April 2014
Islamic Finance Bulletin
Gulf One Lancaster Centre For Economic Research
lums.lancs.ac.uk/research/centres/golcer
From the Editor Sometimes there is no getting away from the fact that market conditions are quieter than traders
Contents
at least might like in terms of the volatility and risks that promote outstanding returns. At the
HIGHLIGHTS (p.3)
same time, those investors not so short-termist may be perfectly content to build their portfolios by steady accretion, unworried by the lack of progression in market prices, provided income
RECENT DEVELOPMENTS (p.4)
can be used to accumulate additional capital. The current interlude across asset classes may not offer lucrative rewards, but remain healthier for long-term outcomes, provided that it is based
PERSPECTIVE (p.7)
on genuinely steady economic performance and conducive political and institutional environments. Unfortunately, the calm prevailing in stocks, bonds and commodities recently may
FEATURE (p.8)
be as much an indication of countervailing tensions as of steady sailing in peaceful waters.
FEATURE (p.12)
Again this month we track the range of markets in a way that documents the component elements to that balance and any sense of underlying trends and forces. Besides the
STOCK MARKETS (p.14)
dangers presented by the situation in Ukraine, it’s found that systemic issues still beset the international upturn, so that financial markets might be seen as getting ahead of themselves,
COMMODITIES (p.17)
unduly reliant on the easy money settings that persist. In this edition too we review the assorted
BOND AND CDS MARKETS (p.19)
developments in Islamic finance in the various leading centres in Europe, extending our ‘report card’ series turning from one country example to the next. As ever, the incidental news and
DIARY (p.21)
comment on the sector leads the way in our regular coverage.
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Highlights Dubai: Not only showing plentiful signs of recovery, with an economy revisiting its roots in trade and commerce, Dubai in the past month has successfully refinanced outstanding debts incurred during the global financial crisis, setting a new 15-year benchmark in doing so. Moreover, the emirate has backed its pronounced vision on becoming the capital of the Islamic economy by bringing forward the upgrading of trading systems to help enhance liquidity management, demonstrating its intent both to capture business and create new financial norms.
Cooper: More than any other commodity investment or market series, copper is identified as a gauge of the state of the world economy. This year the red metal has shown a decline, and slump, that has not accorded exactly with impressions otherwise held that global recovery is well in play and banking and national budget dramas are retreating. In respect of leading consumer China especially, where the credit mountain of a shadow financial system is threatening to crumble, and where growth figures are sliding, copper may be pointing to troubles laying in wait.
Europe: Much mentioned as an illustration of how Islamic finance is gaining ground among developed as well as developing markets, Europe’s embrace of the industry can be characterised in two senses, with London and the UK representing both cases. On one side there are those countries (also Luxembourg and Ireland) seeking to create a worthwhile adjunct to existing financial centres; on the other the core EU nations Germany, France and Italy have Muslim populations who are increasingly receptive to the alternative offering provided by the sector.
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Recent Developments in the Islamic Finance Industry Dubai returns to market
Tamweel Africa Holding, jointly owned by the ICD (IDB’s dedicated arm) and Turkey’s
For the first time in more than a year, Dubai has tapped the capital markets, through a bulk sale of $750 million of 15-year Islamic bonds, to yield 5%. This borrowing seeks to pay down past debt and finance the emirate’s budget in pursuit of its general recovery, which features a significant property rebound. It is the first offering since January 2013, when Dubai raised $1.25 billion from the sale of 10-year and 30-year bonds, and it comes after Abu Dhabi agreed last month to roll over $20 billion of debt for five years.
Bank Asya. Tamweel currently holds stakes in Islamic banks in Senegal, Niger, Guinea and Mauritania. In addition IDB is supporting both Chad and Tunisia: to establish an Islamic bank and a leasing company in Chad, and set up a $30 million fund to support local businesses in Tunisia. Source: Khaleej Times, April 23rd GOLCER finds that current institutional and regulatory supports for Islamic finance in Africa
Source: Bloomberg, April 22nd
became a must with the substantial growth and
GOLCER thinks 2014 is bringing great promise for Dubai and UAE, both showing a relatively rapid recovery from the financial crisis of 2008 which hit quite hard the country’s economy and imparted ripples extending across the Gulf region. We find this large and successful sale as moreover indicating improved investor confidence in the UAE capital markets following announcements earlier in the year
expansion in the region and recent attempts in many countries to facilitate trading in Shariahcompliant products. Particularly, North Africa represents a large and untapped capital market, with a large concentration of Muslims. We expect such support to be viable especially after the Arab Spring and the changing political map with many opportunities in this region.
of serious regulatory reforms to boost the Islamic finance industry. (See Focus.)
Hong Kong to issue sukuk The Hong Kong government’s plans to issue
Boosting Islamic finance in Africa
US$1 billion worth of sukuk later this year may now lead to a debut sukuk for the territory that
The Jeddah-based Islamic Development Bank (IDB) has announced its support for Africa-related activities in an attempt to broaden the trade of
is larger than initially expected. Hong Kong passed a bill last month that will allow the AAArated government to issue sukuk for the first time,
Islamic finance across the continent. This step
with an estimated size of around $500 million.
comes in line with IDB’s support for the economic development of its 51 member countries by way of financing private sector projects which follow Islamic principles, and expanding the concept of “Islamic finance channels”. These include Islamic banks,
The sukuk is expected to be launched after the summer holidays. Source: Reuters, April 15th GOLCER finds this an important initiative by
investment and ijara (Islamic leasing) companies,
Hong Kong. It implies growing interest and wide
and takaful (Islamic insurance). Support on this
acceptance of Islamic finance among a global
basis for Africa will be led by Senegal-based
audience. The issuance of a debut sukuk by
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this country can be expected to boost Islamic finance
Morocco hopes for regulatory support for Islamic
in non-Muslim countries, and will pave the way for
finance
a stronger gateway between mainland China and
As a second attempt to initiate momentum in the
investors in the Gulf and Southeast Asia, with both
sector, Morocco is hoping to develop specific
domains representing the key hubs of the industry.
regulation and a clearer legislative framework to resolve the kinds of problems which plagued its earlier efforts. Banks in the country have been,
GCC sukuk sales in Q2 to strengthen
after the 2008 crisis, predisposed to favour an alternative form of finance that meets the needs
Since the worst quarterly sukuk sale amount ever
of the country’s majority Muslim population. The
having passed in the Gulf during 2009, the region
parliament is considering a detailed bill that would
is showing a revised strategy giving a way forward
regulate Islamic banks and issues of sukuk, and
to optimism. Although 2014’s first-quarter sale was
its passage -- hopefully this year -- is expected
itself slow, the level of second-quarter deals due
to prompt some conventional banks in the country
is promising. That has already been evidenced to some extent by the recent sukuks for Saudi Electricity Co. and Damac Real Estate -- the state-owned SEC
to establish dedicated Islamic windows and subsidiaries. Also, Morocco’s central bank plans to set up a central Shariah board to oversee the
pricing its $1.5 billion issue of 10-year Islamic bonds
sector.
with a profit rate of 4%, and $1 billion of 30-year securities at 5.5%, while Damac sold $650 million
Source: Reuters, April 7th
of Islamic debt to yield 310 basis points above midswaps. Issuance may also be unlocked as almost
GOLCER thinks that although this is an important
$6 billion of sukuk matures this year from borrowers
second trial by the country -- which still lags
including Dubai and Bahrain, and Abu Dhabi’s
behind in terms of the necessary developments
Tourism Development & Investment Co, according to
for the industry as compared to its neighbours -- it
data compiled by Bloomberg.
may be that both investors and banks themselves are still unfamiliar and novice about an Islamic
Source: Khaleej Times, April 3rd
finance framework, which is causing some delays to a prospect which has both high opportunity and
GOLCER too is optimistic about the GCC region’s
uncertainty costs. An underlying reason could be
recovery from the crisis era in this respect. A key
the political momentum behind Islamic finance,
contributing factor is the willingness of global
which has increased since a moderate Islamist-led
investors to enter into Shariah-compliant deals in
government took power through elections in late
order to access the liquidity of the oil-rich six-nation GCC. This evolution also comes after the US Federal
2011.
Reserve’s plan to cut its bond-buying programme, that has created certain doubts in the Treasury market, while investors have also fled the turmoil in other
Bahrain seeking new rules for Islamic financing
emerging markets.
contracts Current attempts by Bahrain to boost the industry are reflected by the central bank’s release of a consultation paper to study possible changes to rules for Shariah-compliant financing arrangements which the country’s Islamic banks
Page 5
can offer to accredited investors. The proposed rules
notwithstanding the current support of the Dubai
would allow Islamic banks to set up special financing
government, which has shown serious reforms
contracts on a wakala basis (a common Shariah-
towards developing the emirate’s Islamic finance
compliant agency agreement where the investor agrees
sector. (See Focus.)
to bear the full risk of default). Source: ArabianBusiness.com, April 2nd GOLCER sees this move as coming, not a spontaneous development, in line with the government’s push to
Focus: Dubai’s repositioning
revamp Bahrain’s efforts in Islamic finance, as the GCC
Dubai’s Department of Finance said this month’s
country historically has been a financial industry hub, notably in the Shariah-compliant sector. These days it is currently facing fierce competition from other centres such as Dubai, London and Kuala Lumpur.
15-year sukuk issue gave a new reference point on the emirate’s credit curve, setting the stage for other Dubai entities to raise longer-term financing. As for the transaction’s detail, it “generated a large order book, with orders of over US$2billion”, from a “wide range” of investors both geographically
Dubai challenging London’s status
and by sector.
After the UK’s announcement that it will issue Islamic bonds and indices, and aims to become the main hub of Islamic finance, Dubai has been working hard to challenge that objective. The Nasdaq Dubai bourse is planning to grab some of the expected business through Islamic finance instruments and a new trading system with focuses on Murabaha. This prospect would open the door for Dubai to compete with London for a share of Islamic banks’ liquidity management business by offering a new platform. Traditionally, banks from the Gulf and South-east Asia use commodities traded on
The UAE’s National newspaper reported research by Bank of America Merrill Lynch (BAML) that the sale had raised sovereign debt to US$54.8 billion, but that general indebtedness was “stabilising”. BAML observed that the proceeds would be used to help repay a $1.9bn sukuk due in November, but there was “a concurrent shift towards less transparent domestic borrowing”, by way of the orientation to local demand.
the London Metal Exchange (LME) as their merchandise when trading in Murabaha. The Nasdaq Dubai bourse is planning to become an enhanced regional player by
Earlier in April, Reuters reported that Dubai’s main
focusing on being fast, cost-effective and efficient.
bourse, the DFM, had published new standards for
Source: Khaleej Times, April 3rd
legal status and attract a wider pool of issuers to
structuring Islamic bonds, seeking to clarify their the market. The final version of the draft previously
GOLCER recognises Dubai’s recent efforts, since London’s announcement late last year, as being directed towards competing with the UK’s capital as a centre for trading Islamic bonds. A number of Dubai-linked firms have listed their sukuk on the Nasdaq Dubai exchange. However, GOLCER finds that the proposed system by Nasdaq Dubai will initially find it hard to compete with the liquidity and name-recognition of the LME,
Page 6
circulated included how sukuk holders’ rights should be protected, and the liability attached to special purpose vehicles. The story suggested that a balance was being sought “between introducing more prescriptive rules which could deter some issuers, and being too lax, which would limit the effectiveness” of the guidance.
Perspective Stalemate in the markets masks fear of the unknown by Andrew Shouler There are times in mainstream investment markets
underwriting market performance, using the mecha-
when sentiment is stuck between competing influ-
nism of quantitative easing (QE) supposedly to boost
ences, while lacking the dynamic tension that might
the economy and thereby national finances.
somehow lead to some kind of breakout.
Not only has the liquidity been created to give that
Many would recognize the symptoms of sideways
buoyancy, but investors have implicitly been driven
trading, when a certain story that participants have
into stocks and other assets in any case, as returns
been told or have been telling themselves seems to
on cash deposits have been crushed. And that story
have played out, and the search is on for the next
continues, since the tapering under way of QE merely
trigger of action.
graduates stimulus.
Indeed, such occurrences have a seasonality, and
So investors are inclined to stay put. Remarkably,
the summer doldrums are a familiar enough phe-
political and geo-political risks -- in particular at pres-
nomenon. Right now, though, the signs of firmness
ent the Ukrainian situation – have only registered so
in stocks and bonds, but modest softness in key
far at the margins of market mood. That has scope to
commodities, relates to a strange balance of confi-
change.
dence and doubt.
On the fixed-income side, apart from the structural
It is not even a period that might suggest the adage
forces of insufficient supply and insatiable demand
‘calm before a storm’, even though some observers
colouring regional markets such as the Gulf, the inabil-
are adamant that there is no firmer basis for global
ity of the global rebound to shift gears has ironically
economic recovery now than when the crisis was in-
supported prices and restrained yields. At the same
duced, so that serious uncertainty might be justified.
time, the needs are met of those searching for a known income stream rather than the fluctuations associated
It seems a reasonable moment to step back and
with equity risk.
look anew at the bigger picture. Since the crisis, and even as it has seemingly eased, the US has led sentiment in providing both the benchmark safe-haven currency and the bellwether
Investors, consequently, have resolved to stick in the markets, while presumably aware of the danger of a pullback.
assets that do most to guide markets and funds
It’s difficult to argue with that instinct, when there are
flows worldwide.
few other places to be (except perhaps to speculate in another property boom) as world authorities seek
The volatile behaviour of emerging markets dur-
deliberately to create inflation to deflate debt burdens,
ing the past year has confirmed that dependence, particularly in the Asian region, equally affected by exposure to China, while the Gulf has been able to
while punishing ordinary savers and trying to stoke consumption.
demonstrate a degree of separation by way of its
It just makes watching and waiting for market jitters
underlying financial strength.
and potential turmoil all the more tense and important.
The US’s monetary policy stance has played a defining part, more or less explicitly committed to
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Feature Islamic Finance Report Card: Europe by Rachel Latham and Andrew Shouler
In October last year the 9th World Islamic Confer-
enhance their position as global financial centres
ence was held in London. It was the first time the
(Luxembourg), or niche players (Dublin), or the op-
event had been held outside the Muslim world,
portunity to satisfy demand from their local Muslim
and itself indicated the spreading appeal of the
population. France, Germany and Italy have been
sector.
active, to varying degrees, in providing a regulatory environment for Islamic finance to flourish.
For London it was an opportunity to consolidate its position as a leading hub for the industry, as prime minister David Cameron put it, “to stand alongside Dubai and Kuala Lumpur.” To underline this intent, the UK government announced plans to become the first non-Muslim country to issue sovereign Islamic bonds in 2014, likely to be worth £200m. But London is not alone in such ambitions. Other European countries are driven either by a desire to
With many of these countries still recovering from the conventional banking crisis, getting involved in a market that is growing 50% faster is obviously appealing. It is also starting from a small base, with Shariah-compliant assets estimated to account for only around 1% of the world’s financial assets. The Islamic finance market is expected to be worth some $2 trillion this year, a 150% increase from its value in 2006, according to consultancy Ernst & Young.
Page 8
Fourth, there is a helpful market mix of limited supply and strong demand for ‘socially-responsible’ investments (SRI). So which European countries are best placed to benefit? Deloitte described both the UK and Luxembourg as “advanced Islamic financial markets”. Both countries have a long track record in the sector, albeit relatively inconspicuous, dating back over thirty years. The UK can claim to have established the first Moreover, the outlook for Europe in particular is bright in this domain. A presentation by Malaysia Inter-
Shariah-compliant retail bank, and now has six fully-compliant banks. The ongoing support of the UK government was underlined last year by the set-
national Islamic Financial Centre (MIFC) earlier this month stated that “monumental developments are in the pipeline”, mentioning not only the UK’s but Lux-
ting up of an ‘Islamic Finance Task Force’, aimed at supporting the sector’s continuing development, and increasing inward investment by Shariah-compliant
embourg’s sovereign sukuk issuance, together with the launch of the first fully-fledged Islamic bank in the eurozone.
funds. The government also extended support to the capi-
Another consultancy, Deloitte, set out in another study reasons for such optimism.
tal to become a preferred market for Islamic financial instruments listings, and announced the launch of a Shariah-compliant index in the London Stock
Firstly, there are the emerging demographics, with a
Exchange (LSE) to facilitate such investments at the
large untapped Muslim customer base in Europe of
bourse.
around 20 million, and rapidly growing. Besides that official support, London is said also to Secondly, there is favourable economic momentum,
benefit from being a major provider of the specialist
with the search for new sources of liquidity and financ-
legal expertise required for Islamic finance, along
ing common throughout the continent, and the fact
with advice on tax, listings, transactions, regula-
that saving rates among European Muslims are higher
tions, compliance, management, operations and IT
than those of other groups. Thus, retail and corporate
systems.
deposits in this segment are forecast to expand, in conjunction with the expansion of European Islamic–
Institutionally, the Financial Services and Markets
related industries, and increasing business relation-
Act 2000 covers all financial sectors, so there is a
ships between Europe and Islamic (OIC) countries.
level playing-field for Islamic products alongside the traditional sector, catering for the needs of
Thirdly, a Shariah-friendly legal environment is emerg-
ethnic-minority consumers. On the retail side, the
ing, as government and regulatory authorities endorse
UK has extended its mortgage scheme (‘Help to
the Islamic finance model.
Buy’) to loans complying with Islamic principles. As another foremost financial centre, Luxembourg
Page 9
has an equally long-standing interest in Islamic
centre in the world after the US. As regards Islamic
finance. It licensed the first Islamic financial institu-
funds, with $1bn Islamic assets under management
tion in Europe in 1978, was the first European coun-
(AUM), they are largely equity funds domiciled in
try to host a Shariah-compliant insurance company
Luxembourg, managed and promoted by global
(takaful) in 1983, and in 2002 the Luxembourg
investment companies, appealing, for instance, to
Stock Exchange was the first European bourse to
Gulf investors wishing to tap the European market.
list sukuk. Since then sixteen Islamic bonds have
The duchy also ranks third behind Malaysia and
been listed in the Grand Duchy. Over 40 regulated
Saudi Arabia in this particular segment.
Shariah-compliant investment funds and sub-funds have been established.
Other European countries have been looking to adopt a similar approach to attract international
In 2009 Luxembourg’s central bank was the first
flows. Ireland’s global standing in the fund man-
from Europe to become a member of the Islamic
agement business has resulted in it becoming a
Financial Services Board (IFSB), the prudential/
significant location for Islamic funds, with an esti-
supervisory standard-setting body in Malaysia.
mated 20% of the Islamic funds market outside of
Following the UK’s symbolic move, it also an-
the Middle East being located there.
nounced plans to float its own sovereign sukuk for Euro200m this year, to help highlight the role of the
Since opening its doors to Islamic finance ten years
Luxembourg Stock Exchange (LuxSE) as a domicile
ago, Ireland has developed a strong foundation for
for international sukuk instruments.
the industry. The Irish government has developed a comprehensive tax treaty network with Muslim
Meanwhile, the eurozone is set to get its first fully-
nations, and a provision in its tax code specifically
fledged Islamic bank, Eurisbank, headquartered in
for Shariah-compliant financial instruments, such as
Luxembourg. Having start-up capital of Euro60m,
those involving ijarah, murabahah and takaful.
its branches will be present in France, Germany, the Netherlands and Belgium. The bank intends to
On a different motivational tack, it is not surprising
offer retail, corporate and private banking services
that the French government has actively promoted
and is expected to commence operations at the
the Islamic sector, given the significant proportion
end of this year.
of its population that originates from North Africa, and the established trade flows with those coun-
Luxembourg is the second largest investment fund
tries. In recent years the French regulatory authorities have taken a number of steps, such as tax and regulatory changes facilitating sukuk issuance and, as in the UK, changes in retail banking such as the launch of an Islamic home finance product, a 10-year murabahah contract. Currently, there are plans to launch a similar Shariah-compliant deposit scheme aimed at small and medium-sized enterprises. Additional guidelines are planned to deal with other Islamic finance concepts, including musharakah and mudarabah, in the near future.
Page 10
There are presently six Shariah-compliant funds in
finance in Europe has been reignited by the turn-
France, with total AUM of $147m.
key announcements by the UK and Luxembourg to issue sovereign sukuk. The Islamic sector in Europe,
Despite being the first Western country to tap the
while still small (assets of $50-60bn, as measured
Islamic capital market, in 2004, when the federal
in 2013), has promising potential to gain traction,
state of Saxony-Anhalt issued an Islamic bond, for
building on growing bilateral ties between the EU
Germany there appears to be contrasting views as
and the Islamic financial hubs of the GCC and
to the progress made since.
Malaysia.
European Central Bank research suggests that the
Right now it seems there is a natural division among
prospects for the further development of Islamic
the respective players between those countries
finance in Germany are solid. First, the largest
looking to enhance their existing financial centres to
economy in Europe features the largest Muslim
accommodate and benefit from Shariah-compliant
population (4.1m, compared to 3.5m in France and
business, and those basing their approach on culti-
2.9m in the UK). Second, German exporters could
vating the market for the Muslim component of their
use institutions offering Islamic financing solu-
populaces.
tions as alternative sources of funding and thereby further enhance their funding profiles. Third, Is-
Looking forward, Europe’s example, amid the rapid
lamic trade finance products offer the potential to
development of Islamic finance in various parts
strengthen trade ties with countries that are already
of the world, is taken to reflect the practicality of
active trading partners with their own Islamic sector
Islamic financial solutions for all potential stakehold-
potential. Turkey is the obvious example. Other
ers, regardless of religious beliefs. In this context,
commentators, however, have highlighted that the
Europe’s efforts, while economically and socially
majority of Muslims in Germany, of Turkish origin,
pragmatic, may also give credence to the sector’s
are both relatively secular in their disposition and
aim to provide alternative and ethical financing
on relatively low incomes, limiting the authorities’
solutions across the board.
incentive to act in this direction. Germany has not, for instance, made the adjustments to its tax system
Sources: European Central Bank, Deloitte, MIFC,
seen elsewhere to account for Shariah-compliance.
PwC, Reuters, Financial Times
With only a relatively small Muslim population (2%), Italy’s involvement in Islamic finance is more focused on the corporate level, through the growing trade and investment with the GCC. However, while there has been no shortage of conferences, working groups and initiatives, concrete progress appears limited, with an apparent lack of regulatory support. However, the need of Italian companies to broaden their funding sources could drive future developments. Overall, it is plain enough that the interest in Islamic
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Feature Overcoming the internal challenges facing Islamic Finance by Dr Abdulazeem Abozaid Associate Professor, Qatar Faculty of Islamic Studies Islamic finance is facing different challenges.
only because it has become a public demand, and
Some are external, like subjecting the sector to the
they do not mind operating conventionally if the
same legal constraints and rules as for conven-
public demand changes.
tional financial institutions, so not acknowledging the special nature and requirements needed for
To other bankers, Shariah is a concern but they
Islamic finance to operate. Other challenges are
much prefer leniency, even if it is considered by oth-
from inside the industry, and mostly relate to a
ers as deviation from Shariah principles, as long as
lack of the necessary governance.
it does not considerably affect the creditability of the bank in the view of clients.
None of these internal challenges is, however, embedded, but rather they are attributable to the
This stand of some bankers has led them to prefer
players and decision-makers in this industry.
employing the services of Shariah scholars known to be flexible, giving less attention to their proper
Principally, Shariah board members are employed
qualifications. Some Shariah scholars have under-
by bankers for the purpose of determining the
stood this attitude and decided to fulfil the mission.
validity of all products and transactions in operat-
This required them to dive into the classical books of
ing Islamic banks. Scrutiny is a demand by both
Fiqh to find some fatwas that accommodate bank-
bankers and clients -- bankers to ensure that they
ers’ needs, or to exercise Ijtihad (legal reasoning)
operate as per Shariah, so their income is lawful,
on unprecedented matters but with the goal set in
and clients to feel relief that they have avoided
advance, which is to try to endorse the product.
Riba and all types of Haram associated with conventional banking.
On the other hand, there are some scholars whose integrity and qualifications cannot be questioned
However, there are some bankers who are purely
but they have inwardly assumed the political re-
profit-oriented, and they have joined this industry
sponsibility of the Muslim governor, so they have justified on a public policy basis issuing controversial banking fatwas believing that they are doing Islam a favour by giving its economic system a push forward. In fact, the core of the above mentioned problem lies in presuming wisdom and full integrity in all those who hold some Shariah degrees or known to be Sheikhs. In Islam no-one is infallible except prophets, so all humans except prophets may make mistakes.
Page 12
Salaries and honorariums payable to the Shariah board members made through the central bank would in turn claim the payable amounts from the individual banks, Shariah board members being simply the employees of the central banks. However, it is far better if accreditation of scholars to join Shariah boards is done by a special purpose institution or even by an already established organization like General Council for Islamic Banks and Financial Institutions. This is to standardize the requirements Acknowledging human nature is the reason behind Shariah not allowing judges to accept gifts from litigants, let alone collect a fee. This is because the judge or the Mufti is speaking in the name of religion and thus precautions should be taken to avoid any possibility of conflict of interest that may affect his judgment. Any solution to the problem must observe the following: (i) Shariah board members must be selected for the job according to certain criteria set by an independent party; (ii) Shariah board members of Islamic financial institutions must be appointed by an independent party; (iii) Shariah board members must not be paid by the same institutions seeking their fatwas. The question now is who may fit to play that role of selecting, appointing the Shariah board members and paying their fees? In light of the prevailing conditions of Islamic financial institutions and the absence of a supervising and governing body, central banks are perceived the best players of the said role. A special division for Shariah governance in central banks should be set up. Its responsibilities would include accrediting Shariah scholars who meet certain criteria, like being well-versed in Islamic law of transactions
in Shariah scholars and help streamline the products eventually. Another manifestation of the above problem is conflict of fatwas. It is no secret that it shakes clients’ confidence in Islamic banks to find that the same product is endorsed and offered in one Islamic bank whereas it is regarded as forbidden in another. This discrepancy is unjustified, but characterized by lack of supporting evidences, loose dependence on a personal presumption of Maslaha (public interest) and reliance on mere technicalities that have no substantial effect on the nature of the transaction. Overseeing Shariah boards in the way described earlier will ultimately result in limiting the reasons for disagreements between Shariah board members. More importantly, Shariah boards must be made bound by the resolutions made in the Fiqh academies and any other highly-ranked legislative bodies. In facing the well-established conventional banks, the Islamic identity of these institutions must remain beyond manipulation, and therefore urgent Shariah governance must be outlined to reform this emerging industry. This is an abridged version of the author’s research
and having the essential knowledge in banking and finance.
Page 13
Stock Markets GCC Although overall equity indices for Gulf stocks rose once again through March, in fact the respective components across the constituent states were rather mixed. Half of the Islamic measures for the six states rose, namely in Saudi Arabia, Kuwait and UAE, while Qatar, Bahrain and Oman slipped. Meanwhile, Dubai extended its advance to some 32% in the year to date, as investors are drawn to evident economic momentum and the flow of project deals that have boosted the
since the displacement of president Morsi, there have
infrastructure sector and prompted earnings estimate
been relatively few signs of revival in real terms, in an
upgrades by analysts. Real estate surged 12% over the
economy whose finances are dominated by subsidies
month. By comparison, the Saudi and Kuwaiti rates
and debt servicing, and whose businesses are
of progress have been steadier. Retreating indices
continually interrupted by power cuts. Turkey’s bourse
elsewhere seemed to be succumbing to a combination
showed further rebound as dominant premier Erdogan
of geopolitical nervousness over Ukraine and further
headed for a clear local election win and a sense of
QE tapering in the US, in line with international jitters.
political crisis retreated.
Egypt / MENA
South East Asia
Bombings in Cairo caused fallout in the Egyptian
Asian markets were especially attuned to international
stock market by sparking concern of an escalation
trends, most importantly the economic and policy
of violence ahead of elections due in late May.
news out of the US and China. The result was market
Effectively it was viewed also as an overdue correction
improvement upon continuing indications of US
following a euphoric spike to complete the recent rally.
rebound, but hesitancy in the face of concern that
That had been prompted by speculation that property
slowdown in China would not be met by a typical,
developers would benefit from the army’s agreement
further stimulus package. Signs of institutional buying
with construction firm Arabtec of the UAE for low-cost
as quarter-end approached were offset to some
housing. Despite indexes having risen by over 50%
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degree by a tendency to profit-taking. Regional sentiment overall was described as relatively subdued, given a global backdrop also slightly nervous at developments in Ukraine. The Thai market’s successive weekly gains were trimmed as political turmoil resurfaced, while the Indonesian bourse was lifted by pre-election optimism. Stocks in Malaysia, the Philippines and Vietnam nudged higher, with the help of foreign funds testing the water again.
Rest of the World Global equities were flattish to broadly bullish still in March, and the MSCI world index reached an all-time high, despite tensions growing in Crimea. US benchmarks maintained their form as the Fed’s monetary tapering plans proceeded as expected. Gentle recovery signs in Europe kept stocks in range, though fears grew of deflation. Chinese indices retreated with economic softening, while India’s surged with expectations of a helpful election outcome. The Japanese market, on the defensive in spite of the much-trumpeted efforts of Abenomics, went nowhere overall, but experienced volatile trading through differing views of the pending consumption tax. Sources: GIC, Reuters, Bloomberg, broker reports
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Islamic Stock Indices Islamic or Shariah compliant indices exclude industries whose lines of business incorporate forbidden goods or where debts/ assets ratios exceed 33%. The increasing popularity of Islamic finance has led to the establishment of Shariah compliant stock indices in many stock markets across the world, even where local Muslim populations are relatively small, such as in China and Japan.
Evolution of Islamic Stock Markets in March 2014 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Prices represent the closing price of the respective index at 31/3/2014. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Conventional Stock Indices
Volatility is a measure of uncertaincy of market returns. It is calculated as the standard deviation of the returns in the reported month. The formula for the standard deviation is: Ďƒ=E[(X-Îź)2]1/2
Evolution of Stock Markets in March 2014 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Price represent the closing price of the respective index at 31/3/2014. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
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Commodities Oil Brent and related prices in March eased upon doubts about China’s economic growth and crude imports, according to OPEC, as well as lower refinery demand and ample supply, which more than offset continuing disruptions to production and the geopolitical tension over Ukraine. The likely restoration of a portion of Libyan exports following a blockade by rebels in the country added pressure. Meanwhile, the WTI series strengthened in line with US-specific factor of diminishing stocks at Cushing, reducing the spread between benchmarks. As monitored by other markets, US data gave enough sense of extended economic recovery still to provide fairly firm support.
Gold/Precious Metals Like oil, gold has had a mixed time, turning softer again in March, but bouncing back on dips. The US’s monetary support (QE) continues but to a declining extent, and the prospect of an interest-rate hike in the foreseeable future -albeit delayed and probably modest -- weighs on sentiment. Economic statistics have shown sufficient sign of recovery to dispel mainstream expectations of extraordinary policy steps. Speculators gave ground in their net long positioning this year, taking profits following an unanticipated run. Yet, the confrontation in Ukraine has underlined the metal’s safe-haven status, and weaker prices have still encouraged bargain buying out of China.
posed a systemic financial threat. Analysts forecast
Copper/Base Metals
overproduction next year. Later in March, though,
a global supply surplus in 2014, leading to structural
China’s credit problems prompted another slump in
support came from suggestions that mining output
copper. Traders worried that industrial production,
might slip below predicted levels, and that the Chinese
retail sales and investment figures all pointed
leadership would not be able to resist stimulatory
to lower demand for raw materials, given the
intervention again.
tremendous escalation of China’s requirements in the past decade, while government policy seems
Sources: OPEC, Reuters, Bloomberg
geared to curbing the liquidity impetus that has
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Bonds and CDS markets GCC Gulf markets remained sanguine in the latest period, prices forging higher, with regional demand outstripping supply, looking to take up new issuance, and seemingly less concerned by volatility and profit-taking in the rest of the world. Some movement was nevertheless seen along the yield curve away from the shorter durations that would be more affected by the prospect of US policy tightening; also a preference for the higheryielding names. Dubai’s successful refinancing buoyed that segment’s offerings, causing spreads to other GCC issues to narrow. Egypt / MENA Sustained appetite has been seen for North African paper, such as Morocco’s, as international investors have added risk against an apparently benign international environment. Egypt’s benchmark 2020 eurobond broke through fresh highs, and five-year CDS traded in April below 400 basis points, compared to over 450 late in March. That said, much of that improvement seemed to be momentum-driven, as there was little news emerging as to the economic upturn being extended. The pound in fact eased somewhat, and the treasury looked to borrow record amounts in domestic debt in the second quarter to cover the budget shortfall. Malaysia / South East Asia Malaysian bonds were somewhat uncertain through March and into April, caught by a mix of factors. Doubts continued about the lead set by the US market and economy, with corporate earnings perhaps not matching hopes sufficiently. The damage to global sentiment from the situation in Ukraine alsp played a part. Locally, concern over inflation and whether the central bank would be minded to respond with higher rates took the edge of a rising ringgit, that had been boosted by speculation about returning international financial
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flows, rotating out of developed market equities. Meanwhile, domestic economic statistics indicated a
Sovereign Bond Markets
slight quickening of growth.
Global Benchmarks Emerging market bonds returned to some favour later in the period, with confidence spreading in the fixed-income sector that benchmark influences were of the ‘muddling-through’ kind, of both moderate growth and moderate inflation, not threatening escalation of yields. Evidence for that view was provided by corporate bonds in the US outperforming the sovereign space, and peripheral, higher-yield eurozone issues doing comparatively well again. The latest comments from the Fed on the policy outlook suggested a steady flightpath for the tapering of QE and eventual induction of tightening. Source: Invest AD, Bloomberg, broker reports
Evolution of Bond Markets in March 2014 relative to the previous month. The table reports the price index on which the MTM Change is calculated (month-to-month) and the Yield of sovereign bond maturities typically between 6 months and 25 years. Data as at 31/3/2014.
Credit Default Swap Markets
Evolution of CDS Spreads in March 2014 relative to the previous month. The index reported here represents the average basis points (bp) of a 5-year CDS for protection against sovereign bonds. Data as at 31/3/2014. MTM Change refers to the change relative to the previous month.
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Islamic Bonds (Sukuk) Secondary market trends were modestly positive
State-backed mortgage lender Cagamas Bhd
during March, against the background of generally
issued MYR500m ($151.3m) worth of three-
supportive benchmarks globally and a continuing
month sukuk, oversubscribed by 2.4 times.
bias in the GCC region in favour of local paper.
Dubai real estate company DAMAC successfully
Meanwhile, the Gulf’s primary market was only
issued a $650m, five-year sukuk maturing
moderately active.
in April 2019 at a profit rate of 4.97%,
KFH Research recorded a total of $11.2bn for sukuk
oversubscribed more than 4 times. It was priced
issuance worldwide in March, higher than either
at mid-swaps plus 310 basis points, at the tight
January or February, but low on GCC issuances,
end of revised guidance, expanded from the
except for short-term liquidity management
originally planned $500m. The sukuk will be
instruments by the Central Bank of Bahrain.
listed on the Irish Stock Exchange and NASDAQ
Malaysia continued to account for the largest share
Dubai.
of the sukuk market with $7.1bn in volume, 63.6% of
Saudi Electricity Co completed its third dual-
total. Instead, sovereign and government-related entities dominated.
tranche sukuk in three years for $2.5bn (a $1.5bn, 4% 10-year note and $1bn, 5.5% 30-
Sabana REIT of Singapore successfully issued 2014’s
year tranche). While lifting the amount raised,
first Singapore dollar-denominated sukuk, with an
SEC still managed to price inside the outstanding
SGD85m 4-year corporate issue.
curve. It recorded a $12.5bn order book.
Bumitama Agri Ltd, a Singapore listed palm-oil
Maybank Islamic Bhd, a unit of Malaysia’s
producer, came with a maiden 5-year MYR500m
Malayan Banking Bhd and the largest Shariah
($152.6m) issue. It was the company’s first
bank in Southeast Asia, raised MYR1.5bn
diversification into the fixed-income market,
($459m) with its first Basel III-compliant Islamic
planning to use the proceeds for capital expenditure,
bond, increased from an initial figure of MYR1bn.
working capital requirements, investments,
It has a tenor of ten years, and was priced at
refinancing existing debts and general corporate
4.75%, and oversubscribed by nearly three
purposes, all of which are to be Shariah-compliant.
times.
Meanwhile, Luxembourg-based ATL issued a 5-year sukuk raising $40m.
Sources: KFH, GIC, Reuters
In the sovereign and quasi-sovereign sector, Malaysian and Indonesian issuers dominated, with government-related entities including Syarikat Prasarana Negara Berhad, Petronas Dagangan Berhad, Telekom Malaysia and Khazanah Nasional Berhad. Over $2bn was raised by Malaysian issuers, intended to finance infrastructural and education-sector related projects. Petronas Dagangan’s MYR300m Islamic medium term notes were issued under its proposed MYR2bn sukuk programme, with a profit rate of 3.53% per annum payable semi-annually.
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Sukuk is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and nontradability in the secondary markets.
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Marwan Izzeldin Director m.izzeldin@lancaster.ac.uk Andrew Shouler Editor a.shouler@lancaster.ac.uk
Research Team Gerry Steele g.steele@lancaster.ac.uk Vasileios Pappas v.pappas@lancaster.ac.uk Marwa El Nahass m.elnahass@lancaster.ac.uk
DISCLAIMER This report was prepared by Gulf One Lancaster Centre for Economic Research (GOLCER) and is of a general nature and is not intended to provide specific advice on any matter, nor is it intended to be comprehensive or to address the circumstances of any particular individual or entity. This material is based on current public information that we consider reliable at the time of publication, but it does not provide tailored investment advice or recommendations. It has been prepared without regard to the financial circumstances and objectives of persons and/or organisations who receive it. The GOLCER and/or its members shall not be liable for any losses or damages incurred or suffered in connection with this report including, without limitation, any direct, indirect, incidental, special, or consequential damages. The views expressed in this report do not necessarily represent the views of Gulf One or Lancaster University. Redistribution, reprinting or sale of this report without the prior consent of GOLCER is strictly forbidden.