Islamic Finance Bulletin May 2013

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.

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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

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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.