Volume13.Issue12

The ‘digitalization’ of economic behavior

Back in the 1980s and 1990s, the internet was not yet a phenomenon like now. Desktops were expensive, few people had laptops and the heroes and legends of Silicon Valley were just coming onto the scene. Computers were associated with work and the office, and certainly not for entertainment – tablets were far from the imagination. However, in today’s world, HUSSAIN KURESHI opines that even economic behavior has been ‘digitalized’.

The internet was a world that no one could have imagined; a digital social life sounded ridiculous and social media or socializing with someone on a computer was seen as an option only for nerds, but not anymore.

In 2000, the dotcom bubble had come and gone. Considerable investment had been made by the public sector to provide internet connectivity and many entrepreneurs came onto the scene. The internet became a place to buy and sell just about anything. From online fashion stores to online retailers selling pet supplies, entrepreneurs came up with ideas for all kinds of activities that could be done online. The biggest eye-catcher was online advertising. Traffic was no longer on the roads; congestion was a virtual experience. 

Internet companies boasted of millions of users and if you put an ‘e’ into your business model, venture capitalists would be interested in investing millions in the hope of making billions. No one was sure which economic behavior would translate into digital behavior. But to create a digital ecosystem, infrastructure, regulations and investor appetite, hype had to be created. Some used the hype to add value, while many misused the hype to swindle investors. But they were not alone on the take.

The dotcom bubble exposed the con of the capital markets and many of its players. Misleading ‘forward-looking statements’, misleading entrepreneurs, misleading investors and misleading investment banks were involved. Valuations made no sense. Companies like Inktomi that developed software for internet service providers (ISPs), once valued at US$25 billion, sold a few years later for just US$235 million. 

In one of my previous articles, I spoke a little about how IPOs can be used to swindle investors and create hype about a company, its products and its investors, and the minute the company goes public, the original investors will sell their stakes at a profit. Employees are not allowed to sell their shares for a minimum period of 12 months, but the original investors have no such restrictions. The dotcom bubble played into an environment of the ever-necessary ingredient of information asymmetry. 

This was new and not too many people knew or understood the implications of the internet and internet companies. The technology was complex and all of a sudden, ISPs, search engines, browsers, etc, became buzzwords, but whether the investment into a company would pay off was unclear.

Many entrepreneurs along with their backers offered fictitious models, made companies that did not even have any products to be offered, and those who did not do their homework got taken for a ride. The phrase, “There’s a sucker born every minute” actually changed to “There’s a sucker born every millisecond”.

Today, many tech companies make more money than oil companies, tablets which look like they were from the movie, ‘Minority Report’, have become household items, and people spend more time with digital friends on smartphones than with actual human friends. Yet it seems the lessons of overvaluations have gone unheeded. Valuations of certain internet companies, especially those that do not have a clear revenue-earning model and their subscription is free, do not make sense. It amazes me, how easy it is to be taken for a ride. 

The real estate bubble, aggravated by products like CDOs, MBS, ABS and CDS, again thrived on information asymmetry. People just did not want to admit that they did not know what these products were, and invested in them based upon opinions provided by rating agencies. Yet securitization is a simple enough phenomenon in principle. 

With all these faux pas in the capital markets, one wonders what the smartest people in the world are doing with other people’s money: investing or swindling?

Hussain Kureshi is CEO of Millennia Global Research House. He can be contacted at husseinkureshi@gmail.com.

Structuring innovations of a Saudi Arabian industrial gases deal: Jazan ASU project financing

In July 2015, Air Products of the US and ACWA Holding of Saudi Arabia achieved financial close of the largest project financing of an air separation unit (ASU) project anywhere in the world. The US$2 billion Jazan ASU project was one of the most important project financings of 2015 and groundbreaking in a number of areas, not least because it was the first-ever ASU to be financed exclusively on an Islamic finance basis. LEROY LEVY writes.

Jazan Economic City 
The Jazan Economic City (JEC) is the home of the ASU project. The economic city is located on a 100 sq km site, 60 km northwest of Jazan city on the Red Sea coast. With the drive toward mass employment and diversification of the economy, the government is now broadening the geographical spread of its industrial base. This has taken root in the form of Ras Al-Khair in the east (also known as the Mineral Industrial City), Waad Al-Shamal in the north close to the border with Jordan, various smaller industrial centers operated by Modon, the King Abdullah Economic City and now JEC. Of all of these, JEC is arguably the most interesting. The anchor investor is Saudi Aramco and with its multi-billion dollar investments, JEC is contributing toward the transformation of the Saudi economy. 

The ASU project is a captive industrial gases plant providing feedstock to Saudi Aramco’s 400,000 barrels a day oil refinery and a 4,000 MW integrated gasification combined cycle power plant (IGCC). This is a highly complex project, located in one of the most remote parts of the Arabian peninsula, close to the Yemen border. 

Diagram 1 sets out a high level configuration of the complex.

Understanding the technology 
In the world of project finance, ASU projects are unusual. As far as the Middle East is concerned, there had never previously been a major project financing of an ASU. Previous project financings had been limited to the power, water, petrochemicals and metals sectors. In that regard, it was critical for the lenders to understand the project in order to allocate risk appropriately. 

At the heart of the due diligence process was an understanding of the technical features of the IGCC and refinery and how they related to the ASU. The intention was to build an IGCC that was fully integrated with the refinery so as to optimize power, steam and hydrogen generation. The hydrogen, steam and electricity to be produced by the IGCC is intended to be used to support the operation of the refinery. The main feedstock to the IGCC was vacuum residue produced in the refinery plus imported high sulfur fuel oil. The objective was to gasify the two feeds to produce syngas. Once produced, the syngas is to be cooled, cleaned and forwarded to the gas turbines inside the power block to be combusted to generate power and steam. 

The principal objective of the ASU was to produce gaseous oxygen at distinct pressure levels for both the gasification unit and the IGCC sulfur recovery unit. In addition, the ASU was intended to generate gaseous nitrogen at distinct pressure levels for the IGCC, refinery and marine terminal. Liquid oxygen and liquid nitrogen were also to be produced and stored to serve as a primary back-up for the ASU, and to provide additional gaseous oxygen and nitrogen for use during times of peak demand. 

Table 1: Risks and penalties of the ASU project

Risk

Penalty

Pressure drops

If Saudi Aramco draws products from the ASU plant within the contracted capacity and ASUCo is not able to supply such products, there will be a drop in pressure (a ‘pressure drop’). This will contractually trigger a pressure drop penalty on ASUCo.

Backup inventories

To ensure ASUCo’s ability to make available the contracted capacity of each type of product, ASUCo must provide certain levels of dedicated backup inventory. A failure to do so will trigger a penalty.

Minimum replenishment rate

If the backup inventories are not replenished in accordance with a given rate, a penalty will be payable.

Consistent availability shortfalls

An availability shortfall can be triggered in one of many ways, for example, a pressure drop, product that does not conform to the relevant specification and shortfall quantities. Where these failures repeatedly occur, a termination right is triggered. The objective is not to terminate the NOSA, but create a disincentive for poor performance.

Source: Author’s own

The ASU uses cryogenic technology. This is a process that takes large quantities of air from the atmosphere which are compressed, cooled and liquefied. There is then a process of distillation where the air is separated into its major component parts. Impurities are removed and oxygen and nitrogen are then made available to be used as feedstock for the refinery and power plant. Oxygen is used to feed the IGCC and nitrogen is used to feed both the IGCC and refinery. In a typical large scale ASU, there are multiple trains, not dissimilar in concept to process plants found in other industrial sectors. The process is illustrated in Diagram 2. 

The commercial structure and bankability 
The key objective for Saudi Aramco was to outsource the construction and operation of the ASU to the private sector. This was achieved by means of adopting a build, own, operate structure, whereby a group of private sector developers form an SPV (ASUCo) that raises finance for the construction of the project and takes responsibility for construction activities, in accordance with an agreed timeline and specification, and the operation and maintenance of the project. The real challenge was to structure the project in such a way that the objectives of Saudi Aramco would be met, the investment would be attractive to private sector developers and the deal would be bankable for domestic, regional and international financiers lending into the project. 

This was achieved through an off-take agreement called the Nitrogen and Oxygen Supply Agreement (NOSA). Knowing that the success of the project was entirely dependent on the willingness of the banks to lend, Saudi Aramco took the decision to structure the NOSA in a way that bore significant similarities to a power purchase agreement (PPA), even though the sectors and technologies could not have been more different. This decision ultimately paid off as the familiarity with the PPA structure and the adoption of a risk allocation broadly typical of a PPA provided the lenders with the comfort that they needed to ensure that the major risks such as payment delays, termination and force majeure would be dealt with in a conventional and familiar way in the context of international project finance principles. 

Key ASU issues 
Although there were many similarities with an independent power project, there were some substantial differences. For example, the project company is required to provide net dependable capacity (NDC). This is conceptually similar to a power plant, although NDC in an industrial gases project is measured in tons per day. The ASU plant is therefore required to be designed to be capable of providing contracted capacity and deliver products at contracted capacity rates with an availability of not less than a certain percentage threshold. The products that the plant must be capable of providing must conform to a certain specification and pressure. An inability to deliver to specification or pressure would amount to an availability failure, even if the relevant quantity of products is capable of being delivered. 

Although the requirement to deliver according to specification is not a novel concept in the project finance world, the idea of a pressure requirement is not always seen. If Saudi Aramco draws more products than the plant is able to supply, the plant will continue to supply the products, but at a declining pressure. This declining pressure will eventually lead to the IGCC tripping with serious consequences to the IGCC and refinery. 

Because the ASU plant provides feedstock to the refinery and the IGCC, the success of the refinery and the IGCC is completely dependent on the performance of the ASU plant. Availability was therefore a major issue for the project and the key objective was to ensure that there were sufficient contractual mechanisms to guarantee that availability remains high. This was achieved in a number of different ways including creating disincentives for low availability (see Table 1).

Conclusion
Being a first of its kind, there was significant complexity involved in negotiating the risk allocation. However, now that the deal has closed, the expectation is that it will serve as a precedent for future project financings of industrial gases projects in Saudi Arabia and the wider Middle East. 

The question is whether the envelope will be pushed out further in the near future and the transaction used as a precedent not just for greenfield projects, but also brownfield projects. There are many industrial gases projects that have been procured on balance sheets through an EPC contract and which are currently operating. Conceptually, there are no fundamental reasons why these projects cannot be acquired by the private sector under a concession where the private sector finances any improvement or expansion works and provides industrial gases at a lower price. It is yet to be seen whether there is appetite in the market for this. However, with the current drive throughout the Middle East for economic reform and energy efficiency, such deals may begin to come to market in the not-too-distant future. 

Leroy Levy is a partner at King & Spalding. He can be contacted at llevy@kslaw.com.

Recent Islamic finance developments in Maldives

Maldives Islamic Bank marks five-year presence in Maldives
Maldives Islamic Bank (MIB) celebrated its fifth anniversary on the evening of the 18th March 2016 at Hotel Jen Maldives. The guest of honor at the event was Khalid Aboodi, CEO of the Islamic Corporation for the Development of the Private Sector, who thanked the government of Maldives for its efforts to establish and facilitate the growth of an Islamic bank in Maldives. 

At the ceremony, the chairman of the bank, Najmul Hassan, announced that in the upcoming months, two new branches of the bank will be opened in the country, namely in Hulhumale and Haa dhaal Kulhuduffushi and that in early 2017 an international debit card will be introduced by the bank. He added that the existing number of customers of the bank is 45,000 and this number will increase to 80,000 over the next two to three years. Currently, the bank has branches in Male’ City, Gaaf Daal Thinadhoo and Addu City. 

During the ceremony, stakeholders who assisted in the opening and the growth of the bank, the first-ever Islamic bank in the country, were honored including Harith Harun, the managing director and CEO of MIB; and former minister of Islamic affairs, Dr Mohamed Shaheem Ali Saeed. 

Litus Automobiles to launch Islamic hire purchase product
Litus Automobiles in Maldives has started work on an Islamic hire purchase product for motor vehicles in Maldives. The managing director of the company, Mohamed Zahid, confirmed that within the next two months, the product will be launched and an in-house Shariah advisory committee of the company has been formed to start the process. Training of company staff in all branches in different parts of Maldives has been initiated in order for the company to be ready to offer the product to the public. The company’s Shariah advisory committee comprises Dr Ibrahim Zakariyya, Uza Mariyam Shabana and myself. Litus will be the second private company in the country to offer an Islamic hire purchase program to the public to finance the purchase of automobiles.

Dr Aishath Muneeza is the deputy minister of the Ministry of Finance and Treasury of the Republic of Maldives. She can be contacted at muneeza.aishath@gmail.com.

The blunt end

The founding father of non-interest banking in Nigeria was waiting for that special moment, in 2012, to mark a turning point in the country’s financial sector. Nigerians from all walks of life were to bank with the first institution aimed at extending non-interest commercial facilities in the country. Those depositors wanted to deliver a message: “Islamic banking is just a product that can be patronized by anybody irrespective of religion.”

This ‘ethical’ seed that was planted in the banking sector has finally flourished. Four years later, Jaiz Bank has entered the profit-making territory and prompted conventional banks to open non-interest windows. The shareholders of the bank have also set up Jaiz Foundation for charity and human development.

When I was invited to speak at an Islamic finance event in Abuja, the headquarters of Jaiz Bank, I was wondering if I would get the chance to meet that visionary leader, and industry veteran, who played an instrumental role in introducing ethical finance to a multi-religious society. The former governor of the Central Bank of Nigeria, Muhammad Sanusi II, was the keynote speaker at the event. It was standing room only that morning as I saw how hundreds of banking executives and researchers came to hear what the Emir of Kano has to say. 

And for those who are not familiar with the history of that region, the emirate of Kano was one of the great Islamic empires that dotted the Sahara from medieval times, profiting from caravan routes connecting Africa’s interior with its Mediterranean coast.

Emir Sanusi was an extraordinary personality, to say the least. He was named in 2011 as one of Time Magazine’s ‘100 Most Influential People’. Having took the throne as a Muslim monarch, he left us with a vision which will promote financial inclusion by introducing alternative banking and debt capital market products. His influence in introducing the non-interest banking paradigm in Nigeria will forever live and influence the lives of millions living there.

  @MKhnifer

Mohammed Khnifer is an Islamic debt capital markets banker at a supranational banking institution as well as an AAOIFI-certified Shariah advisor and auditor.

PowerTalk: Nor Rejina Rahim

At the tender age of 34 years, Nor Rejina Rahim was chosen by Japanese financial giant Nomura Group to set up its Malaysian outfit, becoming the first non-Japanese, and the first woman, tasked with establishing the group’s presence outside its home market. Rejina’s journey navigating the cultural differences and male-dominated corporate landscape of the financial industry has not been easy but it did not stop the mother of two from building a profitable business and solid Islamic finance conduit for Nomura, as VINEETA TAN finds out.

“I actually wanted to be a journalist!” shared Rejina excitedly as she reminisced on her career path. But the Malaysian-born Rejina chose to read law in the UK instead as preferred by her parents. Upon graduation, Rejina returned to her homeland to join the financial industry – dabbling first in the stockbroking segment.

“And then the Asian financial crisis happened, and I began to see a lot of issues in the stockbroking side. That is why I decided to move away from stockbroking and enter the unit trust and fund management space instead,” explained Rejina. 

That was almost 18 years ago; since then, Rejina has immersed herself in legal and compliance, product development, risk management, strategy and marketing which greatly prepared her for her role as the managing director of Nomura Asset Management (NAM) Malaysia – a position she assumed in 2006. Describing herself as “literally employee number one” (who even had to bring her own mug to the office) leading a three-person team (including herself), Rejina found herself in a challenging environment as a result of her overlapping social identities: young, female, foreigner. 

“Trying to get people to take me seriously at my age then was tough. And within the Nomura Group, I was the first foreigner, first woman and first non-Japanese speaking person that they have hired to run their foreign office,” said Rejina. But Rejina persevered and proved her worth as the Malaysian Nomura outfit turned a profit almost immediately after its establishment – today the firm manages RM14 billion (US$3.45 billion) in assets, out of which RM3 billion (US$739.19 million) is from its Islamic business.

Recognizing the significant appetite for Shariah compliant asset management services when she first started the Malaysian business in December 2006, Rejina saw an opportunity and subsequently led the creation of its Islamic arm in 2009. “We are not here for the short term, we are here for good and that is reflected in our long-term Islamic investment strategy,” Rejina emphasized. 

Keeping a close relationship with its clients, NAM Malaysia intends to introduce bespoke Shariah products to truly meet the unique needs of its clients. In 2015, the firm partnered with RHB’s Islamic asset management arm to roll out the country’s first Shariah compliant global developed markets fund; and Rejina confirms that more developments are afoot.

“2016 is indeed a very exciting year since we will be celebrating our 10th year anniversary in December. We have a few things planned in terms of product rollout and new businesses – so watch this space!” enthused Rejina.

“It has been a great 10 years for me and I’m looking forward to doing a lot more,” reflected Rejina. Acknowledging that it hasn’t always been an easy journey, Rejina said persistence and respect for others (at all levels of society) have been instrumental in helping her achieve her success today. Equally, if not more important, is her incredible support system: her family and domestic help. 

“I tell my daughter that as women, we should not feel guilty or compelled that we need to fit into the traditional role of being a wife or mother. Go and explore the world because at the end of the day, you would not want to regret the things you wished you had done but never got around doing them.”

Islamic finance in the UAE gains momentum

The Islamic finance industry in the UAE started the year on a high note with a number of announcements proving the continued growth of this industry and the extensive attention it is being given by various stakeholders in the market. RIMA MRAD explores.

Dubai is keen to achieve its vision of becoming the capital of the world’s Islamic economy and this has been reflected on different fronts. Various government bodies and private corporations have and are continuing to take part in the promotion of this sector.

From a legal and regulatory perspective, the market is looking forward to the introduction of a more comprehensive up to date legal and regulatory framework specifically addressed to govern this industry. This should be expected to come shortly given the research and number of studies that are being conducted with respect to the growth of the Islamic sector and the increasing number of Shariah compliant entities being established in the UAE.

As planned, the Dubai Islamic Economy Development Center that was established in 2013 by Dubai Law 13 of 2013 under the supervision of Sheikh Hamdan Mohammed Rashid Al Maktoum, the crown prince of Dubai, to develop and promote Dubai as the global capital of the Islamic economy, has continued its work with respect to the development of a comprehensive framework for the Islamic sector.

In this respect, during the Gulfood exhibition earlier in February, the UAE introduced the world’s first Halal e-learning portal launched by Dr Rashid Ahmed Fahad, the minister of state and the chairman of the Emirates Authority for Standardization and Metrology (Muwasafat), as the world’s first integrated portal for the Halal economy. 

The portal is expected to be equipped with the most advanced interactive, high-quality technology that contains audiovisuals, print educational materials about Halal services and products, certification and registration of Halal trademarks, Halal statistics, online workshops and informative lectures.

On another level and following the first meeting of the UAE-Luxembourg Council for Islamic Finance Cooperation hosted by the UAE Ministry of Finance in March 2015, a delegation from the Dubai International Financial Center participated this month in the second meeting of the UAE-Luxembourg Council for Cooperation and Development of Islamic Banking and Finance. The visit mainly involved various engagements with industry experts to share insights on the sophistication and future of Islamic finance and the impact of financial technology. 

Also in this context and on the sidelines of the second meeting of the UAE-Luxembourg Council for Islamic Finance Cooperation, the Abu Dhabi Global Market and Luxembourg for Finance signed an MoU on bilateral cooperation with the purpose of strengthening bilateral dialogue between the two organizations and establishing a partnership framework for the exchange of views and expertise in the fields of banking, financial services and securities regulation of each jurisdiction.

In addition, the following events also took place recently:

  • Noor Bank announced its plans to support the UAE’s SME businesses via a financing agreement with the Mohamed Bin Rashid Fund (MBRF). MBRF for SME is a government initiative established by a law issued by Sheikh Mohammed Rashid Al Maktoum, the vice-president and prime minister of the UAE and ruler of Dubai, aimed at maximizing financing solutions for innovative businesses and developing Emirati entrepreneurs. 

    It is expected this will also cover financing solutions for UAE nationals who are already part of existing ventures that have been operating for more than one year. Noor Bank is also participating with the Dubai government to explore the possibility of establishing a Shariah compliant Emirates Exim Bank.

  • Emirates Islamic recently invited students from the Miami University of Ohio and the University of Minnesota’s Carlson School of Management, both US-based, for a cross-cultural learning program about the world of Islamic finance. The bank provided students an introduction into the basic principles of Islamic finance, and offered insights into the increasing importance of Islamic finance in the global financial system.

Further to the developments made so far in 2016, the UAE government has been actively working since the beginning of the year on adopting a firm policy to enhance economic diversification to be able to absorb the impact of falling oil prices. This is expected to boost the influence of other industries on the overall economy and to give more attention toward emerging sectors such as insurance and reinsurance (including Takaful and re-Takaful).

The UAE government also announced that value-added tax (VAT) will be introduced across the UAE by January 2018 at a rate of 5%. It has also been announced that the GCC has agreed to unify their tax policies before the implementation of the VAT. A GCC-wide framework for VAT is expected to be concluded by June 2016 and GCC countries are required to fully implement the VAT by the 1st January 2019. 

Rima Mrad is a partner at BSA Ahmad Bin Hezeem & Associates. She can be contacted at rima.mrad@bsabh.ae.

Availing new opportunities for the Takaful/re-Takaful business

Re-Takaful is an Islamic way of reinsurance where an insurance company can protect itself with other insurance companies against the risk of losses. Though this simplified definition may work within a regulatory framework, there are conceptual differences between reinsurance and re-Takaful from the Shariah point of view. In short, while reinsurance transfers the risk from the insurer to the reinsurer (depending on the structure), re-Takaful adheres to the risk-sharing principle, similar to the Takaful practice. BILAL ABDULAZIZ LAVING examines the Takaful and re-Takaful industry.

The re-Takaful mechanism is one of the areas of transactions (Muamalah) where legality is reinforced through the method of Fiqh that addresses the transactions as described by Al-Suyuti (1998) and Nyazee (2004, p. 34). The original rule for all things is permissibility, unless specifically prohibited by Shariah. Similarly, the re-Takaful sector is one of the areas of transactions that is permissible.

The importance of re-Takaful in the Takaful business centers on the following points:

  • Protecting the solvency of the Takaful operator and its participants
  • Providing underwriting flexibility and the capacity to accept risk
  • Stabilizing claims costs and therefore giving greater stability to Takaful contribution pricing, and
  • Allowing Takaful operators to effectively utilize the assets of the re-Takaful provider to give coverage to its clients.

There are two main types of re-Takaful as follows:

  • Treaty re-Takaful – Re-Takaful is placed under a standing agreement and all risks within the agreement are automatically accepted by the re-Takaful companies, and
  • Facultative re-Takaful – This is a case-by-case basis re-Takaful where re-Takaful is transacted on an individual risk basis. The Takaful company has the option to offer an individual risk to the re-Takaful company and the re-Takaful company retains the right to accept or reject the risk.

Takaful dynamics
Takaful plays a key role in the Islamic finance industry with incessant constructive growth momentum in key markets such as the GCC, ASEAN and Africa now coming in. According to the MIFC (Malaysia International Islamic Financial Center), the Takaful industry was estimated to reach around US$26 billion by the end of 2015 and estimated to exceed US$42 billion by 2020. However, compared with the other Islamic finance sectors, Takaful comprises a market share of only 1.1%.

According to Global Takaful Insights as shown in Chart 1, in 2014, Saudi Arabia leads the Takaful market, commanding over 77% of the total contributions in the GCC. The UAE’s gross Takaful contribution accounts for 15% of the total gross Takaful contributions in the region whereas Qatar contributed to 4% of the market share. The gross contribution of Qatar is projected to double between 2014 and 2017. The huge prospects and strong growth in the economy of Qatar are mainly due to it organizing the 2022 World Cup. The remaining 4% of the total GCC gross Takaful amount is contributed by both Kuwait and Bahrain equally.

The breakdown of Takaful companies in the GCC is as follows: 

  • Bahrain – six 
  • Kuwait – 13 
  • Oman – two 
  • Qatar – six 
  • Saudi Arabia – 37, and
  • UAE – nine.

Malaysia and Indonesia are the main Islamic finance countries in the ASEAN region contributing to more than 90% of the ASEAN Takaful market share according to Global Takaful Insights as shown in Chart 2. Malaysia, which dominates 71% of the Takaful market, now requires all Islamic windows to be converted to fully-fledged entities. This will streamline the Takaful industry by prompting mergers in the Takaful market so as to meet the new capital requirements.

The breakdown of Takaful companies in the ASEAN region is as follows:

  • Bangladesh – six 
  • Sri Lanka and Maldives – one each
  • Thailand – four 
  • Brunei – three 
  • Indonesia – five (fully-fledged) 
  • Malaysia – 13, and
  • Pakistan – five.

Africa is another promising region for Islamic finance where it contributes about 3% of the global Takaful contributions with Sudan having about 15 Takaful operators, leading the market in Africa. Kenya’s Insurance Regulatory Authority has projected an insurance penetration of 3.5% by 2018 from 3.1% through the issuance of the policy and framework for the development of the Takaful industry in Kenya. 

Nigeria has also played its role in the industry by setting up a Takaful framework and registration procedures alongside the guidelines for Takaful operation in 2013 while Tunisia has integrated a section in the insurance code for a legislative framework governing Takaful operation in 2014.

The breakdown of Takaful companies in the African region is as follows:

  • Algeria – one
  • Egypt – six
  • Gambia – one
  • Ghana – one
  • Kenya – one
  • Libya – two
  • Mauritania – two
  • Mauritius – one
  • Nigeria – two
  • Senegal – one
  • Somalia – One Takaful company
  • Sudan – 15 
  • Tunisia – three, and
  • South Africa – two.

America and Europe also offer huge untapped potential for the Takaful market. Luxembourg already has an established Takaful company offering motor and home Takaful products since 2008. The conventional industry is playing a big role in enhancing and serving Shariah compliant products, for example, Swiss Life has launched its first Family Takaful products in Europe mainly to facilitate French customers looking for Islamic investment solutions.

The breakdown of Takaful companies in Europe and America is as follows:

  • Luxembourg – one
  • France – one
  • Germany – one
  • Canada – one
  • US – one, and
  • Trinidad & Tobago – one.

Generally, the Takaful industry has witnessed a favorable evolution process and today globally, there are 235 operators providing Islamic insurance products. Moreover, more than 50 Takaful operators will be established between 2016 and 2017. 

The sustained double-digit growth in the Takaful market, along with the strong take-up of Islamic financing in both the retail and commercial space, presents opportunities for re-Takaful.

Global re-Takaful opportunities
According to the World Population Bureau, the population worldwide for 2014 was 7.2 billion, and the Muslim population was 2.05 billion which is 28.26% of the world’s total population. Africa and Asia have the largest Muslim populations, increasing at a rate of 1.84% per annum. 

In the same year, the total population in Africa was 1.1 billion with Muslims numbering 581.58 million, 53.04% of Africa’s total population. It is clear that there is a scarcity of Takaful operators in Africa and this will lead to the establishment of more re-Takaful operators. 

The world’s two billion Muslims signify a vast potential consumer base, and form a youthful and progressively prosperous society. 

Globally, there are a total of 23 companies offering re-Takaful services based in only 10 countries and thus, opportunities exist for re-Takaful operators to assist the growth and expansion of the Takaful market.

Takaful firms are allowed by Shariah to reinsure a part of their risk through conventional business, a practice allowed under the concept of Darurah, or necessity. Based on the doctrine of necessity or needs (Hajah), the jurists allow reinsurance, but the allocation must be made within the limits (the exercise of Darurah must be made within its limits). However, this concept is gradually changing. 

Reinsurer Swiss Re is in talks with Malaysian market players and the Malaysian Takaful Association to set up a re-Takaful pool market. Lloyd’s of London, which is also building its capacity in the sector, has opened an office in Dubai and is in talks with regulators to access the Malaysian market.

Dubai-based EmiratesRE, a re-Takaful firm with a paid-up capital of US$120 million, aims to conduct a capital increase exercise in 2017 to add new re-Takaful lines. PineBridge Investments, a New York-based asset manager, is exploring the launch of a re-Takaful firm in Dubai. 

Salama plans to launch a Takaful firm in Egypt this year while Oman saw two such firms open in 2014 with a third one on the way. Turkey’s Doga Group is also planning to enter the Turkish market. Pre-emptive backing on the part of regulators and governments will go a long way in supporting the Takaful and re-Takaful industry. 

The Takaful sector could also take the lead in providing solutions in light of universal trends such as longevity risk, escalating health costs and increased wealth, which are just as pertinent to its core Muslim market segment, and take advantage of opportunities in niche areas such as microTakaful.

Bilal Abdulaziz Laving is a Shariah coordinator of re-Takaful at Kenya Reinsurance. He can be contacted at bilal@kenyare.co.ke.

New player joins Islamic wealth management fraternity in the UAE to capture growing Shariah opportunities

The growing appetite for Shariah compliant wealth and financial planning services in the GCC region has prompted conventional global financial advisory group Holborn Assets to launch a dedicated Islamic desk, joining the increasing number of players catering to the sophisticated Muslim investors. VINEETA TAN reports.

“Increasing demand from its advisors and a desire to better serve and meet the needs of clients in this region prompted Holborn to undertake extensive research on Takaful providers in the UAE market,” explained the firm in a statement.

Linking up with Salama Islamic Arab Insurance Company, the largest Takaful and re-Takaful operator in the world which boasts AED3.43 billion (US$in assets as at the end of September 2015, Holborn Assets intends to use this partnership as a launchpad to a wider base of Shariah-conscious Muslims and ethical investors in the UAE, with plans to increase its Shariah scope in the near future.

“Holborn will be expanding its team of Shariah-focused advisors to take advantage of this exciting opportunity, growing Islamic financial awareness and favorable environment,” confirmed Patrick Mahdi O’Neill, the firm’s head of Islamic wealth. “Holborn will also consider strategic partnerships with firms which would like to offer specialized Shariah wealth service[s] to their clients, but lack the expertise or capabilities to do so.”

The industry has seen a promising rise in demand for Islamic wealth management services especially in the Middle East driven by the growing affluence of Muslims. According to intelligence firm Wealth-X, 20% of high-net-worth individuals (with net assets of at least US$30 million) in the Middle East hail from the UAE, while Frank Knight estimated wealth from ultra-high-net-worth individuals will grow by 40% over a 10-year horizon from US$700 billion in 2014.

Scotland recognizes shared values in new Islamic finance alliance

The Church of Scotland is in talks to develop a new ‘practical ethical financial solution’ in collaboration with the UK’s Islamic Finance Council (IFC). Due to be announced this week, the agreement could result in a new ‘cross-faith’ financial institution with shared values based on ethics and principles of both religions. LAUREN MCAUGHTRY explores. 

The project will research, shortlist, test and then establish a viable ethical finance business solution. The consultation and business plan phase is expected to last a year, with the first workshop to take place this May in Edinburgh with theological and financial experts coming to Scotland from as far afield as Nigeria, Malaysia and Bahrain.

On announcing the project, Reverend Dr Angus Morrison, the moderator of the General Assembly of the Church of Scotland, said: “The Christian and Islamic faith traditions share a commitment to economic justice and a call to an equal distribution of the gifts of God. By collaborating and ‘putting our money where our morals are’, we have an opportunity to live out our common values and make a tangible change for those most affected by poverty. Active concern for our communities is an obligation and we look forward to meeting the challenge together.” 

“In recent years, we have developed a strong relationship with the Church of Scotland and this project is a result of that positive engagement and the mutual desire to work collaboratively on a project which brings together the best of our respective faiths,” said Omar Shaikh, an advisory board member of the IFC. Islam is the second-largest faith in Scotland after Christianity, with upwards of 80,000 Muslims or around 1.5% of the total population. 

The Church of Scotland has long been a vocal opposer of high interest rates. In 2010, it set up a special Commission on the Purposes of Economic Activity to look into how the economic and financial system could be improved, which specifically identified the price of consumer credit and the ultra-high interest rates charged by consumer credit companies as a key problem. 

“In our report, and in subsequent discussions with politicians and church figures, we made the point that interest rates at that level were excessive and did damage to families and individuals,” noted Professor Charles Munn, former CEO of the Chartered Institute of Bankers in Scotland and the chairman of the commission. “We were not alone. Before long, there was a cacophony that could not be ignored and legislation has recently been passed to limit the amount of interest that can be charged. It has also forced the payday loan companies to change their business practices.” In 2015, a Mutual Credit Union was established by the Churches of England, Wales and Scotland, along with the Scottish Episcopal Church, to provide affordable funding without charging interest.

While Scotland is not always on the front page when it comes to headlines on Islamic finance, it has been gathering gradual momentum and providing quiet support for over a decade. The IFC is based in Glasgow, while in 2005 Edinburgh-based legal firm Tods Murray launched the first Islamic mortgage in Scotland, allowing Muslims to purchase homes through United National Bank. The UK’s Al Rayan Bank offers a Scotland-specific home financing product, while Dundee University offers one of the UK’s best courses in Islamic accounting and finance. The country also has a strong history of ethical finance, including the development of cooperative societies such as Scottish Equitable and TSB — and in 1810 Church of Scotland minister Henry Duncan created the trustee savings bank model that was used in the 1970s as one of the first sources for Islamic bank structures. 

“Islamic finance is trying to market itself as an ethical alternative to conventional finance and there is a big scope for mutual learning here,” said Dr Rania Kamla of Dundee University, to Scotland.org. “Scotland is already very rich, historically, in the area of ethics in finance. One of the purposes of expanding Islamic finance is the inclusion of segments of society which have been excluded from the financial system because they feel it is against their beliefs. Now that alternatives are being provided for them, it is more likely that they will feel more comfortable.”

The Church of Scotland already runs the majority of its investments through its Investors’ Trust, which makes ethical decisions based on the view of the Church’s General Assembly. These include negative screening, excluding any company that makes more than 15% of its turnover from arms, alcohol, gambling, tobacco or “other activities which are felt to harm society more than they benefit it”. 

There is also an element of positive screening, and the trust claims to seek out companies with good practices in regards to employment, governance, human rights, environmental performance and sensitivity to local communities. 

The Scottish government in 2015 supported the launch of the Scottish Ethical Finance Hub (in partnership with the IFC UK) and provided up to GBP500,000 (US$723,590) in funding, while Dubai’s International Financial Center has also collaborated with Scotland with a focus on the Islamic economy. 

Further information on the project was due to be announced at a press conference on the 22nd March. Updates to follow.

Islamic finance boost as oil and gas players tap Shariah debt market for the first time

GLOBAL: Oil and gas (O&G) players in the GCC are increasingly turning to Islamic finance to fund projects, lending strength to the positive momentum for Shariah compliant financial instruments in the O&G sector, on the back of a fairly robust project pipeline amid tanking oil prices.

At least two O&G companies this week have confirmed they are tapping Shariah compliant funds including Kuwait National Petroleum Company, which is accessing debt markets for the very first time.

“Financing of the first phase of the project is expected to close with local banks in early April 2016 where the mandated lead arrangers include National Bank of Kuwait and Kuwait Finance House, on the conventional and Islamic finance tranches respectively,” confirmed the advisor to the deal, Clifford Chance, which also elaborated that future phases of the multi-billion dollar Clean Fuels project would likely involve international banks and export credit agencies.

Accounting for over 6% of crude oil reserves at approximately 102 billion barrels (according to the Central Intelligence Agency), Kuwait intends to increase oil production to four million barrels per day by 2020 which could boost its standing as one of the biggest oil producers in the world and potentially increase petroleum contributions to its GDP which already stands over 50%. In July 2015, the nation approved a budget increase to the proposed US$13.4 billion Al-Zour New Refinery Project.

However, it is not only Kuwait’s healthy O&G pipeline that is giving rise to Islamic finance opportunities; Oman too is grabbing attention. Registering a 0.72% rise in daily average of crude oil production in February as compared to the month before to 1.01 million barrels daily (according to statistics by the Ministry of Oil and Gas), the Sultanate is opening its doors to international exploration firms to boost its O&G production.

This has led Malaysia-based South Sea Energy to foray into the market; the firm – a key partner in Joint Venture PetroTel Oman – this week revealed it has engaged Bank Nizwa to arrange a US$150 million structured Islamic financing facility to fund a development and production project in Block 17 in the governorate of Musandem. The transaction, according to the structuring bank, is the first-of-its-kind with a fully-fledged Islamic bank in Oman.

The O&G sector for the past 12 months rolling commanded the largest share of the global Islamic finance market, according to data from Dealogic and recent developments are likely to boost the segment’s share valued at almost US$5 billion. A comparison of top Islamic finance-related financing deals concluded in the past 12 months to March 2016 and a similar period to March 2015 show that the number of O&G companies procuring Shariah facilities quadrupled from one last year to four this year with Saudi Aramco topping the table with its US$10 billion Islamic deal.

Pages

Subscribe to RSS - Volume13.Issue12