Here are some key reports from wire agencies on the Dubai World debacle, as it unraveled.
Dubai says not responsible for Dubai World debt
Nov 30 2009
DUBAI: The Dubai government said on Monday it was not responsible for the debts of Dubai World, dealing a blow to creditors' assumptions that the Arab emirate would guarantee the conglomerate's liabilities. "Creditors need to take part of the responsibility for their decision to lend to the companies," said Abdulrahman al-Saleh, director general of Dubai's Department of Finance. "They think Dubai World is part of the government, which is not correct." In its first statement since the crisis began, Dubai World, the government-controlled holding company at the heart of the storm, said a restructuring would involve $26 billion in debt and mostly affect its property firms, Nakheel and Limitless. Other firms, such as DP World, Jebel Ali Free Zone and Istithmar World would not be included in the restructuring because they were financially stable, it said in a statement released by e-mail late on Monday night. The previously unreleased figure of $26 billion may help markets to grapple with the scope of the crisis following estimates that the restructuring could affect $59 billion or more in liabilities. (Reuters)
Impact of Dubai World on banks manageable: IMF
Dec 4, 2009
DUBAI World's attempt to delay debt repayments, while slowing growth in the United Arab Emirates, was ''contained and manageable'' for banks that lent money to the state-run company, an International Monetary Fund official said yesterday. ''We don't see that that's going to be an issue'' for banks, Masood Ahmed, director of the IMF's Middle East and Central Asia department, said. Because Dubai World had assets abroad such as commercial real estate, ''it may well be that some of these assets will be disposed of'', which ''may lead to some degree of re-evaluation of commercial property more generally'', he said. There had been less ''market uncertainty'' since Dubai clarified investors' questions in recent days, Mr Ahmed said. (Bloomberg)
GCC stocks tumble on Dubai World debt concerns
Dec 8, 2009
Amman - The stock markets of five Gulf Cooperation Council (GCC) member states plummeted on Tuesday on ambiguity surrounding talks between the Dubai World conglomerate and its creditors, financial analysts said. The stock exchanges of Dubai, Abu Dhabi and Saudi Arabia were the main losers among Arab bourses due to sell-off mainly by foreigners who preferred to stay out of the market at this juncture, they added. The all-share price index of the Dubai stock exchange sank 6.12 per cent, bringing the total loss in two days to about 12 per cent. Abu Dhabi's benchmark also moved downward, plunging 3.43 per cent, with a total decline of more than 5 per cent in two days. The decline was led by the real estate sector which tumbled more than 9 per cent on the Dubai stock exchange. (Deutsche Presse-Agentur)
Dubai World Crisis Hits Union Square
Dec 9, 2009
The trendy W Hotel in Manhattan's Union Square was auctioned off yesterday for just $2 million. The purchase price is cheap, but the new owner of the hotel, LEM Mezzaine, will also be responsible for any defaulted loans that are in line ahead of its debt. The hotel was owned by Dubai World's private-equity arm, Istithmar World Capital, which paid $282 million for the property in 2006. This fall the company defaulted on $117 million of its debt. As the WSJ (subs req'd) reports the hotel was "the first major property asset of Dubai World to be foreclosed on since the government-owned fund's problems boiled over in late November."
Nakheel had Dh3bn aid from Dubai World
Dec 09. 2009
ABU DHABI: Nakheel, the Dubai property developer, received Dh3 billion (US$816.8 million) in financial assistance from Dubai World in the first half of 2009 as it dealt with a cash flow shortage and mounting obligations, according to a financial statement released today. Details of the support comes a day after Abdulrahman al Saleh, the director general of the Dubai Department of Finance, said that Dubai World had been lent roughly Dh9bn this year from a fund created to help Dubai companies impacted by the economic downturn. (TheNational.ae)
Dubai Company Bonds Dive as Swaps Show Default Risk
Dec. 9, 2009
DUBAI: The tumble in bonds of Dubai’s state- controlled companies to record lows signals growing concern more borrowers will fall behind on debt payments as Dubai World seeks to restructure $26 billion of obligations. “We are concerned that it’s just not Dubai World that has issues,” said Oliver Bell, the head of Middle East and Africa investment at Pictet Asset Management in London, which has $120 billion under management. “The health of other government- related entities is in question.” Dubai World property unit Nakheel PJSC’s $3.52 billion of Islamic bonds due Dec. 14 dropped 5 percent, extending yesterday’s 10 percent slide, to head for a record-low close at 45 cents on the dollar, according to Citigroup Inc. Bonds sold by Dubai Holdings Commercial Operations Group LLC sank as low as 41.5 cents on the dollar after Moody’s Investors Service cut the credit ratings of six state-run companies. A jump in the cost of DP World Ltd.’s credit-default swaps implied a 35 percent risk that the port operator will renege on debt. Dubai World, a government holding company that owns 80 percent of DP World, said last week it’s in talks with banks to reorganize debt after requesting a creditor “standstill” on Nov. 25. Debt restructurings may almost double to $46.7 billion in the “near term” as more of Dubai’s businesses need help paying debt, according to Morgan Stanley. “The ownership structure in Dubai is like spaghetti,” Pictet’s Bell said. “We’re in the process of sorting that spaghetti out.” (Bloomberg)
Dubai World debacle cancels property expo
Dec 10, 2009
MUMBAI: The Maharashtra Chambers of Housing and Industry that had planned a property exhibition in Dubai today has postponed it indefinitely. The reason is not clear though. While the MCHI say the government of Dubai revoked their permission to conduct the exhibition, market
insiders attribute this sudden change of plans to the Dubai market crash. Strangely a week ago, MCHI's international exhibition co-convener J Augustine had told MiD DAY that they were excited about going to Dubai, as they wanted to tap the emotional Indians who would invest in Mumbai beca-use of the bad market there.
Wednesday, December 9, 2009
Abu Dhabi to aid Dubai on "case by case" basis: Reuters
Nov 28 2009
ABU DHABI: Abu Dhabi, wealthy capital of the United Arab Emirates, will "pick and choose" how to assist debt-laden neighbor Dubai, a senior official said on Saturday, after fears of a Dubai default sent global markets reeling. "We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," the official in the government of the emirate of Abu Dhabi told Reuters by phone. Selective assistance for companies in "Dubai Inc.," a network of quasi-sovereign industries, instead of blanket assistance, would serve a rude awakening to investors who for years assumed that the conservative Abu Dhabi provided a safety net for its racier neighbor. At stake is the $59 billion in debt held by government controlled holding company Dubai World and its property arm Nakheel, builder of palm-shaped islands for wealthy celebrities. Dubai delayed payment on Nakheel debt by six months in a shock announcement, which came on the eve of a long holiday.
Years of chasing business in Dubai's property boom means Abu Dhabi banks have built up an exposure to Dubai-based companies worth at least 30 percent of their loan books, senior bankers in Abu Dhabi said on Friday. In most investors' minds, the question is not whether Abu Dhabi will support Dubai but when and how. Abu Dhabi, which pumps 90 percent of the oil that make the United Arab Emirates the world's third-largest oil exporter, has already provided $15 billion in indirect support for Dubai through the UAE central bank and two private Abu Dhabi banks. How much more support the emirate provides for its cash-strapped neighbor, however, will depend on how Dubai clarifies its stand on unresolved issues. (Reuters)
ABU DHABI: Abu Dhabi, wealthy capital of the United Arab Emirates, will "pick and choose" how to assist debt-laden neighbor Dubai, a senior official said on Saturday, after fears of a Dubai default sent global markets reeling. "We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," the official in the government of the emirate of Abu Dhabi told Reuters by phone. Selective assistance for companies in "Dubai Inc.," a network of quasi-sovereign industries, instead of blanket assistance, would serve a rude awakening to investors who for years assumed that the conservative Abu Dhabi provided a safety net for its racier neighbor. At stake is the $59 billion in debt held by government controlled holding company Dubai World and its property arm Nakheel, builder of palm-shaped islands for wealthy celebrities. Dubai delayed payment on Nakheel debt by six months in a shock announcement, which came on the eve of a long holiday.
Years of chasing business in Dubai's property boom means Abu Dhabi banks have built up an exposure to Dubai-based companies worth at least 30 percent of their loan books, senior bankers in Abu Dhabi said on Friday. In most investors' minds, the question is not whether Abu Dhabi will support Dubai but when and how. Abu Dhabi, which pumps 90 percent of the oil that make the United Arab Emirates the world's third-largest oil exporter, has already provided $15 billion in indirect support for Dubai through the UAE central bank and two private Abu Dhabi banks. How much more support the emirate provides for its cash-strapped neighbor, however, will depend on how Dubai clarifies its stand on unresolved issues. (Reuters)
Dubai 9/11 debacle
Dubai's Nakheel seeks suspension for $5 billion in bonds: Reuters
Dubai's Nakheel asked for three of its listed Islamic bonds worth us$5.25 billion to be suspended pending details of restructuring plans at its parent company, a move likely aimed at dampening speculation on the bonds, reports Reuters (Nov 30 2009).
The request briefly stalled but did not stop trading in the bonds, which are exchanged over the counter and not on the bourse, where the listing is regarded as a technicality. The request also added to confusion that has reigned in the markets since the Dubai government last week said it would seek debt standstill agreements from creditors to Nakheel and Dubai World, briefly sparking fears of a renewed crisis, the report added.
It noted that the three instruments listed on the exchange are a $3.5 billion sukuk due on December 14, a 3.6 billion dirham sukuk ($980.1 million) due on May 13 and a $750 million sukuk due on January 16, 2011.
Nakheel's December bond was trading at 58 on Monday, according to Thomson Reuters data, having traded as high as 110 on Wednesday before the Dubai government's announcement. Its 2011 debt was trading at 55, it added.
THE REPORT GOES ON:
Nakheel, developer of a series of created islands in the shape of palm trees off Dubai's coast, said it had asked Nasdaq Dubai to suspend all three of its listed Islamic bonds, or sukuk, "until it is in a position to fully inform the market."
Nakheel's first bond, the $3.5 billion sukuk, was widely expected by the market to be repaid on time.
SOME OTHER RELATED NEWS TO THE ABOVE PIECE:
Dubai says not responsible for Dubai World debt
Nov 30 2009
Dubai's Nakheel asks for suspension of 3 listed sukuk
Nov 30 2009
UAE moves to counter Dubai fallout but markets wary
Nov 29 2009
Abu Dhabi to aid Dubai on "case by case" basis
Nov 28 2009
Abu Dhabi banks have big Dubai exposure-bank execs
Nov 27 2009
Dubai's Nakheel asked for three of its listed Islamic bonds worth us$5.25 billion to be suspended pending details of restructuring plans at its parent company, a move likely aimed at dampening speculation on the bonds, reports Reuters (Nov 30 2009).
The request briefly stalled but did not stop trading in the bonds, which are exchanged over the counter and not on the bourse, where the listing is regarded as a technicality. The request also added to confusion that has reigned in the markets since the Dubai government last week said it would seek debt standstill agreements from creditors to Nakheel and Dubai World, briefly sparking fears of a renewed crisis, the report added.
It noted that the three instruments listed on the exchange are a $3.5 billion sukuk due on December 14, a 3.6 billion dirham sukuk ($980.1 million) due on May 13 and a $750 million sukuk due on January 16, 2011.
Nakheel's December bond was trading at 58 on Monday, according to Thomson Reuters data, having traded as high as 110 on Wednesday before the Dubai government's announcement. Its 2011 debt was trading at 55, it added.
THE REPORT GOES ON:
Nakheel, developer of a series of created islands in the shape of palm trees off Dubai's coast, said it had asked Nasdaq Dubai to suspend all three of its listed Islamic bonds, or sukuk, "until it is in a position to fully inform the market."
Nakheel's first bond, the $3.5 billion sukuk, was widely expected by the market to be repaid on time.
SOME OTHER RELATED NEWS TO THE ABOVE PIECE:
Dubai says not responsible for Dubai World debt
Nov 30 2009
Dubai's Nakheel asks for suspension of 3 listed sukuk
Nov 30 2009
UAE moves to counter Dubai fallout but markets wary
Nov 29 2009
Abu Dhabi to aid Dubai on "case by case" basis
Nov 28 2009
Abu Dhabi banks have big Dubai exposure-bank execs
Nov 27 2009
Sunday, November 22, 2009
Malaysia's new Central Bank Act strong on Islamic finance
By Habhajan Singh
The strong presence of Islamic finance and the explicit mention of ‘dual banking’ are some of the key changes embedded in the soon-to-be operational Central Bank of Malaysia Act 2009.
An analysis of the new ground rules for Bank Negara Malaysia (BNM), via a copy available at the central bank’s website, shows the strong Islamic finance flavour running through part of the 68-page document, especially in empowering of the Shariah Advisory Council (SAC) which is designated to be the ‘authority for the ascertainment of Islamic law for the purpose of Islamic financial business’.
It now gives the SAC an upper hand over the High Court when it comes to deciding on matters related to Shariah.
The new act, which received the royal assent on Aug 19 and was gazetted on Sept 3, has covered the key bases when it comes to managing Islamic financial institutions, an exciting growth area for Malaysia which today has 17 Islamic banks, two international Islamic banks, eight takaful operators, three retakaful operators, one international takaful operator and four takaful brokers.
"It provides consistency in the application of fatwa across the board. This empowerment is good for the industry," said Affin Islamic Bank Bhd chief executive officer Kamarul Ariffin Mohd Jamil, making specific reference to the SAC, when asked to comment on the new act.
Azrulnizam Abdul Aziz, chief executive Officer and executive director at Standard Chartered Saadiq Bhd, added that the dual banking recognition will ‘further support current legal framework’.
Ernst and Young financial services practices partner Gloria Goh noted that BNM was established under the now-repealed Central Bank of Malaysia Act 1958, to be replaced by the new act.
"This is timely as there has been significant developments in the financial services sector over the past 50 years," she said. Islamic bankers would certainly welcome making SAC the ultimate harbinger on what is Shariah-compliant and what runs foul of the Shariah rules for Islamic banking and takaful products and services.
A High Court judgment by Justice Abdul Wahab Patail in April 2008 had rattled the local Islamic banking fraternity when the court had ruled that widely used Bai Bithaman Ajil (BBA) contracts were contrary to Malaysia’s Islamic banking regulations, putting them on high alert for potential spike in defaults for financing structured around that contract, especially on the home financing front.
On March 31, a three-men bench of the Court of Appeal, chaired by Justice Datuk Md Raus Sharif, had unanimously reversed that decision.
The Court of Appeal judgment brought to closure the much-debated Abdul Wahab’s judgment which probably triggered the central bank into making it mandatory for the courts to refer to the central bank’s SAC when deciding on Shariah matters in Islamic banking and finance cases.
In the past, High Court judges had the option of referring to the SAC for guidance when it was deciding upon Islamic finance matters. But that is no longer the case as the new act has made the Shariah scholar led committee the final arbiter in Shariah matters in view of Section 56.
Entitled ‘Reference to Shariah Advisory Council for ruling from court or arbitrator’, the section states that in ‘any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter’, the court or the arbitrator shall take into consideration SAC published rulings or ‘refer such question’ to the SAC ‘for its ruling’.
"While it allows diversity, it sets the grounds rules," added Kamarul Ariffin.
(This story appeared in The Malaysian Reserve on Nov 23, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)
New BNM act seen to introduce ‘dual banking’
by Habhajan Singh
One key area of difference between the old and the new act for Bank Negara Malaysia (BNM) is the reference to the Shariah Advisory Council (SAC), the body set-up under at the central bank itself to bring about order and consistency in the Shariah rulings for Islamic banks and takaful operators operating in Malaysia.
Another key area is the introduction of the 'dual banking' concept. In the old Central Bank of Malaysia Act 1958, Islamic banking comes into play by virtue of Section 16(b) which states that the SAC "shall be the authority for the ascertainment of Islamic law for the purposes of Islamic banking business, takaful business, Islamic financial business, Islamic development financial business, or any other business which is based on Syariah principles and is supervised and regulated by the Bank".
In the new Central Bank of Malaysia Act 2009, which has cleared all hurdles and is set to be underway anytime, a whole new section for Islamic finance has been carved out. Part IV of the new act is entitled 'Islamic financial business' and is broken into two chapters.
Chapter one concerns the SAC while chapter two is about the powers of the central bank in terms of issuing circulars and guidelines on Shariah matters, and also the promotion of Malaysia as an international Islamic financial centre.
On the establishment of SAC, Section 51 (1) of the new act says BNM may establish a SAC on Islamic finance which "shall be the authority for the ascertainment of Islamic law for the purposes of Islamic financial business".
The SAC's functions are outlined in Section 52 (1):
a) to ascertain the Islamic law on any financial matter and issue a ruling upon reference made to it in accordance with this Part;
b) to advise the Bank [read: BNM] on any Shariah issue relating to Islamic financial business, the activities or transactions of the Bank;
c) to provide advice to any Islamic financial institution or any other person as may be provided under any written law; and
d) such other functions as may be determined by the Bank.
In Section 52 (2), it states that "ruling" here means any SAC ruling made for the ascertainment of Islamic law for the purposes of Islamic financial business. Under its interpretation section, the new act defines "Islamic financial business" as any financial business in ringgit or other currency which is subject to the laws enforced by the Bank and consistent with the Shariah, while "Islamic financial institution" means a financial institution carrying on Islamic financial business. The new act also makes explicit mention of dual banking.
A check on the earlier Central Bank of Malaysia Act 1958 shows that the word does not appear anywhere in the regulation. In the new act, Part IV, entitled "Financial stability functions and powers of the bank'" Section 27 states the "financial system in Malaysia shall consist of the conventional financial system and the Islamic financial system'" a direct acknowledgement of the importance of the Islamic banking, along with conventional banking.
With the dual banking underlying thought in the new act, 'financial business' in the act refers collectively to conventional financial business and Islamic financial business.
Ernst and Young financial services practices partner Gloria Goh said the insertion is a reflection that Malaysia now has a dual financial system, the Islamic and conventional financial system, and that the amendments in the new act recognise the role BNM plays in ensuring financial stability in both financial systems.
"Under the Financial Markets Masterplan 2000-2010, Malaysia had planned to develop islamic finance and takaful in tandem with the conventional banking and insurance system.
"As a central bank, BNM is empowered under the Act to supervise the dual financial systems and ensuring financial stability," she said.
The Central Bank of Malaysia Act 2009 is expected to be in operation soon.
In September, BNM governor Tan Sri Dr Zeti Akhtar Aziz had said that the new act will empower the central bank to act decisively in enhancing transparency and accountability.
"The Act will extensively provide greater clarity on the mandates for which we are accountable and provide enhanced powers to undertake these mandates," she said in a Bernama report.
She added it would also provide greater flexibility in monetary policy implementation and allow a diversified range of instruments to be deployed, notig that with the challenges confronting central banks, it must have commensurate capabilities to conduct monetary policy operations to maintain price stability during periods of extreme volatility.
On the local front, among the 17 locally incorporated Islamic banks are Bank Islam Malaysia Bhd, Bank Muamalat Malaysia Bhd, Hong Leong Islamic Bank Bhd, Al Rajhi Banking & Investment Corporation (Malaysia) Bhd and Standard Chartered Saadiq Bhd, while the two international Islamic banks are PT Bank Syariah Muamalat Indonesia Tbk and Unicorn International Islamic Bank Malaysia Bhd.
On the takaful front, the local players include Syarikat Takaful Malaysia Bhd, Etiqa Takaful Bhd and Takaful Ikhlas Sdn Bhd, while retakaful is provided by ACR Retakaful SEA Bhd, MNRB Retakaful Bhd and Munich Re Retakaful. The sole international takaful operator is AIA Takaful International Bhd.
(This story appeared in The Malaysian Reserve on Nov 23, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)
Islamic bonds spur interest in South Korea
Now is the time for Korean companies to tap into the rapidly growing $800-billion Islamic capital market, and Malaysia may be one of the best destinations for such companies hoping to raise capital from Muslim investors, said two top financial regulators from Malaysia, reports JoongAng Daily (Nov 21, 2009).
Dato’ Dr. Nik Ramlah Nik Mahmood, managing director of Malaysia’s Securities Commission, and Dato’ Yusli Yusoff, chief executive of Bursa Malaysia Berhad, Malaysia’s stock market operator, said a growing number of Asian companies, including those in Japan and Korea, are expressing interest in issuing bonds based on Islamic principles, which the two said will open a vast new market for the firms.
The two visited Seoul this week to attend the Islamic Finance Conference, jointly organized by Korea Exchange and Bursa Malaysia to help coordinate more financial cooperation among investors and companies in Korea and in Muslim countries.
“By selling sukuk [Islamic bonds], you will be able to attract not just conventional investors but another group of investors who would not have invested in conventional bonds, because they are required to invest in securities structured in line with Islamic financial principles,” Dato’ Nik Ramlah said in an interview with JoongAng Daily. “You’re not excluding existing investors, but you’re opening up to new groups. That’s a major attraction of Islamic bond issuance.”
Sukuk is an Islamic financial certificate working in a similar way to a bond in Western finance but structured in line with Shariah, Islamic religious law.
Since Shariah prohibits the use of interest-bearing securities, a sukuk issuer sells the certificates to the investors, who then lend the certificates back to the issuer for a predetermined “rental fee.” The issuer then signs a contract to promise to buy back the bonds later at par value.
Oil money
With investors in Western countries still reeling from the recession, a growing number of investors are considering a plunge in the Islamic financial market, which has been hit less severely by the crisis and whose economies still boom with oil.
HSBC recently estimated rising liquidity in Arab regions due to the oil boom would prompt the volume of Islamic bonds issued across the world to jump from about $7 billion this year to $14 billion in 2010.
Dato’ Yusli said he has met with officials from several Korean companies planning to issue sukuk and local stock brokerages trying to take part in the process.
“The companies are quite ready. I’m still waiting for some laws to be changed in Korea, then we will be able to assist them,” he said. “The whole legal, accounting, regulatory and systematic frameworks to issue sukuk are very well established in Malaysia.”
Dato’ Yusli also stressed that the modus operandi of Islamic financial principles offers a fresh antidote to today’s global financial system.
“After the crisis, investors are looking for far safer types of investment, and more of them are allocating funds for companies qualified under the ESG [environmental, social and corporate governance],” he said, referring to the global investment criteria for investing in companies with socially responsible management. “We believe that Islamic financial principles are compatible to these types of criteria, for instance, under Islamic law, investing in gambling, weapons or alcohol is prohibited.”
During the Seoul conference this week, Citigroup said Korean industries like autos, construction, manufacturing, retail, energy, machinery, telecom and transportation will be encouraged to attract Muslim investors.
Around 50 top local companies like Samsung Electronics, GS Caltex, SK Telecom, Lotte Shopping, Posco and Korea Airlines and Hyundai Heavy Industries as such examples.
Dato’ Yusli said he has met with representatives from several companies on the list to discuss possible bond sale deals.
Dato’ Nik Ramlah also echoed the same sentiment, saying the Islamic financial principles, which put more priority in transparency and clarity in financial securities’ underlying assets, will offer more assurance to the global market that learned the lesson through the subprime mortgage crisis.
“In Islamic financial products, every conception or underlying contract should lead to the actual products, so you don’t have products that are derivatives on top of derivatives on top of other derivatives, where you don’t know what’s the real underlying asset,” she said.
Dato’ Dr. Nik Ramlah Nik Mahmood, managing director of Malaysia’s Securities Commission, and Dato’ Yusli Yusoff, chief executive of Bursa Malaysia Berhad, Malaysia’s stock market operator, said a growing number of Asian companies, including those in Japan and Korea, are expressing interest in issuing bonds based on Islamic principles, which the two said will open a vast new market for the firms.
The two visited Seoul this week to attend the Islamic Finance Conference, jointly organized by Korea Exchange and Bursa Malaysia to help coordinate more financial cooperation among investors and companies in Korea and in Muslim countries.
“By selling sukuk [Islamic bonds], you will be able to attract not just conventional investors but another group of investors who would not have invested in conventional bonds, because they are required to invest in securities structured in line with Islamic financial principles,” Dato’ Nik Ramlah said in an interview with JoongAng Daily. “You’re not excluding existing investors, but you’re opening up to new groups. That’s a major attraction of Islamic bond issuance.”
Sukuk is an Islamic financial certificate working in a similar way to a bond in Western finance but structured in line with Shariah, Islamic religious law.
Since Shariah prohibits the use of interest-bearing securities, a sukuk issuer sells the certificates to the investors, who then lend the certificates back to the issuer for a predetermined “rental fee.” The issuer then signs a contract to promise to buy back the bonds later at par value.
Oil money
With investors in Western countries still reeling from the recession, a growing number of investors are considering a plunge in the Islamic financial market, which has been hit less severely by the crisis and whose economies still boom with oil.
HSBC recently estimated rising liquidity in Arab regions due to the oil boom would prompt the volume of Islamic bonds issued across the world to jump from about $7 billion this year to $14 billion in 2010.
Dato’ Yusli said he has met with officials from several Korean companies planning to issue sukuk and local stock brokerages trying to take part in the process.
“The companies are quite ready. I’m still waiting for some laws to be changed in Korea, then we will be able to assist them,” he said. “The whole legal, accounting, regulatory and systematic frameworks to issue sukuk are very well established in Malaysia.”
Dato’ Yusli also stressed that the modus operandi of Islamic financial principles offers a fresh antidote to today’s global financial system.
“After the crisis, investors are looking for far safer types of investment, and more of them are allocating funds for companies qualified under the ESG [environmental, social and corporate governance],” he said, referring to the global investment criteria for investing in companies with socially responsible management. “We believe that Islamic financial principles are compatible to these types of criteria, for instance, under Islamic law, investing in gambling, weapons or alcohol is prohibited.”
During the Seoul conference this week, Citigroup said Korean industries like autos, construction, manufacturing, retail, energy, machinery, telecom and transportation will be encouraged to attract Muslim investors.
Around 50 top local companies like Samsung Electronics, GS Caltex, SK Telecom, Lotte Shopping, Posco and Korea Airlines and Hyundai Heavy Industries as such examples.
Dato’ Yusli said he has met with representatives from several companies on the list to discuss possible bond sale deals.
Dato’ Nik Ramlah also echoed the same sentiment, saying the Islamic financial principles, which put more priority in transparency and clarity in financial securities’ underlying assets, will offer more assurance to the global market that learned the lesson through the subprime mortgage crisis.
“In Islamic financial products, every conception or underlying contract should lead to the actual products, so you don’t have products that are derivatives on top of derivatives on top of other derivatives, where you don’t know what’s the real underlying asset,” she said.
Banks moving away from organised tawarruq
Some Middle Eastern banks are avoiding organised tawarruq after a ruling against the practice, an industry official said, a trend that could signal a shake-up for the $1 trillion Islamic financing sector. Shrugging off criticism of the OIC Fiqh Academy’s controversial decree, the organisation’s secretary-general said some institutions have heeded the call to abandon the popular financing arrangement, reports Reuters (Nov 18, 2009).
The report quoted Abdul Salam Al-Abadi, interviewed on the sidelines of a sharia scholars meeting in Malaysia, as saying: "I have been hearing that some banks have agreed that what they were doing is wrong and they have begun changing the method of their tawarruq transaction,’ Abdul Salam Al-Abadi said in an interview on the sidelines of a sharia scholars meeting in Malaysia. They are trying to do it the way it should be done."
He did not identify the banks, it added.
THE REPORT GOES ON:
The International Council of Fiqh Academy, a powerful group of scholars led by the OIC, rocked the industry in April this year with an order forbidding the use of organised tawarruq, a cornerstone of the sharia banking sector.
With the global tawarruq market estimated at more than $100 billion, practitioners had warned of catastrophic results if the rule were to be implemented strictly.
‘If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities,’ law firm Denton Wilde Sapte had said in a note.
Tawarruq is widely used as a source of financing. It involves the sale of an asset to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds.
Organised tawarruq is similar, although the transactions are executed through banks. Some scholars say it is wrong to pre-arrange the parties’ contractual obligations although bankers want this for legal protection and commercial certainty.
Al-Abadi said the Muslim World League’s fiqh academy had similarly prohibited the use of organised tawarruq.
‘After all these discussions, the majority of the scholars say it is forbidden,’ said Al-Abadi, a Syria and Egypt-trained sharia expert and former Jordanian government minister.
‘Our council consists of more than 70 scholars and at the meeting, there were more than 20 experts besides these 70 scholars and the majority said it’s forbidden.’ Several influential sharia scholars have defended the use of tawarruq, although some say the structure needs further refinement.
‘It’s the right of any scholar to say ‘That’s my view, it’s not forbidden,’ Al-Abadi said.
‘We say to the people ‘The way in which you deal is not correct’ and let the people decide in future.’ Some scholars have said organised tawarruq is a mere paper shuffle, without assets actually changing hands, violating the sharia’s rule that financial transactions must involve specific assets.
Islamic banks and their clients rarely, if ever, take delivery of commodities used in tawarruq transactions, as their purpose is to use the assets as fund-raising tools. — Reuters
The report quoted Abdul Salam Al-Abadi, interviewed on the sidelines of a sharia scholars meeting in Malaysia, as saying: "I have been hearing that some banks have agreed that what they were doing is wrong and they have begun changing the method of their tawarruq transaction,’ Abdul Salam Al-Abadi said in an interview on the sidelines of a sharia scholars meeting in Malaysia. They are trying to do it the way it should be done."
He did not identify the banks, it added.
THE REPORT GOES ON:
The International Council of Fiqh Academy, a powerful group of scholars led by the OIC, rocked the industry in April this year with an order forbidding the use of organised tawarruq, a cornerstone of the sharia banking sector.
With the global tawarruq market estimated at more than $100 billion, practitioners had warned of catastrophic results if the rule were to be implemented strictly.
‘If tawarruq were suddenly withdrawn, this would have a dramatic effect because many Islamic financiers routinely use this instrument as a means of liquidity management and to provide their customers with working capital facilities,’ law firm Denton Wilde Sapte had said in a note.
Tawarruq is widely used as a source of financing. It involves the sale of an asset to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds.
Organised tawarruq is similar, although the transactions are executed through banks. Some scholars say it is wrong to pre-arrange the parties’ contractual obligations although bankers want this for legal protection and commercial certainty.
Al-Abadi said the Muslim World League’s fiqh academy had similarly prohibited the use of organised tawarruq.
‘After all these discussions, the majority of the scholars say it is forbidden,’ said Al-Abadi, a Syria and Egypt-trained sharia expert and former Jordanian government minister.
‘Our council consists of more than 70 scholars and at the meeting, there were more than 20 experts besides these 70 scholars and the majority said it’s forbidden.’ Several influential sharia scholars have defended the use of tawarruq, although some say the structure needs further refinement.
‘It’s the right of any scholar to say ‘That’s my view, it’s not forbidden,’ Al-Abadi said.
‘We say to the people ‘The way in which you deal is not correct’ and let the people decide in future.’ Some scholars have said organised tawarruq is a mere paper shuffle, without assets actually changing hands, violating the sharia’s rule that financial transactions must involve specific assets.
Islamic banks and their clients rarely, if ever, take delivery of commodities used in tawarruq transactions, as their purpose is to use the assets as fund-raising tools. — Reuters
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