Volume13.Issue06

Sovereign Sukuk: The old and the new

Maintaining its impetus, the sovereign Sukuk market over the past week was upbeat with several new developments. Apart from our regular issuers, the industry is seeing traction from Iran as well as Italy as these countries gear up to enhance their Islamic debt capital market. As usual, NABILAH ANNUAR provides a comprehensive insight of the updates and advancements in the sovereign Sukuk arena this week. 

The Iranian government last week announced plans to issue an additional IRR60 trillion (US$2.01 billion) via Islamic T-bills this year to spur investments in the domestic debt market and reduce reliance on loans from the banking sector. According to Reuters, the issuance of government short-term debt is expected to set a pricing benchmark for corporate bonds and support efforts by the Securities and Exchange Organization (SEO) to expand the types of funding tools available to companies.

Upcoming sovereign Sukuk

Country

Amount

Expected date

Iran

IRR60 trillion

2016

Nigeria

TBA

May 2016

Emirate of Sharjah

TBA

First quarter of 2016

Jordan

JOD150 million

TBA

Indonesia

TBA

2016

Pakistan

TBA

Second quarter of 2016

Egypt

TBA

2015/16 fiscal year

Kazakhstan

TBA

2016

Kenya

TBA

2016

South Africa

TBA

2016

Turkey

TRY1.8 billion

February 2016

Bangladesh

TBA

TBA

Hong Kong

US$500 million to US$1 billion

TBA

Ningxia Hui Autonomous Region

US$1.5 billion

TBA

Senegal

TBA

TBA

Niger

XOF150 billion

TBA

Luxembourg

TBA

TBA

Tunisia

US$500 million

TBA

UAE

TBA

TBA

Shandong Province

CNY30 billion

TBA

Sindh Province

US$200 million

TBA

Kuwait

TBA

TBA

Over in Italy, the Shariyah Review Bureau has been appointed by Italian law firm Nctm Studio Legale to facilitate in the structuring and certification of Islamic mini-bonds. Although it is not mentioned whether this Sukuk would be sovereign or corporate, it is nevertheless a positive step in the right direction for the country to begin exploring Shariah compliant means of funding. 

The government of Malaysia has announced the inaugural issuances of the Malaysian Islamic Treasury Bill (MITB) under the Murabahah contract which took place on the 5th February 2016 with an issue size of RM500 million (US$118.63 million) each. According to an announcement on Bank Negara Malaysia’s website, the primary issuances were conducted via competitive auction (through the principal dealer network) whereas secondary trading of MITB was based on the Bai Dayn concept.

Over in Indonesia, the government has awarded IDR5.25 trillion (US$384.3 million) in sovereign Sukuk securities bids auctioned on the 9th February, which received total incoming bids of IDR14.82 trillion (US$1.08 billion), according to an announcement on the Ministry of Finance’s website. Proceeds from the Sukuk will be used to meet part of the financing target of the State Budget 2016.
Up north in Pakistan, the government this week successfully auctioned its first three-year fixed rental rate government of Pakistan Ijarah Sukuk (FRR-GIS) on the 9th February with an indicative target of PKR100 billion (US$953.58 million). The government received an overall bid of PKR245.37 billion (US$2.34 billion) for the sale of FRR-GIS and accepted PKR116.25 billion (US$1.1 billion) at a cut-off fixed rental rate of 6.1%. Jinnah International Airport Karachi was the underlying asset in the auction for FRR-GIS. The government is also expected to auction the remaining amount of around PKR81 billion (US$772.4 million) in the last quarter of the fiscal year. 

IFN Weekly Poll: Which GCC nation (if any) will be the first to de-peg from the dollar?

As global oil prices continue their downward spiral, the increasing strength of the US dollar has created speculation that some GCC countries may not be able to hold on to their dollar currency pegs over the medium to long term. Over the past week IFN asked the industry for its take on which GCC nation could be the first to de-peg from the greenback. NABILAH ANNUAR reports.

Since mid-2015, the price of oil has shed more than 70% of its value. The US dollar in contrast has strengthened 26% against the Euro and 44% against the Japanese yen over the past five years. The oil crash has severely affected government revenues across the GCC with conjecture of de-pegging by countries such as Saudi Arabia, Oman and Bahrain. Sovereigns such as Oman, Qatar, Saudi Arabia, Bahrain and the UAE are pegged to the US dollar while Kuwait is pegged to a basket of undisclosed currencies.

The poll results this week showed a majority vote of 57% for Saudi Arabia as most likely candidate to abandon its currency peg – on the back of stringent austerity measures in its latest budget and low oil prices placing increasing pressure on its dwindling foreign reserves. “History tells us very clearly that, with the possible exception of strict currency boards, holding on to currency pegs over a longer period for the sake of it makes little sense,” said Simon Quijano-Evans, chief emerging markets strategist at Commerzbank, speaking to the FT last month. 

On the 11th January 2016 Fahad al-Mubarak, the governor of the Saudi Arabian Monetary Agency (SAMA), reaffirmed the Kingdom’s commitment to maintaining the riyal’s tie to the US dollar. However, industry reports have surfaced that suggest a move could be afoot to devaluate the Saudi currency. Last week Societe Generale predicted a minimum 25% chance of near-term devaluation of the riyal, rising to 40% should oil prices stay at current levels throughout 2016. “The probability of the pegs failing is one of ability and willingness to defend the regime at all costs. The market is testing the authorities’ willingness, and rightfully so,” the bank said in a note reported by Reuters. If oil prices stay below 50% per barrel for the next two years, this probability could rise as high as 60%. With any break in the peg likely to trigger painful economic reforms and potential political instability however, such a significant step by the authorities will not be taken lightly. 

In second place, and 29% of IFN readers think that Oman will instead be the first to de-peg. Deemed by currency traders to be the most vulnerable currency in the GCC, the Omani rial has come under strong pressure and some analysts believe could be driven to break the peg as early as the end of this year. Goldman Sachs in a January research note warned that: “The currency pegs in Oman and Bahrain are not robust to severe terms-of-trade shocks, and sustainability issues may become increasingly more pressing over the next 12-24 months if oil prices stay at below $60-$70 per barrel.” However, the central bank executive president Hamood Sangour al-Zadjali on the 2nd February told Reuters that Oman had no intention of altering its currency peg. “Nothing changed. We are committed to the peg with the USD. The interest rate hasn’t changed,” he confirmed.

At the other end of the spectrum, 14% of respondents believe that the UAE could be the first to break free from the buck. This is however highly unlikely as according to analysts, the UAE is in a strong position to defend its peg. Within the GCC, it is believed that Kuwait, Qatar and the UAE are in the most comfortable position given fiscal break-even oil prices of US$50-65/bbl and fiscal buffers that can cover deficits incurred under US$30/bbl (AED110) for 15-20 years, as reported Gulf News quoting Jean-Michel Saliba, MENA Economist at Bank of America Merrill Lynch.

Supporting this positive notion, S&P in a mid-January report predicted GCC countries would maintain their exchange rate pegs over the medium-term, as it sees GCC states as having sufficient funds available to defend their currencies. According to the report, Kuwait shows clear strength in terms of the availability of reserves to cover the monetary base and current account payments over the next four years. The UAE, Saudi Arabia, and Qatar similarly show significant strength due to an assumption that their liquid assets, in addition to their official foreign currency reserves, would be brought to bear to defend the currency pegs. 
GCC sovereigns are said to be considering or already implementing subsidy reform or the imposition of indirect taxes. However it is believed that in the judgment of Gulf rulers, the inflationary and social repercussions of a lower exchange rate are likely to outweigh the benefit to the fiscal budget. Given their sizable expatriate populations, should the exchange rates lose value following a de-pegging, this could make GCC states less attractive to foreigners. GCC pegs are to a large degree consistent with the reliance of their economies, to a varying extent, on US dollar-based oil revenues. Over the longer term, should GCC economies continue to diversify, the case for more exchange rate flexibility is likely to become more convincing. 

Egypt picks up pace – can it bounce back?

The UAE Companies Investing Abroad Council last week identified Egypt as a strategic destination for Emirati and Arab investors. Due to its diversified market, major infrastructure requirements as well as the government’s efforts to remove obstacles to inbound investment, the country is this year seeing growing interest from multiple parties keen to leverage its opportunities: from multilateral organizations, governments and sovereign wealth funds to banks and private sector corporate investors. NABILAH ANNUAR explores prospects across the Egyptian market.

Egypt’s economy grew at 4.2% in the 2014-15 fiscal year, up from 2.2% the previous year, while its budget deficit dropped to 11.5% of gross domestic product and is expected to fall to 10.25% by the end of this year. The government is currently working to introduce reforms to investment regulations and remove obstacles to Emirati investments as it prioritizes the creation of a favorable climate for foreign investments, including from Arab countries. 

The UAE council’s stance was recently affirmed by the Egyptian premier, Prime Minister Sherif Ismail, at the World Government Summit. According to a statement on the government’s website, it is presently seeking to achieve real reforms, and is keen on launching social care programs for limited-income segments. The government’s efforts are also being exerted to upgrade the sectors of energy, transport and railways, with health insurance also marked for reform. These transformation efforts require massive investments and major finance from the public as well as the private sector.

Expressing its commitment to Egypt, the UK government has deployed a trade envoy to Egypt this week to strengthen British-Egyptian business links. The visit will explore three key strategic sectors: energy, infrastructure, and education. The delegation is also expected to explore opportunities in the Suez Canal Economic Zone, a mega national project that is anticipated to be up and running by 2020. The Suez committee is expected to conduct an investment campaign focused on Saudi, UAE, Japan, South Korea, UK and France; while Malaysia, Russia and the African Development Bank are all visiting Egypt this month to discuss investment opportunities. British companies invested US$5.4 billion in Egypt in the fiscal year 2014-15, accounting for over 40% of total foreign direct investment inflows. British investment alone over the past five years totals over US$25 billion.

Also indicating its confidence towards Egypt, the International Finance Corporation (IFC) is providing a financing package of US$144 million to Sonker Bunkering Company. The package is designed to help develop vital new energy infrastructure and boost the performance and competiveness of Egypt’s ports. IFC’s financing, including a loan of up to US$70 million (US$52 million mobilized from partners, and US$22 million in mezzanine financing) will go toward the development of Egypt’s first private Liquid Bulk Terminal at Sokhna Port on the Red Sea. The financing is alongside a US$72 million senior loan and US$22 million mezzanine loan from the European Bank for Reconstruction and Development, and a US$72 million equivalent loan from the Commercial International Bank. Egypt will also sees World Bank funds arriving soon, and is at the same time eyeing more aid from Saudi Arabia.

Catching Masdar’s eye, the Abu Dhabi-owned development company is seeking to invest in several MENA countries including Egypt as the demand for clean energy escalates in the region. This demand for energy is expected to double by 2030, largely for renewable sources. Facilitating capital market relations, NASDAQ Dubai has created a link with Misr for Central Clearing, Depository and Registry (MCDR), enabling individual Egyptian investors to trade on NASDAQ Dubai through Cairo-based MCDR, using Egyptian pounds. The new link is a step towards facilitating dual listings by issuers in both countries. 

On the asset management side, Egypt is also seen as an opportune destination for funds. Russia, the UAE and Egypt recently launched a new investment fund with a focus on the Suez Canal project which should provide investors with appealing opportunities. As of last year Egypt reportedly received investment contracts of around US$36 million, primarily from the UAE and Saudi Arabia, signaling its position as a preferred destination for funds. These encouraging developments from various parties, exploring a diverse range of opportunities in the country, highlight improving investor sentiment towards the Egyptian market. Could Egypt witness a meteoric rise, bouncing back from its crises this year? Only time will tell – but it is a location that canny Islamic investors should keep their eye on. 

Microfinance and PPP to push Sudan’s Islamic financial industry

Sudan’s fully Shariah compliant financial system is proving to be a challenge for the Sudanese government in forging bilateral relationships with foreign powers, compounding on the mountain of hurdles the African Republic faces in invigorating its weakening economy amid restrictive US sanctions, global oil price shocks and political instability. VINEETA TAN writes.

“The prohibition of interest by the Islamic banking system in Sudan has caused many obstacles in signing a number of bilateral agreements with China, Russia, Belarus, Switzerland, Vietnam, Azerbaijan, Korea, Iraq and Nigeria,” according to Dr Mudathir Abdul Ghani Abdul Rahman, the Sudanese minister of investment, as quoted in a recent report released by the Islamic Research and Training Institute (IRTI) and the General Council for Islamic Banks and Financial Institutions (CIBAFI). “All these agreements were discussed with the Higher Islamic Shariah Supervisory Board to be revised and re-drafted in a Shariah compliant manner and this point was tackled in several meetings.”

Getting involved in Islamic finance almost four decades ago, Sudan became the region’s first country to operate its financial system on a pure Shariah compliant basis in 2002, joining Iran as the very few in the world to boast a fully-fledged Islamic financial system. Yet, despite being one of the earliest entrants in this space, the African Republic is struggling to compete with newer players in the global landscape as the country is being held back by the effects of poverty and the concentration disparity of financial services in the country.

IRTI and CIBAFI figures show that banking penetration in Sudan is disproportionate with the majority of financial activities taking place in the capital of Khartoum (41%) while remaining relatively dismal in rural areas such as Darfur and Kurdufan states (6%) – such uneven distribution has serious implications to the level of awareness (and subsequently development) of Islamic banking among the public, which has been identified as a major barrier to the development of the country’s financial system. “Human development remains low, which in turn affects consumer knowledge about financial services and push the country behind in terms of product innovation, customer services skills, competitiveness and advanced techniques in attracting new investors,” elaborated IRTI and CIBAFI in its Islamic finance report on Sudan.

Yes despite the major impediment, there are still several bright spots for North Africa’s most resource-rich country. The banking and Takaful segments as well as Islamic capital markets of the Republic have been recording healthy growth. For the 2009-14 period, banking assets registered a 16.64% compound growth reaching SDG92 billion (US$14.94 billion) while insurance contributions amounted to SDG1.1 billion (US$178.68 million) at the end of 2013. In terms of sovereign short-term Sukuk, Sudan is leading in the world, after heavyweight Malaysia. Very encouraging is also the relatively active microfinance sector of the Republic: in 2014, Shariah microcredit extension commanded 4.6% of total banking financing. This along with the mobilization of public-private partnerships for infrastructure developments, agriculture and livestock investments has been highlighted by IRTI and CIBAFI as ways to push the industry forward.

Company Focus: Capital Index

Shariah compliant forex (FX) trading may seem paradoxical, deterring many Muslims from dealing with such sticky transactions. But up and coming global brokerage firm Capital Index  intends to do away with such complications and provide an avenue for Muslims to trade in compliance with their religious beliefs. VINEETA TAN speaks to CEO Robert Woolfe to get an insight behind the firm’s latest strategy in tapping the MENA market.

“I wanted to start my own company because I was a little bit disillusioned with what was happening with retail FX,” Woolfe said. With almost three decades of experience in FX, Woolfe who was previously leading the FX desks at ETX Capital and IG, shared that the idea came about when he noticed a divergence in the industry beginning in the year 2008 when new participants entered the market and changed the way the industry acquired clients – in that it became a numbers game instead of building relationships with clients. 
“I didn’t like that because my background has always required us to have relationships with our clients and I thought we could build a brokerage that had that relationship with our clients and at the same time, be profitable,” he explained to IFN.

And the first year performance of his new venture suggests that he could be on the right track.

In the span of just 18 months since it was established in 2014, Capital Index has managed to anchor itself in four different markets: the UK, Australia, South Africa and Cyprus, and has opened over 6,000 live accounts in its first year of operations. Authorized by UK’s Financial Conduct Authority and Cyprus Securities and Exchange Commission, the global online brokerage now has its eyes on the MENA region.

“Dubai is a really important market for us,” said Woolfe. The emirate is the gateway for the firm to anchor itself in the MENA region, and launching an Islamic trading account is in line with Woolfe’s strategy to reach a broader base of clients. “Many of our Muslim clients wanted a swap-free account in compliance with their religious beliefs. So it made sense for us to enhance our offerings and build an Islamic account,” he explained.

Although there has not been a hard launch for CapitaI Index’s Islamic account, Woolfe confirmed that the response has been positive – with many accounts opened in the first 10 days since the rollout of the product and with multiple traders from across the region already enquiring about an account. 

“We would have been really disappointed if we had not gotten a good response as we did it on the requests of clients,” said Woolfe. So what’s next for this fast-growing brokerage? To continue to build its MENA presence, particularly in the UAE, and when business is ready to take off – China next.

Shariah scholars: A new standard in pricing disclosure

The Shariah advisory board plays a pivotal role in ensuring operations and businesses are in compliance with Shariah law. However, the opacity surrounding the pricing of the services of these scholars has long been a controversial topic. In late 2012, Oman introduced a comprehensive Islamic Banking Regulations Framework (IBRF) to address the transparency issues surrounding the remuneration of Shariah scholars, thus setting a precedent in Shariah governance and best practices. NURUL ABD HALIM asks whether this pioneering measure by Oman could spur the creation of a standardized market rate for Shariah scholars, and entice other jurisdictions to emulate its openness. 

A Shariah board forms an essential adjunct to an Islamic financial institution. To advise on Shariah matters, Shariah scholars must have a deep-rooted expertise in Islamic commercial jurisprudence (Fiqh Muamalat) and Islamic law (Usul Fiqh). While their contributions to the Islamic financial industry are undoubtedly valuable, the high cost of obtaining these services remain an issue for the fledgling industry, spawning serious public scrutiny in some jurisdictions over their governance. This has prompted questions such as whether Shariah scholars should be subject to mandatory disclosure of remuneration.

Banks

Shariah Board’s Remuneration and fees / memberships

 

Chairman

Members

Both

Meethaq Islamic Banking (Bank Muscat)

-

-

OMR71,000

(US$183,766) / 5

Bank Nizwa

-

-

OMR70,717

(US$183,034) / 4

Alizz Islamic Bank

-

-

OMR48,000

(US$124,236) / 3

Maisarah Islamic Banking (Bank Dhofar)

-

-

OMR32,300

(US$83,600) / 5

Al Hilal Bank (Ahli Bank)

OMR10,265

(US$26,568)

OMR15,476

(US$40,055) / 2

-

Sources: Selected Omani banks’ annual reports

Supply vs Demand?
A compelling argument as to the high cost of scholars is that their remuneration is based on free market forces – in effect, an imbalance in supply and demand. “A shortage of individuals who are both qualified as Shariah scholars, and have the necessary knowledge of how the conventional banking and finance industry operates, is particularly acute” opined Mansoor Malik, lawyer and managing partner of Omani law firm Al Busaidy Mansoor Jamal & Co, speaking to IFN. 

Currently demand for respected scholars far exceeds supply, and while there is a growing talent pool of younger scholars, the industry is still dominated by a select handful of veterans whose services extend across a vast array. Research by Fund@Work in 2011 claimed that around 400 scholars hold 1,500 board memberships between them, while the top 20 scholars maintain between 14 to 85 board memberships each. 

The figures suggest the possibility that competition between financial services to appoint these elite scholars could have the potential to inflate the market rate for their services. While demand and supply inevitably will influence remuneration, however, the lack of any standardized disclosure as to scholars’ fees means that the actual impact of this on the industry remains to a large extent unknown. 
 
A call for greater transparency
To combat this opacity, Oman has taken a bold step in enforcing the publication of advisory fees. Looking to standardize reporting practices across the industry, the Sultanate’s IBRF (Article 2.2.1.6) requires that the appointment and remuneration of Shariah scholars must be disclosed in a financial institution’s annual report. This disclosure is in line with its interest to protect consumers and maintain the industry’s reputation, as well as leveling the playing field for Shariah scholars with other board members. “Disclosure is clearly in the interests of transparency and consistency across the sector,” concurred Mansoor, adding that the move has paved the way for the establishment of a market rate for the services of Shariah scholars. “The disclosure would create public awareness about how much institutions pay for a scholar, making the price comparative and enabling Islamic banks to make more informed choices about selecting scholars for their Shariah boards. It will also introduce greater transparency in remunerating the scholars,” IFN learned from an industry source.

Who’s next?
Three years in the running, Omani banks have so far been successful in reporting the remuneration of their Shariah board in the annual reports. Asked whether Oman’s comprehensive regulatory framework could spur other jurisdictions to follow suit, Mansoor noted that other countries must follow their own development path and legislative process for regulatory change. Interestingly, it looks as if Bahrain could be moving in the same direction as Oman. IFN can reveal that the central bank is currently in the process of introducing a new module of Shariah governance which will address many issues in the governance of Shariah board. It remains to be seen whether stalwarts such as Malaysia, Saudi Arabia and the UAE might follow their lead. 

Securitization in Islamic finance

One of the many effective means of raising funds is undoubtedly derived from the securitization of assets. Over the past few months several notable developments have transpired in the securitization arena. NABILAH ANNUAR provides a summary of this progress.

Regulatory advancements
Moody’s, according to a press release, has updated its methodology for the financial statement adjustments it uses in rating analysis for non-financial corporates globally. The main changes are revised standard adjustments for operating leases and refinement of the criteria for when adjustments are made for securitizations and factoring arrangements.

Asia
Continued development in securitization is largely dominated by Asian entities. Encouraging more deals in this space, the region has seen a diverse range of recent transactions. In Malaysia, Danajamin Nasional last November announced that it is guaranteeing RM125 million (US$28.44 million) under a 10-year RM450 million (US$102.39 million) asset-backed Sukuk Ijarah program issued by Purple Boulevard for the acquisition of Ampang Point Shopping Complex. The asset-backed securitization transaction, which is supported by rental income from Ampang Point Shopping Complex, is the first for Danajamin. The 10-year Sukuk Ijarah program consists of RM95 million (US$21.62 million) Class A, RM15 million (US$3.41 million) Class B, the Danajamin-guaranteed Class D RM125 million and the unrated subordinated Class E RM97 million (US$22.07 million) and was successfully issued and fully subscribed on the 13th November 2015. The remaining balance of the subordinated Class E of RM103 million (US$23.44 million) will be issued at a later date. Two months before, RAM assigned a final rating of ‘AA1/Stable’ to Malaysia Building Society (MBSB)’s RM900 million (US$203.88 million) Tranche 4 structured covered Sukuk Murabahah under the company’s RM3 billion (US$679.62 million) structured covered Sukuk commodity Murabahah program. The rating is notched up from MBSB’s long-term ‘A2’ financial institution rating and reflects the quality of the securitized assets as well as the supporting securitization structure.

Moving to Indonesia, Bank Indonesia is exploring ways to securitize Sukuk against the republic’s Zakat and Waqf assets and to utilize subsequent proceeds to finance Islamic economic activities. An international core principle of Zakat — developed in collaboration with the IDB and Islamic economy experts — will be issued this year, with another one for Waqf currently in the works.

Over in the Philippines, The National Home Mortgage Finance Corporation (NHMFC) is planning to issue a PHP2 billion (US$42.66 million) Sukuk on behalf of a Mindanao-based firm which is expected to materialize in the first quarter of 2016. The state-run financier will be hiring government banks, namely the Land Bank of the Philippines and the Development Bank of the Philippines, as underwriters for the debt issuance. The mortgage-backed securities will securitize Paglas Corp’s socialized housing project in Datu Paglas, Maguindanao, and Paglas’s banana plantations will serve as the asset to back up the Sukuk.

In Pakistan, the government is expected to issue Sukuk worth over PKR300 billion (US$2.84 billion) securitized against Jinnah International Airport in a bid to absorb liquidity surplus of Islamic banks. The Shariah Board of the State Bank of Pakistan has reportedly approved the transaction structure and three banks – Meezan Bank, Dubai Islamic Bank and Standard Chartered Bank – have been chosen as the joint financial advisors for the upcoming issuance.

Americas
Toronto Financial Services Alliance and Luxembourg for Finance have established a partnership via an MoU through which the two entities will design a framework to develop their respective financial services industries: including in the area of Islamic finance, financial technology and renminbi trading. Luxembourg for Finance said in a statement that the MoU particularly covers a mutual exchange of research and information on securitization legislation, financial services, market trends and products among others.

Europe
The government of Ireland early last year in its five-year strategy document: ‘IFS 2020 — a Strategy for Ireland’s International Financial Services Sector 2015-2020’, highlighted Islamic finance as a potentially lucrative area for development. Other segments mentioned included: securitization, green finance, aircraft leasing, and financial technology. 

The UK’s Gatehouse Bank also recently launched a new Shariah compliant securitization product, known as a commercial rental-backed security. Acting as sole structuring agent, arranger and lead manager to a Parisian commercial office property acquisition worth over EUR100 million (US$115.6 million) in this transaction, the Islamic bank marketed the deal in Europe. The securitization comprised of two-tranche fixed rate certificates, which will be backed by the direct legal ownership of the property.

Yemen: The struggle continues

As explored in our previous analysis on Yemen, the country’s economy continues to be heavily pressured by extremely difficult political and security conditions – making any economic recovery highly vulnerable as confirmed by the World Bank. VINEETA TAN casts an eye on the Republic’s Islamic banking and finance sector.

Economic overview
Yemen’s economy hangs in a balance as war continues to devastate the oil-dependent nation’s financial health. Expecting oil production to plunge 60-70% over the next year, the World Bank put GDP growth at a mere 0.3% in 2014 – a stark plunge from 4.8% the year before, as oil production take a hit by recurrent infrastructure sabotage and economic activities being disrupted by widespread power outages and fuel shortages. This is expected to improve if peace is restored, however such recovery is undermined by constant political instability and violence.

Table 1: Economic indicators of Yemen

Indicator

Value

Year

Population

26.18 million

2014

GDP

US$35.95 billion

2013

GDP growth

4.2%

2013

Source: World Bank

Banking 
There are four fully-fledged Islamic banks in Yemen: Saba Islamic Bank, Tadhamon International Islamic Bank, Islamic Bank of Yemen for Finance and Investment and Alkuraimi Islamic Microfinance Bank.

Latest financial disclosures show that Tadhamon, the country’s largest Islamic bank by assets, improved its balance sheet in 2014 despite challenging operating environment. Tadhamon attributed its growth in profit (from a 43.8% slide in 2013) to prudent management: keeping activities of the bank within secure limits, lowering excess cash balances as well as for investment and financing and securing the bank’s assets against dangers of terrorism and armed burglary.

At least two Yemeni conventional financiers offer Shariah compliant financing products: Cooperative & Agricultural Credit Bank (CAC) and Yemen Kuwait Bank for Trade & Investment (YKB).

Table 2: Tadhamon’s 2014 financial performance

Profit

26 billion

Revenue

515 million

Profit from investments

15 billion

Profit from savings accounts

224 million

Source: Tadhamon

Table 3: Consolidated balance sheet of commercial and Islamic banks (YER billion)

Description

January 2014

January 2015

Assets

522.28

500.93

Liabilities

41.01

51.76

Claims

1,287

1,275

Deposits

1,204

1,286

Foreign assets

522.3

500.9

Source: Central Bank of Yemen

According to the Central Bank of Yemen, the aggregate of the consolidated balance sheet of commercial and Islamic banks decreased by YER19.2 billion (US$89.17 million) at the end of January 2015 amounting to YER2.79 trillion (US$12.96 billion) compared with an increase of YER28 billion (US$130.05 million) at the end of December 2014.

The aggregate of the consolidated balance sheet of commercial and Islamic banks was YER2.76 trillion US$12.82 billion at the end of January 2014. Total reserves of banks at the end of January 2015 decreased by YER24.4 billion (US$113.13 million) or 8.1% to reach an amount of YER277.8 billion (US$1.29 billion). 

Total credits and loans granted by commercial and Islamic banks to the private sector amounted to YER531.7 billion (US$2.47 billion) at the end of January 2015 compared with an amount of YER523.2 billion (US$2.43 billion) at the end of December 2014.

In the area of Islamic debt capital, treasury bills and Sukuk amounted to YER1.29 trillion (US$5.99 billion) at the end of January 2015.

Takaful
Using the country’s first and biggest Takaful window operator, United Insurance Company (UIC)’s performance as a benchmark, the Islamic insurance segment in Yemen is on an optimistic trajectory. In 2013, UIC, which commands almost half of Yemen’s insurance market (42.3%), distributed its highest level of Takaful net surplus since it began offering Shariah compliant insurance in 2009, 17.6% as compared to 15.8% the year before. The company also raised its paid-up capital to YER1.5 billion (US$6.98 million) from YER1 billion (US$4.65 million).

Conclusion
The country’s people and economy continues to bear the brunt of a violent war, and its Islamic banking and finance sector is not immune, translating into a weakening of balance sheet as central bank data would show. The rapid decline in global oil prices will continue to be a theme, making it more difficult than it already was for the Republic which is trying to push down its high levels of unemployment and improve infrastructure amid weak governance and political volatility.

The silent revolution: UK Islamic retail banks turn the market around

Islamic retail products in the UK are finally taking off – but the long-awaited results appear to be based not on religious principles but on real-life performance. Islamic banks are delivering top of the range returns on savings products, beating conventional high street banks and building societies at their own game and leading to a surge in customer numbers – both Muslim and conventional. LAUREN MCAUGHTRY looks at the story behind the success. 

Islam is the second-largest religion in the UK, with an estimated 2.9 million Muslims accounting for over 4.5% of the population and expected to grow to 5 million by 2021 and potentially 26 million by 2050. Yet so far the domestic retail banking sector has struggled to cater for this latent demand, with just a handful of foreign-owned Islamic banks focusing primarily on the investment banking and wholesale side of the market and experts citing cost competitiveness and low awareness as key reasons for the slow burn on the retail side. 

Yet recently three Islamic banks have been making waves on the UK retail scene, topping the charts for savings products and turning the outdated idea of Islamic = expensive emphatically upside down.   

Best UK savings rates: One-year fixed-rate accounts

Type of account (min investment)

0% tax

20% tax

40% tax

One year

 

 

 

RCI bank (£1,000+) (8)

2.06

1.65

1.24

Al Rayan Bank (£1,000+) (13)

1.9

1.52

1.14

Charter Saving Bank (£500+)

1.81

1.45

1.09

Kent Reliance (£1,000+)

1.8

1.44

1.08

Post Office (£500+)

1.78

1.42

1.07

Aldermore Bank (£1,000+)

1.75

1.4

1.05

Investec Bank (£25,000+)

1.75

1.4

1.05

Close Brother (£10,000+)

1.75

1.4

1.05

United Trust Bank (£500+) (1)

1.7

1.36

1.02

State Bank of India (£10,000)

1.7

1.36

1.02

Shawbrook Bank

1.65

1.32

0.99

Coventry BS (£1+)(3)

1.6

1.28

0.96

Virgin Money (£1+)

1.6

1.28

0.96

ICICI Bank (£1,000+)

1.6

1.28

0.96

Harrod Bank (£20,000)

1.6

1.28

0.96

Leeds BS (£1+)(3)

1.55

1.24

0.93

Source: www.thisismoney.co.uk

Best UK savings rates: Two-year fixed-rate accounts

Type of account (min investment)

0% tax

20% tax

40% tax

Two year

 

 

 

Al Rayan Bank (£1,000+) (13)

1.78

2.22

1.67

RCI bank (£1,000+) (8)

2.35

1.88

1.41

State Bank of India (£10,000+)

2.2

1.76

1.32

Paragon Bank (£1,000+)

2.11

1.69

1.27

Investec Bank (£25,000+)

2.05

1.64

1.26

Close Brother (£10,000+)

2.05

1.64

1.23

Kent Reliance (£1,000+)

2

1.6

1.2

United Trust Bank (£500+)

2

1.6

1.2

Hamspire Trust (£1,000+)

2

1.6

1.2

Shawbrook Bank (£1,000)

2

1.6

1.2

Charter Saving Bank (£1,000+)

2

1.6

1.2

Aldermore Bank (£1,000+)

1.95

1.56

1.17

Harrod Bank (£20,000)

1.85

1.48

1.11

Leeds BS (£1+)(6)

1.7

1.36

1.02

Source: www.thisismoney.co.uk

Best UK savings rates: Three-year fixed-rate accounts

Type of account (min investment)

0% tax

20% tax

40% tax

Two year

 

 

 

Al Rayan Bank (£1,000+) (13)

2.88

2.3

1.73

RCI bank (£1,000+)

2.7

2.16

1.62

Ikano Bank (£1,000+) (8)

2.55

2.04

1.53

State Bank of India (£10,000+)

2.35

1.88

1.41

Hamspire Trust (£1,000+)

2.35

1.88

1.41

Shawbrook Bank (£5,000)

2.35

1.88

1.41

Vanquis Bank High Yield (£1,000+)

2.34

1.87

1.4

Close Brother (£10,000+)

2.3

1.84

1.38

Harrod Bank (£20,000)

2.25

1.8

1.35

Aldermore Bank (£1,000+)

2.2

1.76

1.32

United Trust Bank (£500+)

2.2

1.76

1.32

Tesco Bank (£2,000+)

2.15

1.72

1.29

Charter Saving Bank (£1,000+)

2.15

1.72

1.29

Chealsea BS (£1,000+)(4)

1.9

1.52

1.14

Barnsley BS (£1,000+)(4)

1.9

1.52

1.14

Norwich & Peterborough BS (£1,000+)(4)

1.9

1.52

1.14

Yorkshire BS (£1,000+)(4)

1.9

1.52

1.14

Source: www.thisismoney.co.uk

Positive profits
Al Rayan Bank, subsidiary of Qatar’s Masraf Al Rayan, has been topping UK tables for the last four years: and currently offers a 1.9% for a one-year fixed-rate bond, 2.78% for two years, and 2.88% for three years, all with a GBP1,000 (US$1,446) minimum deposit. The bank is currently leader of the Daily Mail’s This is Money.co.uk independent fixed-rate accounts table in almost every section, while its variable cash ISA with a rate of 2.02% is the number one choice recommended by www.moneyfacts.co.uk

United Bank (UBL), formed in 2001 from the UK subsidiary merger of Pakistani banks United Bank Limited and National Bank of Pakistan, is offering a two-year Shariah compliant savings bond at a reported 2.15%, a three-year product at 2.5%, five-years at 3.04% and seven-years at 3.12% with a GBP2,000 (US$2,894) minimum investment. 

And Milestone Savings, a product range launched in 2015 from the UK’s Gatehouse Bank, is offering even better rates – with a one-year fixed rate bond at 2.1%, a three-year bond at 2.65% and a five-year at 3.2%, with a GBP10,000 (US$14,469) minimum deposit. All of the banks are covered by the UK’s Financial Services Compensation Scheme (FSCS). 

Customer growth
Mainstream retail finance and lifestyle sites across the UK are starting to recognize the performance of these players, and highlight their benefits to their readers: adding to the gathering momentum. BT.com highlighted all of the above three products on its lifestyle homepage last week, while the money page at AOL.co.uk also features a range of Islamic options, warning readers that: “The message is: if you stick with a high street bank or building society, you will lose out.” This is Money.co.uk, the UK’s financial website of the year and which sees around 3 million site visitors a month, in January noted the outperformance of both Milestone and Al Rayan and explained the concept of Shariah compliant savings to its readers. 

Although the banks all highlight that these rates are based on “expected profit” rather than guaranteed rates due to their Islamic structure, this has not stopped customers from flocking to their doors. In January Al Rayan Bank announced that 86% of new fixed-term deposit (FTD) customers joining the bank in 2015 were non-Muslim, along with around 47% of cash ISA (individual savings account) clients. “Over the last few years, we have seen significant growth in our non-Muslim customer base,” said Tim Sinclair, senior head of marketing and retail sales for Al Rayan Bank. “This increase has been driven by [our] consistent, market-leading expected profit rates, our excellent levels of customer service and the overall reputation that Islamic banking enjoys as an ethical alternative to conventional banking.” 

Conventional interest
In fact, across the board it appears to be conventional clients rather than Muslims who are swelling the ranks. “What we are seeing so far is that the vast majority of people saving with us appear to be conventional savers who are choosing Milestone Savings because the expected profit rates are highly competitive and we are protected by Financial Services Compensation Scheme (FSCS),” explained Hanan Al-Najjar, the head of wealth management for Gatehouse Bank, speaking to IFN. 

Some might argue that with popularity based on returns rather than religious principles, this could make for fairweather friendship rather than a real groundswell of organic and sustainable growth. However, the rising reputation of these products across the mainstream population only serves to raise the profile of Shariah compliant opportunities and surely this is a good thing, no matter what principles are driving it. Non-Muslim customers might be attracted to these products for material rather than spiritual purposes, but the end result is still an increase in awareness that is essential for the long-term growth of the industry. 

 “The volumes we are looking to raise from this product range are quite substantial and Muslims account for only 5% of the total UK population. So although these deposit accounts are operated in accordance with Shariah principles, our marketing strategy is not specifically focused on Muslim savers. This is evident throughout our branding, which could be described as conventional,” said Hanan. “We launched these savings products in March 2015, so less than a year ago, and the uptake has been excellent. We have been pleasantly surprised at the high level of interest from non-Shariah savers as we were expecting a larger proportion of Muslim savers. But I think this just goes to show that Shariah-compliant savings products are not as complicated as people think.” 

Islamic advantage
And while clients may be attracted to the products for their high rates rather than their religious qualifications, it must be remembered why these rates are high. Islamic banks are able to generate such positive profits for their clients precisely because they utilize the funds in Islamic investments that are stable, ethical and provide compelling returns. “The comparatively high expected profit rates we are able to offer are derived directly from our Shariah compliant investment and finance activities,” agreed Hanan. The difference in performance between Islamic offerings and their conventional competitors demonstrates the strong performance of these underlying investments, even during such turbulent markets. For example, while Al Rayan Bank offers 2.78% on its two-year fixed-bond, its closest competitor RCI Bank trails with 2.35% and most offerings hover around the 2% mark. 

So what impact could this growing popularity have on the UK domestic Islamic banking landscape, which has been slow to develop and hitherto focused almost exclusively on real estate investment? One of the biggest effects could be profitability. All five fully-fledged UK Islamic banks have struggled to turn a profit, with the majority relying on financial support from their GCC parents. Yet Al Rayan, the only retail Islamic bank in the UK and which has since inception focused on building the UK retail market, last year achieved a net profit of GBP10 million (US$14.4 million) – around 3% of Masraf Al Rayan’s total net profit for 2015, and a giant step forward from its 2014 post-tax profit of GBP1.2 million (US$1.73 million), its first ever posted profit. 

Where next?
With new liquidity requirements from the UK government forcing banks to increase their reserves and raise deposits to fund their investment activities, we could see more retail activity from Islamic players in order to boost capital, given the limited avenues available to them in terms of liquidity management and capital raising instruments. The fact that UK Islamic banks such as Gatehouse are now taking time away from their investment banking and wholesale activities to cast an eye on the opportunities in the retail market suggests proof enough that the industry could finally be on the verge of flight. With performance looking positive, could the next step be to see conventional players such as HSBC, Standard Chartered, Lloyd’s and TSB (all of which currently offer Islamic current accounts in the UK but no savings products) step back into the market? 

Onwards and upwards
Either way, with a growing Muslim client base and a mainstream market increasingly open to the idea, there is plenty of room for Islamic banks to spread their wings.  “I think the retail market in the UK is well-served for basic Shariah compliant savings products, but there is definitely scope for a wider range of tax efficient Islamic products such as ISAs or children’s savings products,” confirmed Hanan. “We don’t currently offer either of these but there is certainly room for expansion.” 

With their growing retail operations able to fund further capital expansion, investment activity and lending capabilities, it looks as if the UK Islamic banking landscape could finally be seeing the organic growth it needs to kickstart a viable domestic cycle. 

A letter from Amin

Clear thinking requires us to avoid confusing religious questions and empirical questions. Muslims answer religious questions by interpreting the Quran and Sunnah and applying that understanding to the question. Empirical questions about the real world can only be answered by observation and experiment.

“Should Muslims consume alcohol or pork?” is a religious question. While I do not give religious advice to others, to me it is clear that the Quran tells Muslims not to consume either. “Is drinking alcohol or eating pork harmful?” is an empirical question. While excessive alcohol consumption has always been known to damage the body, the latest medical research indicates that there is no safe level of alcohol consumption. Conversely, there is no evidence that eating pork which is properly preserved is harmful. I still abstain from eating pork, because of my religious beliefs, and for the same reason did not drink even before the latest scientific findings.

Many Muslims advocate replacing fiat money with the use of gold, or sometimes gold and silver. However, most of the time such advocates fail to distinguish between religious arguments and empirical arguments for making that change.

Whether God prohibits Muslims from using anything other than gold or silver as money is a religious question. Muslims need to decide that question for themselves, since we are all individually answerable to God. In a democracy, if a majority of its citizens consider that fiat money is religiously prohibited, it is not unreasonable for that country to change its national currency to gold or silver. (As an advocate of economic freedom, I consider that such a country should not prohibit its citizens from using the fiat money of foreign countries for private sector transactions if they so wish.)

Whether an economy runs better (measured by criteria such as economic growth, rates of employment, levels of inflation, etc) with the use of gold as money or with fiat money is an empirical question. It can only be answered by looking at the real world, and religion can offer us no guidance.

Fiat money has undoubtedly led to some spectacular national monetary catastrophes, such as the rampant inflation of Weimar Germany or modern Zimbabwe. Despite that, all advanced economies use fiat money; not one requires its paper money to be backed, in full, by gold. This was not the case in the past, for example the nineteenth century.

There is a simple reason why all advanced economies abandoned the use of gold. Gold unduly constrains monetary policy, and its limited supply is inherently deflationary. While it would take a textbook to prove it, the empirical question has a clear answer. Countries’ economies run worse, not better, if gold is their money.

Pages

Subscribe to RSS - Volume13.Issue06