Islamic finance assets forecast to grow substantially

Muscat: As the Islamic finance industry enters a new phase of growth in the Sultanate, Dr Jamil El Jaroudi, chief executive officer of Bank Nizwa, joined government policymakers and regulators, industry leaders and experts as well as representatives of financial services at the Oman Forum to reflect on Oman's Islamic banking journey to date and identify measures to further enhance the industry. 

Attended by over 300 participants, the 2014 edition of the forum explored current opportunities and challenges related to job generation and highlighted Islamic finance's strategic role in contributing to Oman's socio-economic development within the next four years.

During the discussions, Dr El Jaroudi stressed the need to build a regulatory framework that will work in tandem with that of conventional banking to overcome the challenges facing the industry's performance and customer expectations. 

He also said that the expanding geographical reach of Islamic finance across the Sultanate coupled with increased awareness of the banking solutions available to citizens is expected to result in Islamic finance assets reaching 10 per cent of the total banking assets by 2018 in comparison to the current 4.5 per cent.  

The customer response to Islamic finance in Oman has been phenomenal in such a short period of time. In order to ensure the industry's continued growth, it is essential to assess the takeaways and opportunities unveiled in recent years, while looking to support critical sectors such as small and medium enterprises (SMEs), which represent 90 per cent of registered businesses in Oman, with financial solutions that can help them prosper," he explained.

"The Islamic finance industry is registering a solid 15 per cent to 20 per cent year-on-year growth as of the incremental growth in the overall banking sector and it is essential for both users and providers of Sharia-based products and services to capitalise on this opportunity," he added.

Today, Oman's Islamic finance assets are estimated at OMR1.1 billion as of June 2014 and could reach up to OMR7.1 billion in four years. Bank Nizwa has been and will continue to be a key contributor to this organic growth as proven by its latest financial results which registered an increase in assets of 49 per cent to reach OMR257 million, a 349 per cent surge in its customer financing portfolio and a 204 per cent growth in deposits to reach OMR101 million and OMR69 million respectively.

In addition to Dr El Jaroudi, the panel on Islamic finance also included Ali Hamdan Al Raisi, vice-president of the Central Bank of Oman (CBO); Sheikh Rashid bin Saif Al Saadi, chairman of Takaful Oman; Mohammed Al Kharusi, group director (Business Development) at Mohsen Haider Darwish (MHD) Group; and Abdul Samad Al Maskari, chief executive officer of Al Madina Financial and Investment Services Company.  

(Times Of Oman / 15 November 2014)

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Unlisted flydubai says H1 net profit up 40% ahead of debut sukuk

Dubai: Budget carrier Dubai Aviation Corp, known as flydubai, posted a 40 per cent increase in net profit in the six months to June 30, it said in an investor presentation to market its potential debut sukuk.

The unlisted airline, which started operations in June 2009, made a net profit of $14 million in the first half of this year, said the document seen by Reuters. Revenue in the period was $515 million, up 17.1 per cent on the same six months of 2013.

The carrier, fully owned by the Dubai government, started meeting investors in Singapore on Thursday and plans to head to the Middle East and Europe through Tuesday ahead of selling a potential dollar-denominated Islamic bond.

Should flydubai complete an issue, it would be only the second Gulf carrier to raise funds through the debt capital markets after Dubai’s Emirates. Emirates’ previous sukuk offering, worth $1 billion, was sold in March last year.

In the past, flydubai has relied on term loans and leasing arrangements for funding so the sukuk will help to diversify its sources of financing, it said in the presentation.

As of June 30, outstanding debt at the company was $1.05 billion and it had authorised and contracted capital commitments in respect to its fleet of $11.4 billion.

Its costs in the six months to June 30 were $528 million, up from $449 million in the same period a year ago.

The firm has a network covering 71 destinations across 42 countries in Europe, Asia and the Middle East as of June.

Flydubai will issue the unrated Wakala-structured sukuk of benchmark size though the Al Shindagha Sukuk Limited special purpose vehicle, with the Islamic bond listed on Nasdaq Dubai and the Irish Stock Exchange, the document showed. Benchmark size traditionally means upwards of $500 million.

Wakala, in which one party manages assets on behalf of another, is becoming the structure of choice for many sukuk issuers, especially financial institutions, because of its clearer link to the assets backing the instrument.

Credit Agricole, Dubai Islamic Bank, Emirates NBD, HSBC, National Bank of Abu Dhabi, Noor Bank and Standard Chartered will arrange the sukuk sale.

(Gulfnews.com / 13 November 2014)

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Indonesia sharpens centralised Islamic finance oversight

Indonesia's capital market regulator has signed an agreement with the country's national sharia board to strengthen oversight of the Islamic finance industry, supporting a centralised approach being favoured elsewhere around the globe.

A country-level approach to regulating sharia-compliant financial services was pioneered by Malaysia in 1997 and is gaining traction elsewhere as authorities try to standardise industry practices and improve consumer perceptions.

The agreement would support efforts by Indonesia's financial services authority, Otoritas Jasa Keuangan (OJK), to formulate rules governing Islamic financial services, said OJK chairman Muliaman Hadad.

This would help create new sharia-compliant products, develop a wider pool of sharia scholars, and support education and awareness efforts in the industry, he added.

Indonesia's national sharia board has traditionally focused on broader religious matters, although it has issued 95 rulings relating to Islamic finance services, 14 of those related to the capital market.

But authorities want to encourage a wider product range to help Islamic banks grab a bigger share of the market, as the sector plays catch-up to more mature markets in Malaysia and the Middle East.

Indonesia has the world's biggest Muslim population but its Islamic finance market lags well behind that of Malaysia. Indonesia's Islamic banks held 4.9 percent of total banking assets in the country last year compared with more than 20 percent for their Malaysian counterparts.

CENTRALISED

A centralised model to supervising Islamic finance is increasingly being adopted across the global industry, although it remains a rarity in the Gulf region.

Previously, many countries left sharia boards in individual Islamic banks and financial firms to decide whether their products and activities obeyed religious principles.

This approach has been criticised for inviting potential conflicts of interest, and for producing conflicting rulings that confused investors.

Last month, Oman's central bank set up a five-member sharia board to help oversee the sultanate's Islamic banking industry, while Pakistan's securities commission established a nine-member sharia board in May of last year.

Morocco and Nigeria have made similar moves, while the United Arab Emirates plans to develop an independent authority which will be backed by specific legislation.

Authorities in Indonesia want to reshape the country's Islamic finance industry by encouraging consolidation and building a new regulatory system. Regulators are finalising a five-year roadmap to be presented this month to industry players, who have repeatedly called for clearer laws. 

(Reuters / 14 November 2014)

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Dreams of Record Year Being Dashed as Sukuk Sales Slump

Global Islamic bond sales, which had the busiest first three quarters on record, are mired in what’s set to be the worst end to a year since 2008.

Borrowers have raised $1.9 billion in the fourth quarter so far, 73 percent less than in the same period a year ago, according to data compiled by Bloomberg. Issuers have also sold the fewest number of securities in six years, Bloomberg data show.

During the first nine months, the U.K., Luxembourg, South Africa and Hong Kong were among debut issuers of Islamic bonds entering a market that Ernst & Young LLP estimated will exceed $3.4 trillion by 2018. Some borrowers probably accelerated sales on concern borrowing costs may rise as the Federal Reserve ended its bond buying program, according to Jefferies International Ltd.

“It will end up being a very slow quarter, with dismal sentiment,” Richard Segal, the London-based head of international credit strategy at Jefferies, said by e-mail on Nov. 10. Explanations include “expectations of possible Fed tightening,” which encouraged borrowers to bring their sales forward, he said.

Market Volatility

The slowdown threatens to derail issuance in a year that some banks -- including CIMB Group Holdings Bhd. and Standard Chartered Saadiq -- had expected to exceed 2012’s record of $46.8 billion.

Borrowers in Malaysia, Saudi Arabia and the United Arab Emirates, all oil producers, are the biggest issuers of sukuk, according to data compiled by Bloomberg. Sales this quarter may have slowed after crude prices declined 14 percent in the period to $80.96 a barrel at 11:10 a.m. in Dubai, the lowest in four years. Economies in the six-nation Gulf Cooperation Council in the Middle East rely on oil revenue to fund growth.

“There was a lot of volatility at the end of September and the beginning of October,” Abdul Kadir Hussain, chief executive officer of Mashreq Capital DIFC Ltd., which manages about $1.2 billion, said by phone from Dubai on Nov. 10. “There were major sell-offs and major volatility, which has caused a lot of issuers to wait longer than they would have wanted to.”

The average yield on global sukuk rose to 2.82 percent on Nov. 10 from 2.77 percent on Sept. 9, the lowest since May 2013, according to a gauge compiled by Deutsche Bank AG.

Strong Pipeline

While the quarter has started slowly, Hussain said “the pipeline for the remainder of the year is quite strong.”

Issuers including Bahrain Mumtalakat Holding Co. and FlyDubai may sell debt this quarter, according to people familiar with the deals. CIMB and Standard Chartered, which rank first and fourth in arranging sukuk sales this year, said in June that issuance may rise to about $50 billion from $43.1 billion in 2013. Borrowers have raised $38.8 billion this year.

“There’s been a surge in issuance in the past few years, so a lull would be natural at some point,” Segal said. “Unusual first time issuers such as the U.K. and South Africa have entered the market, as will other non-traditional borrowers, but they are more likely to take their time.

(Bloomberg / 12 November 2014)

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Malaysia: Growing role for Japan in Islamic finance

KUALA LUMPUR: There is a growing role for Japan in the development of the Islamic finance market, says RAM Ratings at an Islamic Finance conference on Wednesday.

RAM said tax reforms were introduced in 2011 to level the playing field for the issuance of J-Sukuk and conventional bonds for tax purposes, and amendments had also been made to Japanese Securitisation Law to facilitate the issuance of J-Sukuk.

It said while there had yet to be any issuance of J-Sukuk in the Japanese market, BTMU Malaysia Bhd – a wholly-owned subsidiary of Bank of Tokyo-Mitsubishi UFJ, Japan's largest lender – had taken the first important step.

In September this year, it became the first Japanese bank to enter the Sukuk market in when it debuted a US$500mil Sukuk programme in Malaysia.

The conference was jointly organised by RAM and the Rating and Investment Information Inc (R&I), Japan's largest credit rating agency with nearly 40 years of bond market and credit rating experience.

More than 150 members from financial institutions, insurance companies, pension funds and corporates from Tokyo.

(The Star Online / 12 November 2014)

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Exim Bank Plans Sukuk as Shariah Assets Expand

The head of Malaysia’s state-owned trade financier said he plans to tap the global sukuk market for a second time, as Shariah-compliant assets look set to reach 40 percent of the bank’s total in 2015.

Export-Import Bank of Malaysia Bhd.’s assets that comply with religious tenets will rise to 2.4 billion ringgit ($718 million) this year, representing a 30 percent portion, from 2013’s 1.5 billion ringgit, Chief Executive Officer Adissadikin Ali said in an interview yesterday. The company is aiming to sell dollar-denominated Islamic bonds in the second half of next year, he said.

The state-owned entity became the world’s first trade financier to issue U.S. currency sukuk with its debut offering in February that helped plug a shortage of corporate Islamic dollar debt in Asia. The lender started providing Shariah-compliant loans in 2009 to support demand in an industry whose assets Bank Negara Malaysia projects will triple to $6.5 trillion worldwide by 2020.

“We are not short of business,” Adissadikin said in Kuala Lumpur. “Our plan is to grow by 30 percent every year and we have been beating the target consistently.”

The lender is expanding its Islamic finance business as part of Prime Minister Najib Razak’s drive to make the nation a global Shariah-compliant hub by 2020, Adissadikin said. Exim Bank met its full-year target of 5 billion ringgit for Islamic and conventional loans at the end of October and the figure may now climb to 6 billion ringgit this year, he predicts.

Pass Costs

The company’s planned sukuk will be its third in the international debt market and Exim Bank faces the prospect of higher yields as the Federal Reserve gears up to raise interest rates next year.

The bank will probably offer $200 million to $300 million of dollar sukuk with a maturity of five years or more sometime in the second half of 2015, Adissadikin said.

“Timing is not a priority as we can pass the cost to our clients,” he said.

Exim Bank sold $300 million of dollar Islamic notes due in 2019 at a coupon of 2.874 percent in February. The yield on the securities rose eight basis points, or 0.08 percentage point, to 2.55 percent today, according to data compiled by Bloomberg. The lender is rated A3, the fourth-lowest investment grade, by Moody’s Investors Service and A- by Fitch Ratings.

Average yields on global sukuk, which pay returns on assets to comply with the religion’s ban on interest, dropped 57 basis points this year to 2.85 percent, according to a Deutsche Bank AG Index. That’s down from 2014’s high of 3.44 percent on Jan. 2 and compares with the low of 2.77 percent in September.

Worldwide sales of the debt rose 10 percent to $38.8 billion in 2014 from a year earlier after reaching $43.1 billion in 2013 and an unprecedented $46.8 billion in 2012, data compiled by Bloomberg show.

Makes Sense

Exim Bank’s total banking assets may end the year around 8 billion ringgit, up from 5.3 billion ringgit in 2013, Adissadikin said. The company posted a net profit of 144.7 million ringgit last year, compared with 123.8 million ringgit in 2012, according to its annual report. Adissadikin declined to give an earnings forecast for 2014.

Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd., said it makes sense for Exim Bank to be offering Shariah-compliant financing given that it’s a significant part of the Malaysian economy.

“Exim Bank Malaysia acts as a strong ambassador for Islamic finance,” Badlisyah at the unit of CIMB Group Holdings Bhd., said in a phone interview in Kuala Lumpur yesterday. “The very fact that they issued a dollar sukuk this year and are able to offer wider solutions to their clients also allows them to stand out.”

(Bloomberg / 11 November 2014)

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Islamic finance body AAOIFI picks up pace with new standards

The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has issued two new sharia standards, revised three others and said it will review at least five more in coming months.

The move appears to signal a more proactive approach by AAOIFI, which is one of the world's top standard-setting bodies for Islamic finance but has acted only gradually to address some of the industry's big issues and controversies in recent years.

Before its latest announcement, AAOIFI had issued only two of its 88 standards in the last three years, while other Islamic finance organisations have stepped up their activities as the industry expands around the globe.

AAOIFI may now be picking up the pace after it appointed a new secretary-general in September, Saudi Arabian national Hamed Hassan Merah.

After a meeting of its 20-member sharia board last week in Riyadh, AAOIFI said it had issued a standard for arboun (down payments) and another on conditional termination of contracts, following a public hearing held in October.

AAOIFI has also revised standards covering the conversion of conventional banks into Islamic ones, debt transfers (hawala) and murabaha - a common sharia-compliant sale contract.

In murabaha, an institution agrees to purchase merchandise from a counterparty, who promises to buy it back with an agreed mark-up at a later date. Murabaha contracts can take several forms, some of which may resemble interest-bearing loans, which has attracted criticism from some scholars and regulators.

AAOIFI did not publicly reveal details of its new and revised standards, so it was not immediately clear whether the murabaha change was minor or substantial.

The organisation is also developing a new standard on repurchase agreements, a key liquidity management tool to which most Islamic banks currently have limited access. It will review existing standards for several widely used contracts, including those on ijara, salam, istisna, musharaka and mudaraba.

As part of the review, it will seek industry feedback before its next sharia board meeting, to be held next March. AAOIFI will hold its annual conference, organised in partnership with the World Bank, on Nov. 17 and 18 this year.

Under its previous secretary-general, AAOIFI had said it would look to develop a new framework for disclosing financial data, while possibly revising standards for takaful (Islamic insurance), investment accounts and other products.

Established in 1990, AAOIFI issues guidelines that are followed wholly or in part by Islamic financial institutions around the world. AAOIFI standards have been used by or influenced regulation in jurisdictions including Bahrain, the Dubai International Financial Centre, Jordan, Lebanon, Malaysia, Pakistan, Qatar, and Saudi Arabia.

(Reuters / 11 November 2014)

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