UK: The Sukuk market in the UK and Europe is struggling in the aftermath of the Dubai World standoff and a recovery in more traditional forms of financing, said law firm Norton Rose partner Farmida Bi.

The pipeline for Islamic bonds in the UK, the most sophisticated Islamic financial market in Europe, was “not fantastic,” she noted.

This was compounded by the fact that UK and European corporates, which used to be eager in tapping the Islamic markets over concerns that conventional sources were drying up, have seen these concerns being alleviated, she added.

Bi reported that investors had “woken up” to the complexities of Sukuk vehicles. ”It seems that many investors had not understood what they had bought. If you look at any (Sukuk) prospectus, disclosure was very clear.

“There was almost a sort of willful blindness to what they were buying,” she said. Bankers and lawyers are trying to get the market going again by touting the benefits to European companies of issuing Islamic bonds to highlight their commitment to local Muslim markets. That strategic approach has sparked some renewed interest, said Bi, who cited as an example General Electric’s US$500 million Sukuk launched in November 2009 and listed in Dubai and Kuala Lumpur.

New tax rates

MOROCCO: More of the country’s banks are expected to introduce Shariah compliant products and services with a recent tax rate change, which places Islamic banking products on par with those offered by conventional banks.

As of January 2010, the value added tax on alternative banking products like Murabahah and Ijarah was halved to 10%. It was learnt that financing companies will be marketing Shariah compliant products through their subsidies.

Positive on Sukuk

GLOBAL: Standard & Poor’s (S&P) sees good growth prospects for the world’s Sukuk market this year. Its credit analyst Mohamed Damak said: “The 2010 pipeline remains healthy in our view.”

He also pointed out that the main uncertainty this year lies in market conditions, highlighting the default of two Sukuk — those of The Investment Dar and Saad Group — which has raised questions about the relatively young Sukuk market.

Damak however believes that once investors have a clearer view of the possible outcome of the defaults, the Sukuk market is likely to record stronger growth after making some adjustments. The S&P report expects Malaysia to continue to lead the way in global Sukuk issuance and foresees steady growth in the broader market in Southeast Asia over the next couple of years.

However, it felt that prospects remain weak for Dubai-based issuers and possibly other countries in the Middle East because investors are likely to have a low risk appetite and ask for a higher return to reflect the higher risks that they perceive.

Bank of America Merrill Lynch said the issuance volume of Sukuk in the last quarter of 2009 stood at US$9.6 billion, bringing the total issuance last year to US$31 billion, more than double that of the previous year.

Power, oil and gas, and financial services were the three largest sectors to dominate the issuance of Islamic bonds last year.

Murabahah for BBK

KENYA: Barclays Bank of Kenya (BBK) has launched two Murabahah-based products — La Riba Personal Finance and La Riba Vehicle Finance — which provide financing of up to KES1 million (US$13,000).

BBK managing director Adan Mohamed said the demand for Islamic financing facilities has been on the rise in the country, given its large Muslim community.

Billion-dollar bank

SOUTH AFRICA: Investors from Kuwait and other Gulf states plan to set up an Islamic investment bank in South Africa with a capital of US$1 billion, according to the investors’ legal advisor Saad Al Rayyes, which did not confirm the bank’s establishment date.

Al Rayyes said the bank’s capital will be raised through a private placement. It added that the investors are to make an official application to the South African authorities to form the bank.

No legal hurdles

CANADA: Shariah compliant mortgages would not pose any legal hurdles if widely offered in the country, law firm Gowling Lafleur Henderson said in a report. It sees no particular difficulties under Canadian accounting standards, and expects that international harmonization of Islamic financial accounting and reporting will occur in due course. On demand in Canada for Shariah mortgages, the report cited most Canadian firms offering Islamic housing finance stating that demand exceeds supply. Meanwhile, Toronto-based UM Financial estimated that there are about 5,000 Canadian Muslims who are prepared to transfer their current conventional mortgages to Shariah compliant ones once a bank begins to offer the service.

Less risk averse

GLOBAL: Islamic banks are expected to move into riskier, equity-based financing as they seek alternatives to controversial debt practices like the Tawarruq, said Shariah scholar Mohamad Laldin Akram.

He attributed this to the recent changes in the global economy, with the focus reverting to real economic activities instead of some sort of artificial investment.

Shariah banks have been reluctant to adopt equity models like the Mudarabah to avoid taking more risk, given the recent Sukuk defaults and the Dubai debt
crisis.

However, pressure on the industry to reduce its dependence on debt instruments are also on the rise, in order to make Islamic-based products more attractive to investors.

UK Treasury removes hurdle

UK: A new law has come into force that removes one of the final technical obstacles to the issuance of Sukuk. The Financial Services and Markets Act 2000 Order 2010 provides a level playing field for corporate Sukuk as it provides clarity on the regulatory treatment of such Sukuk, reduces the legal costs and removes unnecessary obstacles to their issuance. It was reported that regulating Sukuk as bonds rather than investment vehicles could save issuers about GBP10,000 (US$16,152) yearly.

Another step forward

LUXEMBOURG: In its efforts to become a major European hub for Islamic finance, the country’s tax authority has issued a circular on the treatment of a wide range of Islamic finance products. It outlines the major principles and contracts of Islamic finance and their tax treatment. Undertaking for collective investment under the country’s laws and investing in Islamic assets are excluded from the circular.

It also classifies Sukuk as debt for Luxembourg tax purposes, where yield payments under Sukuk are to be treated as deductible interest expenses at the level of the paying entity. It also confirms that no Luxembourg withholding tax is levied on yield payments.

Hiccups remain

MALTA: The country should be in a position to issue guidelines on Sukuk by the middle of this year. However, legal and technical difficulties remain with regards to the banking system, said finance minister Tonio Fenech.

A consultation document on the introduction of Islamic finance in Malta was issued last year by the Malta Financial Services Authority, which had finalized its studies and would publish its guidelines on securities in the first half of 2010. However, Fenech said, more work would need to be done before progress could be made on Islamic banking.

Sukuk move

IRELAND: The government has proposed several new measures to accommodate Shariah-based transactions, in a move to boost the republic’s Islamic financial services.

They are aimed at wholesale financial markets rather than retail businesses. However, provisions which involve retail financial services could be looked at next year, a government official said, in view of the growing Muslim population in the country. The new finance bill adds new provisions to the Taxes Consolidation Act 1997 that covers specific financial transactions, which will treat returns on Shariah based transactions as interest. The measures cover a range of credit transactions and allow for the creation of investment securities similar to Sukuk.

Islamic banks thrive

TURKEY: UniCredit Group has called Islamic banks (participation banks in Turkey) “the fastest growing segment in Turkish banking.” Between August 2008 and January 2010, the credit volume of these banks grew by 9.7% while that of private banks contracted 1% and that of public banks expanded by 25%.

The share of participation banks in terms of overall credit volume rose to 3.9% from 3.8%. Established in 2005, the Participation Banks Association of Turkey comprises Albaraka Turk, Bank Asya, Turkiye Finans and Kuveyt Turk.

Overnight fund

UK: Cash management firm Prime Rate Capital Management plans to raise a first-of-its kind US$250 million commodity Murabahah-based overnight liquidity fund, which was put off last year as Shariah scholars needed to understand its structure, said CEO Chris Oulton. The fund, to be launched on the 18th March, will give banks, insurers and corporate treasurers the ability to park their cash overnight in a Shariah compliant way, he added. It will be domiciled in Dublin, Ireland, where transactions based on commodities will be made on the clients’ behalf.

Expressing confidence that the fund will see good demand in the Middle East, UK and continental Europe, he stressed that it will help fill the overnight liquidity gap, in addition to facilitating other product developments.

Investment boutique

UK: Former Barclays Wealth investment banker Saftar Sarwar plans to launch a GBP50 million (US$77 million) boutique business specializing in Shariah compliant and general investment products. No specific date has been given for the establishment of the new firm, although it is expected to be operational within the next three years. The company will provide wealth management services as well as specialist advice to the government and corporate sectors. It will initially target private clients with investments of between GBP10 million (US$15 million) and GBP50 million (US$77 million).

Low-hanging fruit

SWITZERLAND: Independent Islamic wealth and asset management consultant John Sandwick has urged Switzerland to consider delving into Islamic banking as it holds the promise of a new source of wealth for the country. Sandwick said: “The low-hanging fruit in Swiss private banking is in Islamic finance. We must start now to ensure global dominance in this fast-growing sector.” The suggestion for Switzerland to venture into Islamic banking comes in the wake of the country being forced to deal with mounting international pressure which has forced it to relax banking secrecy rules in line with the Organization for Economic Cooperation and Development’s standards for tax cooperation, which in turn has affected the traditional markets of wealth managers like UBS.

‘No return to roots’

GLOBAL: The global financial crisis has intensified the push for Islamic finance to “return to its roots” and shun conventional banking. However, some experts warn that this could alienate investors. “The industry’s move back to its roots will lead to a different approach to risk by the investor base.

“This shift in approach will change the landscape of Islamic banking,” said JPMorgan’s Bahrain-based Islamic structuring head Safdar Alam. Many bankers fear radical changes to the industry could make products less appealing to investors who have become reluctant to take on fresh risk and uncertainty in the wake of the financial crisis. Meanwhile, Shariah scholar Mohamad Daud Bakar wants the Islamic banking industry to avoid confining itself to retail financing. He said the aviation, shipping and infrastructure sectors also present potential growth opportunities. Bakar said Islamic finance was set up in the early 70s and 80s to help Muslims to buy houses and cars but it did not grow from there. “We have to move on and embrace new areas of growth,” he said. With this in mind, he called upon Islamic banks to establish subsidiaries to look into potential growth sectors.

Shariah-based swap out soon

GLOBAL: The first Shariah compliant over-the-counter (OTC) derivatives are expected to be launched soon, said Credit Agricole Corporate Investment Banking managing director Simon Eedle. The contract, which will allow for quicker and cheaper Islamic risk management, was to have been launched a year ago. No reason was given for the postponement.

OTC derivatives or swaps are privately negotiated deals between investors and counterparties and are commonly used to hedge against interest rate risk and default risk. The Islamic-based contract will create a standard legal framework for the derivatives in the Islamic market, as opposed to the ad hoc basis for current contracts. The International Islamic Financial Market as well as Credit Agricole CIB have been working with the International Swaps and Derivatives Association on the contract.

Seeing the right picture

UK: Despite the gloom that lies behind the global Sukuk crash as a result of Dubai’s financial crisis, Guernsey-based Birch Assets founder Toby Birch said the situation has opened the eyes of investors and creditors on the Sukuk market which emulated western bonds with guaranteed rates of return.

Holders of Nakheel’s Sukuk may not have the same rights as a western bondholder, Birch said, as there may be no recourse to seize the assets.

Thus, if the cash flow is low and the value collapses, investors can be left with nothing.

Birch explained that according to the concept of Shariah, investors and intermediary banks have a stake in the success of a financial product which would exclude the possibility of a government guarantee.

As such, there would be no guaranteed rate of return for the Sukuk.