority, a quasi-sovereign entity, broke the mould in 2004 by going down the Sukuk route instead of plain vanilla finance, by issuing a $1 billion Sukuk, the world’s largest single Sukuk issuance in terms of size at that time by any issuer. The proceeds were used to finance the building of a new international terminal and for the expansion of existing engineering and other infrastructure. The Musharaka was set up to develop a new engineering centre and a new headquarters building on land situated near Dubai’s airport that will ultimately be leased to Emirates. Profit, in the form of lease returns, generated from the Musharaka will be used to pay the periodic distribution on the trust certificates.

Bahrain Financial Harbour - Al Marfa'a Al Mali Sukuk

The Istisna'a-Ijara Sukuk, known as the Al Marfa'a Al Mali Sukuk, has been structured by the Liquidity Management Centre in accordance and in compliance with the principles of Islamic Shari'a. The Sukuk has a five-year term maturing in 2010 offering a quarterly profit distribution with the proceeds used to finance the development and construction of the Financial Centre which represents the first phase of the Bahrain Financial Harbour project comprising the Dual Towers, the Financial Mall and the Harbour House.

Dubai World Sukuk

In 2006, Dubai property developer Nakheel Group, developer of three palm-frond shaped islands off Dubai's coast, sold the world's largest Islamic bond after increasing its size by more than 40 per cent to $3.52 billion to meet demand. Nakheel will use cash from its Sukuk to fund projects in Dubai, which is leading a surge in Gulf Arab investment in construction and real-estate developments. The Sukuk has been listed on the Dubai International Financial Exchange.

DP World Sukuk

In 2007, global marine terminal operator DP World priced a $1.75 billion conventional bond and a $1.5 billion Sukuk. It is the first issuer to list both conventional and Islamic debt securities on the Dubai International Financial Exchange.

The $1.5 billion, 10-year Sukuk attracted demand globally, including from the United States. This was the first time U.S. investors had the opportunity to subscribe to a UAE corporate rated Sukuk. DP World's Sukuk is ground breaking and innovative because it is partly convertible to shares in the event the ports group lists through an initial public offering, thus becoming the first convertible instrument in the Islamic finance market. The issue is part of a large financing package being arranged for general corporate activities, ongoing business development needs, and expansion plans, including the financing of the purchase of the British rival P&O.

East Cameron Gas Sukuk

The first and only Sukuk to have originated from the United States tapped the market in 2006. The unique feature of the East Cameron Gas Sukuk was that it was the first ever Shariah compliant gas backed securitisation and was the first-ever Islamic securitisation rated by Standard and Poor’s. The $165.7 million Sukuk originated from Houston based East Cameron Partners, whose reserves are located in the shallow waters off the shores of the State of Louisana. The Sukuk was structured as a Musharaka structure in terms of the management of the assets and then a funding agreement between the issuer and the purchaser.

The initiatives taken by the governments of the UAE, Bahrain, Malaysia and the United Kingdom, to name a few, have acted as a catalyst for the evolution and growth of the Sukuk market and the development of Islamic Finance as a whole. The regulatory bodies within such countries have been actively introducing rules and regulations pertaining to the issuing and offering of Sukuks, which we hope in time will help provide standardisation, resulting in the maturation of the field.

From the financing structures focused mainly on plain vanilla type commodity-trading murabaha transactions to the complex structures involved in the Sukuks, Islamic finance has come a long way and Sukuks have emerged as high profile financial instruments. With top international banks, financial institutions, law firms and other financial services providers scampering for a piece of the cake in the Middle East, Islamic banking and finance has grown into a full-fledged practice area of its own. With a catalogue of successful issues worth billions of dollars reflecting the huge appetite for Sukuks, there are all signs pointing towards the long term success and growth of Sukuks.

Halal Banking Revolution goes from strength to strength

PR-Inside.com:The last month has seen a further deterioration in the UK economy, with a deepening recession, banking bail-outs and big-name retailers going bust. However, one sector of the market still active is Islamic Finance which is now both cheaper and more accessible. Most recently, alburaq, the UK's most innovative Islamic 'mortgage' provider, has responded to interest-rate cuts by improving its range of Shari'ah-compliant Home Purchase Plans.

'Our new product range means our new customers now have products priced from the equivalent of 5.49% on their home finance,' explains Keith Leach, Head of alburaq. He continues: 'The new year could bring even lower rates for our customers. If rates continue to fall as predicted, from March 09 many of our customers could be paying a rate equivalent to 4.5% or less.

In addition to the improving prices, there are plenty of other advantages for those choosing alburaq's Islamic alternative. Recently, banks have been criticised for varying margins; imposing collar rates and reducing the range of mortgage products they offer.

'Collar rates' have made the headlines recently as many mortgage holders have discovered to their cost that their mortgage payments will not fall inline with the general drop in rates.

alburaq works very differently, as Leach explains: 'When applying for a mortgage, the public would be well-advised to study carefully what margin will be applied, for how long it is guaranteed and whether there is a ‘collar' rate. One of the distinguishing features of our products is that we fix our margins so these are clearly known from the outset and we don't have a ‘collar' on our rates. In addition, we don't tie-in our customers for when we offer incentives, like fees assisted or cashback offers. We also allow unlimited overpayments, which isn't always available with other Islamic or conventional mortgages.'

Leach continues: 'Unlike many of the UK banks, we continue to offer a full range of products and we are still offering buy-to-let finance - which has almost disappeared from the conventional market.'

Full details and terms for alburaq's Shari'ah-compliant products are available by visiting www.alburaq.co.uk or by calling (freephone) 0800 587 88 66.

About alburaq

alburaq is the UK's most innovative provider of Shari'ah-compliant Islamic Home Finance, and has launched a wide range of products for the Halaal Mortgage market.

Alburaq is a brand name belonging to ABC International Bank plc (a subsidiary of the Arab Banking Corporation), a major Middle-Eastern banking group in which government agencies of Kuwait, Abu Dhabi and Libya have significant share-holdings. ABC was founded in 1980, and is headquartered in Manama, Bahrain. The Group has a well-established international network including offices in Paris, Milan, Frankfurt, London and of course the Arab world. ABC Group is one of the largest banks in the Arab world, with assets totalling approximately US$33 Billion (December 2007).

Islamic banking is a faith-based system of financial management, which derives its principles from the Shari'ah - Islamic ethics derived from three sources:

• The Holy Qur'an
• The Hadith (sayings of the Prophet Muhammad) and
• The Sunnah (practices and traditions of the Prophet Muhammad)

For Muslims, giving or receiving interest (known as 'Riba' in Arabic), is strictly forbidden. All of alburaq's products are free of from Riba, and operate in accordance with Shari'ah principles. Prior to launch, all alburaq products are reviewed by a Shari'ah Supervisory Committee (SSC), composed of respected Islamic scholars. Products are only launched once their structure and associated contracts have been approved by the SSC.

Demystifying Sukuk

IFSPOT: SUKUK ,An Emerging Asset Class.
By:Ibrahim Mardam-Bey CEO, Siraj Capital Ltd.Click here to view the Slides...

Islamic Ethics and The Financial Crisis

Part 1/2



Islamic Ethics and The Financial Crisis 2/2

Bank Of Tokyo-Mitsubishi UFJ (Malaysia) To Promote Islamic Finance

Bernama:Bank of Tokyo-Mitsubishi UFJ (Malaysia) Bhd (BTMU) has embarked on an initiative to take a leadership role in promoting Islamic financing to its clientele across the globe.

It aims to not only attract such transactions to Malaysia but also to pro-actively participate in the transactions originating from the Middle East and other region.

In a statement here Friday, the bank said the move follows the introduction of the Malaysian International Islamic Financial Centre (MIFC), and in support of Bank Negara Malaysia's initiative to enhance Malaysia's position as a centre of origination, distribution and trading of Islamic financial instruments.

"In line with our aim to be the first Japanese bank to aggressively promote Islamic finance, our initiative is supported fully by the Bank of Tokyo-Mitsubishi UFJ Ltd, and the parent bank and head office in Tokyo has also established a high-level standing committee to promote Islamic banking and further support all Islamic financing activities of the group," the bank said.

In February 2008, the bank received BNM's approval to set up the International Currency Business Unit (ICBU) within Bank of Tokyo-Mitsubishi UFJ Malaysia.

It then established the Islamic Banking Department in April 2008, followed by the historic appointment of Shariah Committee by a Japanese bank.

BTMU said with the continued growth of importance and acceptance of Islamic finance it wanted to encourage more of this business to originate from Malaysia.

"It is said that there is approximately US$700 to US$1,000 billion of funds within the Islamic finance system, growing at around 10 to 15 percent annually.

In the Gulf and Asia, Standard & Poor estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile," BTMU said.

The Islamic financial market's growth in importance has also attracted some of the largest capital markets in the world such as London and Singapore to develop financial services and products to capture this market.

In addition, ambitious plans have been announced to make London the western capital of Islamic finance as the government announced tax relief for sukuk in March 2007.

Other financial centres such as Hong Kong has also joined the bandwagon.

The bank said Malaysia has progressed significantly in the development of Islamic financial services, especially in terms of the size of investments and an increase in the number of Islamic financial institutions.

In meeting the needs of the growing Islamic financial services, BTMU has taken the leadership role in attracting deals to Malaysia and actively participating in the Islamic financing transactions originating from the Middle East and other regions.

Towards this, it established the ICBU which can play an active role both as a booking office and as an arranger for Islamic financing activities.

The bank's ICBU will facilitate the potential participation of the bank in large deals originating from various parts of the world.

With the increasing number of players from Malaysia, the MIFC (Malaysia International Islamic Financial Centre) will attract more banks to set up their respective hub in Malaysia not only to enjoy the incentives provided but also to participate in the ever-increasing size of the Islamic financing opportunities.

The bank's financial products, vetted for its documentation and implementation by the Shariah committee, will be at par with all global Islamic financing products.

Among the reasons for the BTMU's move to embark on Islamic financing business include the huge opportunities in the sector, especially funds originating from the Middle East, and the vast opportunities emerging in Malaysia's new regional growth corridors.

Crisis widens appeal of Islamic finance

AP:France is becoming the latest country to woo Islamic banks, which avoided much of the damage from the subprime mortgage crisis by following strict principles laid out in the Quran — as the global financial crisis broadens the appeal of Islamic finance.

French Finance Minister Christine Lagarde has promised to make adjustments to the regulatory and legal arsenal to enable Paris to become a major marketplace in Islamic finance.

At a recent forum in Paris, she said Western financiers could learn a thing or two from the Islamic world as global leaders try to establish "new principles for the international financial system, based on transparency, responsibility and, I would like to add, moderation."

"In this sense, Islamic finance is calling out to us," she said.

Finance that complies with Shariah, or Islamic law, accounts for around $700 billion of assets and is growing at 10 to 30 percent a year, according to Moody's Investors Service.

That's grabbing the attention of governments eager to oil their liquidity-strapped economies with money and deposits from the Islamic world. Islamic finance is concentrated in the Persian Gulf and Muslim parts of Asia such as Indonesia and Malaysia but is spreading into North Africa and Europe.

Islamic banking does not have the scale to replace Western-style finance, but in these cash-strapped times it is seen as offering another alternative for raising money.

London has attracted the largest pool of Shariah-compliant assets in the West and desire to compete with Britain's ailing financial center is motivating Paris to get in on the act. The country has some 5 million Muslims, but does not offer Islamic-based retail banking, and the country's secular traditions may present an obstacle to a French version of the Islamic Bank of Britain.

Moody's ratings agency noted in a November report that Islamic financiers will need to quell fears that France's official religious neutrality could be put at risk.

But more people are seeing business reasons to attract Islamic funds. A report by economics professors Olivier Pastre and Elyes Jouini claims that France could attract up to euro100 billion ($136.9 billion) from Islamic financial institutions.

"We want to make sure that Paris is in a position to be able to welcome this money to finance the French economy," said Gilles Saint Marc, a Paris-based lawyer who is advising an Islamic institution which plans to make a formal application to start investment banking activities in France.

Anouar Hassoune, a senior credit officer at Moody's France and co-author of the book 'Islamic Finance a la francaise," said that Islamic institutions could initially focus on investing in property and Shariah-compliant businesses, and within three to five years they might also offer retail services. He mentioned Kuwait Finance House and Al-Baraka Islamic Bank as possibilities.

A November report by Moody's shows that Islamic banks have been fairly resilient. No Islamic financial institution has acknowledged investing in Bernard Madoff's $50 billion Ponzi scheme, and Saleh Al Tayar, Secretary General of the Franco-Arab Chamber of Commerce, said the $4.9 billion hit taken by Societe Generale SA from what it calls unauthorized trading by Jerome Kerviel couldn't have happened in an Islamic institution.

"If global banking practices were based on Islamic practices then we wouldn't be seeing the kind of crisis we are living through now," he said.

Islamic financial institutions work on a philosophy of prohibiting transactions considered immoral and promoting greater social justice by sharing risk and reward. Investing in casinos, pornography, arm dealers or anything to do with pork is out: long-term investments in projects considered to benefit society are in.

Interest payments, short selling and contracts considered excessively risky are also prohibited. That rules out some of the products that got Western finance into so much trouble such as subprime mortgages, collateralized debt obligations or credit default swaps.

Muslim scholars versed also in the arcane rules of finance have approved instruments that parallel many non-Islamic financial products from loans to insurance to bonds.

Sukuks are the equivalent of bonds, but instead of selling a debt, the issuer sells a portion of an asset which the buyer is allowed to rent.

"Islamic finance does demonstrate good banking behavior that has been perhaps lost over the last 10 years or so," said Neil Miller, head of Islamic finance at Norton Rose and an adviser to the British government.

"Islamic banking is saying we are close to our clients and we're only going to do genuine transactions where we can see the asset, we understand the asset, we can make an assessment of that asset: whether it's financing a ship or an aircraft they will go and have a look at the business. It's giving guidance as to what banking should be."

Hassoune says that conventional banks can be as ethical as an Islamic bank but competition and shareholder demands have encouraged excessive risk taking.

"I don't think conventional banks are dirty, bad, money obsessed," he said. But "they are pushed to make unreasonable profits."

France: Senate looks at easing limits on Muslim finance

AKI :The French Senate is looking at ways to eliminate legal hurdles, particularly levies, for Islamic financial services and products in France and the potential for listing companies on the Paris Stock Exchange. The Senate said its initiative was consistent with recommendations from a report on Islamic finance prepared by the Financial Affairs Commission last May.

The report stressed the great importance of Islamic finance in France and indicated the legal amendments required at a financial level to adapt French laws to the Islamic financial system.

Senate sources said that this area of the financial market was worth from 500 to 600 billion dollars and could grow by an average 11 percent a year.

Last month French Finance Minister Christine Lagarde announced France's intention to make Paris "the capital of Islamic finance" and announced several Islamic banks would open branches in the French capital in 2009.

Lagarde said at least three banks had requested permission to operate in France - the Qatar Islamic Bank, the Kuwait Finance House and the Al Baraka Islamic Bank of Bahrain.

According to an opinion poll condcuted last May, around 500,000 French Muslims are interested in Islamic banks.

Crisis prompts embrace of sukuk

Hürriyet:The Justice and Development Party government is working on laying the ground for the sovereign issuance of Islamic bonds, Hürriyet Daily News has learned. Declining to name the bonds 'Islamic,' a top official says 'this market' will grow to $200 billion globally by 2010, and 'Turkey wants its share.' The issuance will be based on leasing state-owned properties

The government has shown Turkey the path to spare the country from the effects of the global credit crunch - the diversification of export routes from crisis-hit Western markets to other locations, such as the Middle East. However, diversification has taken on a whole new meaning, as plans to issue "sukuks," or Islamic bonds, are underway, a top official told the Hürriyet Daily News & Economic Review.

Due to the possibility of political controversy or a backlash from the secularist camp, this new means of foreign financing will not be described openly as Islamic.

"Until now, we have created finance mainly through exporting bonds," said Selim Yeşilbaş, the head of the international finance markets department at the Turkish Undersecretariat of Treasury. "Now we will introduce a new method based on rent certificates."

The department has examined various models and developed two of its own, "head-lease/sub-lease" and "selling and re-letting." Both models employ the same idea, Yeşilbaş told the Daily News. "A state-owned property will be leased to a private company for a long period, say, 30 years. Then, the company will lease the same property to other companies for a shorter period. It will then issue rent certificates to investors, who may prefer these bonds as they are not based on standard interest procedures."

Traditional Islamic rules do not permit interest-bearing bonds. Sukuks, or Islamic bonds, comply with Islamic law and its investment principles.

"By the year 2010, it is estimated this market will be as big as $200 billion and Turkey wants a share," Yeşilbaş said, without mentioning the ’I’ word.

Legislation to implement the new financial scheme has been developed by experts in the Treasury and will be submitted by the government to Parliament shortly, he added.

'No, not Islamic'

Declining to use the word Islamic, Economy Minister Mehmet Şimşek said the government was "working on the lease of every type of asset." Şimşek said this means of financing could not be described as Islamic bonds, and would be "understood when it is made public."

"No, you cannot call it that," said Şimşek, when asked by the Daily News whether the scheme included Islamic bonds. "This is a scheme to lease every type of asset. It could include [them] or not. One cannot call it such."

Rumors were circulating from as early as 2003 that the government was working on sukuk issuance, but simmering political tension over the last few years prevented it surfacing.

The global financial crisis, however, seems to have created a suitable basis for this initiative, as Turkey strives to lure foreign capital to help finance its growth which ground to a halt in the third quarter as gross domestic product only recorded a 0.5 percent growth.

Work to enable Islamic bonds to be issued continue at the Privatization Administration and the State Planning Agency, according to sources in Ankara who requested anonymity. Sources confirmed Yeşilbaş's statement that the plan is to draw in Gulf capital using state-owned property as security. Rent from properties will be distributed among purchasers of bonds instead of interest payments. The same sources said a participation bank - the legal name for Islamic banks in Turkey - was cooperating with the government in the process.

At least one foreign bank active in Turkey is also waiting for the legal framework to be finalized. Hüseyin Özkaya, deputy general manager of HSBC Turkey, told Reuters in August they were expecting a change in the law. "The government must carry out legislative changes in connection with Islamic bonds... We have undertaken serious work on this matter for when these (legislative changes) are complete," he told the agency.

Not everyone is ready to embrace sukuks. Only a handful of Turkish asset management firms are interested in offering Islamic bonds to customers, a Turkish fund manager said, speaking on condition of anonymity. "I would not consider introducing Islamic bonds to our product range because it might put off our investors who may then transfer their assets to another asset manager with a more secular outlook," he told the Daily News.

"Given the challenging external financing outlook and foreign exchange liquidity strains, it makes sense for the Treasury to borrow as much as it can externally and introduce new instruments to do so," said Emre Deliveli, an economist. "Increasing the variety makes sense if you think global sovereign bond issuance is likely to swell next year, as developed and developing countries alike, start enacting expansionary fiscal policies to counter the slowdown."

Sukuks have remained relatively unscathed during the crisis, said Deliveli, who is also a Daily News columnist. "In the current environment, for a country with an external financing gap, every penny counts."

Although rapidly expanding over the last few years, Islamic banking assets account for less than 0.5 percent of the world's total, according to a study by Rodney Wilson, from the Institute for Middle Eastern and Islamic studies at Durham University in Britain. Corporate sukuk issuance rose from $400 million in 2000 to $24.5 billion in 2006, according to figures from the International Islamic Financial Market.

The popularity of Islamic finance strengthened with the global financial crisis, as this method of financing bans the trading of toxic debt contracts, profit-sharing and leasing without underlying tangible assets. According to the Islamic Finance Information Service, over $43 billion in sukuks were issued in 177 deals last year. The figure stood at $5.71 billion in 2003.

Faith-based investing

Faith-based investing does not apply only to Islam. Predominantly in Christian countries, numerous funds already exist that use moral screening processes to choose their stock. Christian funds, such as Ave Maria Mutual Funds, will not invest in companies involved in abortion, contraception, pornography, or companies that offer non-marital partner benefits to employees.

Faith-based investing can be classified as a subset of socially responsible investing, or SRI, which has become a major trend in the West over the past decade. Numerous pension funds have also adopted an SRI approach to portfolio management. An example of this is the Norwegian Government Pension FundĞGlobal, one of the largest pension funds in the world. It has established its own advisory council on ethics and excludes companies from the fund's portfolio it finds breach ethical standards.

More than $31 billion in assets are invested in faith-based funds today, while SRI funds have assets totaling $2.2 trillion.

Taylan Bilgiç, Mustafa Akyol and Reeta Paakkinen in Istanbul, and Serkan Demirtaş and Göksel Bozkurt in Ankara contributed to this report.

'Public sukuk can help create a stable and regular funding source'

Emirates Business 24/7:Islamic securitisation through the issue of public sukuk could be the answer to the liquidity constraints faced by home financing institutions, says a Dubai-based Shariah consultancy firm.

"Traditionally Islamic institutions have sought funding from institutional investors and banks but have not created any relationship with small investors or the common man," said Sohail Zubairi, CEO of Dar Al Sharia, a subsidiary of Dubai Islamic Bank.

"Most sukuks launched in the UAE and the Gulf have been arranged by conventional banks and taken up by conventional institutional investors. These investors tend to come with borrowed funds and there is always a cost associated with such funds. This is understood by the sukuk promoters and results in artificially structured returns to investors rather than the original return on equity.

"Mobilising public interest in sukuk in the past would have helped reduce these costs and the liabilities that come with them."

He said Islamic financing allowed institutions to securitise their assets from time to time by launching public sukuk, thereby creating a regular and stable funding source.

"Islamic institutions will also have peace of mind since the funding obtained through securitisation will not be like a corporate deposit, which can be withdrawn at short notice," said Zubairi.

Investors in Islamic securitisation sukuk would buy an undivided ownership share in the sukuk assets leased by the company and receive rent.

A stock exchange listing would provide an exit route to the investors, who could sell sukuk at the prevailing market price any time. And the Islamic home finance company would be free from liquidity worries.

"Had such public sukuk been launched in the past they could have continued operating to some extent during the current situation," said Zubairi.

Citing National Bonds as an example, he said, it had established strong grassroots relationships and continued to attract new investors despite the liquidity crunch.

Dar Al Sharia helped Tamweel launch a landmark multi-class Islamic securitisation sukuk last year in Europe just before the global liquidity crisis hit. The product was rated 'Aa2' by Moody's and 'AA' by Fitch.

And the company was engaged to work on the first Islamic real estate investment trust structure in the region. The scheme would have given investors a diversified asset base and, because of its listing on a GCC bourse, a quick exit channel. Work on the product has been suspended because of market conditions.

Zubairi said Islamic financial institutions (IFIs) were not completely protected from the liquidity crisis as they operated in the same market as conventional banks.

"IFIs were insulated from the losses that the conventional banks in the UAE and the Gulf suffered since they were not permitted to invest in toxic instruments, but the fear factor has dried up the liquidity from their system as well."

He welcomed the merger of Amlak and Tamweel, saying it was a positive step and adding: "I believe the move will soon restore to a great extent home financing activities."

And he said a conventional mortgage borrower could use a shariah-approved mechanism to switch to Islamic home financing. "If the title to the property is held by the customer but mortgaged to the conventional bank the customer must give the liability certificate issued by the conventional bank to the IFI. The IFI will arrange for the conventional bank to agree to release the mortgage upon receiving the amount stated in the liability certificate. The IFI will purchase the property at an agreed price from the customer and have the title transferred to it.

"If the IFI's purchase price is higher than customer's liability with the conventional bank the IFI will pay the liability amount directly to the conventional bank and release the balance to the customer. The IFI will start the lease on the day it purchases the property from the customer. The lease rent will be as per the terms agreed in the lease contract. The IFI charges a one-time fee for processing a home finance request, which is standard and reasonable compared with conventional banks' charges. All charges made by an Islamic bank must be approved by the shariah board, which will not allow unfair practices such as commitment fees and penalty payments," he said.

Zubairi said Islamic finance could provide a number of benefits in the current tight liquidity conditions. These included more straightforward and faster amortisation compared with a conventional loan, the absence of compounding and the fact that the rent payments would stop if the property were totally destroyed.

In addition there were no hidden charges and the customer was prevented from over-borrowing against a property – the main cause of the current turmoil – because the IFI held the title.

Takaful wins positive S&P outlook

Gulf Daily News: Standard & Poor's Ratings Services has assigned its long-term 'BBB' counterparty credit and insurer financial strength ratings to Bahrain-based Takaful International Company (TIC).

The outlook is stable.

"The ratings on Bahrain-based composite insurer TIC reflect good operating performance and good financial flexibility," said Standard & Poor's credit analyst Kevin Willis.

"These positive factors are partially offset by the absolute small size of the company, operating in the relatively small market of Bahrain, and only adequate capitalisation at the current level," he added.

"The stable outlook reflects our expectation that TIC will reinforce its current capitalisation next year, thereby supporting its growing business base and expanding competitive position," said Mr Willis.

Earnings will continue to be good, with the takaful fund continuing to deliver surpluses. The assets will reflect good liquidity and provide cover to technical and other liabilities. TIC's competitive position will grow within Bahrain.

Negative rating action would be prompted by failure to strengthen capitalisation in the first half of next year, to a position where capital adequacy was strong. Negative rating action would also result from any weakening of its earnings or competitive position.

Islamic banking is the answer

Gulf Daily News: World Bank and the International Monetary Fund experts are studying Islamic finance to see how its principles can help them rebuild the Western financial system. That was the claim by the General Council for Islamic Banks and Financial Institutions secretary general Ezzedine Khoja.

He was speaking at the Third Business Symposium at the University of Bahrain yesterday which has attracted more than 700 students from the kingdom and across the GCC.

"When financial experts are trying to explain the financial crisis and find solutions for the future they are looking for a financial model that will provide comfort and they are continually seeing that the way to achieve this involves the human principles inherent in Sharia-compliant finance," he said.

"Islamic finance is now showing the West how to repair and rebuild its financial structures."

He told the students that since it was first established back in 1975, the Islamic finance industry had created more than 400 fully-fledged Islamic banks with total assets of more than $600 billion.

"We are seeing an annual growth in Islamic finance of more than 35 per cent, both from the formation of new institutions and from traditional financial institutions converting to or offering Sharia compliant finance," he said.

Opening the three-day event, which has been organised by students at the university, the leader of the Deanship of Student Affairs, Dr Osama Jodar, said that Bahrain was now the hub of Islamic finance and the symposium has specifically chosen this field for discussion because of the benefit it would bring to the students.

The head of the organising committee, Abdulla Bucheeri, said that the main purpose of the seminar was to help educate students in the role and goals of Islamic banks and finance and that a number of specialist speakers would be outlining the difference between Islamic financial institutions and traditional finance and how Islamic finance made a difference.

Gulf International Investments public relations manager Ahmed Shawqi said that the Islamic financial industry has suffered a lot less than traditional institutions in the current financial meltdown.

Khaleeji Commercial bank general manager Fuad Taqi speaking about the growth of the industry said that not only were new players coming into the industry but established Western banks like HSBC and Citibank were now offering customers Sharia-compliant services.

"Our sponsorship of this symposium shows how much we support Islamic banking and educational studies about Sharia-compliant finance," he said.

"You, the students of today, are the main assets of Islamic banking for tomorrow."

Islamic banks unscathed by global crisis: Al-Aboodi

Arab News: Islamic banks are the least affected by the current global financial crisis triggered by subprime tsunami in the United States, the CEO & general manager of Islamic Corporation for the Development of the Private Sector (ICD) said.

In an exclusive interview with Arab News, Khaled Al-Aboodi said, “Islamic banks are Shariah-compliant and Shariah does not allow them to invest in subprime products as compared to conventional banks.”

Al-Aboodi, who began his career with the Saudi Ministry of Economy and Finance in 1982, became ICD chief in 2007. Talking about the recent banking crisis, he said you must have seen that most conventional banks worldwide were in trouble because they don’t deal with Shariah products. “Islamic banks are very strict in their policies which are monitored closely by Shariah boards at various stages,” Al-Aboodi said.

He said ICD is in the process of setting up an asset management firm in the Kingdom, which will be named Ewaan Capital and will deal with Shariah-compliant mortgage financing. ICD has applied for a license from the Capital Market Authority (CMA) and already had initial discussions with the Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank.

ICD, an Islamic Development Bank (IDB) affiliate, applies Islamic modes of financing in operations that include installment sales, leasing, Mudaraba, Murabaha and equity participation, Al-Aboodi said. The authorized capital of ICD is $1 billion. ICD’s shareholders are the IDB (50 percent), Islamic member countries (30 percent) and five financial institutions from member countries (20 percent).

He said the mandate of ICD is to support economic development of its 48 member countries through provision of finance to projects promoting private sector as a vehicle for economic growth and prosperity. The projects financed by ICD are selected on the basis of their contribution to economic development taking into account factors such as creation of employment opportunities and contribution to exports.

ICD also accepts co-financing for its projects and advises governments and private sector groups on policies to encourage the establishment, expansion and modernization of private enterprises, development of capital markets, improvement in management practices and for enhancing the role of market economy, he added.

In 2007-08, the market for ICD evolved further and investment diversified into new markets. Bangladesh became a new member of the ICD as a beneficiary country and financing of projects in the country increased from $5.3 million to $6 million.

Despite global economic slowdown and negative impact of a tightening financial market, ICD achieved its targets. Al-Aboodi said this year ICD approved $340 million in financing which is a 6 percent increase compared to last year. Since its founding in 2001, ICD has approved projects worth $1.2 billion, he said.

“The global financial crisis is creating some kind of uncertainty but we will try to meet demands from the private sector and we expect same growth next year,” he added. “So far none of ICD projects is affected by the global crisis,” Al-Aboodi said after visiting various countries and taking the first hand information of the ongoing ICD projects. Al-Aboodi recently visited Azerbaijan, Kazakhstan, Uzbekistan, Russia, Turkey and Bosnia where ICD has financed private sector projects. In Azerbaijan, ICD has established Caspian International Investment Company (CIIC), which has started operations after reaching the projected capital of $70 million.

He added, “The first Islamic investment company was set up after identifying investment opportunities offered by the developing Azerbaijan economy - the fastest growing economy in the world.” Al-Aboodi, who also participated in “Agroinvest.kz-2008”, the first international investment forum, held in Astana, Kazakhstan, in October, signed memorandums of understanding (MoUs) with Kazagro national holding company and Food and Agriculture Organization (FAO) to explore Kazakhstan’s agricultural potential and establish contacts with Kazakh entrepreneurs.

He said ICD also organized a half-day seminar in June for knowledge sharing and information dissemination among IDB member countries on the challenges and solutions for public-private participation (PPP) in the social sectors such as health, education and other related fields. ICD, which was recently admitted as an associate member to the Islamic Financial Services Board (IFSB), had signed a $12.5 million Ijara (lease) agreement with Arab Malaysian Vegetable Oil Products Company Ltd., to set up the first palm oil-based vegetable oil refining and downstream processing plant in Yanbu. The project would produce cooking oil and have an annual production capacity of 90,000 metric tons. It will also produce non-hydrogenated downstream products such as vegetable ghee, fats, shortening and margarine. The project plans to export up to 90 percent of its production while the rest will be sold in the Saudi market.

He said ICD has a big presence in Africa also. It has signed a line of finance agreements with the Arab Bank for Economic Development in Africa (BADEA) to finance private sector projects in its African member countries. ICD has also been involved in charitable exercises for the last few years. Recently, ICD had given away 700 free school bags to the children of needy families and orphans in cooperation with Al-Irshad Charitable Society, Tripoli, Lebanon.

“This initiative came as ICD’s Solidarity Fund strategy to serve needy communities within IDB member countries by providing assistance in different fields and various ways,” Al-Aboodi added.

Italy's Muslims 'waiting' for Maltese Shariah-compliant banking

Times of Malta:Italy's one million Muslims could be among the first customers of a Shariah-compliant finance structure in Malta as they wait for the island to give them the opportunity to invest, finance projects and create wealth, Malta Institute of Management chairman Reuben Buttigieg believes.

Mr Buttigieg says an Islamic finance structure for Italy is under discussion but there is a long way to go for the necessary legislative changes to be in place. One of the reasons, he points out, is the structure of the Berlusconi government.

"There are some 70,000 Arab holding companies in Italy and some one million Muslims," Mr Buttigieg says. "Companies seem to resort to banks in the Middle East to obtain Shariah-compliant finance. Malta is 90 kilometres away and an EU member. It would be much more efficient for them to use the available funds in Malta or to invest excessive cash here. Islamic finance in euro is also something that seems to be lacking, while it is available in sterling and dollar. There is substantial cost-saving on this aspect alone.

"If the government wants to attract a massive inflow of investment it should issue Sukuk (asset-backed trust certificates) itself, and then the entire Muslim world would be looking at Malta, particularly people in European countries with no investment opportunities. We are not the first in Europe, and that is positive because we can learn from others' experience. Being among the first is, however, crucial."

In late November, Mr Buttigieg relayed this message to the 100-odd participants at a second seminar on Islamic finance organised jointly by the MIM, the Malta Union of Bank Employees and the Malta Employers' Association.

The event aimed to dispel misconceptions on Islamic finance and to raise awareness among financial services professionals and lawyers who "need to do their homework if they want to attract business to Malta".

Islamic banking is the world's fastest growing sector in world finance. There are over 300 Islamic financial institutions in over 70 countries.

Mr Buttigieg, who is managing director of Erremme Business Advisors, insists the financial services and business community should be well prepared to face this challenge as soon as the government gives it the green light.

"There can be opportunities for both employers and employees in other industries if Islamic finance is introduced in Malta," Mr Buttigieg points out. "The MEA recognised this from the start and is encouraging employers to investigate further. The association wants to ensure that it presents more and more opportunities to its members. From a social policy aspect, the MEA and the government will have to address certain issues. So the seminar is only a first step.

"The MEA recently organised a breakfast meeting on family-friendly measures, an issue at the heart of Islamic finance given its social principles. The same goes for the MUBE, whose members must have the necessary training. The MIM views Islamic finance as an opportunity for professional managers who want to steer their firms into this lucrative market."

Europe's experience with Islamic finance has been positive so far, both in the UK and also in a region in Germany, and Mr Buttigieg believes Malta, through its financial regime structure and strategic location, can also target North African markets, and Libya in particular.

Libya's financial sector is less robust than Malta's - Mr Buttigieg points out that Muslims there have no opportunity to use their money in a Shariah-compliant manner. Many North African countries are in the same situation.

In Malta, the members of the 3,000-strong Muslim community who use our retail banks have to donate any income they derive as it would be considered usury and not Shariah-compliant.

Overseas, HSBC has an Islamic 'window', HSBC Ammanah. Malta's banks may set up similar operations, but Malta could lure European and Middle Eastern banks to operate here.

Tax planning opportunities also await. Mr Buttigieg says they would differ from country to country and according to the type of operation.

"There are various structures that could be used in Islamic finance which depend very much on the product," he explains. "Today there are Islamic finance institutions that are setting up in the Cayman Islands to try to tap into Libya and benefit from the tax legislation.

"Malta can offer that advantage too, with even more added value to it. Our legislation on trusts is also a tool we can use with respect to Islamic finance structures. However, it depends on the jurisdiction we are addressing. It is also an opportunity for our government to enter into more double taxation agreements with Arab countries."

Islamic finance has sailed through the economic crisis as ethical operations and the underlying assets behind all Islamic finance transactions means the structure is more resistant.

"It does not mean Islamic finance institutions will not be affected by a recession," Mr Buttigieg warns. "In a recession, even underlying assets will be affected. For example, if property prices continue to fall, then Islamic funds investing in property will be affected too."

This resistance has made Islamic finance more attractive to non-Muslims, especially in the UK. Maltese customers could use Islamic finance.

Mr Buttigieg explains: "The fundamentals of the main religions in the world are similar. Most religions are against usury, for example, and there are other social issues. Certain structures in Islamic finance are not new to Malta.

"The foundation of APS Bank is similar to what is called a 'donation contract' in Takaful (Islamic insurance). Islamic finance is a different system of doing finance. It focuses on ethics, on avoiding uncertainty and investing according to specific rules."

Realistically, how far is Malta from introducing fully-fledged Islamic banking and finance, insurance, and bonds?

"If Malta wants to head that way, we could have the three main branches of Islamic finance in the span of a year," Mr Buttigieg replies.

"There obviously needs to be the will and the political commitment. The good news is that the two political parties have expressed themselves in favour of enabling Islamic finance. Finance Minister Tonio Fenech has also spoken positively about the issue.

"The Malta Financial Services Authority has issued the first consultation document to which the industry has given its feedback.

"It is expected that two other consultation documents will be issued next year regarding Takaful and Sukuk. After that, it very much depends on the MFSA and government to ensure we do not miss this golden boat."

The future of Islamic finance after crunch

Gulf Weekly:The current crisis provides Islamic finance with a rare opportunity to reinvent itself and to appeal not just to the 1.5 billion Muslims in the world but the rest of humanity too, which is suffering as a whole from the collapse of free market capitalism and for whom the pain is likely to intensify next year, as the effects of the financial crisis are fully felt in the real economy in the form of higher costs and fewer jobs.

Islamic finance needs to focus less on complying with each rule and more on reflecting the principles which underlie those rules so that transactions are no longer Sharia-compliant but are Sharia-based.

The AAOIFI statement on sukuk issued in February 2008 (which stated that purchase undertakings, where the exercise price was fixed at issuance, were not Sharia-compliant for sukuk based on musharaka, mudaraba and wakala structures) reflected the frustration of scholars at the manipulation of Sharia rules by clever bankers and lawyers wanting to create products that did not reflect the underlying principles of Islamic finance but that do fit into a model that is easily understood by conventional investors who thus far have tended to be the main investors in sukuk.

This may change as Islamic investors are attracted by the more predictable returns offered by sukuk in an attempt to diversify their asset pool from the more volatile property and equity markets.

In the current climate there seems to be a widespread revulsion against excessive speculation, the trading of risk and the payment of large bonuses for short term gains that are believed to have been amongst the causes of the current financial crisis.

If Islamic finance is seen in its true guise as a form of ethical financing, of interest to all rather than only as a faith-based activity of interest to the Muslim population, it is likely to find favour with a different type of conventional investor who would be potentially willing to consider different types of risk-reward stuctures.

The non-Islamic world's increasing interest in understanding Islamic finance is likely to continue as cash-strapped companies look to the Gulf as a possible source of funding and begin to explore Sharia-compliant structures for the first time.

Their governments are responding by following the UK model to create a level playing field through removing tax and regulatory obstacles.

Non-Muslim majority countries in Europe, such as the United Kingdom, France and Italy are ensuring that their legal systems create a level playing field for Sharia-compliant structures.

In Asia, Singapore and Hong Kong are vying to be the hub for Islamic finance, despite Malaysia's traditional dominance.

Even if the hoped for liquidity does not materialise for many of these companies and their advisers, their research into Islamic finance as a source of possible funding will be valuable in consolidating the position of Islamic finance as a form of finance available to all.

This process could help to realise the 'New Silk Road' of financial flows linking Asia and the Middle East that Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia (the central bank), has discussed.

Tougher business conditions and a reduced deal flow next year will also give market participants an opportunity to respond to the demands of the market for increased harmonisation of Islamic principles, products, documentation and processes both markets and across markets.

This process has already started with the launch of the IIFM/ISDA Commodity Murabaha form and with the creation of working groups to consider how best to structure sukuk in order to address AAOIFI's concerns.

It is possible to argue that the market reaction to the AAOIFI statement on sukuk has demonstrated the importance of AAOIFI as an institution to the Islamic financial markets and so the need for a central decision making body is also being addressed in response to the current crisis.

The next year is likely to be a milestone in the development of Islamic finance since it will address its first global crisis and is likely to respond by consolidating its principles and procedures, developed in the very short time period that it has formed part of the global financial industry.

Islamic finance is a very young industry despite relying on principles established 1,400 years ago. It was only used in the West in the 1970s when Sharia-compliant trades were carried out on the London Metal Exchange.

The pace of innovation that Islamic finance has shown in the last four years demonstrates that it is a fast learner and that it is likely to respond to the challenges of 2009 by emerging as a stronger and larger part of the global finance industry.

l Farmida Bi, a partner at Norton Rose LLP, has specialised in capital markets transactions for over 15 years and has advised on English and New York law debt and equity capital markets transactions (including Islamic finance and securitisations), emerging markets, regulatory issues, structured finance and mergers and acquisitions.

She acts for a broad range of the leading financial institutions and for both sovereign and corporate issuers.

Farmida is an expert in Islamic capital markets and has advised the arrangers on a number of the leading transactions, including the Tamweel securitisation, recognised as the first Islamic true securitisation, and on the PCFC Sukuk issue to fund Dubai World's purchase of P&O. Farmida qualified as solicitor in 1992 and as a New York attorney in 1999.

Norton Rose LLP is an international legal practice with offices worldwide. Its Bahrain office was established in 1979 at the request of the Bahrain Monetary Agency - now called the Central Bank of Bahrain.

'GCC will have focused Islamic private banks soon'

AJP:Gulf Co-operation Council (GCC) countries will soon have a comprehensive Islamic private banking system to address a variety of requirements in the region, according to banking experts.

In the backdrop of investors and depositors across the world turning their focus on Islamic banking as safe and reliable bet, private non-Islamic bankers and wealth funds should get rid of commercial banking mentality and be committed to customers' wealth care, they said.

Saying GCC banks should gear up to compete with global lenders, Saadat Muzaffar, Head of International Wealth Management, Dubai Islamic Bank, told Emirates Business: "GCC is likely to have its first Islamic private bank very soon. Despite the region having immense potential to offer reliable banking services, there is no Islamic private bank yet. Private non-Islamic banks and wealth funds need to improve after-sales service. Local banks are still unable to offer focused and customised banking services."

Though private banks, retailing banks and co-operative banks managing a significant chunk of revenues in the GCC, they need to move up the value chain to compete with global banking players on the home front, he said.

Over the recent years, the private banking system has moved on from a remote tax-driven offshore activity to a prominent onshore business model because of international pressure on tax avoidance. Onshoring of financial assets has led to change choice of future offices, distribution model and corporate structure.

Saying that interest rates and speculation were prime reasons for sub-prime crisis, Muzaffar said that these are "haram" in Islamic banking.

He added: "GCC banks must focus on private banking and wealth management services for individuals and high net worth individuals (HNIs). There is a growing need to create niche products for private banking clients and customers.

It is estimated that the wealth held by HNIs in the GCC is likely to go up from $2.1 trillion (Dh7.7trn) in 2007 to $3.8trn in 2012. Hence, there will be good demand for Islamic wealth management and private banking in the near future, Muzaffar said.

SBP invites bids for Sukuk

Pakistan News: State Bank of Pakistan on Tuesday invited tenders for sale of 3-Year Government of Pakistan Ijara Sukuk (GIS).

The target for this auction is Rs 10 billion. The tenders have been invited in accordance with the provisions of SBP, FSCD circular No.13 dated Sept. 06, 2008, says SBP statement.

The bids will be opened on Dec 20, 2008 at 11:30 and the results will be announced on same day.

The settlement date will be December 29, 2008. The maximum remaining value of the assets under the present issuance program of Ijara Sukuk is Rs 29.02 billion. The bids can be rejected without assigning any reason.

Halal Expo nets over $11m deals

TradeArabia News Service:‘Halal Expo 2008’ concluded in Dubai with exhibitors closing more than $11 million worth of deals over the course of the event, according to show organisers, Orange Fairs & Events.

The three-day show, which was sponsored by Jawhara, the first Group of Islamic hotels in the UAE, hosted more than 55 global companies and international exhibitors from 17 countries including the UAE, Malaysia, Australia, France, Hong Kong, Pakistan, UK, Brunei and the Philippines.

Among the top exhibitors, the manufacturers of Cham'alal, a sparkling non-alcoholic alternative to champagne, announced that they secured a total of 38 international contracts during the show, thereby prompting them to ensure a repeat participation for the event’s 2009 edition.

The manufacturers of the much sought-after product further revealed that their participation at ‘Halal Expo 2008’ resulted in potential contracts amounting to $4 million, from partners and investors originating from countries such as Saudi Arabia, UAE and Iran.

In addition to revolutionary and top-quality Halal offerings, the event also featured a host of Shari'ah-compliant lifestyle products and services, including food items, hospitality management, cosmetics and health and pharmaceutical products.

“Our participation has presented us with an outstanding opportunity to expand the market of Cham'alal and talk directly to our target audience, who comprised the bulk of the visitor turnout at the event,” said Daas Salim, business developer, Cham'alal.

Among the other success stories during ‘Halal Expo 2008’ was Ozzy Meat Exporters (Halal) Pty Ltd, having closed deals worth $5 million, with around 19 local traders and companies from Zambia, Somalia, Belgium, KSA, Malaysia, Indonesia, Pakistan, India, Egypt, Yemen and Jordan placing significant meat orders.

Erapoly Oil & Fats, a company that exports Halal products to the UAE and Saudi Arabia, also confirmed to have secured around $1 million in contracts, mostly for the first half of 2009, during its participation at ‘Halal Expo 2008’, thereby boosting the company’s expectation to increase its market presence by 10 to 20 per cent.

'Halal Expo 2008 has achieved tremendous success largely because of the impressive array of Halal products that have been showcased,” concluded Raees Ahmed, director, Orange Fairs & Events.