IslamicFinance.de

Malaysia’s Employees Provident Fund is allocating an initial fund size of 100 bn ringgit (US$24.64 bn) – equivalent to 14.67% of 681.71 bn ringgit in total AUM as at March 31, 2016 – to shariah investments, making the Shariah-compliant allocation the largest in the world thus far.
The move is in accordance with the EPF’s plan to roll out its shariah-compliant fund – also known as EPF-i – in January 2017. What sets the fund apart from its conventional counterpart is that the former is not exposed to banking and insurance stocks. Meanwhile, contributors are free to choose from among the two schemes.
Shahril Ridza Ridzuan, chief executive officer of EPF, says the fund has been investing in shariah-compliant assets for more than five years and about 45% of its existing total assets – worth 295 bn ringgit – already conform to Islamic principles.
In fact, prior to the launch of EPF-i, the EPF had assured investors that its investment considerations are in line with ESG practices, as it does not invest in businesses related to gambling, adult entertainment and alcohol.

As the referendum on whether to leave or remain in the European Union looms in the UK, voices are getting louder, particularly in the country’s financial industry that it would not necessarily be a good idea to vote for a Brexit. Since the weight of the UK in the global financial market is substantial – the financial sector of the City of London has a 20% share in the global market for trading foreign securities and a sizeable part of it depends on the UK’s access to the internal EU market – such a strong position would be certainly threatened.
This could have serious impact on the growing role of Islamic finance in Europe which is entrenched in the UK and from there makes its way into the continent. Since the 1990s, when the first mortgages in the UK were set up in line with Shariah law, the country has aggregated the most advanced experience in Shariah-compliant finance in the Western world. Corporate sukuk followed a decade later, and in 2014, the UK became the first country in the EU to issue some sovereign sukuk and listed them on the London stock exchange. From then on, Islamic finance steadily entered the rest of Europe.

Highlights and Performance
Bloomberg Malaysia Sukuk
Bloomberg Malaysia Sukuk Ex-MYR Total Return and Dow Jones Sukuk Total Return indices ended relatively flat at 103.9 (+0.02%) and 159.8 +0.01%) respectively, with yields tightened marginally by 0.6bps to 2.470%. Combined with the Fed‘s dovish meeting (June 15), uncertainty over the Brexit referendum jitters (June 23) and mixed signals from China over slowing economy bring the risk-adverse sentiment. The top performers over the week were INDOIS 3/26 and GS 9/19, which moved -11bps to -13bps; while the underperformers were dominated by banking papers — EIB 1/17, Noor Bank B3T1 and DIB B2T1 which widened 12bps each.
Bank Indonesia
Bank Indonesia cuts key policy rates by 25bps in a surprise move, with the BI rate, deposit facility rate and 7-day reverse repo rate now stand at 6.50%, 4.50% and 5.25% respectively. In addition to the rate cut, BI also raised the minimum threshold on loan-to-funding ratio to 80% from 78%. Indonesia risk premiums widened 1.5bps to 196.0bps.

The important role of the Republic of Turkey in the global Islamic finance industry as well as its distinct standing both at the official and popular levels, the steady growth both of Islamic banks and financial institutions operating there, in addition to the parallel evolution of its regulatory and supervisory framework, the AAOIFI has been keen to strengthen professional and technical ties with this country. This was translated into an official visit by AAOIFI to a number of banking regulatory and supervisory bodies as well as a number of Islamic banks and financial institutions, professional entities and academic institutions.

On the demand side, the institutional demand for high quality liquid assets are expected to keep sukuk demand high. As we get closer to the deadline of Basel III implementation, the lack of liquidity management instruments in Islamic finance is pushing this issue to the forefront.
Among the global economic developments, one positive driver for sukuk issuance could be the European Central Bank’s quantitative easing that might prompt some European investors to take positions on higher-yielding but riskier emerging-markets assets such as sukuk. Negative interest rates in Europe and Japan also are likely to attract investor of Gulf sukuk issues.
In 2015, the market saw $11.3 bn (17% to the total) in sukuk issuance for liquidity management purposes. The International Islamic Liquidity Management Corp. alone issued $6.4 bn and is actively working on providing solutions to the market. Other stakeholders such as sovereign and central banks are now conscious of the role they have to play. In 2015, the market also saw another $4.9 bn issued in form of capital-boosting sukuk by financial institutions in the GCC and Malaysia.

Plans by the Philippines to sell Islamic bonds could open a new source of financing for the incoming government of Rodrigo Duterte. Governments across Asia are increasingly viewing sukuk as a viable funding option, with Hong Kong open to tap the market for a third time while Sri Lanka and the Maldives consider debuts. A sukuk from these debutante countries could widen the Asian market that is dominated by sovereign deals from Malaysia and Indonesia. The Duterte government would have to work on a legal framework to facilitate sukuk, which could prove difficult in a busy agenda. Ashraf Mohammed, Assistant General Counsel of Asian Development Bank, said despite the concerns, interest is growing in the region to use Sukuk for infrastructure financing.

Conyers advised DP World on the recent establishment of a sukuk program comprising up to US$3 billion of sukuk certificates to be listed on the Nasdaq Dubai, as well as the successful first drawdown of US$1.2 billion thereunder. Linklaters advised the joint lead managers and bookrunners, who included Citigroup, Dubai Islamic Bank, Deutsche Bank, HSBC, Barclays, Emirates NBD, First Gulf Bank, J.P. Morgan Securities, National Bank of Abu Dhabi and Société Générale. Fawaz Elmalki and Oliver J. Simpson of Conyers’ Dubai office advised on the matter.

The worst time for global markets may be the best time for Hong Kong’s government to carry out its planned third Islamic bond sale. Aberdeen Islamic Asset Management says the time is ripe for a sukuk. The yield on the city’s five-year Shariah-compliant bonds sold in September 2014 has fallen 32 basis points to 1.56% since February. Sales of dollar sukuk are at an all-time high for this time of year, suggesting there’s appetite for an issue by Hong Kong, rated AAA by S&P Global Ratings.

Algeria is preparing to launch Islamic financial services as the OPEC member seeks new ways to raise money after a sharp fall in energy earnings. Algeria’s outdated financial system has been a barrier to investment as the government seeks to diversify its economy away from oil and gas, which account for 60 percent of the state budget. Boualem Djebbar, head of the state-run Banks and Financial Institutions Association, said a legal framework would need to be finalized before introducing Islamic financial services. Djebbar said developing the banking system had become inevitable, with a particular focus on electronic payment systems, which are still little used in Algeria.

Abu Dhabi's Al Hilal Bank acquired $225MM RegS floating rate note Sukuk at 3mL+160bps under its $2.5 billion existing Trust Certificate Issuance Program. This trade marks the return to senior unsecured dollar Sukuk market since 2013 by an Abu Dhabi financial institution. CEO of Al Hilal Bank, Khaled Abdulla Alkhoori, said this was the first Islamic private placement in the UAE. The bank aims to work towards raising funding for medium term to enhance its funding profile.

Dubai’s Meydan Group has obtained Dhs 1bn ($272m) of Islamic financing partly through an issue of Islamic bonds and partly from a term financing facility. The money will help to strengthen Meydan’s capital structure, diversify its investor base and support new projects. Despite the regional economic slowdown Dubai is continuing to invest heavily in its tourism and real estate industries. Abu Dhabi Islamic Bank coordinated and structured Meydan’s financing. Three other UAE banks – Al Hilal Bank, Sharjah Islamic Bank and Ajman Bank – were also involved.

Abu Dhabi government-owned Al Hilal Bank has raised $225 million by privately placing Islamic bonds. The issue, maturing in January 2019, was priced at the three-month London interbank offered rate plus 160 basis points. It was the first unsecured U.S. dollar sukuk issue by an Abu Dhabi bank since 2013. CEO Khaled Abdulla Alkhoori said the bank aims to work towards raising funding for the medium term to enhance their funding profile. The issue was the second tranche of the bank's $2.5 billion notes programme. In the first tranche, Al Hilal raised $500 million of five-year debt in 2013.

A Memorandum of Understanding was signed between the Islamic Development Bank (IDB) and India’s EXIM Bank, which enables IDB to open its first branch in Ahmedabad. During Prime Minister Narendra Modi’s visit to Saudi Arabia there were a wide range of discussions on business and investment in the background of the Kingdom’s $2 trillion Public Investment Fund. Islamic banking could restore equilibrium in Indian society by providing succour to debt-ridden farmers, labourers and other marginalised groups. Hence, Islamic banking has potential as a tool of financial inclusion.

After the publication of Oman's new Sukuk Regulations on 5 April 2016 new listing categories have been introduced on the Muscat Securities Market (MSM). The Capital Market Authority (CMA) introduces a new "Bond and Sukuk Market" on the MSM. The CMA intends to have existing and future bonds and Sukuks listed on the MSM to be placed into this new category. A number of other new categories also being introduced, such as "Under Monitoring Market" and a "Rights Issue Market".

The Silk Road Economic Belt and Maritime Silk Road initiative, now known as One Belt One Road (OBOR), was designed in 2013 to develop economic cooperation between China and Eurasia. The Chinese government has now decided to speed up the operation of the Silk Road fund. Proposals to strengthen the cooperation of China-ASEAN Interbank Association have also been completed. Also a High Speed Rail project in China is considering using Islamic securities to raise a fund for almost 30 billion Chinese yuan (US$4.7billion). In addition, Hainan Airlines Group is planning to raise US$150 million for ship purchasing and to raise offshore Islamic securities.

In Russia a Memorandum of Understanding was signed between Islamic business and finance development Fund (IBFD) and TAWUN, a Shariah consulting company of Pakistan. The Pakistani delegation was led by S.M Muneer from the Trade Development Authority of Pakistan and Mehmood Arshad, the Founder of TAWUN. Arshad stated that the Russian market is very interesting for his organization and TAWUN has all the necessary experience and competence. They will support Russia to launch Shariah-compliant products and get additional funding from OIC countries.

The #Philippines’ incoming finance minister is looking at raising debt via sukuk bonds and yuan borrowings in a bid to diversify its debt profile. The Philippines last went to the debt market in February selling $2bn of 25-year bonds. Minister Carlos Dominguez is also planning to impose new taxes on more unhealthy products to compensate for a planned cut in income taxes. He also said he would put casinos under an anti-money laundering legislation to avoid a repeat of the Bangladesh Bank heist. Dominguez is returning to the Cabinet after 27 years and will assume office on June 30.

Unless tax systems properly accommodate Islamic finance transactions, prohibitive tax costs can arise. The legislation in South Africa, Singapore and Malaysia explicitly refers to Islamic finance transactions. Strictly speaking, this introduces a religious test into secular tax law, which may not be acceptable to other countries. The UK takes a different approach. UK tax law proceeds by only looking at the economic implications of the transaction, without any concern for whether it qualifies religiously as Islamic finance or not, so religious tests do not enter into the UK tax system. UK law already operates to avoid additional VAT costs. In other countries specific legislation will be needed to create parity of tax treatment between conventional finance and Islamic finance.

Roughly one-third of those suffering from extreme poverty worldwide live in member states of the Organisation of Islamic Cooperation (OIC). In 21 of those 57 countries, fewer than half of the population has access to adequate sanitation. Instability places enormous strain on national budgets. The capital accumulated in some of the OIC countries could play an important role in helping them. If Islamic finance is to play its full part, governments will need to undertake important reforms. There is a need for stronger legal institutions that protect property rights and ensure that contracts are enforced. The industry will need to be standardised and regulated.

The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) today published two new standards for Islamic forward foreign exchange products for use in Islamic hedging transactions. The Islamic Foreign Exchange Forward (IFX Forward) is intended to help minimize the exposure of Islamic financial institutions to foreign exchange volatility. The new standard does not require the usage of the balance sheet for both counterparties in Foreign Exchange Forward hedging transactions.