The World Bank Group and the Islamic Development Bank published the first Global Report on Islamic Finance. Subtitled “A Catalyst for Shared Prosperity?”, the report provides an overview of trends in Islamic finance, identifies major challenges hindering the industry’s growth, and recommends policy interventions to leverage Islamic finance. According to the report the Islamic finance industry needs to expand beyond banking, which is currently a dominant component of Islamic finance, accounting for more than three-quarters of the industry’s assets. Another area of development is Islamic capital markets. The use of sovereign sukuk to mobilize financing is essential to develop the market. The report also notes that using Islamic social finance can alleviate poverty and create a social safety net for the extremely poor. By tapping into the potential of the institutions like zakat and waqf, the report estimates that resource needs for the most deprived in South and Southeast Asia and Sub-Saharan Africa could be met.
Dubai Islamic Bank became the first Gulf financial institution to print a sukuk this year as it priced a US$1bn 3.664% five-year issuance. The only other bank from the region to have issued this year is Gulf International Bank, which sold a conventional US$500m five-year last month. Proceeds will go towards refinancing a US$500m sukuk coming due in May, as well as a US$300m maturity for the subsidiary Tamweel. Middle East accounts took 61%, Europe 20%, and Asia 19%. By investor type, banks got 52%, asset managers 39%, agencies 3%, private banks 2% and insurers 2%. Lead arrangers include Bank ABC, DIB, Emirates NBD, HSBC, KFH, Maybank, National Bank of Abu Dhabi, Sharjah Islamic Bank and Standard Chartered.
According to Fitch Ratings, the plan to introduce Value Added Tax (VAT) in Gulf Cooperation Council (GCC) member states could be a key test for the region's Islamic finance industry. Saudi Arabia and Bahrain approved the implementation of VAT in the GCC, however, local implementation laws must still be agreed in each country. This paves the way for the introduction of an expected 5% VAT rate as early as the beginning of 2018. Without tax neutrality or equality rules, the introduction of VAT would put Islamic finance transactions at a disadvantage to conventional transactions. A VAT charge adds to the instalment payments in a murabaha, while a conventional transaction would not have VAT for the sale of the asset added to the interest payments. Numerous countries with VAT have provided for some form of tax neutrality or equality for Islamic finance transactions, including Malaysia, Indonesia, Turkey and Pakistan.
A global body for Islamic finance has issued a draft standard on centralized sharia boards, aiming to improve corporate governance in the industry. The proposed rules come at a time when Islamic banks are trying to widen their appeal in the Middle East and Southeast Asia, while opening up entirely new markets in Africa. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is seeking industry feedback on the proposed standard until the end of February. AAOIFI said the standard would encourage convergence of industry practices by avoiding contradictory rulings and fostering consistency across products and services. While the standard does not prescribe term limits for scholars, it does require sharia boards to implement a rotation policy for its members while including members with expertise in areas such as accounting and law.
The banking sector in #Kuwait remains solid, robust and unaffected by regional events. The operating environment can be described as low-risk thanks to the country’s central bank regulatory role and conservative approach. Kuwait International Bank (KIB) has risen to become one of the most established in Kuwait. The bank's CEO, Loai Muqames, says diversification into the retail sector took priority with the launch of stand-alone retail banking operations. Since adopting a unified CRM system the quality and efficiency of the customer service has dramatically increased. KIB partners with Kuwait’s telecom providers to offer SMS banking for those account holders without a mobile internet connection. KIB is also investing in those sectors related to the $100bn government funded national development plan currently in motion. These sectors include infrastructure, oil and gas, energy, and real estate.
Halic Leasing is expanding its sharia-compliant business portfolio to tap demand from small businesses. This is a sign that Turkey's Islamic finance market is growing beyond traditional banking services. According to Halic's General Manager Gokcen Sahin, the company is building a portfolio of leased assets and is targeting new business of around $25 million by the end of the year. Halic also aims to attract further investments from Islamic mutual funds while expanding into construction equipment later this year. The plans come after the firm's new shareholders injected fresh capital at the end of last year and set up a sharia committee to ensure its products conform to Islamic principles. Gokcen Sahid added that with a good quality portfolio, Halic may also consider raising funds via sukuk in the future.
According to S&P Global Ratings, the lower liquidity level in the GCC is not the main reason for a drop in the region’s sukuk issuances in recent years. The volume of sukuk was muted last year, particularly compared with conventional bond issuance in GCC countries. S&P believes the complexity of structuring sukuk is the main reason behind muted sukuk issuance in 2016 and it will continue to weigh on volumes in 2017. S&P also estimates GCC sovereigns financing needs at around $275bn over the next three years, the majority of which pertains to Saudi Arabia. While sukuk comprise only a small amount of total outstanding issuance, various governments established the necessary legal frameworks for their issuance.
Pakistan's government-operated National Savings Scheme (NSS) is evaluating whether to offer Islamic banking services. This plan will help depositors put their cash into Islamic Shariah-compliant Ijara sukuk. As soon as that happens, millions of new accounts are expected to be opened, bringing a huge population of medium and small savers into the banking stream. Millions of others who are currently operating accounts in conventional banks may also be snatched away by the NSS. Investments in all types of the NSS go directly to the government of Pakistan, which uses this cash inflow to fill the budgetary gap and to fund its development projects. NSS deposits by people totalled Rs233 billion in 2015-16 and Rs337 billion in 2014-15. In the event of introduction of Ijara sukuk, some of these deposits are likely to be switched to this Islamic mode.
The first workshop on the Sukuk Model Law was held in Dakar, Senegal. The event was organzied by the Islamic Development Bank (IDB) and the Islamic Research and Training Institute (IRTI), in partnership with the Central Bank of West African States (BCEAO). A number of experts and finance officials from the eight BCEAO member countries participated in the event. The project aimed to create a model Sukuk law and guidelines that leverage global best practices. Subsequent regional consultations are planned for South East Asia, Central Asia and the MENA regions. Speaking on the occasion, IRTI Director Mohamed Azmi Omar said the workshop reaffirmed the importance of Sukuk as an increasingly significant instrument of resource mobilization.
The Investment Corporation of Dubai (ICD) has completed the issuance of a US$1 billion 10-year sukuk. The $1billion sukuk will be listed on the Nasdaq Dubai exchange and is the first to be issued from the region in 2017 and the second for ICD since 2014. International investor participation was robust with 26% of the issuance subscribed by investors based in the United Kingdom and Europe and 15% by investors based in Asia. Regional investor participation consisted of 58% of the total subscription with the remaining 1% of the investors based around the rest of the world. CEO Mohammed Al Shaibani said the issuance proves the ICD’s ability to provide a stable foundation that supports the ongoing success of Dubai.
#India will soon have Islamic Banking facilities. The Saudi Arabia-based Islamic Development Bank will start its operations from Gujarat soon. During Prime Minister Narendra Modi's visit to UAE in April last year, the Indian Exim Bank had signed a memorandum of understanding with IDB for a $100 million line of credit to facilitate exports to IDB's member countries. The Reserve Bank of India had proposed opening of an Islamic window in conventional banks for introduction of Sharia-compliant or interest free banking in the country. The proposal was taken up to ensure financial inclusion for those sections of society which remain excluded due to religious reasons.
Islamic finance is the area where Malaysia leads the world. Malaysia has 54% of global sukuk outstanding, 314 Islamic investment funds worth RM100.6 billion ($22.7 billion), and an Islamic capital market that has tripled in size since 2005, accounting for 60.1% of the total Malaysian capital market. In August the Employees Provident Fund (EPF) launched its Shariah savings scheme to give members the option to convert their conventional account to an Islamic one. It has said it expects to invest an average of RM25 billion in Shariah assets every year and it intends to allocate a minimum of 45% of its assets into Shariah-compliant forms. Thus, EPF has sufficient scale to be very interesting to asset managers worldwide. Largely through that mechanism, there are now 20 fully fledged Islamic fund management companies operating in Malaysia.
Dubai Islamic Bank will meet fixed income investors in London on Feb. 6 ahead of a potential sukuk issuance. A five-year benchmark issue, which usually means upwards of $500 million, might follow. The lender has appointed Bank ABC, Dubai Islamic Bank, Emirates NBD, HSBC, KFH Capital, Maybank Investment Bank Berhard, National Bank of Abu Dhabi, Sharjah Islamic Bank and Standard Chartered Bank as joint lead managers and bookrunners.
The Dubai Islamic Economy Development Centre (DIEDC) announced the launch of its refreshed strategy for 2017-2021. Making the announcement, Sheikh Hamdan said the first part of the strategy includes identifying new key performance indicators (KPIs) for monitoring the growth of important sectors. The second component is enhancing Dubai’s status as a reference for Islamic finance, Halal sector and Islamic lifestyle that includes culture, art, fashion and family tourism. Sultan bin Saeed Al Mansouri said the DIEDC’s latest goal is to demonstrate the positive impact of Islamic economy. It is necessary to establish the structural framework of the ecosystem. Finance, production and consumption must feature in it as integrated systems aligned with the UN Sustainable Development Goals. Al Mansouri pointed out the need for universally accepted standards across Islamic economy sectors and stressed that the UAE will focus on refining these standards.
Turkey's privately-owned Aktif Bank has received regulatory approval to sell up to $120 million via sukuk. Turkey has seen steady issuance of sukuk from the government and the country's Islamic banks, but corporate issuance remains rare. Aktif Bank will sell the sukuk through its asset leasing company, Aktif Bank Sukuk Varlk Kiralama. Companies can sell sukuk directly by setting up their own asset leasing companies, but the process can be onerous for smaller firms. The government has previously granted tax exemptions for lease-based sukuk, but in August it extended those incentives to all other types of sukuk contracts.
The government of Indonesia plans to sell another series of sharia-compliant government retail bonds (Sukri). The offering period is planned for 4 February-2 March 2017. In last year's Sukri issuance the Indonesian government set an indicative target of IDR 30 trillion (approx. USD $2.2 billion) for its SR-008 series. However, due to robust demand authorities raised a total of IDR 31 trillion. The three year SR-008 bonds carry a fixed coupon of 8.3% per year. It was the government's biggest ever sale of Sukri bonds. In 2017 the Indonesian government plans to sell IDR 597 trillion worth of bonds, mostly rupiah-denominated government bonds. Robert Pakpahan, Head of the Debt Office within Indonesia's Finance Ministry, earlier said Indonesia will offer retail bonds twice this year, consisting of Sukri and Indonesian Retail Government Bonds.
Al Rayan Bank has revealed that applications for two of its home finance plans reached an all-time high in 2016, as demand for Islamic finance soared. Both the bank’s home purchase and buy-to-let purchase plans received a record number of eligible enquiries last year. This surge follows a 9% rise in applications to the bank in 2016, marking a 99% increase over the past five years. Keith Leach, chief commercial officer at Al Rayan, said there was still substantial room for growth in the market and the bank expects demand to continue to rise in the coming years. Al Rayan estimates that 94% of its fixed-term deposit customers who joined last year are not of the Muslim faith. The announcement comes just weeks after Al Rayan launched a Sharia-compliant buy-to-let range in Scotland.
The Canadian fintech company Goldmoney has certified its gold-based financial products as sharia-compliant. The move illustrates how fintechs are broadening their footprint to include the core markets for Islamic finance in the Middle East and Southeast Asia. Goldmoney provides financial products that are fully-backed by reserved gold. Goldmoney says it has more than 1.3 million users across 150 countries and administers $1.7 billion in client assets. Several other fintech ventures were launched in 2016. In February, a group of six Islamic lenders launched an internet-based investment platform to serve as a central marketplace to finance small and medium-sized businesses. Malaysia-based HelloGold has also launched a sharia-compliant online platform that uses blockchain. HelloGold is currently rolling out its product in Malaysia with plans to enter Indonesia, the Philippines and Thailand later this year, and China by 2019.
Before handing over his charge to present Reserve Bank of India (RBI) Governor Urjit Patel, former Governor Raghuram Rajan had proposed working with the Government to introduce Islamic Banking. Most recently, Union Finance Ministry said that Islamic banking was not relevant any more as the Government has already introduced several programmes for all citizens towards financial inclusion. Finance Minister Santosh Kumar Gangwar said various legal changes are needed if even limited products were to be introduced under Islamic banking. It is estimated that 180 million Muslims in India are unable to access Islamic banking because of non-availability of interest free banking. RBI in its report had said it would explore to introduce interest-free banking products in consultation with the government, but before the consultation could be held, the Government of India derailed this whole process.
Africa Finance Corporation (AFC), a pan-African development finance institution, has issued its maiden Sukuk as the first Sukuk to be issued by an African supranational entity. The initial target of US$100 million was more than twice oversubscribed, resulting in the transaction being upsized to US$150 million and a final order book of approximately US$230 million. The privately placed Murabaha Sukuk has a three year tenor and will mature on 24 January 2020. Emirates NBD Capital, MUFG and RMB acted as Joint Bookrunners and Joint Lead Managers with Emirates NBD Capital also acting as the Sole Global Coordinator. Andrew Alli, President and CEO of AFC, said this Sukuk represents a milestone for AFC and helps to diversify its portfolio to continue delivering real impact across the continent.