slideshow

A Glimpse into Islamic Finance in 2016

Posted on 29th March 2016 by Camille Paldi , camille@faaif.com

 

Halal finance has now created opportunities for businesses, governments, banks, and individuals across the Middle East, Africa, South Asia, East Asia, Southeast Asia, Australia, Russia, Europe, and North and South America.  This form of finance enables people to diversify portfolios, perform interest-free financial transactions, and attract a wider class of investors including socially responsible and ethical investors.   A wide cross-sector of society is  participating in this form of business globally, increasing their profitability, growing their businesses, raising capital, and investing for the future.  In fact, pension funds across the non-Muslim world heavily invest in Islamic funds and more than 50% of investors in Islamic funds and sukuk are non-Muslim.  This is truly an emerging opportunity for the entire world.

 

More than 750 Islamic Investment Funds have been established around the world with assets under management (“AUM”) totaling approximately USD$60 Billion compared to 70,000 conventional funds with AUM of USD$19trillion. Currently, a wide variety of Shari’ah compliant asset classes are available for investment including equity, sukuk, real estate, commodities, leasing, trade finance, private equity, structured products, REITS, and exchange – traded, murabahah, ijarah, balanced, index, and hedge funds. Hot spots for global Islamic investment funds include Luxembourg, Ireland, and the Cayman Islands, collectively, which host 12% of the total Islamic funds available globally. The Islamic asset management industry is also growing rapidly in the Asia-Pacific region including Malaysia, Brunei, Singapore, Japan, South Korea, China, and Indonesia. In terms of distributing investment products, international fund managers offer offshore funds in the Middle East by using Bahrain, the UAE, and Qatar as distribution platforms. Financial centers from Malaysia, Singapore, Hong Kong, Bahrain, Dubai, and London are leading the global Islamic Investment fund initiative.

 

Major banks,  financial institutions, and governments in Asia, Europe, Africa, the United States, and Australia are engaging in the different modes of Islamic finance, issuing million dollar sukuks, developing takaful (Islamic insurance) companies, and implementing legislation and regulations in order to enable Islamic finance transactions. The business leaders of most nations of the world including IMF Chief Christine Lagarde recognize Islamic finance as a valuable business model and form of alternative finance to stimulate economic growth, raise funds for businesses and government projects, and diversify assets, investments, and investor classes. Africa is now embracing large-scale Islamic finance as it seeks to tap Middle Eastern Investors to finance large infrastructure programs. The Seychelles and Ghana issued Euro bonds, in 2006 and 2007 respectively, but it was not until 2011-12 that others followed suit with sukuk. In 2013, Nigeria became the first big economy in sub-Saharan Africa to issue a sukuk al-ijarah  at USD $71 Million Dollars.  Osun State of Nigeria incorporated an SPV, Osun Sukuk Company Plc (the SPV), to which it transferred the land for construction of the schools. The SPV issued sukuk in the aggregate principal amount of $71 million representing undivided ownership interests in the land. The net proceeds of the issuance were used by the SPV to pay the purchase price for the land and fund construction of the schools.  The land was leased back to the state government against periodical rental payments and partial redemption payments, which passed through to the sukuk holders in proportion to their ownership interest in the underlying asset based on the sukuk they held.  The central banks of Nigeria and Mauritius are also shareholders in the International Islamic Liquidity Management Corp., which has started to issue sukuk to help Islamic banks manage their finances.

 

Soon after, Senegal raised $200 Million through a sukuk issuance in 2014. That sukuk was the first major sukuk issued by a West African nation and achieved a profit rate of 6.25% with a four year maturity. Rolling with the African Sukuk momentum, South Africa issued a $500m sukuk, which was more than four times subscribed, with an order book of $2.2bn according to the SA Treasury, indicating that desire for emerging market Islamic bonds matches that of developed world issuance. The bond, which matures in June 2020, is a Sukuk Al-Ijarah structure with cash flows based on infrastructure assets. Even Gambia and Sudan have issued sukuk, however, for small amounts and on a short-term basis. Gambia issued a USD $40 million dollar sukuk al-salam in 2011.  Also in 2011, Sudan issued a 160 million GBP sukuk.  Sudan offered another sukuk at 758 million GBP in 2011 backed by a state electrical firm.

 


The Ivory Coast issued a Sovereign Sukuk in 2015 with its debut five year 150 billion CFA issuance sukuk priced at a profit rate of 5.75%. The sukuk is being arranged by the Islamic Corporation for Private Sector Development (ICD). The ICD signed an agreement in April 2015 for the implementation of a five-year Sukuk programme for 300 billion CFA to be issued in two equal phases of 150 billion CFA each. A road show was held in Saudi Arabia from 14 to 19 November 2015 and followed a recent upward revision of the Ivory Coast’s sovereign rating by Moody’s from B1 to Ba3. The launch ceremony held in Abidjan was attended by the Prime Minister and Finance Minister as well as guests from the IMF, World Bank, African Development Bank as well as domestic CEO’s of local banks.


Sukuk are particularly suited for sub-Saharan Africa, a region that needs huge investments in infrastructure. In addition, Morocco, Tunisia, and Kenya are laying the legal groundwork to issue sukuk and operate Islamic banks. Tunisia is planning a sovereign sukuk for USD 1 Billion dollars with a ten year term, 5.875 yield, and closing date of 2016.  It is to be printed through the Central Bank of Tunisia and performed by Citibank, Natixis, and Standard Chartered.   

 

Morocco agreed to a $2.4 billion package with the IDB or Islamic Development Bank, under which it would receive $600 million each year from 2013 to 2016. It also raised $750 million in 2013 in a two-part re-opening of its $1.5 billion bond. Dar Assafaa, an affiliate of the country’s largest lender AttijariWafa Bank, became the nation’s first wholly Shari’ah-compliant financial institution when the central bank approved its switch.  The country introduced a law in January 2015 to regulate Islamic financial products and allow local and foreign banks to set up units that comply with the religion’s ban on interest. Morocco is rated BBB- at Standard & Poor’s, the lowest investment grade, while Egypt is B-, six levels into junk. Tunisia is rated Ba3 by Moody’s Investors Service, three levels below investment grade. Algeria and Libya aren’t rated.  Morocco’s Islamic finance bill, which came into force on January 30, also allows for the formation of a centralized Shari’ah board to oversee Islamic banks.  The Moroccan Association of Participative Financiers estimates total investment in Shari’ah-compliant products in the country will reach $7 billion by 2018.  About $1.8bn in assets are held by Islamic financial institutions worldwide, according to S&P. Islamic finance may account for as much as 10 per cent of the total banking assets within 10 years,” said Mohamed El Kettani, the Chief Executive Officer of AttijariWafa.

 

Islamic finance was derailed in Egypt when Morsi, whose administration pledged to expand the industry, was removed from power. The country is now attempting to revise a new sukuk law. In 2013, Libya passed a law to ban non-Shari’ah compliant or conventional banking.  However, successor governments to Qaddafi have been unable to assert full control over the country, which now has two rival governments and parliaments.  Qaddafi had actually tried to implement the gold standard in Libya prior to his passing.

 

Kenya's financial regulator has proposed a separate regulatory framework for Islamic financial institutions as part of a broad ten-year strategy designed to boost capital markets.  Kenya is reviewing all laws and regulations governing its Islamic finance industry to aid the issuance of a debut sukuk.  The East African nation, which issued its first Eurobond in 2014, wants to expand the range of financing available for infrastructure projects.  The Treasury has said it is looking at the possibility of issuing sukuk in the 2016/17 fiscal year, starting in July.  Kenya's central bank licensed two Shari’ah-compliant banks in 2007.  At least one firm has since started to offer Shariah-compliant insurance products.  Amadou Sy, a fellow at the Brookings Institution and former official at the International Monetary Fund who has studied the sector, says sukuk issuance could help Africa to pay for multibillion-dollar infrastructure programmes.  “You have money from the Gulf and then you have the Islamic Development Bank, and also Malaysia and Indonesia – there is money out there,” he said. The Islamic Development Bank, for example, is lending $150m through Shari’ah-compliant facilities for the new Lekki port in Nigeria. It also supported the construction of the Kenitra power plant in Morocco with a $200m loan.

 

According to Ernst and Young, the global sukuk market is projected to reach $900 Billion by 2017. In 2014, the UK was the first Western nation to issue sovereign sukuk.  The UK drew orders of more than £2bn from investors in the UK, Middle East, and Asia for its sale of £200m of Shari’ah-compliant debt.  London considers itself a European hub of Islamic finance along with Ireland and Luxembourg.  Also in 2014, Hong Kong raised $1bn in its debut Islamic bond issue, attracting nearly $5bn in orders.  The states of Illinois and New York have both passed legislation enabling sukuk transactions.  In New York, the bill was introduced by Senator Parker from Brooklyn in 2011, who is a strong advocate for introducing Islamic finance in the United States. The US has seen two major sukuk issuances including the East Cameron Gas Sukuk (USD$165,670,000.00), which was the first ever musharakah sukuk in America backed by oil and gas assets and the General Electric Sukuk (USD $500,000,000.00), which was an ijarah sukuk backed by aircraft leases due for maturity in November, 2014.  Although the East Cameron Gas Sukuk experienced some technical difficulties, the General Electric Sukuk performed well and there is a large potential for sukuk in the United States as a capital raising instrument for American firms. Riding the sukuk momentum, in 2014, Goldman-Sachs issued a $500 million dollar sukuk, which was heavily oversubscribed. Brazil and Mexico are both also considering sukuk. 

Posted on 29th March 2016 by Camille Paldi


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