January 2013
Islamic Finance Bulletin
Gulf One Lancaster Centre For Economic Research
www.lums.lancs.ac.uk/research/centres/golcer/
From the Editor For much of December the world’s markets were on tenterhooks over politically-charged deliberations in the US as to the supposed fiscal cliff. If the rival factions in Congress and the executive could not resolve their essentially ideological impasse, then financial markets generally would have to factor in a declining ability to fuel the world’s economic recovery process. In the weeks ahead of the year-end deadline -- with the idea that the national debt ceiling might be breached and bills not paid -- markets had simply to factor in the partial risk of that interruption. It would hinder the collective global rebound based on the continuation of cheap money in the West, and catchup developmental momentum in the East and commodity-based surpluses elsewhere. This was an inflexion point in more than one sense. Not only might it denote a decisive step forward into the next phase of the cycle, but in doing so it could spur the rotation of investor portfolio alignments away from bonds towards equities, especially as policymakers have seemed increasingly determined among the key authorities to try to trade growth for inflation. Japan in particular has sparked that notion, and even ignited fresh talk of currency wars. So bonds and sukuk essentially went roughly nowhere on the month, while equity indices generally climbed. Sideways trends in commodities such as gold and copper typified the uncertainty of trading and economic prospects, with activity quiet also because of the festive break and the relative lack of drama in the eurozone. Among emerging markets, Egypt stood out for the advance of its stock market in contrast to the decline of its currency, credit standing and political stability. In respect of developments in Islamic finance, meanwhile, a host of examples in various corners of the world, including France, Germany, Australia and the south-east Asia region, gave testimony to the rising influence of Shariah-compliant products, in terms both of capital-raising and the institutional architecture required to build on the sector’s inherent promise. At the same time, a certain reality check could be perceived in the competition with conventional funding and its related investments over the course of the year, for instance in the Gulf as issuers sought subscriptions from a diverse investor base.
Contents HIGHLIGHTS (p.3) RECENT DEVELOPMENTS (p.4) STOCK MARKETS (p.6) COMMODITIES (p.9) BOND AND CDS MARKETS (p.11) ACCOUNTANCY ISSUES (p.14) PERSPECTIVE (p.15) DIARY OF EVENTS (p.16) Page 2
Highlights Egypt: A rollercoaster month saw the pound plunge over concerns for the depletion of foreign exchange reserves as political turmoil revisited the country, but also the continuation of investment inflows from overseas, and a double-digit rise in the stock market. A sovereign credit rating downgrade added to the mix, and the central bank took protective measures towards year-end. It also, incidentally, announced draft guidelines for Islamic banking and the launch of sukuk to finance infrastructural projects. GCC: While the overall trend in Islamic finance globally remains decisively upward, sales of sukuk in the Gulf region lagged behind non-Shariahcompliant offerings in the fourth quarter of 2012. Sukuk issuances dropped to $3.5 billion as companies looked to extend their investor base beyond Asia and the Middle East. This news constituted a reminder that conventional finance continues to provide a competitive challenge in terms of being easier to arrange and offering broader investment options.
Initiatives in Western markets: France issued its first two sukuk late in 2012, giving its companies the potential for alternative funding. In Germany, Kuveyt Turk, Kuwait Finance House’s Turkish unit, applied for a banking licence, aiming to become the first Islamic bank operating in Germany. Meanwhile in Australia fund manager Crescent Wealth launched the country’s first Islamic pension fund, seeking to tap into not only Muslim investor requirements but also those of native investors seeking conservative, value-based products.
Page 3
Recent Developments in the Islamic Finance Industry GCC companies bypass Islamic bonds GCC sales of sukuk lagged behind non-Shariahcompliant offerings in the fourth quarter of 2012 for the first time in a year. Companies including International Petroleum Investment Co, based in Abu Dhabi, and Qatar National Bank SAQ opted to draw on demand among non-Islamic bond investors, raising $10.4 billion in the three-month period. Sukuk issuances in the quarter fell to a year-low of $3.49 billion. Still, Islamic bonds from the Gulf may flourish as the region’s governments plough oil wealth into projects valued at more than $1 trillion. Saudi Arabia, for example, will issue sukuk to fund airport expansions in Riyadh and Jeddah. GOLCER finds that this dip in sukuk issuance is attributable to companies seeking to broaden their investor base beyond Asia and the Middle East. Non-Islamic debt is easier to arrange and much broader in investment options and instruments. The average yield on sukuk from the six-nation GCC dropped 139 basis points in 2012 to 2.92 per cent at year-end, HSBC/Nasdaq Dubai’s GCC US Dollar Sukuk Index shows, while yields on nonIslamic debt were at 3.28 per cent, according to Bloomberg. Source: Khaleej Times, January 4th
Merger of three Islamic banks completed in Bahrain Bahrain Kuwait Finance House (KFH) announced this month the successful closing of the merger initiated in the later part of 2011 between three Bahrain-based Islamic banks: Elaf Bank, Capital Management House and Capivest. It creates a strengthened financial institution with a total equity of approximately $340 million and total assets in excess of $400 million spanning the Middle East and North Africa, Europe and Asia. GOLCER perceives this as a robust merged entity that can better compete in the dynamic and growing global Islamic banking and investment industry. The newly-created institution will be better positioned to participate in larger investment projects, and more effectively capitalise on a broader set of available opportunities across the Middle East and North
First Oman Islamic bank opens its doors
Africa (MENA) region, and worldwide.
The first dedicated Omani Islamic bank, Bank Ni-
Source: Khaleej Times, January 9th
zwa, started operation this month, initiating a new era for Islamic banking in the country. The sultanate announced last year it would introduce Islamic finance, becoming the last country in the GCC to do so. Oman’s central bank has adopted a strict approach to regulating Islamic banking, setting higher standards for the industry than many other countries. Its rules cover areas including liquidity management, the administration of boards of Shariah scholars, and the operation of conventional banks’ Islamic windows. Source: The Arabian Business News, January 11th
Page 4
France launches its first sukuk As France attempts to establish the Islamic financial sector, its first sukuk issues have finally appeared. Two sukuk were issued late in 2012 for both individuals and institutional investors, giving French companies the potential for alternative funding. The first was aimed at financing investment in a growing segment in the food sector in France, namely halal catering. The second is in the area of solar panels and finances an ecological, economically responsible investment.
Supported by the economy minister in 2008, de-
Mauritania planning Islamic Treasury Bills
velopments towards Islamic financial instruments in
With Islamic finance continuing its progress in
France have been slow but gradual. In 2005 BNP Paribas Najmah received the Euromoney Award for the best Islamic Finance House. In June 2011 Chaabi Bank, French subsidiary of the Moroccan Banque Populaire Group, opened an Islamic window offering Islamic deposit accounts for private customers. In 2013 Chaabi Bank seeks to launch a deposit account for SMEs, to respond to the latent need of their clientele for Islamic banking products.
Africa, several Islamic banks are now operating in Mauritania, with new authorisations being granted while a developing interbank market emerges. The Central Bank of Mauritania (BCM) has recently completed a study to investigate the potential development of a local Shariah-compliant securities market, aided by IFAAS (Islamic Finance Advisory and Assurance Services), an international advisory firm. Its report assessed the potential for BCM to
GOLCER sees these initiatives as reflecting obvious
issue Treasury Bills.
interest among international European banks in the
GOLCER considers that substantial challenges still
sector of Islamic credit. Having the largest Muslim community in the European Union, French banks have developed an excellent knowledge of the sector in the past few years. It also appears that the diversification of the French economy is likely to facilitate several types of assets that could be used to carry out operations in line with Shariah as well as promote the issuance of sukuk. Source: Zawya, December 19th
Licence sought for Germany’s first Islamic bank
await the Islamic finance industry in Mauritania given the limited size of the market, which will impede the sector’s rapid development and might prevent entrants from making guaranteed profits. Source: Zawya, December 22nd
Australia’s first Islamic pension fund launched Australian fund manager Crescent Wealth has launched the country’s first Islamic pension fund, following a deal with the Association of Independently Owned Financial Professionals (AIOFP). The
Kuveyt Turk, Kuwait Finance House’s Turkish unit,
main purpose is to tap Australia’s large pension in-
has applied for a German banking licence, and
dustry, which had about $1.3 trillion in assets at the
aims to become the first Islamic bank operating in
end of 2011, according to the Australian Prudential
Germany. Permission is pending from the German
Regulation Authority. Crescent Wealth, established
financial authorities. The bank issued a $350 mil-
last year, currently has an Australian equities fund
lion sukuk last year.
and a cash fund, while it also plans to launch inter-
GOLCER believes that entering the European market still requires effort. Passing legislation governing Islamic finance in Germany may be a concern, and might lead to some politically-charged debates. Europe in general, and particularly Germany, shares the challenge faced by other jurisdictions new to Islamic finance, namely taxation. Obtaining the necessary tax amendments appears to be an obstacle. Source: Reuters, November 28th
national equities and property funds. The potential for Islamic funds in Australia is estimated by the firm to grow to $22 billion in funds under management by 2020. Crescent Wealth’s managing director said this new investment option is expected to appeal not only to Australians of Islamic faith but to all Australians seeking conservative, value-based investments. Crescent is training in both product and Islamic finance principles advisors who would focus on the Sydney and Brisbane communities and later move on to Melbourne. Source: Reuters, December 17th
Page 5
Stock Markets GCC GCC markets closed on a positive note with the exception of Kuwait and Qatar, where markets fell by 2.8 per cent and 0.8 per cent respectively. Saudi Arabia’s market slipped initially owing to the reported ill health of the King, but rebounded as his condition improved, with a public appearance, and upon the announcement of record budget spending for 2013. In fact, the Saudi index was the best performer in the region in December, up by 4.2 per cent, aided also
rose by a whopping 16.5 per cent in December,
by strong oil prices, although Oman almost matched
owing to the country’s still enhanced appeal to
that outcome with buying from funds impressed by
foreign investors. Although the Arab Spring shook
growing recovery signs.
the political stability of the region, domestic banks have proved to be a magnet for foreign investors.
Kuwait saw profit-taking among retail investors in
Gulf banks such as the Qatar National Bank and
the absence of supportive economic data, and the
Emirates NBD perceive that it’s the right time to
persistence of political skirmishes implied a continuing drag on progress. Privatization of the bourse itself ran into legal obstacles. Qatar similarly saw profittaking. Abu Dhabi’s index dipped upon central bank
make investments. Central bank manoeuvres to protect reserves in the face of a plunging currency provided some fillip towards the end of the month.
regulations curbing mortgage lending, while Dubai
Turkey was up by 8 per cent as a result of its ef-
rose slightly on the improving mood in the real estate
forts to shift business to Africa as its largest trading
market. Bahrain ticked up modestly as well.
partner, with the EU in a weakened state. Turkey’s financial sector has remained robust in spite of the
Source: GIC Research, Financial Times, Kamco
global sluggishness, and the markets have been
MENA
helped by interest rate cuts that have boosted investments in the country. With 2012 the best
The Egyptian index remained surprisingly resilient to
year since 2008 for mergers and acquisitions in
the bubbling political tensions in the nation coupled with S&P downgrading its government debt (from B to B-) and the cancellation of treasury sales. The market
95.5
360
Correlation (1 mth) 0.937963 94
66 65.5
93.5
65
93
64.5
92.5 19−Oct
06−Nov
24−Nov
12−Dec
31−Dec
92
355 850 Egypt Islamic Index
94.5
Conventional Index
95
66.5 Islamic Index
MENA
900
350 345
800
340 335
750
700 01−Oct
330
Correlation (1 mth) 0.209324 325
19−Oct
06−Nov
24−Nov
12−Dec
31−Dec
320
MENA Aggregate Index
67
Page 6
Monitor, Reuters
96
67.5
64 01−Oct
with transactions valued at $10.1 bn. Source: Financial Times, Banque Audi, Turkey News
GCC
68
the MENA region, the Turkish market led that race
1.16 x 10
Far East
4
400
1.15
to the news in the US as to averting the threatened
395
1.14
390
1.13
385
1.12
380
1.11
375
fiscal cliff. Malaysia, the second largest market for IPOs in 2012, rose by 5.4 per cent in December. An inflation rate at its lowest in more than two years meant the central bank left interest rates unchanged. Rising demand for electronics and other goods from China and US helped pushed up the Taiwanese index by 2.1 per cent, and its
Malaysia Islamic Index
Most Asian stocks rose on the month, responding
1.1 1.09 1.08 01−Oct
purchasing managers’ index (PMI) at 50.6 indi-
370
Correlation (1 mth) 0.616932 365
19−Oct
06−Nov
24−Nov
12−Dec
31−Dec
Aggregate Far East
Far East
360
cated modest expansion in the economy. Indonesia enjoyed its seventh straight month with its PMI in positive territory; the index rose by 1.0 per cent.
1500
Higher demand from Asian, European and African
World Conventional Benchmarks
690
markets is thought likely to promote business activ-
680 1450
December. India’s index roughly tracked sideways on the month.
S&P 500
South Korea, whose index rose by 5.4 per cent in
Source: Financial Times, Bloomberg
670 660
1400
650 Correlation (1 mth) 0.486405
Rest of the World 1350 01−Oct
Markets across the globe ended 2012 on a high as ideas of overcoming the barrier of the US fiscal
19−Oct
06−Nov
24−Nov
12−Dec
31−Dec
Euronext 100
ity in the coming months. Pick-up is evident too in
640 630
cliff obstacle emerged, with a background sense also tensions easing over the Eurozone and signs
2350
of improvement in the US and Chinese economies.
World Islamic Benchmarks
1750
improvement in trade, industrial production and
2300
1700
2250
Correlation (1 mth) 0.990118 1650
2200
1600
in late 2012 as the government increased investments in infrastructure, while demand from the US and EU economies weakened. As price and production data fuelled speculation of further stimulus, the Japanese index rose even more sharply, by 6.4 per cent, heralding a policy-induced surge with the change of administration. The incoming gov-
DJ Islamic Index
retail sales. Momentum in the economy picked up
2150 01−Oct
19−Oct
06−Nov
24−Nov
12−Dec
31−Dec
FTSE Shariah World Index
China’s index rose by 4.4 per cent, with signs of
1550
ernment appears determined to spark growth by way of unprecedented monetary stimulus. Exports rose after the weakening of the yen in December. Source: Financial Times, Bloomberg
Page 7
Islamic Stock Markets 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 December 2012 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 31/12/2012. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Conventional Stock Markets
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 December 2012 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 31/12/2012. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Page 8
Commodities Crude Oil
115
With the revolution in the shale industry, and supply bot-
110
come now distorted. Analysing the prices of WTI, Brent
105
cember, although up over the course of the year. Inves-
100 95
tors were concerned about US lawmakers not reaching
90
a budget deal by year-end, besides general economic
85
slowdown. Additionally, there was a drop in winter
80 01−Oct
crude oil demand. Nonetheless, analysts expected the price of crude to persist in triple digits in the new year in OPEC countries would trim their supply.
3.7
Source: Financial Times, OPEC
3.6 USD/MMBTU
spite of rise in US production, as Saudi Arabia and other
3.8
Natural Gas Henry Hub fell by 1.6 per cent in December – mainly in the second half of the month -- owing to above-usual
Brent Oil Dubai Oil WTI Oil
19−Oct
12−Dec
31−Dec
Natural Gas
3.5 3.4 3.3 3.2
translating into lower requirements for heating. While
3.1
demand remained flat, supply had risen slightly, mov-
3 01−Oct
19−Oct
06−Nov
rising stocks. The warm December was reflected in the
24−Nov
12−Dec
31−Dec
Gold
1800
withdrawal of natural gas storage as well.
24−Nov
Natural Gas
temperatures in the US, especially in the north-east,
ing up by about 0.6 per cent, against a background of
06−Nov
2400
Source: US EIA, OPEC
Despite fears for the US economy and the dollar, which have led to strong gains in gold in the past, the metal’s price fell by 3.3 per cent last month. Hedge funds were reported as cutting their long positions. In 2012 as a
1750 USD/Troy Ounce
Gold
2350 2300 1700
2250 2200
1650 2150
whole gold showed one of the smallest annual percentage rises in prices in recent years. A decline in demand in India (owing to a weak rupee) and China, the world’s
1600 01−Oct
Precious Metals Index
19−Oct
06−Nov
24−Nov
12−Dec
31−Dec
Precious Metals Index
par instead with Brent, which fell by 1.7 per cent in De-
USD/barrel
tlenecks, the US’s WTI benchmark for oil prices has beand other indices, OPEC series seem to be roughly at
Crude Oil
120
2100
biggest buyers, has been a major factor. In mid-month gold reacted to the lowest consumer prices in the US in
price), while others have linked gold prices to nominal
six months. Gold’s movements have intrigued observers,
yields, the two moving in opposite directions. Opin-
particularly considering the serious concern over the so-
ions are now split for gold prices in 2013.
called fiscal cliff. Krugman has cited the hoteling pricing theory (where gold is seen as an exhaustible resource and the rate at which it is used up determines its real
Source: Financial Times, The New York Times, OPEC, Markaz
Page 9
Copper Copper
8400
3600
pending for the looming US fiscal cliff, but fell back when the talks appeared to sour. Prices declined by 0.9 per
3550
8200
3500
ing data added in this respect to the fear of increasing global stock of the metal. Housing data are an indicator of future demand, as copper is primarily turned into elec-
3450
8000
3400 7800
3350 3300
7600
tric wire and plumbing material. Swelling inventories in
3250
China, the sector’s largest consumer, implied slower de-
7400 01−Oct
mand. However, an increase in US GDP numbers limited
Metals Aggregate Index
19−Oct
06−Nov
the negative trend, and strong manufacturing data from China gave a lift late in the month.
12−Dec
31−Dec
Sugar
22
Source: Wall Street Journal, Reuters, Bloomberg, OPEC
24−Nov
Agriculture Aggregate Index
21.5
Sugar
3200
630 620
Sugar outperformed other commodities as it rose by 1.2 per cent in December. This increase was due to funds selling their short positions in the market for profit, also to the speculation of fiscal cliff negotiations reaching a positive outcome, which would be a supportive fac-
USD cents/lb
21 610
20.5 20
600
19.5
590
19 580
18.5
tor for global growth and all commodities. Over the
18 01−Oct
year, however, the price of sugar was about 18 per cent
19−Oct
lower, and high Brazilian output has been identified as imposing continuing downward pressure.
06−Nov
24−Nov
12−Dec
31−Dec
Palm & Soybean Oil
900
570
Agriculture Aggregate Index
sentiment provided a weak backdrop. Weak US hous-
USD/MT
cent over the month. At the same time global economic
Metals Aggregate Index
Copper gained slightly as it seemed a solution was
15.5
Source: Reuters, ITAU BBA, Bloomberg, OPEC
ber, by 6.8% and 0.9% respectively. In fact the recent drop in palm oil prices can be partly attributed to the exceptional soybean harvest earlier this month, as well
850 14.5 800 14
as a rising yield of palm oil itself. A very good harvest led to the drop in soybean prices, but higher demand
750 01−Oct
Soybean Oil
19−Oct
06−Nov
24−Nov
12−Dec
31−Dec
13.5
from China provided offsetting support. Source: Financial Times, US EIA, ITAU BBA.
Page 10
Evolution of highly traded commodities in December 2012. MTM Change and Percentage Volatilities. US $ and US c indicate United States Dollar and United States cent repsectively. bbl = billion barrels, MMBTU = Million British Thermal Unists, MT = Metric Tonne, LB = Pound and Bsh=Bushel. Prices represent the price of the respective commodity at 31/12/2012. Source: Datastream
Soybean Oil (USD/Bsh)
Palm and soybean oil prices continued to fall in Octo-
15 Palm Oil (USD/MT)
Palm and Soybean Oils
Bonds and CDS markets GCC bond markets continued higher in December,
names of longer maturity, such as Abu Dhabi-based energy firm Taqa, which have dominated liquidity. As a rough proxy for the Gulf, Bahraini sovereign
Yield to Maturity (%)
have shown persistent interest in investment-grade
136 135
4.6
with spreads tightening, showing resilience as global benchmarks began to struggle. Offshore investors
Bahrain Bond Yields & Prices
4.8
bond yields dropped on the month, stabilizing at
134 133
4.4
132 4.2
131
Bond Index
GCC
130
4
129 3.8 01−Oct
19−Oct
06−Nov
24−Nov
12−Dec
128
31−Dec
around 3.9%. Sentiment was ‘wait-and-see’ in light particularly of developments in the US surrounding
6.4
the fiscal cliff issue. Recession in the US, however,
MENA
6 5.9
230
5.8 5.7 5.6 01−Oct
Egyptian sovereign bond yields surged, stabilizing
235
6.1
Bond Index
Source: GIC, Invest AD
6.2 Yield to Maturity (%)
upon financial support for the weaker members.
240
6.3
appears to have receded, while the EU’s difficulties have brought less drama for the moment, with focus
Egypt Bond Yields & Prices
19−Oct
06−Nov
24−Nov
12−Dec
31−Dec
225
at around 6.3% at the end of December. A Treasury sale was cancelled late in the month following S&P’s
1.9
downgrade. Market sentiment generally has been
to enforce restrictions on the availability of hardcurrency like US dollars. Moreover, doubts as to whether an IMF deal will be reached before the April elections muddies the waters. By contrast, analysts
276 1.8
275.5 275
Bond Index
pound to all-time lows, and forcing the central bank
1.85 Yield to Maturity (%)
side FX reserves have been depleted, pushing the
277 276.5
affected by two factors recently on different paths; the foreign exchange and the bond markets. On one
Malaysia Bond Yields & Prices
1.75 274.5 1.7 01−Oct
19−Oct
06−Nov
24−Nov
12−Dec
274 31−Dec
believe the country will still honour its obligations both locally and internationally. Source: Reuters, Bloomberg Far East Malaysian sovereign bonds in December closed at roughly the same level as in November, with quiet conditions around the festive break and doubts on direction with reference to the US fiscal cliff, which dominated headlines. Yields fell initially to 1.71%, before rising up to 1.8% and closing eventually at
1.76%. Signs of economic growth pick-up provided backing, with an unexpected increase in the country’s industrial production by 7.5% year-on-year. Malaysia’s potential has been reflected in a study by PWC identifying countries that could be seen as the ‘new BRICS’. Bond issuances in the year remained at a high level, and re-affirmation of the credit rating on Islamic bonds also kept yields down. Source: Borneo Post
Page 11
Rest of the World US sovereign bond yields surged compared to
1.9
November, though stabilizing at around 1.75% at
position is in favour of deep cuts, arguing that an increase in the debt ceiling will prevent a necessary budget discipline being applied. Democrats
1.75
157
1.7 156
1.65 1.6
Bond Index
ing needs appear to have surpassed that. The op-
Yield to Maturity (%)
that US can raise is limited to $16.4tn while spend-
158
1.8
political tension over the US finances between the the debt ceiling still in place, the amount of debt
159
1.85
the end of December, primarily reflective of the government and Republicans in Congress. With
US Bond Yields & Prices
155
1.55 1.5 01−Oct
19−Oct
06−Nov
24−Nov
12−Dec
31−Dec
154
need to find alternative measures for revenues that would replace automatic spending cuts, but are hesitant to increase taxation for fear of recession caused by falling demand. Instead they push for an increase in the debt ceiling. The deal found by the year-end deadline has afforded only temporary respite for the underlying issue, while the Fed’s extraordinary easing programme and support for the extended bull run in Treasuries seemed to be running out of steam. Source: Financial Times
Credit Default Swap Markets
Sovereign Bond Markets
Evolution of Bond Markets in December 2012 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 31/12/2012.
Page 12
Evolution of CDS Spreads in December 2012 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 31/12/2012. MTM Change refers to the change relative to the previous month.
Islamic Bonds (Sukuk) The HSBC Nasdaq-Dubai USD Sukuk clean price Index (Bloomberg: SKBI) increased marginally on the month from 100.281 to 100.320, yielding 2.81 percent. The index’s spread over LIBOR also tightened fractionally, by 1.45 basis points. Trading in the secondary sukuk markets was in line with the conventional GCC credit markets, which were relatively directionless -- the US fiscal cliff issue dominated the mood and was (temporarily) resolved towards the end of the month, but doubts have arisen over the continuing momentum of the long bull run that has been witnessed. Otherwise, liquidity in regional sukuk dried up owing to the holiday season, as 2012 drew to a close. Bid-offer spreads widened accordingly upon this lack of supply.
first ever by a German corporate. According to IFIS database, December also marked a
Demand was evident, however, for long-dated, high-
healthy end to the year in terms of the issuance of sukuk,
er-yielding paper from Dubai, where the environment
with around $7.5 billion of deals completed last month.
is seen as having markedly improved.
Global issuance in 2012 surged by 55% on the year,
There were other notable market developments in
reaching around $144 billion, from $93 billion in 2011.
December.
It was reported that in Malaysia – which has the domi-
In Egypt draft legislation to regulate sukuk was final-
nant share in sukuk globally – while the fixed-income
ized. The proposed law, developed by the Egyptian
market continues to register double-digit growth in
Financial Supervisory Authority (EFSA), includes thirty
both conventional and Islamic spheres, by year-end
articles setting a legal framework for the issuance and
2012 sukuk in fact are rapidly approaching the size
transaction of sukuk.
of the conventional market, and may overtake in the
Dana Gas, the Sharjah-based company, having
coming year.
defaulted on notes in early November, completed a
Sources: GIC, Invest AD, IFIS, Khaleej Times, Star Online
$920m sukuk restructuring with creditors. The company will pay $70 million in cash and issue two new $425m five-year sukuk (one ordinary and one convertible) paying 9% and 7% respectively. December also marked an important repayment by Nakheel, the Dubai-based real estate developer which was on the verge of defaulting on its sukuk before Abu Dhabi intervened and helped the company restructure its debts. A payment of $57 million was made to sukuk holders last month, thus decreasing its debt by a total of $2.6 billion since November 2009. Meanwhile, a $55 million Sukuk Ijarah by FWU Group, a Munich-based financial services company,
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.
is the largest Islamic bond sale out of Europe, and the
Page 13
Accountancy Issues Rules and Regulations Liquidity management issue in Oman Oman’s central bank is currently reviewing the possible issuance of sukuk and other instruments, which the country’s new Islamic banking system could use to manage liquidity. Oman announced during 2012 that it would introduce Islamic finance, becoming the last country in the six-nation Gulf Cooperation Council (GCC) to do so. The sector’s expansion is expected to
try, currently valued at $1.3 trillion globally, with Malaysia’s share measured at $144bn. Malaysia’s Islamic banks are looking to compete with conventional lenders in targeting a wider niche of investors and depositors. However, the framework is said still to need adjustment for greater clarity, remaining subject to further discussions and draft guidance prior to adoption. The aim is to streamline requirements which currently may be hindering economic
emerge during 2013 in the shape of two fully-
growth.
fledged Islamic banks and the Islamic windows of
Source: Reuters, December 19th
six conventional banks. The rules for Islamic banking that the central bank
Egypt to issue Islamic banking guidelines during Q1
published last December, however, tightly restrict
Egypt’s central bank has announced draft guide-
the use of tawarruq (securitization), a controver-
lines for Islamic banking and the launch of sukuk.
sial form of Islamic transaction. Some bankers
The main purpose of the prospective measures is
have complained that restricting tawarruq will
to underpin public projects, in particular guarantee
make liquidity management harder and expen-
sufficient funding for some infrastructure develop-
sive, slowing the growth of the industry.
mental projects. The circulated drafts are still being
GOLCER finds that a key issue for the bankers in Oman and many of the GCC countries is how they can manage their funds in the fledgling Islamic money market. This issue results from the lack of a standardized regulatory framework. While some of the GCC’s banks comply with international accounting standards, banks in Bahrain and Qatar separately apply the rules stipulated by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Bahrain-based. Source: Zawya, December 23rd
Malaysia finalizing Islamic finance legal framework Malaysia is in the final stages of introducing new legislation for Islamic banking and takaful products. This framework is likely to give a stronger legal basis to contracts devised by financial institutions, and will help the central bank better regulate and supervise the Islamic finance indus-
Page 14
introduced to practitioners and professional experts to shade the content for the final draft and obtain central bank approval. Financial institutions need to be informed to prepare themselves for the market roll-out of Islamic sukuk issuance. Source: AMEinfo.com, December 17th
Perspective Saudi budget plans signal familiar cyclical stimulus by Andrew Shouler The process of economic fluctuation among the Gulf countries is perceptibly a well-established derivative of the fiscal multiplier. In this framework the private sector tends to be led by the variations of spending of the public sector, in a way that naturally results from the presence of a massive mineral resource endowment and its secure, rent-gener-
and put pressure on expenditure priorities. Saudi Arabia’s planned expenditure in 2013 is 18.8 per cent higher than the 2012 budget proposal, and has retained its focus on education, health and social services. Yet, to deal with a rapidly rising population and the “thorny issue” of youth unemployment, investment
ating sale around the globe.
spending would have to feature in future commitments.
Recovery is apparent in the region, supported by the
In fact the investment component in the Saudi budget
very low interest rates that have become endemic in this era of boom, bust, global financial crisis, and a US dollar printing bonanza. The scale and strength of this rebound is being tem-
is set to increase, and should, critically, promote the fortunes of both banking and the construction sector, thanks to the government’s allocations to transport and housing projects, Dr Eid explained.
pered by a recuperating banking sector, and subject to
As a continuing effect, the role of private sector in-
the degree of pick-up in international trade, but the im-
volvement should be enhanced rather than displaced
pact of prolonged, triple-digit oil prices is plain enough.
by the states’ stimulus programmes. “There is a
The recent announcement of a record budget in Saudi Arabia is the clearest example of that, and prompts the
golden opportunity to push ahead with diversification efforts,” she ventured.
recurrent issues associated with the Gulf’s governments’
As ever, a key concern might be complacency, as the
finances.
need to pursue self-motivating private-sector impetus
For instance, budget breakevens have reportedly risen since the Arab Spring imposed pressures on social spending in rapid, precautionary reaction. Equally, conservative oil price assumptions might suggest some budgetary leeway, except for the fact that
is supplanted by government largesse, a phenomenon witnessed repeatedly in the past. Dr Eid admitted that currently the private sector still occupies a supporting role in the current phase of economic development.
actual outcomes tend to outstrip the planned expendi-
It remains to be seen whether greater inroads can be
tures.
made into creating a genuinely variegated style of
As chief economist of Arabia Monitor, a London research firm, Dr Florence Eid responded to our queries on the underlying realities of budget pledges in the GCC.
economic strategy, while the richest pickings are still to be had servicing the aspirations and project-oriented planning of the region’s governments.
On financial sustainability, she stated there might be medium- to long-term challenges, rather than short-term constraints, to be faced with such spending patterns, saying that Saudi Arabia at least has a “comfortable situation” with a likely surplus exceeding 10% of GDP this year. It would take several years for energy market developments and lower anticipated production to hit revenues
Page 15
Diary of Events February: 14-15, 2013 Kuala Lumpur, Malaysia ICIBFC 2013: International Conference on Islamic Banking, Finance and Commerce The XXXIV International Conference on Islamic Banking, Finance and Commerce aims to bring together leading academic scientists, researchers and scholars to exchange and share their experiences and research results about all aspects of Islamic Banking, Finance and Commerce, and discuss the practical challenges encountered and the solutions adopted. More Information: http://www.waset.org/conferences/2013/kualalumpur/icibfc/ March: 11-13, 2013 Lahore, Pakistan Global Forum on Islamic Finance (GFIF) 2013: COMSATS Institute of Information Technology Lahore, Pakistan is hosting Global Forum on Islamic Finance with the collaboration of Lancaster University UK to provide an opportunity to share latest developments among scholars from around the globe in the field of Islamic finance. The theme of the Conference is “Islamic Finance: New Realities, New Challenges�. The GFIF will consider the political and socio-economic developments and their likely effects on Islamic financial institutions. Contact: Dr. Yahya Rashid COMSATS Institute of Information Technology, Lahore, Pakistan. islamicfinance@ciitlahore.edu.pk More Information: http://www.inomics.com/economics/conferences/2012/9/6/global-forum-islamicfinance-gfif-2013 March: 17-18, 2013 Muscat, Oman Oman Second Islamic Banking and Finance Conference: Oman Second Islamic Banking & Finance Conference is to take place on the 17th & 18th of March 2013 at the Al Bustan Hotel in Muscat, to shed light on latest developments in the banking industry of the Sultanate and explore outlook and challenges of implementing Islamic banking. Contact: OIBF@iktissad.com More Information: http://www.iktissadevents.com/events/OIBF/2 Training Courses: GOLCER Training Courses in Finance, Management and Statistics: More Information: http://www.lums.lancs.ac.uk/files/coursesnew.pdf
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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 Rhea George r.george@lancaster.ac.uk Marwa El Nahass m.elnahass@lancaster.ac.uk Momna Saeed m.saeed@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.