Gassner's blog

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Short European fixed-income trade. A loss of a lifetime?

Bill Gross, well known fixed income fund manager twittered (https://twitter.com/januscapital/status/590519759797530624) and moved markets with his idea to sell German sovereign bonds short (selling without having them) to buy them back later cheaper. He called it "The Short of a lifetime"; the only issue would be the "timing"...

Interest rates will be once raising again but will short seller stay solvent long enough to benefit? The German economy is doing fine, but other EURO zone countries do not perform as well and need low interest rates for a prolonged period of time. Japan has so far not convincingly ended their easy money policy.

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Greece vs. Lehman Brothers

Is it fair to compare Greece with Lehman Brothers? May be not, but in fact many would want to figure out, what would happen if sometime later, e.g. in summer Greece would default. Will it be like Lehman? Wouldn't a country's default be more serious than a bank's?

Thus the question is how to compare the size of a country with a size of an investment bank? Surely not exactly but some figures are indeed interesting:

The economy of Greece has a national income of USD 242 billion (nominal gross domestic product) according to World Bank statistics for the year 2013. And the GDP to Debt ratio is said to be around 174%.

http://en.wikipedia.org/wiki/Economy_of_Greece

Lehman Brothers back in the 2007 annual report showed a net income of USD 4 bn. With long term borrowing of Lehman stood at USD 123 bn this would look much worse in terms of income and debt level than Greece. A better comparison for debt sustainability would need to take into account the assets of a country and a corporate of course. Lehman had reported USD 691 bn. What are the national assets of a country???

https://www.zonebourse.com/NB-PRIV-EQ-PARTN-56192/pdf/87896/NB%20PRIV%20...

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How to achieve a soft landing of a deleveraging, while growing economy?

For many years we see in the media experts believing in inflation and even hyper inflation. However, in the same time we face proponents warning against deflation. So far we all noticed.

Only a about a week ago I read an article by Myret Zaki clarifying that unfortunately inflation and deflation co-exists.

Myret Zaki's thesis is that we face inflation on financial markets, and deflation in the real economy (in French):

http://www.bilan.ch/myret-zaki/redaction-bilan/inflation-et-deflation-co...

In my view there is a general major shift in the price matrix and I still try to figure the magnitude and implications thereof. It is a bit irritating as at University we learned about neutrality of money:

http://en.wikipedia.org/wiki/Neutrality_of_money

This means any extra supply will increase prices equally, 5 % more money, all prices going up 5 %. Pretty plausible at first hand. However, it seems it does not work in reality any more (or never did).

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Venture Capital the Islamic ideal?

Dear Readers,

Venture Capital has often been regarded as the ideal tool for Islamic finance, particpating in profits and losses of innnovative companies.

Now a major assessment has been done by Cambridge Associates in terms of performance, comparing it to the wider stock market. Result: No outperformance. Considering the lack of liqudity it seems to be much less attractive to professional investors than thought.

See: http://www.cambridgeassociates.com/pdf/Venture%20Capital%20Index.pdf

The lack of success also is induced by lack of transparency and fee models taking away the eventual outperformance. This is for the US market of course. Experiences in less advanced markets could be better or even much worse.

It still has other benefits, as diversifying risk, promoting overall growth and eventuall fostering social benefits.

In order to protect the investor, proper disclosures must be integrated to grow this industry in a healty manner. Further the focus on impact investing will ensure that value is created and risk better managed. What impact investing means could be read here:

See: http://www.thegiin.org/cgi-bin/iowa/home/index.html

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Outlook & Review 2012/2013

Dear Reader,

Islamic finance had another great year. Many of its market segments progressed, like for example the Sukuk market gaining more maturity. Despite the ongoing debt crisis a good sign of hope and happiness.

Nevertheless we are - as an industry - still not satisfied with the achievements. Islamic finance shall grow stronger in terms of social impact and in terms of substance:

Hence, please allow me to re-iterate my call for participating in international initiatives beyond just our own industry to learn and spread knowledge and experience:

Calling Islamic financial institutions to become member of the United Nations Finance Initiative
http://www.islamicfinance.de/?q=node/811

Inshallah we see more Islamic financial institutions taking a lead in SRI, Social Impact Investing and other approaches while contributing with Islamic finance knowdledge to the conventional industry. The time is now; and there are signs that Malaysia aims for a lead:
http://www.islamicfinance.de/?q=node/4151

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Debt to Equity in Microfinance

Dear Reader,

The issue of debt vs. equity is now going to be increasingly recognised - in microfinance - as I found out today on the cfi blog:

"Debt to Equity. The demand for equity and subordinated debt is huge and continuing to grow, mainly coming from mature MFIs. More MIVs are moving away from debt toward equity, being driven in part by a desire to be more involved in governance, to play a larger role in risk management, and because the regulators are requiring more capital. Also, fund investors increasingly want to know how much of a fund’s return is coming from debt versus equity. Some of the larger DFIs need to disburse large amount of funds, so they have to make debt investments, leaving an unmet demand for equity."

http://cfi-blog.org/2012/11/19/microfinances-new-normal/

An important food for thought beyond microfinance itself in my opinion.

Best regards,

Michael Saleh Gassner

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Why the lack of profit/loss sharing?

Well, repeatedly we read and hear about the lack of profit/loss sharing (equity finance) in Islamic finance. Here my five cents about it:

1) Islamic commercial law, Fiqh Muamalat, per se has no preference of either permissible mode of finance, be it musharaka, ijara or murabaha whatsoever. All is halal. However, the call for modesty of debt in many hadith and the seriousness of being indebted upon death (withholding of death prayer) shows a call for a solid equity portion in business; let's call it a technical preference.

2) If we look up all debt financing modes (e.g.Murabaha, Ijara) there are remaining difficulties to finance wages, rents and installments on fresh debt. This is a true indicator for a required minimum amount of equity in a company.

3) Point 1) and 2) leads us to demand a sound debt/equity ratio.

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Analysis of the JAK interest free loan model

Dear Readers,

aside from Islamic banks there is another model in practice for more than 20 years avoiding the topic of interest. I usually cite it in my seminars to show that even interest free loans can exist along a banking model. Years ago, an in depht analysis was published online:

http://anielski.com/wp-content/documents/The%20JAK%20Bank%20Report.pdf

In the meantime interested groups can seek assistance to set it up by:

http://www.cajasweden.se/downloads/caja_folder_e-version.pdf

And also JAK offers courses and backgrounds for international interested groups from abroad in their first newsletter:

http://jak.aventus.nu/download/JAK_Int/JAK_International_Newsletter_1.pdf

Addendum: A master thesis about JAK Medlemsbank can be downloaded here:

http://www.jak.se/sites/default/files/folkbildning/dokument/MARK_BURTON_...

Enjoy reading and take it as a source of inspiration!

Best regards,

Michael Saleh Gassner

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Islamic finance media - a challenge, and what one could do

Dear Readers,

Islamic finance media are a tricky service. This is true for various reasons: The Internet eats up the revenues, because everything ought to be free. Islamic banks are still a niche phenomena, and international banks like UBS or Deutsche are almost as large as the entire global Islamic finance industry. Consequently the marketing budgets are much lower, too.

Last not least, who should advertise? The banks among themselves or to the clients? Advertising from bank to bank, does usually not make much sense, but real client oriented formats are hard to find, too. May be this is a niche. Others, who could finance Islamic finance media are basically the service providers to the banks, but due to the limited number of Islamic financial insitutions, direct marketing, e.g. face to face meetings will be preferred.

This in short is the background why Islamic finance media are not so well established in terms of journalism and research, but mostly reflecting the press release as criticised by the makers of the Islamic Globe. See: http://www.theislamicglobe.com/index.php?option=com_content&view=article...

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Goldman Sachs Sukuk

Dear Reader,

The last weeks we have read about criticism in regard to the Sharia compliance of the Sukuk program of the investment bank Goldman Sachs:

< Mohammed Khnifer reveals, after examining the offer circular thoroughly, three possible flaws in the overall structure.
1- Strong indication from the proposed structure and the prospectus as well that the sukuk is not, as they claim, Murabaha, but a Reverse Tawarruq.
2- Strong indication that Goldman will be using, eventually, the proceeds to fund its conventional activities.
3- The so called Murabaha sukuk is listed on the Irish Stock Exchange (ISE). There are some concernes on how the ISE will make sure that the securities will be traded at par value.>>

http://www.islamicfinance.de/?q=node/3155

Some remarks to this discussion:

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How to balance form and substance - the role of Sharia Scholars

Dear Reader,

Many times I read, and on all conferences we debate on the issue of form over substance - is their a simple solution?

Let's revisit:

Form over substance means that contemporary Islamic finance takes more emphasize on the form of the contracts (in their Arabic terminology like Murabaha, Musharaka etc.) as in their substance, especially their economic substance, which often looks the same after conducting a sequence of Arabic named contracts.

Scholars have to judge the appearance of the form, meaning the contracts in front of them. A judge shall not guess the intentions of the contractual parties but typically has to rely on the text itself to come a decision. Different schools of Islamic law have different degrees on reliance on the form and considering or rejecting to assume 'intentions' . The hesitance to guess about 'intentions' is based on the fear to commit injustice to the parties and a procedural cause to get evidence about them.

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Greece - how to handle a debt crisis?

Dear Reader,

Greece has a substantial impact on the ever nervous markets these days.

Interestingly, the help offered to the country is based on interest-bearing loans, which likely will go along with cost cuttings to service the debts causing all kinds of social hardships. This is the standard recipe.

How help would need to look according to Islamic law and morals?

1. Interest-bearing loans are a clear no go. Interest-free loans could be an option, even for the whole European Union for mutual support situations.
2. Fostering investments based on profit-/loss sharing. Greece could undertake a capital raise for state owned companies and infrastructure - the other EU countries could become investors rather than creditors.

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Congrats to Brunei for the new credit card rules

Dear Reader,

I am very glad to read the news that the first Muslim country is taking a strict policy against credit cards in its country. Brunei shows courage and leadership and shall be congratulated by the whole community of Islamic finance.

http://www.collectionscreditrisk.com/news/brunei-battles-credit-card-deb...

Even the US ambassador is supporting and defending the rules which for a transition period makes life of consumers more difficult, but he reminds for the good effect it has on the long run:

http://www.brudirect.com/index.php/Columnist-Column/bruneians-better-off...

Remember: Credit cards are a major part of the world financial crisis, hundred of thousands of people went into debt and even worse in a vicious circle of debt. There is barely on consumer level a financial product spreading more harm, whether or not it is Islamically replicated.

See my previous blog on it: http://www.islamicfinance.de/?q=node/582 and the entry in the Islamic Finance WIKI: http://wiki.islamicfinance.de/index.php/Credit_Card

Best regards,

Michael Saleh Gassner

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Thrust Fund - a fresh approach for unrestricted Mudaraba in Social Investments

Dear Readers,

Would you ever imagine an investor giving you an amount X to participate at a percentage of your lifelong income?

This is what the Thrust Fund suggests:

"Here's how it works:

Thrust Funders learn about Entrepreneurs.

When the Funder sees an Entrepreneur of interest, she or he submits an inquiry to that Entrepreneur and coordinates a time and manner to discuss passions, plans, and pursuits.

When a Thrust Funder decides to support an Entrepreneur, she or he may negotiate exactly what that support will look like. "

The sample contract is shown here:
http://www.thrustfund.com/documents/contract.pdf

The investment is done one to one, no diversification like usually with a fund concept. The current entrepreneurs seeking finance are shown here:

http://www.thrustfund.com/biographies.html

Could such a model work in the Muslim world? Any Sharia restrictions to be imposed for the sake of justice?

Let's start thinking!

Best regards,

Michael Saleh Gassner

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Nakheel - Event of Default - Legal Issues?

Dear Readers,

An article in the Financial Times, has discussed the legal issues surrounding to an eventual Event of Default of the Nakheel Sukuk, which can be read here:

http://www.ft.com/cms/s/0/215c0502-e038-11de-8494-00144feab49a.html

Some comments came afterwards referring to that piece, e.g. on FT Alphaville:

http://ftalphaville.ft.com/blog/2009/12/04/86736/nakheel-and-the-sukuk-l...

Claiming that because of Sharia law in the UAE there is uncertainty regarding burden sharing.

Such a claim is an error. While the Sukuk was structured to comply with Sharia the various Agreements are either governed by English law or UAE law.

Therefore it is crucial to see how assets could be seized under UAE law not under Sharia law: A nice summary of the dispute resolution in the UAE is free for download by the law firm Afridi and Angell:

http://www.legal500.com/assets/images/stories/firmdevs/disputeresolution...

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Dubai World and Nakheel Sukuk - What did the prospectus say?

Dear Readers,

some background on the standstill:

Sukuk prospectus of the related Nakheel entity:
http://blogs.thenational.ae/economy_blog/Nakheel%20Development%201%20Pro...

citation:
"Risks Relating to the Co-Obligors and the Co-Obligor Group Strategy

The growth strategy of the Co-Obligor Group is based on certain assumptions relating to, inter alia,
economic conditions, market for real estate and demographic conditions in Dubai. [...] This could, for example, have an impact on the rental income, sales proceeds or other income (such as management fees) available to the Co-Obligor Group and the value of its projects, which could affect its ability to make payments under he Transaction Documents."

and the issue of implicit sovereign support was nicely discussed in a blog:
http://blogs.thenational.ae/economy_blog/2009/08/nakheels-bond-prospectu...

The rational behind is explained by a rating agency here in 2007:
http://www2.standardandpoors.com/spf/pdf/media/sp_approach_to_sukuk_17-s...

"from its parent also benefited from strong implicit government support."

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Obama's fight against credit cards

Dear Reader,

"President Barack Obama, who met card executives at the White House on April 23, says customers deserve protection from unfair practices. "

http://www.bloomberg.com/apps/news?pid=20603037&sid=a4tXvQTb.j0Q&refer=home

He actually is a long standing opponent of credit cards offering repayment in installments. A short search in Google proofs he is looking into the issue far before his election, e.g. in 2007:

"Democrat Barack Obama called for new restrictions on "predatory" credit card companies he says deceive consumers into piling up massive debt they have little hope of repaying."

http://www.cbsnews.com/stories/2007/12/03/politics/main3570454.shtml

In spite of cheaper funding, the card companies continue to charge high justifying it with the write offs:

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Need for SME finance? Lack of cooperative banks in the GCC!

Dear Reader,

Just reading an article how much the UAE economy needs the small and medium sized companies and how much difficulties they face to be financed by banks:

http://www.business24-7.ae/articles/2009/4/pages/26042009/04272009_46940...

One issue I missed in this article:

Not a word mentions the role of cooperative / mutual banks or the saving & loans; both financial institutions, which are non profit by its bylaws but dedicated to their members or region. This sector has about 50 % of the total banks balance sheet in my home country Germany, where small and medium sized companies are the backbone of the economy.

So, what is missing in the GCC desperately is setting up cooperative banks and regional saving banks - both can be done Islamically.

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Sustainability, Islamic Finance and Managing Risk While Seizing Opportunities

I just published an article with the Dow Jones Islamic Market Indexes Newsletter, giving an overview about the lines of arguments regarding performance and ethical screens, be it Islamic or Sustainability and what empiricial findings have been published.

It is claimed by critics that the reduction of the universe through ethical screens shall reduce the performance, likewise corporate social responsiblity comes against a cost. Similar counterarguments have been raised regarding Islamic screening criteria.

Bank Sarasin published a study doing own research with partners and reviewing published empirical analyses in the literature. It shows that there is no negative impact on performance. My review of empirical analyses in regard to Islamic finance concluded the same and all publications let conclude that ethical screens add value by way of risk management. An example is the debt limitation of the Sharia tolerance criteria.

Ethical screens may therefore improve the investment decision process and more research shall determine, which factors add value to the portfolio and therefore form part of a professional process.

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Sukuk Debate

Dear Readers,

Please see my explanation to the recent Sukuk debate layed out in two articles.

Best regards,

Michael Saleh Gassner

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