In this issue Islamic Capital Markets Briefs ................ 1 Islamic Ratings Briefs .............................. 11 IFN Reports................................................ 12 Urgent Need to Improve Resolution of Disputes in Shariah Transactions........... 13 Comparing Risk Management in Islamic Financial Institutions and Conventional Financial Institutions................................ 15 Banking and the Risk Environment: Corporate Governance ............................. 17 Risk Management Guidelines for IBIs... 21 Conventional Derivatives in Islamic Finance? .................................................... 24 Meet the Head .......................................... 25 Omar Farooq Kalair, UM Financial Canada Termsheet .................................................. 26 Queen Alia International Airport Takaful News Briefs.................................. 27 Takaful Report .......................................... 28 Surplus in Takaful — An Actuary’s Perspective Moves ......................................................... 31 Deal Tracker .............................................. 32 Islamic Funds Tables ................................ 33 Dow Jones Islamic Indexes ..................... 34 Malaysian Sukuk Update......................... 35 Islamic League Tables ............................. 36 Events Diary............................................... 39 Subscriptions Form .................................. 40 Country Index ............................................ 40 Company Index ......................................... 40 Vol. 5, Issue 6 15 th February 2008 The World’s Global Islamic Finance News Provider MALAYSIA And the best banker of 2007 is… In the tough battle for Islamic Finance news most coveted title of Best Individual Islamic Banker, Badlisyah Abdul Ghani showed he is a cut above the rest. The CEO of CIMB Islamic Bank was the favorite, and has been involved in more than US$10 billion Islamic financial deals locally and globally. His impressive accomplishments include the creation and introduction of the world’s first Ijarah Sukuk, Istisna Sukuk and Musharakah ABS and residential mortgage backed securities. A close second was Afaq Khan, CEO of Standard Chartered Saadiq. After joining Stanchart in 2003 with a mandate to launch the Islamic initiative for the bank, he successfully led the setting-up of a global Islamic business for Stanchart covering retail, corporate and investment banking, across multiple locations and products. Third place went to Salman Younis, managing director of Kuwait Finance House Malaysia. This time around, the public had the opportunity to nominate their choices for the title. A total of 1,316 people nominated about 45 names, from whom 10 with the highest votes made it to the final poll. Those who had not previously voted were invited to participate in the second part of the poll. 496 people cast their votes. 18.92% of the votes went to Badlisyah, 18.24% chose Afaq while 11.82% chose Salman. A total of 41% of the votes came from the Middle East, 36% from Asia and 14% from Europe. BAHRAIN Landmark Dar Al-Arkan Sukuk listed on BSE Yet another first for the Dar Al-Arkan International Sukuk company. The company has listed its landmark US$1 billion Sukuk Ijarah on the Bahrain Stock Exchange (BSE), marking the first Saudi Sukuk and the largest ever issue to list on the BSE. The Sukuk has also been listed on the Dubai International Financial Exchange (DIFX) and Malaysia’s Labuan International Financial Exchange. Successfully closed in July 2007, the landmark five-year Sukuk issue will mature in 2012 and pays an annual return of 2.25% above LIBOR payable to the Sukuk holder every three months. It is the second Sukuk to be issued by Dar Al-Arkan Real Estate Development Company (Dar Al-Arkan). The company had also concluded its initial public offering on the Saudi Tadawul All Share Index, which saw the company’s founding shareholders dilute their existing shareholding by 11.01%, equal to a total of 59.45 million shares. The IPO was the largest non-governmental listing in Saudi history to date, attracting a wide range of investors. Dar’s inaugural Sukuk was issued in March 2007 and valued at US$600 million, making it the first Sukuk to be issued by a Saudi corporate in the international capital markets. It is listed on the DIFX.
Subscriptions Form ..................................40
Country Index ............................................40
Company Index .........................................40
Vol. 5, Issue 6 15th February 2008
T h e W o r l d ’ s G l o b a l I s l a m i c F i n a n c e N e w s P r o v i d e r
MALAYSIAAnd the best banker of 2007 is…In the tough battle for Islamic Finance news most coveted title of Best Individual Islamic Banker, Badlisyah Abdul Ghani showed he is a cut above the rest.
The CEO of CIMB Islamic Bank was the favorite, and has been involved in more than US$10 billion Islamic fi nancial deals locally and globally.
His impressive accomplishments include the creation and introduction of the world’s fi rst Ijarah Sukuk, Istisna Sukuk and Musharakah ABS and residential mortgage backed securities.
A close second was Afaq Khan, CEO of Standard Chartered Saadiq. After joining Stanchart in 2003 with a mandate to launch the Islamic initiative for the bank, he successfully led the setting-up of a global
Islamic business for Stanchart covering retail, corporate and investment banking, across multiple locations and products.
Third place went to Salman Younis, managing director of Kuwait Finance House Malaysia.
This time around, the public had the opportunity to nominate their choices for the title. A total of 1,316 people nominated about 45 names, from whom 10 with the highest votes made it to the fi nal poll. Those who had not previously voted were invited to participate in the second part of the poll. 496 people cast their votes.
18.92% of the votes went to Badlisyah, 18.24% chose Afaq while 11.82% chose Salman. A total of 41% of the votes came from the Middle East, 36% from Asia and 14% from Europe.
BAHRAINLandmark Dar Al-Arkan Sukuk listed on BSEYet another fi rst for the Dar Al-Arkan International Sukuk company. The company has listed its landmark US$1 billion Sukuk Ijarah on the Bahrain Stock Exchange (BSE), marking the fi rst Saudi Sukuk and the largest ever issue to list on the BSE. The Sukuk has also been listed on the Dubai International Financial Exchange (DIFX) and Malaysia’s Labuan International Financial Exchange.
Successfully closed in July 2007, the landmark fi ve-year Sukuk issue will mature in 2012 and pays an annual return of 2.25% above LIBOR payable to the Sukuk holder every three months. It is the second Sukuk
to be issued by Dar Al-Arkan Real Estate Development Company (Dar Al-Arkan). The company had also concluded its initial public offering on the Saudi Tadawul All Share Index, which saw the company’s founding shareholders dilute their existing shareholding by 11.01%, equal to a total of 59.45 million shares. The IPO was the largest non-governmental listing in Saudi history to date, attracting a wide range of investors.
Dar’s inaugural Sukuk was issued in March 2007 and valued at US$600 million, making it the fi rst Sukuk to be issued by a Saudi corporate in the international capital markets. It is listed on the DIFX.
QATARICBC fi rst Chinese bank in QFCThe Industrial & Commercial Bank of China (ICBC) has been authorized by the Qatar Financial Centre Regulatory Authority to operate a full branch from the Qatar Financial Center (QFC), making it the fi rst Chinese bank to open an offi ce in the Middle East.
ICBC chairman Jiang Jianqing said this was the fi rst time a Chinese bank had established operations in the Middle East, “which is evidence of our continued commitment to supporting the growth and development of our clients’ interests in the Middle East”.
UAEAjman Bank to list sharesAjman Bank has announced plans to list on the Dubai Financial Market. The initial public offering, scheduled to take place on the 17th February, would value the bank, which is currently under formation, at AED1 billion (US$272 million).
The IPO, which is open to non-UAE as well as UAE investors, is for 550 million ordinary shares, or 55% of the total. The government of Ajman owns a 25% stake in the bank and fi nancial institutions and private investors across the UAE have a 20% share.
careersA number of excellent opportunities to join one of the world’s leading and most innovative Islamic banks, to be based in the UAE. The role will involve advising on legal and Shariah issues for syndicated transactions and Sukuk issues.
The successful candidate will be a law and/or Shariah graduate with 1 to 5 years experience of drafting fi nancial transaction documents either in a bank or a law fi rm. Must be fl uent in written and spoken English. Experience of Islamic fi nancial transactions and working knowledge of Arabic will be an advantage.
Highly competitive salary and benefi ts.
Please send applications with full resumes in strictest confi dence to: application@islamicfi nancecareers.com with the subject heading of IFC1001. Only short listed applicants will be contacted for interview.
Leading GCC Islamic Bank requires In-House Lawyers
GLOBALMorgan Stanley’s US$5 billion term noteMorgan Stanley executive director, Yavar Moini said the company is preparing a US$5 billion medium-term note for a blue chip multinational corporation, adding that the Islamic bond market has been affected by the US subprime mortgage crisis.
UKFSA allows Macquarie accessMacquarie has been granted a banking license by the UK’s Financial Services Authority. The new unit, Macquarie Bank International, will have an initial capital base of £200 million (US$393.45 million) and will lend to corporate and retail clients as well as trade commodities.
The Australian bank has been expanding its presence in Europe with 5,000 staff being employed outside Australia, and its investment banking business, Macquarie Capital, providing more than half the group’s profi ts.
PAKISTANFirst mortgage backed Sukuk closedThe House Building Finance Corporation Limited (HBFC) has closed its Sukuk issuance at PKR1.5 billion (US$23.85 million). The Sukuk is Pakistan’s fi rst mortgage backed issuance.
Standard Chartered Bank (Pakistan), AMZ Securities (Private) and Emirates Global Islamic Bank acted as the deal’s advisers and arrangers. Units will be repurchased by HBFC in equal installments starting from the 18th month of fi rst drawdown.
Proceeds from the issuance will be utilized for the company’s business expansion.
HONG KONG/MALAYSIA EON Capital stake sold for US$415 million Hong Kong-based Primus Pacifi c Partners has confi rmed its buy of 20.2% of EON Capital at RM1.34 billion (US$415 million). The buy includes EON Bank and EONCap Islamic- subsidiaries of EON Capital. Primus’ buy follows its failed bid for RHB Capital last year, against fi nance bigwigs Kuwait Finance House and government-backed Employees Provident Fund of Malaysia.
Primus’ buy has also elicited unfavorable comments, with some analysts arguing that Primus is “over-paying for an unimpressive franchise”. However, this has not marred the Hong Kong private equity fi rm’s intentions of making an impact in the Malaysian fi nancial markets. Jeroen Nieuwkoop, managing director of Primus, expressed that this is perhaps the last opportunity for the fi rm to become a substantial stakeholder in a Malaysian bank.
Bank Negara Malaysia has approved the Primus transaction, and the deal is expected to be completed by the end of March, subject to approval by the Foreign Investment Committee, and shareholders of both Hicom and DRB-Hicom. ABN Amro is advising EON, while Primus is being advised by Lehman Brothers.
LEBANONProfi t rose 19% at Bank of BeirutBank of Beirut has announced that its 2007 profi t rose 19% as customer deposits increased. Net income increased to LBP66.5 billion (US$43.9 million) from LBP55.8 billion (US$36.8 million) the previous year. Customer deposits climbed 19.5% to LBP276.6 billion (US$182.7 million).
UAEMoU signed for young business leadersNoor Islamic Bank (NIB) has signed an agreement with Sheikh Mohammed Bin Rashid Establishment for Young Business Leaders (SME) to build on mutual expertise and foster the growth of small and medium-sized enterprises in the region.
Under the agreement, NIB will be granted preferred fi nancial services provider status by SME to provide its members with specifi c Islamic fi nance solutions, including access to Shariah compliant working capital and cash fl ow management, and business analysis on specifi c industry segments.
In exchange, SME will help NIB to identify vendors and organize training workshops and seminars. It will also help the bank review and validate assumptions for business plans to drive the growth of the aforementioned enterprises in the region.
UAEGARP seminar on risk managementThe Global Association of Risk Professionals (GARP) UAE chapter is organizing a seminar on “Risk Management in Islamic Banking: An Integrated Approach” in Dubai next week. The event is organized in association with IRIS integrated risk management ag.
Sohail Zubairi, AVP and head of the Shariah coordination department at Dubai Islamic Bank, said the seminar will provide an insight into the fascinating aspect of self-mitigation of risks in Shariah structures for fi nance and investment.
The event, which is scheduled for the 21st February, will feature Dr Sunil Kumar and Dr Ioannis Akkizidis, authors of Financial Risk Management for Islamic Banking and Finance; Hung Wong, senior manager insurance and investments at HSBC Bank Middle East Ltd; and Horst Simon, head of operational risk at the group risk management, UAE and co-regional director at GARP.
The world's leading offshore law firm and the first to establish an office in the Middle East. Maples offers clients around the Middle East an unparalleled range of Cayman Islands and British Virgin Islands legal services, including advising on offshore Islamic finance structures such as sukuk transactions, investment funds, trusts and securitisations.
UKABE partners IIBIThe Association of Business Executives (ABE) has worked with the Institute of Islamic Banking & Insurance (IIBI) to develop two optional modules within the existing ABE Business Management qualifi cation.
“Concepts and Principles of Islamic Economics” will be offered at diploma level while “Islamic Finance” will be available at advanced diploma level. Both modules will be examined for the fi rst time in June 2008 and are accredited by the UK regulatory authorities for qualifi cations.
BAHRAINHSBC Amanah plans new Islamic fundsHSBC Amanah is developing new funds, including Islamic structured notes in view of the growing demand for Islamic investments. The GCC region is all set to see new instruments like exchange-traded funds and new asset classes, especially the halal industry, said HSBC Amanah regional head of wealth management, Ishrat Kiyani.
He said HSBC Amanah was currently developing new funds such as HSBC Global Emerging Market Fund and HSBC Amanah Hangseng Index Fund to leverage on growth in emerging markets and Asia-Pacifi c. UAE
Islamic banks increase shareUAE banks are becoming less dependent on income from interest as lending levels drop and income from service fees rises with the ratio of interest margin to gross income to about 29% at the end of 2006 from about 59% at the end of 2003, according to a study released by Dubai Chamber of Commerce and Industry (DCCI), based on the IMF’s recent report on the UAE’s fi nancial system’s stability.
The banking system’s exposure to the mortgage market seems to be less signifi cant. Real estate loans averaged 5% of total loans during the period between 2003 and 2006. DCCI said the ratio of non-performing loans to total loans fell to 6% at the end of 2006 from about 14% at end of 2003. The regulatory capital assets’ ratio stood at about 17% at end of 2006.
BAHRAINEnhancing corporate governanceA seminar aimed at increasing awareness of corporate governance issues in Islamic fi nance including banking, insurance and capital markets will be held on the 11th and 12th March in Manama, Bahrain.
Jointly organized by the Islamic Financial Services Board (IFSB), the World Bank’s Group Corporate Governance Department and the IFC Global Corporate Governance Forum, the seminar will look at collective investment schemes among fi nancial regulators and market participants.
Introduction to Islamic Finance & the Islamic Financial Services Industry10 – 12 March, MUMBAI
Risk Management, Basel II & Islamic Banking Regulation
17 – 19 March, KUALA LUMPUR
Sukuk & Islamic Capital Markets: Product & Documentation
23 – 26 March, DUBAI
Introduction to Islamic Finance & Banking7 – 9 April, SINGAPORE
Islamic Financial Markets, Treasury & Derivatives
20 – 22 April, BAHRAIN
Islamic Financial Markets, Treasury & Derivatives
13 – 15 May, SINGAPORE
Islamic Financial Engineering & New Product Development18 – 21 May, DUBAI
Refresher Day: Principles of Islamic Finance & Investment
2 June, LONDON
presents
SAUDI ARABIASTC seeks US$2.6 billion loanSaudi Telecom (STC) said it would borrow SAR9.6 billion (US$2.56 billion) from local banks to fi nance its purchase of a 35% stake in fellow operator Oger Telecom, said STC chairman Mohammed Al-Jasser.
The largest Arab telecoms fi rm by market value would take loans from local banks and could look at selling Islamic bonds in the future.
STC completed its purchase of Dubai-based Oger Telecom earlier this month for SAR9.6 billion, gaining access to markets from Turkey to South Africa. STC was looking to borrow at least SAR5.76 billion (US$1.54 billion) to help fi nance the purchase.
QATARQatari Diar raising loan for Chelsea BarracksQatari Diar Real Estate & Investment is preparing to raise US$2.5 billion in a syndicated Islamic loan to help fi nance its purchase of Chelsea Barracks in London.
Qatari Diar, owned by the Qatar Investment Authority, last month bought the London property from Britain’s Ministry of Defence for GBP959 million (US$1.87 billion). The former military camp, built in the 1960s, is to be demolished and replaced with luxury housing in the UK’s most expensive home property deal ever.
Qatari Islamic lender Masraf al-Rayan, BNP Paribas, Qatar National Bank, Calyon and HSBC have underwritten the loan, which will be open for general syndication by the end of February.
CHINAShenyang… China’s fi rst Islamic hub?Shenyang, the largest city in northeast China, has started the ball rolling by seeking Malaysia’s expertise in Islamic banking and fi nance to help establish an Islamic fi nance center in the region.
China, the new economic powerhouse and one of the world’s fastest-growing economies, has set its sights on Islamic banking and fi nance. The US$3.43 trillion economy plans to woo Islamic fi nancial institutions by establishing an Islamic fi nance hub.
If the plan materializes, Shenyang will become the fi rst Islamic banking and fi nancial hub in the country of 1.3 billion. The plan to establish an Islamic fi nance center would complement Shenyang Finance Development Target 2010.
INDIAMutual funds clamor for Shariah productsWith Islamic investments in global markets on the rise, Indian asset management companies are gearing up to get their hands on a piece of the lucrative pie. Frontline mutual funds such as UTI AMC, SBI MF, Birla Sunlife and Kotak MF are all making a beeline to launch Shariah compliant products in the domestic market.
The reason? In India, 61% of listed companies are Shariah compliant compared to 57% in Malaysia and 51% in Pakistan.
While SBI MF has already introduced a Shariah compliant offshore fund under SBI Resurgent India Opportunities Fund (RIOF), Taurus has applied to the market regulator Securities and Exchange Board of India to come up with a similar product.
UAEADNIF operational in MarchAbu Dhabi National Islamic Finance (ADNIF) plans to be operational by the end of March, said its general manager Aref Ismail Al Khouri. The new subsidiary of Abu Dhabi National Bank expects new business as well as transfers from traditional banks. It will focus only on the UAE for the next few years but plans to go global later.
IRANLaunch of investment banks in MarchIran will launch its fi rst investment banks in March as part of efforts to speed up privatization and dodge US restrictions on its banking sector, its deputy fi nance minister, Heidari Kord Zangeneh said last week.
He added that the three banks will help Iran to sell all public companies by 2015, including steel, banking and telecoms operations. “This is the fi rst time we have had investment banks and they will do what other investment banks all over the world do. They will take share subscriptions and act as an intermediary between the privatization organization and the stock exchange,” said Heidari.
KUWAITKFH introduces iMalKuwait Finance House (KFH) announced the activation of a new technical system from Path Solutions Company called iMal. Acting assistant general manager for the investment sector Abdul Nasser A-Subeih said the system offers new, fl exible and advanced solutions that will help KFH reinforce its existence regionally and globally, and to face competition by focusing on better products and a level of service that will satisfy clients and global markets.
UAENIB-MasterCard allianceNoor Islamic Bank (NIB) and MasterCard Worldwide announced an exclusive relationship for NIB to issue only MasterCard credit and debit cards to its customers.
According to the agreement, NIB and MasterCard will also develop innovative, technologically advanced and customer focused Shariah compliant payment solutions.
MALAYSIABNM dialogue on MIFC with lawyersBank Negara Malaysia (BNM) has invited Malaysian lawyers to participate in a dialogue on the Malaysian International Islamic Financial Center (MIFC) initiative and the issue of admission of foreign lawyers.
In a notice to its 13,000 members, the Malaysian Bar said the dialogue will be chaired by the central bank’s governor Dr Zeti Akhtar Aziz and will be held on the 3rd March.
In recent months, there have been a number of meetings between Bank Negara, the Attorney General’s Chambers and the Bar Council on whether foreign lawyers should be allowed to practice in Malaysia under the MIFC initiative.
BNM is of the view that foreign law fi rms, in addition to forming a joint law venture (JLV) with local law fi rms, should also be allowed to establish stand-alone fi rms. However, the Bar favors the JLV model. A Bill to amend the Legal Profession Act 1976 to allow the admission of foreign lawyers under the MIFC initiative will soon be tabled in Parliament.
QATARBait Al Mashura makes debutBait Al Mashura Finance Consultations, the fi rst Islamic consultancy company specializing in Islamic fi nance services industry, auditing and training, was offi cially launched last week.
General manager Osama Al Dereai said the company will offer its services to banks, fi nance companies, investment, traditional Islamic and Islamic insurance companies and brokerages.
Bait Al Mashura is a private joint stock company, which is the fi rst fi rm licensed by the Qatar Central Bank and the Ministry of Economy and Trade. It specializes in providing Shariah advice, development and training in Islamic fi nance.
BAHRAINAUB, ABC close US$480 million loan Ahli United Bank (AUB) and Arab Banking Corporation (ABC) (the initial mandated lead arrangers) have successfully closed the senior phase for a US$480 million, 15-year syndicated debt fi nance facility for Damietta International Port Company, SAE (DIPCO).
The loan proceeds will be used to fi nance 75% of project capital expenditure and capitalization of interest up to the completion date of the fi rst phase.
AUB and ABC have been joined in the facility by African Development Bank, Banque Misr (BM) and National Bank of Egypt as mandated lead arrangers.
The transaction launched into general syndication on the 4th February through ABC and AUB (international bookrunners) and BM (Local Egyptian Bookrunner). The project is expected to cost US$650 million.
BAHRAINIIFM to step up Sukuk market researchBahrain-based International Islamic Financial Market (IIFM) was mulling the possibility of initiating additional research projects during 2008 to further enhance the development of the Sukuk market.
The 18th board of directors meeting of IIFM held in London recently reviewed the progress of development initiatives spearheaded by IIFM — the aster agreement for Islamic treasury placements and the master agreement for Islamic hedging and Shariah compliant repurchase agreement (repo).
MALAYSIAHSBC, Deutsche Bank optimisticHSBC Malaysia and Deutsche Bank have received approval to set up dedicated Islamic banking subsidiaries and are optimistic about the potential for expansion of their Islamic banking branches in Southeast Asia.
HSBC believes Malaysia will become a strong launchpad for Islamic banking in the region and hopes to expand into India, Pakistan, Hong Kong, China and Indonesia.
UAECorporate trustee for Tamweel SukukThe Bank of New York Mellon has been appointed by Tamweel PJSC, the largest real estate fi nance provider in the UAE, to provide multiple corporate trust services for a US$300 million exchangeable Sukuk issue to fi nance the company’s mortgage fi nance business in the region.
As corporate trustee, the bank will act as delegate trustee, principal paying agent, exchange agent, transfer agent, replacement agent, calculation agent and registrar.
Managing director and head of the international division for The Bank of New York Mellon’s corporate trust business, Samir Pandiri, said their work for Tamweel highlights the important role the company plays in supporting Islamic transactions and other complex structured fi nance deals globally.
UKSukuk market to hit US$100 billionThe issuance of global Islamic bonds, or Sukuk, is likely to double to US$100 billion this year due to the higher take-up of Shariah compliant fi nancial products among Middle East investors, said Ernst & Young managing partner, Noor ur Rahman.
The sum of Islamic assets has been growing at over 20% a year and reached US$900 billion in 2007 and is set to hit US$2 trillion by 2010. Excess wealth has been created by the oil boom, and a growing proportion of that wealth has been allocated to fi nancial products that are Shariah compliant.
An estimated US$1.5 trillion of the world’s high net worth individual wealth to come from the Middle East is expected by 2009 and 70% of this wealth could invest in Islamic fi nancial product.
MALAYSIAIssuance of Bon Simpanan Merdeka 2008Bank Negara Malaysia last week announced the issuance of Bon Simpanan Merdeka 2008 amounting to RM2 billion (US$618 million) on the 1st April 2008. The Shariah compliant bond is an additional savings instrument for senior citizens aged 55 and above and are not employed on a full-time basis, BNM said.
The minimum investment is RM1,000 (US$309) and the maximum is RM50,000 (US$15,437) per investor and can be subscribed at all commercial banks.
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BAHRAINGFH net profi t increase by 61%Gulf Finance House (GFH) closed 2007 as the most profi table year in the bank’s history with a net profi t of US$340 million, an increase of 61% compared to 2006.
GFH fourth-quarter net profi ts marked an exponential increase of 205% to US$109 million over the previous corresponding period, and up 28% on 3Q2007, attributable to shareholders.
Earnings per share for 4Q2007 were US$0.15 compared to US$0.05 for the end of December 2006, while earnings per share for the entire 2007 was US$0.48 compared to US$0.30 for the entire fi scal 2006. Return on equity of 2007 stood at 44% and return on assets stood at 18%.
GFH’s board of directors has proposed a record total dividend of 95%, payable as 85% cash and 10% bonus shares, subject to the approval of the Central Bank of Bahrain and the annual general meeting.
UAETamweel eyes Egypt, SaudiDubai-based Islamic mortgage provider Tamweel said it expects to start business in Saudi Arabia and Egypt this year as part of an international expansion program to reduce reliance on its home market, said its head of investment Feras Kalthoum.
Tamweel, which depends on Dubai for almost all its revenue, is in the “advanced stages” of setting up in Saudi Arabia in a joint venture it will control, which aims at accruing between 20% and 30% revenue from the international market.
Shares in Tamweel surged 66% last year, but are down about 2% in 2008.
MALAYSIACIMB to arrange US$4 billion SukukCIMB, one of the biggest deal-makers in Sukuk, expected to arrange as much as US$4 billion in Islamic bonds this year, CIMB bank head of Islamic banking, Badlisyah Abdul Ghani said.
He said the amount of Sukuk to be issued this year is likely to match last year’s US$30 billion as a result of the high appetite due to a very shallow supply of investible instruments in the Islamic market.
In 2007, CIMB accounted for nearly half of the local Islamic bond market and a fi fth of global Sukuk issues.
QATARUDC raises US$600 millionUnited Development Company (UDC), one of Qatar’s leading public shareholding companies has completed the fundraising for the fi rst fully Shariah compliant closed-ended real estate development fund in Qatar.
The fund has raised a total of US$600 million of equity commitments and committed fi nancing, which will be used to invest in a Shariah compliant manner exclusively in the Qanat Quartier development, a residential and retail development project in Doha. Qanat Quartier is part of The Pearl Qatar.
Commercial Bank of Qatar (CBQ) is the fund manager and also a joint mandated lead arranger along with National Bank of Abu Dhabi, Qatar Islamic Bank and Standard Chartered Bank. QIB will act as investment agent.
UAEGCC market surgesThe volume of Sukuk issuances in the Middle East, particularly the GCC states, rose substantially to 53 from 38 last year.
Worldwide, the total number of Sukuk issued in 2007 was 207, compared with 199 in 2006 and 89 in 2005. In terms of value, the number of Sukuk issued in 2007 added up to US$47 billion, up 73%, compared with about US$25 billion in 2006 and US$10 billion in 2005, according to Islamic Finance Information Service (IFIS).
Listed Sukuk on the Dubai International Financial Exchange alone amounted to about US$16.1 billion at year-end 2007, up from US$7.6 billion in 2006, recording more than 100% growth due to both issuers’ and investors’ growing interest in Islamic fi nance.
The number of corporate Sukuk in the GCC grew to 21 in 2007 from 13 in 2006 and 10 in 2005. The value of these Sukuk also rose, rising to US$13.5 billion in 2007 from US$6.8 billion in 2006 and US$2 billion in 2005.
CHINAChina Shariah REIT eyes Middle East A total of US$250 million is being raised by an Arab Emirates-linked fund from Middle East investors for what would be the fi rst Shariah compliant property trust based entirely on malls in China.
The initial portfolio of three malls in Beijing, Tianjin and Changchun, is valued at US$350 million, said Emirates Tarian Real Estate Management managing director of the trust manager, Willy Ng.
The real estate investment trust will bring together interests from two of the fastest-growing regions, giving Middle East investors exposure to China’s red-hot retail sector within their religious strictures.
IRANIslamic Solidarity Fund to be set upThe head of Iran’s Chamber of Commerce, Industries and Mines (ICCIM) has announced that the members of Islamic Development Bank (IDB) are to establish the Islamic Solidarity Fund in the near future with a US$10 billion initial capital.
Members of the bank’s board of directors will hold their fi rst meeting in ICCIM in Tehran. Saudi Arabia, with US$1 billion worth of contribution, holds the lion’s share of the fund, followed by Kuwait (US$300 million), Iran (US$100 million), Qatar and Algeria, each with a contribution of US$50 million respectively.
The main objectives of the fund include elimination of poverty, eradication of illiteracy and battle against contagious diseases.
BAHRAINABC profi t declines 38%Arab Banking Corp BSC (ABC)’s full-year profi t declined 38% as its holdings were affected by the subprime housing loan crisis in the US, with a net income falling to US$125 million last year from US$202 million.
Earnings per share were not released. ABC set aside US$230 million as provisions due to securities writedowns the group was obliged to take in the wake of the global credit squeeze caused by the crisis.
The collapse of the US subprime mortgage market has led to about US$146 billion of losses and markdowns at securities fi rms and banks worldwide since the beginning of 2007. Losses may exceed US$265 billion as regional US banks, credit unions and overseas fi nancial institutions write down the value of their holdings, according to Standard & Poor’s last week.
UAEDIB net profi t surges 61%Dubai Islamic Bank (DIB) reported a net profi t of AED2.5 billion (US$680 million) for the year ended the 31st December 2007, against AED1.56 billion (US$420 million) recorded the previous year, indicating a rise of 61%. The results were announced following a meeting of the board of directors recently. A bonus share of 15% and a cash dividend of 40% for the year 2007 were proposed.
The bank recorded a total revenue of AED7 billion (US$1.91 billion) for the year ended the 31st December 2007, rising by 46% compared to AED4.8 billion (US$1.31 billion) for the year ended the 31st December 2006. The profi t for 2007, including depositors’ profi ts, stood at AED5.2 billion (US$1.41 billion), an increase of 58% compared to AED3.3 billion (US$900 million) for the year ended the 31st December 2006.
UAETameer, DIB sign fi nance dealTameer Holding has signed a memorandum of understanding with Dubai Islamic Bank (DIB), whereby the bank will provide home fi nance to buyers of a number of Tameer’s projects across Dubai.
The contract sees two of the UAE’s leading institutions come together in a strategic partnership that will facilitate the home buying process for both individuals and investors. In accordance with the agreement, Dubai Islamic Bank will provide home fi nance to buyers of fi ve of Tameer’s current projects, namely the Princess Tower and Elite Residence both located in Dubai Marina, the Palace Towers in Dubai Silicon Oasis, the Imperial Residence located in Jumeirah village and the Regal tower in Business Bay.
Further plans are also underway for Tameer’s other Business Bay project, the Silver Tower, to be added to the list.
LIBYAGFH ready to set up energy hubGulf Finance House (GFH) signed a memorandum of understanding with Libya last week to pump in US$3.8 billion to build an integrated economic district for energy fi rms west of Tripoli, GFH chairman Esam Janahi said at the signing ceremony.
The Energy City would provide business infrastructure for oil and gas producers, refi neries and companies involved in shipping, energy trading and support services. This unique concept of Energy City will contribute substantially to Libya’s growing energy sector and further add momentum to the progress and status of Libya’s burgeoning energy sector.
QATARLighting up Qatar Energy CityQatar Energy City recently launched syndication of an Islamic loan to help fi nance construction of a US$2.6 billion economic zone being developed by Bahraini investment bank Gulf Finance House. The transaction had been closed.
The US$300 million Musharakah, which carries a margin of 2.5%, matures on the 31st October 2010.
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BAHRAINUIB acquires manufacturing bizThe law fi rm of Murtha Cullina LLP has represented Unicorn Investment Bank BSC in its acquisition of Victron Inc., a California electronics manufacturing business.
Umar Moghul, William F. Pinney Jr, and Robert Giunta, Jr led the transaction. In addition, attorneys Frank Giordanella, H. Kennedy Hudner, Kenneth Levine, Raj Mahale, Stephanie Sprague, Ryan Mihalic and David Menard had also provided assistance. The Murtha team had worked closely with Unicorn’s general outside counsel, Isam Habbas of Al-Sarraf & Al-Ruwayeh.
MALAYSIA Shariah compliant energy fundSarawak Energy has signed a memorandum of understanding (MoU) with a consortium of banks comprising RHB Islamic Bank, Unicorn International Islamic Bank Malaysia, Asian Finance Bank (AFB) and Kuwait Finance House Malaysia to carry out a study on the energy fund structure for Sarawak Energy’s projects excluding Murum hydroelectric project in a three-month period.
It had also signed similar agreements with Sime Darby and Tenaga Nasional to implement power-related projects following the launch of Sarawak Corridor for Renewable Energy on Wednesday.
Announcing its projects in several releases this week, Sarawak Energy said it would cooperate with Sime Darby to implement the proposed 8X300MW Bakun Hydroelectric and the High Voltage Direct Current (HVDC) Link projects, which include the dual submarine cable linking the Bakun dam to Peninsular Malaysia.
Last week, CEO of AFB Faisal Alshowaikh revealed that the three banks are teaming-up to set the fi nance-up to US$6 billion in projects in Sarawak. He added that the parties hoped to set up the fund with an initial size of about US$1 billion this year alone.
“We will start with a US$1 billion fund and then move towards the rest of the US$6 billion as we go along,” he said at the Reuters Islamic Finance summit.
SAUDI ARABIASmall businesses get boost The International Islamic Trade Finance Corporation (ITFC) and the International Trade Centre signed a memorandum of understanding in its bid to boost small fi rms in developing countries.
The partnership will help the ITFC to enhance trade among the 57 member states of the Organization of the Islamic Conference (OIC), and subsequently increase trade among OIC countries to 20% by 2015 from the current estimate of 15%.
KUWAIT/UKInvestment Dar eyes British poundsInvestment Dar is reportedly setting up an investment bank in the UK. The move comes as the company plans to advise investors in the Gulf region and to attract Shariah compliant businesses from Europe.
The company is due to submit its plans to the UK’s Financial Services Authority this month and will continue to operate outside the country until it obtains a license.
INDIA/KUWAITKFH investment project closedPath Solutions and Kuwait Finance House (KFH) have completed the KFH-Kuwait iMAL Project, encompassing the automation of operations in the investment sector.
According to Naji Moukadam, president of Path Solutions, the iMAL Project at KFH was part of Path’s 2007 agenda. He credited support received from the project’s Kuwait and Beirut offi ces.
MALAYSIAIDR development to commenceSet to be the region’s premier Islamic fi nancial hub, construction on the Iskandar Development Region (IDR) will commence in the coming months.
The three themed zones in Node 1 in the IDR have been mandated to developers Rim City (RC) — the master concessionaire of Node 1 — and Cultural Cluster (CC). RC is a subsidiary of the South Johor Investment Corporation (SJIC), while CC is a special purpose development vehicle that is majority-owned by Al-Nibras 2 Limited, a Labuan-based private fund company managed by Kuwait Finance House (Labuan).
(Also see IFN Reports on page 12)
UAEMorgan Stanley Sukuk subject to marketAt the Reuters Islamic Finance summit last week, executive director at Morgan Stanley, Yavar Moini, had disclosed details on the “fi rst global Islamic bond issue by a multinational company”, slated at US$5 billion in medium-term notes. The fi rst tranche is reportedly due in the fi rst quarter.
Calling the deal a landmark issue, Yavar said: “It’s the fi rst time a blue-chip multinational from outside the region is going to issue something of this size and tap the Sukuk market.”
However, when contacted by Islamic Finance news, Yavar declined to comment, and would only say that the issuance is subject to market conditions, as it is not decoupled from the international capital markets. The information, Yavar stressed, will not be made public until further notice.
UAEMashreqbank profi t up 21%Mashreqbank Group has released its annual fi nancial results for 2007, declaring net profi t of AED1.9 billion (US$517.3 million) over the year — a 21% increase on the net profi t of AED1.57 billion (US$427.5 million) gained in 2006.
In a successful year, total assets grew by 54.4%, reaching AED87.6 billion (US$24 billion) in 2007 compared to AED56.7 billion (US$15.4 billion) the previous year. Loans and advances including Islamic fi nancing were up 29.3% from AED28.7 billion (US$7.8 billion) to AED37.1 billion (US$10.1 billion) while customer deposits increased from AED34.7 billion (US$9.5 billion) to AED48.3 billion (US$13.2 billion) — a growth of 39.2%. The faster growth of deposits led to an improved advance to deposit ratio of 76.8% as compared to 82.7% in 2006.
BAHRAINAhli United profi t up 63%Ahli United Bank, Bahrain’s biggest lender by market value, made US$70.37 million in the fourth quarter, up 63.2% from the year-earlier period, it has been reported.
Ahli United posted profi t of US$296.32 million in 2007 compared with US$207.48 million in 2006.
BAHRAINAirAsia X chooses Manara and OrixBahrain-based Manara Consortium and Japan-based Orix Corp have taken a total 20% stake in long-haul low-cost carrier AirAsia X for RM250 million. Manara and Orix will each receive 16.7 million newly issued common shares of AirAsia X, or 10% of its equity.
CEO of AirAsia X Azran Osman-Rani said the stake represents an important phase of AirAsia X’s growth plans as proceeds raised will enable the airline to fund aircraft orders already placed with European airplane maker Airbus and for further fl eet expansion.
The Manara Consortium comprises four leading Saudi investment groups, which, together with 3i Group sponsored the Manara Infrastructure Fund.
UAENoor Islamic Bank eyeing the UKNoor Islamic Bank, Dubai’s newest Islamic bank, plans to buy stakes in UK fi nancial institutions in an effort to become the world’s largest Shariah lender within fi ve years, a UK daily reported.
The bank hopes to acquire controlling stakes in British banks to gain a foothold in European markets, where demand for Shariah compliant services is growing.
UAES&P at the DIFCStandard & Poor’s (S&P) has opened its fi rst offi ce in the Middle East in the Dubai International Financial Center (DIFC). The company cited its interest to link local markets with the global economy, and enhancing transparency for investors as reasons behind the opening. The offi ce will be managed by Jan Willem Plantagie, S&P’s regional manager for the Middle East.
The Dubai offi ce will offer up S&P’s full range of independent research, credit and fund management ratings, investment management and investment banking tools and index products that together help them more effectively manage their investments, access capital, control risk, and develop and manage investment products.
BAHRAINAddax Bank profi t increases by 71%Bahrain-based Addax Bank last Tuesday reported a consolidated net profi t of US$20.2 million for the year ended the 31st December 2007, an increase of 71% over the previous year, an English-language daily reported.
Gross consolidated income increased 77% to US$33.7 million compared with US$19 million in 2006. The increase was primarily gained from fees and advisory services, generated from structuring and placement of new investment opportunities for clients, which continued to play a major role in the bank’s profi tability.
MIDDLE EASTSwitzerland’s Faisal keen to branch out Geneva-based Faisal Private Bank wants to set up in Malaysia, Dubai and Saudi Arabia, luring wealthy Muslim clients on the home turf of its parent company Ithmaar Bank.
Switzerland’s fi rst fully Shariah compliant bank combines that feature with the sound fi nancial reputation of a western bank under Swiss management. Switzerland, easily the largest destination for private wealth parked abroad, is hugely popular with Middle-Eastern clients for its stable politics, banking secrecy and deep fi nancial know-how.
Having obtained a banking license in 2006, Faisal Private Bank has gathered US$759 million in client assets. But this year, new offi ces in Dubai, Malaysia and Saudi Arabia should bring more growth with two new real estate funds adding up to US$400 million.
KUWAITSalhia ups stake Salhia Real Estate Company has increased its holding in The International Investor to 6.2%. The purchase was made via a fund managed by Al-Tharwa Investments on the 5th February. The investment aims to create a closer working relationship between the two companies.
Salhia currently owns, rents and manages commercial property and hotels in Kuwait.
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KUWAITInvestment Dar’s telecom interest Investment Dar has revealed that it could invest up to US$800 million in a US or European telecom, citing its level of infl uence in the company as the main driver behind future buys. According to industry sources, a likely US target is the troubled Sprint Nextel, which post-acquisition of Nextel has had to write down up to US$31 billion due to losses.
The investment fi rm is looking to diversify its portfolio into new sectors including energy, pharmaceuticals and telecommunications as it seeks to expand into Europe and the US, affi rmed Dar’s business development manager and valuation manager, Adham Charanoglu.
THIS TIME LAST YEAR• The European Islamic Investment Bank introduced UK’s
fi rst Wakalah placement for funds.
• Citigroup announced plans to develop its consumer sector, corporate investment banking and wealth management to boost its Islamic banking business.
• Maybank Singapore launched its 12-month Premier Structured Deposit, marking Singapore’s Shariah compliant deposit debut.
• Masraf Al Rayan began offering a Shariah compliant Profi t Rate Swap hedging product to corporate customers and high net worth individuals.
• Reef — Real Estate Finance Company signed a memorandum of understanding with the owners of Fontana Towers- The Developers WLL, for the development of a US$130 million waterfront residential project.
• It was revealed that Gulf Finance House launched projects and investments worth US$12 billion over the past seven years.
• Deyaar recorded a 192% increase in net profi t increase for 2006, attributed to sales accretions by almost 100%.
• Al Rajhi Bank offi cially launched its banking operations in Malaysia, with an initial 12 branches.
UAEFitch affi rms DHCOGFitch Ratings has affi rmed Dubai Holding Commercial Operations Group LLC’s (DHCOG) Long-term Issuer Default (IDR) and senior unsecured ratings at ‘AA-’. Its short-term IDR is also affi rmed at ‘F1+’. The outlook on the long-term IDR remains stable. The action affects nearly US$3 billion of bonds outstanding.
The ratings refl ect DHCOG’s ownership structure and strategic position in the development of Dubai as a commercial/business and tourism/leisure hub. DHCOG is effectively 100% owned by Dubai Holding LLC, which is 97.5%-owned by Sheikh Mohammed bin Rashid Al Maktoum, vice-president and Prime Minister of the UAE.
DHCOG has business interests in the real estate, hospitality and leisure and telecommunications and media sectors. The fi rst two account for about 85% of total revenues. Real estate activities are conducted through four subsidiaries: Dubai Properties LLC, Tatweer Dubai LLC (Tatweer), SAMA Dubai LLC (Sama) and TECOM Investments FZ LLC (Tecom).
MENAFund managers remain positiveAccording to Standard & Poor’s Funds Services (S&P), managers of funds investing in the Middle East and North Africa (MENA) region maintain a positive outlook despite last year’s rebound, attributed mainly to the strength of economic fundamentals.
In 2007, the best-performing GCC market was Oman at +51.4%, while the worst was Bahrain at +15.8%. Among non-GCC countries in the MENA region, the top performer Egypt returned 54.9% while Jordan lagged at 20.9%.
GCC markets are trading on a prospective price-to-earnings ratio of nine to 16 times against 15.5 times for the MSCI Emerging Markets index. Earnings growth is expected to be between 18% and 25% in 2008 and should accelerate. At the same time, non-GCC countries in the MENA region are trading on multiples of 10 to 14 times 2008 earnings, offering earnings growth of 15% to 20%.
SAUDI ARABIASTC assigned ‘A1’ ratingStandard & Poor’s Ratings Services has assigned long- and short-term foreign currency corporate credit ratings of A+ and A-1 respectively to Saudi Telecom Company (STC). The company maintains a stable outlook.
The ratings are supported by STC’s leading market position in the recently liberalized Saudi fi xed-line telecom market with a diffi cult-to-replicate national network, implicit state support, high operating profi tability margins and strong cash fl ows.
The ratings are, however, constrained by potential further regulatory changes, which may negatively affect the company’s competitive position and market shares.
INDONESIABank Muamalat gets ‘AA’Islamic International Rating Agency (IIRA) has assigned Shariah Quality Rating of ‘AA’ to Bank Muamalat Indonesia (BMI), the fi rst Shariah compliant bank in Indonesia. The rating refl ects IIRA’s opinion that BMI confi rms to high standards of Shariah requirements in all aspects of Shariah quality analysis and takes the bank closer to its vision as a role model of Islamic banking module in Indonesia, initiated by the Indonesian Council of Ulama (Majelis Ulama Indonesia) and approved by the government.
MALAYSIAPSSB Ship Management downgradedMalaysian Rating Corporation (MARC) has lowered its rating on PSSB Ship Management (PSM)’s RM40 million (US$12.36 million) Bai Bithaman Ajil Islamic Securities (BAIS) to BBB-ID from AID. MARC also removed PSM’s rating from MARCWatch Negative, where it had been placed last November.
The rating downgrade refl ects the signifi cant deterioration in PSM’s credit quality, indicating further erosion of liquidity and higher operating cost.
Kuwait Finance House Malaysia’s subsidiary Cultural Cluster (CCSB) has signed a defi nitive agreement with Rim City (RCSB) for the works in developing the fi rst integrated international city infrastructure in the Iskandar Development Region (IDR).
This was followed by a memorandum of understanding (MoU) between CCSB and Eastern & Oriental (E&O) to form a joint venture company for the development of a 195-acre parcel of land within Node 1 of the IDR.
The agreements affi rm an earlier MoU signed between the two last year when RCSB was awarded the development project — valued at RM1.2 billion (US$371 million) — to CCSB.
CCSB — a special purpose vehicle majority-owned by Al-Nibras 2 Limited — is vested with the development of the Logistics Village, Creative Park and Heritage District, covering approximately 620 acres with a built-up area of 54 million sq ft, offering residential and commercial properties, and mixed development.
Under the terms of the MoU, CCSB and E&O will each hold 50% in a JV company with the mandate to develop the 195 acres, known as the Heritage District, on an exclusive basis. The Heritage District forms part of the 624-acre Cultural Cluster within Node 1 of the IDR which comprises 2,228 acres in total.
Node 1 is conceptualized as an international mixed-use development of commercial properties, leisure and tourism as well as luxury residential properties.
Expected to span over 15 to 20 years with a gross development value of approximately US$20 billion, Node 1 encompasses several zones, namely the city center, fi nancial district, golf village, amusement bay, residential district, medical & wellness village and the Cultural Cluster District.
On the 28th August 2007, the Government of Malaysia had awarded the concession for a 99-year lease to CCSB to develop the Cultural Cluster District. The recent MoU, however, is the fi rst partnership between CCSB and a local Malaysian property company within the IDR concession.
“The partnership with E&O is part of KFHM’s plans to increase its presence in other areas outside of the Klang Valley and refl ects the important role of the bank in infrastructural developments in Malaysia. The underlying strategy is to capture various local, regional and international market segments in view of the strategic positioning of the development in key target sectors,” affi rmed Salman Younis, managing director of KFHM.
KFHM also anticipates the yearly average economic growth rate for the IDR to exceed that of Malaysia or Singapore’s between 2005 and 2025.
By Nazneen Halim
KFH seals state developmentMALAYSIA
Future Islamic LBO (leveraged buyout) transactions will be more effi cient following Unicorn Investment Bank’s successful purchase of a majority stake in a US-based electronic manufacturing business, Victron Inc.
Umar F Moghul of Murtha Cullina LLP, the law fi rm that represented UIB in the acquisition, told Islamic Finance news that the debt structure facility it crafted for the deal bears positive results for the Islamic fi nance industry especially from the legal perspective.
“This transaction was exciting and, from an Islamic legal perspective, innovative and challenging. I expect the debt structure we crafted will serve Unicorn and Islamic investors worldwide and make future Islamic LBO transactions more effi cient,” said Umar.
It took the fi rm about fi ve months to complete the debt structure that merged the concepts of Musharakah and Sukuk.
Umar added: “The debt structure included the usual Islamic LBO or Ijarah facility structure which involves both a loan and a sale-leaseback. In addition to this, an Islamic party provided additional debt fi nancing.
“With this structure, we might be able to do away with the loan piece going forward — that at least is the hope. The Islamic fi nancier could obviously not provide a loan.”
Umar teamed up with the fi rm’s private equity practice head William F Pinney Jr and co-head of Islamic fi nance practice Robert V.Giunta Jr in crafting the structure.
He said what made their task more challenging was that they had to ensure UIB has equal footing with conventional debt fi nanciers involved in the deal but yet “suffi ciently apart” to ensure that Islamic laws are complied with.
“While we had to place the sponsor (UIB) somewhat alongside, we also had to keep them suffi ciently apart and keep certain collateral away from any conventional fi nance — all for Shariah reasons.
“We did this by creating a structure that combined the concepts of Musharakah with Sukuk, thereby creating another vehicle and instrument for the Islamic debt provider. The certifi cate or fi nancing that we created also had to be tradable,” he explained.
Apart from that the team had to work on various legal jurisdictions including the US federal laws, New York, Delaware and California state laws, as well as Islamic law.
“Consideration had to be given to securities, antitrust, banking, labor and general corporate laws as well as FDI regulations. Bahrain law was also applicable in certain areas, and certainly to the sponsor,” said Umar.
In January, it was reported that UIB had invested US$70 million for an 80% stake in Victron. The acquisition marks UIB’s second high-profi le private equity transaction in the US in two months. Just a month earlier, it announced the acquisition of a 75% equity stake in Open-Silicon Inc, a leading US microchip designer and manufacturer.
The new year, which this time coincided slightly with the Islamic New Year of 1429, began with great optimism for Shariah economy in Indonesia. The long-awaited draft laws on Shariah banks and National Shariah Bond have reached the fi nal stage in the parliamentary discussion.
The fi gures from last year’s report have been more than satisfactory; the asset growth of Shariah banks reached a record-breaking IDR36.5 billion (US$4 million) and the rate of non-performing fi nancing fell to 4.05% in December 2007, while the level of expansion in fi nancing rose to IDR27.9 billion (US$3.02 million).
These undoubtedly laid out great hopes for 2008. A recent report from Karim Business Consulting estimates the growth of total asset of Shariah banks in 2008 at IDR50 billion (US$5.4 million).
While all the factors appear to indicate the country is on the right track, one issue remains for the players in the industry. The ever-growing number of transactions based on Shariah principles will inevitably lead to a growing number of disputes from these transactions.
Common sense dictates that transactions, even those which are based on religious principles, do not always run smoothly. Confl icts between the parties are unavoidable. Where, then, should the party go to seek resolution in the event a dispute arises from a Shariah transaction?
This issue has been around for some time and has sparked academic, and not-so-academic, debates. However, it appears that no pleasing solution has really been achieved. It is the purpose of this brief paper to contribute to the discourse on the dispute settlement in Shariah transactions.
Shariah Arbitration BoardThe National Shariah Board (DSN), a body established by the Indonesian Ulema Council (MUI) to issue fatwa (religious decision) concerning matters on the Shariah economy, has prepared guidelines to solve disputes in Shariah transactions. In most of its fatwas, DSN included a clause providing that disputes arising from the transaction shall be resolved by the Shariah Arbitration Board.
This can be seen, for example, from Fatwa No 32/DSN-MUI/IX/2002 on Shariah Bond, which in paragraph 3 stipulates: “Settlement Disputes. Should any of the party fail to perform its obligations or in the event there is a confl ict between the relevant parties and the amicable solution failed, the resolution of such matter shall be done through the Shariah Arbitration Board.”
From the regulatory point of view, a DSN fatwa is not binding. However, when a fatwa is accommodated in an agreement (akad), and the settlement dispute clause referring to the Shariah Arbitration Board is included in the agreement entered into by such institutions and their counterparts, this referral to Shariah Arbitration Board shall be binding on the parties, as Article 1338 of the Indonesian Civil Code provides that all legally executed agreements shall bind the parties by law.
The problem with resolving disputes by Shariah arbitration lies exactly on the Shariah Arbitration Board itself. The National Shariah Arbitration Board, which was established in 1993 under the name Badan Arbitrase Muamalat Indonesia (BAMUI) and became Badan Arbitrase Syariah Nasional (Basyarnas) in 2003 is not widely used in practice.
Amid the amazing growth of the Shariah economy, a report from hukumonline.com shows that fewer than 20 cases have been settled by the National Shariah Arbitration Board within 15 years. The reason for this is the parties’ ignorance of the existence of the National Shariah Arbitration Board, or even if they were aware, the parties did not fi nd enough confi dence in the National Shariah Arbitration Board to settle their disputes.
This can be mainly attributed to the relatively small offi ce of the board and the minimum personnel it has. Several players in the industry have called for restructuring of the board for the improvement of its services.
Religious courtIn March 2006, the government promulgated Law No 3 of 2006 regarding the Amendment on Law No 7 of 1989 on Religious Court (“New Religious Court Law”). Article 49 of the New Religious Court Law provides that the Religious Court shall have the authority to hear and decide in the fi rst instance for certain cases, including cases of Shariah economy.
The elucidation of this article defi nes Shariah economy as transactions based on Shariah principles, which cover basically all Shariah transactions ranging from Shariah bank and Shariah insurance, to Shariah bond and Shariah pension funds.
Great concerns emerge from this new legislation. The judges of the Religious Court are deemed to be not completely ready to accommodate the mandate of the legislation. The judges of the Religious Court still require more education and need to gain more experience in settling the disputes from Shariah transactions.
Urgent Need to Improve Resolution of Disputes in Shariah Transactions
By Ilman Rakhmat
continued...
“Amid the amazing growth of the Shariah economy, a report from hukumonline.com shows that fewer than 20 cases have been settled by the National Shariah Arbitration Board within 15 years.”
Urgent Need to Improve Resolution of Disputes in Shariah Transactions (continued...)
Prior to the issuance of the New Religious Court Law, the judges of the Religious Court only had the authority to hear and decide the cases relating to marriage, divorce and inheritance.
Their skill and knowledge will need a massive adjustment. It will be such a huge leap from examining a case concerning marriage to one involving the Shariah capital market. Moreover, information obtained from the Association of Experts on Shariah Economy (Ikatan Ahli Ekonomi Indonesia) showed that of the 2,000 judges at the Religious Court, only 500 are deemed qualifi ed.
Other problems arising from the use of the Religious Court to settle disputes from Shariah transactions concern the reference for the judges to decide the case. To date, there have been no sets of regulation concerning Shariah economy.
Judges of the Religious Court will encounter immense diffi culty in locating the source of laws to assist them in handling the complexity of the case in Shariah economy. The government should start compiling the legal sources to equip these judges.
Credible mechanism neededClearly, there is no one perfect solution to address this matter. Whether to opt for arbitration or court, there is still much work to be done to improve the current situation.
These improvements are urgently needed to support the intensive growth of Shariah economy enjoyed by Indonesia in the last decade. The absence of an effi cient and reliable institution to settle these disputes may serve to destroy the foundation of Shariah economy that has been built for a long time.
Creating and maintaining a credible and dependable mechanism of dispute settlement for Shariah transactions will surely contribute to keep the growth of Shariah economy in Indonesia on the right track.
Ilman Rakhmat is an associate at KarimSyah Law Firm in Jakarta, Indonesia. He can be contacted via
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Vol. 4, Issue 32 10th August 2007
T h e W o r l d ’ s G l o b a l I s l a m i c F i n a n c e N e w s P r o v i d e r
MALAYSIACagamas hits big timeAll-round success for Cagamas MBS (CMBS) yesterday as its residential mortgage-backed securities of RM2.41 billion (US$694.72 million) nominal value attracted a book size of RM9.10 billion (US$2.6 billion) from a diverse group of domestic and offshore investors, giving an over-subscription rate of close to four times.
Approximately 51.9% of the bids came from institutional investors, with the remaining
coming from government agencies (22.6%), asset management companies (13.9%), insurance companies (11%) and corporates (0.6%) (see Islamic Finance news, Vol. 4, issue 31, page 1 for more details).
Despite market jitters in the US sub-prime debt market, investor confi dence in the domestic asset-backed securities market was seen from both local and foreign fi xed income investors.
SINGAPORETrust withdrawnArcapita Bank has withdrawn the proposed S$300 million (US$198.29 million) IPO of Ar-capita Unit Trust in Singapore. The strength-ening of private markets for wind and water assets has caused a widening of the valua-tion gap between private and public markets, thus disrupting public market expectations.
Arcapita thus believe that divesting assets via a listing would be sub-optimal at present.
The IPO had already been registered with the Monetary Authority of Singapore, and was slated to be the fi rst Shariah compliant busi-ness to list in the country.
MAURITIUSGetting down to businessThe Mauritian ministry of fi nance has passed the 2007/2008 bill on tax measures, which encompasses Islamic banking services.
Rama Sithanen, the country’s minister of fi nance, elucidated: “Mauritius has a great opportunity to diversify its fi nancial sectors and provide foreigners with new services
in the fi elds of wealth management and investment. Existing and new banks will be able to provide such services.”
Rama added that Shariah compliant institutions are now able to carry out activities under the existing regulations and legal framework for conventional banks.
GLOBALAll-time Sukuk highAccording to latest reports, the global Sukuk market is valued at US$24.5 billion as at the end of June 2007. This marks a 75% growth over last year.
The Malaysian Sukuk market experienced a
growth rate of 71.4%, while the international markets have expanded by 83.3% over the last year. Sovereign Sukuk issues also grew by 521% to US$4.4 billion, with Malaysian ringgit-denominated Sukuk accounting for 70% of the market.
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REPORT 2007 BAHRAIN
A Product
“Judges of the Religious Court will encounter immense diffi culty in locating the source of laws to assist them in handling the complexity of the case in Shariah economy. The government should start compiling the legal sources to equip these judges. ”
The robust growth of the Islamic fi nancial industry in past years has led to heightened interest in and importance of managing risks in Islamic fi nancial institutions (IFIs). To ensure effective risk management, conventional banks strive to abide by the Basel frameworks, set by the Bank for International Settlements, in existence since the late 1980s.
However, these frameworks are inadequate to guide the management of risks in Islamic IFIs, whose workings and risk profi les differ from conventional fi nancial institutions. The establishment of the Islamic Financial Services Board (IFSB) has aided in fi lling the vacuum of regulatory guidance that hinders the effective functioning of IFIs. IFSB has issued a number of prudential standards since its establishment in 2003.
These new prudential standards, which complement the Basel frameworks to address the specifi cities of Islamic fi nancial institutions, illustrate that the broad principles of good risk management can be maintained across both the Islamic and conventional banking sectors.
Fundamental Islamic fi nance principlesIFIs are predicated on different foundations from conventional fi nancial institutions. The rationale of the former is conformance to principles of Shariah law, the juristic code of Islam of the Quran and the Hadith, as opposed to the profi t-maximising objectives of the latter; these dissimilar roots give rise to contrasting risk profi les.
IFIs abide by the following principles: • The promotion of fairness in transactions and the prevention
of exploitative relationships.• The sharing of risk and reward between principals in a
transaction.• Transactions should carry elements of materiality leading to a
tangible economic purpose (the prohibition of interest).• The sanctity of contracts should be upheld.• The prohibition of fi nancing of activities that are haram.
Financial institutions organized along these lines bear resemblance to asset-management companies — these institutions are co-investors and partners rather than providers or depositors of funds. Consequently, Islamic modes of fi nancing — particularly, the asset-based Murabahah or the profi t-sharing Musharakah — display unique and distinct risk characteristics.
Risk Differentials in Islamic Financial InstitutionsUnderstanding the risks faced by IFIs requires us to understand the balance sheet of an IFI. A conceptual balance sheet for an IFI is shown in Diagram 1.
While the risk profi les of IFIs on the surface are generally similar to those of conventional fi nancial institutions, IFIs face some unique and distinct risks. In particular, the assets and liabilities highlighted in red in Diagram 1 are unique to IFIs given their profi t- and risk-sharing
structures. An example of the distinct risk characteristic displayed by a profi t-sharing transaction on the assets side is the home fi nancing product.
Often, an Islamic home fi nancing is structured as a diminishing Musharakah, which results in the IFI having co-ownership in the house purchased, as opposed to a conventional mortgage product where the house is just collateral to the fi nancial institution. A comparison of the risks between a conventional and Islamic home fi nancing is provided in Diagram 2.
Further, on the liabilities side, the “deposit taking” activities, which are referred to as investment account holders (IAHs), are not like conventional deposits, but share the profi t and loss of the IFIs. In other words, IAHs are like mutual fund holders or private equity fund holders.
Comparing Risk Management in Islamic Financial Institutions and Conventional Financial Institutions
Institutions and Conventional Financial Institutions (continued...)
With these product structures, the unique and distinct risks faced by IFIs include:
• Displaced commercial risk: This risk arises when IFIs are under pressure to pay a return that exceeds the rate that has been earned on assets fi nanced by their IAHs, when the return on assets is underperforming as compared with competitors’ rates.
In such a scenario, the IFI may decide to waive its rights to the profi ts, or a part thereof, in order to retain its fund providers and dissuade them from withdrawing their funds;
• Rate of return risk: This risk is associated with overall balance sheet exposures where mismatches arise between the assets and liabilities of IFIs. Revenue and expenses are generally accounted for on an accrual basis when deriving the exposure and the IFIs are exposed to the expectation of IAH when allocating their profi ts;
• Asset price risk: This risk is associated with exposures to price volatility of the underlying “real” assets inherent in some fi nancing modes, which are in the form of trading and real investment. This risk arises because IFIs carry out many asset-based transactions in which they take ownership of physical assets as co-investors;
• Asset transformation risk: This risk arises because the risk associated with a fi nancing structure transforms itself during the term of the fi nancing. For example, in a Diminishing Musharakah Home Financing Structure, the risk may initially be an asset price risk, given that the IFIs are co-owners of the asset.
However, as the home owners build up their equity ownership further through their repayment of the fi nancing, the risk in the fi nancing structure transforms to more credit risk.
• Fiduciary risk: This risk arises from a breach of the investment contract for management of IAHs’ funds.
• Shariah compliance risk: This risk arises from non-compliance with Shariah principles in conducting the IFIs’ business.
IFSB standardsIn view of the unique and distinct risks faced by IFIs, the IFSB has issued a number of prudential standards to complement the Basel standards to address the specifi cities of Islamic products. These standards include:
• Capital adequacy;• Risk management; and• Corporate governance.
The importance of a holistic approach to risk management for IFIs is highlighted by the IFSB. This is particularly important in the context of Islamic fi nance as reputational
risk is arguably a greater factor in the performance of an IFI than it is in a conventional fi nancial institution. A vital segment of reputational risk exposure originates from the possibility of Shariah non-compliance. Conformance to Shariah law is the raison d’être of IFIs, and so any transgression of the laws of God will mean a total loss of credibility.
continued...
Dr John Lee is executive director of KPMG Global Lead Islamic Finance and head of Asia-Pacifi c fi nancial risk management. He can be contacted via email at [email protected]
Islamic Finance news, the global Islamic fi nance news provider, will host a series of one-day forums in the worlds developing markets for Shariah fi nance in 2008.
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This unique roadshow will lay witness to the development of the Islamic fi nancing phenomenon in markets which are yet to show their true potential.
While the emergence of Islamic banks in the global markets was a signifi cant development, it in no way compares to the enormous changes that have taken place in the conventional banking industry. Rapid innovations in the fi nancial markets and the internationalization of fi nancial fl ows have changed the face of conventional banking almost beyond recognition.
Technological progress and deregulation have provided new opportunities, increasing competitive pressures among banks and non-banks alike. The growth in international fi nancial markets and a greater diversity of fi nancial instruments have provided large banks with wider access to funds.
New information-based activities, such as trading in fi nancial markets and income generation through fees, are now major sources of a bank’s profi tability. Financial innovation has also led to the increased market orientation and marketability of bank assets, using assets such as mortgages, automobile loans and export credits as backing for marketable securities, a process known as securitization.
A prime motivation for innovation has been the introduction of prudential capital requirements, which has in turn led to a variety of new fi nancial instruments. Some instruments are technically very complicated and poorly understood except by market experts, while many others pose complex problems in terms of risk measurement, management and control.
Moreover, profi ts associated with some of these instruments are high, and, like the fi nancial markets from which they are derived, also highly volatile, thus exposing banks to new or higher degrees of risk.
These developments have increased the need for and complicated the function of risk measurement, management and limiting risks (control assessment). The quality of corporate governance of banks has become a hot topic, and the approach to regulation and supervision has changed dramatically. Within an individual bank, the new banking environment and increased market volatility have necessitated an integrated approach to asset/liability and risk management techniques.
Corporate governanceThe issue of corporate governance has recently received considerable attention in the conventional economic literature and public policy debates. This increased attention can be attributed to several factors, such as:
(a) the growth of institutional investors — that is, pension funds, insurance companies, mutual funds and highly leveraged institutions, and the role institutional investors play in the fi nancial sector, especially in major industrial economies;
(b) widely articulated concerns and criticism to the effect that the contemporary monitoring and control of publicly held corporations in English-speaking countries, like the UK and the US, is seriously defective, leading to sub-optimal economic and social development;
(c) a shift away from a traditional “shareholder value-centered” view of corporate governance in favor of a corporate governance structure extended to a wide circle of stakeholders; and
(d) the impact of increased globalization of fi nancial markets, a global trend of deregulation of fi nancial sectors and liberalization of institutional investors’ activities which have raised concerns over corporate governance.
Liberalization and the volatility of fi nancial markets, increased competition and diversifi cation expose banks to new risks and challenges, requiring the continuous innovation of ways to manage the business and its associated risks in order to remain competitive. The increasing market orientation of banks has also necessitated changes in the approach to regulation and supervision.
The responsibility for maintenance of the banking system and markets is being redefi ned, in one country after another, as a partnership among a number of key players who manage various dimensions of fi nancial and operational risks. This approach reconfi rms that the quality of bank management, and especially the risk management process, are key concerns in ensuring the safety and stability of both individual banks and the banking system as a whole.
Corporate governance relates to the manner in which the business of the bank is governed, including setting corporate objectives and a bank’s risk profi le, aligning corporate activities and behaviors with the expectation that management will operate in a safe and sound manner, and running day-to-day operations within an established risk profi le while protecting the interests of depositors and other stakeholders. It is defi ned by a set of relationships between the bank’s management, its board, shareholders and other stakeholders.
The workings of the risk management partnership may be summarized as follows:
• Bank regulators and supervisors cannot prevent bank failures. Their primary role is to act as facilitators in the process of risk management and to enhance and monitor the statutory framework in which risk management is undertaken.
• Ultimate responsibility for the way in which a bank’s business is conducted lies with the board of directors. The board has to set the strategic direction, appoint management, establish operational policies and, most importantly, take responsibility for ensuring the soundness of the bank.
• Executive management of a bank has to be “fi t and proper”, meaning not only that managers subscribe to standards of ethical behavior, but also that they have the competence and experience to run the bank.
• The audit committee and the internal auditors should be regarded as an extension of the board’s risk management policy function. Although audit committees play a valuable role in assisting management in identifying and addressing risk areas, the prime responsibility for risk management cannot be abdicated to them, but rather should be integrated into all levels of management.
• External auditors have come to play an important evaluative role in the risk-based fi nancial information process. The audit approach should be risk-oriented, rather than based on a traditional balance sheet and income statement audit. Over-reliance on external auditors would weaken the partnership, especially if it leads to a weakening of the management and supervisory roles.
Banking and the Risk Environment: Corporate GovernanceBy Hennie van Greuning and Zamir Iqbal
Banking and the Risk Environment: Corporate Governance (continued...)
• Shariah boards at the institutional and systemic level have a great responsibility to protect the rights of all stakeholders according to the principles of Shariah. Shariah boards carry the trust of the investors/depositors, as well as of the users of the funds to ensure that the institution is fully compliant with the Shariah in all its activities.
• The public/depositors as market participants have to accept responsibility for their own investment decisions. In order to do so, they require transparent disclosure of fi nancial information and informed fi nancial analyses. The public can be assisted in its role as risk manager if the defi nition of public is widened to include the fi nancial media, fi nancial analysts such as stockbrokers and rating agencies. The small or unsophisticated depositor would normally need more protection than simply transparent disclosure.
• Shareholders are in a position to appoint the people in charge of the corporate governance process and their conduct should be carefully screened to ensure that they do not intend to use the bank solely to fi nance their own or their associates’ enterprises.
All of the above mentioned players will play a similar critical role in the governance of an Islamic fi nancial institution (IFI). However, the governance of IFIs is different in the ways discussed below.
Stakeholder-oriented governance framework: An Islamic perspective on the partnership between the key playersThe Islamic economic system fully endorses a stakeholder view of governance based on Islam’s principles of preservation of property rights and the sanctity of contracts. The corporate governance model in an Islamic fi nancial system can be derived from a comprehensive understanding of three principles of Islam:
• recognition of property rights of individuals, legal entities (that is, fi rms) and the community
• signifi cance of contractual obligations, explicit as well as implicit, among economic agents
• the design of incentive systems to enforce Shariah rules in order to preserve social order.
The design of a corporate governance system in the Islamic fi nancial system entails implementation of a rule-based incentive system such that compliance with the rules will ensure an effi cient governance system to preserve social justice and order among all members of society.
A paradigm shift is taking place in the conventional economic system, which has traditionally been an advocate of a “shareholder- or owner-centered” governance system. There is widening acceptance of the idea of inclusion of stakeholders in the governance structure, but without any solid theoretical foundation.
A governance model in an Islamic fi nancial system is of a stakeholders-based incentive system through active participation of public policy institutions, regulatory and supervisory authorities, and Shariah authorities. All of these institutions collectively monitor the performance of the fi rm and its faithfulness and commitment to explicit as well as implicit contracts that protect the interests of all stakeholders without violating anyone’s property rights.
This does not in any way negate or undermine the rights of shareholders to maximize profi ts, but this objective function is made subject to
Islamic economic constraints to protect the rights of stakeholders through shareholders or their agents’ (or fi rm’s) explicit or implicit contracts.
Role of Shariah boards as an organ of governance The concept of Shariah boards is unique to IFIs. The board consists of Shariah scholars who oversee and monitor the activities of a fi nancial institution to ensure compliance with the principles of Shariah. Shariah boards take on a major responsibility and serve as organs of governance, as they are the fi nancial institution to perform economic activities according to their beliefs.
The role of Shariah boards in sound governance is also critical — especially regarding consistent application. It is common practice in the current governance structure of IFIs to maintain a Shariah board or Shariah adviser for each institution that not only monitors and ensures Shariah compliance but also issues the authoritative opinions or proclamations (fatwas) that the institution should follow in its operations.
The latter practice leads to ineffi cient decision-making due to duplication of effort, lack of standardization and lack of competent Shariah experts. Instead, a system-wide board of knowledgeable religious scholars who are also specialized by training in Islamic economic and fi nancial principles will be more effi cient and will lead to optimal governance structures.
This structure of governance with a system-wide religious board will be more effi cient and cost-effective for the following reasons:
• Each stakeholder will not be required to duplicate monitoring. • Each institution will not be required to maintain its own fatwa-
issuing board. • The fatwa-issuing board will consist of experts knowledgeable
in Shariah as well as fi nance. • There will be uniformity of expected behavior, which will set the
standards to be followed by individual institutions.
IAHs as stakeholdersInvestment account holders (IAHs) are like quasi-equity holders but without any participation in the governance of the fi nancial institutions.
continued...
“The design of a corporate governance system in the Islamic fi nancial system entails implementation of a rule-based incentive system such that compliance with the rules will ensure an effi cient governance system to preserve social justice and order among all members of society”
Banking and the Risk Environment: Corporate Governance (continued...)
As a result, IAHs do not have any direct recourse to protection of their rights. There should be a way to devise a transparent and effi cient governance arrangement to include and protect the rights of IAHs.
Financial institutions as stakeholdersIFIs carry assets that are based on partnership contracts of Mudarabah and Musharakah. This creates a situation where fi nancial institutions themselves become a stakeholder in businesses to which they provide fi nancing.
Governance of reservesMaintaining reserves to smoothen income distributed to IAHs over periods of time is becoming a common practice. The objective of such a profi t equalization reserve (PER) is to hedge against future low-income distributions by keeping a portion of current profi ts to pay out to IAHs in the future.
IFIs should standardize their practice in respect of such reserves, and the rights of IAHs to these reserves should be clearly stated and explained to the depositors. One suggestion is that deduction from the profi ts belonging to IAHs should apply only to long-term depositors, who are more likely to be exposed, and not to every depositor, including short-term depositors who are not exposed to such risk.
Transparency• Transparency and appropriate information fl ows internally and
to the publicOver the past decade, the issues of transparency and accountability have been increasingly and strongly debated as part of economic policy discussions. Policymakers have long been accustomed to secrecy, which has been viewed as a necessary ingredient for the exercise of power; it also has the added benefi t of hiding the incompetence of policymakers.
However, secrecy also hinders the emergence of the desired effects of policies. The changed world economy and fi nancial fl ows, which have entailed increasing internationalization and interdependence, have placed the issue of openness at the forefront of economic policymaking. There is growing recognition on the part of national governments, including central banks, that transparency improves the predictability, and therefore, the effi ciency, of policy decisions.
In part, the case for greater transparency and accountability rests on the need for private-sector agents to understand and accept policy decisions that affect their behavior. Greater transparency improves economic decisions taken by other agents in the economy.
Transparency is also a way to foster accountability, internal discipline and better governance, while both transparency and accountability improve the quality of decision-making in policy-oriented institutions. Such institutions — as well as other institutions that rely on them to make decisions — should be required to maintain transparency. If actions and decisions are visible and understandable, monitoring costs can be lowered.
In addition, the general public is more able to monitor public-sector institutions, shareholders and employees have a better view of corporate management, creditors monitor borrowers more adequately and depositors are able to keep an eye on banks. Poor decisions therefore do not go unnoticed or unquestioned.
• What transparency cannot ensure Transparency and accountability are not ends in and of themselves, nor are they panaceas to solve all problems. They are instead designed to assist in increasing economic performance and may improve the working of international fi nancial markets by enhancing the quality of decision-making and risk management among market participants.
In particular, transparency does not change the nature of banking or the risks inherent in fi nancial systems. While it cannot prevent fi nancial crises, it may moderate the responses of market participants to bad news. Transparency also helps market participants to anticipate and assess negative information, and thereby it mitigates panic and contagion.
The public disclosure of information is predicated on the existence of high-quality accounting standards and adequate disclosure methodology. The process normally involves publication of relevant qualitative and quantitative information in annual fi nancial reports, which are often supplemented by biannual or quarterly fi nancial statements and other important information. Because the provision of information can be expensive, its usefulness to the public should be weighed against the cost when disclosure requirements are determined.
• Transparency in fi nancial statements The objective of fi nancial statements is generally accepted to be to provide information about an entity’s fi nancial position (balance sheet), performance (income statement), changes in fi nancial position (cash fl ow statement), and signifi cant risk exposures and risk management practices (in the notes) to the entity’s stakeholders.
The transparency of fi nancial statements is secured through full disclosure and by providing fair presentation of the information necessary for making economic decisions to a wide range of users. In the context of public disclosure, fi nancial statements should be easy to interpret.
• Transparency and IFIsIFIs have made considerable efforts to improve the level of transparency and the quality of information disclosure in the market in recent years. However, there are still several areas where transparency is required to be enhanced. Some transparency-related issues are discussed below.
Disclosure practicesAnalysts often have diffi culty in collecting useful information regarding IFIs. One factor contributing to this problem is the lack of uniform reporting standards by the fi nancial institutions. For example, a recent study points out that a cursory survey of a sample of nine Islamic banks — for which balance sheet data was easily available — revealed that one bank did not provide suffi cient details as to the division of equity and deposits, while the other eight provided a satisfactory division of equity and deposits.
However, only fi ve of those eight banks provided a detailed breakdown of the deposit types they offer; the remaining three clubbed different types of deposits together. Out of these three deposit types, two made no specifi c reference to special investment accounts; the third made no distinction between demand and saving deposits.
The disclosure practices of Islamic banks are highly dispersed, and the supervisor’s authority to impose disclosure norms is also highly varied.
Financial information infrastructure. The collection and dissemination of fi nancially relevant information and credit ratings need signifi cant improvement. However, it requires an institutional infrastructure that facilitates the production of accurate fi nancial information, the development of agents that can interpret and disseminate it, as well as arrangements to protect its integrity.
Considering that reliable and timely information is more critical for a system such as the Islamic fi nancial system, which is supposed to take partnership positions, the current level of fi nancial information infrastructure is not satisfactory. The existing limited infrastructure reduces the role that information fl ows may play in promoting competition and market activities that would induce managers to adopt sound corporate governance practices.
Demarcation of equity and depositors’ funds. As mentioned earlier, an Islamic bank is a hybrid of the commercial and investment types of bank, more akin to a universal bank; but unlike conventional universal banks, Islamic banks do not erect fi rewalls to separate — legally, fi nancially and managerially — their investment and commercial banking services. As a result, investment accounts’ funds are not “ring-fenced” from others’ funds, including the equity holders’. This commingling of funds is of concern to all stakeholders, since it becomes diffi cult to identify the sources of funds invested when the time comes to distribute profi ts and losses.
Transparency in Shariah rulings. A transparent fi nancial institution would ideally reveal the duties, decision-making, competence and composition of the Shariah board, as well as publish all fatwas issued by the board. This would strengthen stakeholders’ confi dence in the credibility of the Shariah board’s assessments. In addition, public disclosure would provide a venue for educating the public, thus paving the way for a larger role for market discipline with respect to Shariah compliance.
Lack of quantitative methods. The current Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards and the supervisory disclosure rules do not cover the quantitative risk measures such as probability of default, value-at-risk (VAR) and so on. The use of quantitative methods can enhance the fi nancial disclosures
due to the enhanced measurement of risk exposures, especially in the area of credit and equity risk.
Say no to special approachesGiven the special nature of fi nancial intermediation of IFIs with a “pass-through” mechanism, one might ask whether any special risk management approaches should be necessary. The answer must be a resounding “no” — it is not the risk management itself that will differ from conventional banking practices, but the analysis and identifi cation of the risk environment. In addition, it is not the theoretical framework that is vulnerable to additional risk; the existence of certain practices changes the risk landscape.
It was argued that the balance sheet has to be structured in such a manner as to facilitate the identifi cation of risk — to ensure that the risks and risk bearers become transparent to the reader of a fi nancial statement. If funding is divided into risk-based buckets, liquidity and agency/principal relationships are immediately clear. Likewise, a clear grouping of the lending or investment products into risk and risk-bearing buckets will further enhance the identifi cation and management of risk — without a detailed knowledge of the subtle nuances of the actual products and their variants offered by IFIs.
It is further argued that the governance issues of IFIs need special attention. The inclusion and protection of the rights of all stakeholders in the governance process are critical elements. In the context of the corporate governance of IFIs, the above quotation can be adapted to place the emphasis on the role of Shariah boards as compensating for regulatory and other governance gaps. As stated earlier, Shariah boards have a great and grave responsibility to protect the rights of all stakeholders according to the principles of Shariah.
This grave burden arises from the fundamental principles implicit in Islamic economics — that of a higher authority which governs the dealings of men, and the responsibility of all who base their business on the commands of such authority to comply with higher standards, moral principles and integrity than are often found in the secular business world. The drive to preserve property rights and commitment to contracts will eventually develop an environment of “trust” as well as of transparency, thus reducing the need for an extensive governance structure.
Finally, a consistent risk-based framework for the transparent presentation of IFI fi nancial statements should therefore be the goal of all parties interested in promoting the growth of a stable global Islamic fi nancial system where risks are clarifi ed, accountability is accepted, and the bearers of risk understand the nature and extent of their exposure.
Banking and the Risk Environment: Corporate Governance (continued...)
The above article is an extract from a chapter on “Banking and the Risk Environment”. Hennie van Greuning and Zamir Iqbal, senior offi cials at the World Bank, have published several articles on Islamic fi nance in reputed journals and presented papers in international forums. The two recently wrote a new book entitled Risk Analysis for Islamic Banks.
“The drive to preserve property rights and commitment to contracts will eventually develop an environment of ‘trust’ as well as of transparency, thus reducing the need for an extensive governance structure”
Risk Management Guidelines for Islamic banking institutions (IBIs) in Pakistan have been issued via the IBD Circular No 01 of 2008, which has been tailored according to the Islamic Financial Services Board (IFSB) guiding principles on risk management.
These guidelines are in addition to the various risk management guidelines issued by the State Bank of Pakistan (SBP) from time to time. These guidelines provide a set of the best practices in establishing and implementing effective risk management in IBIs.
The guidelines set out 15 principles of risk management that give practical effect to managing risks underlying the business objectives that IBIs may adopt. One of the principles is defi ned for “general requirement” while the other 14 touch on six specifi c risk categories.
Executing risk managementUnder “General Requirement”, it is stated IBIs shall have in place a comprehensive risk management and reporting process, including appropriate board and senior management oversight, to identify, measure, monitor, report and control relevant categories of risks. The process shall take into account appropriate steps to comply with Shariah rules and principles and to ensure the adequacy of relevant risk reporting to the supervisory authority.
This principle means that IBIs shall have a sound process for executing all elements of risk management, including risk identifi cation, measurement, mitigation, monitoring, reporting and control.
This process requires the implementation of appropriate policies, limits, procedures and effective management information systems (MIS) for internal risk reporting and decision-making that are commensurate with the scope, complexity and nature of the activities of IBIs’.
The guideline then addresses the subject of “credit risk”. The risk assessment and measurement processes undertaken by IBIs shall be applicable to profi t-sharing assets which are classifi ed under equity investments. Rigorous risk evaluation and controls of these investments are necessary in view of their exposure to capital impairment.
According to four principles concerning this risk category, which are also applicable to credit risks associated with securitization and investment activities, IBIs shall:
• have in place a strategy for fi nancing, using various instruments in compliance with Shariah, whereby they recognize the potential credit exposures that may arise at different stages of the various fi nancing agreements;
• carry out a due diligence review in respect of counterparties prior to deciding on the choice of an appropriate Islamic fi nancing instrument;
• have in place appropriate methodologies for measuring and reporting the credit risk exposures arising under each Islamic fi nancing instrument;
• have in place Shariah compliant credit risk mitigating techniques appropriate for each Islamic fi nancing instrument.
IBIs shall defi ne and set the institution’s overall levels of risk appetite, risk diversifi cation and asset allocation strategies applicable to
each Islamic fi nancing instrument, economic activity, geographical spread, season, currency and tenor. They shall establish policies and procedures defi ning eligible counterparties, the nature of approved Shariah compliant fi nancings and types of appropriate fi nancing instruments.
They must obtain suffi cient information to permit a comprehensive assessment of the risk profi le of the counterparty prior to the fi nancing being granted. Their approval process should engage appropriate experts, including a Shariah adviser. Depending on the Islamic fi nancing instrument, IBIs may employ an appropriate methodology that takes into account price volatilities of underlying assets.
The selected methodology shall be appropriate given the nature, size and complexity of the IBIs’s credit related activities. They shall ensure that adequate systems and resources are available to implement this methodology.
Furthermore, they shall clearly defi ne their credit risk-mitigating techniques including having in place a methodology, clear documentations and procedures and permissible and enforceable collateral and guarantees. They should have appropriate credit management systems and administrative procedures in place to undertake early remedial action in the case of fi nancial distress of counterparty or, in particular, for managing problem credits, potential and defaulting counterparties.
The IBIs shall also establish appropriate policies and procedures that require them to honor their commitment to the parallel contract counterparty as well as with their own exposure in parallel transaction. They shall also have in place an appropriate policy for determining and allocating provisions for doubtful debts including counterparty exposures and estimated impairment in the value of leased assets.
Market liquidityOn “Equity Investment Risk”, the guideline points out that investments via Mudarabah and Musharakah instruments may contribute substantially to IBIs’ earnings as they entail signifi cant market, liquidity, credit and other risks, potentially giving rise to volatility in earnings and capital.
This section sets out the principles pertaining to the management of risks inherent in the holding of equity instruments for investment purposes. According to three guiding principles defi ned for this risk category, IBIs shall:
Risk Management Guidelines for IBIsBy State Bank of Pakistan
continued...
“IBIs must obtain suffi cient information to permit a comprehensive assessment of the risk profi le of the counterparty prior to the fi nancing being granted”
Risk Management Guidelines for IBIs (continued...)
• have in place appropriate strategies, risk management and reporting processes in respect of the risk characteristics of equity investments, including Mudarabah and Musharakah investments;
• ensure that their valuation methodologies are appropriate and consistent, and shall assess the potential impact of their methods on profi t calculations and allocations. The methods shall be mutually agreed between the IBIs and the Mudarib and/or Musharakah partners;
• defi ne and establish the exit strategies in respect of their equity investment activities, including extension and redemption conditions for Mudarabah and Musharakah investments, subject to the approval of the institution’s Shariah adviser.
In evaluating the risk of an investment using the profi t-sharing instruments, the risk profi les of potential partners are crucial considerations for the undertaking of due diligence. Such due diligence is essential to the fulfi llment of IBIs’ fi duciary responsibilities as an investor of deposits in such modes.
These risk profi les include the past record of management team and quality of business plan of, and human resources involved in, the proposed investment activity. IBIs shall ensure that proper infrastructure and capacity are in place to monitor continuously the performance and operations of the entity in which IBIs invest as partners. They shall identify and monitor the transformation of risks at various stages of investment lifecycles.
IBIs that employ different fi nancing instruments at different contract stages shall have appropriate procedures and controls in place, as different stages may give rise to different risks. They shall also analyze and determine possible factors affecting the expected volume and timing of cash fl ows for both returns and capital gains arising from equity investments.
IBIs shall use Shariah compliant risk-mitigating techniques like Shariah permissible security from the partner, which can reduce the impact of possible capital impairment of an investment. Valuation and accounting play an important role in measuring the quality of an equity investment. An appropriate and agreed method to be applied to determine profi t of the investment can be in the form of a certain percentage of either gross or net profi t earned by the profi t-sharing business, or any other mutually agreed terms.
IBIs shall also recognize that, as a going concern, an investee may not always have the liquidity necessary to enable profi t distributions. Hence, they shall agree with the investment partner the methods for treatment of retained profi ts by the investee. They should also assess and take measures to deal with risks associated with potential manipulation
of reported results leading to overstatements or understatements of partnership earnings.
Market riskThis is the risk of losses in on- and off-balance sheet positions arising from movements in market prices, i.e. fl uctuations of tradable, marketable or leasable assets (including Sukuk) and in off-balance sheet individual portfolios. The risks relate to current and future volatility of market values of specifi c assets and foreign exchange rates.
When IBIs get involved in buying assets that are not actively traded with the intention of selling them, it is important to analyze and assess the factors attributable to changes in liquidity of the markets in which the assets are traded and which give rise to greater market risk. Assets traded in illiquid markets may not be realizable at prices quoted in other more active markets.
One of the principles described for market risk states: IBIs shall have in place an appropriate framework for market risk management (including reporting) in respect of all assets held, including those that do not have a ready market and/or are exposed to high price volatility.
Potential lossLiquidity risk is the potential loss arising from inability to meet their obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses. There are two major types of fund providers, current account holders and PLS deposit holders.
As current account holders do not participate in the profi ts of the IBIs’ business activities, a sound repayment capacity is required to meet cash withdrawal requests as and when they arise. In contrast, PLS deposit holders are depositors who participate in the uncertainties of IBIs’ business. Therefore, they have a share in the profi ts and losses arising from investments made on their behalf, to the extent of their share.
Apart from general withdrawal needs, the withdrawals made by PLS deposit holders may be the result of lower-than-expected or acceptable rates of return, concerns about the fi nancial condition of the IBIs and non-compliance by the IBIs with Shariah rules and principles in various contracts and activities.
According to two principles for liquidity risk, IBIs shall:• have in place a liquidity management framework (including
reporting), taking into account separately and on an overall basis their liquidity exposures in respect of each category of current accounts and PLS deposits;
• assume liquidity risk commensurate with their ability to have suffi cient recourse to Shariah compliant funds to mitigate such risk.
IBIs shall establish the maximum amounts of cumulative liquidity mismatches which they consider acceptable and manageable for different time bands, as a percentage of total assets available. The effects of liquidity shortages may vary according to the fund providers’ liquidity preferences; hence, separate limits on liquidity mismatches should be set up accordingly.
“IBIs that employ different fi nancing instruments at different contract stages shall have appropriate procedures and controls in place”
Risk Management Guidelines for IBIs (continued...)
These limits shall be regularly reviewed, taking into account the IBIs’ liquidity situation, economic climate and market conditions.
Rate of return riskIBIs are exposed to rate of return risk in the context of their overall balance sheet exposures. An increase in benchmark rates may result in PLS deposit holders expectations of a higher rate of return. Rate of return risk differs from interest rate risk in that IBIs are concerned with the result of their investment activities at the end of the investment-holding period.
IBIs may be under market pressure to pay a return that exceeds the rate that has been earned on assets fi nanced by PLS deposit holders when the return on assets is underperforming as compared with competitors’ rates. IBIs may decide to waive their rights to part of or their entire Mudarib share of profi ts in order to satisfy and retain their fund providers and dissuade them from withdrawing their funds. Displaced commercial risk derives from competitive pressures on IBIs to attract and retain investors.
This category comprises two guiding principles which, among others, state that IBIs shall:
• establish a comprehensive risk management and reporting process to assess the potential impact of market factors affecting rates of return on assets in comparison with the expected rates of return for PLS deposit holders;
• have in place an appropriate framework for managing displaced commercial risk, where applicable.
When calculating a rate of return, IBIs shall employ a gapping method for allocating positions into time bands with remaining maturities or re-pricing dates, whichever is earlier. Fixed and fl oating rate assets of IBIs will be classifi ed according to their receivable dates because the returns on these receivables represent the fund providers’ direct and benefi cial ownership of the assets.
Actual cash fl ows may indicate a gap for a given time frame, affecting the rate of return for that period. Depending on the complexity and the nature of their business operations, IBIs may employ techniques ranging from simple gap to advance simulation or dynamic approaches to assess future cash fl ow variability and net income.
The estimates derived from selected approaches may provide acceptable approximations of periodic future earnings’ variability; hence, the outcomes will yield different levels of expected returns to PLS deposit holders.
In reference to operational risk, IBIs are exposed to risks arising from failures in their internal controls involving processes, people and systems. They are also exposed to reputational risk arising from failures in governance, business strategy and process.
Negative publicity about the IBIs’ business practices, especially those relating to Shariah non-compliance products and services, could have an impact on their market position, profi tability and liquidity. This category comprises two guiding principles:
• IBIs shall have in place adequate systems and controls, including a Shariah adviser, to ensure compliance with Shariah rules and principles, and they shall also have in place
appropriate mechanisms to safeguard the interests of all fund providers.
• Where PLS deposit holders’ funds are commingled with the IBIs’ own funds, the IBIs shall ensure that the bases for asset, revenue, expense and profi t allocations are established, applied and reported in a manner consistent with the IBIs’ fi duciary responsibilities.
IBIs shall also incorporate possible causes of loss resulting from Shariah non-compliance and failure in their fi duciary responsibilities. These risks expose IBIs to fund providers’ withdrawals, loss of income or voiding of contracts leading to a diminished reputation or limitation of business opportunities.
Moreover, a reliable IT system is a must for profi t-sharing mechanism, failure of which may lead to Shariah non-compliance risk. The bank should identify key risk indicators and place key control activities like code of conduct, delegation of authority, segregation of duties, succession planning, mandatory leave, staff compensation, recruitment and training, dealing with customers, complaint handling, record keeping, MIS and physical controls.
Furthermore, they should also identify investing activities that contribute to investment returns and taking reasonable steps to carry on those activities in accordance with the IBIs’ fi duciary and agency duties and to treat all their fund providers appropriately and in accordance with the terms and conditions of their investment agreements.
The allocation of assets and profi ts between the IBIs and their PLS deposit holders will be managed and applied appropriately to PLS deposit holders funds invested over different investment periods. IBIs shall also adequately disclose information on a timely basis to their PLS deposit holders and the markets in order to provide a reliable basis for assessing their risk profi les.
State Bank of Pakistan (SBP) is the central bank of Pakistan. SBP has been entrusted with the
responsibility to formulate and conduct monetary and credit policy in a manner consistent with the government’s targets for growth and infl ation and the recommendations of the Monetary and Fiscal Policies Coordination Board with respect to macro-economic policy objectives. For further information, visit www.sbp.org.pk
“A reliable IT system is a must for profi t-sharing mechanism, failure of which may lead to Shariah non-compliance risk”
“Derivative” is a relatively new term in the commercial world, having fi rst been used in the courts only in 1982 in the US, and 1995 in the UK. It has been defi ned as “… a fi nancial instrument whose value depends on the value of other, more basic variables”. “Derivative” is therefore a generic term that classifi es instruments that display the same features.
The necessity for common terminology describing these instruments came about because of the explosion of fi nancial engineering and innovation of these instruments. Some examples include interest rate swaps, forward rate agreements, caps, fl oors, swap options, butterfl ies, straddles, condors and strangles.
The market size of trading in derivatives is enormous and increasing; for example, the average daily volume of derivatives for the fi rst quarter of 2007 reached a record 3.87 million contracts at the Chicago Board of Trade, one of the world’s leading derivatives exchanges. This is an increase of 24% compared with 1Q2006. On the other hand, the average daily volume of futures and options in March 2007 was 4.03 million contracts at Euronext.liffe.
This is an increase of 58% from the average daily volume of March 2006 in futures, and for options, this is a 15% increase. Further, it is reported that the total notational amount or bookkeeping value of derivatives today has reached US$330 trillion and has tripled in less than seven years. It exceeds the growth rate of any other type of securities or assets in the global economy.
The increasing popularity of derivatives can be attributed to their fl exibility or ease of use — they are easier to buy and sell than the underlying commodity or fi nancial asset, such as agricultural commodities, metals, energy, currencies and stock indices.
Derivatives are useful alternatives to holding the underlying commodity or fi nancial asset; also a relatively small amount of capital is suffi cient to trade in derivatives as compared to the actual amount needed to buy the commodity or fi nancial asset. There are also other benefi ts such as better risk allocation and reduced information asymmetry.
How about the development of derivatives in Islamic fi nance? Development of Islamic fi nance itself has been unparalleled as “no other fi nancial industry, market or jurisdiction in the last decade has witnessed the staggering fi nancial engineering and innovation of the Islamic fi nance industry”. For example, statistics show Islamic bond issuance in 2006 to be US$16.81 billion, and is expected to reach US$18 billion in 2007. With such growth in the Islamic capital markets, one would expect similar growth in the Islamic derivatives markets.
Currently, however, in Islamic fi nance there are no derivatives markets. Derivatives contracts are unanimously considered impermissible in Islamic fi nance and have been disputed by Shariah (Islamic law) scholars from the 1980s until today.
As one academic succinctly summarized the dilemma of derivative usage in Islamic fi nance: “Options and futures contracts cannot be traded under Shariah, as they are too remote from the underlying assets… The concern in Islam is with gharar (contractual uncertainty).”
Notwithstanding the overwhelming objections, some scholars are arguing the permissibility of derivatives in Islamic fi nance. Industry practice also seems to be pushing on with the pilot introduction of derivatives in Islamic fi nance.
In 1997, the Shariah Advisory Council (SAC) of the Securities Commission in Malaysia resolved that the futures contract on crude palm oil was permissible and in accordance with Shariah principles.
A year later, the SAC resolved that the mechanism for stock index futures contracts did not contradict Shariah principles, and that stock index trading was allowed as long as it was Shariah compliant. This is done by ensuring that the index component is made up of Shariah compliant securities.
Later, in 2006, the SAC approved another derivative instrument — the single stock futures (SSF). As long as the underlying stocks of the SSF were Shariah compliant, the SSF was considered permissible. Half of the 10 SSFs trading on Bursa Malaysia Derivatives Berhad were deemed Shariah compliant, namely AirAsia, IOI Corporation, Maxis Communications, Scomi Group and Telekom Malaysia.
In the same year, on the 12th September, the International Swaps and Derivatives Association (ISDA) and the International Islamic Financial Market (IIFM) signed a memorandum of understanding as a basis for developing a master agreement for documenting privately negotiated Shariah compliant derivatives transactions. ISDA and IIFM hoped that the agreement would be accepted by Shariah advisers and become a standard document used for Shariah compliant privately negotiated derivatives around the world.
Again, in November 2006, Malaysia witnessed the signing of the derivatives master agreement to document Islamic derivative transactions between Bank Islam Malaysia Bhd. and Bank Muamalat Malaysia Bhd.
These developments indicate that despite the objections raised by scholars, derivatives are present in Islamic fi nance, though existing primarily in Malaysia. Whether they will have greater presence in Islamic fi nance remains to be seen.
Conventional Derivatives in Islamic Finance?By Sherin Kunhibava
Sherin Kunhibava is an academician pursuing her PhD in Islamic banking and fi nance at Monash University Malaysia. She can be contacted via email at [email protected]. References are available on request from the writer.
“Notwithstanding the overwhelming objections, some scholars are arguing the permissibility of derivatives in Islamic fi nance”
Islamic Finance news talks to leading players in the industry
Could you provide a brief journey of how you arrived where you are today?
UM Financial was a vision to bring quality competitive Islamic fi nancial services to the Canadian Muslim market. As the founder, a business plan was put together and over 100 institutions were approached, showing them the growth of Islamic fi nance in the US and UK and the potential for the Canadian market.
Our fi rst major contract was a credit union for a Mudarabah commercial facility which we used for Musharakah Islamic mortgages. The pilot started at US$4 million in early 2005 that grew to US$100 million by the end of 2006 in only 18 months.
What does your role involve?Managing a staff of close to 20 which includes divisions of real estate, legal, investment, retail banking, residential fi nancing, commercial fi nancing and product development. To further grow the industry, much of my time is spent in media interviews and speaking at Islamic fi nance conferences.
The three largest Canadian newspapers all covered our growth in Islamic fi nance on the front pages in 2007, bringing much attention to the growing Islamic fi nance industry that our company is servicing.
What is your greatest achievement to date?
We’re not quite there yet… to reach the US$100 million mark in Islamic retail fi nancing. Many other conventional major banks and mutual funds tried to launch products targeting the close to one million Muslim market in Canada but initial products were all discontinued due to lack of demand.
Being a company formulated from within the community and knowing the dynamics, we have succeeded in proving that as Islamic fi nance has grown international, there is a tangible demand within Canada.
Which of your products/services deliver the best results?
Islamic mortgages at the grassroots local market have been most rewarding as a signifi cant number of Muslims desire to have a house but want it structured in a Shariah compliant manner. Over the years,
we have added Islamic investments and deposit products, and we are working on many other Islamic fi nancial products for the community.
What are the strengths of your business?
A community-based, strong team that can communicate at a grassroots level. We have achieved many fi rsts: the fi rst competitive Islamic mortgage product, fi rst Islamic deposit product, fi rst Islamic fi nance Shariah supervisory board, the Canadian sole representative as members of Islamic Financial Services Board (IFSB) and the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI).
What are the factors contributing to the success of your company?
An untapped Islamic mortgage market, where we created a competitive Islamic mortgage product. High immigration numbers to Canada, which has a Muslim population that is doubling every 10 years.
What are the obstacles faced in running your business today?
The concentration of fi nancing in a few large institutions in Canada with much red tape. Foreign institutions are not attracted due to Canadian real estate returns of residential (6%) and commercial (8%). Canadian institutions are still hesitant to venture into Islamic fi nance, especially in view of the recent failure of products launched by major Canadian institutions.
Where do you see the Islamic fi nance industry, maybe in the next fi ve years?
The Islamic fi nance explosion at the grassroots level. Islamic fi nance retail demand penetration in most markets is only 1% to 3%, and with a tenfold increase, would bring Islamic fi nance to the true forefront.
Name one thing you would like to see change in the world of Islamic fi nance?
Islamic fi nance sticking to its roots of promoting trade, equal distribution of wealth and keeping ethical principles ahead of profi t motivation. Also have the media stop quoting individuals who disagree with Islamic fi nance. Not all Muslims eat halal meat, nor do all Jews eat kosher but a signifi cant portion do for religious reasons. We should analyze those who desire the products, not the naysayer of an industry.
Name:
Position:
Company:
Based:
Age:
Nationality:
Omar Farooq Kalair
President/CEO
UM Financial Canada
Toronto, Canada
32
Canadian and British
UM is a premier Canadian Islamic fi nance corporation. The company secured a US$120 million facility from Credit Union Central of Ontario in 2004, which was used to fi nance
Shariah compliant real estate residential properties in Canada.
It has structured Shariah compliant banking deposit products with McMaster Savings and Credit Union. UM is the Canadian representative for two of the largest Islamic fi nance associations: IFSB based in Malaysia and AAOIFI based in Bahrain.
INSTRUMENT Istisna and Ijarah Mawsufa Fi Al Dhimah (Islamic forward lease): US$100 million. (First Middle-East PPP-style dual tranche pari passu Islamic Facility and Conventional Loan)
PROJECT COMPANY Airport International Group PSC
ISLAMIC FACILITY US$100 million
TOTAL PROJECT SIZE US$675 million (for conventional and Islamic facilities)
DATE OF CLOSING 15th November 2007
FINANCING TERM 17 years
PAYMENT MECHANISM The funding was provided to the project company under an Istisna agreement. Under the forward lease, the Islamic Development Bank leased the constructed assets to the Airport International Group PSC in return for:
(i) monthly forward rentals during the construction phase; and (ii) monthly rentals thereafter till the end of the facility term.
FINANCIERSIslamic Development Bank (for the Islamic facility) and International Fund Corporation (for the conventional facility)
LEGAL COUNSEL TO THE FINANCIERS
Norton Rose LLP
LEGAL COUNSEL TO THE PROJECT COMPANY
Ashurst
FINANCIAL ADVISOR Ernst & Young
GOVERNING LAW English, Bahraini and Jordanian laws
GUARANTOR The Hashemite Kingdom of Jordan
HEDGING Both facilities were hedged by International Fund Corporation
SHARIAH ADVISER The Shariah Board of Islamic Development Bank
RANKING The Islamic facility was ranked pari passu with the A tranche of the conventional facility
PURPOSE OF FINANCING
To fi nance the 25-year concession for the operation, rehabilitation and the expansion of Queen Alia International Airport in addition to building a new terminal
Queen Alia International Airport
For more termsheets, visit www.islamicfinancenews.com
Dubai Islamic Insurance and Reinsurance Company (Aman) will distribute insurance profi ts to policyholders once the distribution formula is approved by its Shariah control board.
Aman’s board had previously approved the distribution of net profi t achieved by the company to policyholders who did not get compensation from accidents, adding that benefi ciaries will be paid 4.9% of the paid subscription value.
UAEAman Shariah board to approve profi ts
Some leading fi gures in the growing Takaful industry will speak at the Takaful 2008 conference to be held in Bahrain next month. The event will seek to address the challenges facing participants in the Islamic insurance sector, such as regulation, effective distribution of Takaful products and product innovation.
The event will be held at the Gulf Hotel and Convention Center in Manama on the 30th and 31st March. BIIH and Solidarity are the sponsors.
BAHRAINTakaful titans at March conference
Newly established Mithaq Takaful, which was launched last week, has seen an oversubscription of 20 times for its IPO, initially set at 82.5 million shares.
The shares were set at a par value of AED1 (US$0.27), representing 55% of the total AED150 million (US$40.84 million) in shares. Subscriptions had poured in from the UAE and GCC.
UAEMithaq IPO response overwhelming
BRUNEITakaful BIBD launches membership cardTakaful BIBD recently launched its fi rst “newly developed” membership cards. Customers can apply for the cards when they sign up for any of the following Takaful schemes/plans — motor Takaful, Takaful Cahaya Mata, fi re protection or mortgage Takaful.
With the cards, customers can enjoy exclusive discount privileges from the company’s premiere merchants selling electronics, jewelry and car parts.
Dubai-based Islamic fi nance fi rm Mawarid has been given the green light to set up an insurance fi rm with a capital of AED100 million (US$27.25 million) and sell shares to the public, its deputy CEO said.
“The company has received the required approval… and offer it to the public in April, and we expect to receive double the initial public offering (IPO) value,” Saleh Al-Hashimi said last Sunday.
Mawarid will also take an 8.5% stake in the establishment of an investment bank in Bahrain with a capital of US$120 million, he said. That company might launch an IPO two years after being founded if shareholders so wish, he added.
UAEMawarid to sell stock in insurance unit CMS I-Systems has been appointed technology solutions
provider to Hong Leong Tokio Marine Takaful (HLTMT). Dubbed “InsureConnect”, CMS I-System’s solution will serve as HLTMT’s Intermediaries Portal System. It is designed to service its entire distribution channel of agents, fi nancial executives of Hong Leong Bank and independent fi nancial planners.
MALAYSIACMS-I provides solutions to HLTMT
Hannover Re is satisfi ed with its treaty renewals in non-life insurance for 2008, despite market softening and rate reductions.
Seventy-three per cent of the company’s treaties — at EUR2.63 million (US$3.83 million) — were up for renewal as at the 1st January 2008, while EUR613 million (US$893.12 million) in treaties were either cancelled or restructured.
Hannover Re expects market conditions to remain favorable for non-life reinsurance throughout 2008, and has proposed selective underwriting, cycle management and regrouping measures to maintain sustainability.
GERMANYHannover Re happy with renewal
Smart Synergy Ventures (SSV) which introduced the fi rst safety product under its stable, the German-French technology “Smart Alert”, expects to sell 500,000 units of the product to Takaful and insurance companies within a year, said SSV managing director, Aznain Abdullah.
The product, a personal safety device that can be used while driving, prevents drivers from nodding off to sleep. It works on the principle of electronic balance that has been created to either set off an alarm or vibrate should a driver loose his balance due to a sleepy state while driving to prevent road accidents.
The device resembles a bluetooth head-set and is expected to enjoy a good response with its reasonable pricing and ease of use.
Surplus in Takaful — An Actuary’s PerspectiveBy Zainal Abidin Mohd Kassim
Takaful, the Shariah compliant version of insurance, requires the payment of contribution before cover is provided. In conventional insurance this is represented by the premium payable. In general insurance, all premiums once paid become part of the “assets” of the insurer. After all claims are paid, the remainder becomes a profi t or a loss to the shareholders.
This paper considers the issue of surplus in Takaful. We do not use the words “profi t” or “loss” as they denote fi nality, while in insurance and Takaful, fi nality is often clouded by practical issues. “Surplus” or “defi cit” is usually used instead as the terminology denotes an excess (surplus) or a shortfall (defi cit) as compared to a particular benchmark.
How premiums are calculatedIt would be instructive to fi rst consider how premium rates are derived. In simple terms, there are three components to expected total claims.
• Claim frequency (the probability of a claim occurring during the insured period, for example, one in 10 years, i.e. 10%)
• Claim size• Management and other expenses (including commission).
Frequency and claim size are usually determined by a statistical distribution (see diagram below).
In a good year, there could be a small number of claims with small claim size (Scenario A) while in a bad year, there could be several with a large claim size (Scenario B). The premium rate, however, is determined by Scenario P, where Scenario P represents the “average” claim frequency and the “average” claim size.
The insurer either makes a surplus or a defi cit, depending on how its claims experience turns out. From the Shariah perspective, this is not acceptable as the profi t or loss to the insurer is derived by chance (albeit statistically determined) more than effort.
What this means is that in conventional insurance, the insurer can make an underwriting profi t in a good year and an underwriting loss in
a bad year. As far as the policyholder is concerned, his “loss” is equal to the “loss” of his premium. There has effectively been a transfer of risk to the insurer for a fi xed cost.
Assuming 20% of the premium is used for expenses (including commission), the composition of the premium could look like this:
Conventional insurance is not Shariah compliant as it involves a transfer of risk to the insurer. In the above example, the insured is underwritten in case of a loss (his insurance company will pay for the loss) but the insurer will either suffer a loss or make a profi t, depending on the cumulative experience of all the insured in the insurer’s portfolio.
In contrast, Takaful involves a sharing of risk among participants. Under the same arrangement, 20% of the contribution (premium) is used to pay the wakalah (agency) fee, while 80% goes as a Tabarru. Unlike conventional insurance, the “loss” to the insured is not equal to his contribution (premium). It can be more or less than this amount, depending on whether there is a defi cit or a surplus in the Takaful fund in the year respectively.
Structure of Shariah-based contractsTrade/agreements in a Shariah compliant environment have to be based on a Shariah-approved contract type. The structure of a Shariah-based contract is such that uncertainty must be eliminated. We can extrapolate this fact into a crucial element of all Shariah based contracts: transparency.
The conventional insurance contract fails this test as the insured does not know how his premium is used. Even when the insured is told how much of his premium goes towards expenses, he is not told how the surplus or defi cit is utilized.
In Takaful, there is a need to be transparent on issues such as how much of the contribution goes towards expenses and how any surplus is utilized. The determination of what is payable on early termination (the surrender value) of the contract should also be clearly set out and easily determinable by the participant (policyholder). The existence of gharar (interpreted as uncertainty, lack of clarity or a transfer of risk) makes conventional insurance unacceptable under Shariah.
The Tabarru fundGharar is also present in Takaful, but to a lesser extent as the Takaful operator clearly sets out all the charges incurred at the outset. From the benefi t side, as in conventional insurance, gharar arises from the perspective of the insured (participant) as for the contribution (premium) paid he may or may not receive a benefi t.
In order to address the gharar element in Takaful, the contribution towards paying the future claims are deemed donations (Tabarru). As Tabarru is a gratuitous (i.e. not a commercial) contract, the presence of gharar is acceptable in Shariah.
What happens to the surplus and defi cit in Takaful? The position of surplus in the Tabarru fund has been the subject of much discussion among Takaful practitioners.
We need to recognize that surplus is a function of many factors which may vary from country to country (e.g. the statutory reserving basis) and from company to company (the practice with regard to surplus distribution, e.g. are all surplus distributed or are some held back to build up provisions for adverse claims experience?). There are many elements of gharar involved here, even in Takaful. Treatment of this surplus and the reasons given for this include:
• As the contributions to the Tabarru fund is considered as donation, then any surplus should remain in the Tabarru fund to meet future claims and not be distributed to any parties.
• Although the contributions to the Tabarru fund are considered a donation, its specifi c purpose is to pay claims. If surplus
arises, then the contribution/donations were excessive and the surplus remains the property of the participant and should be returned to the participants.
The surplus in the Tabarru fund does not specifi cally belong to any party as they have been donated in the true sense. However, through the concept of hiba (or gift), the surplus can be distributed to participants and (in contrast to (b)) to the Takaful operator in a predetermined agreed percentage.
The way surplus is calculated and treated in Takaful has an important bearing on how Takaful works fi nancially. The Takaful model of choice is the wakalah (or agency) model. Depending on how surplus is treated above, the level of wakalah fee would differ. Everything else being equal, where the Takaful operator shares in surplus, the wakalah fee is usually lower.
Actuary’s perspective of surplusThe actuary’s role in insurance includes the determination of statistically adequate premiums. This is done by observing historical data and extrapolating into the future. In an operation where all risks are undertaken by the insurance company, all underwriting profi ts and losses accrue to the insurer.
Insurance works by ensuring that risks are spread as widely and as thinly as possible. The insurer does this by reinsuring its portfolio to other insurers (reinsures). If we consider the insurance cycle, initially insurers compete by offering low and lower rates (while claims experience remain favorable) and when rates become so low as to be unprofi table, or if the insured is hit by calamities, rates generally begin to rise. This happened after 9/11 and Hurricane Katrina in the US when insurance and reinsurance rates increased signifi cantly.
Over one insurance cycle, the total premiums collected by the insurance industry in total should not vary too much from the total claims paid by the insurance industry. It is important to realize that even in conventional insurance, and over time, insurance claims are ultimately paid by the insured through the premiums paid.
The confusion as to the treatment of surplus in Takaful is due to differences of opinion on the nature of contribution paid by the participants. Note, though, there are no differences in opinion among practitioners as to the treatment of defi cits; all defi cits are for the account of the participants.
From the actuary’s perspective, an overriding factor is that there should be fairness in the treatment of participants. This is not inconsistent with the spirit of Islam. Considering that all defi cits are for the account of participants, all surpluses should be for the account of the participants as well. The concept of sharing of risks among participants should not result in a fi xed contribution (as in conventional insurance) but a variable contribution for all Takaful participants. Thus, a surplus refund would effectively result in the participant paying less contribution for the year, and when in a defi cit the participant would be asked to pay for a higher contribution than originally envisaged. Practical consideration, though, would normally see either higher future contributions (to cover past defi cits) or the recovery of past defi cits from future surpluses.
Surplus in Takaful — An Actuary’s Perspective (continued...)
continued...
“The confusion as to the treatment of surplus in Takaful is due to differences of opinion on the nature of contribution paid by the participants”
Among participants, surplus should be determined by grouping similar risks with similar expected profi t margins. This is especially pertinent where tariffs determine the contribution level like they do for personal lines motor and fi re risks in Malaysia.
One technical argument against shareholders sharing in a surplus is that surplus in insurance are estimates, and is subject to adjustments in reserves and provisions. A surplus in one year may actually be a defi cit once provisions materialize and claims paid. As shareholders do not share in defi cits, this can result in inequitableness between participants and the shareholders.
Is the principle of Tabarru inconsistent with that of equity?It has been said that where the contributions in Takaful are made on the basis of Tabarru, then how the surplus is determined and distributed does not need to be guided by the principle of equity. This resolves a lot of issues in Takaful as surplus or defi cit at any particular time is, as stated above, only an estimate at that point of time (as provisions made for claims incurred but not yet settled are subject to future adjustments, or as the regulator imposes conservative valuation bases).
The writer submits though that a literal interpretation of Tabarru should not apply in the case of Takaful. It is often said that if someone wants to study the Quran, he should seek a teacher who understands God’s message. A literal translation of the Quran can be misleading. Given that the concept of Takaful is too technical for the layman to understand, it is up to the practitioners to ensure that equity should not be less of an issue just so because the participant has made the contribution on the basis of the concept of Tabarru.
It is likely that over the initial years of a Takaful operation, signifi cant amounts of surpluses are not distributed but rather kept as reserves. This may raise the issue of intergenerational subsidies and can be deemed inequitable.
Islam also preaches that the good of the majority can override the needs of the individual. There are merits in building up reserves so that a buffer exists to ride out future volatility in claims experience as ultimately policyholders are also the insurers in Takaful.
When it matters most, in a mergerThe question of what happens in a merger raises many issues. There are Shariah issues which are interrelated with what follows, but this has been ignored so as to concentrate purely on the technical aspects.
There are many variations among Takaful operators as to the Islamic contract/Takaful model used and the profi t-sharing percentages written into the Takaful contract. The fi rst problem that arises in any merger is, therefore, what is possible without reverting to each participant for an endorsement of the Takaful contract.
A merger between two long-term Takaful funds is not possible if (among others):
• The Islamic contract/Takaful model are different. For example, you cannot merge a Takaful fund run on a Mudarabah basis with one run on a wakalah basis.
• The profi t-sharing basis between participants and where applicable, between participants and the Takaful operator
is different. For example, if one Takaful fund shares the investment profi t 30% to the operator and 70% to participants, while another does so on the basis of 70% to the operator and 30% to the participants, merging the two funds would not be possible.
In a situation where a merger is possible, it is pertinent that consideration be given to the treatment of reserves and undistributed surplus in each fund. It is unlikely that the level of undistributed surpluses and reserves between two Takaful funds is the same. From the equity perspective therefore, a distribution of some of the surpluses would be advisable before two Takaful funds can be merged.
Where a merger is not possible, one of the funds would have to be run off (that is closed to new participants, but contributions from existing participants would continue to be accepted). The question that arises, then, is: What happens if in the end where only a very few contributors are left, there are defi cits or surpluses in the fund that are being run off? Two alternatives have been suggested.
In the case of a surplus, one option is that it should be distributed to surviving participants and another is that it be donated to charity. The latter option fi ts neatly into the concept of Tabarru but should probably be subservient to the priority of achieving equity among participants. To achieve equity, the surplus should be distributed earlier during the run-off period.
ConclusionAs an actuary by training, it is diffi cult to justify not putting equity among participants (subject to practical limitations and a need to build adequate reserves) fi rst before other considerations. The writer does not think that this is in any way inconsistent with Shariah law and sees the utilization of the principle of Tabarru as valid, given the uncertainty associated with managing a Takaful operation. Using any other Islamic contract currently available would not be possible in Takaful.
However, the writer submits that the Takaful industry should rise above the basic interpretation of Tabarru as used in Takaful to ensure that the concept of equity among participants is its fi rst priority. In the writer’s opinion, a literal translation of Tabarru does not apply in Takaful; it is a means to an end, not an end to itself.
Surplus in Takaful — An Actuary’s Perspective (continued...)
Zainal Abidin Mohd Kassim, FIA, is a managing partner at Mercer Zainal Consulting, Malaysia. He can be contacted via email at [email protected]
“The Takaful industry should rise above the basic interpretation of Tabarru to ensure that the concept of equity among participants is its fi rst priority”
The Bankers’ Society of Bahrain has appointed Robert Ainey as CEO. Ainey has banking experience in the Gulf region and the US, primarily in fi nancial technology. He will manage the full operations of the society to achieve its objectives as well as promote Bahrain as the fi nancial capital of the Middle East.
The Bankers’ Society of Bahrain is a professional association of banks in Bahrain. It promotes Bahrain as an international fi nancial center, provides a forum for member banks to network and discuss matters of interest to the banking community, as well as consulting with authorities on matters of policy and regulation. The society supports training and development in the banking sector.
ADIB — UAE
Abu Dhabi Islamic Bank (ADIB) has appointed Tirad Mahmoud as CEO. Tirad has more than 25 years of regional and international banking experience. He previously worked at Citigroup and the Saudi American Bank, where he held several senior management positions — including CEO and managing director for Citibank.
UBS — Germany
UBS recently announced Jerker Johansson as chairman and CEO of its Investment Bank, and his appointment to the group executive board. He will take up his appointment from the 17th March and will be based in London.
Johansson joined UBS from Morgan Stanley, where he was vice-chairman, Europe. In his 22-year career at Morgan Stanley, Johansson was head of the institutional equity division and co-head of the combined equity and fi xed income sales and trading business.
AL-TAMDEEN — Kuwait
Faisal Abdul-Rahman Al-Mudlaj, deputy board chairman of Al-Tamdeen Investment Company, has submitted his resignation from the board effective the 31st January.
ITHMAAR BANK — Bahrain
Ithmaar Bank, a Bahrain-based investment bank with global reach and part of the Ithmaar banking group, has appointed Andrew Pocock as managing director of private equity.
Pocock will be focusing on several of the bank’s private equity fund initiatives, including the recently announced Aldar Private Equity Fund, which has a target amount of US$500 million. Pocock will report directly to Michael P Lee, Ithmaar Bank CEO and member of the board.
Pocock, a British national and Cambridge University graduate, is a veteran investment banker, having held managerial positions in international banking and fi nance since 1971.
RUSSELL INVESTMENT GROUP — Global
Peter Gunning is transferring from Sydney to Washington to become new global CIO and managing director of multi-manager investments for Russell Investment Group, which had previously partnered with Jadwa Investments to create Shariah compliant solutions.
MAKAN CAPITAL GROUP — UAE
Makan Capital Group (MCG), a prominent real estate private equity group that unites accomplished fi nancial professionals with innova-tive real estate practices, has appointed international investment spe-cialist Barry Didato as director of strategic investment and a member of the board of directors, based in the corporate offi ces in Newport Beach, California.
Didato has worked on a wide range of real estate products for private investors, high-end signature resorts, club management companies, government agencies and multi-lateral lenders worldwide; and has written numerous articles and lectured on real estate development at domestic and international forums.
SABB — Saudi Arabia
SABB has appointed Saeed Al-Khuraimi as general manager of SABB Amanah Islamic Services, where he will head up the bank’s Islamic fi nancial services division.
Saeed has more than 25 years’ experience in the fi nancial services sector in the UAE. He held several posts in SABB , the most recent being manager of private banking.
TAQA — UAE
Klaus Reinisch has been appointed global head of midstream at The Abu Dhabi National Energy Company PJSC. He will be responsible for expanding TAQA’s current midstream energy portfolio worldwide and delivering increased returns by capitalizing on midstream synergies within the company’s global upstream and power generation assets.
SECURITIES COMMISSION — Malaysia
Dr Nik Ramlah Mahmood and Ranjit Ajit Singh have been elected as managing directors of the Securities Commission Malaysia (SC), while Goh Ching Yin has been appointed executive director for strategy and development.
Nik Ramlah and Ranjit will assist the SC chairman in areas of regulation, development, and the coordination and delivery of key projects. On top of her role as MD, Nik Ramlah has also assumed the position of executive director for enforcement, while Ranjit maintains his post as executive director of market supervision.
DBS — Asia
Richard Stanley, formerly of Citigroup, will be replacing Jackson Tai as CEO of DBS Bank effective the 1st May.
DEUTSCHE BANK — Global
Deutsche Bank has lost its former head of Equity Capital Markets Structured Solutions, Martin Fisch. Fisch, one of the bank’s youngest managing directors, left to join an undisclosed hedge fund.
Fisch had previously helped establish Deutsche Bank as one of the top originators of convertible bonds in Europe and has consistently made the Financial News Rising Stars list for the last three years. According to sources, his position will be permanently covered by a combination of its equity-linked team and another part of the business.
Monthly returns for Middle East/Africa funds (as of 13th February 2008)
FUND MANAGEMENT COMPANY Performance Measure FUND DOMICILE
1 Saudi Companies Fund The Saudi Investment Bank 15.25 Saudi Arabia
2 Al Rajhi Local Shares Fund Al Rajhi Banking & Investment Corporation 14.55 Saudi Arabia
3 Riyad Equity Fund 2 Riyad Bank 13.14 Saudi Arabia
4 Gulf Industrial Companies Fund The Saudi Investment Bank 11.80 Saudi Arabia
5 Al-Saffa Saudi Equity Trading Fund Banque Saudi Fransi 10.36 Saudi Arabia
6 Saudi Equity Fund (Al Raed) Samba 9.31 Saudi Arabia
7 Bakheet Saudi Trading Equity Fund Bakheet Investment Group 9.28 Saudi Arabia
8 Gulf Companies Fund The Saudi Investment Bank 9.18 Saudi Arabia
9 Islamic Balanced Income Fund Riyad Bank 8.94 Saudi Arabia
10 Amanah GCC Equity Fund The Saudi British Bank 8.89 Saudi Arabia
Eurekahedge Middle East/Africa Islamic Fund Index* 1.68
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Eurekahedge Islamic Fund League Table
Monthly returns for Asia Pacifi c funds (as of 13th February 2008)
FUND MANAGEMENT COMPANY Performance Measure FUND DOMICILE
1 Hang Seng Islamic China Index Fund Hang Seng Investment Management Limited 13.40 Hong Kong
2 Euro Peregrine Syariah Balanced Plus PT Eurocapital Peregrine Securities 9.11 Indonesia
3 PNM Syariah PT PNM Investment Management 8.68 Indonesia
4 TRIM Syariah Berimbang PT Trimegah Securities 6.39 Indonesia
5 Mega Dana Syariah PT Mega Capital Indonesia 6.22 Indonesia
6 Danareksa Indeks Syariah PT. Danareksa Investment Management 5.23 Indonesia
Outstanding Bond by Issuer Class as at 5th February 2008 (RM’000) Bond Traded Amount by Issuer Class as at 5th February 2008 (RM’000)
Financial4,056 (2%)
BNM20,500 (10%)
Corporate Guaranteed2,447 (1%)
Corporate111,946 (56%)
ABS6,889 (3%)
Government30,000 (15%)
Quasi-Govt25,425 (13%)
Financial20 (1%)
BNM1,752 (66%)
Disclaimer: Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bondweb Malaysia Sdn Bhd (“Bondweb”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profi tability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this page are provided on an “as is” basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, Bondweb provides no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fi tness for a particular purpose, accuracy, correctness, non-infringement, timeliness, completeness, or that the information is always up-to-date.
5 YR YTM Historical Chart (week closing, last 3 months)YTM Curves as at 5th February 2007
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Islamic Finance news team
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ABN Amro 2Abu Dhabi National Bank 5Abu Dhabi National Islamic Finance 5Addax Bank 10African Development Bank 6Ahli United Bank 6,9AirAsia 10Ajman Bank 2Al-Tharwa Investments 10AMZ Securities 2Arab Banking Corporation 6,8Asian Finance Bank 9Association of Business Executives 3Bahrain Stock Exchange 1Bait Al Mashura Finance Consultations 6Bank Muamalat Indonesia 11Bank Negara Malaysia 5,6Bank of Beirut 2Bank of New York Mellon 6Banque Misr 6BIIH 27BNP Paribas 4Calyon 4Central Bank of Bahrain 7Central Bank of Kuwait 5Chamber of Commerce 7CIMB 7
CMS I-Systems 27Commercial Bank of Qatar 7Core Banking 5Cultural Cluster 9Damietta International Port Company SAE 6Dar Al-Arkan Sukuk Company 1Deutsche Bank 6Dubai Financial Market 2Dubai Holding LLC 11Dubai International Financial Center 10Dubai International Financial Exchange 1,7 Dubai Islamic Bank 8Emirates Global Bank 2Emirates Tarian Real Estate 7Employees Provident Fund Malaysia 2EON Bank 2Ernst & Young 6Faisal Private Bank 10Financial Services Authority 2Fitch 11Global Association of Risk Professionals 3Gulf Finance House 7,8Hannover Re 27Hong Leong Tokio Marine Takaful 27HSBC 4,8IIRA 11iMal 5
Industrial & Commercial Bank of China 2International Islamic Financial Market 6International Islamic trade Corporation 9Investment Dar 10IRISDubai Islamic Bank 3IFSB 3Islamic Information Finance Service 7KFH 2,5,9Dar Al-Arkan 1Lehman Brothers 2Macquarie 2Macquarie Bank International 2Manara Consortium 10MARC 11MarterCard Worldwide 5Mashreqbank Group 9Masraf al-Rayan 4Mawarid 27Mithaq Takaful 27Morgan Stanley 2,9Murtha Cullina LLP 8National Bank of Abu Dhabi 7National Bank of Egypt 6Noor Islamic Bank 3,5Oger Telecom 4Orix Corp 10Path Solutions 9
Primus Pacifi c Partners 2PSSB Ship Management 11Qatar Central Bank 6Qatar Energy City 8Qatar Financial Center 2Qatar Investment Authority 4Qatar Islamic Bank 7Qatar National Bank 4Qatari Diar 4RHB Capital 2Rim City 9S&P 10,11Salhia Real Estate Company 10SAMA Dubai LLC 11Sarawak Energy 9Securities and Exchange Board of India 4Sime Darby 9Standard Chartered Bank 2Takaful BIBD 27Tameer Holding 8Tamweel 7Unicorn Investment Bank 8United Development Company 7Victron Inc. 8
NE-IFN05/6
Company Index
Company Page Company Page Company Page Company Page
Country Index
Bahrain Enhancing corporate governance 3 HSBC Amanah plans new Islamic funds 3 Landmark Dar Al-Arkan Sukuk listed 1 IIFM to step up Sukuk market research 6 AUB, ABC close US$480 million 6 GFH net profi t incasrease by 61% 7 ABC profi t declines 38% 8 Ahli United profi t up 63% 9 Addax Bank profi t increases by 71% 10 AirAsia X chooses Manara and Orix 10 Takaful titans at March conference 27Brunei Takaful BIBD launches membership card 27China Shenyang…China’s fi rst Islamic hub? 4 China Shariah REIT eyes Middle East 7Germany Hannover Re happy with renewal 27Global Morgan Stanley’s US$ billion term note 2Hong Kong/Malaysia EON Capital stake sold for US$415 million 2India Mutual funds clamor for Shariah products 4India/Kuwait KFH investment project closed 9
Indonesia Bank Muamalat gets ‘AA’ 11IRAN Launch of investment banks in March 5Iran Islamic Solidarity Fund to be set up 7Kuwait KFH introduces iMal 5 Investment Dar’s telecom interest 10 Salhia ups take 10Lebanon Profi t rose 19% at Bank of Beirut 2Libya GFH ready to set up energy hub 8Malaysia HSBC, Deutsche Bank optimistic 6 CIMB to arrange US$4 billion Sukuk 7 IDR development to commence 9 PSSB Ship Management downgraded 11 CMS-I provides solutions to HLTMT 27 Anti-sleep device for insurers 27 BNM dialogue on MIFC with lawyers 5MENA Fund managers remain positive 11Middle East Switzerland’s Faisal keen to branch out 10Pakistan First mortgage Backed Sukuk closed 2Qatar Bait Al Mashura makes debut 6 ICBC fi rst Chinese bank in QFC 2
Qatar UDC raises US$600 million 7 Lighting up Qatar City 8Saudi Arabia STC seeks US$2.6 billion loan 4 Small business get boost 9 STC assigned ‘A1’ rating 11UAE Mou signed for young business leader 3 Islamic banks increase share 3 ADNIF operational in march 5 NIB-MasterCard alliance 5 Ajman Bank to list shares 2 Tamweel eyes Egypt, Saudi 7 Tameer, DIN sign fi nance deal 8 DIB net profi t surges 61% 8 Morgan Stanley Sukuk subject to market 9 S&P at the DIFC 10 Mithaq IPO response overwhelming 27UK ABE partners IIBI 3 Sukuk market to hit US$100 billion 6 FSA allows Macquarie access 2
Country Title Page Country Title Page Country Title Page
