Mudarabah

English: trust financing, profit sharing
Alternate spelling: Mudaraba, Modaraba, Modarabah

Definition: An investment partnership, whereby the investor (the rab al maal) provides capital to the entrepreneur (the mudarib) in order to undertake a business or investment activity. While profits are shared on a pre-agreed ratio, losses are born by the investor alone. The mudarib loses only his share of the expected income. The investor has no right to interfere in the management of the business, but he can specify conditions that would ensure better management of his money. In this way Mudarabah is sometimes referred to as a sleeping partnership. A joint Mudarabah can exist between investors and a bank on a continuing basis. The investors keep their funds in a special fund and share the profits before the liquidation of those financing operations that have not yet reached the stage of final settlement. Many Islamic investment funds operate on the basis of joint Mudarabah.

Contracts: The backbone of Islamic banking

The bank is a financial intermediary institution that accepts funds from the surplus unit and channels it to the deficit unit. Accordingly, the main function of a banking institution is to fund the mobilization in the form of deposit and its allocation in the form of financing and investment activities. MOHAMMAD MAHBUBI ALI delves further. 

The idea of the banking system as a financial intermediary is not something new in Islam. The simplest form of banking in the early Muslim state was manifested in the form of the money changer (Sharrafah) which also offered deposit-taking and short-term financing services. However, a more sophisticated form of banking structure was provided by the trade vendor (Jahabidhah/singular Jahbadh) who undertook modern funding and financing activities under the Muslim state supervision.

The Abbasid Caliph established the central bank in 316AH/929CE known as Diwan Al-Jahabidhah to supervise the operation and the development of these banks. The famous Persian historian, Nasir Khusraw (died 1088 CE) recorded that almost 200 banking institutions were established in Isfahan at that time which called for prudent regulation and supervision. A similar initiative was taken in Egypt by the Fatimid state. 

Among the common banking instruments offered by Jahabidhah were Sakk (cheque), Suftajah (combination of traveler’s cheques and letter of credit features), Hawalah (remittance) and Wadiah (deposit). Nevertheless, modern Islamic banking made a fresh start in the 1960s with the establishment of the Mit Ghamar Bank in Egypt in 1963 under the purview of Ahmed Al-Najjar.

As an institution guided by Shariah principles, Islamic banks are governed by certain rules, values and objectives, which are distinct from the conventional system. Chapra (1985) argued that the introduction of the Islamic banks should bring about the abolition of usury/Riba, adherence to public interest, be a catalyst for development, promote economic well-being, help toward establishing socioeconomic justice and the equitable distribution of income. Dusuki (2005) summarized the views of a number of Islamic economists and Muslim scholars such as Chapra, Ahmad, Mirakhor, Warde, Lewis, Algoud, Iqbal and Molyneux on the nature of Islamic banks and concluded that Islamic banks should strive for justice and fairness, promote brotherhood and cooperation and develop a community-oriented and entrepreneur-friendly financing environment.

The value proposition of Islamic banks as expounded by their advocates is manifested in the application of a variety of Shariah contracts in Islamic banks which provide different risk and return profiles and seek to realize their differential objectives in Islamic banking and finance. These objectives are often stated by Muslim scholars as follows: To secure Maslahah through the application of a profit and loss-sharing concept, justice and fairness in commercial dealings, the enforcement of equity and equality and to avoid harm and hardship (Mafsadah) via the elimination of usury (Riba), excessive risk-taking and uncertainty (Gharar), gambling (Maysir), deception and giving out asymmetric information.

A contract is the backbone of Islamic banks. It plays an essential role in determining the Shariah compliant status of Islamic banking activities. Rosly (2010) concluded that the validity of a contract is the only measure used so far to assess the Shariah compliant status of Islamic banking products and transactions. The strict adherence to Shariah requirements of a contract therefore ascertains the permissibility and validity of their products and services.

The application of Shariah contracts in Islamic banks is reflected in both asset and liability sides. The liability side is the main sources of Islamic bank funding and is generally categorized into two: deposit products and investment products. Section 2 of the Islamic Financial Services Act (IFSA) 2013 defines Islamic deposit as “a sum of money accepted or paid in accordance with Sharīah”, whereby the money “will be repaid in full with or without any gains, return, or any other consideration in money or money’s worth”. The common contracts for deposit products include Wadiah (safekeeping), Qard (loan) and Tawarruq (monetization).

As for the investment account, IFSA defines it as “an account under which money is paid and accepted for the purpose of investment, including for the provision of finance, in accordance with Sharīah on terms that there is no express or implied obligation to repay the money in full”. The prominent contracts for investment purposes are Mudarabah (profit sharing and loss bearing); Musharakah (profit and loss sharing) and Wakalah Bil-Istishmar (investment agency). 

On the asset side, Islamic banks employ different sets of Shariah contracts ranging from exchange-based contracts, ie Murabahah (cost-plus sale), Salam (forward sale) and Istisnah (manufacturing contract), to equity-based contracts like Mudarabah and Musharakah, and fee-based contracts such as Ijarah (leasing), Wakalah (agency) and Jualah (commission). IFSA 2013 states that Islamic banks may provide partnership-based financing, lease-based financing, sale-based financing, currency exchange contracts and fee-based activities.

Mohammad Mahbubi Ali is a research fellow at the International Institute of Advanced Islamic Studies Malaysia. He can be contacted at mahbubi@iais.org.my.   

IFN Deals of the Year 2016 – big winners!

GLOBAL: IFN is pleased to announce the winners of the IFN Deals of the Year 2016! Known for its independence and integrity, the prestigious IFN Deals of the Year (DOTY) – 11th year in the running – is recognized as the industry’s leading accolade honoring industry captains who engineered and executed the best Shariah compliant financial deals of the year. Breaking new grounds, reaching new heights and opening new doors, transactions from around the world were considered: 19 product categories were contested and winners hailed from 10 countries with Malaysia and the UAE as the top deal-making jurisdictions.

Winners:

By sector:

  • Commodity Murabahah DOTY – Al Dzahab Assets’s RM900 million (US$201.1 million) Sukuk
  • Corporate Finance DOTY – Sime Darby’s RM3 billion (US$669.83 million) hybrid perpetual Sukuk
  • Cross-border DOTY – Thar Block II’s US$1.52 billion financing
  • Equity & IPO DOTY – Middle East Healthcare Company’s SAR1.8 billion (US$479.34 million) IPO
  • Hybrid DOTY – Six Flags (Dubai Parks & Resorts)’s AED993 million (US$270.28 million) deal
  • Ijarah DOTY – Tiga Pilar Food Sejahtera’s IDR1.2 trillion (US$89.88 million) Sukuk
  • Infrastructure & Project Finance DOTY – Sime Darby TNBES Renewable Energy’s RM35.3 million (US$7.89 million) facility
  • Most Innovative DOTY – Ziya Capital’s RM20 billion (US$4.47 billion) Islamic auto securitization 
  • Mudarabah DOTY – Egyptian Electricity Transmission Company’s EGP2 billion (US$111.06 million) syndicated facility
  • Murabahah DOTY – Axiom Telecom
  • Musharakah DOTY – Noman Group’s US$32 million syndicated facility
  • Real Estate DOTY – Emaar Sukuk’s US$750 million Sukuk
  • Regulatory DOTY – Mumtaz’s RM300 million (US$67.03 million) transaction
  • Restructuring DOTY – National Titanium Dioxide Company’s SAR6.96 billion (US$1.85 billion) syndication
  • Social Impact DOTY – Government of Senegal as beneficiary and Sonacos’s US$75 million financing for the groundnuts sector
  • Sovereign DOTY – The Kingdom of Jordan’s JOD34 million (US$47.81 million) Sukuk
  • Structured Finance & Trade Finance DOTY – Government of Senegal as beneficiary and Sonacos’s US$75 million financing for the groundnuts sector
  • Sukuk DOTY – Al-Falaah, Islamic Business Unit of LOLC Finance’s LKR500 million (US$3.25 million) Sukuk Ijarah
  • Syndicated DOTY – Emirates Global Aluminium’s US$1.23 billion Islamic tranche transaction

By country:

  • Africa DOTY – Yinson Production (West Africa)’s US$780 million commodity Murabahah financing
  • Bahrain DOTY – Kingdom of Bahrain’s US$1 billion Sukuk
  • Indonesia DOTY – Perusahaan Penerbit SBSN Indonesia III’s US$2.5 billion sovereign Sukuk
  • Kuwait DOTY – Boubyan Bank’s US$250 million Tier 1 Sukuk
  • Malaysia DOTY – Sime Darby TNBES Renewable Energy’s RM35.3 million (US$7.89 million) facility
  • Oman DOTY – Mohammed Al Barwani Sukuk
  • Pakistan DOTY – Power Holding’s PKR25 billion (US$238.32 million) financing
  • Qatar DOTY – Ezdan Sukuk Company’s US$500 million Sukuk
  • Saudi Arabia DOTY – Jabal Omar Development Co’s SAR8 billion (US$2.13 billion) deal
  • Turkey DOTY – Yemeksepeti’s EUR250 million (US$263.17 million) Mudarabah facility
  • UAE DOTY – DP World Crescent’s US$1.2 billion Sukuk Wakalah
  • US DOTY – Panasonic Corporation of North America’s US$165 million head office building acquisition

And, the Deal of the Year 2016 goes to DP World Crescent’s US$1.2 billion (part of a US$3 billion program) Sukuk Wakalah!

Heartiest congratulations to all winning parties! We look forward to welcoming you at one of the largest gatherings of Islamic finance elites next month, to honor all your achievements over 2016.

A comprehensive list of winners and detailed justification behind each win is available in this week’s newsletter: ‘IFN Deals of the Year 2016: A good year after all’.

IFN Deals of the Year 2016: A good year after all

2016. It was a bad year. But, it was bad in ways that we didn’t expect, and some segments of the Islamic financial markets made major headway. Four clear trends emerged in the 2016 IFN Deals of the Year. 

New markets continued to open: Jordan, Togo and Senegal launched their maiden sovereign Sukuk; Sri Lanka’s first domestic Sukuk was issued; ITFC and ICD kept building new markets and building on their prior work; Oz provided a magical journey to commercial real estate finance. Newness, however, remains characterized by slow and steady progress. 

We are Tawarruq. 2016 brought innovation and perfection of recent innovations. But, the volume of submissions applying Tawarruq was shockingly overwhelming. The innovation story seemed to be one step forward, two steps backwards.  

Whatever the price of oil, whatever the geopolitical challenges, Malaysia, the UAE and Saudi Arabia are the champions. Domestic demand for Islamic finance in these three giants continues to prove rich and active. Indonesia and Pakistan continued to play catch-up. But some of 2015’s rising stars like Turkey have faltered.   

Environmental and social impact were noted in a number of deals across categories. For the first time, Islamic finance players and their customers are demonstrating a more clear and systematic focus on doing well for the planet and for people.

Shockingly absent, Europe. Nominations from Luxembourg and London nearly evaporated. Cross-border deals into North America were rare. Housekeeping and austerity took their toll.

Nineteen product categories were contested. Winners came from 10 countries with Malaysia followed by the UAE as the top deal-making countries. Nine currencies were used with the US dollar and Malaysian ringgit the top currencies used in seven and five of the deals respectively. Eight of the winners were Sukuk transactions. Seven were syndicated. Two were bilateral and two were equity.  Eleven countries were put to the test. Six currencies were used, but the US dollar was dominant as it was applied in seven of the countries deals. 

For a year that everyone thought would have few notable deals, 2016 was a good year after all.

Corporate Finance: Sime Darby

Size:

RM3 billion (US$670.32 million); first issuance RM2.2 billion (US$491.57 million)

Arrangers:

Maybank Investment Bank

Lawyers:

Zaid Ibrahim & Co for the arrangers and Wong & Partners (member of Baker McKenzie) for the issuer

Rating:

‘AAIS’ by MARC

Date closed:

24th March 2016

Shariah advisors:

Maybank Islamic

The endless drone of Tawarruq fueled most corporate finance transactions in 2016.  Axiom brought to the fore a program of goods Murabahah support from Noor Bank. Meezan supported key customers like Sui Southern Gas with the development of flexible leasing products.  Equate of course relied on steady freddy Tawarruq to fund the Islamic tranche.

Sime Darby turned to deleveraging. Due to rating pressures at the time, Sime Darby wanted to explore a solution to bolster its balance sheet and manage its credit rating. Via the issuance of capital market instruments, Sime Darby wanted a solution which was dual-pronged ie strengthen its balance sheet whilst being able to raise funding cost effectively. This involved a two-pronged approach by this Shariah compliant counter: the first was to issue perpetual Sukuk based on Wakalah Bil Istithmar; the second was to issue new shares worth RM2.36 billion (US$527.32 million) in October 2016.
The Sukuk is the largest perpetual Sukuk issuance globally by a non-bank, the largest ringgit-denominated perpetual Sukuk issuance so far, and the first perpetual Sukuk globally based on the Shariah principle of Wakalah. The Sukuk program revolves around a Wakalah arrangement entered between the Sukuk trustee for the program and Sime Darby, whereby the Sukuk trustee appoints Sime Darby as its agent or Wakeel to perform duties in respect of a basket of Wakalah portfolio, including management of the Wakalah portfolio. The Wakeel’s responsibilities include investment in the Wakalah portfolio and collection and distribution of income generated from the Wakalah portfolio. Sime Darby will issue Sukuk Wakalah to the Sukukholders, and the Sukukholders will subscribe to the Sukuk Wakalah by paying a subscription price. 

The structure provides for flexibility in the determination of the Wakalah portfolio and the manner in which the Wakalah portfolio can be acquired by the Wakeel, subject to the compliance of certain asset classifications. For instance, for the initial issuance of the Sukuk Wakalah, the Wakeel, as buyer needed to acquire a certain basket of Ijarah assets from Sime Darby that complied with certain prescribed minimum standards. The Wakeel as lessor will then lease the Ijarah assets to Sime Darby at an agreed rental and tenure with option to renew upon expiry. In addition to using the principles of Ijarah to facilitate the procurement of the Wakalah portfolio, the structure also allows the Wakeel to use the principles of Murabahah for investment into commodity Murabahah investments. 

Honorable mention: Axiom Telecoms, Sui Southern Gas and Equate

Ijarah: Tiga Pilar Food Sejahtera

Size:

IDR1.2 trillion (US$89.88 million)

Arrangers:

Maybank Kim Eng Securities, Mandiri Sekuritas, OCBC Sekuritas Indonesia, Indo Premier Securities and Danareksa Sekuritas

Bookrunners:

Maybank Kim Eng Securities, Mandiri Sekuritas, OCBC Sekuritas Indonesia, Indo Premier Securities and Danareksa Sekuritas

Legal counsel:

Tumbuan & Partners for the issuer

Rating:

‘idA’ by PEFINDO

Date:

19th July 2016

Shariah advisors:

Digi Laras Prosperindo (Iggi H Achsien)

Even if Tawarruq was widely applied, Ijarah deals were a close second. Complex deals were done to facilitate the leasing of 11 airliners to Saudi Arabian Airlines by International AirFinance Corp. Sovereigns still prefer Ijarah for their initial launch deals as was the case with Jordan, Togo and Senegal.  

Tiga Pilar Food Sejahtera returned to the market with the largest Indonesian ruppiah issuance for 2016. The transaction refinanced the obligor’s existing debt and provided for future working capital needs. The firm, which brands itself TPS, is the leading consumer goods player in Indonesia. TPS produces and distributes basic consumer food products including egg noodles, instant noodles, rice noodle, snacks and candy. 

An important observation is that previously Ijarah deals were not considered easy to execute in the Indonesian securities market. This deal by prominence and size demonstrates that key impediments to Sukuk Ijarah have been overcome.

Honorable mention: International AirFinance Corp and Jordanian Company for Islamic Sukuk for Financing Government Projects

Cross-Border: Thar Block II

Size:

US$1.52 billion

Arrangers:

Mining Project: China Development Bank Corporation (Lead arranger of US dollar-denominated tranches) and Bank Alfalah, Habib Bank, United Bank, Faysal Bank (Lead arrangers of rupee-denominated tranches)

Power Project: China Development Bank Corporation (Lead arranger of US dollar-denominated tranches) and Habib Bank (Lead arranger of rupee-denominated tranches)

Lawyers:

Pinsent Masons (Lead counsel to the project companies) and HaidermotaBNR & Co (Pakistan counsel to the project companies)

Linklaters (Lead counsel to the arrangers) and Vellani and Vellani (Pakistan counsel to the arrangers)

Date:

4th April 2016

Guarantor:

Government of Pakistan

Shariah advisors:

Internal Shariah boards of Islamic facility providers

2016 was a good year for cross-border transactions. These included Malaysian capital flowing into Africa. Cagamas returned to the international market with a Singapore dollar issuance; but, China’s One Belt and One Road Initiative finally included Islamic finance for the financing of Thar Block II.  

Thar is a 3.8Mt/a coal mining project and 2x330MW coal-fired power project in Pakistan. Each financing comprised a mix of Chinese credit under Sinosure cover and conventional and Pakistan rupee tranches. The use of Islamic tranches to finance these projects demonstrates the immense importance of Islamic liquidity in current market conditions. Islamic financing was provided under the Musharakah structure by a syndicate of Pakistani banks (Habib Bank, Meezan Bank and Faysal Bank) and sat neatly with the conventional tranches under the head of a common terms agreement.

The Thar projects represented a greater than usual set of ‘firsts’. It was the first power project in Pakistan to utilize indigenous coal reserves and as such, marks a new era of energy security and economic development in Pakistan. It was also the first project financing of a mine project in Pakistan. It was also China Machinery Engineering Corporation’s first major overseas investment project. 

The financing involved a comprehensive suite of security being taken by the lenders. Some of the relevant secured assets such as the project accounts were located offshore in the Dubai International Financial Center (DIFC). Due to Pakistani stamp duty regulations, the signing of the transaction documents also took place in the DIFC.

Honorable mention: Yinson Production and Cagamas Singapore dollar Sukuk

Commodity Murabahah: Al Dzahab Assets

Size:

RM900 million (US$201.1 million) of which RM155.48 million (US$34.74 million) Class A and RM181 million (US$40.44 million) Class B

Arrangers:

AmInvestment Bank and Hong Leong Investment Bank

Lawyers:

Adnan Sundra & Low for the arrangers

Rating:

Class A: ‘AAA/Stable’; Class B: ‘AA3/Stable’; and Class C: unrated

Date:

21st June 2016

Shariah advisor:

Dr Mohd Daud Bakar

Tawarruq was the most highly nominated category. Key market players like Al Rajhi arranged a commodity Murabahah financing for Yanbu Aramco Sinope Refining. In project financing, Tawarruq allows project financing like Sarawak Hidro to proceed with draws akin to traditional project finance. In the Al Dzahab Assets’s deal, the process is used to facilitate asset securitization.  

Al Dzahab’s proceeds allow the purchase of all the rights, benefits, titles and interests to and under the Islamic personal financing agreements entered into between various Malaysian cooperatives and their customers. These asset-backed securities facilitate the extension of credit into markets that banks frequently miss and increase economic inclusion.

In addition to its high level of structuring with three classes, the program’s originator retains an option (in the form of a clean-up call) to repurchase all outstanding obligations sold to the issuer upon occurrence of certain events, if it desires. 

Dzahab is the first non-property related asset-backed securitized Sukuk, piping Ziya Capital by two months. Dzahab is also the first asset-backed security issued by a non-government linked company in the Malaysian capital market. 

Honorable mention: Sarawak Hidro, Yanbu Aramco Sinope Refining 

Most Innovative: Ziya Capital

Size:

RM20 billion (US$4.47 billion); first tranche: RM900 million (US$201.1 million) comprising RM630 million (US$140.77 million) senior Sukuk and RM270 million (US$60.33 million) subordinated Sukuk

Lead arranger:

Bank of Tokyo-Mitsubishi UFJ (Malaysia)

Lead manager:

CIMB Investment Bank

Legal counsel:

Zaid Ibrahim & Co for arranger

Rating:

Unrated

Date:

12th August 2016

Shariah advisors:

Dr Shamsiah Mohamad and Mohd Fadhly Md Yusoff

Much of the innovation in 2016 involved expanding tested concepts into new applications. DP World took the well tried concept of selling capacity into port throughput. The government of Malaysia also broadened its use of the same concept. These concepts turned heavily on the use of the seller as Wakeel or agent to deliver the services to third parties on behalf of the investors.

Bank of Tokyo-Mitsubishi UFJ (BTMU) implemented Malaysia’s first Islamic auto securitization under a Wakalah Bil Istithmar. The program is a multi-source program with different Shariah compliant auto financiers delivering assets into the conduit. The program is one of the few asset-backed Islamic securitization transactions. The originator and seller in the first issuance was CIMB Islamic Bank. The purchases are funded by paired issuances of senior and subordinated Sukuk by the issuer. The proportions of the senior and subordinated Sukuk may vary.

Although the program began with auto transactions, the universe of eligible ‘Islamic receivables’ may include trade receivables, corporate financing, Islamic credit cards, hire purchase financing, commercial financing and leases, inventories, project cashflows, etc.

Although Malaysia permits Bai Al Dayn, the Wakalah Bilistithmar structure facilitates buying ‘Ayn’ such as the property in Ijarah and Musharakah transactions. The concept may be copied for application in other jurisdictions. BTMU, the first Japanese bank appointed as lead arranger for such a program, hopes that this will help launch a more active Islamic asset-backed securities market in Malaysia.

Honorable mention: Al Dzahab Assets, DP Crescent World and Malaysia Global Sukuk

Sovereign: Jordanian Company for Islamic Sukuk for Financing Government Projects

Size:

JOD34 million (US$47.81 million)

Arrangers:

Islamic Corporation for the Development of the Private Sector, Japan International Cooperation Agency and Nomura International

Lawyers:

Dentons for the arrangers

Guarantor:

The Hashemite Kingdom of Jordan, acting through the Ministry of Finance (Obligor)

Rating:

Unrated

Date:

17th October 2016

Shariah advisors:

International Islamic Fiqh Academy and Dr Hana Huneity and Dr Mohammed Hawalmh from the Central Shariah Scholars Committee of Jordan

Although Malaysia and Indonesia returned to the markets, they built on tried and true methods. Jordan, however, came to market with its first sovereign Sukuk which issuance bears a number of unique features that may influence the evolution of the Islamic capital markets.

For instance, the issuing special purpose company covers its expenses by a deduction from the periodic payments. The deduction is subject to a ceiling. Another factor is that the rental stream is not based on a central bank benchmark, but the fair value of the rental payment. This led to the formation of an Expert Advisory Committee to conduct a study of the underlying asset and advise on the rental payment.  A third innovation was that the investors would subscribe to the deal based on an expected yield, not the final yield. This left the investors to negotiate with the obligor once the deal was closed.

In the process of this project, the Jordanian scholars had to be convinced about using an asset under construction as an underlyer. The IDB Group Shariah Committee provided assistance in resolving this in the affirmative. This led to a need to address the forbidding of sale and leaseback under Jordan’s Leasing Law. As part of the comprehensive reforms required for this deal, the Japan International Cooperation Agency provided a technical assistance package.

The transaction now establishes a benchmark Sukuk Ijarah for the Jordanian market and a risk-free reference rate for the section. Key innovations in the structure may lead to new developments in the global Sukuk market.

Honorable mention: Malaysia Global Sukuk and Perusahaan Penerbit SBSN Indonesia III

Musharakah: Noman Group

Size:

US$32 million

Arrangers:

Standard Chartered Bank and Islamic Corporation for the Development of the Private Sector

Lawyers:

Clifford Chance and Syed Ishtiaq Ahmed & Associates as local Bangladeshi counsel for the arrangers and Legal Shelter for the obligor.

Date:

23rd October 2016

Shariah advisors:

Shariah committees of the arrangers

South Asian deals frequently feature Musharakah and diminishing Musharakah deals. Lalpir returned to the market in 2016. New deals were seen in Indonesia like Jaya Marga Persero.

The Ismail Spinning transaction brings the Noman Group, one of Bangladesh’s largest textile groups, within the Islamic finance ambit. The transaction represents Ismail Spinning’s first club or syndicated facility structured on a Shariah compliant basis. The facility enabled Ismail Spinning to diversify its financier base by attracting new banking relationships from abroad.

The facility was structured as a diminishing Musharakah with the financiers sharing in the company’s machinery.

Honorable mention:  Jasa Marga Persero and Lalpir.

Equity & IPO: Middle East Healthcare Company

Size:

SAR1.8 billion (US$479.34 million)

Arranger &

bookrunner:

Samba Capital & Investment Management Company

Lawyers:

The Law Office of Salman Al-Sudairi in association with Latham & Watkins advised the issuer. Clifford Chance advised the arranger.

Date:

3rd March 2016

IPOs took their time to come to market in 2016. Eventually two prominent deals hit the Saudi market: Middle East Healthcare Company (MEAHCO) and Riyadh REIT.  Elsewhere on the equity front, Sime Darby came to market with perpetual and secondary issuances. And, Khazanah Nasional monetized part of their holding in Tenaga Nasional.

MEAHCO went IPO in what is the largest IPO by a Saudi Arabian healthcare company. This sector is hot in the GCC. MEAHCO has long been a key player in the Saudi market. MEACHO owns and operates hospitals under the Saudi German Hospitals brand name in Saudi Arabia and is an affiliate of the Bait Al Batterjee Medical Co. The IPO was the outcome of two years effort in the reorganization of the former Saudi German Hospitals Group which operates in Jeddah, Riyadh, Madinah and Aseer with new hospitals under development in Dammam and Hail.

MEAHCO is a fully Shariah compliant company and therefore the transaction had to comply with all Shariah bylaws of the company making it particularly complex. 

Honorable mention:  Sime Darby and Riyadh REIT

Sukuk: Al-Falaah Sukuk Ijarah

Size:

LKR500 million (US$3.25 million)

Arranger:

Trillion Investments

Bookrunner:

Hatton National Bank

Lawyers:

Nithya Partners for the arranger and issuer

Rating:

Unrated

Date:

4th August 2016

Shariah advisor:

Shariah Supervisory Board of Al-Falaah, Islamic Business Unit of LOLC Finance

Jordan blazed the trail with a novel sovereign Sukuk structure; DP World tested a new concept under the wakalah structure; and, Al-Falaah opened the Sri Lankan market another crack. The deal is small. Yet, it is the first Sukuk of any kind issued in Sri Lanka. Despite discussions that the government might issue, this Ijarah transaction is for a local leasing company. The deal is expected to provide a roadmap for future issuances in Sri Lanka. 

Honorable mention: Jordanian Company for Islamic Sukuk for Financing Government Projects and DP World Crescent Sukuk 

Mudarabah: Egyptian Electricity Transmission Company

Size:

EGP2 billion (US$111.06 million)

Arrangers &

bookrunners:

Société Arabe Internationale de Banque & Industrial Development & Workers Bank of Egypt and Abu Dhabi Islamic Bank — Egypt

Date:

February 2016

Guarantor:

Ministry of Finance

Shariah advisors:

Abu Dhabi Islamic Bank — Egypt

Most Mudarabah deals have been investments in the Tier I and Tier II capital of Islamic banks. This applied respectively to our runners-up Boubyan Bank and Meezan Bank.  Abu Dhabi Islamic Bank — Egypt (ADIB Egypt) has been quietly perfecting the method in the local market.  

In this case, ADIB Egypt syndicated a Mudarabah with conventional banks in order to partially finance the emergency plan of the electricity sector in Egypt. The funds support the upgrading of the electricity transmission network.  

As the biggest Mudarabah transaction completed in Egypt, the deal is the first syndicated Mudarabah facility for the Egyptian Electricity Transmission Co. ADIB Egypt’s syndicate was selected in an intense competition with conventional banks. 

Based on the success of the nominated deal, the obligor returned to ADIB Egypt for a second syndication in September 2016. The performances indicate that the emerging Islamic finance institutions in Egypt can compete head to head with the leading conventional banks. 

Honorable mention: MBL Tier II Mudaraba Sukuk and Boubyan Tier 1 Capital SPC. 

Structured Finance & Trade Finance: Sonacos (formerly Suneor)

Size:

US$75 million

Arrangers:

Islamic Corporation for Trade Finance (ITFC)

Lawyers:

Dentons for the arrangers

Rating:

Unrated

Date:

21st February 2016

In 2016, there were a number of attractive structured finance deals like Al Dzahab and Ziya Capital. The IDB Group’s ITFC plays an important part in breaking the ground for new markets. The typical ITFC deal requires updates in local laws, the introduction of new techniques and a focus on key development sectors linked to import and export finance. 

ITFC purchases groundnuts and the processing of groundnut oil and cake for export by Sonacos, the leading actor in the sector. Groundnuts are a strategic commodity for Senegal: up to 40% of the population is dependent on this cash crop commodity for their livelihood. Growth in groundnut oil and cake exports will improve the country’s overall export revenues and employment level, thus contributing to poverty alleviation. 

The procedures involve ITFC providing liquidity to local farmers and cooperatives by purchasing groundnuts for delivery to Sonacos. In accordance with an Islamic tolling arrangement, ITFC pays a tolling fee to Sonacos for the processing of the groundnuts into groundnut oil and cake, both which are exported (the cake is used as animal feed). The final products are then sold under Murabahah contracts with the proceeds from the export sales assigned to ITFC.

The security package of this self-liquidating structure is strengthened by the fact that the final products are put under Collateral Management Agreement (CMA) from their production until their final export. A third party collateral manager oversees the management of the goods until export. The above enhancements (assignment of proceeds, CMA) are additional securities in addition to the sovereign backing of the government of Senegal.

The deal was challenging as the sector was facing difficulties. The main actors faced financial deterioration due to a downward trend in market prices. ITFC was able to provide a unique and tailor-made pre-export structured commodity trade finance program. 

Honorable mention:  Axiom Telecoms and Ziya Capital

Social Impact: Sonacos (formerly Suneor)

Size:

US$75 million

Arrangers:

Islamic Corporation for Trade Finance

Lawyers:

Dentons for the arrangers

Rating:

Unrated

Date:

21st February 2016

Social Impact nominations in 2016 lacked the glitz of Khazanah’s 2015 winner. 2016 is the year of steady goes the game. Sime Darby TNBES Renewable Energy will make its impact felt over an extended period. ADIB Egypt’s syndication for the Egyptian Electricity Transmission Company provides key assistance in the improvement of electricity transmission for millions of Egyptians.  
ITFC’s financing of government of Senegal as beneficiary and Sonacos has an immediate impact on the daily lives of millions of Senegalese connected to each step of the groundnut industry. Beyond its immediacy, the financing is sustainable and replicable. More critically, the process may be applied to other commodities and products in Senegal and elsewhere. This points the way for Senegal to diversify its economy and ITFC to continue improving lives in more emerging markets.

Honorable mention: Sime Darby TNBES Renewable Energy and Egyptian Electricity Transmission Company

Hybrid: Six Flags (Dubai Parks & Resorts)

Size:

AED993 million (US$270.28 million)

Arrangers:

Dubai Islamic Bank, Abu Dhabi Commercial Bank, Sharjah Islamic Bank

Lawyers:

Linklaters the arrangers and Allen & Overy for the obligor

Rating:

Unrated

Date:

21st February 2016

Shariah advisor:

Shariah committees of arrangers

Khazanah Nasional returned to market with a new exchangeable. The structure took a turn by using an unexpected form of security into which investors could exchange their obligations. Barwa Bank issued a hybrid Mudarabah/Wakalah security.  

Dubai Islamic Bank, however, syndicated a hybrid for the proposed Six Flags-branded theme park. Scheduled to open in late 2017, the project financing includes a combination of debt and equity. Dubai Parks and Resorts has issued rights for 37% of the deal and the banks provided the balance in the form of Tawarruq. This is unusual from two perspectives: the deal is not a Sukuk facility with two or more operational contracts like Mudarabah in business operations and a Wakalah to do Tawarruq; and, the deal runs a rights issuance in parallel to the debt in lieu of having all of the obligor equity in place.

Honorable mention: BBG Sukuk (Barwa Bank) and Bagan Capital (Khazanah)

Perpetual & Regulatory: Mumtaz

Size:

RM300 million (US$67.03 million)

Arrangers:

Maybank Investment Bank

Bookrunners:

Maybank Investment Bank and AmInvestment Bank

Lawyers:

Shook Lin & Bok for the issuer and Adnan Sundra & Low for the arrangers

Rating:

‘AA3(s)’ by RAM Ratings

Date:

20th June 2016

Shariah advisors:

Maybank Islamic

The perpetual category was dominated by submissions for bank deals. The majority of these were Tier I Mudarabah deals like Boubyan’s. Malaysian Airlines and Sime Darby issued perpetuals as part of their corporate finance strategies. Mumtaz represents the first time that a development finance institution has issued regulatory capital instruments in Malaysia.

The obligor is Bank Rakyat which currently operates under Basel I. Bank Negara Malaysia has mandated that Bank Rakyat prepare for Basel III compliance. These Tier 2 subordinated Sukuk serve as the strategic step for the bank to meet  Basel III requirements.

Honorable mention: Sime Darby, Malaysian Airlines and Boubyan

Real Estate: Emaar Sukuk

Size:

US$750 million under US$2 billion program

Arrangers:

Standard Chartered Bank (SCB)

Bookrunners:

National Bank of Abu Dhabi (NBAD), Arab Banking Corporation, Dubai Islamic Bank (DIB), Emirates NBD, First Gulf Bank, Mashreqbank, Noor Bank, SCB and Union National Bank

Legal counsel:

Linklaters and Maples and Calder (Dubai) for the issuer and Allen & Overy for the bookrunners.

Rating:

‘Baa3’ by Moody’s and ‘BBB-’ by S&P

Date:

7th September 2016

Shariah advisor:

Shariah board of SCB

Real estate will always be the top category for Islamic investors. The love of tangible assets with predictable cash flows has a strong allure whether one invests at home as with the Ezdan Sukuk Company or abroad as with GFG CI-1. In 2016, the consensus real estate deal of the year is Emaar Sukuk.
 
Emaar Sukuk represents Emaar Properties’s return to the Islamic capital markets following a four-year hiatus. The deal bears the lowest coupon ever achieved for a 10-year international Sukuk by a UAE corporate issuer as well as the longest dated senior Sukuk from the MENA region in 2016. The structure blends Ijarah (51% of the deal) and Tawarruq legs under a Wakalah.  These Sukuk Wakalah incorporated the Tawarruq leg to allow the deal to be upsized and to reduce reliance on the firm’s tangible assets. This eases the way for Emaar to apply the proceeds with greater flexibility.

Honorable mention: GFG CI-1 and Ezdan Sukuk Company 

Syndicated: Emirates Global Aluminium

Size:

US$1.23 billion Islamic tranche of US$4.9 billion facilities

Arrangers:

Dubai Islamic Bank, Emirates NBD, National Bank of Abu Dhabi, BNP Paribas, Citibank, ING, Natixis, APICORP, Export Development Canada, Masheqbank, Kuwait Finance House

Bookrunners:

Dubai Islamic Bank, National Bank of Abu Dhabi, Citibank, BNP Paribas, Emirates NBD, ING, Natixis

Lawyers:

Allen & Overy for the obligor and Clifford Chance for the arrangers

Rating:

Unrated

Date:

17th February 2016

Shariah advisor:

Dubai Islamic Bank

Al Rajhi led the SAR6 billion (US$1.6 billion) syndication for Yanbu ARAMCO SINOPEC Refining Co in a domestic syndication. Noor pulled together a purely Islamic syndicate for Axiom Telecom. Emirates Global Aluminium (EGA) required a high level of complex coordination to pull together Islamic and conventional banks along with export credit agencies for the largest co-financing syndication in the UAE since 2008.

The sovereign wealth funds of Abu Dhabi and Dubai own EGA. The deal consolidates the merged entity’s project financing liabilities which had been arranged in 2007 and 2012. The facility was initially underwritten by the seven initial mandated lead arrangers and bookrunners, which was then syndicated to the wider bank group. The transaction simplified EGA’s corporate financing structure and is expected to pave the way for a capital markets issuance. The deal brought in new financiers to EGA.
A key element of the transaction was the establishment of EGA as the primary funding vehicle of the EGA Group as part of the merger which created EGA. The company has helped the UAE to become the 4th largest aluminum-producing country in the world.

Honorable mention: Axiom Telecom and Yanbu ARAMCO SINOPEC Refining Co

Murabahah: Axiom Telecom

Size:

Confidential

Arranger:

Noor Bank

Lawyers:

Allen & Overy and Clifford Chance

Rating:

Unrated

Date:

5th April 2016

Shariah advisor:

Supervisory Board of Noor Bank

We are mostly familiar with the Murabahah legs in Tawarruq. In 2016, ITFC built on its impressive record in Africa using Murabahah to supply or export goods. In the UAE, Noor Bank syndicated a deal for Axiom Telecom with Al Hilal Bank, Dubai Islamic Bank and Qatar Islamic Bank.  

Axiom Telecom is a household name in the UAE. Noor Bank used ‘goods Murabahah’ to assist Axiom Telecom with meeting its working capital requirements. This differs from commodity Murabahah or Tawarruq — in the latter, the customer seeks cash. In Noor’s program, Noor as an investment agent for the syndicate buys the specific goods like mobile phones from pre-approved vendors. The phones are then sold onward to customers on a cost-plus-profit basis. The customer pays on deferred basis. 

Goods Murabahah is familiar in the retail and SME markets but its application in a large syndicated deal is unusual. Advantages of using goods Murabahah include its diversified obligor universe.  Finally, the secured program is preferred to Tawarruq by many Shariah councils because it is based on the physical movement of goods desired by the end buyer. 

Honorable mention: Government of Mauritania and government of Senegal (Sonacos).

Restructuring: National Titanium Dioxide Company (Cristal)

Size:

SAR6.96 billion (US$1.85 billion)

Bookrunners:

Alinma Bank, Bank AlJazira, Bank Saudi Fransi, JPMorgan, Riyad Bank, Samba Financial Group, The Saudi British Bank, Saudi Hollandi Bank, Saudi Investment Bank

Lawyers:

Khoshaim & Association in cooperation with Allen & Overy for the arrangers and Latham Watkins for the obligor

Guarantor:

Limited support provided by the National Industrialization Company

Rating:

unrated

Date:

25th September 25 2016

Shariah advisors:

Shariah committees of all bookrunners

Restructuring fell into two buckets in 2016, the first was the reorganization of truly challenging businesses like Limitless; the second was the reorganization of the finances of companies affected by declining commodity prices, but not themselves affected; this included Ma’aden and Cristal.

Cristal involved a number of important steps in the consolidation of various funded and unfunded bilateral facilities under a common terms agreement. The facilities were then restructured into a two-tranche syndicated Murabahah facility and a separate two-tranche Bai Al-Ajal facility with various ancillary facilities (with one tranche under each of the facilities benefiting from credit support). 

The syndicated Murabahah and Bai Al-Ajal agreements have a bullet repayment at the end of the third year. Cristal has an option to extend for an additional two years if certain conditions are met. The structure and covenants allow the company breathing space to recover from the extended dip in the commodity cycle. The transaction does not have asset security, but it enjoys support from its 79% shareholder The National Industrialization Company.

Honorable mention: Limitless and Ma’aden Phosphate Company

Infrastructure & Project Finance: Sime Darby TNBES Renewable Energy

Size:

Confidential

Arrangers:

RHB Islamic Bank

Lawyers:

Wong and Partners for the issuer and ZUL RAFIQUE & partners for the arranger

Guarantor:

TNB Energy Services and Sime Darby Plantation

Rating:

Unrated

Date:

April 2016

Shariah advisors:

RHB Islamic Bank

Project and infrastructure typically take us to mega projects. Certainly KNPC’s Clean Fuels deal and Lebuhraya DUKE Fasa 3 fit in the mega category as does Yanbu Aramco Sinope Refining. This year’s best project deal is closer to the micro level. TNB Energy Services and Sime Darby Plantation teamed up to build power plants which will be capable to develop renewable energy using biogas converted from palm oil mill effluent.  

Up until now, the palm oil industry has faced a number of environmental challenges.  One persistent problem has been the disposal of palm oil mill waste. This project addresses the problem by generating a cleaner source of energy. The project is sustainable, leading to a green certification from the Malaysian Green Technology Corporation.

The Tawarruq facilities finance up to 80% of the project costs of the development and construction of biogas power plants owned by Sime Darby TNBES Renewable Energy as well as working capital purposes, the importation of local purchases of Shariah compliant trade-related goods and for the issuance of security deposit, tender bonds, performance bonds and other guarantees.

Honorable mention: KNPC Clean Fuels, Lebuhraya DUKE Fasa 3 and Yanbu Aramco Sinope Refining

Indonesia: Perusahaan Penerbit SBSN Indonesia III

Size:

US$25 billion dual tranche comprising of a US$750 million five-year facility and US$1.5 billion 10-year paper

Arrangers:

Standard Chartered Bank, Citi, CIMB, Deutsche Bank, and Dubai Islamic Bank

Lawyers:

Allen & Overy (English & US Law) and Hadiputranto, Hadinoto & Partners member Baker McKenzie (Indonesian Law) for the arrangers and Clifford Chance (English Law) and Assegaf Hamzah & Partners (Indonesian Law) for the issuer

Rating:

‘Baa3’/‘BB+’/‘BBB-’ by Moody’s, S&P and Fitch respectively

Date:

21st March 2016

Shariah advisors:

Shariah committees of Standard Chartered Bank, CIMB Islamic Bank, Citi Islamic Investment Bank, Deutsche Bank and Dubai Islamic Bank

Slowly but surely, the Republic of Indonesia is claiming an important role in Islamic finance. Tiga Pilar Food Sejahtera and Jasa Marga Persero were cases of increasing corporate appetite for Islamic finance. The Republic itself has proven an adept and active issuer.  

Perusahaan Penerbit SBSN Indonesia III achieved several landmarks: largest deal out of Asia in 2016; largest ever US dollar sovereign Sukuk in Asia; first Sovereign US dollar Sukuk issued this year; and the Republic’s first dual tranche US dollar Sukuk; and the Republic’s largest ever US dollar Sukuk

The program permits the Republic to issue both Ijarah and Wakalah series of certificates. This issuance is under the Wakalah series, which is underpinned by a Shariah compliant portfolio of certain state-owned real properties (the Ijara assets) with no less than 51% of the Sukuk proceeds used by the issuer to procure such Ijarah assets and beneficial rights (Hak Manfaat) in certain identified assets that are either under construction or to be constructed (the project assets) and which shall be delivered on a future date upon completion. The Hak Manfaat are restricted to 49% of the issuance. 

The Hak Manfaat represent a new development within the Indonesian market.

Honorable mention: Jasa Marga Persero and Tiga Pilar Food Sejahtera

Malaysia: Sime Darby TNBES Renewable Energy

Size:

RM35.3 million (US$7.89 million) composed of RM28.9 million (US$6.46 million) term-financing and RM2.4 million (US$536,253) trade finance

Arranger:

RHB Islamic Bank

Lawyers:

Wong and Partners for the issuer and ZUL RAFIQUE & partners for the arranger

Guarantor:

TNB Energy Services and Sime Darby Plantation

Rating:

unrated

Date:

April 2016

Shariah advisors:

RHB Islamic Bank

Malaysia remains the most dynamic Islamic finance market. A hub of innovation, Malaysia enjoys the highest volume production of Sukuk year in and year out. In 2016, small is beautiful. The joint effort of TNB Energy Services and Sime Darby Plantation to build renewable energy power plants using biogas converted from palm oil mill effluent is the winner.  

The deal represents the conjunction of two of Malaysia’s most visible industries:  palm oil and Islamic finance. On the one hand, the palm oil industry has to overcome many SRI issues including the management of its waste. On the other hand, the Islamic finance industry as a whole is often seen as not fully embracing social, environmental and sustainable projects. In this financing, Islamic finance is directly engaged in a socially relevant environmentally sound project that it sustainable. And, how so? Islamic finance assists in the conversion of palm oil mill waste into a cleaner source of energy. Certified by the Malaysian Green Technology Corporation, Sime Darby TNBES Renewable Energy is the Malaysian deal of the year.

Honorable mention: Al Dzahab Assets, Malaysian Sovereign Sukuk, Purple Boulevard, Ziya Capital and Sime Darby.

Pakistan: Power Holding

Size:

PKR25 billion (US$238.32 million)

Arrangers:

Meezan Bank, Dubai Islamic Bank Pakistan and Bank Islami Pakistan

Lawyers:

Ahmed and Qazi for the arrangers

Rating:

Unrated

Guarantor:

Government of Pakistan

Date:

April 2016

Shariah advisor:

Shariah committee of Meezan Bank

Thar Block II represented an outstanding example of cross-border cooperation. The Islamic Republic of Pakistan’s third international Sukuk was a successful replication of previous Sukuk. Meezan Bank is the power house of innovation in an increasingly dynamic Pakistani market. In this case, Meezan led a syndicated long-term Wakalah Bil Istismaar financing for Power Holding (PHPL).

PHPL is a government of Pakistan holding company which accesses the financial markets to fund Central Power Purchasing Agency Guarantee (CPPA). Providing an Islamic finance structure to PHPL was a challenge. The solution was for the financiers to appoint PHPL as their agent for onward investment in the purchase and sale of electricity. 

Subsequently, PHPL entered into Wakalah agreement with the CPPA to purchase electricity generated from different sources (first priority will be from hydro power plants (cheapest source), next is nuclear then thermal and so on.) As agent of financiers and PHPL, CPPA will sell this electricity to distribution companies for onward distribution to end consumers.

The CPPA will provide semi-annual accounts to the financiers to provide a complete picture of the business’ profitability. At an agreed semi-annual date, the financiers will redeem their Wakalah investments and receive a distribution of profits.

Honorable mention: The Third Pakistan International Sukuk Company and Thar Block II

UAE: DP World Crescent

Size:

US$1.2 billion under US$3 billion

Arrangers:

Citigroup Global markets, Deutsche Bank (London branch), Dubai Islamic Bank, Emirates NBD, First Gulf Bank, HSBC Bank, Barclays Bank (appointed as dealers for the day), JPMorgan Securities (appointed as dealers for the day), National Bank of Abu Dhabi (appointed as dealers for the day) and Société Générale (appointed as dealers for the day)

Bookrunners:

Barclays Bank, Citigroup Global Markets, Deutsche Bank, Dubai Islamic Bank, Emirates NBD Capital, First Gulf Bank, HSBC Bank, JPMorgan Securities, National Bank of Abu Dhabi and Société Générale

Lawyers:

Linklaters for the arrangers and Clifford Chance with Conyers Dill & Pearman for the issuer

Rating:

‘Baa3’ by Moody’s and ‘BBB-’ by Fitch

Guarantor:

DP World as obligor

Date:

31st May 2016

Shariah advisors:

Shariah committees of Citi Islamic Investment Bank, HSBC Saudi Arabia, Dubai Islamic Bank, First Gulf Bank and Dar Al Sharia

If Malaysia is the market leader: watch out because the UAE is sprinting to catch up. Innovation and volume are always hallmarks of the UAE market. Major deals like Six Flags and Emirates Global Aluminum were syndicated. Noor Bank led the Axiom goods Murabahah syndication. Emaar, Noor and Etihad Airways all issued Sukuk. And, DP World returned to market. 

DP World is one of the largest container terminal operators in the world by capacity and throughput. DP World is also one of the most geographically diversified. This transaction was the groundbreaking return to the market of DP World after nine years.  

This RegS/144A Sukuk transaction was issued on the back of a highly successful tender offer on the outstanding DPW US$1.5 billion 2017 Sukuk certificates. The aim of the transaction was to optimize the issuers funding through the tender and new issue process. It helped DPW achieve their strategy of building a liquid curve to better reflect the strength of their credit. 

The Sukuk Wakalah are based on throughput services. These comprise loading, off-loading, storing and delivering containers at various terminals owned or operated by the company in the UAE. 

Honorable mention:  Axiom Telecoms, Emaar Sukuk and Six Flags

Saudi Arabia: Jabal Omar Development Co

Size:

SAR8 billion (US$2.13 billion)

Arrangers:

HSBC Saudi Arabia, Samba Capital, Saudi British Bank

Lawyers:

Allen & Overy for the obligor and Clifford Chance for the arrangers

Rating:

Unrated

Date:

January 2016

Shariah advisor:

Shariah committees of the arrangers

The Saudi Arabian market seems to be swimming in Tawarruq. But, Jeddah Economic City Real Estate Fund and International AirFinance Corp showed some independence and branched respectively into diminishing Musharakah and Ijarah. Middle East Healthcare Company, of course, was an equity deal. For much of the past 10 years, the question of how to redevelop Jabal Omar, a mountain near the Haram Sharif in Makkah, has dogged financiers.
The current transaction represents an expanded facility based on Istisnah-Ijarah Mawsufah Fil Dhimah. The original transaction was meant to be a SAR2 billion (US$532.61 million) multi-tranche facility. The final deal is SAR8 billion which funds the mixed use project. The project comprehends three of the seven phases. This involved complexity in dealing with the different phases in the same operating company and contractually ring-fencing the security and cash flows from each phase in the wider project. The ultimate project includes hotel, retail and residential elements.  

Honorable mention: Jeddah Economic City Real Estate Fund, International AirFinance Corp  and Middle East Healthcare Company    

Oman: Mohammed Al Barwani Sukuk

Size:

US$51.020 million and OMR9.86 million (US$25.51 million)

Arrangers:

National Bank of Oman and Standard Chartered Bank

Lawyers:

Allen & Overy and Trowers & Hamlins for the arrangers; Dentons for the issuer

Rating:

Unrated

Date:

29th June 2016

Shariah advisors:

Sharia Supervisory Committee of Standard Chartered Bank and Amanie Shariah Supervisory Board

In 2016, Bank Muscat Meethaq continued being a juggernaut as the largest player in Islamic banking. Their financing for Sebacic involved an Ijarah Mawsufah Fi Dhimmah. Oman Shipping also enjoyed a landmark Musharakah funding. And, the Sultanate returned to the markets. Mohammed Al Barwani Holding, a diversified natural resources company, became the first issuer to apply the Sultanate’s new Sukuk regulations.  

The Barwani Sukuk issuance utilizes a Wakalah structure. The issuer special purpose company purchased a portfolio of assets and engaged Barwani as servicing agent. The assets included income-generating real estate assets and shares. This is the first time that a Wakalah structure has been used in Oman. This required an extensive analysis of Omani law to determine whether the key cash flows in such a structure would be enforceable from a local law perspective. This structure now paves the way for Omani Islamic banks and corporates to utilize this type of structure for future Sukuk issuances. 

The Barwani transaction also achieves another milestone as the first dual tranche (Omani rial and US dollar) Sukuk issuance in Oman. Oman’s local clearing system, the Muscat Clearing and Depository Company, clears and settles the US dollar-denominated Sukuk for the first time. The Sukuk will also be listed on the newly established Bond and Sukuk Market pursuant to the amendments made to the Executive Regulations of the Capital Markets Law in June 2016. 

Honorable mention: Sebacic Oman and Oman Shipping Co

Kuwait: Boubyan Tier 1 Capital SPC

Size:

US$250 million

Arrangers:

Boubyan Capital, Dubai Islamic Bank, Emirates NBD Capital, HSBC, KFH Capital, National Bank of Kuwait, Standard Chartered Bank

Lawyers:

Allen & Overy, Meysan Partners for the arrangers and Dentons and AlTamimi & Co for the issuer

Rating:

Unrated (obligor rating ‘A+’ by Fitch and ‘Baa1’ by Moody’s)

Date:

16th May 2016

Shariah advisors:

Sharia committees of Boubyan Bank, DIB, HSBC, KFH Capital, Standard Chartered Bank

KNPC Clean Fuels and Equate show the demand for syndicated finance in Kuwait. In the meantime, the Capital Markets Authority of Kuwait (CMA) has established a robust framework for the launch of Islamic securities. Boubyan Bank provided some of the first clear applications of the framework. In the process, Boubyan’s issuance was the first ever fully Basel III-compliant public Sukuk issue in the world.  

As Kuwait’s first public Sukuk, the deal paved the way for Warba Bank and Ahli United Bank to issue their regulatory capital Sukuk. Accordingly, there was a significant amount of time spent with the relevant Shariah boards and scholars who were looking at this type of structure and instrument for the first time. Although Tier I issuances in the UAE and Qatar have used Mudarabah structures, this was the first time for Kuwait. This transaction was the first Sukuk transaction to have received formal approval from the Kuwait CMA pursuant to amendments made to the CMA’s bylaws which now require CMA approval for capital markets issuances for Kuwaiti entities (even when the issuer is an offshore SPV). In addition, approval was obtained from the CMA to offer and market the Sukuk in Kuwait. 

Boubyan wins the Kuwait Deal of the Year for opening the Kuwaiti Islamic capital market under the CMA rules.

Honorable Mention: KNPC Clean Fuels and Equate

Qatar: Ezdan Sukuk Company (Ezdan Holding Group)

Size:

US$500 million issued under US$2 billion program

Arrangers:

Abu Dhabi Islamic Bank, Barwa Bank, Emirates NBD, HSBC Bank, Mashreqbank, Qatar First Bank and QInvest

Bookrunners:

Abu Dhabi Islamic Bank, Barwa Bank, Emirates NBD, HSBC Bank, Mashreqbank

Lawyers:

Linklaters and Al Tamimi & Company for the arrangers and Allen & Overy and Maples and Calder (Dubai) for the issuer

Rating:

‘Ba1’ by Moody’s and ‘BBB-’ by S&P

Date:

18th May 2016

Shariah advisors:

The Shariah committees of HSBC Saudi Arabia and Mashreq Al Islami of Mashreqbank

In 2016, Qatari banks were active with regulatory Sukuk issuances. In the past, the State of Qatar and its government-linked companies have issued. Ezdan Holding, however, is the first ever private sector Qatari corporate to issue Sukuk in the international capital markets. 

The Ezdan deal is the first time that a hybrid real estate Wakalah (for no less than 51% of the underliers) and commodity Murabahah Sukuk paper has been issued in Qatar. The deal required counsel to address a number of novel local law issues in connection with the real estate assets. The Wakalah limb of the structure allows for the use of real estate-based assets that are in designated zones in Qatar where a usufruct interest in such real estate may be granted to a foreign entity. The initial issuance was composed of 70.7% Wakalah assets and 29.3% Tawarruq proceeds.

This is an important transaction in view of Ezdan’s profile in Qatar and the wider region. Ezdan is one of the Gulf region’s largest real estate companies with a market capitalization of approximately US$13.3 billion. Ezdan is also one of the largest companies listed on any Arabian stock market.  

Honorable mention: Qatar Islamic Bank and BBG Sukuk (Barwa Bank)

Turkey: Yemeksepeti

Size:

EUR250 million (US$263.17 million)

Buyer:

Delivery Hero

Lawyers:

Hourani & Associates, Dentons and Bird & Bird (advised the sellers) for the arrangers and King & Spalding, legal counsel for Delivery Hero Holding (buyer)

Date:

Ongoing due to local law issues for cross-border acquisition

Shariah advisor:

none

The Turkish market continues to be very promising. Nonetheless, the majority of 2016 deals are bank deals as well as a domestic currency deal for the Republic. Delivery Hero’s acquisition of Yemeksepeti is remarkable as it validates the opportunities in Turkey. With a major German applied technology group buying a Turkish peer, the deal is exciting on its own. But, this deal was structured as a Mudarabah. When two major groups that are not explicitly mandated to arrange their finances according to Shariah structures, one knows that Islamic finance is highly relevant. 

Honorable mention: Hazine Müstesarligi Varlik Kiralama Anonim Sirketi  (Republic of Turkey) and KT Kira Sertifikaları Varlık Kiralama 

Bahrain: Kingdom of Bahrain

Size:

US$1 billion

Arrangers:

Arab Banking Corporation, BNP Paribas, Credit Suisse, JPMorgan Securities and Standard Chartered Bank

Lawyer:

Allen & Overy and Hassan Radhi & Associates for the arrangers and Norton Rose Fulbright and Zu’bi & Partners for the issuer

Rating:

‘BB’ (Stable outlook) by S&P and ‘BB+’ (Stable) by Fitch

Date:

4th October 2016

Shariah advisors:

Shariah advisory committees of joint lead arrangers

Not too long ago, one thought of Bahrain as almost exclusively a banking center. The Kingdom has been diversifying its economy. Over the past five years, no single industry accounts for more than 25% of real GDP. As a result, real estate and corporate finance deals featured among the nominees for Deals of the Year. The Kingdom of Bahrain’s own Sukuk leads the pack as the Kingdom was able to achieve its key goals: affirmation of the government benchmark in the domestic market, diversification of funding sources, and a successful confirmation of the Kingdom’s acceptance in global capital markets through the issuance of 144A and Reg S tranches for the Irish Stock Exchange-listed securities. 

Bahrain continued to use the head-lease/sub-lease structure. But, like others, the issuance adds a Tawarruq feature. The underlying real estate assets are to be no less than 51% of the total Sukuk underliers. This structure paves the way for the Kingdom of Bahrain to more easily issue Sukuk in the future by minimizing the amount of real estate assets which are required for a Sukuk issuance. 

Honorable mention: Diyar Al Muharraq and The Oil and Gas Holding Company

Africa: Yinson Production (West Africa), a subsidiary of Yinson Holdings

Size:

US$780 million

Arrangers:

CIMB Investment Bank, Maybank Kim Eng Securities, OCBC, United Overseas Bank, Standard Chartered Bank, Instesa Sanpaolo

Lawyer:

Clifford Chance for the obligor

Rating:

Unrated

Date:

December 2016

The deal is a US$780 million commodity Murabahah financing for the refinancing of Yinson’s existing project financing arrangements for the acquisition, conversion and refurbishment of a floating production, storage and offloading unit as well as the chartering, installation and operation of the Vessel in the Offshore Cape Three Points block located in the Tano Basin approximately 60 kilometers off the western coast of Ghana. 

The deal brings key Asian players to the African market for the first time in a deal supporting the African subsidiary of a Malaysian corporate. The deal may be the largest vessel financing in both Africa during 2016. 

Honorable mention: Government of Senegal as beneficiary and Sonacos, and government of Mauritania.

US: Panasonic Corporation of North America Head Office building acquisition

Size:

US$165 million

Investors:

KFH Capital

Lawyer:

King & Spalding

Rating:

The tenant is rated ‘A-’ by S&P

Date:

December 2016

Shariah advisors:

Shariah Supervisory Committee of KFH Capital

Significant flows of private capital left the GCC and ASEAN regions for the US and UK real estate. Most of the investors preferred anonymity. Morgan Lewis represented Gulf Finance House’s return to the US market with a US$55.5 million acquisition of an industrial property portfolio and Sidra Capital entered the US real estate market with the acquisition of Amerisource/Lash Group Headquarters with a purchase price of US$67 million. 
After a long silence, KFH Capital also re-entered the US market with the acquisition of Panasonic Corporation of North America. The leveraged US$165 million deal is a bondable lease of the 12-storey building. KFH Capital’s equity in the investment is 35%. The Panasonic building enjoys advanced technology and has been certified with Leadership in Energy and Environmental Design (LEED) Platinum Interiors as well as LEED Core and Shell. LEED is an independent certification and recognized as the standard in the US and Europe. Not only has KFH made a sound income-generating investment, but KFH has invested in a sustainable and environmentally sound manner.

Honorable mention: GFG CI-1 and Sidra Capital — Amerisource Building.

Nearly 40 transactions were nominated for 2016’s Deal of the Year. Transactions like Boubyan, Togo, Jordan, and Al-Falaah all represented the opening of new Sukuk markets. Even if Jordan and Kuwait are established Islamic finance markets, Sukuk deals have lagged in both. Jordan now has a sovereign benchmark and ideas for the global Islamic capital market to consider. Boubyan gave proof of concept to Kuwait’s new capital market rules. The sovereign issuance for Togo and Al-Falaah’s maiden Sri Lankan Sukuk expanded the Islamic capital market into new domains.

Dzahab, Ziya, Axiom, Barwani and Jeddah Economic City are bringing new concepts into an established market.  Dzahab and Ziya provide examples of how to use the capital markets to manage corporate balance sheets in the financing industry. Barwani demonstrates the capacity of Oman’s CMA rules to accommodate innovation and new thinking. And, Jeddah Economic City breaks away from the overuse of Tawarruq in Saudi Arabia.  
Malaysia’s Sime Darby brought three landmark deals to bear. In a deleveraging exercise, the diversified corporation issued perpetual Sukuk and new shares. Sime Darby also entered the renewable and sustainable energy field.

Yinson, Thar Block II and Cagamas all provided worthy examples of cross-border collaboration: Yinson taking Malaysian capital to Africa; Thar achieving cooperation between China’s lenders who lack Islamic finance experience and Pakistan’s seasoned Islamic financiers; Cagamas showed the capacity of Malaysia and Singapore to collaborate in a deal that demonstrated the role of Singapore’s global financial center.

In 2016, DP World Crescent showed a bit of each as the flagship business of the Emirate of Dubai returned to market.

DEAL OF THE YEAR: DP World Crescent

Size:

US$1.2 billion under US$3 billion program

Arrangers:

Citigroup Global Markets, Deutsche Bank (London branch), Dubai Islamic Bank, Emirates NBD, First Gulf Bank, HSBC Bank, Barclays Bank (appointed as dealers for the day), JPMorgan Securities (appointed as dealers for the day), National Bank of Abu Dhabi (appointed as dealers for the day), and Société Générale (appointed as dealers for the day)

Bookrunners:

Barclays Bank, Citigroup Global Markets, Deutsche Bank (London branch), Dubai Islamic Bank, Emirates NBD Capital, First Gulf Bank, HSBC Bank, JP Morgan Securities, National Bank of Abu Dhabi and Société Générale

Lawyers:

Linklaters for the arrangers and Clifford Chance with Conyers Dill & Pearman for the issuer

Ratings:

‘Baa3’ by Moody’s and ‘BBB-’ by Fitch

Guarantor:

DP World as obligor

Date:

31st May 2016

Shariah advisors:

The Shariah committees of Citi Islamic Investment Bank, HSBC Saudi Arabia, Dubai Islamic Bank and Dar Al Sharia, and First Gulf Bank

In the consensus deal of the year, DP World returned to market with an innovative deal. One of the largest container terminal operators, DP World has unrivaled capacity and throughput throughout the world. This transaction relies upon that capacity to back its Sukuk Wakalah

This innovation is based on the first ever use of TEUs (twenty-foot equivalent units) as the underlying assets. TEUs are an industry measure of capacity. The TEUs are represented by vouchers allocated to the SPV for capacity comprised of loading, off-loading, storing and delivering containers at various terminals owned or operated by the company in the UAE. The Sukuk structure ties neatly into the company’s operating model without tying up physical assets in a transfer to the SPV or by their pledge as collateral. The Sukuk represents the latest in an evolving line of structures based on capacity rather than tangible assets. 

During 2016, we all shared great anxieties about the economic and political issues embroiling the MENA region. At the same time, global trade has stalled yet again. Nonetheless, DP World’s return to the global market after a nine-year hiatus was welcomed globally. 

The Sukuk were issued in 144A and Reg S formats. The deal was oversubscribed 1.75 times with a final orderbook of US$2.1 billion. Investors represented 154 accounts from the UAE (47%), other MENA (17%), UK (14%), Switzerland (7%), other Europe (6%), Asia (5%), and the US (3%). 

DP World’s Sukuk were part of a broader corporate finance exercise. The Sukuk were issued on the back of a highly successful tender offer on DP World’s outstanding US$1.5 billion 2017 Sukuk certificates. The Sukuk helped to optimize the obligor’s funding through the tender and new issue process. DP World has been able to build a liquid curve to better reflect the strength of their credit. 

DP World’s deal achieved many milestones including: the second-largest GCC Sukuk transaction in 2015-16; the largest GCC corporate Sukuk tranche since 2014; the largest CEEMEA corporate international debt issuance over the past 12 months; and the largest non-SSA Sukuk issuance out of CEEMEA since 2015.

Islamic finance and UN Sustainable Development Goals: A regulatory perspective

The philosophies of profit maximization and consumerism as a means for the pursuit of happiness have failed people. The typical model of economic development has resulted in the collapse of financial markets on more than one occasion, and created a number of externalities. JAMSHAID ANWAR CHATTHA writes.

Notably, the recent global financial crisis has posed poignant challenges about the stability and sustainability of the financial system. Therefore, the recurring financial debacles coerce a dire need for an economic model that addresses these global challenges. In the process of exploring possible answers to the challenges, what has remained less explored is the fact that Islamic finance offers basic principles closely in line with the concept of sustainable development (SD) adopted by the UN.

To make a long story short, the UN Sustainable Development Goals (SDGs), replacing the Millennium Development Goals, is a new set of guidelines for the world, which sets priorities and aspirations for 2030 (Table 1) and envisages a revitalized global partnership for SD. 

That being said, debates about SD and SDGs have moved center stage in recent years from many perspectives. This article endeavors to address the following questions: “How Islamic finance can help in achieving the SDGs?” and “What are the key considerations for regulators for achieving the SDGs?”.

Islamic finance perspective on sustainable development – natural alliance
The principles of Islamic economy – with features of social altruism – offer a just and fair socioeconomic system where there is a strong commitment toward the well-being of human society. From its fusion of economic and moral principles, Islam advocates a sustainable model of development.

Right from the advent of Islam, the unfeigned significance of the economy has been emphasized by Prophet Muhammad (s.a.w.) whose first profession was trade and commerce. In order to ensure a broad-based sustainable economic growth, Islam has put in place certain mechanisms such as the mandatory payment of Zakat and the voluntary payment of Sadaqat, the creation of Waqf and the prohibition of Riba and Gharar. These measures in totality are sufficient for poverty alleviation and the creation of a sustainable society which ultimately ensures SD.

SD is not a new concept to Muslim economists. Islamic economics has medieval roots including an immense literature from Muslim scholars such as Al-Ghazali and Ibn-Khaldun. In his work, Al-Ghazālī refers to the protection of five purposes or essential elements to promote the well-being of all mankind: religion (Al-Deen), life (Al-Nafs), progeny (Al-Nasl), intellect (Al-Aql) and property (Al-Maal). Further, according to Ibn Khaldun’s multidisciplinary theory, promulgated more than 600 years ago, immorality, and injustice are indicators of unsustainable development which caused the fall of the nations. The intellectual legacy of Ibn Khaldun is unique among Muslim thought, and very relevant in the modern context. Ibn Khaldun’s Muqaddimah was the first work which promulgated the economic theories put forward by Adam Smith in his Wealth of Nations publication.

There are over hundred verses in the Quran covering economic justice, equality and equal distribution of wealth. For instance, Quranic verse 7:31 reflects the very basic concept of SD: “Eat and drink, but waste not by excess, for Allah loves not the wasters.”

Actually, sustainability and Islamic finance represents a natural alliance. Given its emphasis on justice and risk-sharing, direct linkages between finance and the real economy, partnership-based and equity-focused approaches and the avoidance of excessive speculation and leverage, Islamic finance emphasizes the full integration of finance with the real economy and helps the financial services sector to achieve greater stability and a sustainable growth trajectory.

In my view, greater reliance on the principles underlying Islamic finance will improve financial sector stability, which in turn, helps in promoting resilience, increasing social sustainability and facilitating sustainable infrastructure development. A similar view is reflected in the recent G20 and OECD report (July 2016), and this is already being translated into a reality, for example in 2014, the International Finance Facility for Immunization, for which the World Bank acted as treasury manager, launched a US$500 million Sukūk facility, the proceeds of which were used to finance projects for the Global Alliance for Vaccines and Immunization.

SDGs being addressed by Islamic finance
Major areas to which Islamic finance can contribute are ending poverty (SDG-1), achieving food security (SDG-2), ensuring healthy lives (SDG-3), achieving gender equality (SDG-5), economic growth (SGD-8) and promoting a peaceful and inclusive society (SDG-16). Additionally, innovative Islamic financial instruments such as Sukuk can be used to mobilize resources to finance water and sanitation projects (SDG-6), sustainable and affordable energy (SDG-7) and build resilient infrastructure (SDG-9) and shelter (SDG-11). Islamic philanthropy programs such as Zakat (alms), Sadaqat (charity) and Wakaf (donation) have played a vital role in social protection and alleviating poverty in a dignified manner and have led to wider social and financial inclusion. These are in line with, and, are able, to support the SDGs. 

Roadmap to achieve the SDGs with Islamic finance: Key regulatory considerations
There are five ways through which Islamic finance could support efforts to achieve SDGs.

1. Trust and credibility of Islamic finance products. Foremost, there is a fundamental need to build trust and credibility of Islamic finance products which are based on contracts. One way is the standardization and enforcement of contracts that would be critical in achieving sustainable growth and financial stability. With sustainable and credible Islamic economy, the goals of SDGs can be realized. From a supervisory point of view, minimum regulation to enforce contracts and adequate commitment to the implementation of relevant standards are strongly desired.

It is no surprise or arbitrary that the longest verse in the longest Surah of the Quran (282: Al Baqarah), known as the verse of debt (Ayat Al Dayn), speaks about financial transactions, the rights of the debtor, the approach of the creditor, justice and equity, documentation, witness and evidence, fear of Allah (s.a.w) and being conscious of Him.

To underscore the importance of the contracts in the modern era, we saw a Nobel Prize for 2016 awarded jointly to Oliver Hart and Bengt Holmström “for their contributions to contract theory”. While the new theoretical tools created by Hart and Holmström are valuable to the understanding of real-life contracts and institutions, as well as potential pitfalls in contract design, their significance has been outlined 1,400 years ago by Islam and Islamic finance is built of these contracts.

2. Direct link between the real sector and the financial sector. So how do we ensure direct links? The empirical evidence from the Islamic banking industry points to debt-financing being the most dominant form of financing compared to risk-sharing modes of financing (Musharakah and/or Mudarabah). This makes the promotion of risk-sharing modes of financing quite challenging. Risk-sharing modes of financing are no doubt one of the essential distinctive qualities of Islamic finance.

In the case of equity-like financing, the following measures, if applied, have the potential to ensure a direct link between the real sector and the financial sector. These measures include: (a) enforcing sector-wide limits for risk-sharing modes of financing and adjustments in risk weights (RWs) and collaterals; (b) encouraging Islamic banks to participate in and develop equity-like financing structures and ensuring banks have in place appropriate strategies, balance sheet management tools, and risk management techniques; and (c) ensuring that certain factors (such as taxation) relating to the legal and regulatory environment will not affect risk-sharing modes of financing in the jurisdiction. 

3. Regulation and supervision. Strengthening regulation and supervision is an important component in the development of Islamic finance, to support higher sustainable growth and to foster financial stability. This includes providing a robust supervisory and regulatory framework, in line with the recommendations of both the BCBS and the IFSB, covering inter alia, risk management policies, corporate governance, transparency and Shariah governance and ensuring a level-playing field for market participants. Therefore, proper regulatory policies and supervision will ensure Islamic finance will contribute its part in achieving SDGs. Removing regulatory impediments (eg gaps in financial infrastructure, policy regulations) to support SD is also imperative.

4. Financial inclusion. The work of international work agencies (such as the AFI and the CGAP) indicates that over half of the world’s adult population – 2.5 billion people – lacks access to formal financial services. To underline the importance of this issue, in September 2016, the BCBS issued ‘Core principles for regulation and supervision of institutions relevant to financial inclusion’. In this context, while the Islamic banking sector can support broad-based economic growth, we need financial deepening and increasing financing inclusion through access to finance inclusion.

An important question, however, is: how to ensure better access to finance inclusion? The answer is promoting financial inclusion requires, among other things: (a) enhancing access to basic banking services; (b) creating a regulatory environment conducive to promoting financial inclusion and development (eg simplifying regulatory requirements like KYC and KYCC, appropriate RWs for SME clients); (c) implementing a number of regulatory and tax policies to provide support to Islamic financial institutions that would foster greater financial inclusion; and (d) enhancing financial infrastructure.

5. Cross-sectoral cooperation. Given the nature of Islamic finance, cross-sectoral exposures are unique, which raise concerns for authorities that supervise Islamic financial institutions. This consideration remains underdeveloped calling for cross-sectoral synergy. Other than traditional components of Islamic finance (such as banking, capital market and Takaful), policies and regulations are also needed specifically for Islamic microfinance institutions, partnership Mudarabah models, microTakaful, crowdfunding platforms and social impact investment. In order to increase the cooperation among the different supervisors within the jurisdiction, similar to the Financial Stability Committee Model, a cross-sectoral committee (CSF) can be established with specific scope and mandate. The CSF can have representatives from the regulators such as the central bank, the capital market and the insurance industry.

Table 1: Sustainable development goals and Islamic finance

UN Sustainable Development Goals

* Goal 1. End poverty in all its forms everywhere

* Goal 2. End hunger, achieve food security ….

* Goal 3. Ensure healthy lives and promote well-being for all at all ages

* Goal 4. Ensure inclusive and equitable quality education …

* Goal 5. Achieve gender equality and empower all women and girls

* Goal 6. Ensure availability and sustainable management of water and sanitation for all

* Goal 7. Ensure access to affordable, reliable, sustainable and modern energy for all

* Goal 8. Promote sustained, inclusive and sustainable economic growth, …

* Goal 9. Build resilient infrastructure…,

* Goal 10. Reduce inequality within and among countries

* Goal 11. Make cities and human settlements inclusive, safe, resilient and sustainable

* Goal 12. Ensure sustainable consumption and production patterns

* Goal 13. Take urgent action to combat climate change and its impacts

* Goal 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development

* Goal 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

* Goal 16. Promote peaceful and inclusive societies for SD, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

* Goal 17. Strengthen the means of implementation and revitalize the global partnership for SD

Source: https://sustainabledevelopment.un.org/sdgs

 

Conclusion
As a system, Islamic finance helps to stimulate economic activity and entrepreneurship toward addressing poverty and inequality, ensures financial and social stability and promotes comprehensive human development and fairness. All of these parameters are relevant to the SDGs and many aspects of the SDGs are well covered by Islamic finance.

By nature, the scope of the SDGs is people, irrespective of any religious considerations. A large majority of the 52 countries of the Muslim world are set to be the principal benefactors of the SDGs. What is needed is the exclusive commitment of supervisory authorities to ensure that the necessary legal and regulatory infrastructure is in place and adequate attention is given to the aforementioned considerations.

To this end, Islamic finance, being just 2% of global finance, has a long way to go, but the foundation needs to be strong. With a strong foundation and credible financial system, investors will be more likely to bank on Islamic finance to achieve these goals.

The views expressed in this article are those of the author, and they do not reflect the views of the Central Bank of Kuwait.

Jamshaid Anwar Chattha is the chief financial analyst and Islamic finance expert at the Central Bank of Kuwait. He can be contacted at jamshaid.anwar@gmail.com.  

Al Madina Takaful announces fees

OMAN: Al Madina Insurance Company (Al Madina Takaful) has announced in a bourse filing its Wakalah and Mudarabah fees for the fiscal year ending the 31st December 2017. The aggregate Wakalah fee for 2017 would be 20% of the gross written contributions for all contributors in General Takaful and Family Takaful funds. Al Madina Takaful will also charge a Mudarib fee of 55% of the net profits generated from the investment of the policyholders fund.

Turkish Sukuk market review: A look at corporate Sukuk

METIN TEKECI provides an analytical review of the Turkish corporate Sukuk landscape.

Despite 99.2% of its population being Muslim (according to Diyanet Report), Turkey was a latecomer to the global Islamic finance arena. The modern Turkish Islamic banking history goes back to the early 1980s and the legal infrastructure has been unified with that of conventional banking under the Banking Law No 5411 in 2005.

Turkey has received substantial support from the World Bank Group to develop its Islamic finance sector; the World Bank Group is also supporting the Republic’s initiatives to position Istanbul as a finance center. The government is taking active steps to develop its treasury Sukuk markets to diversify sources of capital to channel it toward economic development.

Turkey’s Sukuk legal framework was initiated under the capital market regulations, first of which is the Serial III-43 Communique on Lease Certificates in 2010.  

This subordinate legislation remained inapplicable in the market until the enactment of Omnibus Bill No 6111 in 2011, which introduced tax neutrality on Sukuk Ijarah issuances. The first issuance registered under the Turkish Capital Markets Board (apart from the US$100 million issuance by Kuveyt Turk in August 2010 which was issued through an SPV in Cayman Islands) and sold out to foreign investors was the US$1.5 billion Sukuk facility by the Turkish Undersecretariat of Treasury (Hazine) in September 2012. 

Diagram 1: Turkish Sukuk development timeline

At the end of 2012 and mid of 2013, the new capital Markets Law No 6362 and the new Communique in Lease Certificates (Serial 61.1) (the Communique, hereafter) were issued and provided the biggest leverage for market players to issue their own Sukuk

Table 1: Sukuk issuance in the Turkish market

 

EUR

MYR

TRY

USD

Total

MATURED

 

 

 

 

 

Domestic

 

 

74

 

74

Foreign

 

 

1

4

5

OUTSTANDING

 

 

 

 

 

Domestic

 

 

20

 

20

Foreign

1

6

2

7

16

TOTAL

1

6

97

11

115

The momentum of Sukuk issuances especially those observed in the domestic market until 2016, proved that Sukuk have significant potential to become a complementary solution to conventional bonds and loans in Turkey, both for the originators and investors. We have observed 115 issuances from 2010 until November 2016, and 36 of these are still outstanding today, corresponding roughly to US$8.7 billion-worth of Sukuk circulating in the market. 

We have observed that the outstanding Sukuk issuances of each issuer in Turkey are mainly denominated in US dollars with an average tenor of slightly above five years. TRY issuances are mostly used for short-term financing needs, generally in the size of TRY6 million (US$1.71 million). 

Turkiye Finans (a subsidiary of Saudi giant National Commercial Bank) and Kuveyt Turk (the Turkish arm of Kuwait Finance House Group), and the Hazine are the leading originators of US dollar Sukuk issuances. Both Turkiye Finans and Kuveyt Turk are also the only Turkish issuers in the ringgit market to date. 

Table 2: Outstanding Sukuk volume (in USD million)

Outstanding Sukuk

EUR

MYR

TRY

USD

BEREKET VKS

 

 

175

350

Hazine

 

 

9.48

2.75

KABTEK VKS

12

 

 

 

KT VKS

 

800

550

1

TF VKS

 

1.16

394

1

TFKB VKS

 

 

314

 

ZIRAAT KATILIM VKS

 

 

100

 

Total

12

1.96

11.02

5.1

 

Sukuk are also of crucial importance in generating quasi-capital sources, considering the growth pressures on Islamic banking in Turkey. Tier 2 Sukuk issuances with 10-year tenors issued by Kuveyt Turk (US$350 million), Turkiye Finans (US$250 million) and Albaraka Turk (US$250 million), provided more capitalization opportunities for growth. 

New Turkish participation banks such as Vakif Bank and Ziraat Bank are also expected to emerge as new players in the domestic and international Sukuk market, thanks to the political support of the government to increase Islamic banking share up to 15% from the current 4.7% (according to October 2016 figures by the Banking Regulation Supervisory Authority). 

In 2013, the legal framework was modified to permit the use of diversified Islamic financial instruments in Turkey, enabling Sukuk to be structured using:

  1. Ownership  (Ijarah)
  2. Management contract (Wakalah)
  3. Trade (Murabahah)
  4. Partnership (Mudarabah)
  5. Work of art contract (Istisnah)

All these types of Sukuk, or any hybrid types acceptable by the Capital Markets Board (CMB), may be issued through public offering, private placement or sales to qualified investors only.
The most preferred issuance method is to qualified investors mostly due to the fact that the market is still premature. On the other hand, the CMB regulation does not require prospectus for private placement issuance.
Chart 1: Breakdown of Sukuk issuance methods 

Chart 2: Number of Sukuk issuance by type 

Ijarah is the most common Sukuk structure in the Turkish market. More than half of Turkish issuances are based on the Ijarah model or are based on an Ijarah-Murabahah combination. This has mainly stemmed from the opaque tax treatment on the Mudarabah and Istisnah models. The issuers, in response, are avoiding such tax risks. 

A unique feature of Turkish Sukuk regulation against its global peers is that SPVs or asset leasing companies (ALCs) are permitted to issue multiple Sukuk concurrently on behalf of different originator companies, subject to the approval of the CMB. This permission mitigates cost of establishment and running an SPV, and concentrates knowledge base on the subject matter. 

The financial reporting of asset base of different Sukuk issuances are segregated on the financial statements. Liquidation in case of a default is also defined to be managed and executed by the Investor Compensation Center, a public legal entity established under Capital Market Law. 

The legal presence of ALCs in Turkish legislation has not been tested through a default case, however, the robust CMB supervision over each issuance provides comfort to investors. It is also worth to mention that ALCs are mainly used to fund their founder companies (except TFKB VKS).

TFKB VKS, differs in the market by functioning as a special Sukuk origination hub for customers of Turkiye Finans. Total issuance by TFKB VKS to date stands at TRY343 million (US$130 million, according to USD-TRY exchange rates during times of issuances) on behalf of four different originators operating in real economic sectors of Turkey,  and Turkiye Finans remains the sole investor in these issuances. This model can set the groundwork for corporates looking to tap the Sukuk market.

Table 3: ALCs in Turkey 
ALC    Type    Founder
HAZINE  VKS    Sovereign    Turkish Treasury
AKTIF BANK SUKUK VKS    Investment bank    Aktif Investment Bank
ASYA VKS    Islamic bank    Bank Asya
BEREKET VKS    Islamic bank    Albaraka Turk
KABTEK VKS    Corporate    Kablotek AS
KT SUKUK VKS    Islamic bank    Kuveyt Turk
KT VKS    Islamic bank    Kuveyt Turk
TF VKS    Islamic bank    Turkiye Finans
TFKB VKS    Islamic bank    Turkiye Finans
ZIRAAT KATILIM VKS    Islamic bank – public    Ziraat Katilim

Non-bank financial institutions are playing an increasing role in the Turkish Sukuk market as an investor to these issuances however there is still plenty of room to reach to full potential. With the accelerating contribution of Turkish Takaful operators (eg, Katilim Emeklilik, Neova Insurance, Doga Insurance), Islamic investment firms (eg BMD Portfolio Management, Qinvest Portfolio Management), and conventional companies providing Islamic investment products to their customers ( eg Ziraat Portfolio, Ak Portfolio, Vakif Emeklilik,  Garanti Emeklilik)  the Sukuk market is expected to generate stronger demand in domestic market. On top of this list, the inclusion of large real sector companies which are already active buyers in bonds market  is promising higher growth potential for this sector. 

With the new Omnibus Bill – Law No 6728, published on the 9th August 2016, less popular Sukuk structures such as Mudarabah, Musharakah and Istisnah were granted tax neutrality, and this is expected to boost the utilization of Sukuk as a financing tool. 

With the amendment of the Stamp Tax Law, VAT Law, and Law on Charges, all types of Sukuk transaction documents, proceeds, transfer of assets between issuer/ALC and originator will be exempted from tax and charge burdens, as required in the previous regulation. The exemptions will be also be valid for construction companies providing corporate tax exemption, and supporting project financing legal infrastructure. 

Being an alternative financing source for Turkish corporations, the newly-relaxed tax framework facilitating Sukuk structures mentioned above would be useful for bridging the project financing gap in Turkey, particularly for infrastructure projects and public-private partnership projects such as airports,  bridges, highways, and energy power plants. 

The key challenges over the short to medium term, however, are the global and domestic macroeconomic challenges which have decelerated the growth of the Turkish economy. In order to increase the appeal of Islamic financial instruments, the government should consider introducing incentives for such products as in the case of Malaysia.

Metin Tekeci is the head of Turkiye Finans’ Bahrain branch. He can be contacted at metin.tekeci@turkiyefinans.com.tr.

Islamic finance development in Tunisia

Over the past four years, the Tunisian economy has faced significant challenges which have increased pressure on Tunisia’s public finances and led to the country revising higher current account and fiscal deficits, indicating a significant deterioration in the debt burden over the past year.

In the same way, these challenges will continue to influence Tunisian banks’ financial performance despite the recent banking regulation enhancement and the development of the Islamic financial landscape in Tunisia.

The Tunisian banking system consists of 23 full-service banks, of which five banks are specialized (three Islamic banks, one SME finance bank and one microfinance bank).

The three Islamic banks are:

  • Zitouna Bank, which obtained a license in May 2010
  • Al Baraka Bank, which was transformed from a non-resident bank to an onshore bank in January 2014, and
  • Wifack International Bank, which was transformed from a leasing company to an onshore bank and which was granted a banking license in November 2015 and authorized to transform its activity to Islamic banking.

There are also six Islamic mutual funds: ATID Fund (March 2009), Al Kaouther Fund (March 2010), FCPR MAX-Jasmin (2012 ), Theemar Investment Fund ( February 2013), UGFS Islamic Fund and CEA Islamic Fund ( December 2014).

Furthermore, four Takaful institutions were recently created: Zitouna Takaful (2011), El Amana Takaful, Al Takafulia Insurance (June 2013) and Tunis Re which created a dedicated unit, Tunis ReTakaful to meet the needs of the domestic market. In addition, there is also BEST RE (L) (April 1985) which is considered as an offshore reinsurance company (with headquarters based in Tunis) and as the world’s re-Takaful pioneer.

Another component of the Islamic financial landscape is Best Lease (1999) which is the only operator on the market of Islamic leasing in Tunisia.

Review of 2016
Zitouna Bank’s initiatives continued in 2016 after its successful TND40 million (US$17.41 million) local issuance in December 2015 of participative bonds for seven years (a hybrid facility with a fixed part of its yield of 6% and a variable part of up to 2%). Indeed, Zitouna Bank recently developed the activities of an Islamic microfinance fund, Zitouna Tamkeen, in partnership with the IDB.

Moreover, the Tunisian Solidarity Bank recently adopted the Islamic banking option in conformity with the new banking law to regularize the funding for projects supported by the IDB’s grant of US$50 million.

In 2016, Tunisia and the IDB signed an agreement to fund the gas turbine power plant in Mornaguia with a budget of US$200 million in addition to a US$27.7 million funding for the Sfax Integrated Agricultural Development Project. 

Furthermore, Tunisia and the International Islamic Trade Finance Corporation, a member of the IDB Group, signed a US$310 million agreement to support the energy sector.

Following certain major changes related to tax provisions (Finance Act 2014: the exemption of profit margin from value-added tax and the avoidance of double taxation on the transfer of properties) and those related to certain legal provisions (Sukuk law, Islamic funds and Takaful), the New Banking Law approved in 2016 introduces a number of changes to the functioning and supervision of the banking sector in order to reorganize it through the formal legal recognition of Islamic banking activities.

This banking law defines Islamic finance transactions (Murabahah, Ijarah, Mudarabah, Musharakah, Istisnah, Salam, Wadiah Istithmar) and also allows all banks to carry out Islamic finance transactions, subject to approval from the central bank (including for Islamic windows).

Preview of 2017
Although Islamic finance transactions are expressed in the law, and subject to the same law, the central bank is expected to elaborate more on this in early 2017 with a circular which will define these transactions and provide their regime.

Even though the law is placing Islamic finance transactions under the supervision of the central bank, it is also expected in 2017 that Shariah compliance will be well defined in the subsequent regulations (for example, the limits between the roles of the Shariah board, the board of directors and the central bank and the recognition of international regulations).

Conclusion
The following is a list of what should and perhaps what needs to happen for the Islamic finance industry to develop regarding the legal and regulatory framework:

  • Tax and accounting aspects
  • Convergence between Tunisian law and Islamic principles and even additional laws
  • Conditions to accept the approval to perform Islamic banking activities
  • New regulations with reference to the new banking law that will fit alongside with other laws
  • New Islamic finance transactions not regulated by the banking law to be allowed in Tunisia, and
  • SPV/trustee regulations and law to develop the Sukuk market and project finance.

Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated. 

Mohamed Araar is the deputy director of external private financing and international relations at the General Directorate of External Financing and Settlements at the Central Bank of Tunisia. He can be contacted at med.araar@yahoo.fr.

Indonesia: Growing dominance of government Sukuk

Similar to the year of 2015, the growth of the Islamic banking industry in Indonesia is still continuing on a decelerating trend. In 2014, the Islamic banking industry grew 12.4%. The growth then dipped in 2015 to 8.8%. 

As at August 2016, it recorded a 3.1% growth. It is, of course, a tentative growth figure for 2016 but it at least indicates persistent slow growth experienced by the Indonesian Islamic banking industry. The same also applies to the Islamic rural bank industry that has so far recorded slower growth compared with 2015 although it still recorded higher growth compared to its Islamic bank counterpart.

However, comparatively speaking, it is important to note that there has been a small increase in the market share of the Islamic banking industry to 4.95% in August 2016 from 4.71% in August 2015, meaning that the growth of Islamic banking is still faster than conventional banking.

Contrary to the growth of the Islamic banking industry, the year 2016 saw the acceleration in the growth of government Sukuk issuance. Sovereign Sukuk issuance up to August 2016 (from December 2015) reached 45.05%. It maintained a fast growth momentum and is most likely to surpass the full year growth of 2015 which was at 54.23%. Government Sukuk issuance has now become the most dominant player in the Indonesian Islamic finance industry.

The Islamic insurance industry is another component of the Islamic finance industry that has also shown encouraging growth in 2016 (as at August 2016) although its asset size is still small compared to Islamic banking. The Islamic life insurance industry and general (and reinsurance) industry recorded growth of 22.9% and 22.2% respectively.

Corporate Sukuk have still not made any major progress so far. The same can be said for the Islamic mutual fund industry. It even recorded negative growth as at August 2016 although it has yet to be seen how it will perform until the end of 2016.

Apart from the aforementioned industry perspectives, a general slowdown in the global economy also contributed to some extent to the slower economic growth in the country, which in turn, also affected the growth of the Islamic banking industry.

Review of 2016
Despite the fact that the growth of the Islamic banking industry is still comparatively faster than conventional banking, the growth is historically reaching a record low. Two major Islamic banks, Bank Syariah Mandiri (BSM) and Bank Muamalat Indonesia (BMI), whose assets accounted for 43% of total Islamic banking assets in 2015, have entered their slowest growth periods since 2014. BMI even experienced negative growth in 2015, experiencing a 7.4% decline in assets to IDR57.8 billion (US$4.28 million) in 2015 from IDR62.4 billion (US$4.62 million) in 2014. Worse still for BMI, by August 2016, its total assets went down further to IDR52.6 billion (US$3.89 million).

In fact, the market share of BSM and BMI have declined over time; in 2010, their market shares were 33.3% and 22% respectively and by 2015, their market shares declined to 23.7% and 19.3% respectively. While these two largest Islamic banks experienced declining market shares, second-tier Islamic banks such as Bank Negara Indonesia Syariah (BNIS), Bank Rakyat Indonesia Syariah (BRIS) and Permata Syariah (the Islamic window of Permata Bank) increased their market shares.

BRIS, BNIS, and Permata Syariah increased their market shares to 8.2%, 7.8% and 5.1% respectively in 2015 from 7%, 6.5% and 2.3% in 2010. It is most likely that this trend will continue by the end of 2016.

While the Islamic banking industry is facing a slowdown, Islamic government securities are continuing their upward trend. In fact, according to data from the Ministry of Finance, as at the 6th October 2016, total issuance of government global Sukuk is the largest in the world amounting to US$10.15 billion, followed by the Emirate of Dubai (US$7.07 billion), Malaysia (US$6.85 billion) and Turkey (US$4.86 billion).

In 2016, the Indonesian government issued two global Sukuk facilities with two different tenors and pricings. The first one has an issuance size of US$750 million with a five-year tenor and a 3.4% pricing while the other issue of US$1.75 billion had a 10-year tenor and a 4.55% pricing. The government also issued its first savings Sukuk facility intended for local retail investors in 2016, mobilizing around almost US$200 million in local currency. This saving Sukuk facility offered a 6.9% return under the Wakalah structure with the minimum order at around US$150.

On the corporate side, the progress has not been like its sovereign counterpart. Up to the end of July 2016, there was only a 7.8% increase in issuances compared with 2015. However, it is expected that more Sukuk can be issued by the end of 2016. In fact, in November 2016, BRIS issued its first Sukuk Mudarabah in the amount of around IDR1 trillion (US$74 million). 

The other segment of the Islamic finance industry that recorded a significant increase in 2016 is Islamic life insurance. Considering that the market penetration of the insurance industry as a whole is still low, Islamic life insurance has the potential to grow further. According to the Indonesian Islamic Insurance Association, only 9.4% of the Indonesian population know that there are Islamic life insurance products.

Although it is still small in absolute value, similar progress can also be seen in the general insurance and reinsurance segment where it recorded growth of 22.2% up until August 2016, surpassing the full year growth of 13.9% in 2015. Unfortunately, Islamic mutual funds experienced an almost 10% decline in terms of the net asset value up until July 2016.

Preview of 2017
Government Sukuk have continued the trend to be a dominant player in the Indonesian Islamic finance industry and this is expected to continue in 2017. It is most likely that government Sukuk will also play a more important role in the global Sukuk market, especially considering the fact that the government has looked into Sukuk more and more to plug its budget deficit and finance many infrastructure projects.

The challenge for Indonesia is now more on how to make other components of Islamic finance such as Islamic banking, corporate Sukuk, Islamic insurance and Islamic mutual funds more competitive and grow further. 

Although the intention is actually there by the authorities to support the growth of Islamic finance as a whole (see IFN Annual Guide 2016), it seems that there is a lack of understanding on what actions to take to really stimulate the growth.

Officials in Indonesia’s OJK claimed that it has created a comprehensive infrastructure to support the growth of Islamic finance by issuing many regulations. However, it is high time to discuss whether those regulations are simplifying the businesses or complicating them. The issue here is not about how many regulations are issued, but how effective they are in stimulating the development of Islamic finance.

Like any other business, the Islamic finance industry needs a less bureaucratic environment to grow. Government Sukuk, taking advantage of its sovereign status, may not have as much bureaucratic barriers than those faced by its private counterparts. 

Apart from bureaucratic issues, the government may need to encourage its state-owned enterprises to place more of their funding into Islamic banks and/or Islamic mutual funds. Alternatively, they may also be encouraged to issue more Sukuk instead of conventional bonds.

Last but not the least, fiscal incentives is the area that has not been touched by the government to promote the growth of Islamic banking and corporate Sukuk. As an infant industry in the country, giving fiscal incentives to Islamic finance is to put it on a more level playing field with its conventional counterpart.

Table 1: Selected figures from the Indonesian Islamic finance industry (IDR trillion)

 

2011

2012

2013

2014

2015

2016

Assets of Islamic commercial banks and Islamic windows

145.47

195.02

242.28

272.34

296.26

305.29*

Assets of Islamic rural banks

3.52

4.7

5.83

6.57

7.74

8.59*

Sovereign Sukuk issuance (cumulative)

81.53

138.62

186.22

250.17

385.85

559.67**

Corporate Sukuk issuance (cumulative)

7.92

9.79

11.99

12.96

16.08

17.33***

Islamic mutual funds (net asset value)

5.56

8.05

9.43

11.16

11.02

9.93***

Assets of Islamic life insurance

7.25

9.83

N/A

18.05

21.61

26.57*

Assets of Islamic general insurance and reinsurance

1.91

3.23

N/A

4.31

4.91

6*

Sources: Alwyni (2016), Financial Services Authority (OJK), Ministry of Finance, and calculated further.

Notes: *As at August 2016; **As at the 6th October 2016; ***As at July 2016; ^includes all government Islamic securities issuances; US$1 = IDR13,640 (22nd October 2015).

Conclusion
Notwithstanding the aforementioned issues, Indonesia needs to consider Islamic finance as a way to attract more funds into the country in view of the current global political climate, especially in the US and Europe which are not perceived to be very friendly with Muslim countries and further exacerbated by the election of Donald Trump as the US president-elect and the growing influence of ‘far right’ politics in Europe.

However, it is imperative for the country to create a more business-friendly environment with less bureaucracy, fewer unnecessary regulations and better rules of law. All of these factors are critical to attract capital, including Shariah compliant capital.

Farouk Abdullah Alwyni is the chairman of the Center for Islamic Studies in Finance, Economics, and Development and CEO of Alwyni International Capital. He can be contacted at faalwyni@alwynicapital.co.id.

Islamic finance finds a perfect market in France

In 2008, the then French minister of the economy, Christine Lagarde, announced that: “We wish to make Paris a better market for Islamic finance, particularly in this background of crisis, credit excess, volatility and cupidity.’ Since then, numerous transactions in France, particularly in the real estate market, have been financed by Islamic products (generally offered by foreign banks and governed by foreign laws). However for the time being, most of the investors, acting through Islamic finance products in France, are not French residents.

Islamic finance started to emerge in France toward the end of the millennium and, to date, no specific set of rules concerning Islamic finance has been issued. The concepts of Islamic finance, though, can be implemented in France and foreign institutions may enter into the banking, insurance or capital markets on the condition that they are licensed to operate (unless they can rely on the European passport). Indeed, the French legal system is quite Shariah friendly. The concept of contractual freedom facilitates the transfer of the core concepts of Islamic finance. Therefore, no specific amendments to French regulations appear necessary to accommodate Islamic transactions. However, the French tax regime still needs to be adapted to Islamic transactions, for instance, with respect to transfer taxes incurred in Ijarah arrangements.

Review of 2016
At the beginning of 2016, Azurite Courtage created Takaful insurance products for French residents, adding to the already existing Shariah compliant products in the French market. Moreover, Noorassur, a company that used to offer online Shariah compatible products, has now opened several offices around the country; Noorassur offers Takaful insurance products (the protection can cover the Hajj) and Shariah-compatible savings (for weddings, studies, pensions and such).

A recent reform of the French contract law (Ordinance n°2016-131 dated the 10th February 2016 reforming the French Civil Code), which entered into force on the 1st October 2016, has reaffirmed and specified some of the core concepts of French civil law, such as good faith (‘bonne foi’) and, like the Haram principle, the existing rule of ‘public order’. This reform also introduced a new rule, in line with the Maysir principle, according to which a court can force the parties to an agreement, the enforcement of which has become substantially unaffordable for one of the parties, to renegotiate the agreement in order to find a new economic balance; otherwise, the parties can agree to terminate the contract.

Also, the reform reasserts that any civil contract will need to have content that is certain (‘contenu certain’) or at least determinable (by indicating the quantity or the quality of the goods), which is a rule ‘ad valitatem’ (for example, a court would rule that a purchase contract that does not sufficiently determine the elements of the purchase is null and void). All of the aforementioned principles have common values with Islamic finance rules and allow the reaffirming that Islamic transactions have good roots for growing in France. More particularly, Mudarabah can be implemented under French law through a limited partnership, Musharakah through a joint venture-type arrangement or a partnership company, Ijarah through a leasing transaction and a Wadiah can take the form of a deposit agreement governed by the Civil Code. Murabahah, however, is treated under French law as a credit transaction, and thus particular attention must be paid to the compliance of the financier with the regulations for financial institutions, credit transactions and the package securing the repayment. Furthermore, Shariah funds make up a significant part of ethical funds in France and the French government, as well as the Financial Markets Authority, has promoted Sukuk type securities to attract Islamic investors.

Preview of 2017
With nearly six million French Muslim citizens, France is one of the European countries with the biggest growth potential in terms of Islamic retail banking. French residents are more and more active in the Islamic finance market, for instance, some ‘VIP-customers’ working in the sport or media industries. In view of this, various foreign Islamic banks are considering the establishment of a direct subsidiary in France, more particularly in the context of Brexit.

Conclusion
Professionals of Islamic finance in France are suggesting the implementation of several reforms such as greater publicity, establishing legal and fiscal certainty for Islamic finance instruments, a stock exchange index of Islamic funds created by the NYSE Euronext similar to the US’s S&P Shariah indices, or a strategy for the collection of savings, making it easier for Islamic finance institutions to obtain banking licences. The creation of such a welcoming Shariah business environment is a challenge for the French market. The integration of Islamic finance training in the French higher education system is also crucial and is currently provided in particular by the prestigious University Paris-Dauphine. With all this potential, there is no doubt that the French market is really a windfall for Islamic investors.

Jean-Baptiste Santelli is a partner at De Gaulle Fleurance & Associés. He can be contacted at jbsantelli@dgfla.com.

Islamic finance in Bangladesh

Attributed to its intrinsic value, uniqueness of distinctive banking and sustainability aspects, Islamic finance has been growing fast in Bangladesh. Not only banking but other segments of Islamic finance like insurance and non-bank financial institutions (NBFI) are also enjoying strong positioning among customers and shareholders with the growth of the country’s economy.

Review of 2016
Among 57 scheduled banks working in the country, eight are fully-fledged Islamic banks with 966 branches and 15 are conventional banks with their 21 branches and 15 windows with Shariah banking operations. Some six banks are known to be in the process of converting into fully-fledged Islamic operations. Those banks altogether contribute about one-fifth of the banking industry in terms of assets. The banking industry in Bangladesh is largely dominated by private commercial banks with two-thirds of the market share in which Islamic banks hold about one-third. In the case of financial inclusion, Islamic banks are doing better through their small size deposit and investment products. Islamic banks have maintained a growing market share in all major business segments in 2016. 

In addition to the General Index and Blue Chips Index, both the stock markets (Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE)) in Bangladesh have separate Shariah indices. Around one-third of 293 companies listed in the DSE from different sectors are in the Shariah index. Out of the CSE’s 258 companies, 63 companies are included in the Shariah index. These Shariah indices are mostly dominaned by banks, insurance companies, mutual funds and NBFIs.

Takaful has been growing steadily in Bangladesh as a Shariah-based segment of financial products since its inception in 1999. At present, 78 insurance companies are in operation of which 32 are life and 46 are non-life or general. A total of 11 (eight life and three non-life) Takaful companies are now running and more than a dozen conventional life and non-life insurance companies are offering Takaful products through windows or projects. The asset base of the Takaful industry has stood at US$929 million which is around 17% of the insurance industry in Bangladesh.

The NBFI sector in Bangladesh plays an important role in financing various sectors such as manufacturing and service industries, trade, housing, transport, information and communication technology and capital markets. With 33 companies, this sector consists of specialized financing companies, leasing companies, investment companies, merchant banks, etc. Two Islamic NBFIs with assets of US$221 million have a 3% market share.

Of the 34 mutual fund companies under both the DSE and the CSE, three are Islamic financial institutions. Market capitalization of those funds stood at BDT2.26 billion (US$27.97 million) in November 2016, which is 7.7% of the total mutual fund market. Recently, the Bangladesh Securities and Exchange Commission approved the prospectus of the SEML IBBL Shariah Fund, a closed-end mutual fund. The size of the Shariah mutual fund will be BDT1 billion (US$12.37 million) and the offer price of the units will be BDT10 (12.38 US cents) each.

Islamic microfinance institutions working for the poor on the principles of equity and justice have proved their worth in contributing toward poverty alleviation in Bangladesh. Of the 697 microfinance institutions (licensed with the Microcredit Regulatory Authority) operating in the country, some 13 offer Islamic financing. In addition, three Islamic banks, ie Islami Bank Bangladesh (IBBL), Social Islami Bank and Al-Arafah Islami Bank, conduct Islamic microfinance through specialized divisions.

Though the bond market is very small in the financial market of Bangladesh, several subordinated bonds have been issued in recent times. The importance of Islamic bonds or Sukuk is also drawing the attention of different stakeholders. The biggest issuance of Islamic corporate bonds, amounting to BDT3 billion (US$38.12 million), was first issued in 2007 by IBBL to support its Tier 2 capital. This Mudarabah perpetual bond facility has a market capitalization of BDT2.92 billion (US$36.13 million) in the DSE.

Preview of 2017
In terms of asset quality, capital adequacy and profitability, Islamic banks are outperforming their conventional peers. However, they still have scope to explore further alternative banking products like mobile banking, internet banking and e-commerce.

The DSE has already initiated steps to launch various new tradable products starting with exchange-traded funds to be followed in the long term by the expansion of current product offerings to include convertibles, bonds, Shariah compliant products including Sukuk, exchange-traded funds and REITs.

Takaful has ample room to grow in Bangladesh. Industry experts see its rapid growth as a welcome phenomenon. The formulation of appropriate rules and regulations is required for the healthy development of Takaful. Sound regulatory and supervisory mechanisms based on a Takaful act would serve as a vehicle for a thriving Takaful business. Stakeholders need to work together to develop standard practices and a regulatory framework to make the Takaful industry in Bangladesh more efficient and vibrant.

In Bangladesh, Sukuk could be an alternative source of financing for infrastructure projects such as bridges, a deep-sea port and vast road and rail river crossings that link the southwest of the country to the rural northern and eastern regions. The issuance of Sukuk in Bangladesh is expected to receive a positive response from Middle Eastern investors. The government of Bangladesh can raise the required funds by issuing cross-border Sukuk under a syndication process as well.

Conclusion
Islamic finance still has ample room to flourish in Bangladesh, a country of 160 million people who are largely Muslims. For a sustained growth of the Islamic finance industry, scholars and practitioners feel it is necessary to have separate Acts for different segments of Islamic finance like banks, insurance companies, NBFIs and Sukuk, etc. These will facilitate the industry to grow further in terms of volume and product innovation and will protect the interests of stakeholders with adequate legal support. 

Md Siddiqur Rahman is the executive vice-president of Islami Bank Bangladesh. He can be contacted at siddiqur.md@gmail.com.

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