Islamic finance and food sector need convergence

The two Sharia-compliant industries could work together for their mutual benefit
Dubai’s recently unveiled strategy to be the capital of the Islamic Economy brings with it a range of exciting opportunities as well as some interesting challenges.

Islamic finance and food sector need convergence

Islamic finance and food sector need convergence

Food and finance are the two most emergent opportunities. Islamic finance has excess liquidity and limited Sharia-compliant investment opportunities; the expanding Halal food sector is under-supplied and in need of capital. So what is stopping these two from working together for their mutual benefit?
Over the past decades, the Islamic finance and Halal food industries have developed in separate, isolated silos. Despite having common roots in the Quran, (and specifically even in the same chapter, Surat al Baqarah) there has been very little interaction between these two Sharia-compliant industries.
On the one hand, there are continued reports of excess liquidity in the Islamic finance sector, albeit mostly related to institutional funds that are looking for fixed-income investments opportunities. According to data from Thomson Reuters, Islamic finance assets reached $1.32 trillion (Dh4. 8 trillion) at the end of 2012; average growth over the past four years has been at 19 per cent and sukuk market is growing at 10 per cent.
Overall, growth is 50 per cent faster than conventional banking in many of the core markets and, yet, somehow there is the feeling that something is missing; engagement with the real economy has not been achieved.

Islamic finance and food sector need convergence

Islamic finance and food sector need convergence

The food sector, on the other hand, struggles to keep up with demand from increasingly aware Muslim consumers who are becoming more vocal in terms of what products they want, as well as what they do or don’t consider to be Halal.
Level of traction
One glaring difference between the two is in terms of engagement. Over 70 per cent of the Muslim world is still “un-banked” in any shape or form, let alone with an Islamic bank. Islamic finance does not have much traction with the average man in the street, and most would not be that familiar with the technical terms.
In the food sector, it is a totally different story. Not only is the average Muslim fully engaged with the Halal food market, they also have strong opinions about what constitutes Halal compliance. Indeed, the expansion of the food sector is driven from both the consumer and producer ends, as consumers become more aware and vocal, and producers look for new opportunities in increasing saturated markets.
Another point of divergence is that in the Islamic finance industry, Sharia scholars tolerate minor amounts of interest or impermissible income, and the investment can still be considered compliant. In the food sector, any minor trace of haram ingredient would be rejected out of hand by the overwhelming majority of Muslim consumers. While there is zero tolerance among informed consumers, there is, paradoxically, a considerable degree of tolerance of the prohibited among educated Islamic finance scholars.
The Islamic Finance industry is largely controlled by Muslims, by scholars and senior executives. Yet, the common complaint within the industry is that a high percentage (one bank CEO stated as much as 85 per cent) of Sharia-compliant funds get re-invested in the mainstream interest-based markets to earn the profit that is later returned to the investor as being “Sharia-compliant”.
In direct contrast, the Halal food industry is largely in the hands of non-Muslim controlled companies, and yet the majority of them are very aware and respectful of the need to be compliant, and will convert their production lines to being 100 per cent Halal in order to secure the trust of the consumers.
As these two sectors expand, we can expect to see more avenues of convergence over the course of time. Following the example of Saudi dairy giant Almarai, major corporations in the food, personal care and pharmaceutical sectors could issue sukuk for expansion, and at the same time increase their credibility in the Halal marketplace.

Job creation
Given the real employment shortage within the Arab world — it is estimated that 60 million jobs will be needed by 2020 — one would hope the increasing focus on the Islamic Economy will be a catalyst to create more overlap between the twin pillars of food and finance. However, until there is greater awareness by governments, more transparent regulatory frameworks in the food sector, and more adventurous capital in the finance sector, one suspects that the silos may remain in place for some time yet.
From the perspective of the Islamic economy, these two sectors clearly belong together, but it will take time and some imaginative, bold moves to bring them closer together.
One gets the feeling that when and where that happens, there will be a real engine of growth kicking into gear.
CREDIT: The writer is an advisor to Thomson Reuters on matters relating to the Islamic economy.

Malaysia's Maybank first quarter net profit up 18.4 percent

Malaysia’s largest lender Malayan Banking Bhd (Maybank) (MBBM.KL) on Thursday posted an 18.4 percent increase in first-quarter net profit, lifted by a stronger loan business and its Islamic banking operations.

The bank posted a net profit of 1.35 billion ringgit ($429.25 million) in the quarter ended March 31, 2012 compared with 1.14 billion ringgit in the same quarter a year ago.

Malaysia's Maybank first quarter net profit up 18.4 percent

Revenue for the quarter ending March 31, 2012 climbed 29.8 percent to 6.66 billion ringgit from a year earlier.

Maybank said the better performance was mainly on the back of growth in its net loans and advances.

Malaysian banks have reported robust earnings in recent quarters, riding on growth at home and in Singapore and Indonesia, although a possible euro zone recession may slow global growth and earnings for the lenders.

The group’s first quarter financial performance was above the profit estimate of 1.23 billion ringgit provided by analysts tracked by Thomson Reuters I/B/E/S.

Of the 25 analysts tracked by the data service, 13 held a “Strong Buy” or “Buy” call on the stock, six called the stock a “Hold” and six “Underperform” or “Sell.”

Maybank said it expected a “satisfactory” financial performance for this fiscal year ending December 31 due to solid economic growth in Southeast Asia.

Maybank shares rose 0.95 percent prior to the announcement, outperforming the Malaysia’s benchmark stock index’s .KLSE rise of rose 0.35 percent. ($1 = 3.1450 Malaysian ringgits)


Gary Dugan sees liquidity fueled exuberance

UAE. What a start to the year. As we end February investors can reflect back on year-to-date double digit returns from equities and some commodity markets. The DFM General index has rebounded 30% from the lows of mid-January.

It is clear that the massive flows of liquidity circling the world are being put back to work in financial markets. However it is always worth bearing in mind that rises in equity markets don’t in themselves solve the problems of economies. Note that Greece is still bordering on default.

Liquidity continues to be the main driver of the rise in markets. Last week’s European CentralBank (ECB) Long Term Refinancing Operation (LTRO) led to 800 banks receiving funding of an aggregate €539 billion for three years at a cost of just 1%. The banks are then going out and using the funding to buy Euro zone debt, which in turn drives down Euro zone bond yields.

Italy has been the chief winner from the ECB’s actions. The Italian 10 year bond yield has fallen by over 200bps since the start of the year. Whilst the cash seems to be finding its way into the financial markets, the only way the market rally can be sustained is if the cash finds its way into the Euro zone economy and drives growth.

Unfortunately Euro zone money supply growth – a good measure of the impact of money on the economy- is still weak. A growth rate for M3 (a broad measure of money supply) of just over 2.5% is very poor relative to many other parts of the world and not consistent with a recovery in the economy.

Liquidity will continue to play a major part in driving markets but after such a strong rally for markets to make progress needs ongoing upgrades to global growth forecasts. There is a new impetus in the emerging markets with strong industrial confidence indicators reported for Korea and Taiwan in recent days. In Korea the trade report showed exports up 33% at an annualized rate.

In Thailand industrial production was up nearly 20% month-on-month in January after an even stronger December. In contrast the US economic data has disappointed somewhat. The labour market continues to show improvement but industrial confidence slipped back after the recent strong consistent rise. In truth US economic data was so strong earlier in the year that it was going to be difficult for the data to keep matching best expectations.

The stronger data from the emerging economies is likely to reinforce the strong relative performance from emerging market equities and bonds. The only reservation we have is that the ongoing strength of the oil price could still deliver an inflation scare that slows the pace of monetary easing in many parts of the emerging world.

The original reason investors piled into emerging markets over the turn of the year was the prospect for cuts in interest rates, and the belief that Europe’s problems weren’t going to do systematic damage to the rest of the world.

In just a few weeks many of those interest rate cuts have been more than discounted with the risk that the rise inflation may stop some of those cuts in interest rates from happening. Not only is inflation posing a potential problem but Brazil for example is also trying to cope with significant inflows of capital that has led to upward pressure on the Brazilian Real.

The authorities have announced a series of measures to slow the rate of appreciation of the currency such as restrictions on companies issuing external debt as it encourages inflows of capital into the country. After such a strong start to the year there is a temptation to take profits on the Brazilian equity market.

In contrast to the challenges to the Brazilian markets, Russian asset markets could rally further post the emphatic win of Vladimir Putin in the Presidential election. In particular the Russian equity market could provide investors with further strong absolute gains.

Russian equities trade on an exceptionally low valuation (P/E of 6.3x). The oil price high and greater clarity on the political front should act as a catalyst for further strong performance. Many investors have been waiting for the election results before buying into the Russian financial markets.

In the meantime there has been a significant rally in Russian assets. The ruble has gained 9.7% against the dollar so far this year and the MICEX equity market index is up 15%. In the debt markets the cost of insuring Russian debt has fallen from a Credit Default Swap (CDS) level of 335bps October last year to 178bps. Some of the Russian credits have not kept pace with the rally in either frontier or emerging markets. We expect further good performance from Russian asset markets.

Greek problems have not gone away. A melt down in Greece still has the potential to have investors running to take profits on recent gains in risk markets. As we suspected the Greek situation is lurching towards almost inevitable debt default. It now appears likely that private investors will be forced to accept the terms offered them by the Greek government hence the Greek government will technically be in default.

Although the matter is very technical in practical terms the defaulting of debt will mean that Greek banks lose access to the capital markets.

The ECB has already announced that it will no longer accept Greek debt as collateral as security for new loans. Moody’s the credit rating agency cut the long-term foreign currency debt rating of Greece to C from Ca. For the moment the markets seem to have taken the news of probably default in their stride however we suspect that the default is only one further step of Greece towards its probably exclusion from the Euro zone.

Greece’s ongoing problems and some slippage in Spain’s to reduce their deficit have put the skids under the Euro. After trading as high as 1.3460 against the dollar the Euro has slid to 1.3188. A move back to the recent low of 1.2667 is still quite possible given the likely difficulties in Greece and the lack of new positive news post the latest round of liquidity support from the ECB.

Although oil and gold saw some profit taking in recent trading sessions we believe there is upside for both commodities. Another way of playing the rise in the oil price is through energy stocks.

The share prices of oil companies have not kept pace with the rise in oil prices. Indeed the gap between the performance the oil price and oil shares is quite exceptional. One of the challenges for oil stocks is that although oil prices have risen oil product prices have not risen as much.

Companies that are more reliant on petrochemical sales are being partially squeezed between high input prices – crude oil and not so high product prices (petrochemical prices).

Investors should look to invest in either actively managed energy funds or oil production companies.

Frontier Stocks Lose in Best Rally Since '91 as Growth Slows

The best start to a year for stocks in two decades is leaving the smallest markets behind, a sign of reduced investor confidence in the least-developed economies.

All eight of the world’s worst-performing equity indexes this year are in frontier countries, where the average stock- market value of $30 billion is about 95 percent less than in emerging nations.

While the MSCI All-Country World Index jumped 11 percent, gauges in Bangladesh and Sri Lanka sank at least 9 percent as interest rates increased. Nigeria’s stock index fell 1.8 percent after union strikes and attacks by Islamic militants. Frontier-nation stocks trade at the lowest valuations since at least 2008 versus emerging-market shares.

Falling valuations reflect concern that growth in the smallest economies, which expanded about 20 percent slower than larger developing nations on average during the past three years, won’t accelerate in 2012. Bank Julius Baer & Co. says the losses create buying opportunities for long-term investors. Ashmore EMM LLC has been cutting frontier-market holdings and Oversea-Chinese Banking Corp. is avoiding the stocks.

“On a purely tactical basis, we have actually reduced exposure in frontier markets,” said Antoine van Agtmael, who coined the term “emerging markets” in 1981 and now oversees about $7.1 billion as chairman of Ashmore EMM in Arlington, Virginia. “The larger, more liquid markets offered relatively more compelling investment opportunities.”

Emerging-Market Rally

The 25-country MSCI Frontier Markets Index increased 2.8 percent this year, trailing the emerging-market measure by about 13 percentage points. Nigeria’s Union Bank of Nigeria, Bangladesh’s Dhaka Electric Supply Co. and Sri Lanka’s Lanka Orix Finance Co. declined more than 29 percent, countering gains in Vietnamese shares including Bao Viet Holdings and Vietnam Dairy Products Joint-Stock Co.

MSCI Inc.’s gauge of shares in 21 emerging countries, which have an average stock-market capitalization of $603 billion, surged 15 percent this year as Brazil reduced its benchmark interest rate to the lowest level in 18 months and China cut banks’ reserve requirements.

A new three-year lending program from the European Central Bank and data showing a rebound in the U.S. job market eased concern that developing-nation exports will slow.

The price-to-reported earnings ratio for the frontier index, comprised of companies with an average market value of $2.6 billion, dropped to 10.7 from 16 a year ago and trades at a 10 percent discount to the emerging-market measure, made up of companies with a mean market capitalization of $12 billion.

‘Macro Risk’

“I would go for quality as opposed to underperformance,” said Vasu Menon, a vice-president of wealth management at Oversea-Chinese Banking, the second-largest financial services group in Southeast Asia. “It’s a year you don’t want to add on another layer of risk on top of macro risk.”

Frontier markets have smaller economies and worse rankings on gauges of business climate and corruption than emerging markets. They also have lower trading volumes, which make it more difficult for investors to sell shares.

The average annual gross domestic product for nations in the frontier index is $118 billion, compared with $994 billion for the emerging-market gauge, according to data compiled by Bloomberg and the International Monetary Fund. Frontier countries have an average ranking of 74 in the World Bank’s ease of doing business index, compared with 70 for emerging markets.

Their mean ranking of 82 in Transparency International’s corruption perceptions index is worse than the 75 average for emerging countries.

Liquidity Trap

Less than $15 million of shares changed hands each day on Sri Lanka’s Colombo Stock Exchange during the past month, compared with $12 billion on the Shanghai Stock Exchange in China, the biggest emerging market, according to data compiled by Bloomberg.

Bahrain banks 'on solid economic fundamentals'

Solid fundamentals will support a resumption of strong long-term economic growth and secure Bahrain’s long-term future as a wealth management centre of excellence, said a top government official.

‘Bahrain remains committed to ensuring that the same core business fundamentals remain in place,’ remarked Economic Development Board (EDB) chief executive Shaikh Mohammed bin Essa Al Khalifa ahead of the Euromoney GCC Private Banking Conference at the Ritz-Carlton Bahrain Hotel and Spa on March 7, which will put wealth management and private banking in the spotlight.

Euromoney, the specialist financial publisher and conference organiser, is returning to Bahrain for the first time in a decade to host a major financial event, which is supported by the EDB and the Central Cank of Bahrain.

‘These are stable and transparent regulation, an open business environment and sustainable growth, exploiting our location between East and West and offering a base from which to access the GCC’s trillion-dollar market.

‘Clearly this event will provide a strong platform to engage with the private banking and wealth management business community and highlight the benefits and opportunities presented by establishing operations in Bahrain.

‘More broadly, the EDB has an extremely active business development programme to attract businesses to Bahrain, including international road shows and hosting events in Bahrain to allow people to see the kingdom for themselves.’

The quality of growth depends more than anything else on the sustainability of the workforce and quality of people and Bahrain’s business sector is supported by the most productive, highly-skilled bilingual national work force in the GCC, he argued.

‘Bahrain is home to a well-educated, able local financial services workforce and of the total workforce of more than 14,300 in the financial services sector 67 per cent are Bahraini, of which 37pc are Bahraini women.

‘In addition to the strength of the regulatory framework and the skilled workforce, we also have a track record of more than 40 years of managing wealth in our financial system,’ he said.

‘We also offer platforms for investment through our thriving funds industry, with more than 2,800 registered funds in Bahrain,’ he said and added we are global leaders in Islamic finance, and this means we can support a broader range of private wealth management needs in the kingdom.

‘We felt that now was the right time and Bahrain the right venue to attract an international audience and we already have around 250 delegates signed up,’ said Euromoney Conferences director of private banking Richard Banks.

‘This is not a big conference but it is an event which will attract quality people and we have representation from as far away as Malaysia, Singapore and Switzerland.

‘We chose Bahrain for this event as the kingdom remains a centre of excellence for wealth management in the Middle East,’ he added.-TradeArabia News Service

Kuveyt Turk Plans Second Sukuk, Spearheads Market Growth: Islamic Finance

Kuveyt Turk Katilim Bankasi AS is spearheading Turkey’s five-month-old Islamic bond market, planning a second sale of Shariah-compliant debt for 2012.

Kuveyt Turk, the Istanbul-based bank owned by Kuwait Finance House KSC, may sell more than $100 million of five-year sukuk, after a similar size sale in August that was the first in the nation since regulators allowed companies to offer Islamic bonds, said Chief Executive Officer Ufuk Uyan. The government is considering selling sukuk “in the future,” Finance Minister Mehmet Simsek said in an interview with Bloomberg HT television on Aug. 25.

“We’re targeting investors from the Middle East, Europe and Asia,” Uyan said in an interview from Istanbul on Aug. 25. “Everyone was expecting a sovereign sukuk from the treasury, but we wanted to pave the way as a bank.” Continue reading

Persian Gulf Sukuk Returns Accelerating in Quarter on GDP: Islamic Finance

Islamic bonds in the Persian Gulf are returning six times more this quarter than in the previous three months as Dubai-based companies restructure debt and economic growth in the region accelerates.

Sukuk sold by the six-country Gulf Cooperation Council have returned 2.9 percent since June 30, compared with a 0.5 percent gain in the second quarter, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The average yield on the debt narrowed 83 basis points, or 0.83 percentage point, in the past six weeks to 6.65 percent and reached an eight-month low of 6.49 percent on Aug. 3, according to the HSBC/NASDAQ GCC Index.

Persian Gulf Sukuk Returns Accelerating in Quarter on GDP: Islamic Finance

Bonds in the region that comply with Shariah law may extend gains after the International Monetary Fund said in a report on July 7 that gross domestic product growth in the Middle East will quicken to 4.5 percent this year from 2.4 percent in 2009. State-owned Dubai World said on July 22 it will complete a restructuring of its $23.5 billion of liabilities in “coming months,” while real-estate unit Nakheel PJSC said a group of creditors supported a proposal to alter the terms on $10.5 billion of loans and unpaid bills. Continue reading

Asia to Dominate Sukuk Growth Next 18 Months: Islamic Finance

Aug. 4 (Bloomberg) — Islamic bond offerings may accelerate in the next 18 months, led by first-time issuers in Asia after the region accounted for most sukuk sold this year, Standard & Poor’s said.

While issuance of securities that comply with Shariah law are down 17 percent globally this year, Asian borrowers issued $5.3 billion, about 68 percent of the total $7.8 billion worldwide, according to data compiled by Bloomberg. Sales from companies in the Persian Gulf dropped 24 percent to $2.5 billion so far in 2010, the lowest level since 2005, after Dubai World, one of the United Arab Emirates three main state-owned business groups, announced plans to restructure debt in November.

Asia to Dominate Sukuk Growth Next 18 Months: Islamic Finance

“Sovereigns, particularly from Asia, are pushing for the revival of the sukuk market,” Mohamed Damak, Paris-based credit analyst and co-chair of the Islamic finance working group at S&P, said in an interview. “We expect additional countries, or issuers domiciled in countries new to Islamic finance to tap the sukuk market in the near future, within the next 18 months.”

Khazanah Nasional Bhd., Malaysia’s state investment company, sold S$1.5 billion ($1.1 billion) of Islamic bonds, its first in Singapore, the company said in a statement late yesterday. The Philippines’ state-owned Al-Amanah Islamic Bank is exploring a sale, the lender’s President Armando Samia said on July 26. Continue reading