Islamic Financing, alternative investment source to Azerbaijani economy

The International Bank of Azerbaijan, the largest lender and the only state-owned bank in the country remains confident to promote Azerbaijan as an Islamic Banking hub in the region.

Behnam Gurbanzade, Director of the Islamic Banking Department of the IBA, spoke quite positive about the prospects of Azerbaijan’s eventful role in the Islamic finance markets.

“Developing Islamic Financing in Azerbaijan gives us an advantage to set up a center for the development of Islamic Financing in the CIS based in Baku,” Gurbanzade wrote in an e-mail to AzerNews.

“Thus, in 2015 we are planning to increase the amount of Islamic financing in Azerbaijan. To this end, an alternative banking division was set up within Bank IBA-Moscow where the Islamic Banking is also part of new duties,” he said.

The IBA concluded last year with $526 million sharia compliant assets compared to the Islamic Banking assets at the level of $220 million at the beginning of 2014.

Islamic finance has not developed well in Azerbaijan, which has a predominantly Muslim population. The IBA assists the government to draft the relevant regulation. It also plans to convert its Islamic unit into major Shariah-compliant lender after the country OKs the Islamic legislation licenses.

The Baku-based bank actively works in this direction, which is encouraging the development of Islamic Finance here. The bank currently offers Shariah-compliant products through an Islamic window introduced in September 2012, a practice which allows conventional lenders to provide Islamic financial services as long as client money is segregated from the rest of the bank.

Gurbanzada said the IBA Islamic Banking department is working on draft legislation together with consultants. “The initial documents including Islamic Financial Policies and Procedures, Operational procedures and Products and Services are under consideration,” he said.

Laws allowing Azerbaijan to OK Islamic bond offerings is expected to be passed in 2015, and the government may issue securities that adhere to Islam’s ban on interest the next year.

Speaking about the role that the Islamic bank could play in driving the banking sector of the country, Gurbanzada said Islamic Financing is considered as alternative investment sources to the economy of Azerbaijan.

“Azerbaijan and CIS markets are growing and there is a huge demand for direct investments. The IBA realizes that sources of funding should be diversified in order to secure economic safety. All this comes against the backdrop of the world financial crisis in which the liquid capital stands as the primary issue,” he noted.

Gurbanzada said the current Islamic Banking portfolio of the IBA is 386 million manats ($493 million) which is approximately 6.2 percent of the total credit portfolio.

The loan portfolio of the Bank hit 5.868 billion manats as of early January with an increase of 16.6 percent since early 2014.

IBA Islamic presented a new Murabaha card which was set up on MasterCard Gold basis. The card is for retail financing in Azerbaijan and outside of the country. “Furthermore we are also strutting Musharakah refinancing products and unrestricted and restricted Mudarabah financing. Most of products and services will be implemented after legislation development,” he concluded.

The bank, 50.2-percent owned by the Azerbaijani Ministry of Finance, holds over 40 percent of banking assets in the country and enjoys huge importance for Azerbaijan's economy. The IBA‘s reported consolidated total assets of 8.8 billion manats, aggregate capital of 1.008 billion manats and net profit of 64.5 million under audited IFRS as at year-end 2014.

(Azernews / 30 January 2014)

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The Globalization of Islamic Finance

Islamic finance remains one of the bright spots in the global financial industry post the 2008 financial crisis. Despite two decades of strong growth, the industry is now finally poised to break into conventional financial markets in the West.

Islamic finance is comprised of instruments, infrastructure, institutions, and markets that apply Sharia rules and principles. You might be wondering how Islamic finance impacts you, if you’re based in a non-Muslim country. Increasingly it’s being viewed as an avenue of growth for global banks, as the industry caters to the world’s 1.6 billion Muslims.

The advent of Islamic finance allowed devout Muslims the ability to access financial products and services without compromising on their beliefs. As a result, total global Islamic banking assets are projected to surpass US$2 trillion in 2014.

The Islamic finance sector is primarily comprised of Islamic Banking, Sukuk (Islamic Bonds), Takaful (Islamic Insurance), and Islamic Mutual Funds. The geographic centers of Islamic finance are primarily in Asia (Malaysia and Indonesia) and the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates).

At its core, Islamic finance is governed by fundamental principles outlined in Sharia law. The main distinction between conventional finance and Islamic finance is that the latter prohibits riba (usury/interest). Thus, virtually all Islamic finance products are based on the principle of risk sharing as opposed to risk transfer.

For example, an Islamic mortgage transaction would entail the bank purchasing a property and then reselling it to the homebuyer at a fixed profit. The buyer would then have the option to make the payments in installments. However, due to the concept of risk sharing, the bank could not charge additional penalties for late payments but would retain ownership until the loan was paid off.

Global Investors and Islamic Finance

For global investors, the sukuk (Islamic bond) market is probably the area of greatest interest within Islamic finance. The sukuk is an asset-backed security, which represents ownership in a tangible asset. With a sukuk the initial face value of the bond isn’t guaranteed. Unlike a conventional bondholder, a sukuk investor shares the risk from the underlying asset.

In practice, some sukuks are issued with repurchase guarantees, which would result in the investor receiving face value at maturity, much like a conventional bondholder. However, not all Sharia scholars agree this structure isSharia compliant.

Traditionally, governments and government-related entities in Asia and the Gulf Cooperation Council (GCC) issuedsukuks denominated in the local currency to domestic investors. However, increased demand from global investors has led to increased cross-border issuance from non-traditional sources.

Last September, rating agency Moody’s observed,

The year 2014 has become a landmark year for sovereign sukuk, with the UK issuing its inaugural sukuk, and with Hong Kong and South Africa expecting to conclude sales in September 2014. All three are major non-Islamic countries, and the transactions indicate a significant change in the potential size, depth, and liquidity of this market.

This move into sukuk finance by countries with populations that are not predominately Muslim marks a shift in the long-held perception that Islamic finance is the domain of Muslim countries.

In an effort to assist countries that seek to issue sukuk, Islamic institutions like the Islamic Corporation for the Development of the Private Sector offer help with the structure of sovereign sukuk finance.

(Casey Research / 28 January 2015)

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Islamic banks eye market share in strife-torn Iraq

Baghdad: For all the sectarian violence gripping Iraq, Sharia-compliant banks operating in the nation see opportunities for growth.

Elaf Islamic Bank, the 14-year-old Baghdad-based lender, is targeting a 28 per cent increase in profit this year, even as rival Cihan Bank said its income dropped last year as rebels seized parts of the country. 

Iraq's cabinet approved a draft law on Tuesday regulating the Sharia-compliant banking industry, which will now move to the country's parliament for passage.

Airlines cancelled flights to Baghdad on Tuesday after a United Arab Emirates passenger jet was shot at, highlighting the growing security threat in a country where IS group has declared a caliphate. Amid the strife, at least eight Sharia-compliant lenders are operating, including Abu Dhabi Islamic Bank, seeking to tap a population of 36 million that has one of the lowest penetrations of formal banking in the Middle East.

"It's a high-risk market, but at the same time there's strong potential," Montasser Khelifi, a Dubai-based senior manager at Quantum Investment Bank, said by phone. "There is a huge population, it's a big country with important oil resources. But the banking market is still not developed."

Huge opportunities

About 11 per cent of Iraqis aged 15 years and older have accounts at formal banking institutions, according to World Bank data, compared to about 60 per cent in the UAE.

Elaf expects to increase income to about $15 million this year from $11.7 million in 2014, according to Manjula Mathew, the bank's executive director of research, investments and asset management. Kurdish International Bank's profit increased 5 per cent to $36.7 million in 2014, according to chief executive officer Bustam Al Janabi. Cihan's earnings fell 37 per cent to $22.6 million, said deputy chief executive officer Naz Bajger.

Iraq's Islamic banks are still in their early phase and "the challenges are acute, but the opportunities are enormous," Mohieddine Kronfol, the Dubai-based chief investment officer for global sukuk and Mena fixed-income at Franklin Templeton Investments, said by phone. "We find that Islamic banks, wherever they operate, they tend to grow faster than conventional in acquiring market share."

Security concerns

Iraq's lenders have been constrained by the dearth of legislation governing Islamic banks and advances by IS, which threaten to drag the country into the worst sectarian conflict since 2007. The central bank said it will spend $4.2 billion to support economic activity and create jobs as the nation also grapples with oil prices close to the lowest in six years.

The yield on Iraq's 2028 dollar bond rose 37 basis points this year to 8.3 per cent. That compares to a 28 basis-point decline through January 27 to 4.1 per cent in the average yield of Middle East bonds, according to JPMorgan Chase indices.

Iraqi Prime Minister Haidar Al Abadi said this month that the country's economic recovery isn't complete and the fight against IS is far from over, more than a decade after the fall of Saddam Hussein.

"The challenges are huge," he told Bloomberg TV's Charlie Rose on January 23. "Our economy cannot sustain two major spendings. One is to sustain our society and two is to sustain this awful war. We need help on this."

Abu Dhabi Islamic Bank, the second-biggest Sharia-compliant lender in the UAE, has been operating in Iraq since 2012 and is taking a long-term view of the country where it sees "great potential," Nuhad Saliba, head of ADIB International Banking Group, said. Cihan Bank said its outlook improved toward the end of last year as the United States began airstrikes on IS.

"The last quarter of the year was better," Bajger said by phone from Erbil. "The first half of the year will be tough, but I can say that it would not be hard as the third quarter of 2014.

(Times Of Oman / 28 January 2015)

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Islamic banks show off earings strength and asset quality

Dubai: In a new set of bank results announced on Sunday, the country’s two Islamic banks displayed their balance sheet strength and high profitability, reinforcing the robust health of the UAE’s banking sector.

Dubai Islamic Bank (DIB), the largest Islamic bank in the UAE by total assets reported a net profit of Dh2.8 billion for 2014, up 63 per cent compared to Dh1.7 billion for 2013.

DIB’s net financing assets at Dh74 billion at the year-end 2014 was up by more than 32 per cent compared to Dh56 billion at the end of 2013.

The bank’s total assets were up by 9 per cent Dh123.9 billion at the year-end 2014 compared to Dh113.2 billion at the end of 2013.

“Despite the relatively subdued market, the bank has witnessed a 63 per cent hike in net profit and 32 per cent jump in financing book,” said Dr. Adnan Chilwan, CEO of DIB.

Abu Dhabi Islamic Bank (ADIB) Group’s net profit for 2014 increased by 20.7 per cent to Dh1.75 million compared to Dh1.45 billion in 2013. The bank’s net revenues for 2014 increased by 16.6 per cent to Dh4.58 billion compared to Dh3.93 billion in the same time period.

The bank’s customer financing assets increase by 18.2 per cent to Dh73 billion, while customer deposits increased by 12.3 per cent to Dh84.8 billion over the same period.

Abu Dhabi Commercial Bank (ADCB) reported a full year net profit of Dh4.2 billion, up 16 per cent compared to 2013. The bank’s total assets crossed Dh200 billion mark this year.

ADCB’s net loans and advances increased 7 per cent to Dh141billion in 2014 as customer deposits from increased 9 per cent to Dh126 billion. Bank’s Islamic banking business remained a prime driver of growth, with Islamic financing assets (gross) up 5 per cent and total Islamic deposits up 15 per cent over 2013.

(Gulfnews.Com / 25 January 2015)

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Sukuk issuances likely to face slowdown in 2015

Dubai: The global sukuk market is expected to face some slowdown in 2015 after reaching the second-highest year for sukuk issuance in 201, according to projections by credit rating agency Standard & Poor’s.

Sukuk issuance reached $116.4 billion in 2014 compared with $111.3 billion in2013, and despite the economic headwinds, the rating agency said it expects the total issuance to cross the $100 billion mark again in 2015.

“Supporting sukuk issuance is the still-positive economic performance of core markets such as nations in the Gulf Cooperation Council (GCC) and Malaysia, the implementation of new regulatory requirements such as the Basel III liquidity coverage ratio, and increasing interest in sukuk from countries that have not yet tapped the sukuk market looking to diversify their investor base,” said Mohamed Damak, global head for Islamic finance of S&P.

Despite the positive environment, Damak expects some emerging headwinds could slow its progress compared to 2014. “We foresee some turbulence ahead that could cause overall issuance volumes to be lower in 2015,” he said.

A serious potential threat could emerge from the US Federal Reserve’s plan to increase its benchmark interest rate in the second quarter of 2015. The rate hike is likely to reduce liquidity in global capital markets, including emerging markets.

A preview of such risk took place in 2013 and to a lesser extent in 2014 when the Fed announced the tapering of its quantitative easing. However, S&P said emerging market instruments will benefit, as a side effect, from the monetary stimulus that the European Central Bank is likely to implement in 2015.

The economic impact of rapid decline in oil prices is also expected to reduce demand for funding in core markets for sukuk such as the GCC. Analysts say a decline economic growth resulting form low oil prices could reduce financing needs in these markets, especially if the oil prices continue to decline. S&P forecasts economic growth in the GCC to average around 3.7 per cent in 2015 compared with 4.2 per cent in 2014.

But the slowdown in demand for sukuk in GCC could be offset by strong economic growth in Malaysia which is expected to grow at 5.5 per cent and new sovereign issuances.

“We expect new sovereign issuers to tap the sukuk market in 2015, continuing a trend that started few years ago. In 2014 alone, the UK, Luxembourg, South Africa, Hong Kong, Senegal, and others went to the market with their first sukuk issuances. The rationale for sovereign sukuk issuance can vary for different governments, but we think creating benchmarks and diversifying the investor base have been among the most important reasons for new sovereign sukuk issuance in 2014,” said Damak.

The implementation of new regulatory requirements, particularly Basel III, and the lack of high-quality liquid assets in the Islamic finance industry might increase sovereign and central banks’ issuances and provide the Islamic finance industry with much-needed instruments to manage liquidity.

Central banks are looking at the experience of Bank Negara, the central bank of Malaysia, which is the established leader in sukuk issuance. Total sukuk issuance from central banks reached $50.2 billion in 2014, or 43.1 per cent of all issuance, with Malaysia alone accounting for 92.1 per cent of that at year-end 2014, followed by the Central Bank of Bahrain at 3.7 per cent.

(Gulfnews.com / 25 January 2014)

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The Time is Now for Japan and Islamic Finance

Dubai, UAE, January 23, 2015 -- Camille Paldi, CEO of the Franco-American Alliance for Islamic Finance, while on a trip to Tokyo, Japan commented that Japan is an emerging Islamic finance powerhouse and East Asian hub for the billion dollar Islamic finance industry. Japan has traditionally been known as an economic powerhouse and East Asian Tiger and therefore this Islamic finance role is fitting with the image of Japan as an economic and financial giant. 

In addition, the sword exterior and chrysanthemum interior of Japan (The Sword and the Chrysanthemum) is quite conducive to the soft interior of Islamic finance, which is being played out in an extremely competitive global marketplace. The competition for investments from cash-rich Gulf and Asian investors is fierce. 

However, with Japan’s discipline and hard work ethic, Paldi is confident that Japan can become a major player in the Islamic finance industry. In addition to the Japanese government, the Japanese keiretsu, similar to the South Korean Chaebol, are interested in issuing sukuk to raise capital for Japanese businesses and to increase their competitiveness in domestic and global financial markets. 

Islamic finance is definitely on the horizon of the Land of the Rising Sun.

According to Tariqullah Khan, Japan’s interest in Islamic finance began in 2005. Khan explains that Japanese financial institutions cooperated with Islamic financial institutions in Malaysia and the UAE as a means of indirect expansion and that Islamic finance has been used as a method to attract investment from Islamic investors into Japan. 

The first sukuk was issued by Aeon Credit Services in Malaysia in 2007. Next, in 2010, Nomura Investment Company issued sukuk in US$. 

In 2012, Toyota Motor Corp. sold USD$88 Million of sukuk in two offers via its unit Toyota Capital Malaysia Sdn. due for maturity in May 2015. In 2014, Bank of Tokyo-Mitsubishi UFJ (Malaysia) Bhd, a member of the financial group that is part of Japan’s biggest lender by market value, set up a $500 million multi-currency sukuk program and is also considering the world’s first yen denominated sukuk.

In 2007, Japan amended FIEL, which is the Financial Instrument and Exchange Law and in 2008, the Banking and Insurance Business Law was amended enabling subsidiaries of Islamic IFI’s and banks to engage in Islamic financial transactions in Japan including ijarah and murabahah sukuk. In 2009, the rules were changed so that interest income would be tax free when an overseas sovereign fund invested in Japanese bonds or deposits. 

In addition, in 2011, the Asset Securitization Act was amended so that the ijarah sukuk would be considered as a special bond type beneficial interest issued by SPT or the Specified Purpose Trust. Before this reform, when a Japanese company issued sukuk to foreign investors, the distribution of profits of sukuk were subject to a 15% withholding tax while conventional bonds remained at 0% tax. 

Now, tax exemption is given to foreign investors who purchase bond type beneficial interests, which are quasi-bond beneficial interests of a specified purpose trust (SPT). The SPT was established under the Asset Securitization Law, which is the basis for the issuance of sukuk in Japan. 

Next in 2011, Japan tailored the tax system to the issuance of special bond type beneficial interest. In 2013, the Sunset Provision was enacted, creating a tax exemption for the distribution amounts of sukuk received by foreign investors and exempting registration tax on the repurchase of the real estate for the same sukuk, thereafter expired on that same day. 

In sum, Japan allowed the income of foreign investors to be tax exempt and initiated tax reform for the special bond type beneficiary interest; issuance, including exemption of income; withholding tax on profit distributions and gains on redemption, property registration, and acquisition tax. Japan has taken the necessary legislative and regulatory steps to make the East Asian Tiger Islamic finance and sukuk ready.

Japan is a member of the IFSB Islamic finance regulatory body and has agreements with the MIFC or Malaysia International Islamic Financial Centre in Malaysia and through JICA or the Japan International Cooperation Agency with the ICD or Islamic Corporation for the Development of the Private Sector to receive technical assistance in the issuance of sukuk. 

(WhaTech / 23 January 2014)

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Malaysia: Cagamas to seek new investors for first non-ringgit sukuk

KUALA LUMPUR: Malaysia's Cagamas Bhd will target new investors across the Middle East and Europe for its first foreign currency sukuk this year.

The state-backed mortgage lender set up a US$2.5bil multi-currency sukuk programme in November, after issuing conventional bonds in yuan, Hong Kong dollars and US dollars that year.

"We would have to look into new markets where we have not interacted with investors yet, for example, the Middle East, the greater part of Europe, Taiwan and Japan," chief executive officer Chung Chee Leong told Reuters in an interview.

Foreign investors may be more cautious after Malaysia cut its economic forecast and shrunk its budget for the year, to reflect lower revenues from oil and gas.

"You'll see some investors may choose to do a more stringent credit assessment before they invest in a Cagamas paper," said Chung.

"In our new issuance, we may need to engage with them more. They may have more questions, we'll be happy to answer." The company's fundamentals in terms of its capital position, asset quality and profitability were still strong, he added.

Cagamas is aiming to further diversify its investors and will seek more participation from sovereign wealth funds.

"It's important because it shows that they recognise us as a paper they can invest in. They have a more stringent criteria compared to the funds," said Chung.

Cagamas provides liquidity to primary lenders of housing loans to promote home ownership, by issuing bonds and sukuk to make those purchases.

It is Malaysia's second-largest issuer of debt instruments behind the government. The country's central bank, CIMB Group Holdings Bhd and RHB Bank own stakes in the company.

About 52% of its current portfolio is Islamic.

For its foreign currency issuance last year, the company had met investors in Asia and London to create awareness of its business model.

"What they want is diversity. The market was looking for issuers from emerging markets like Malaysia," said Chung.

The company hopes its move into foreign markets can set the price benchmarks for local bond issuers to follow suit.

"We want others to look at opportunities when it makes economic sense, for others to tap into those markets.

(The Star Online / 23 January 2015)

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Opportune time for corporates to issue sukuks in UAE

Dubai: Corporates in the UAE and the wider GCC region may prefer a bond issue as tumbling oil prices could crimp liquidity in the banking system.

Banks have been struggling to match the rates that sukuk markets provide. Senior sukuk yields are at 1.5-2 per cent currently as against bank loans that cost 2.7-3 per cent, Jaap Meijer, managing director at Arqaam Capital told Gulf News.

“It is more attractive to issue Islamic bonds than borrow from banks, given the strong investors’ interest. Already sukuks continue to be popular and banks can’t really match the rates the market provides,” said Meijer.

Sukuk issuance globally reached $116.4 billion in 2014 compared with $111.3 billion in 2013, and industry participants see more issuances this year.

The major driver would be crude oil, which fell more than 50 per cent in 2014, the biggest drop since 2008 financial crisis after the Organisation of Petroleum Exporting Countries (Opec) kept the output steady to counter US shale gas, triggering.

“The fall in oil prices could prompt governments to reduce their deposits held at the commercial banks, and this could reduce the availability of credit over time,” said Meijer.

“Though this may appear as the most liquid option for the government to tap into, it does have further reaching impact on the economy as lower deposits should translate into tighter liquidity, wider credit spreads, curbing bank lending and hence putting further pressure on GDP growth versus decreasing international reserves held elsewhere that does not have the same magnitude of an effect on the economy,” Meijer said.

A senior official at the Gulf Bonds and Sukuk Association also agreed. “If liquidity would tighten some what, that would drive more potential sukuk issuers to capital markets. I’m fairly bullish on more sukuk issuances. We may even see newer issuers coming to the market, said Micheal P. Grifferty, president of The Gulf Bonds and Sukuk Association.

Meanwhile, a Thomson Reuters survey of 44 lead arrangers and 106 investors had shown considerable confidence in the market about Sukuk issuances in 2015, with forecast figures ranging from $150-175 billion globally.

Successful reception

“Government that choose the path of sukuk issue would find it successful reception,” said Grifferty.

Saudi Arabia, and Oman budgeted a deficit for 2015 while increasing its spending, which analysts expect may give rise to more sukuk issuances from the governments.

“One of the silver lining of lower oil prices is that there could be more sukuk issuances as countries run budget deficits, they need to finance that. Also we would see tangible progress on subsidy reforms,” Mohieddine Kronfol, chief investment officer global sukuk and Mena (Middle East and North Africa) fixed income, at Franklin Templeton said on January 14.

The GCC region produces about $200 billion of debt a year, out of which $40-50 comes to capital market, said Franklin Templeton.

“So far the governments haven’t cut back spending at all in announced budgets. Only if the oil price stays this low for a prolonged period, would we see austerity measures being announced, affecting the private sector growth. We do not expect drastic fiscal austerity in GCC, despite double digit fiscal deficits in Saudi Arabia, Oman and Bahrain, though Oman and Bahrain are most vulnerable. We find that the UAE is very comfortable in terms of reserves,” said Meijer.

(Gulf News.Com / 22 January 2014)

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Islamic finance body IILM re-issues $860 mln sukuk

Malaysia-based International Islamic Liquidity Management Corp (IILM) has reissued $860 million worth of three-month Islamic bonds, or sukuk, the organisation said on Monday.

The auction drew 11 bids worth $1.065 billion, with the sukuk priced at a profit rate of 0.553 percent, according to a filing on the website of Malaysia's central bank.

The IILM last went to the market in November when it increased its outstanding sukuk programme, rated A-1 by Standard and Poor's, to $1.85 billion from $1.65 billion.

IILM sukuk are designed to meet a shortage of highly liquid, investment-grade financial instruments which Islamic banks can trade to manage their short-term funding needs.

Shareholders of the IILM are the central banks of Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Turkey and the United Arab Emirates, as well as the Jeddah-based Islamic Development Bank.

(Reuters / 19 January 2014)

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Dubai: Qatar Islamic Bank plans $549 mln Tier 1 sukuk

DUBAI, Jan 18 (Reuters) - Qatar Islamic Bank (QIB) plans to raise up to 2 billion riyals ($549.4 million) through a capital-boosting sukuk; the latest Gulf bank eyeing debt markets to replenish its reserves after a period of strong lending growth.

Qatar's largest sharia-compliant institution by assets announced the sukuk after reporting fourth-quarter net profit that was up an estimate-beating 30.4 percent year on year, according to Reuters calculations.

Unlike European peers that have been dogged by capital concerns in recent years, Gulf banks have increasingly turned to capital-enhancing bonds for positive reasons, seeking to build on existing growth and diversify their sources of capital.

New Basel III banking standards, due to come into full force in 2019, will also oblige banks to set aside more capital.

A number of Saudi banks have used the local-currency sukuk market to raise instruments that enhance their Tier 2 -- or supplementary -- capital in the past two years, while banks from the United Arab Emirates have also sold bonds and sukuk that enhance core Tier 1 capital.

The latest was a Tier 1 sukuk from Dubai Islamic Bank , completed last week.

On Sunday QIB said that its board had proposed a Basel III-compliant Tier 1 sukuk worth up to 2 billion riyals, subject to shareholder and regulatory approval.

QIB's total capital adequacy ratio, a combination of Tier 1 and Tier 2 capital -- regarded as one of the key indicators of a bank's health -- stood at 14 percent at the end of 2014, against a 12.5 percent minimum prescribed by Qatar's central bank.

STRONG GROWTH

Qatari banks have been able to build their loan books at a fast pace in recent years as the Gulf state spends billions of dollars developing infrastructure and prepares to host the 2022 soccer World Cup finals.

QIB's lending book jumped 27 percent in 2014 to stand at 60 billion riyals on Dec. 31, while deposits surged by 32 percent to reach 67 billion riyals at the end of last year.

This helped the bank make a net profit of 470 million riyals during the fourth quarter, according to Reuters calculations based on financial statements, compared with 360.3 million riyals in the last three months of 2013 and well ahead of the 333.3 million riyal average estimate of five analysts polled by Reuters.

The bank's board proposed a cash dividend of 4.25 riyals per share for 2014, up from 4 riyals for 2013, the statement added.

(Reuters / 18 January 2015)

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Rise of Islamic finance and banking ‘to reach new heights in 2015’

The CIBE said the industry realised $2.1tn of assets in 2014, owing to “gains in popularity in traditional markets” such as Malaysia and the Middle East, and boosted by moves into new markets in Europe, Australia and China.

CIBE chief executive officer Muhammad Zubair Mughal said Islamic banking is likely to represent a share of 86% of the industry’s $2.5tn market in 2015, followed by sukuk, the Islamic equivalent of a bond (6%), Islamic funds (4%), takaful (Islamic insurance – 2%) and Islamic micro-finance (1%). He said Dubai will continue in its role as “a global Islamic finance hub”.

Zubair Mughal said there are more than 1,500 organisations working for Islamic banking, finance, takaful, sukuk, Islamic funds and micro-finance in more than 90 countries, some 40% of which are non-Muslim nations. He said Muslim countries, which have a 76% share of the global Islamic banking market, include Qatar, Saudi Arabia, the United Arab Emirates, Malaysia, Pakistan and Indonesia.

Zubair Mughal said that the sukuk market recovered in 2014 after a fall in 2013 and promises “a great chance of rapid growth” in 2015. He also anticipated that the sukuk market will reach $150 billion, with Islamic funds having “great potential” of attaining a market share worth around $100bn.

On takaful, Zubair Mughal forecast a growth rate of 15% and said the global takaful contribution is expected to reach $20bn during 2015. “Tanzania, Namibia, Morocco, and India are the new destinations for Islamic insurance,” he said. The new year is also expected to see increased take-up of Islamic micro-finance, which is being promoted by “many multilateral agencies” and backed by governments in countries such as Pakistan and Malaysia, Zubair Mughal said.

In September 2014, South Africa entered the sukuk market with the launch of a $500 million Islamic bond. The National Treasury said it had concluded its debut 5.75-year Islamic bond issuance in the international capital markets priced at a coupon rate of 3.90%, “representing a spread of 180 basis points above the corresponding benchmark rate”.

In October, the governor of Malaysia's central bank, Bank Negara Malaysia, said the $270bn global market for sukuk could become an "important source of funding" for infrastructure and other long-term projects. Zeti Akhtar Aziz told the 10th World Islamic Economic Forum in Dubai that the sukuk market had "significant potential" to fund infrastructure projects in the Gulf Cooperation Council, Africa and Asia. She said that some developing economies in Africa were already looking to the sukuk market as a means of obtaining financing for infrastructure.

(Out-Law.Com / 12 January 2015)

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DIB sukuk may open window for Gulf bond issues

Gulf issuers of overseas bonds, kept on the sidelines by volatile markets, may revive their issue plans after Dubai Islamic Bank completed a $1 billion sukuk issue.

The capital-boosting sukuk sale, with a perpetual tenor, was priced after generating $2 billion of demand nearly two months since the last deal was priced in the region.

Before the primary market froze up, a slew of companies had announced plans or mandated banks for possible bond issues including Bank Muscat, Gulf Finance House  and Etisalat.

Sovereigns such as the Emirate of Sharjah and the Kingdom of Bahrain have also been looking into U.S. dollar conventional bond or sukuk issues.

Such plans were put on hold as oil prices collapsed and emerging markets saw capital outflows late last year.

The big Gulf states have huge fiscal reserves and are expected to be able to ride out an era of cheap oil fairly comfortably; Gulf bonds have actually performed well compared to emerging market counterparts in the last few months.

But the plunge of Gulf stock markets, which were overvalued and dominated by panicking retail investors, convinced bond issuers to stay out of the primary market.

"Volatile markets globally and the ripples in the regional equity markets soured sentiment in the Gulf bond markets, keeping issuers and investors at bay, despite strong liquidity and moderate rises in yield compared to global bonds," a senior banker with a foreign institution said.

Before the primary market froze up, issuance in the region was fairly active; Middle East companies raised $46.08 billion via foreign currency bonds and sukuk in 2014 compared with $38.38 billion in the previous year.

PIPELINE

The success of DIB's issue on Wednesday may now persuade issuers to return. The perpetual Tier 1 transaction was offered at 6.75 per cent, trimmed from initial price thoughts of 7 per cent.

The healthy demand allowed DIB to sell the sukuk with almost no new issue premium, and the issue was trading flat in the secondary market on Thursday.

The deal priced well within some comparable debt; the perpetual bond of Kuwait's Burgan Bank, which raised $500 million at 7.25 per cent in September 2014, is now trading at 7.15 per cent.

DIB's earlier perpetual debt issue in March 2013, a $1 billion Tier 1 sukuk issue at a profit rate of 6.25 per cent, was 14 times subscribed. However, that note was only Basel II-compliant, whereas the new sukuk will include loss absorption features at the point of non-viability, making it Basel III-compliant.

Assuming a 30-50 basis point pick-up to compensate for this factor, the Dubai lender appears to have left little on the table for investors.

Other factors may also encourage a revival of Gulf issuance. Although recent U.S. economic data may have pushed back the timing of a U.S. interest rate hike, issuers still see the possibility of one later this year, which would increase loan rates.

So some issuers may want to establish or maintain a presence in the bond market now, giving them another fund-raising option when the loan market eventually starts to tighten.

Some bankers think lower oil prices will make Gulf banks more cautious about lending, pushing companies toward bonds.

"I think banks will be less aggressive to lend so borrowers will have to look at public markets," said Abdul Kadir Hussain, chief executive at Mashreq Capital, the investment unit of Dubai's Mashreq bank, who oversees about $1.2 billion of assets.

"Benchmark rates are likely to stay low at least for the first half, so even if spreads widen a bit, a borrower could still get an attractive all-in funding cost."

Some analysts also think that as Gulf governments' oil revenues tumble, they will not rely entirely on their reserves to fund spending but will tap the bond market more, leading to both sovereign and quasi-sovereign issues. This may be particularly true of Bahrain and Oman, the financially weakest of the Gulf Cooperation Council states.

DUBAI

Dubai names may have an especially good window to issue after conglomerate Dubai World said this week that it had finalised a deal with a "substantial majority" of creditors to back its $14.6 billion debt restructuring.

Since the announcement early this week, the yield on the emirate's dollar sukuk due May 2022 has dropped 15 basis points to 3.37 percent, within 6 bps of the record low hit last June. The broader S&P Mena (Middle East and North Africa) bond and sukuk index has tightened 5 bps in the same period.

"The restructuring deal has removed uncertainty over the debt in the next few years, and the fact they are paying part of the debt early, even though it's a small part, is a positive for Dubai credits," a senior banker with a foreign bank said.

Dubai World had been in talks with lenders for months to secure a renegotiation of terms of the debt deal it signed in 2011, which followed a 2009 standstill request.   

(Emirates Business / 15 January 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com