May 2013
Islamic Finance Bulletin
Gulf One Lancaster Centre For Economic Research
lums.lancs.ac.uk/research/centres/golcer
From the Editor The keynote of market developments in April was the continuing uptrend of stock markets, fuelled in the West by the ongoing commitment of central banks to providing liquidity impetus, a degree of rotation from wavering bond accounts, and the demise of gold as a safe haven. Risk aversion gave way to improving confidence about the US economy especially, and its trade-related and dollar-related associates in Asia and the Gulf region. Doubts remained, however, as to whether the eurozone will eventually escape its structural impasse between creditor and debtor, essentially northern and southern, members, and whether China’s relapse in manufacturing activity can be dismissed as a temporary phenomenon. Japan’s newfound policy dedication to reflation, and aspiration of cyclical reactions in inflation and growth, initiated another phase of stimulus-based sentiment, until uncertainties crept in. Sukuk markets were loaded still to the primary side, with issuances in likely locations continuing to be well received, demand outstripping supply, to the point where secondary trading and prices were disappointing by comparison. As we note in a viewpoint piece, the structural support for Islamic fixedincome nevertheless may have to contend with the benchmark lead given by developed-country sovereign bonds, whose outlook appears potentially brittle. Besides tracking those trends, and regular news items on the Sharia-compliant sector, in this edition we reflect on the range of opinions aired at an Islamic finance conference in Dubai, whether scholarly or market-oriented in origin, as to the probable or preferred future for the industry. We focus also on gold, whose status as both monetary and real asset means it is a special case in asset allocation, but which for a mixture of reasons tumbled in the month.
Contents HIGHLIGHTS (p.3) RECENT DEVELOPMENTS (p.4) VIEWPOINTS (p.6) STOCK MARKETS (p.10) COMMODITIES (p.13) BOND AND CDS MARKETS (p.15) ACCOUNTANCY ISSUES (p.18) PERSPECTIVE (p.19) DIARY OF EVENTS (p.20)
Page 2
Highlights Gold: The yellow metal fell drastically in April, and has struggled to recover since. Its price movements are generally in reaction to a range of fundamental, economic and market factors, but in this instance it probably cracked under the pressure of lacking a running investment yield compared to equities, which have surged this year, as well as prolonged sideways trading. Also, the efforts by Western central banks to spark growth by monetary means have produced lacklustre results, and not prompted much of an apparent inflation threat.
Global supervision: The Islamic Development Bank (IDB) has called for the creation of a global Shariah supervisory board, to bring greater uniformity to the Islamic finance industry. While country-level boards have been installed and initiated in Malaysia, originally, and subsequently among GCC states, Pakistan and Nigeria, the notion remains favoured of a globallyaccepted committee that can require a single set of standards. The dispersion of practices to date has prompted concerns about conflict of interest and confusion among investors.
Asset allocation: While stock markets have surged on waves of liquidity, bonds have shown nervousness, and commodities have suffered against an unconvincing background of global economic recovery. Sukuk trading, meanwhile, has also reflected (regional) liquidity, and yet remains exposed to international, fixed-income benchmarks. With the potential for economic and financial upset still so obvious, investors in these Islamic instruments have to be aware of the global dangers that could damage even diversified portfolios.
Page 3
Recent Developments in the Islamic Finance Industry Global adviser for Islamic finance? The Islamic Development Bank (IDB), a Jeddah-based multilateral institution, is calling for the creation of a global Shariah supervisory board, which would offer greater uniformity for the Islamic finance industry. Islamic scholars are likely to be experts in financial and religious law, but they are not certified or accredited as in other professions. Regulators nowadays are increasingly developing ways to ensure the hiring of experienced and financially-literate scholars. Supervision over Shariah-compliant banking products is
Kuwait investment firm launches Islamic finance fund
gaining acceptance across the globe. Malaysia pioneered
Kuwait-based Asiya Investments, whose largest
the country-level Shariah board. Recently, several
shareholder is the sovereign wealth fund Kuwait
countries have introduced central boards of their own,
Investment Authority, has launched an Islamic trade
including Dubai, Oman, Pakistan and Nigeria.
finance fund worthing $20 million, providing seed
Some countries, like Oman, have imposed term limits on the Shariah scholars who are members of these boards, while also requiring they abide by a code of conduct.
capital for small Asian manufacturers. Asiya’s Cayman fund offers short-term financing through Murabaha contracts, where the fund buys and sells merchandise on behalf of the company and shares a portion of
Still, however, there needs to be further investigations
the profits. Asiya is striving to fill the gap left by
into acceptable references for the industry that would
conventional banks which are severely scaling back
enable the concept of a globally-accepted Shariah
their trade finance business, making credit scarce
committee with the aim of helping all Islamic financial
for small and medium-sized firms. It aims to engage
institutions operating across the world, bringing them in
with those companies that are already banked but
line with a uniform standard to be able to meet or beat
whose credit lines are limited, so as to complement
conventional counterparts.
their financing needs. The retreat of conventional
Source: The Arabian Business News, May 16th
banks follows the impact of the global financial crisis, and the higher capital requirements of the upcoming
It seems to GOLCER that with the wide expansion of the
Basel III regulations. Some 20% of the business could
industry, regulators are seeking to standardise industry
thereby be opened to non-bank institutions.
practices and improve consumer perceptions. That trend
Source: Reuters, May 6th
is justifiable, considering the wide dispersion of practices in Islamic banking and finance worldwide, alongside
GOLCER believes that, though Islamic finance has
its expanded acceptability in many countries after the
been flourishing worldwide, the industry has been
global financial crisis and the perceived weaknesses of
ignoring merchandise trade and allowing dominance
the conventional banking system in intensifying the
over trade finance by conventional banks. It also
credit crunch. Leaving Shariah advisors in individual
seems that Islamic institutions across the Gulf are
Islamic banks and financial firms to decide whether their
working to diversify their money market transactions.
products and activities obeyed religious principles is
Initiatives by firms like Asiya could help in promoting
an approach adopted in many countries that has been
the range of industry practices.
criticised for inviting potential conflicts of interest, and producing conflicting rulings that have confused
UK’s largest Islamic bank targets the Gulf
investors.
The Bank of London and The Middle East (BLME),
Page 4
representing Britain’s largest standalone Islamic
Shariah-compliant insurance platform that uses a
bank, is working hard to attain this year 15% growth
syndication model to help spread risk across a panel
in assets, while seeking the help from its Dubai office
of underwriters. The purpose is to design an Islamic
to boost its capital markets and wealth management
alternative in London for Islamic insurance, allowing
offerings. BLME offers corporate banking and wealth
multiple insurers to pool their capacity. Each insurer
management services. The bank was founded in
can subscribe to the desired level of risk though
2006 with the backing of Kuwaiti investors, including
individual Islamic windows wherein policyholder
Boubyan Bank. It has succeeded to carving out a
funds are segregated from conventional funds,
niche in middle-market transactions, while benefiting
without affecting their rating levels, and helping price
from the reduced activity of large British banking
the risk competitively. Cobalt aims to address capacity
groups. The bank is planning a greater presence in
constraints in the takaful (Islamic insurance) industry,
the emirate’s financial district this year, hoping to
which is based on the concept of mutuality.
attract regional business from the biggest resource-
Source: Reuters, May 16th
rich countries such as Qatar and Saudi Arabia. Source: The Arabian Business News, May 17th
Qatar attempting to help Islamic Bank of Britain Islamic Bank of Britain (IBB), which narrowed its losses in 2012, is expected to fund an asset growth and transformation programme following the raising of £10m ($15.5m) from majority shareholder Qatar International Islamic Bank (QIIB). QIIB, which now owns 91% of IBB, has been in discussions since June last year to sell a controlling stake in the British bank. IBB has struggled to turn a profit since its inception in 2004, posting a loss of £6.99 million pounds in 2012 versus a loss of 9 million pounds in 2011. The gap was narrowed by nearly doubling the home financing business to £117m pounds in 2012 from £61m a year earlier. Source: The Arabian Business News, April 30th
GOLCER sees this initiative as a novel method that could boost capacity in the Islamic finance industry in the UK, where the industry seems to be struggling to compete with conventional counterparts. Within this format the risk is priced by a lead insurer, and other firms must then subscribe under similar terms, akin to the subscription model used in London’s insurance market. Indian Stock Exchange launches Islamic Index Mumbai’s stock exchange (BSE) has launched an Islamic equity index based on the broad-based S&P BSE 500 index. This offers a new benchmark for Islamic investors in one of the world’s largest stock exchanges. The new index draws on the largest 500 companies in the BSE, out of more than 5,000 listed, while fitting Islamic finance principles such as bans on investing in alcohol, tobacco and gambling-related
GOLCER finds IBB’s reported financial figures during the last year as sending a poor signal for the operation of the Islamic banking industry in one of Europe’s largest countries. However, with the high population of Muslims living in the UK, and the majority seeking Shariah-compliant financing for real estate, instead of conventional mortgages, the bank still has the prospect of competing in that area of business. Launch of Islamic insurance by London firm
businesses. Source: Reuters, May 6th GOLCER recognizes the obvious interest towards India as one of the large stock markets and an economy of such potential. Substantial challenges still await the Islamic finance industry in that country, which is of limited size to date. These are likely to restrain the rapid development of the sector, as well as prevent entrants to the business from making quick profits.
London-based firm Cobalt has developed a
Page 5
Viewpoint Why gold’s image has been tarnished by Andrew Shouler Gold shocked markets with a steep dive last month, when prices plunged to around $1350 an ounce, having begun the year near $1700. A rebound of some ten per cent was subsequently seen, without threatening the $1500 level. Another slip has followed, and the rebuilding of confidence has been a delicate affair. The metal has clearly lost its lustre, at the same time displaying a degree of volatility that itself compromises a key part of its traditional appeal for those seeking safety in turbulent times.
In particular, the finances of Western developed countries became so overstretched, as banking
To discern why, a combination of fundamental,
bailouts swelled accumulated indebtedness, that they
economic, and market or technical influences needs
seemed out of control, and gold represented a safe
to be digested.
haven in the event of a desperate reflation of money in circulation by the authorities.
Firstly, the supply of gold is naturally constrained, whether mined, or released from stocks, or
The various programmes of quantitative easing
replenished by a certain amount of annual recycling.
(QE) by key central banks in the US, UK and now
Meanwhile, demand reflects the cultural devotion of
remarkably Japan have fulfilled part of that
some societies to jewellery, but otherwise responds
expectation.
to price in a fairly conventional way. The modest recovery in prices to around $1400 an ounce has owed substantially to the opportunism of traditional consumers and industrial users, such as from India and China, whose interest is abiding and recurrent, but still price-sensitive. Secondly, gold had been propelled higher following the global financial crisis because of the dangers of economic chaos and/or inflation.
Page 6
Gold
2000
prone to overshooting, the result of speculative
5000
forces and momentum trading. Since gold pays no
vulnerable to sharp swings. Moreover, the breaching of floors and ceilings of various chart levels can trigger even sharper movements up or down. That occurred with the break below the $1520 marker
USD/Troy Ounce
the return on investment, which is enough to make it
4000
1500
income (yield), it relies on capital growth (price) for
3000 1000 2000 500
1000
during April. It seems plausible that gold’s recent plunge, and
0 2002
Precious Metals Index
2004
2006
2008
2009
2010
2011
Precious Metals Index
Thirdly, financial markets are well-known for being
0 2013
struggle to revive, could be attributed to two drivers in particular. yield curve. That could be a relatively unpublicized Because a sideways pattern had been sustained for
but very seriously pertinent aspect of the huge policy
quite a while, market patience wore thin in waiting
experiment that is being so forcefully conducted.
for gold’s climb back towards its peak of September 2011, beyond $1900 an ounce. A relative collapse
It seems reasonable to suppose that gold succumbed
in price was an accident to some extent waiting to
to these market and economic factors especially.
happen.
Without a change in international policies, it may take some time to regain its sparkle.
Also, while governments are indeed trying to reflate their way out of trouble, they have made relatively little headway. So insipid has been the response of real growth, particularly in Europe, that inflation has not resurfaced as vigorously as feared. Growth is difficult to revive promptly when the underlying failings are on the supply side of the economy, requiring structural reforms, yet demandside management is the main chosen remedy. QE’s deliberate suppression of both short and long interest rates has had much more of a monetary than real effect. It may even have damaged credit creation and the profitability of the banks by flattening the
Page 7
Viewpoint A doubtful crossroads for asset classes, including sukuk by Andrew Shouler Equities have outperformed in recent market trends. Bonds have trodden water, having approached what many consider to be the limit of their inherent potential; commodities such as copper have reflected the sluggishness of the world economy in its recovery phase, overhung by sovereign debt burdens; gold has slumped, having run out of reasons to be held in the absence of running yield or inflation (see adjoining article). For investors in sukuk, there is an obvious downside to beware, in relation to the vulnerability of benchmark US Treasuries, especially as the American economy seems on the rebound and the Federal Reserve is publicly contemplating tapering its (QE) programme of asset purchases. The pool of regional liquidity that upholds the Islamic fixed-income paper, in the Gulf especially, is an offsetting comfort of sorts. Ricky Husaini, chief investment office at Trading Portfolio, told an Islamic finance conference in Dubai earlier this month that it was only a matter of time before sukuk portfolios would be unwound. In this regard, a detailed examination of the correlation factors behind the surge in these instruments had shown that sheer liquidity was by far the most important, so in that sense there was ongoing support. Indeed, US interest rates were only 0.25 per cent inversely correlated with sukuk prices. Still, the international background would not be so benignly irrelevant in future, he implied. At some point, yields and credit spreads would rise, and sukuk would not avoid the fallout. While economic
Page 8
recovery had been slow to this point, a pick-up in growth and inflation would eventually be achieved, even though the perversity of QE – namely that suppression of rates across the yield curve means that banks return deposits to the central bank rather than boost their lending – had dragged on that prospect.
In fact, so overextended is the Fed’s exposure to the US Treasury market, including the extension of maturities, that a small hike in rates would lead to an eightfold decline in portfolio value, something that should concentrate the minds of bond investors, budget watchers and taxpayers alike. With a huge debt overload to be worked out, the US is nowhere near out of the woods financially, with implications for all asset classes and any investor exposed to the US dollar or related currencies, such as occupy key investment pockets across Asia and the Gulf. So scrutiny has to be all the more careful now,
something is badly wrong, and Japan is the example that
it seems. “Global credit markets are nervously
the other leading countries seem destined to follow.
watching the gyrations in US Treasury markets,” said Standard Chartered Bank in recent research. “With
When policymakers don’t appear to know what they are
spreads across credit markets having tightened
doing, putting the growth horse behind the inflation
over the past couple of years, the cushion is very
cart, investors have to be especially on their guard to
thin.” That said, it believes a sweet spot for the bond
get smartly off the merry-go-round at the right moment.
market may persist a while.
For frontier and emerging markets, the fact there are localized factors which may cushion the shock doesn’t
As for stock markets, also evidently riding a wave
mean it’s an experience worth sharing.
of official liquidity stimulus, the hope must be that underlying economic conditions are genuinely improving, whereas the fear would be that the bubble which burst so dramatically several years ago is now being pieced painstakingly together again, potentially only to explode into another, maybe even greater, crisis. The grim, recently adopted determination of the Japanese authorities to provoke inflation in an effort to promote growth -- in the face of a potential debt morasse, deteriorating demographics and a zombified economic system -- belongs to the same mode of thinking that is afflicting central banks and governments in the Western world. Both the Nikkei and the JGB markets have already sensed that
Page 9
Stock Markets GCC Though dipping sharply in mid-month on an aggregate basis, equities overall in the Gulf reasserted their upward bias in April. The move was led by the UAE, and qualified by a lagging performance by the Saudi bourse. Dubai’s DFM index surged by 16.7% on the month, driven by a banking sector which soared by 27% as first-quarter earnings impressed, far exceeding
fortunes, upon the persistence of both political
expectations. According to GIC, the market
and economic concerns, and the feeling that
seemed to be re-rating an industry that had
the government, inexperienced and under
previously been disfavoured, priced at a steep
pressure, does not have stock market sentiment
discount compared to fair-value estimates. Abu
as a priority. Turnover remained slack, with
Dhabi’s ADSM index rose by 8.2%, with banks
both new issuance and foreign investors in
and telecoms again at the forefront. Emirates
abeyance. Reuters reported positive signs,
NBD reported that UAE bank profit margins and
however, as the stock exchange took technical
returns on equity continued to improve. The
steps seeking to restore volumes, and a
Saudi Tadawul, meanwhile, barely moved, with a
parliamentary committee decided to reverse
mixture of performers against a backdrop of some
a tax charge on a controversial takeover
disappointment over oil prices.
deal. Uncertainty nevertheless seemed set to prevail, including over the proposed merger of
MENA
investment firm EFG-Hermes with QInvest of
Non-GCC stocks lacked impetus in April, reflecting
but a cabinet reshuffle made it plain that this
Qatar. The IMF’s critical loan remained pending,
a mixed tone internationally, as epitomized
target was firmly in sight.
by Turkey’s index retreating slightly, despite a background of continually declining interest rates. Egypt’s bourse, due in fact to merge with
MENA
900
360 355
880
GCC
102 101.5
70.5
101
100 99.5
69.5
99 98.5 Correlation (1 mth) 0.981924
69
98 97.5
68.5 01−Feb
Page 10
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
97
Conventional Index
Islamic Index
100.5 70
350
860 Egypt Islamic Index
71
Correlation (1 mth) 0.371888
840
345 340 335
820
330 325
800
320
780 760 01−Feb
315 19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
310
MENA Aggregate Index
Istanbul’s later this year, continued with mixed
Far East in April, typically recording gains of 2-5%, to
1.17
an extent tracking world benchmarks. Markets
1.16
were lifted by expectations that the US Federal
1.15
Reserve and European Central Bank would retain their determined, accommodative monetary stances, as well as by strong quarterly earnings releases regionally that prompted uptake of blue chips. Malaysia, benefiting noticeably from
Far East
4
410 405 Correlation (1 mth) 0.130731
1.14
390
1.12 1.11
385
1.1
1.08 01−Feb
high levels. Thailand, with key energy stocks
395
1.13
380
1.09
foreign inflows, and Indonesia reached record
400 Aggregate Far East
1.18 x 10
Malaysia Islamic Index
South-East Asian stocks were essentially upbeat
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
375
boosted by oil prices, and Taiwan jumped by over 5%; Singapore’s bourse rose to a 5-year high.
World Conventional Benchmarks
1600
Across the board, however, a measure of concern
730 725
1580
from China, and consequently the durability of
720 715
1560
global growth signs. S&P 500
710 1540
705 700
1520
Rest of the World
695 Correlation (1 mth) 0.591338
1500
Among key equity benchmarks, Japan’s ascendant indices stood out last month, driven by the new
1480 01−Feb
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
Euronext 100
prevailed over growth-related statistics emerging
690 685 680
government’s overriding concern to provoke inflation and growth, and its effective diktat to the World Islamic Benchmarks
2460
wave of monetary liquidity to boost consumption and asset markets. Investors in developed
Correlation (1 mth) 0.996657
2440
rates and tempered inflation, complemented by corporate earnings beating estimates and jobs data outstripping forecasts. Europe, however, remained a mixed influence, as weak manufacturing and business confidence figures, even in Germany, provoked an ECB rate cut.
1790
2420 DJ Islamic Index
recovery in the US, accompanied by low interest
1810 1800
and dependent emerging markets continued to be encouraged by the apparent economic
1820
1780 2400
1770 1760
2380
1750 1740
2360
1730 2340 01−Feb
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
FTSE Shariah World Index
central bank to that effect, aiming to create a tidal
1720
Policy easing was seen also in countries ranging from Australia to Vietnam. Sources: GIC, Emirates NBD, Reuters
Page 11
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 April 2013 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 30/4/2013. 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 April 2013 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 30/4/2013. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Page 12
Commodities Oil
120
Oil prices dipped quite sharply in mid-month, but
115
recovered as trading positions rebalanced. Notably,
110
Brent troughed below $100, as demand from European in gold prices. Opec, the IEA and US EIA all reduced their forecasts for demand this year, referring to global
105 USD/barrel
refiners declined, also in sympathy with the plunge
Crude Oil
100 95
economic weakness. Both US and Chinese requirements
90
have slipped. Meanwhile, supply is comparatively firm.
85
The shale revolution in the US has seen crude exports rise
80 01−Feb
to their fastest for over a decade, and Iraq and Libya are producing solidly again. High trading volumes reflected
Brent Oil Dubai Oil WTI Oil
19−Feb
27−Mar
14−Apr
30−Apr
Natural Gas
4.5
the unwinding of speculative positions earlier in the year,
09−Mar
Natural Gas
with some sign of momentum. A quieter geopolitical USD/MMBTU
environment has also tempered price expectations. The WTI-Brent spread narrowed to around $10, as traders bet on its volatility, rather than for any significant change in the transport bottlenecks in the US that have driven the discrepancy.
4
3.5
Natural Gas 3 01−Feb
The Henry Hub (HH) natural gas price index once again
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
gained substantially during April, contrasting with the downforce upon other major commodities. It hit a localized peak of $4.43/mmbtu in the middle of the
injections. Buyers appeared again as prices breached technical levels. However, late in the month profit-taking kicked in, the market recognizing that climbing gas output will actually keep supplies comfortable. Sellers also saw further chart points failing to be breached.
1550
2000
1500 1900
1450 1400
1800
1350 1300 01−Feb
Precious Metals Index
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
1700
Moreover, utilities were likely to be driven to use coal
to quash the metal’s key attractions, and the onset
rather than gas at such price levels.
of volatility itself created harm. A slip below $1520
Gold
Precious Metals Index
the result of an unexpectedly cool spring, limiting storage
2100
1600 USD/Troy Ounce
stocks data. Inventories were already below normal as
2200
1650
month upon cold Midwest and Texas US weather forecasts promising elevated heating demand, as well as sliding
Gold
1700
broke an important technical level, leading to bearish momentum. Investors had showed signs of growing
Gold took a conspicuous dive in April, prompting much
tired of waiting for the recovery of higher levels
soul-searching among investors and commentators, and
previously seen, losing out compared to the income-
doubt about future direction. The apparent muddling
yielding returns of equities in the year to date, as well
through of the US economy, without inflationary impetus,
as their capital growth. Reactive buying from industrial
and declining sense of crisis in the eurozone, combined
users and Chinese and Indian consumers brought a
Page 13
turnaround late in the month, but gold’s spell seemed to have
Copper
8500
been broken.
3800
Copper/Base Metals
investments are realized. Chile’s output has been boosted by the expansion of Escondida, the world’s largest copper mine.
3600 3500
7500
3400 3300
7000
Traders were concerned that producer profitability at current
3200 3100
prices meant that the downtrend could easily be sustained.
6500 01−Feb
Stocks of the metal at LME warehouses have almost tripled
Base Metals Aggregate Index
19−Feb
09−Mar
since last autumn. The sluggishness of manufacturing activity
14−Apr
30−Apr
Sugar
19.5
in China, and its knock-on to global trade, added to the
27−Mar
Agriculture Aggregate Index
concern, although later in the month a hint of optimism from Chinese consumers came through to moderate sentiment.
A likely bumper cane crop depressed sugar prices, overriding harvest delays owing to heavy rains. Record output from the
660 650
19 USD cents/lb
Sugar/Agriculturals
3000
640 18.5 630 18
dominant centre-south region of Brazil is due, and speculators
620
drove prices down through technical supports. A huge delivery against the US May futures contract compounded the
17.5 01−Feb
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
610
Agriculture Aggregate Index
rising at its quickest rate in a decade, as past mining
USD/MT
Copper hit an 18-month low during April, with production
8000
Base Metals Aggregate Index
3700
trend by adding to the global surplus, despite strong demand checked by mills switching to making ethanol, the biofuel alternative to uptrending gasoline prices. With cane planting
Edible Oils Palm oil dropped again in April, with concern prevailing over the health of China’s economy, and supply continuing to outpace demand. However, inventories in Malaysia, the
Palm Oil (USD/MT)
Brazilian energy policy, specialists advised.
15 14.8
840
creating a multi-year effect, however, the key props for sugar would still appear mainly to be a weather event or change in
Palm & Soybean Oil
860
14.6
820
14.4 800
14.2
780 760 01−Feb
14 Soybean Oil
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
Soybean Oil (USD/Bsh)
from Asia and the Middle East. The price tumble might be
13.8
world’s second-largest producer, declined as exports held above production, generating some hope of price rebound.
that Indonesia, the world’s largest producer, cut export
Bargain-hunting emerged late in the month, alongside a
taxes, liable to limit Malaysian shipments.
rally in soybeans as demand for US product grew as Brazilian
Sources: Financial Times, Wall Street Journal, OPEC, Bloomberg, Daily Telegraph
exports slowed. However, prices were checked by the news
Page 14
Evolution of highly traded commodities in March 2013. 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 29/3/2013. Source: Datastream
Bonds and CDS markets Bahrain Bond Yields & Prices
3.8
141
Gulf bonds progressed even higher in April in line
the month, CDS spreads tightened the most in the emirate. Regional credit markets overall headed sideways for much of the month, focusing on new
139.5
3.6
139 3.5
138.5 138
3.4
137.5 3.3 01−Feb
issuances and concentrated at the longer end of the curve, particularly in investment-grade, although additional investments veered towards the shorter
9
end to contain any duration risk. Regional liquidity
Late in the month, however, the ongoing support from the US and European central banks appeared to be reaffirmed, giving another shot in the arm to global fixed-income, GCC instruments included.
Yield to Maturity (%)
of the US Fed’s easing and asset purchase strategy.
In contrast with GCC bonds, others in the Mena space
Egyptian pound, and diminished official reserves, were alleviated, while agreement with the IMF remains an
Yield to Maturity (%)
last year. Concerns for further devaluation of the
30−Apr
137
Egypt Bond Yields & Prices
230 225 220 215
7.5
205 200
7
195 19−Feb
09−Mar
27−Mar
14−Apr
190
30−Apr
Malaysia Bond Yields & Prices
278.5
1.8
sector activity continued to reflect continued political
bonds, following the precedent of the $5bn committed
14−Apr
278
turbulence of Egypt, where unpromising private
another $3bn in purchasing the country’s sovereign
27−Mar
210
1.85
fared less well during the month, dominated by the
a degree of stability was brought by Qatar’s pledge of
09−Mar
8
6.5 01−Feb
Egypt / MENA
dissensions and economic uncertainty. Nevertheless,
19−Feb
8.5
provided much bolster, but uncertainty had increased, with doubts growing about the efficacy and longevity
Bond Index
common with Dubai’s outperformance in stocks on
140
277.5 1.75
277 276.5
Bond Index
pressure on yields, which continued to drop. In
Yield to Maturity (%)
impeding any inflationary threat that might put
140.5
3.7
with a continuing sense of global economic weakness,
Bond Index
GCC
1.7 276 1.65 01−Feb
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
275.5
outstanding and critical component of a concerted recovery in sentiment. Tunisia meanwhile managed to
high-yield benefited in the same way as their US
secure preliminary approval for a $1.75bn facility from
counterparts, as relative risk-aversion in earlier weeks
the Fund. Even so, recourse to bailouts and associated
was reversed. Asian local currency bond markets
terms can hardly given confidence to investors looking
performed well as weak global economic data,
beyond speculative investment to the medium term.
concerns over sharp declines in commodities prices
Malaysia / Far East Yields fell on the month in response to overseas
and aggressively easy monetary policies provided solid backing. Bank of Japan announced a quantitative and qualitative easing programme that surpassed
benchmarks. Moreover, later in the month Asian
Page 15
expectations. News that Japan is investing in ASEAN bonds also gave support to regional markets. Asian currencies generally rose in April, and inflation
Sovereign Bond Markets
data eased, both assisting sentiment. Malaysian government securities advanced steadily, with local accounts relatively undisturbed by election fears, which were reflected instead by an interruption to funds flows from abroad.
Global Benchmarks Key bond markets were well supported in April, giving a firm lead across the fixed-income universe, owing to a succession of relatively poor economic statistics around the developed world, in terms of the rate of activity, with corresponding cuts to the IMF’s respective forecasts. For example, US Q1 growth data came in below expectation, though reasonably positive at 2.5%, while Spanish unemployment data highlighted the grim state of the eurozone. Both US and European headline inflation figures fell. Investors’ increasingly desperate hunt for income led to higher returns among riskier assets, including
Evolution of Bond Markets in April 2013 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 30/4/2013.
floating-rate and high-yield, corporates and
Credit Default Swap Markets
peripheral sovereigns, rather than safe havens. To illustrate the point, Apple successfully issued $17bn of debt, the largest such transaction ever. Sources: GIC, Invest AD, Broker Reports
US Bond Yields & Prices
158 157
Yield to Maturity (%)
2
156 155
1.9
154 1.8
153
Bond Index
2.1
152
1.7
151 1.6 01−Feb
Page 16
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
150
Evolution of CDS Spreads in April 2013 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 30/4/2013. MTM Change refers to the change relative to the previous month.
Islamic Bonds (Sukuk) GCC fixed-income trading was positive with a
Indonesia’s finance ministry raised 1 trillion rupiah
tightening of spreads in April, according to GIC, with the
($102.9m) worth of project-based sukuk, below
conventional space outperforming sukuk (1.51% versus
itsntargeted 1.5 trillion, at 6.8%.
+1.07%). The HSBC Nasdaq-Dubai GCC USD Sukuk/Bond TR Index (GCCB) rose to 160.2 from 158.0, to yielding 3.2%.
Dana Gas received shareholder approval for refinancing of its US$ 1bn trust certificates. New sukuk of US$ 850m (half a convertible tranche, half ordinary, with 5-year maturities
Deal flow was quiet. Among primary issues reported by
and an average profit rate of 8%) were subsequently listed
Reuters, Sharjah Islamic Bank (SIB) sold a $500 million
on the Irish Stock Exchange, following a US$70m cash pay-
five-year sukuk at tighter pricing than initially indicated
down and cancellation of another US$80m.
owing to the strength of bidding from the Gulf Arab region.
Kuwait Finance House (KFH) research showed the volume of sukuk issued in the first quarter of 2013 to have reached
Maturing in 2018, and priced at par with a profit rate
$34.2bn, up 21.5% on the quarter. Sovereign issuances
of 2.95%, the issue’s order book was over $2 billion
continued to dominate. Total issuance is expected to reach
when the official guidance was released. Traders noted,
$275bn by year-end. Global outstanding sukuk reached
however, that the it offered only a fractional premium for
$235.4bn, up 2.6% from $229.3 bn at year-end 2012 and
an extended maturity, that might lead to a weakening
16.7% on the year.
in secondary markets, as had already been seen on a
Sources: GIC, Reuters
3.3
GIC remarked that the deal attracted a wide range of investors across geographies and investor types, as SIB of such a reputable name. A $500 million sukuk from Turkiye Finans was the latest in a series of international debt issues from Turkey. Middle Eastern investors dominated, taking just over half the deal, which was nearly four times oversubscribed. Islamic banks in Turkey have followed the sovereign’s lead, and sales of Turkish sukuk to Gulf investors may increase as Istanbul extends its offerings, currently
Yield to Maturity (%)
correctly positioned the credit, besides the scarcity value
HSBC−NASDAQ Dubai Sukuk Index (SKBI)
100.6
3.2
100.4
3.1
100.2
3
100
2.9 2.8 01−Feb
Clean Price
number of occasions.
99.8
19−Feb
09−Mar
27−Mar
14−Apr
30−Apr
99.6
Source: HSBC Nasdaq Dubai
working on new regulations to allow a range of sukuk structures, designed for project finance and infrastructure development. Riyadh-based Al Bayan Holding became the first Saudi Arabian company to issue an Islamic bond in Malaysian ringgit (200m, $65.4m), as the first tranche of a 1 billion ringgit programme. Companies in the Gulf are targeting Malaysian investors to diversify funding sources and tap Asian demand for Middle East debt. The sukuk was in the form of wakala; certificates issued by an originator
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.
through an SPV that buys assets given to an agent for management.
Page 17
Accountancy Issues, Rules and Regulations Liquidity guidance for Islamic banks due The Kuala Lumpur-based Islamic Financial Services
estate, Islamic equity, agriculture, transport and more
Board (IFSB) is planning to issue strict guidance for
besides. Malaysia has become world-renowned as an
Islamic banks on the adoption of liquidity standards
unprecedented Islamic financial hub. As long ago as
by 2014, having already issued a draft guideline
1999 the Kuala Lumpur Stock Exchange (now known
in March 2012. That advisory warned lenders
as Bursa Malaysia) launched its Shariah Index (SI) to
lacking high-quality assets to meet new regulatory
facilitate participation in equity investments to be
requirements under Basel III, focusing on the liquidity
compatible with the Islamic principles of Shariah. The
coverage ratio provision, designed to help meet short-
Bursa Malaysia SI is a weighted-average index, initially
term obligations. The IFSB sets global guidelines for
made up of 276 main board companies designated as
Islamic finance which are combined with those by
Shariah-approved securities by the Shariah Advisory
national financial regulators. A separate guideline on
Council (SAC) of the Securities Commission of
capital adequacy is currently under revision, hoped to
Malaysia.
be issued at the end of this year. Source: Reuters, May 15th
Source: The Global Islamic Finance Magazine, May 13th
GOLCER finds that the global growth of Islamic capital
GOLCER believes this guidance for Islamic banks needs
market products and services in Malaysia has been
to be finalized as soon as possible, as the industry
tremendous in recent years, with the development of
is urged to develop instruments to meet the Basel
the stock market’s Sharia Index and the offering of a
III criteria, given that guidance has already been
holistic range of innovative Islamic market products,
issued for conventional banks. Liquidity is an area
from equities, derivatives, and commodities to debt
where Islamic banks are seriously challenged, given
securities, across all sectors and industries.
limited access to liquidity tools generally compared to conventional banks, and specifically the lack of liquid
Pakistan sets up Shariah Advisory Board
Shariah-compliant instruments that can meet Basel III’s
Pakistan’s securities commission has established a
stringent requirements. To date, most countries have
nine-member Shariah supervisory board, with the
a shortage of Shariah-compliant financial instruments
aim of overseeing Islamic finance instruments in
that can be classified as “level 1 assets” under Basel
the world’s second-most populous Muslim nation.
criteria. Worse still, sukuk issued in countries with
A country-level approach to supervising Shariah-
a sovereign rating lower than AA- would not meet
compliant products was pioneered by Malaysia, and
the requirements for “level 2 assets”. It is urgent that
recently other economies have introduced central
the industry find a speedy solution, innovating the
Shariah boards of their own, including Dubai, Oman
necessary instruments, which should also take into
and Nigeria. Pakistan’s regulators are rolling out new
account the avoidance of concentration of risk that
rules in an effort to grow Islamic banks’ share of the
would otherwise place pressures on bank margins and
total banking sector to 15% by 2017.
financing rates. Source: Reuters, May 9th
Innovative opportunities in Malaysia Investors worldwide are increasingly attracted to the
The creation of the Shariah supervisory board was
lucrative opportunities that Malaysia exhibits in the
predicted by GOLCER in previous issues of the bulletin
many different sectors of Islamic finance. The country
this year, since an accumulative and centralised
is spurring the sukuk sector forward while achieving
approach for regulating Islamic banks was understood
growth in various other sectors such as takaful, real
to be increasingly needed for adoption worldwide.
Page 18
Perspective Spectrum of views tests Islamic Finance’s way forward by Andrew Shouler At a conference in Dubai on Islamic finance recently, it was clear that the subject can be approached in very different ways, not only in the frequent divergence between some scholars and many bankers, but in the varying assessments among themselves as to the motivating forces by which the industry should grow. Lead speaker Harun Kapetanovic, economic adviser to the Dubai government, effectively made the point in his remark, “Islamic finance has a dilemma. Does it want to converge with international practices, or does it want to integrate with economic development?” He noted that the sector itself wants to converge with
own version of Islamic finance. That diversity was not
certain established norms, “because the demand is
a source of difficulty, though, in his opinion. Indeed,
so strong”, but argued that it needed also to serve a
“that’s part of its beauty”, as to the sector’s possibilities
broader perspective in advancing prosperity, in line
and range. There can be greater harmonization in terms
with Dubai’s own aspirations to become an Islamic
of regulatory requirements and documentation, but not
economic (not merely financial) hub.
global standardization as such, he ventured.
There is a distinction generally between those
Beyond that, representatives from banking, particularly
voices seeking to identify basic principles and settle
those from the conventional sector with Islamic
universally upon them, and those who treat theoretical
windows, made it clear that their main concern was to
purity as implausible in the world as it is today,
meet the expectations of customers and clients.
particularly as Sharia-compliant institutions compete with traditional banks for funds.
One practitioner explained how even those people wishing to retain Sharia-compliance were bringing
Dr Azeemuddin Subhani, head of Islamic finance
requests to achieve high yields from investment-grade
at Ajman University, told the audience his
instruments, using leverage to enhance, for instance,
research found that “Sharia is one and final, but its
the slight yield premium paid on sukuk compared to
interpretation differs from scholar to scholar, region
traditional fixed-income bonds. It can be done, he said,
to region, country to country”, and the chances of
but the gestation of the necessary paperwork can take
standardisation, frankly, were nil. His exposition on
months, and the cost is correspondingly higher.
the meaning of riba, and the prohibition on money begetting money, clearly defaulted to the attempt to find a common scholarly understanding to inform the whole of Islamic finance. Equally clearly, he was not hopeful that the problems of a spectrum of views would be solved.
Thus, assorted pressures impinge on the evolution of Islamic finance, which could be summarised most briefly by highlighting whether the emphasis is on the first or second element of the term. One leans towards a commanding concept, implying uniformity; the other acknowledges flexibility and a marketplace already in
Another speaker, from Malaysia, cited that he had
existence, and takes a practical or pragmatic approach
worked for four different banks, each harbouring its
to that challenge.
Page 19
Diary of Events June: 10-11, 2013 AIx-en-Provence, France Infinity Conference on International Finance The 11th INFINITI Conference on International Finance: “The Financial Crisis, Integration and Contagion”, is organised by SciencesPo Aix, Trinity College Dublin and Euromed Management Marseille, in coordination with the Aix-Marseille School of Economics. Keynote Speakers: René M Stulz, The Ohio State University, USA Geert Bekaert, Columbia University, USA Contact: Linda Soriton: infinityconference@gmail.com More information: http://www.infinityconference.com/ June: 26-28, 2013 Nottingham, UK 5th International IFABS Conference This year, IFABS will be celebrating its 5th Anniversary in Nottingham at the East Midlands Conference Centre. From the 26th -28th June, experts from over 60 countries around the world will come together in this historic city to consider, collaborate and create ideas and solutions for the coming years. More information and a call for papers (deadline is March 15) can be found online. Contact: Ms Sandra Hopkins: IFABS2013@le.ac.uk More Information: http://www.ifabsconference.com/ July: 1-5, 2013 Durham, UK Islamic Finance Summer School The intensive five-day programme, organised annually, will enhance and develop your knowledge and skills to help place you in an advantageous position for entering and working in the Islamic financial sector. More information: if.dtc@durham.ac.uk Register now at: http://www.durham.ac.uk/dcief/ifss Training Courses: GOLCER Training Courses in Finance, Management and Statistics: More Information: http://www.lums.lancs.ac.uk/files/coursesnew.pdf
Page 20
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
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.