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A monthly update on Islamic and conventional stock markets in Middle-East, Far East and Africa Regions. It also covers bonds, sukuk, commodities, recent developments and an update on accounting issues.
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Islamic Finance Bulletin
January 2013
www.lums.lancs.ac.uk/research/centres/golcer/
Gulf One Lancaster Centre For Economic Research
Page 2
From the EditorFor much of December the world’s markets were on tenterhooks over politically-charged deliberations in the US as to the supposed fiscal cliff. If the rival factions in Congress and the executive could not resolve their essentially ideological impasse, then financial markets generally would have to factor in a declining ability to fuel the world’s economic recovery process.
In the weeks ahead of the year-end deadline -- with the idea that the national debt ceiling might be breached and bills not paid -- markets had simply to factor in the partial risk of that interruption. It would hinder the collective global rebound based on the continuation of cheap money in the West, and catch-up developmental momentum in the East and commodity-based surpluses elsewhere.
This was an inflexion point in more than one sense. Not only might it denote a decisive step forward into the next phase of the cycle, but in doing so it could spur the rotation of investor portfolio alignments away from bonds towards equities, especially as policymakers have seemed increasingly determined among the key authorities to try to trade growth for inflation. Japan in particular has sparked that notion, and even ignited fresh talk of currency wars.
So bonds and sukuk essentially went roughly nowhere on the month, while equity indices generally climbed. Sideways trends in commodities such as gold and copper typified the uncertainty of trading and economic prospects, with activity quiet also because of the festive break and the relative lack of drama in the eurozone.
Among emerging markets, Egypt stood out for the advance of its stock market in contrast to the decline of its currency, credit standing and political stability.
In respect of developments in Islamic finance, meanwhile, a host of examples in various corners of the world, including France, Germany, Australia and the south-east Asia region, gave testimony to the rising influence of Shariah-compliant products, in terms both of capital-raising and the institutional architecture required to build on the sector’s inherent promise.
At the same time, a certain reality check could be perceived in the competition with conventional funding and its related investments over the course of the year, for instance in the Gulf as issuers sought subscrip-tions from a diverse investor base.
ContentsHIGHLIGHTS (p.3)
RECENT DEVELOPMENTS (p.4)
STOCK MARKETS (p.6)
COMMODITIES (p.9)
BOND AND CDS MARKETS (p.11)
ACCOUNTANCY ISSUES (p.14)
PERSPECTIVE (p.15)
DIARY OF EVENTS (p.16)
Page 3
Egypt: A rollercoaster month saw the pound plunge over concerns for the depletion of foreign exchange reserves as political turmoil revisited the country, but also the continuation of invest-ment inflows from overseas, and a double-digit rise in the stock market. A sovereign credit rating downgrade added to the mix, and the central bank took protective measures towards year-end. It also, incidentally, announced draft guidelines for Islamic banking and the launch of sukuk to finance infrastructural projects.
GCC: While the overall trend in Islamic finance globally remains decisively upward, sales of sukuk in the Gulf region lagged behind non-Shariah-compliant offerings in the fourth quarter of 2012. Sukuk issuances dropped to $3.5 billion as compa-nies looked to extend their investor base beyond Asia and the Middle East. This news constituted a reminder that conventional finance continues to provide a competitive challenge in terms of being easier to arrange and offering broader investment options.
Initiatives in Western markets: France issued its first two sukuk late in 2012, giving its companies the potential for alternative funding. In Germany, Kuveyt Turk, Kuwait Finance House’s Turkish unit, applied for a banking licence, aiming to become the first Islamic bank operating in Germany. Meanwhile in Australia fund manager Crescent Wealth launched the country’s first Islamic pen-sion fund, seeking to tap into not only Muslim investor requirements but also those of native investors seeking conservative, value-based products.
Highlights
Recent Developments in the Islamic Finance Industry
GCC companies bypass Islamic bonds
GCC sales of sukuk lagged behind non-Shariah-compliant offerings in the fourth quarter of 2012 for the first time in a year. Companies including Inter-national Petroleum Investment Co, based in Abu Dhabi, and Qatar National Bank SAQ opted to draw on demand among non-Islamic bond inves-tors, raising $10.4 billion in the three-month period. Sukuk issuances in the quarter fell to a year-low of $3.49 billion. Still, Islamic bonds from the Gulf may flourish as the region’s governments plough oil wealth into projects valued at more than $1 trillion. Saudi Arabia, for example, will issue sukuk to fund airport expansions in Riyadh and Jeddah.
GOLCER finds that this dip in sukuk issuance is at-tributable to companies seeking to broaden their investor base beyond Asia and the Middle East. Non-Islamic debt is easier to arrange and much broader in investment options and instruments. The average yield on sukuk from the six-nation GCC dropped 139 basis points in 2012 to 2.92 per cent at year-end, HSBC/Nasdaq Dubai’s GCC US Dollar Sukuk Index shows, while yields on non-Islamic debt were at 3.28 per cent, according to Bloomberg.
Source: Khaleej Times, January 4th
First Oman Islamic bank opens its doors
The first dedicated Omani Islamic bank, Bank Ni-zwa, started operation this month, initiating a new era for Islamic banking in the country. The sultan-ate announced last year it would introduce Islamic finance, becoming the last country in the GCC to do so. Oman’s central bank has adopted a strict approach to regulating Islamic banking, setting higher standards for the industry than many other countries. Its rules cover areas including liquidity management, the administration of boards of Sha-riah scholars, and the operation of conventional banks’ Islamic windows.
Source: The Arabian Business News, January 11th
Merger of three Islamic banks completed in Bahrain
Bahrain Kuwait Finance House (KFH) announced this month the successful closing of the merger initiated in the later part of 2011 between three Bahrain-based Islamic banks: Elaf Bank, Capital Management House and Capivest. It creates a strengthened fi-nancial institution with a total equity of approximate-ly $340 million and total assets in excess of $400 million spanning the Middle East and North Africa, Europe and Asia.
GOLCER perceives this as a robust merged entity that can better compete in the dynamic and growing global Islamic banking and investment industry. The newly-created institution will be better positioned to participate in larger investment projects, and more effectively capitalise on a broader set of available opportunities across the Middle East and North Africa (MENA) region, and worldwide.
Source: Khaleej Times, January 9th
France launches its first sukukAs France attempts to establish the Islamic financial sector, its first sukuk issues have finally appeared. Two sukuk were issued late in 2012 for both indi-viduals and institutional investors, giving French companies the potential for alternative funding. The first was aimed at financing investment in a growing segment in the food sector in France, namely halal catering. The second is in the area of solar panels and finances an ecological, economically responsi-ble investment.
Page 4
Supported by the economy minister in 2008, de-velopments towards Islamic financial instruments in France have been slow but gradual. In 2005 BNP Paribas Najmah received the Euromoney Award for the best Islamic Finance House. In June 2011 Chaabi Bank, French subsidiary of the Moroccan Banque Populaire Group, opened an Islamic win-dow offering Islamic deposit accounts for private customers. In 2013 Chaabi Bank seeks to launch a deposit account for SMEs, to respond to the latent need of their clientele for Islamic banking products.
GOLCER sees these initiatives as reflecting obvious interest among international European banks in the sector of Islamic credit. Having the largest Muslim community in the European Union, French banks have developed an excellent knowledge of the sector in the past few years. It also appears that the diversification of the French economy is likely to facilitate several types of assets that could be used to carry out operations in line with Shariah as well as promote the issuance of sukuk.
Source: Zawya, December 19th
Licence sought for Germany’s first Islamic bank
Kuveyt Turk, Kuwait Finance House’s Turkish unit, has applied for a German banking licence, and aims to become the first Islamic bank operating in Germany. Permission is pending from the German financial authorities. The bank issued a $350 mil-lion sukuk last year.
GOLCER believes that entering the European mar-ket still requires effort. Passing legislation governing Islamic finance in Germany may be a concern, and might lead to some politically-charged debates. Europe in general, and particularly Germany, shares the challenge faced by other jurisdictions new to Islamic finance, namely taxation. Obtaining the necessary tax amendments appears to be an obstacle.
Source: Reuters, November 28th
Mauritania planning Islamic Treasury Bills
With Islamic finance continuing its progress in Africa, several Islamic banks are now operating in Mauritania, with new authorisations being granted while a developing interbank market emerges. The Central Bank of Mauritania (BCM) has recently completed a study to investigate the potential de-velopment of a local Shariah-compliant securities market, aided by IFAAS (Islamic Finance Advisory and Assurance Services), an international advisory firm. Its report assessed the potential for BCM to issue Treasury Bills.
GOLCER considers that substantial challenges still await the Islamic finance industry in Mauritania giv-en the limited size of the market, which will impede the sector’s rapid development and might prevent entrants from making guaranteed profits.
Source: Zawya, December 22nd
Australia’s first Islamic pension fund launched
Australian fund manager Crescent Wealth has launched the country’s first Islamic pension fund, following a deal with the Association of Indepen-dently Owned Financial Professionals (AIOFP). The main purpose is to tap Australia’s large pension in-dustry, which had about $1.3 trillion in assets at the end of 2011, according to the Australian Prudential Regulation Authority. Crescent Wealth, established last year, currently has an Australian equities fund and a cash fund, while it also plans to launch inter-national equities and property funds.
The potential for Islamic funds in Australia is esti-mated by the firm to grow to $22 billion in funds under management by 2020. Crescent Wealth’s managing director said this new investment option is expected to appeal not only to Australians of Islamic faith but to all Australians seeking conserva-tive, value-based investments. Crescent is training in both product and Islamic finance principles advi-sors who would focus on the Sydney and Brisbane communities and later move on to Melbourne.
Source: Reuters, December 17th
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GCC
GCC markets closed on a positive note with the exception of Kuwait and Qatar, where markets fell by 2.8 per cent and 0.8 per cent respectively. Saudi Arabia’s market slipped initially owing to the reported ill health of the King, but rebounded as his condition improved, with a public appearance, and upon the announcement of record budget spending for 2013. In fact, the Saudi index was the best performer in the region in December, up by 4.2 per cent, aided also by strong oil prices, although Oman almost matched that outcome with buying from funds impressed by growing recovery signs.
Kuwait saw profit-taking among retail investors in the absence of supportive economic data, and the persistence of political skirmishes implied a continu-ing drag on progress. Privatization of the bourse itself ran into legal obstacles. Qatar similarly saw profit-taking. Abu Dhabi’s index dipped upon central bank regulations curbing mortgage lending, while Dubai rose slightly on the improving mood in the real estate market. Bahrain ticked up modestly as well.
Source: GIC Research, Financial Times, Kamco
MENA
The Egyptian index remained surprisingly resilient to the bubbling political tensions in the nation coupled with S&P downgrading its government debt (from B to B-) and the cancellation of treasury sales. The market
rose by a whopping 16.5 per cent in December, owing to the country’s still enhanced appeal to foreign investors. Although the Arab Spring shook the political stability of the region, domestic banks have proved to be a magnet for foreign investors. Gulf banks such as the Qatar National Bank and Emirates NBD perceive that it’s the right time to make investments. Central bank manoeuvres to protect reserves in the face of a plunging currency provided some fillip towards the end of the month.
Turkey was up by 8 per cent as a result of its ef-forts to shift business to Africa as its largest trading partner, with the EU in a weakened state. Turkey’s financial sector has remained robust in spite of the global sluggishness, and the markets have been helped by interest rate cuts that have boosted investments in the country. With 2012 the best year since 2008 for mergers and acquisitions in the MENA region, the Turkish market led that race with transactions valued at $10.1 bn.
Source: Financial Times, Banque Audi, Turkey News
Monitor, Reuters
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec64
64.5
65
65.5
66
66.5
67
67.5
68
Isla
mic
Ind
ex
92
92.5
93
93.5
94
94.5
95
95.5
96
Co
nv
en
tio
na
l In
de
x
GCC
0.937963Correlation (1 mth)
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec700
750
800
850
900
Eg
yp
t Is
lam
ic I
nd
ex
320
325
330
335
340
345
350
355
360
ME
NA
Ag
gre
ga
te I
nd
ex
MENA
0.209324Correlation (1 mth)
Stock Markets
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Page 7
Far East
Most Asian stocks rose on the month, responding to the news in the US as to averting the threatened fiscal cliff. Malaysia, the second largest market for IPOs in 2012, rose by 5.4 per cent in Decem-ber. An inflation rate at its lowest in more than two years meant the central bank left interest rates unchanged. Rising demand for electronics and other goods from China and US helped pushed up the Taiwanese index by 2.1 per cent, and its purchasing managers’ index (PMI) at 50.6 indi-cated modest expansion in the economy. Indone-sia enjoyed its seventh straight month with its PMI in positive territory; the index rose by 1.0 per cent. Higher demand from Asian, European and African markets is thought likely to promote business activ-ity in the coming months. Pick-up is evident too in South Korea, whose index rose by 5.4 per cent in December. India’s index roughly tracked sideways on the month.
Source: Financial Times, Bloomberg
Rest of the World
Markets across the globe ended 2012 on a high as ideas of overcoming the barrier of the US fiscal cliff obstacle emerged, with a background sense also tensions easing over the Eurozone and signs of improvement in the US and Chinese economies. China’s index rose by 4.4 per cent, with signs of improvement in trade, industrial production and retail sales. Momentum in the economy picked up in late 2012 as the government increased invest-ments in infrastructure, while demand from the US and EU economies weakened. As price and pro-duction data fuelled speculation of further stimulus, the Japanese index rose even more sharply, by 6.4 per cent, heralding a policy-induced surge with the change of administration. The incoming gov-ernment appears determined to spark growth by way of unprecedented monetary stimulus. Exports rose after the weakening of the yen in December.
Source: Financial Times, Bloomberg
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec1.08
1.09
1.1
1.11
1.12
1.13
1.14
1.15
1.16 x 10 4
Ma
lay
sia
Isl
am
ic I
nd
ex
360
365
370
375
380
385
390
395
400
Ag
gre
ga
te F
ar
Ea
st
Far East
0.616932Correlation (1 mth)
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec1350
1400
1450
1500S
&P
50
0
630
640
650
660
670
680
690
Eu
ron
ex
t 1
00
World Conventional Benchmarks
0.486405Correlation (1 mth)
Page 7
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec2150
2200
2250
2300
2350
DJ
Isla
mic
In
de
x
1550
1600
1650
1700
1750World Islamic Benchmarks
FT
SE
Sh
ari
ah
Wo
rld
In
de
x
0.990118Correlation (1 mth)
Islamic or Shariah compli-ant indices exclude indus-tries whose lines of busi-
ness incorporate forbidden goods or where debts/
assets ratios exceed 33%. The increasing popular-ity of Islamic finance has
led to the establishment of Shariah compliant stock
indices in many stock markets across the world, even where local Muslim populations are relatively
small, such as in China and Japan.
Volatility is a measure of un-certaincy of market returns. It is calculated as the standard deviation of the returns in the reported month. The formula for the standard deviation is:
σ=E[(X-μ)2]1/2
Page 8
Islamic Stock Markets
Conventional Stock Markets
Evolution of Islamic Stock Markets in December 2012 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Prices represent the closing price of the respective index at 31/12/2012. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Evolution of Stock Markets in December 2012 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Price represent the closing price of the respective index at 31/12/2012. Per-centage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
CommoditiesCrude OilWith the revolution in the shale industry, and supply bot-tlenecks, the US’s WTI benchmark for oil prices has be-come now distorted. Analysing the prices of WTI, Brent and other indices, OPEC series seem to be roughly at par instead with Brent, which fell by 1.7 per cent in De-cember, although up over the course of the year. Inves-tors were concerned about US lawmakers not reaching a budget deal by year-end, besides general economic slowdown. Additionally, there was a drop in winter crude oil demand. Nonetheless, analysts expected the price of crude to persist in triple digits in the new year in spite of rise in US production, as Saudi Arabia and other OPEC countries would trim their supply.
Source: Financial Times, OPEC
Natural GasHenry Hub fell by 1.6 per cent in December – mainly in the second half of the month -- owing to above-usual temperatures in the US, especially in the north-east, translating into lower requirements for heating. While demand remained flat, supply had risen slightly, mov-ing up by about 0.6 per cent, against a background of rising stocks. The warm December was reflected in the withdrawal of natural gas storage as well.
Source: US EIA, OPEC
GoldDespite fears for the US economy and the dollar, which have led to strong gains in gold in the past, the metal’s price fell by 3.3 per cent last month. Hedge funds were reported as cutting their long positions. In 2012 as a whole gold showed one of the smallest annual percent-age rises in prices in recent years. A decline in demand in India (owing to a weak rupee) and China, the world’s biggest buyers, has been a major factor. In mid-month gold reacted to the lowest consumer prices in the US in six months. Gold’s movements have intrigued observers, particularly considering the serious concern over the so-called fiscal cliff. Krugman has cited the hoteling pricing theory (where gold is seen as an exhaustible resource and the rate at which it is used up determines its real
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8Natural Gas
US
D/M
MB
TU
Natural Gas
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec80
85
90
95
100
105
110
115
120Crude Oil
US
D/b
arr
el
Brent OilDubai OilWTI Oil
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec1600
1650
1700
1750
1800
US
D/T
roy
Ou
nce
2100
2150
2200
2250
2300
2350
2400
Pre
cio
us
Me
tals
Ind
ex
Gold
Precious Metals Index
Page 9
price), while others have linked gold prices to nominal yields, the two moving in opposite directions. Opin-ions are now split for gold prices in 2013.
Source: Financial Times, The New York Times, OPEC,
Markaz
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec7400
7600
7800
8000
8200
8400
US
D/M
T
3200
3250
3300
3350
3400
3450
3500
3550
3600
Me
tals
Ag
gre
ga
te In
de
x
Copper
Metals Aggregate Index
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec18
18.5
19
19.5
20
20.5
21
21.5
22
US
D c
en
ts/l
b
570
580
590
600
610
620
630
Ag
ricu
ltu
re A
gg
reg
ate
Ind
ex
Sugar
Agriculture Aggregate Index
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec750
800
850
900
Pa
lm O
il (U
SD
/MT
)
13.5
14
14.5
15
15.5
So
ybe
an
Oil
(US
D/B
sh)
Palm & Soybean Oil
Soybean Oil
Evolution of highly traded commodities in December 2012. MTM Change and Percentage Volatilities. US $ and US c indicate United States Dollar and United States cent repsectively. bbl = billion barrels, MMBTU = Million British Thermal Unists, MT = Metric Tonne, LB = Pound and Bsh=Bushel. Prices represent the price of the respective commodity at 31/12/2012. Source: DatastreamPage 10
CopperCopper gained slightly as it seemed a solution was pending for the looming US fiscal cliff, but fell back when the talks appeared to sour. Prices declined by 0.9 per cent over the month. At the same time global economic sentiment provided a weak backdrop. Weak US hous-ing data added in this respect to the fear of increasing global stock of the metal. Housing data are an indicator of future demand, as copper is primarily turned into elec-tric wire and plumbing material. Swelling inventories in China, the sector’s largest consumer, implied slower de-mand. However, an increase in US GDP numbers limited the negative trend, and strong manufacturing data from China gave a lift late in the month.Source: Wall Street Journal, Reuters, Bloomberg, OPEC
SugarSugar outperformed other commodities as it rose by 1.2 per cent in December. This increase was due to funds selling their short positions in the market for profit, also to the speculation of fiscal cliff negotiations reaching a positive outcome, which would be a supportive fac-tor for global growth and all commodities. Over the year, however, the price of sugar was about 18 per cent lower, and high Brazilian output has been identified as imposing continuing downward pressure.Source: Reuters, ITAU BBA, Bloomberg, OPEC
Palm and Soybean Oils
Palm and soybean oil prices continued to fall in Octo-ber, by 6.8% and 0.9% respectively. In fact the recent drop in palm oil prices can be partly attributed to the exceptional soybean harvest earlier this month, as well as a rising yield of palm oil itself. A very good harvest led to the drop in soybean prices, but higher demand from China provided offsetting support.Source: Financial Times, US EIA, ITAU BBA.
GCC
GCC bond markets continued higher in December, with spreads tightening, showing resilience as global benchmarks began to struggle. Offshore investors have shown persistent interest in investment-grade names of longer maturity, such as Abu Dhabi-based energy firm Taqa, which have dominated liquidity. As a rough proxy for the Gulf, Bahraini sovereign bond yields dropped on the month, stabilizing at around 3.9%. Sentiment was ‘wait-and-see’ in light particularly of developments in the US surrounding the fiscal cliff issue. Recession in the US, however, appears to have receded, while the EU’s difficulties have brought less drama for the moment, with focus upon financial support for the weaker members.
Source: GIC, Invest AD
MENA
Egyptian sovereign bond yields surged, stabilizing at around 6.3% at the end of December. A Treasury sale was cancelled late in the month following S&P’s downgrade. Market sentiment generally has been affected by two factors recently on different paths; the foreign exchange and the bond markets. On one side FX reserves have been depleted, pushing the pound to all-time lows, and forcing the central bank to enforce restrictions on the availability of hard-currency like US dollars. Moreover, doubts as to whether an IMF deal will be reached before the April elections muddies the waters. By contrast, analysts believe the country will still honour its obligations both locally and internationally.
Source: Reuters, Bloomberg
Far East
Malaysian sovereign bonds in December closed at roughly the same level as in November, with quiet conditions around the festive break and doubts on direction with reference to the US fiscal cliff, which dominated headlines. Yields fell initially to 1.71%, before rising up to 1.8% and closing eventually at
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec3.8
4
4.2
4.4
4.6
4.8
Yie
ld t
o M
atu
rity
(%)
128
129
130
131
132
133
134
135
136
Bo
nd
Ind
ex
Bahrain Bond Yields & Prices
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec5.6
5.7
5.8
5.9
6
6.1
6.2
6.3
6.4
Yie
ld t
o M
atu
rity
(%)
225
230
235
240Egypt Bond Yields & Prices
Bo
nd
Ind
ex
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec1.7
1.75
1.8
1.85
1.9
Yie
ld t
o M
atu
rity
(%)
274
274.5
275
275.5
276
276.5
277Malaysia Bond Yields & Prices
Bo
nd
Ind
ex
Bonds and CDS markets
Page 11
1.76%. Signs of economic growth pick-up provided backing, with an unexpected increase in the coun-try’s industrial production by 7.5% year-on-year. Malaysia’s potential has been reflected in a study by PWC identifying countries that could be seen as the ‘new BRICS’. Bond issuances in the year remained at a high level, and re-affirmation of the credit rating on Islamic bonds also kept yields down.
Source: Borneo Post
Page 12
Credit Default Swap Markets
Sovereign Bond Markets
Evolution of Bond Markets in December 2012 relative to the previous month. The table reports the price index on which the MTM Change is calculated (month-to-month) and the Yield of sovereign bond maturities typically between 6 months and 25 years. Data as at 31/12/2012.
Evolution of CDS Spreads in December 2012 relative to the previ-ous month. The index reported here represents the average ba-sis points (bp) of a 5-year CDS for protection against sovereign bonds. Data as at 31/12/2012. MTM Change refers to the change relative to the previous month.
01−Oct 19−Oct 06−Nov 24−Nov 12−Dec 31−Dec1.5
1.55
1.6
1.65
1.7
1.75
1.8
1.85
1.9
Yie
ld t
o M
atu
rity
(%
)
154
155
156
157
158
159US Bond Yields & Prices
Bo
nd
In
de
x
Rest of the World
US sovereign bond yields surged compared to November, though stabilizing at around 1.75% at the end of December, primarily reflective of the political tension over the US finances between the government and Republicans in Congress. With the debt ceiling still in place, the amount of debt that US can raise is limited to $16.4tn while spend-ing needs appear to have surpassed that. The op-position is in favour of deep cuts, arguing that an increase in the debt ceiling will prevent a neces-sary budget discipline being applied. Democrats need to find alternative measures for revenues that would replace automatic spending cuts, but are hesitant to increase taxation for fear of recession caused by falling demand. Instead they push for an increase in the debt ceiling. The deal found by the year-end deadline has afforded only tempo-rary respite for the underlying issue, while the Fed’s extraordinary easing programme and support for the extended bull run in Treasuries seemed to be running out of steam.
Source: Financial Times
Islamic Bonds (Sukuk)The HSBC Nasdaq-Dubai USD Sukuk clean price Index (Bloomberg: SKBI) increased marginally on the month from 100.281 to 100.320, yielding 2.81 percent. The index’s spread over LIBOR also tightened fraction-ally, by 1.45 basis points.
Trading in the secondary sukuk markets was in line with the conventional GCC credit markets, which were relatively directionless -- the US fiscal cliff issue dominated the mood and was (temporarily) resolved towards the end of the month, but doubts have arisen over the continuing momentum of the long bull run that has been witnessed.
Otherwise, liquidity in regional sukuk dried up owing to the holiday season, as 2012 drew to a close. Bid-offer spreads widened accordingly upon this lack of supply.
Demand was evident, however, for long-dated, high-er-yielding paper from Dubai, where the environment is seen as having markedly improved.
There were other notable market developments in December.
In Egypt draft legislation to regulate sukuk was final-ized. The proposed law, developed by the Egyptian Financial Supervisory Authority (EFSA), includes thirty articles setting a legal framework for the issuance and transaction of sukuk.
Dana Gas, the Sharjah-based company, having defaulted on notes in early November, completed a $920m sukuk restructuring with creditors. The com-pany will pay $70 million in cash and issue two new $425m five-year sukuk (one ordinary and one con-vertible) paying 9% and 7% respectively.
December also marked an important repayment by Nakheel, the Dubai-based real estate developer which was on the verge of defaulting on its sukuk be-fore Abu Dhabi intervened and helped the company restructure its debts. A payment of $57 million was made to sukuk holders last month, thus decreasing its debt by a total of $2.6 billion since November 2009.
Meanwhile, a $55 million Sukuk Ijarah by FWU Group, a Munich-based financial services company, is the largest Islamic bond sale out of Europe, and the
Page 13
Sukuk is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities
are structured to comply with the Islamic law and its investment principles, which
prohibits the charging, or paying of interest. Financial assets that comply with the Islamic law can be classified in ac-
cordance with their tradability and non-tradability in the secondary markets.
first ever by a German corporate.
According to IFIS database, December also marked a healthy end to the year in terms of the issuance of sukuk, with around $7.5 billion of deals completed last month. Global issuance in 2012 surged by 55% on the year, reaching around $144 billion, from $93 billion in 2011.
It was reported that in Malaysia – which has the domi-nant share in sukuk globally – while the fixed-income market continues to register double-digit growth in both conventional and Islamic spheres, by year-end 2012 sukuk in fact are rapidly approaching the size of the conventional market, and may overtake in the coming year.
Sources: GIC, Invest AD, IFIS, Khaleej Times, Star Online
Accountancy Issues Rules and Regulations
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Liquidity management issue in Oman
Oman’s central bank is currently reviewing the possible issuance of sukuk and other instruments, which the country’s new Islamic banking system could use to manage liquidity.
Oman announced during 2012 that it would intro-duce Islamic finance, becoming the last country in the six-nation Gulf Cooperation Council (GCC) to do so. The sector’s expansion is expected to emerge during 2013 in the shape of two fully-fledged Islamic banks and the Islamic windows of six conventional banks.
The rules for Islamic banking that the central bank published last December, however, tightly restrict the use of tawarruq (securitization), a controver-sial form of Islamic transaction. Some bankers have complained that restricting tawarruq will make liquidity management harder and expen-sive, slowing the growth of the industry.
GOLCER finds that a key issue for the bankers in Oman and many of the GCC countries is how they can manage their funds in the fledgling Islamic money market. This issue results from the lack of a standardized regulatory framework. While some of the GCC’s banks comply with international accounting standards, banks in Bah-rain and Qatar separately apply the rules stipu-lated by the Accounting and Auditing Organi-zation for Islamic Financial Institutions (AAOIFI), Bahrain-based.
Source: Zawya, December 23rd
Malaysia finalizing Islamic finance legal framework
Malaysia is in the final stages of introducing new legislation for Islamic banking and takaful prod-ucts. This framework is likely to give a stronger legal basis to contracts devised by financial institutions, and will help the central bank better regulate and supervise the Islamic finance indus-
try, currently valued at $1.3 trillion globally, with Malaysia’s share measured at $144bn. Malaysia’s Islamic banks are looking to compete with conven-tional lenders in targeting a wider niche of investors and depositors. However, the framework is said still to need adjustment for greater clarity, remain-ing subject to further discussions and draft guidance prior to adoption. The aim is to streamline require-ments which currently may be hindering economic growth.
Source: Reuters, December 19th
Egypt to issue Islamic banking guidelines during Q1
Egypt’s central bank has announced draft guide-lines for Islamic banking and the launch of sukuk. The main purpose of the prospective measures is to underpin public projects, in particular guarantee sufficient funding for some infrastructure develop-mental projects. The circulated drafts are still being introduced to practitioners and professional experts to shade the content for the final draft and obtain central bank approval. Financial institutions need to be informed to prepare themselves for the market roll-out of Islamic sukuk issuance.
Source: AMEinfo.com, December 17th
Perspective
The process of economic fluctuation among the Gulf countries is perceptibly a well-established derivative of the fiscal multiplier.
In this framework the private sector tends to be led by the variations of spending of the public sector, in a way that naturally results from the presence of a massive mineral resource endowment and its secure, rent-gener-ating sale around the globe.
Recovery is apparent in the region, supported by the very low interest rates that have become endemic in this era of boom, bust, global financial crisis, and a US dol-lar printing bonanza.
The scale and strength of this rebound is being tem-pered by a recuperating banking sector, and subject to the degree of pick-up in international trade, but the im-pact of prolonged, triple-digit oil prices is plain enough.
The recent announcement of a record budget in Saudi Arabia is the clearest example of that, and prompts the recurrent issues associated with the Gulf’s governments’ finances.
For instance, budget breakevens have reportedly risen since the Arab Spring imposed pressures on social spending in rapid, precautionary reaction.
Equally, conservative oil price assumptions might sug-gest some budgetary leeway, except for the fact that actual outcomes tend to outstrip the planned expendi-tures.
As chief economist of Arabia Monitor, a London re-search firm, Dr Florence Eid responded to our queries on the underlying realities of budget pledges in the GCC.
On financial sustainability, she stated there might be medium- to long-term challenges, rather than short-term constraints, to be faced with such spending patterns, saying that Saudi Arabia at least has a “comfortable situation” with a likely surplus exceeding 10% of GDP this year.
It would take several years for energy market develop-ments and lower anticipated production to hit revenues
and put pressure on expenditure priorities.
Saudi Arabia’s planned expenditure in 2013 is 18.8 per cent higher than the 2012 budget proposal, and has retained its focus on education, health and social services.
Yet, to deal with a rapidly rising population and the “thorny issue” of youth unemployment, investment spending would have to feature in future commitments.
In fact the investment component in the Saudi budget is set to increase, and should, critically, promote the fortunes of both banking and the construction sector, thanks to the government’s allocations to transport and housing projects, Dr Eid explained.
As a continuing effect, the role of private sector in-volvement should be enhanced rather than displaced by the states’ stimulus programmes. “There is a golden opportunity to push ahead with diversification efforts,” she ventured.
As ever, a key concern might be complacency, as the need to pursue self-motivating private-sector impetus is supplanted by government largesse, a phenomenon witnessed repeatedly in the past.
Dr Eid admitted that currently the private sector still occupies a supporting role in the current phase of eco-nomic development.
It remains to be seen whether greater inroads can be made into creating a genuinely variegated style of economic strategy, while the richest pickings are still to be had servicing the aspirations and project-oriented planning of the region’s governments.
Saudi budget plans signal familiar cyclical stimulus
by Andrew Shouler
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Diary of Events
February: 14-15, 2013Kuala Lumpur, MalaysiaICIBFC 2013: International Conference on Islamic Banking, Finance and Commerce
The XXXIV International Conference on Islamic Banking, Finance and Commerce aims to bring together lead-ing academic scientists, researchers and scholars to exchange and share their experiences and research results about all aspects of Islamic Banking, Finance and Commerce, and discuss the practical challenges encountered and the solutions adopted.
More Information: http://www.waset.org/conferences/2013/kualalumpur/icibfc/
March: 11-13, 2013Lahore, PakistanGlobal Forum on Islamic Finance (GFIF) 2013:
COMSATS Institute of Information Technology Lahore, Pakistan is hosting Global Forum on Islamic Finance with the collaboration of Lancaster University UK to provide an opportunity to share latest developments among scholars from around the globe in the field of Islamic finance. The theme of the Conference is “Islamic Finance: New Realities, New Challenges”. The GFIF will consider the political and socio-economic developments and their likely effects on Islamic financial institutions.
Contact: Dr. Yahya Rashid COMSATS Institute of Information Technology, Lahore, [email protected]
More Information: http://www.inomics.com/economics/conferences/2012/9/6/global-forum-islamic-finance-gfif-2013
March: 17-18, 2013Muscat, OmanOman Second Islamic Banking and Finance Conference:
Oman Second Islamic Banking & Finance Conference is to take place on the 17th & 18th of March 2013 at the Al Bustan Hotel in Muscat, to shed light on latest developments in the banking industry of the Sultanate and explore outlook and challenges of implementing Islamic banking.
Contact: [email protected] Information: http://www.iktissadevents.com/events/OIBF/2
Training Courses:GOLCER Training Courses in Finance, Management and Statistics:More Information: http://www.lums.lancs.ac.uk/files/coursesnew.pdf
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Research TeamGerry Steele
Vasileios [email protected]
Rhea [email protected]
Marwa El [email protected]
Momna [email protected]
Marwan IzzeldinDirector
DISCLAIMER
This report was prepared by Gulf One Lancaster Centre for Economic Research (GOLCER) and is of a general nature and is not intended to provide specific advice on any matter, nor is it intended to be comprehensive or to address the circumstances of any particular individual or entity. This material is based on current public information that we consider reliable at the time of publication, but it does not provide tailored investment advice or recommendations. It has been prepared without regard to the financial circumstances and objectives of persons and/or organisations who receive it. The GOLCER and/or its members shall not be liable for any losses or damages incurred or suffered in connection with this report including, without limitation, any direct, indirect, incidental, special, or consequential damages. The views expressed in this report do not necessarily represent the views of Gulf One or Lancaster University. Redistribution, reprinting or sale of this report without the prior consent of GOLCER is strictly forbidden.
Andrew ShoulerEditor
