islamic finance bulletin may 2013

Islamic Finance Bulletin

May 2013

lums.lancs.ac.uk/research/centres/golcer

Gulf One Lancaster Centre For Economic Research

From the Editor

The keynote of market developments in April was the continuing uptrend of stock markets, fuelled

in the West by the ongoing commitment of central banks to providing liquidity impetus, a degree of

rotation from wavering bond accounts, and the demise of gold as a safe haven. Risk aversion gave way to

improving confidence about the US economy especially, and its trade-related and dollar-related associates

in Asia and the Gulf region.

Doubts remained, however, as to whether the eurozone will eventually escape its structural impasse

between creditor and debtor, essentially northern and southern, members, and whether China’s relapse

in manufacturing activity can be dismissed as a temporary phenomenon. Japan’s newfound policy

dedication to reflation, and aspiration of cyclical reactions in inflation and growth, initiated another phase

of stimulus-based sentiment, until uncertainties crept in.

Sukuk markets were loaded still to the primary side, with issuances in likely locations continuing to

be well received, demand outstripping supply, to the point where secondary trading and prices were

disappointing by comparison. As we note in a viewpoint piece, the structural support for Islamic fixed-

income nevertheless may have to contend with the benchmark lead given by developed-country sovereign

bonds, whose outlook appears potentially brittle.

Besides tracking those trends, and regular news items on the Sharia-compliant sector, in this edition we

reflect on the range of opinions aired at an Islamic finance conference in Dubai, whether scholarly or

market-oriented in origin, as to the probable or preferred future for the industry. We focus also on gold,

whose status as both monetary and real asset means it is a special case in asset allocation, but which for a

mixture of reasons tumbled in the month.

ContentsHIGHLIGHTS (p.3)

RECENT DEVELOPMENTS (p.4)

VIEWPOINTS (p.6)

STOCK MARKETS (p.10)

COMMODITIES (p.13)

BOND AND CDS MARKETS (p.15)

ACCOUNTANCY ISSUES (p.18)

PERSPECTIVE (p.19)

DIARY OF EVENTS (p.20)

Gold: The yellow metal fell drastically in April, and

has struggled to recover since. Its price movements

are generally in reaction to a range of fundamental,

economic and market factors, but in this instance

it probably cracked under the pressure of lacking

a running investment yield compared to equities,

which have surged this year, as well as prolonged

sideways trading. Also, the efforts by Western central

banks to spark growth by monetary means have

produced lacklustre results, and not prompted much

of an apparent inflation threat.

Global supervision: The Islamic Development Bank

(IDB) has called for the creation of a global Shariah

supervisory board, to bring greater uniformity to the

Islamic finance industry. While country-level boards

have been installed and initiated in Malaysia, originally,

and subsequently among GCC states, Pakistan and

Nigeria, the notion remains favoured of a globally-

accepted committee that can require a single set of

standards. The dispersion of practices to date has

prompted concerns about conflict of interest and

confusion among investors.

Asset allocation: While stock markets have

surged on waves of liquidity, bonds have shown

nervousness, and commodities have suffered against

an unconvincing background of global economic

recovery. Sukuk trading, meanwhile, has also

reflected (regional) liquidity, and yet remains exposed

to international, fixed-income benchmarks. With the

potential for economic and financial upset still so

obvious, investors in these Islamic instruments have

to be aware of the global dangers that could damage

even diversified portfolios.

Highlights

Recent Developments in the Islamic Finance IndustryGlobal adviser for Islamic finance?

The Islamic Development Bank (IDB), a Jeddah-based

multilateral institution, is calling for the creation of a

global Shariah supervisory board, which would offer

greater uniformity for the Islamic finance industry.

Islamic scholars are likely to be experts in financial and

religious law, but they are not certified or accredited as in

other professions. Regulators nowadays are increasingly

developing ways to ensure the hiring of experienced and

financially-literate scholars.

Supervision over Shariah-compliant banking products is

gaining acceptance across the globe. Malaysia pioneered

the country-level Shariah board. Recently, several

countries have introduced central boards of their own,

including Dubai, Oman, Pakistan and Nigeria.

Some countries, like Oman, have imposed term limits on

the Shariah scholars who are members of these boards,

while also requiring they abide by a code of conduct.

Still, however, there needs to be further investigations

into acceptable references for the industry that would

enable the concept of a globally-accepted Shariah

committee with the aim of helping all Islamic financial

institutions operating across the world, bringing them in

line with a uniform standard to be able to meet or beat

conventional counterparts.

Source: The Arabian Business News, May 16th

It seems to GOLCER that with the wide expansion of the

industry, regulators are seeking to standardise industry

practices and improve consumer perceptions. That trend

is justifiable, considering the wide dispersion of practices

in Islamic banking and finance worldwide, alongside

its expanded acceptability in many countries after the

global financial crisis and the perceived weaknesses of

the conventional banking system in intensifying the

credit crunch. Leaving Shariah advisors in individual

Islamic banks and financial firms to decide whether their

products and activities obeyed religious principles is

an approach adopted in many countries that has been

criticised for inviting potential conflicts of interest,

and producing conflicting rulings that have confused

investors.

Kuwait investment firm launches Islamic finance fund

Kuwait-based Asiya Investments, whose largest

shareholder is the sovereign wealth fund Kuwait

Investment Authority, has launched an Islamic trade

finance fund worthing $20 million, providing seed

capital for small Asian manufacturers. Asiya’s Cayman

fund offers short-term financing through Murabaha

contracts, where the fund buys and sells merchandise

on behalf of the company and shares a portion of

the profits. Asiya is striving to fill the gap left by

conventional banks which are severely scaling back

their trade finance business, making credit scarce

for small and medium-sized firms. It aims to engage

with those companies that are already banked but

whose credit lines are limited, so as to complement

their financing needs. The retreat of conventional

banks follows the impact of the global financial crisis,

and the higher capital requirements of the upcoming

Basel III regulations. Some 20% of the business could

thereby be opened to non-bank institutions.

Source: Reuters, May 6th

GOLCER believes that, though Islamic finance has

been flourishing worldwide, the industry has been

ignoring merchandise trade and allowing dominance

over trade finance by conventional banks. It also

seems that Islamic institutions across the Gulf are

working to diversify their money market transactions.

Initiatives by firms like Asiya could help in promoting

the range of industry practices.

UK’s largest Islamic bank targets the Gulf

The Bank of London and The Middle East (BLME),

Recent Developments in the Islamic Finance Industry

representing Britain’s largest standalone Islamic

bank, is working hard to attain this year 15% growth

in assets, while seeking the help from its Dubai office

to boost its capital markets and wealth management

offerings. BLME offers corporate banking and wealth

management services. The bank was founded in

2006 with the backing of Kuwaiti investors, including

Boubyan Bank. It has succeeded to carving out a

niche in middle-market transactions, while benefiting

from the reduced activity of large British banking

groups. The bank is planning a greater presence in

the emirate’s financial district this year, hoping to

attract regional business from the biggest resource-

rich countries such as Qatar and Saudi Arabia.

Source: The Arabian Business News, May 17th

Qatar attempting to help Islamic Bank of Britain

Islamic Bank of Britain (IBB), which narrowed its

losses in 2012, is expected to fund an asset growth

and transformation programme following the raising

of £10m ($15.5m) from majority shareholder Qatar

International Islamic Bank (QIIB). QIIB, which now

owns 91% of IBB, has been in discussions since June

last year to sell a controlling stake in the British bank.

IBB has struggled to turn a profit since its inception

in 2004, posting a loss of £6.99 million pounds in

2012 versus a loss of 9 million pounds in 2011. The

gap was narrowed by nearly doubling the home

financing business to £117m pounds in 2012 from

£61m a year earlier.

Source: The Arabian Business News, April 30th

GOLCER finds IBB’s reported financial figures

during the last year as sending a poor signal for the

operation of the Islamic banking industry in one of

Europe’s largest countries. However, with the high

population of Muslims living in the UK, and the

majority seeking Shariah-compliant financing for real

estate, instead of conventional mortgages, the bank

still has the prospect of competing in that area of

business.

Launch of Islamic insurance by London firm

London-based firm Cobalt has developed a

Shariah-compliant insurance platform that uses a

syndication model to help spread risk across a panel

of underwriters. The purpose is to design an Islamic

alternative in London for Islamic insurance, allowing

multiple insurers to pool their capacity. Each insurer

can subscribe to the desired level of risk though

individual Islamic windows wherein policyholder

funds are segregated from conventional funds,

without affecting their rating levels, and helping price

the risk competitively. Cobalt aims to address capacity

constraints in the takaful (Islamic insurance) industry,

which is based on the concept of mutuality.


GOLCER sees this initiative as a novel method that

could boost capacity in the Islamic finance industry in

the UK, where the industry seems to be struggling to

compete with conventional counterparts. Within this

format the risk is priced by a lead insurer, and other

firms must then subscribe under similar terms, akin

to the subscription model used in London’s insurance

market.

Indian Stock Exchange launches Islamic Index

Mumbai’s stock exchange (BSE) has launched an

Islamic equity index based on the broad-based S&P

BSE 500 index. This offers a new benchmark for

Islamic investors in one of the world’s largest stock

exchanges. The new index draws on the largest 500

companies in the BSE, out of more than 5,000 listed,

while fitting Islamic finance principles such as bans on

investing in alcohol, tobacco and gambling-related

businesses.


GOLCER recognizes the obvious interest towards India

as one of the large stock markets and an economy

of such potential. Substantial challenges still await

the Islamic finance industry in that country, which is

of limited size to date. These are likely to restrain the

rapid development of the sector, as well as prevent

entrants to the business from making quick profits.

Viewpoint

Why gold’s image has been tarnished

by Andrew Shouler

Gold shocked markets with a steep dive last month,

when prices plunged to around $1350 an ounce,

having begun the year near $1700. A rebound of

some ten per cent was subsequently seen, without

threatening the $1500 level. Another slip has

followed, and the rebuilding of confidence has been

a delicate affair.

The metal has clearly lost its lustre, at the same

time displaying a degree of volatility that itself

compromises a key part of its traditional appeal for

those seeking safety in turbulent times.

To discern why, a combination of fundamental,

economic, and market or technical influences needs

to be digested.

Firstly, the supply of gold is naturally constrained,

whether mined, or released from stocks, or

replenished by a certain amount of annual recycling.

Meanwhile, demand reflects the cultural devotion of

some societies to jewellery, but otherwise responds

to price in a fairly conventional way.

The modest recovery in prices to around $1400 an

ounce has owed substantially to the opportunism of

traditional consumers and industrial users, such as

from India and China, whose interest is abiding and

recurrent, but still price-sensitive.

Secondly, gold had been propelled higher following

the global financial crisis because of the dangers of

economic chaos and/or inflation.

In particular, the finances of Western developed

countries became so overstretched, as banking

bailouts swelled accumulated indebtedness, that they

seemed out of control, and gold represented a safe

haven in the event of a desperate reflation of money

in circulation by the authorities.

The various programmes of quantitative easing

(QE) by key central banks in the US, UK and now

remarkably Japan have fulfilled part of that

expectation.

Thirdly, financial markets are well-known for being

prone to overshooting, the result of speculative

forces and momentum trading. Since gold pays no

income (yield), it relies on capital growth (price) for

the return on investment, which is enough to make it

vulnerable to sharp swings. Moreover, the breaching

of floors and ceilings of various chart levels can

trigger even sharper movements up or down. That

occurred with the break below the $1520 marker

during April.

It seems plausible that gold’s recent plunge, and

struggle to revive, could be attributed to two drivers

in particular.

Because a sideways pattern had been sustained for

quite a while, market patience wore thin in waiting

for gold’s climb back towards its peak of September

2011, beyond $1900 an ounce. A relative collapse

in price was an accident to some extent waiting to

happen.

Also, while governments are indeed trying to reflate

their way out of trouble, they have made relatively

little headway. So insipid has been the response of

real growth, particularly in Europe, that inflation has

not resurfaced as vigorously as feared.

Growth is difficult to revive promptly when the

underlying failings are on the supply side of the

economy, requiring structural reforms, yet demand-

side management is the main chosen remedy.

QE’s deliberate suppression of both short and long

interest rates has had much more of a monetary than

real effect. It may even have damaged credit creation

and the profitability of the banks by flattening the

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yield curve. That could be a relatively unpublicized

but very seriously pertinent aspect of the huge policy

experiment that is being so forcefully conducted.

It seems reasonable to suppose that gold succumbed

to these market and economic factors especially.

Without a change in international policies, it may

take some time to regain its sparkle.

Viewpoint

A doubtful crossroads for asset classes, including sukuk

by Andrew Shouler

Equities have outperformed in recent market trends.

Bonds have trodden water, having approached

what many consider to be the limit of their inherent

potential; commodities such as copper have

reflected the sluggishness of the world economy

in its recovery phase, overhung by sovereign debt

burdens; gold has slumped, having run out of

reasons to be held in the absence of running yield or

inflation (see adjoining article).

For investors in sukuk, there is an obvious downside

to beware, in relation to the vulnerability of

benchmark US Treasuries, especially as the American

economy seems on the rebound and the Federal

Reserve is publicly contemplating tapering its (QE)

programme of asset purchases. The pool of regional

liquidity that upholds the Islamic fixed-income paper,

in the Gulf especially, is an offsetting comfort of sorts.

Ricky Husaini, chief investment office at Trading

Portfolio, told an Islamic finance conference in Dubai

earlier this month that it was only a matter of time

before sukuk portfolios would be unwound. In this

regard, a detailed examination of the correlation

factors behind the surge in these instruments had

shown that sheer liquidity was by far the most

important, so in that sense there was ongoing

support. Indeed, US interest rates were only 0.25 per

cent inversely correlated with sukuk prices.

Still, the international background would not be so

benignly irrelevant in future, he implied. At some

point, yields and credit spreads would rise, and

sukuk would not avoid the fallout. While economic

recovery had been slow to this point, a pick-up in

growth and inflation would eventually be achieved,

even though the perversity of QE – namely that

suppression of rates across the yield curve means that

banks return deposits to the central bank rather than

boost their lending – had dragged on that prospect.

In fact, so overextended is the Fed’s exposure to

the US Treasury market, including the extension of

maturities, that a small hike in rates would lead to

an eightfold decline in portfolio value, something

that should concentrate the minds of bond investors,

budget watchers and taxpayers alike. With a huge

debt overload to be worked out, the US is nowhere

near out of the woods financially, with implications

for all asset classes and any investor exposed to the

US dollar or related currencies, such as occupy key

investment pockets across Asia and the Gulf.

So scrutiny has to be all the more careful now,

it seems. “Global credit markets are nervously

watching the gyrations in US Treasury markets,” said

Standard Chartered Bank in recent research. “With

spreads across credit markets having tightened

over the past couple of years, the cushion is very

thin.” That said, it believes a sweet spot for the bond

market may persist a while.

As for stock markets, also evidently riding a wave

of official liquidity stimulus, the hope must be that

underlying economic conditions are genuinely

improving, whereas the fear would be that the

bubble which burst so dramatically several years ago

is now being pieced painstakingly together again,

potentially only to explode into another, maybe even

greater, crisis.

The grim, recently adopted determination of the

Japanese authorities to provoke inflation in an

effort to promote growth -- in the face of a potential

debt morasse, deteriorating demographics and a

zombified economic system -- belongs to the same

mode of thinking that is afflicting central banks

and governments in the Western world. Both the

Nikkei and the JGB markets have already sensed that

something is badly wrong, and Japan is the example that

the other leading countries seem destined to follow.

When policymakers don’t appear to know what they are

doing, putting the growth horse behind the inflation

cart, investors have to be especially on their guard to

get smartly off the merry-go-round at the right moment.

For frontier and emerging markets, the fact there are

localized factors which may cushion the shock doesn’t

mean it’s an experience worth sharing.

GCC

Though dipping sharply in mid-month on an

aggregate basis, equities overall in the Gulf

reasserted their upward bias in April. The move

was led by the UAE, and qualified by a lagging

performance by the Saudi bourse. Dubai’s DFM

index surged by 16.7% on the month, driven

by a banking sector which soared by 27% as

first-quarter earnings impressed, far exceeding

expectations. According to GIC, the market

seemed to be re-rating an industry that had

previously been disfavoured, priced at a steep

discount compared to fair-value estimates. Abu

Dhabi’s ADSM index rose by 8.2%, with banks

and telecoms again at the forefront. Emirates

NBD reported that UAE bank profit margins and

returns on equity continued to improve. The

Saudi Tadawul, meanwhile, barely moved, with a

mixture of performers against a backdrop of some

disappointment over oil prices.

MENA

Non-GCC stocks lacked impetus in April, reflecting

a mixed tone internationally, as epitomized

by Turkey’s index retreating slightly, despite a

background of continually declining interest

rates. Egypt’s bourse, due in fact to merge with

Istanbul’s later this year, continued with mixed

fortunes, upon the persistence of both political

and economic concerns, and the feeling that

the government, inexperienced and under

pressure, does not have stock market sentiment

as a priority. Turnover remained slack, with

both new issuance and foreign investors in

abeyance. Reuters reported positive signs,

however, as the stock exchange took technical

steps seeking to restore volumes, and a

parliamentary committee decided to reverse

a tax charge on a controversial takeover

deal. Uncertainty nevertheless seemed set to

prevail, including over the proposed merger of

investment firm EFG-Hermes with QInvest of

Qatar. The IMF’s critical loan remained pending,

but a cabinet reshuffle made it plain that this

target was firmly in sight.

01−Feb 19−Feb 09−Mar 27−Mar 14−Apr 30−Apr68.5

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Stock Markets

Far East

South-East Asian stocks were essentially upbeat

in April, typically recording gains of 2-5%, to

an extent tracking world benchmarks. Markets

were lifted by expectations that the US Federal

Reserve and European Central Bank would retain

their determined, accommodative monetary

stances, as well as by strong quarterly earnings

releases regionally that prompted uptake of

blue chips. Malaysia, benefiting noticeably from

foreign inflows, and Indonesia reached record

high levels. Thailand, with key energy stocks

boosted by oil prices, and Taiwan jumped by over

5%; Singapore’s bourse rose to a 5-year high.

Across the board, however, a measure of concern

prevailed over growth-related statistics emerging

from China, and consequently the durability of

global growth signs.

Rest of the World

Among key equity benchmarks, Japan’s ascendant

indices stood out last month, driven by the new

government’s overriding concern to provoke

inflation and growth, and its effective diktat to the

central bank to that effect, aiming to create a tidal

wave of monetary liquidity to boost consumption

and asset markets. Investors in developed

and dependent emerging markets continued

to be encouraged by the apparent economic

recovery in the US, accompanied by low interest

rates and tempered inflation, complemented

by corporate earnings beating estimates and

jobs data outstripping forecasts. Europe,

however, remained a mixed influence, as weak

manufacturing and business confidence figures,

even in Germany, provoked an ECB rate cut.

Policy easing was seen also in countries ranging

from Australia to Vietnam.

Sources: GIC, Emirates NBD, Reuters


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Islamic or Shariah compli-ant indices exclude indus-tries whose lines of busi-

ness incorporate forbidden goods or where debts/

assets ratios exceed 33%. The increasing popular-ity of Islamic finance has

led to the establishment of Shariah compliant stock

indices in many stock markets across the world, even where local Muslim populations are relatively

small, such as in China and Japan.

Volatility is a measure of un-certaincy of market returns. It is calculated as the standard

deviation of the returns in the reported month. The formula for the standard deviation is:

σ=E[(X-μ)2]1/2

Islamic Stock Indices

Conventional Stock Indices

Evolution of Islamic Stock Markets in April 2013 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Prices represent the closing price of the respective index at 30/4/2013. Percent-age Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream

Evolution of Stock Markets in April 2013 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Price represent the closing price of the respective index at 30/4/2013. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream

CommoditiesOil

Oil prices dipped quite sharply in mid-month, but

recovered as trading positions rebalanced. Notably,

Brent troughed below $100, as demand from European

refiners declined, also in sympathy with the plunge

in gold prices. Opec, the IEA and US EIA all reduced

their forecasts for demand this year, referring to global

economic weakness. Both US and Chinese requirements

have slipped. Meanwhile, supply is comparatively firm.

The shale revolution in the US has seen crude exports rise

to their fastest for over a decade, and Iraq and Libya are

producing solidly again. High trading volumes reflected

the unwinding of speculative positions earlier in the year,

with some sign of momentum. A quieter geopolitical

environment has also tempered price expectations. The

WTI-Brent spread narrowed to around $10, as traders bet

on its volatility, rather than for any significant change in

the transport bottlenecks in the US that have driven the

discrepancy.

Natural Gas

The Henry Hub (HH) natural gas price index once again

gained substantially during April, contrasting with

the downforce upon other major commodities. It hit

a localized peak of $4.43/mmbtu in the middle of the

month upon cold Midwest and Texas US weather forecasts

promising elevated heating demand, as well as sliding

stocks data. Inventories were already below normal as

the result of an unexpectedly cool spring, limiting storage

injections. Buyers appeared again as prices breached

technical levels. However, late in the month profit-taking

kicked in, the market recognizing that climbing gas

output will actually keep supplies comfortable. Sellers

also saw further chart points failing to be breached.

Moreover, utilities were likely to be driven to use coal

rather than gas at such price levels.

Gold

Gold took a conspicuous dive in April, prompting much

soul-searching among investors and commentators, and

doubt about future direction. The apparent muddling

through of the US economy, without inflationary impetus,

and declining sense of crisis in the eurozone, combined


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to quash the metal’s key attractions, and the onset

of volatility itself created harm. A slip below $1520

broke an important technical level, leading to bearish

momentum. Investors had showed signs of growing

tired of waiting for the recovery of higher levels

previously seen, losing out compared to the income-

yielding returns of equities in the year to date, as well

as their capital growth. Reactive buying from industrial

users and Chinese and Indian consumers brought a

turnaround late in the month, but gold’s spell seemed to have

been broken.

Copper/Base MetalsCopper hit an 18-month low during April, with production

rising at its quickest rate in a decade, as past mining

investments are realized. Chile’s output has been boosted by

the expansion of Escondida, the world’s largest copper mine.

Traders were concerned that producer profitability at current

prices meant that the downtrend could easily be sustained.

Stocks of the metal at LME warehouses have almost tripled

since last autumn. The sluggishness of manufacturing activity

in China, and its knock-on to global trade, added to the

concern, although later in the month a hint of optimism from

Chinese consumers came through to moderate sentiment.

Sugar/Agriculturals

A likely bumper cane crop depressed sugar prices, overriding

harvest delays owing to heavy rains. Record output from the

dominant centre-south region of Brazil is due, and speculators

drove prices down through technical supports. A huge

delivery against the US May futures contract compounded the

trend by adding to the global surplus, despite strong demand

from Asia and the Middle East. The price tumble might be

checked by mills switching to making ethanol, the biofuel

alternative to uptrending gasoline prices. With cane planting

creating a multi-year effect, however, the key props for sugar

would still appear mainly to be a weather event or change in

Brazilian energy policy, specialists advised.

Edible Oils

Palm oil dropped again in April, with concern prevailing

over the health of China’s economy, and supply continuing

to outpace demand. However, inventories in Malaysia, the

world’s second-largest producer, declined as exports held

above production, generating some hope of price rebound.

Bargain-hunting emerged late in the month, alongside a

rally in soybeans as demand for US product grew as Brazilian

exports slowed. However, prices were checked by the news


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Palm & Soybean Oil

Soybean Oil

Evolution of highly traded commodities in March 2013. MTM Change and Percentage Volatilities. US $ and US c indicate United States Dol-lar and United States cent repsectively. bbl = billion barrels, MMBTU = Million British Thermal Unists, MT = Metric Tonne, LB = Pound and Bsh=Bushel. Prices represent the price of the respective commodity at 29/3/2013. Source: Datastream

that Indonesia, the world’s largest producer, cut export

taxes, liable to limit Malaysian shipments.

Sources: Financial Times, Wall Street Journal, OPEC, Bloomberg, Daily Telegraph

GCC

Gulf bonds progressed even higher in April in line

with a continuing sense of global economic weakness,

impeding any inflationary threat that might put

pressure on yields, which continued to drop. In

common with Dubai’s outperformance in stocks on

the month, CDS spreads tightened the most in the

emirate. Regional credit markets overall headed

sideways for much of the month, focusing on new

issuances and concentrated at the longer end of the

curve, particularly in investment-grade, although

additional investments veered towards the shorter

end to contain any duration risk. Regional liquidity

provided much bolster, but uncertainty had increased,

with doubts growing about the efficacy and longevity

of the US Fed’s easing and asset purchase strategy.

Late in the month, however, the ongoing support from

the US and European central banks appeared to be

reaffirmed, giving another shot in the arm to global

fixed-income, GCC instruments included.

Egypt / MENA

In contrast with GCC bonds, others in the Mena space

fared less well during the month, dominated by the

turbulence of Egypt, where unpromising private

sector activity continued to reflect continued political

dissensions and economic uncertainty. Nevertheless,

a degree of stability was brought by Qatar’s pledge of

another $3bn in purchasing the country’s sovereign

bonds, following the precedent of the $5bn committed

last year. Concerns for further devaluation of the

Egyptian pound, and diminished official reserves, were

alleviated, while agreement with the IMF remains an

outstanding and critical component of a concerted

recovery in sentiment. Tunisia meanwhile managed to

secure preliminary approval for a $1.75bn facility from

the Fund. Even so, recourse to bailouts and associated

terms can hardly given confidence to investors looking

beyond speculative investment to the medium term.

Malaysia / Far East

Yields fell on the month in response to overseas

benchmarks. Moreover, later in the month Asian


3.4

3.5

3.6

3.7

3.8

Yie

ld t

o M

atu

rity

(%

)

137

137.5

138

138.5

139

139.5

140

140.5

141

Bo

nd

Ind

ex

Bahrain Bond Yields & Prices


7

7.5

8

8.5

9

Yie

ld t

o M

atu

rity

(%

)

190

195

200

205

210

215

220

225

230Egypt Bond Yields & Prices

Bo

nd

Ind

ex


1.7

1.75

1.8

1.85

Yie

ld t

o M

atu

rity

(%

)

275.5

276

276.5

277

277.5

278

278.5Malaysia Bond Yields & Prices

Bo

nd

Ind

ex

Bonds and CDS markets

high-yield benefited in the same way as their US

counterparts, as relative risk-aversion in earlier weeks

was reversed. Asian local currency bond markets

performed well as weak global economic data,

concerns over sharp declines in commodities prices

and aggressively easy monetary policies provided solid

backing. Bank of Japan announced a quantitative

and qualitative easing programme that surpassed

Credit Default Swap Markets

Sovereign Bond Markets

Evolution of Bond Markets in April 2013 relative to the previous month. The table reports the price index on which the MTM Change is calculated (month-to-month) and the Yield of sovereign bond maturities typically between 6 months and 25 years. Data as at 30/4/2013.

Evolution of CDS Spreads in April 2013 relative to the previ-ous month. The index reported here represents the average ba-sis points (bp) of a 5-year CDS for protection against sovereign bonds. Data as at 30/4/2013. MTM Change refers to the change relative to the previous month.


1.7

1.8

1.9

2

2.1

Yie

ld t

o M

atu

rity

(%

)

150

151

152

153

154

155

156

157

158US Bond Yields & Prices

Bo

nd

In

de

x

expectations. News that Japan is investing in ASEAN

bonds also gave support to regional markets. Asian

currencies generally rose in April, and inflation

data eased, both assisting sentiment. Malaysian

government securities advanced steadily, with local

accounts relatively undisturbed by election fears,

which were reflected instead by an interruption to

funds flows from abroad.

Global Benchmarks

Key bond markets were well supported in April,

giving a firm lead across the fixed-income universe,

owing to a succession of relatively poor economic

statistics around the developed world, in terms of the

rate of activity, with corresponding cuts to the IMF’s

respective forecasts. For example, US Q1 growth

data came in below expectation, though reasonably

positive at 2.5%, while Spanish unemployment data

highlighted the grim state of the eurozone. Both

US and European headline inflation figures fell.

Investors’ increasingly desperate hunt for income

led to higher returns among riskier assets, including

floating-rate and high-yield, corporates and

peripheral sovereigns, rather than safe havens. To

illustrate the point, Apple successfully issued $17bn

of debt, the largest such transaction ever.

Sources: GIC, Invest AD, Broker Reports

Islamic Bonds (Sukuk)

GCC fixed-income trading was positive with a

tightening of spreads in April, according to GIC, with the

conventional space outperforming sukuk (1.51% versus

+1.07%). The HSBC Nasdaq-Dubai GCC USD Sukuk/Bond

TR Index (GCCB) rose to 160.2 from 158.0, to yielding

3.2%.

Deal flow was quiet. Among primary issues reported by

Reuters, Sharjah Islamic Bank (SIB) sold a $500 million

five-year sukuk at tighter pricing than initially indicated

owing to the strength of bidding from the Gulf Arab

region.

Maturing in 2018, and priced at par with a profit rate

of 2.95%, the issue’s order book was over $2 billion

when the official guidance was released. Traders noted,

however, that the it offered only a fractional premium for

an extended maturity, that might lead to a weakening

in secondary markets, as had already been seen on a

number of occasions.

GIC remarked that the deal attracted a wide range of

investors across geographies and investor types, as SIB

correctly positioned the credit, besides the scarcity value

of such a reputable name.

A $500 million sukuk from Turkiye Finans was the latest in

a series of international debt issues from Turkey. Middle

Eastern investors dominated, taking just over half the

deal, which was nearly four times oversubscribed.

Islamic banks in Turkey have followed the sovereign’s

lead, and sales of Turkish sukuk to Gulf investors may

increase as Istanbul extends its offerings, currently

working on new regulations to allow a range of

sukuk structures, designed for project finance and

infrastructure development.

Riyadh-based Al Bayan Holding became the first Saudi

Arabian company to issue an Islamic bond in Malaysian

ringgit (200m, $65.4m), as the first tranche of a 1 billion

ringgit programme. Companies in the Gulf are targeting

Malaysian investors to diversify funding sources and tap

Asian demand for Middle East debt. The sukuk was in

the form of wakala; certificates issued by an originator

through an SPV that buys assets given to an agent for

management.


2.9

3

3.1

3.2

3.3

Yie

ld t

o M

atu

rity

(%

)

99.6

99.8

100

100.2

100.4

100.6HSBC−NASDAQ Dubai Sukuk Index (SKBI)

Cle

an

Pri

ce

Sukuk is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities

are structured to comply with the Islamic law and its investment principles, which

prohibits the charging, or paying of interest. Financial assets that comply with

the Islamic law can be classified in ac-cordance with their tradability and non-

tradability in the secondary markets.

Source: HSBC Nasdaq Dubai

Indonesia’s finance ministry raised 1 trillion rupiah

($102.9m) worth of project-based sukuk, below

itsntargeted 1.5 trillion, at 6.8%.

Dana Gas received shareholder approval for refinancing of

its US$ 1bn trust certificates. New sukuk of US$ 850m (half

a convertible tranche, half ordinary, with 5-year maturities

and an average profit rate of 8%) were subsequently listed

on the Irish Stock Exchange, following a US$70m cash pay-

down and cancellation of another US$80m.

Kuwait Finance House (KFH) research showed the volume

of sukuk issued in the first quarter of 2013 to have reached

$34.2bn, up 21.5% on the quarter. Sovereign issuances

continued to dominate. Total issuance is expected to reach

$275bn by year-end. Global outstanding sukuk reached

$235.4bn, up 2.6% from $229.3 bn at year-end 2012 and

16.7% on the year.

Sources: GIC, Reuters

Accountancy Issues, Rules and Regulations

Liquidity guidance for Islamic banks due

The Kuala Lumpur-based Islamic Financial Services

Board (IFSB) is planning to issue strict guidance for

Islamic banks on the adoption of liquidity standards

by 2014, having already issued a draft guideline

in March 2012. That advisory warned lenders

lacking high-quality assets to meet new regulatory

requirements under Basel III, focusing on the liquidity

coverage ratio provision, designed to help meet short-

term obligations. The IFSB sets global guidelines for

Islamic finance which are combined with those by

national financial regulators. A separate guideline on

capital adequacy is currently under revision, hoped to

be issued at the end of this year.


GOLCER believes this guidance for Islamic banks needs

to be finalized as soon as possible, as the industry

is urged to develop instruments to meet the Basel

III criteria, given that guidance has already been

issued for conventional banks. Liquidity is an area

where Islamic banks are seriously challenged, given

limited access to liquidity tools generally compared to

conventional banks, and specifically the lack of liquid

Shariah-compliant instruments that can meet Basel III’s

stringent requirements. To date, most countries have

a shortage of Shariah-compliant financial instruments

that can be classified as “level 1 assets” under Basel

criteria. Worse still, sukuk issued in countries with

a sovereign rating lower than AA- would not meet

the requirements for “level 2 assets”. It is urgent that

the industry find a speedy solution, innovating the

necessary instruments, which should also take into

account the avoidance of concentration of risk that

would otherwise place pressures on bank margins and

financing rates.

Innovative opportunities in Malaysia

Investors worldwide are increasingly attracted to the

lucrative opportunities that Malaysia exhibits in the

many different sectors of Islamic finance. The country

is spurring the sukuk sector forward while achieving

growth in various other sectors such as takaful, real

estate, Islamic equity, agriculture, transport and more

besides. Malaysia has become world-renowned as an

unprecedented Islamic financial hub. As long ago as

1999 the Kuala Lumpur Stock Exchange (now known

as Bursa Malaysia) launched its Shariah Index (SI) to

facilitate participation in equity investments to be

compatible with the Islamic principles of Shariah. The

Bursa Malaysia SI is a weighted-average index, initially

made up of 276 main board companies designated as

Shariah-approved securities by the Shariah Advisory

Council (SAC) of the Securities Commission of

Malaysia.

Source: The Global Islamic Finance Magazine, May 13th

GOLCER finds that the global growth of Islamic capital

market products and services in Malaysia has been

tremendous in recent years, with the development of

the stock market’s Sharia Index and the offering of a

holistic range of innovative Islamic market products,

from equities, derivatives, and commodities to debt

securities, across all sectors and industries.

Pakistan sets up Shariah Advisory Board

Pakistan’s securities commission has established a

nine-member Shariah supervisory board, with the

aim of overseeing Islamic finance instruments in

the world’s second-most populous Muslim nation.

A country-level approach to supervising Shariah-

compliant products was pioneered by Malaysia, and

recently other economies have introduced central

Shariah boards of their own, including Dubai, Oman

and Nigeria. Pakistan’s regulators are rolling out new

rules in an effort to grow Islamic banks’ share of the

total banking sector to 15% by 2017.


The creation of the Shariah supervisory board was

predicted by GOLCER in previous issues of the bulletin

this year, since an accumulative and centralised

approach for regulating Islamic banks was understood

to be increasingly needed for adoption worldwide.

Perspective

At a conference in Dubai on Islamic finance recently, it

was clear that the subject can be approached in very

different ways, not only in the frequent divergence

between some scholars and many bankers, but in

the varying assessments among themselves as to the

motivating forces by which the industry should grow.

Lead speaker Harun Kapetanovic, economic adviser

to the Dubai government, effectively made the point

in his remark, “Islamic finance has a dilemma. Does it

want to converge with international practices, or does

it want to integrate with economic development?”

He noted that the sector itself wants to converge with

certain established norms, “because the demand is

so strong”, but argued that it needed also to serve a

broader perspective in advancing prosperity, in line

with Dubai’s own aspirations to become an Islamic

economic (not merely financial) hub.

There is a distinction generally between those

voices seeking to identify basic principles and settle

universally upon them, and those who treat theoretical

purity as implausible in the world as it is today,

particularly as Sharia-compliant institutions compete

with traditional banks for funds.

Dr Azeemuddin Subhani, head of Islamic finance

at Ajman University, told the audience his

research found that “Sharia is one and final, but its

interpretation differs from scholar to scholar, region

to region, country to country”, and the chances of

standardisation, frankly, were nil. His exposition on

the meaning of riba, and the prohibition on money

begetting money, clearly defaulted to the attempt

to find a common scholarly understanding to inform

the whole of Islamic finance. Equally clearly, he was

not hopeful that the problems of a spectrum of views

would be solved.

Another speaker, from Malaysia, cited that he had

worked for four different banks, each harbouring its

own version of Islamic finance. That diversity was not

a source of difficulty, though, in his opinion. Indeed,

“that’s part of its beauty”, as to the sector’s possibilities

and range. There can be greater harmonization in terms

of regulatory requirements and documentation, but not

global standardization as such, he ventured.

Beyond that, representatives from banking, particularly

those from the conventional sector with Islamic

windows, made it clear that their main concern was to

meet the expectations of customers and clients.

One practitioner explained how even those people

wishing to retain Sharia-compliance were bringing

requests to achieve high yields from investment-grade

instruments, using leverage to enhance, for instance,

the slight yield premium paid on sukuk compared to

traditional fixed-income bonds. It can be done, he said,

but the gestation of the necessary paperwork can take

months, and the cost is correspondingly higher.

Thus, assorted pressures impinge on the evolution

of Islamic finance, which could be summarised most

briefly by highlighting whether the emphasis is on the

first or second element of the term. One leans towards

a commanding concept, implying uniformity; the other

acknowledges flexibility and a marketplace already in

existence, and takes a practical or pragmatic approach

to that challenge.

Spectrum of views tests Islamic Finance’s way forward

by Andrew Shouler

Diary of Events

June: 10-11, 2013

AIx-en-Provence, France

Infinity Conference on International Finance

The 11th INFINITI Conference on International Finance: “The Financial Crisis, Integration and Contagion”, is

organised by SciencesPo Aix, Trinity College Dublin and Euromed Management Marseille, in coordination with

the Aix-Marseille School of Economics.

Keynote Speakers:

René M Stulz, The Ohio State University, USA

Geert Bekaert, Columbia University, USA

Contact: Linda Soriton: [email protected]

More information: http://www.infinityconference.com/

June: 26-28, 2013

Nottingham, UK

5th International IFABS Conference

This year, IFABS will be celebrating its 5th Anniversary in Nottingham at the East Midlands Conference Centre.

From the 26th -28th June, experts from over 60 countries around the world will come together in this historic

city to consider, collaborate and create ideas and solutions for the coming years. More information and a call

for papers (deadline is March 15) can be found online.

Contact: Ms Sandra Hopkins: [email protected]

More Information: http://www.ifabsconference.com/

July: 1-5, 2013

Durham, UK

Islamic Finance Summer School

The intensive five-day programme, organised annually, will enhance and develop your knowledge and skills to

help place you in an advantageous position for entering and working in the Islamic financial sector.

More information: [email protected]

Register now at: http://www.durham.ac.uk/dcief/ifss

Training Courses:

GOLCER Training Courses in Finance, Management and Statistics:

More Information: http://www.lums.lancs.ac.uk/files/coursesnew.pdf

Research Team

Gerry [email protected]

Vasileios [email protected]

Rhea [email protected]

Marwa El [email protected]

Marwan IzzeldinDirector

[email protected]

DISCLAIMER

This report was prepared by Gulf One Lancaster Centre for Economic Research (GOLCER) and is of a general nature and is not intended to provide specific advice on any matter, nor is it intended to be comprehensive or to address the circumstances of any particular individual or entity. This material is based on current public information that we consider reliable at the time of publication, but it does not provide tailored investment advice or recommendations. It has been prepared without regard to the financial circumstances and objectives of persons and/or organisations who receive it. The GOLCER and/or its members shall not be liable for any losses or damages incurred or suffered in connection with this report including, without limitation, any direct, indirect, incidental, special, or consequential damages. The views expressed in this report do not necessarily represent the views of Gulf One or Lancaster University. Redistribution, reprinting or sale of this report without the prior consent of GOLCER is strictly forbidden.

Andrew ShoulerEditor

[email protected]

islamic finance bulletin may 2013

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