South Africa all set to introduce Islamic Bonds

Johannesburg: Plans by South Africa’s National Treasury to introduce Islamic bonds are gaining a strong support in the African country, amid expectations the move would help boost the state’s economy.

“I am sure this was at the request of those Middle Eastern countries because SA has a small Muslim population,” Kokkie Kooyman, head of Sanlam Investment Management told Fin24.

The National Treasury has announced plans to introduce Islamic bonds as part of efforts to get a share of the booming Islamic banking industry.

Other financial instruments planned by the Treasury include Mudarabah, a form of investment partnership between banks and businesses that shares the risk and losses.

There is also Murabah, a transaction in which the bank buys the asset then immediately sells it to the customer at a pre-agreed higher price payable by installments.

The Sharia-compliant Islamic finance is not new to South Africa with different banks and investment companies offering these products. Several banks as the First National Bank and ABSA bank offer Sharia-compliant services.

Kooyman said the Sharia-compliant offerings are worth pursuing because the end result or return is the same as that of conventional banks.“The returns are also not much different for ordinary investors,” he said.Islam forbids Muslims from usury, receiving or paying interest on loans.

Transactions by Islamic banks must be backed by real assets — not shady repackaged subprime mortgages and banks cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Sharia-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.Analysts opine that offering Islamic bonds will help South Africa lure investments from the Middle East and the Gulf region.

“If people that have been using Islamic banking have been happy all the time, let us have (more) of it,” Steve Meintjes, a senior banking analyst at Imara SP Reid, told Fin24.The banking expert said the introduction of more Islamic finance products into South Africa would enhance the economy.

“The SA economy needs more finance. Islamic banking will enhance the productive capacity of this economy,” Meintjes said.Tom Winterboer, a banking analyst at PwC, noted that Islamic finance products can be accessible to investors beyond the Muslim population.

“It must be a good thing to happen to South African investors. It is a different principle from the domestic finance we have come to know,” Winterboer said, adding, however, that it needed a different expertise.“But South African banks have this expertise.”

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

Goldman Sachs Sukuk Row May Dent Industry Lure: Islamic Finance

Dec. 21 (Bloomberg) — Goldman Sachs Group Inc., the fifth biggest U.S. bank by assets, has become entangled in a debate about how Shariah compliant its $2 billion Islamic bond program is, which may diminish the allure of Islamic debt.

Goldman Sachs’ sukuk program, blessed by eight of the world’s top scholars, is criticized by some Islamic advisers for not ensuring the debt will be traded at par value as mandated by Islamic law. Advisers including Riyadh-based Mohammed Khnifer of Edcomm Group Banker’s Academy in New York and Dubai-based Harris Irfan at Cordoba Capital have also said it’s unclear on how Goldman will use the funds it raises.

The debate highlights the struggle of Islamic finance’s standard-setting bodies to formulate rules that apply globally. Companies and governments aren’t bound by the regulations set by organizations including Manama-based Accounting & Auditing Organization for Islamic Financial Institutions and Kuala Lumpur-based Islamic Financial Services Board.

“The industry needs to welcome key global financial institutions if it wants to strengthen and further entrench Islamic finance globally in order for it to become a viable and competitive alternative,” Rizwan Kanji, a Dubai-based debt capital markets partner at King & Spalding LLP said in a telephone interview Dec. 15. “That said, new entities looking to Islamic finance as a source of financing should work hard to answer queries by the Islamic finance community.”

Islamic Bond Demand

Islamic bond sales, which jumped 68 percent to $26 billion in 2011, are still below 2007’s record $31 billion and are dwarfed by the $764 billion in bonds sold globally this year. Shariah restricts investors to transactions based on the exchange of assets rather than money alone because interest payments are banned.

Goldman Sachs set up a sukuk program based on a so-called commodity murabaha structure, or a cost plus mark-up transaction, that was approved for listing on the Irish Stock Exchange by the Central Bank of Ireland in October. Murabaha certificates can only be bought and sold at par value because they represent a future claim on the underlying assets.

“The commodity murabaha structure is already under fire from much of the Islamic community who consider it a shallow attempt to mimic conventional debt structures, and using such proceeds to fund conventional banking activities is ludicrous,” Irfan, managing partner of Cordoba Capital, an Islamic finance advisory company, said in an e-mailed response to questions Dec. 7.

Tawarruq Contracts

Edcomm’s Khnifer, a sukuk structurer and strategist, drew parallels between Goldman Sachs’ Islamic bond structure and the reverse Tawarruq contract, which was banned in 2009 by the Jeddah-based unit of the 57-member Organization of Islamic Cooperation. International Islamic Fiqh Academic hasn’t deterred issuers in Malaysia from using Tawarruq.

He also says Goldman’s program doesn’t ensure the commodity murabaha certificates are only traded at par, as per shariah law, especially since the program is listed on the Irish bourse.

Goldman Sachs says it has done its due diligence. The bank is “entirely confident” in the certification of its program as Shariah compliant, New York-based spokesman Michael DuVally said in an e-mail Dec. 7.

The bank, which hired Dubai-based Islamic finance advisory Dar Al Istithmar Ltd. to help set up the program, said it plans to use the funds it raises ”for its general corporate purposes and to meet its financing needs,” according to details offered in the program. It didn’t specify whether the money would be used in compliance with Shariah law, which would prevent it from paying interest and investing in businesses associated with gambling or alcohol.

Scholars Approve

Scholars involved in overseeing the sukuk program deemed it to comply with Shariah guidelines, Chairman of Dar Al Istithmar’s Shariah board, Hussain Hamed Hassan, said in a Dec. 19 e-mailed statement. Hassan sits on more than 15 boards, including Dubai Islamic Bank PJSC. Additional scholars mentioned in Goldman Sachs’ program include Mohammed Elgari and Sheikh Abdullah Bin Sulaiman Al Manea.

The sukuk structure is “a Murabaha, pure and simple,” Asim Khan, London-based managing director and head of structuring at Dar Al Istithmar, said in an e-mailed response to questions. A listing on the Irish Stock exchange would offer tax benefits, added Khan, whose said his comments reflect his own views rather than those of his company.

With Islamic bond sales increasing globally, investors may yet overlook the controversy and buy the bonds. South Africa invited banks Dec. 6 to submit proposals for the sale of its first Islamic bond, and Senegal plans to start investor meetings before year-end for the possible sale of sukuk.

Appetite for Goldman

“There will be an appetite from the market as Goldman Sachs is still one of the largest financial institutions in the world,” said Hakim Azaiez, head of capital markets in the Middle East and North Africa at London-based Dinosaur Securities. Still, “if its main aim is to achieve lower funding costs through this deal, then this won’t offer much value for investors as there will be comparison with its conventional bonds,” he said in an e-mailed response Dec. 19.

The yield on Goldman Sachs’ 5.375 percent dollar bonds maturing March 2020 jumped 88 basis points in 2011 to 5.79 percent today, according to Bloomberg prices. The average yield on Islamic bonds in emerging markets has fallen 65 basis points so far this year to 4.09 percent yesterday on the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The debt returned 6.7 percent in 2011, compared with a loss of 0.1 on Goldman Sachs’ debt.

The yield on Dubai government’s unrated 6.396 percent sukuk maturing November 2014 dropped 59 basis points so far this year to 5.98 percent today, lowering the extra yield investors demand to hold Dubai’s sukuk over Malaysia’s 3.928 percent debt maturing in June 2015 26 basis points in the period to 312, according to data compiled by Bloomberg.

‘Fine Mess’

“We got ourselves into this fine mess, and have no one else to blame,” Safdar Alam, chief executive officer of Manchester, U.K.-based Solum Asset Management, said in an e- mailed response to questions Dec. 15.

On the one hand the Islamic finance industry encourages issuers to use structures as debt instruments “in clear contradiction of one of the most prominent facets of our industry — the prohibition of Riba” or interest, he said in an e-mailed response to questions Dec. 15. “Then on the other hand we disagree with how some entities use this product, because it is not ‘right’ or ‘good’, according to a definition of those words I am not familiar with.”

Repos for Sukuk Planned to Expand Shariah Market Trading: Islamic Finance

The International Islamic Financial Market, founded by the central banks of Bahrain, Indonesia and Malaysia, plans to create Shariah-compliant repurchase agreements to help Islamic banks manage funds and boost trading.

The IIFM, a Bahrain-based standards-setting body for Islamic markets, wants to introduce repos that don’t violate the religion’s ban on interest. It has proposed allowing third parties to act as intermediaries between buyers and sellers of sukuk used as collateral for short-term funds.

International Islamic Financial Market

Regulators from Bahrain to Malaysia are trying to expand products available to Islamic banks and borrowers. The repurchase agreements recommended by the IIFM would use a profit rate, unlike non-Shariah repos, where traders post securities as collateral for cash and agree to buy them back at a specified price and date, earning or paying the difference as interest.

If “banks don’t have an option like an alternative repo tool, then their balance sheets remain tied up,” IIFM Chief Executivei Officer Ijlal Ahmed Alvi said in an Aug. 15 interview from Manama, Bahrain. “A repo tool would definitely help.” Continue reading

Central Bank of Kenya to launch Sharia compliant bonds and Treasury Bills

Central Bank of Kenya  to launch Sharia compliant bonds and Treasury Bills

The Central Bank of Kenya (CBK) has announced that it is working on plans to launch the flotation of sharia-compliant bonds and treasury bills in the Kenyan money market.

The inclusion of sukuk bonds and bills, which will be structured in compliance with sharia law, is likely to increase the amount of cash flowing into Kenya from the Gulf region.

Central Bank of Kenya to launch Sharia compliant bonds and Treasury Bills

The CBK Governor, Prof Njuguna Ndungu, said the two sharia-compliant banks in Kenya have contributed to the development agenda by participating in the sukuk component of infrastructure bonds issued by the apex bank on behalf of the Kenyan government.

“We are still waiting for ’structured sukuk’ to cover the bonds and T-bills market,” Ndungu said.

According to CBK figures, Gulf African Bank (GAB) invested KSh500 million (US$6.5 million) in the sukuk portion of a government infrastructure bond issue last year and received a 13.5% rate of return.
In a speech read on his behalf by Alex Nandi, the deputy director banking supervision at the CBK, during the opening ceremony of the Second Gulf African Bank Annual East and Central Africa Islamic conference in Nairobi, Ndungu said the entry of Islamic banking institutions in the country posed a challenge for the CBK in terms of regulation.

“Islamic banking prohibits interests and allows profit sharing; however, our prudential returns and disclosure report formats were tailored for institutions which have an element of interest in their financials. We have therefore tailored our returns and disclosure formats to cater for the new market niche,” Ndungu said.

He said the CBK grants exemptions to Islamic banking institutions upon request in transactions that involve wholesale trading and holding land and buildings since the Banking Act prohibits these activities.

Ndungu commended the two fully fledged sharia-compliant banks in Kenya, First Community Bank (FCB) and GAB, for enabling formerly unbanked Kenyans, specifically those in the Muslim community and rural areas, to access financial services.

The two banks currently boast of 1,570 loan accounts and 58,548 deposit accounts and control 0.8% of the banking sector’s net assets after being in operation for less than two years.

Ndungu warned that the lack of research and innovativeness by Islamic banking institutions will hamper their growth and competitiveness.

Chief executive officer of GAB, Najmul Hassan, said that Islamic banking institutions have to come up with innovative banking products and solutions targeting its Muslim and non-Muslim clients.

“We should strive to reach clients who are not driven by fear or faith but by innovative products that meet their demands,” Hassan added.

Sukuk Gain to Six-Month High on Global Growth: Islamic Finance

By Soraya Permatasari and Khalid Qayum

June 25 (Bloomberg) — Islamic bonds are trading at their highest level in more than six months as companies reach agreements with creditors to restructure debt and the global economy recovers.

The Dow Jones Citigroup Sukuk Index, which measures the performance of Islamic bonds globally, closed at 120.53 yesterday, the highest since Nov. 30 and leaving it 3.8 percent short of the record set Nov. 25. The index has climbed 6.3 percent from its low in December, helped by Dubai World’s May 20 agreement to restructure part of its $23.5 billion of debt.

Sukuk Gain to Six-Month High on Global Growth: Islamic Finance

“That was a big boost for the global sukuk market,” said Zeid Ayer, who helps manage $1.6 billion of Shariah-compliant equities and bonds in Kuala Lumpur for Principal Global Investors and Malaysia’s CIMB Group Holdings Bhd., which have an asset management joint venture. “Restructuring deals help to bring a lot more clarity to the situation.”

Shariah-compliant bonds have weathered the European debt crisis better than notes in emerging markets. Islamic bonds returned 6 percent so far this year, according to the HSBC/NASDAQ Dubai Listed US Dollar Sukuk Index,while regular debt in developing markets gained 5.45 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows. Continue reading