Volume13.Issue34

Looking to Iraq

We don’t often hear of Iraq when it comes to Shariah compliant investments or Islamic finance; however, as our cover story this week finds out, perhaps it is high time we turn our attention to this promising market.

The IFN Editorial Team tracks the performance of Tadawul since the introduction of new investment rules last year, provides exclusive insights into Oman’s maiden dollar Sukuk deal, explores Malaysia’s latest Takaful player’s business strategy and delves deep into the Afghan market and crowdfunding sector. We also speak to Samina Akram, who recently received Freedom of the City by the City of London for her work in Islamic finance, in our Women in Islamic Finance segment. Our correspondents bring you updates from Italy, Indonesia, Hong Kong, Saudi Arabia and the real estate sector while IFN Columnist Mohammed Khnifer provides an insight into Sukuk/Islamic loan restructuring after technical defaults. CEO of Beehive Group, Craig Moore, writes on the dynamics between crowdfunding platforms and Islamic banks while Anass Patel, the co-founder of 570easi, shares on the developments of Islamic finance in the French market.

As usual, we hope our readers have an informative and insightful read.

Sovereign Sukuk: Indonesia, Brunei and Bahrain to the rescue

In what was a hectic period just two weeks ago, the sovereign Sukuk space took a slight breather the past week, with Indonesia, Brunei and Bahrain issuing their regular government-backed Islamic papers. DANIAL IDRAKI brings you the usual updates.

In its usual issuance to support the 2016 state budget financing, the government of Indonesia is targeting to raise IDR4 trillion (US$305.2 million) via an auction of sovereign Sukuk (SPN-S 24022017 and four project-based Sukuk series) to be conducted on the 23rd August, according to an announcement on the Ministry of Finance’s website.

In Brunei, The Autoriti Monetari Brunei Darussalam (AMBD) successfully priced its 135th short-term Sukuk Ijarah amounting to BN$100 million (US$73.1 million) on the 18th August. The issue, with a tenor of 91 days, has a rental rate of 0.69%. The Bruneian government has thus issued over BN$10.09 billion (US$7.38 billion)-worth of short-term Sukuk Ijarah securities since the maiden offering on the 6th April 2006, and the total holdings of the Bruneian government Sukuk outstanding until the 18th August 2016 stood at BN$555 million (US$405.73 million).

Over in Bahrain, the central bank saw its monthly issue of Sukuk Salam securities worth BHD43 million (US$114.04 million) and carrying a maturity of 91 days subscribed by 163%, with subscriptions worth BHD70 million (US$185.65 million) received. The issue has an expected return of 2.09%, equivalent to the previous issue on the 20th July.

Meanwhile, Fitch Ratings recently updated its criteria for rating Sukuk, replacing the existing criteria published on the 18th August 2015. The new criteria apply to originator-backed (asset-based) Sukuk structures, internationally encompassing corporates, financial institutions, sovereigns, supranationals, public finance, insurers and global infrastructure, but not to asset-backed Sukuk which rely on underlying collateral.

Upcoming sovereign Sukuk

Country

Amount

Expected date

Ivory Coast

XOF150 billion

31st Aug 2016

Oman

US$2 billion

TBA

Iran

IRR60 trillion

2016

Nigeria

TBA

First quarter 2017

Jordan

JOD175 million

TBA

Pakistan

PKR79.1 billion

TBA

Egypt

TBA

2016

Kazakhstan

TBA

2016

Kenya

TBA

2016

South Africa

TBA

2016

Bangladesh

TBA

TBA

Hong Kong

US$500 million to US$1 billion

TBA

Ningxia Hui Autonomous Region

US$1.5 billion

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

KWD5 billion

Sept 2016

Maldives

TBA

TBA

Sri Lanka

US$1 billion

TBA

Germany

US$1 billion

TBA

GFH continues buying spree — eyes inorganic and organic growth

GFH Financial Group has revived plans to acquire Shariah compliant Bank Al Khair (BAK) after merger negotiations between the latter and GFH’s subsidiary, Khaleeji Commercial Bank, fell through in 2014. VINEETA TAN takes a closer look at the potential merger.

The announcement, one element in GFH’s aggressive expansion and restructuring strategy, comes amid increasing pressure for banks in the Middle East to merge to better compete, triggered by National Bank of Abu Dhabi and First Gulf Bank’s proposed amalgamation. 

Subject to regulatory and shareholders’ approval, GFH intends to become the majority shareholder of Bahrain-based BAK which is also present in Saudi Arabia, Malaysia and Turkey. The financial group believes that the acquisition of the loss-making outfit “will create a larger financial group having banking operations within the GCC, the UK, Malaysia, Turkey, Pakistan and India”. GFH may have been severely hit by the 2008 financial crisis – it plunged into the red in 2009 as net losses reached US$728 million – however, the group has been proactive in restructuring its operations and debts and has been on an asset-buying spree with eyes on geographical expansion and this includes rebranding itself from Gulf Finance House to GFH, transforming from an Islamic investment bank to a financial holding group in November 2014.

GFH earlier in May secured preliminary approval to jointly launch an Islamic bank with the Abu Dhabi Financial Group (which increased its stake in GFH to 11.74% this year) in Abu Dhabi’s international financial center. The following month, the Bahraini group confirmed plans to set up a specialized real estate company amid a string of property purchases in the GCC and North America; it also announced plans to raise US$150 million through Sukuk to repay outstanding debts and undertake future investments. Just this month, it made a US$45 million repayment to its debt syndicates, settling over a quarter of the group’s outstanding facilities, which as of the beginning of August, stood at US$105 million while its total equity at US$700 million. 

GFH, which raked in a consolidated net profit of US$17.9 million in the first half (up 31% year-on-year), expects the acquisition to impact favorably on shareholders of the combined entity although it cannot ascertain the impact of its financial position just yet until the deal has been finalized.

Company Focus: Zurich Takaful Malaysia takes off

Zurich Takaful Malaysia (ZTMB), a new brand in Malaysia’s Takaful market after the largest insurer in Switzerland, Zurich Insurance Group, acquired MAA Takaful earlier this month and renamed the Takaful provider, is set to penetrate deeper into the second-largest Takaful markets in the world. DANIAL IDRAKI speaks to Philip Smith, the executive director of ZTMB and CEO of Zurich Insurance Malaysia, to find out more about ZTMB’s growth strategies and future plans as it seeks to build its brand in the Islamic insurance business. 

While Malaysia may be leading the ASEAN region in the Takaful segment with 76% of the region’s market share, the general insurance penetration within the country remains low. According to a report by EY, Malaysia’s insurance penetration rate stood at 5.2% of GDP in 2014, while the country’s Family Takaful sector is just 14.5% in comparison with life insurance’s market penetration rate of 41.2%. Despite the low penetration rate, the country’s young and growing middle-class population provides room for further market expansion, as reflected by the Takaful assets and net contributions over the last five years, which have almost doubled. EY’s figures show that Takaful’s fund assets increased to RM23 billion (US$5.73 billion)in 2014 from RM12 billion (US$3 billion) in 2009, while net contributions increased to RM6.3 billion (US$1.57 billion) from RM3.5 billion (US$871.55 million) over the same period.

“We know that the overall insurance penetration in Malaysia is below where Bank Negara Malaysia is targeting it to be in the medium term. However, this overall picture disguises the fact that some areas and some segments are well served and penetrated, while other segments are even less well served than the ‘average’ figures would lead us to think. This represents a considerable opportunity for Zurich, provided we can find the right products through the right distribution at the right price, to [access] these less well-served segments of the market,” Smith told IFN. Smith added that Zurich’s positioning in the market, with a conventional and Takaful offering across both life/family and general under a single brand, will allow it to grow rapidly and in a sustainable manner across multiple segments.

As ZTMB prepares to chart its path through Malaysia’s Takaful market, its short to medium-term goals would be to bring in additional capabilities from other companies under Zurich’s stable. “We will therefore see a number of initiatives over the next 12 months to bring the best of Zurich to the Takaful market in Malaysia. This will involve not only products but new ideas on marketing, systems and processes, and delivery channels,” Smith affirmed. 

Over the longer term, ZTMB will be looking to develop its skills and capabilities in Malaysia, and serve as an advisor to other businesses under the Zurich umbrella on the development of the Takaful segment. “Despite being a global insurer in the world, this [ZTMB] is the first Takaful operation within the Zurich Insurance Group. The company is therefore a pioneer within the Zurich group context, and other countries in the Zurich universe will look to us in Malaysia for guidance and advice on providing Takaful products to the market,” Smith opined. 

Eventually, ZTMB hopes to expand its capabilities from the current focus on retail customers to the SME, corporate and government-linked companies segments. “[We will also] bring more tailored customer solutions to the market, [which] will involve deepening our understanding of the market and its customers and their preferences, as well as developing people and talent in this area through our Takaful Academy and Takaful Center of Excellence, both of which will be set up in the near future” Smith added.

Tadawul under new investment rules — has it lived up to expectations?

When Saudi regulators introduced new investment rules in 2015 with the aim of easing foreign investment into its stock market, the move was described as “historic” and a potential game changer by pundits. But how has the stock exchange performed since its implementation? VINEETA TAN finds out.

Industry participants, both domestic and foreign, were excited when Tadawul, in the second quarter of 2015, revealed new rules (Rules for Qualified Foreign Financial Institutions Investment in Listed Securities) to lure foreign investments into the oil-rich nation in its search for economic diversification. At that time, the Saudi stock market was performing well — market capitalization was up 3.51% year-on-year to SAR2.01 trillion (US$535.49 billion) as at the end of June 2015, daily average of shares traded edged up 1.48% and over 38.43 billion shares were traded during the period, a 0.91% increase.

While analysts and market observers were realistic in not expecting a flood of investments into Saudi-listed equities once the rules were implemented in June 2015, the liberalization measure was still hailed as historic, a positive progress. 

But as the markets would have it, Saudi Arabia’s stock exchange index is taking a beating, with equity market capitalization shrinking and trading activities sliding. Tadawul suffered as oil prices collapsed, austerity measures took root, geopolitical unrest persisted and the Saudi economy falling into recession in July for the first time since the 1980s. In the first six months of 2016, total equity market capitalization for Tadawul tanked by 25.29% to SAR1.5 trillion (US$399.62 billion) against corresponding 2015 figures. The downtrend was apparent across all measures: total value of shares plunged 34.07% to SAR668.19 billion (US$178.01 billion), total number of shares traded slowed down by 0.74% to 38.74 billion and total number of transactions executed declined by 10.14% to 16.04 million. The Tadawul All Share Index (TASI) was down 28.47% reaching 6,499.88 at the end of the first half.

In an attempt to prop the Saudi capital markets at a time when things seem to head south, the Capital Market Authority (CMA) is preparing to implement augmented Rules for Qualified Foreign Financial Institutions Investment in Listed Securities next month, making it even easier for foreign investors to channel investments onto its shores.

“When the CMA implemented the original rules in 2015, it said it would keep them under review and would change them if it thought changes could be justified. That has now happened,” explained Tim Plews, a Riyadh-based partner at Clifford Chance, to IFN.
Under the revised rules, investors with assets under management (AUM) of at least SAR3.75 billion (US$999.62 million) will now be allowed to invest in listed securities — an 80% slash from the previous SAR18.75 billion (US$5 billion) requirement (in other words US$1 billion instead of US$5 billion in AUM).

“The move to reduce the AUM test to SAR3.75 billion opens up the Saudi market to a much wider range of fund managers,” said Plews. This, in theory, coupled with the Kingdom adding governments and government-related entities into its mix of foreign financial institutions and allowing a qualified foreign investor (QFI) to engage with a local or non-Saudi portfolio manager to manage investments in the Saudi capital market, means a wider investor base which should translate to more inward investments. 

“The rules have been simplified by consolidating the two QFI applicant regimes into one regime. An entity will now apply for QFI status rather than considering QFI Client status. The junior category has been abolished,” elaborated Plews.

But even if the revised rules come into effect next month, foreign investors are still very cautious and analysts are not expecting spurts in the market, with no dramatic movements in Tadawul. But what this also means is that Tadawul could be one step closer to being admitted into the MSCI Emerging Markets Index — a development much sought-after by the Kingdom which views it as a crucial step in bolstering its financial markets to finally reduce oil dependence.

Crowdfunding: A platform for Islamic finance to expand its reach

As the crowdfunding industry expands to become a popular source of alternative financing and investment, a growing number of entities in the Islamic finance universe have also begun to leverage on the growing use of technology to provide Islamic investors and entrepreneurs with a platform to widen their reach. DANIAL IDRAKI recaps some of the latest development in Islamic crowdfunding.

Overview
According to the World Bank, professional investors are likely to start allocating portions of their portfolios to crowdfunding investing as the industry grows in size and becomes widely accepted. Massolution revealed in a report that crowdfunding platforms worldwide raised US$16.2 billion in 2014, demonstrating a 167% growth over the amount raised a year earlier, and doubled in 2015 to reach US$34.4 billion. A study commissioned by the World Bank, meanwhile, forecast that the crowdfunding industry could reach up to US$96 billion by 2020. 

Kapital Boost, an Islamic-focused peer-to-peer crowdfunding platform, estimates that Islamic crowdfunding globally in 2015 stood at approximately US$30 million. The crowdfunding financing model is consistent with Islamic finance principles due to its community-based needs and risk-sharing model, giving unbanked individuals or groups with access to much-needed capital. Islamic banks, for one, are increasingly becoming aware of the potential that the crowdfunding platform provides, as it could facilitate more deals and unleash capital where it is needed most.

Recent developments
Shariah compliant crowdfunding platform EthisKapital.com recently announced that it applied for a peer-to-peer license in Malaysia and agreed to collaborate with LOKAmotion Malaysia, a retail-start-up incubator to develop SMEs. Ethis Ventures developed WaqfWorld.org as a crowdfunding platform to mobilize donations or endowments by Muslims, and launched the platform earlier this month. Considered as the world’s first Waqf crowdfunding platform, WaqfWorld, which also received the support of Malaysia’s former prime minister, Abdullah Badawi, as the founding patron, will serve as a Wakeel matching cash donations by individuals to recognize Mutawalli or charities for their campaigns. This could range from Islamic microfinance, humanitarian relief and social enterprise to religious activities.

EthisCrowd.com had in May this year received funding amounting to SG$500,000 (US$362,440) from Malaysia’s Azmi Global (a subsidiary of Azmi & Associates which has strong Islamic finance capabilities) and Singapore’s Quest Ventures, as well as from angel investors in Singapore and the Middle East. The Singapore-based Islamic real estate crowdfunding platform will utilize the funds for its Asia Pacific expansion plans as well as bolster corporate governance and the project selection process and enhance its technological infrastructure.

In April, a group of diverse Islamic crowdfunding platforms, comprising Ethis Crowd, Natwi, Easi Up, Blossom Finance, Funding Lab, Kapital Boost, Launch Good and Skola Fund joined forces to set up the Islamic Fintech Alliance, with the aim of facilitating the adoption of finance technology among Muslims. Beehive, the UAE’s leading online marketplace for peer-to-peer (P2P) finance, received certification from the Shariyah Review Bureau (SRB) in September 2015 — making it the first P2P platform in the world to independently confirm that its processes are Shariah compliant.

A subsidiary of a consortium of Malaysian Islamic banks (IAP Integrated) in February this year launched the Investment Account Platform (IAP), a multi-bank online Shariah compliant platform inspired by the concept of crowdfunding to facilitate direct investment by investors into viable projects — the first of its kind in the Islamic financial world. 

Outlook
The continued prospects of a low-interest environment, improvements in technology and continually higher capital requirements for the banking sector provide the alternative finance market an opportunity to innovate and accelerate its growth. The lack of suitable investment products for Islamic investors, in particular, provides an opportunity for such platforms to succeed.

Afghanistan: More needs to be done

Despite its economy improving since the fall of terrorist groups in the early 2000s, landlocked Afghanistan is still reeling from decades of conflict which has continued to undermine investor and private sector confidence. Heavily dependent on foreign aid, the government under President Ashraf Ghani is pushing for economic reforms, with Islamic finance coming to the fore in the form of a new dedicated banking law. VINEETA TAN provides an overview of the Afghan Shariah finance landscape.

Regulatory environment
Da Afghanistan Bank (DAB), the country’s central bank, in the latter half of 2015 issued much-awaited Islamic finance regulations which cover licensing of Shariah banks and windows, Islamic liquidity management, capital adequacy, asset classification, profit distribution and Shariah governance among others. All Islamic financial institutions were given three months to fully comply with the new regulations in February 2016.

In the first quarter of 2015, an independent Shariah board was established by the Afghanistan Islamic Finance and Consulting Company in collaboration with the UAE-based Al Maali Dubai. The board provides Shariah consultancy services on a freelance basis and is advising Mutahid Development Finance Institution, the country’s largest microfinance institution. 

Banking and finance 
Banking and finance players have been positioning themselves in Afghanistan’s nascent Islamic finance market attracted by the high demand from the Muslim-majority population: an overwhelming majority (94%) of Afghans surveyed by independent non-profit Harakat indicated keenness in Shariah compliant solutions, although only a minority (46%) are aware of such facilities. 

There are 18 licensed banks in Afghanistan, according to the Ministry of Finance, with at least seven offering Shariah banking services on a window basis including Afghanistan International Bank. Conventional lender Bakhtar Bank is in the process of transforming its operations to comply with Shariah principles — becoming the Republic’s first fully-fledged Islamic bank. Afghan United Bank reportedly also has plans to convert to become fully Shariah compliant. 

Islamic microfinance is also present in the country: the Foundation for International Community Assistance was the first institution to extend Shariah compliant (Murabahah) microcredit in 2006 and has led the way for others to follow suit including non-governmental organization Islamic Relief. Another prominent Islamic microfinance initiative was the Rural Finance and Cooperative Development program by the US Agency for International Development which ran from 2009-12 and which developed Islamic investment and finance cooperatives to enhance financial accessibility in southern and eastern Afghanistan. The UK’s Department for International Development also supports the extension of Islamic microcredit facilities to Afghans via its Helmand Improved Livelihoods and Economic Opportunity program which introduced Ijarah products and expanded opportunities for Islamic investment and finance cooperatives by increasing the availability of loans and diversifying existing credit products. To boost microfinance activities in the country, the government in 2003 established the Microfinance Investment Support Facility for Afghanistan.

Takaful
There are four insurance operators in Afghanistan — Afghan National Insurance Company, Insurance Corporation of Afghanistan, Insurance Group of Afghanistan and Afghan Global Insurance — which fall under the purview of Afghanistan Insurance Authority (AIA); however, none of them are offering Shariah compliant products. The regulator is working on drafting a new insurance law and regulations to replace the law passed in July 2008; however, no specific Takaful provisions are included, according to an official update by the AIA. 

Capital markets
It has been years since talks about establishing an Afghanistan Stock Exchange (initially planned for 2014) emerged but nothing has materialized yet. A dedicated stock exchange is viewed as a crucial next step in developing the country’s financial market which has so far been restricted to banking and insurance activities and as a vital avenue to attract much-needed foreign investment. It is learned that the apex bank and the Ministry of Finance is keen to create a domestic Islamic capital market; they previously approached Afghanistan Islamic Finance and Consulting to formulate a concept and design proposals to that end. This follows discussions to issue Sukuk and Islamic long-term bills since 2011.

Challenges
Passing the Islamic banking law was a pivotal step in the right direction for Afghanistan in developing its Shariah finance industry. However, the Republic still has a multitude of challenges to overcome — apart from geopolitical and macroeconomic pressures, there is still the hurdle of supervision and ensuring compliance to the regulation. Awareness about Islamic finance needs to be improved and the Shariah finance talent pool needs to be developed.

PowerTalk: Samina Akram

What differentiate Samina Akram from most of her peers are perhaps her passion and commitment to empower women in Islamic finance which have led her to spearhead the creation of a platform to connect and support women worldwide in navigating the male-dominated sector – one that was most welcomed by the industry. The UN Ambassador of Peace shares with VINEETA TAN lessons from her journey, future goals and what it means to her to be bestowed Freedom of the City by the City of London.

Humble beginnings
“My career story is a rather unusual one,” admits Samina. It isn’t the fact that the Londoner does not have a finance degree – many successful Islamic finance professionals have built their career without a finance qualification – but her rapid rise at the workplace, particularly in the area of Islamic finance. The University of London graduate (Bachelor of Arts degree in philosophy and a Master of Arts degree in psychology of religion) worked for private, commercial and investment banks before joining Merrill Lynch in 2006. She started in a support role and quickly climbed the ladder within the five years she was there: progressing to a client-facing role and promoted internally to lead and develop the international bank’s Islamic wealth management business. 

“At the heart of my fast-paced career progression was Merrill Lynch’s diversity initiatives. As a member of the Merrill Lynch South Asian Professional Network, I saw an opportunity to highlight and teach others about the sector,” Samina explains. The bank’s diversity initiatives were instrumental and invaluable to Samina’s career, as they provided her a chance to highlight her ideas, ultimately landing her in her “dream role”, in an otherwise rather challenging environment.

Samina wasn’t sure if the many obstacles she faced when she first entered the industry was because she was female, or her lack of experience in the field but she persevered. “I had a great deal of passion for Islamic finance; however, I had no direct industry experience,” she says. “I found the banking sector to be very closed, with very few opportunities existing to gain your break, in particular in the London Islamic finance market. So I decided I would have to somehow leverage from my internal networks and highlight this growth market.” 

In 2009, she left the bank to set up her own consultancy specializing in Islamic and ethical finance, but not before leaving a deep impression.

“Samina worked for me when I was [the] chairman of Merrill Lynch and was a visionary thinker in terms of the way we built our Islamic finance business,” Bob Wigley, Samina’s mentor who is now the chairman of several corporations and previously an ambassador for UK business for former prime minister, David Cameron, tells IFN. “She has continued to develop her expertise in this area with great success and remains in the forefront of both product development and execution.”

WIEFF
In the midst of establishing her own firm, Samina was also working on realizing something close to her heart – an independent networking platform for industry professionals to meet, collaborate, support and promote the interests of the ethical and Islamic finance industry – the result was Women in Islamic & Ethical Finance Forum (WIEFF), formally launched in 2015. From a mere 30 keen supporters in 2007, Samina has managed to grow WIEFF’s database to over 8,000 members who hail from over 25 countries. 

“One personal goal has always been to have a platform where we could somehow highlight and give the stage to women who have against all odds risen to the very top of their profession. We learn so much from people’s stories, their struggles, what has motivated them, what inspired them. Also more importantly, these inspirational role models in turn motivate, encourage and inspire others,” says Samina, reflecting on the past year since the launch of WIEFF; she calls it a dream come true and an incredible journey. “The long-term goal of WIEFF is to become an active think tank for the industry. We hope WIEFF can assist and play an important role to support and inspire female talent.”

Freedom of the City
For her work in promoting women in Islamic finance, Samina this month was bestowed the Freedom of the City by the City of London, a tradition dating back to the 13th century honoring valued members of the community, a recognition, Samina shared, was made possible due in no small part to her mentor, Wigley. 

“I am delighted she was awarded the Freedom which she wholeheartedly deserves. The City needs more Saminas,” commented Wigley.

Glimmer of hope
So how has the Islamic finance landscape for women changed over the decade Samina has been in the industry?

“When I first entered the industry several years back, you would hardly see any women speaking at industry conferences or mentioned in mainstream media. However, over the years, much progress has been made. We are beginning to see women are not just visible, they are at the forefront of industry innovation and playing increasingly important roles in industry development,” Samina opined, adding that commitment and focus on increasing women participation in senior roles are being discussed at a very high level and that it is only a matter of time before tangible results materialize. 

What also leaves Samina with glimpses of hope for women in the industry is seeing more young women, during her time speaking at universities, vocalizing interest in building a career in the sector compared to men. To them, Samina cannot emphasize enough the importance of networking and continuous professional development.

“I didn’t have a strong background in the Islamic finance sector; however, I paid to attend courses. And when no one gave me my break, I decided to create opportunities myself. If you’re passionate about something, no matter how many rejections you get, you won’t give up. Keep going, keep knocking – your time will come.”

The blunt end

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

With the ongoing market conditions, one should take notice of the growing restructuring debt in a Shariah compliant manner. This week’s column provides an insight into Sukuk/Islamic loan restructuring after technical defaults. Most IFN readers have come across many default events resulting from firms facing difficulty in generating operating profits. We have seen, in some jurisdictions, investment banks assisting, for instance, low credit quality issuers to tap the market, creating a junk Sukuk market. 

By now, a few universal and boutique household names are making their mark in a growing business: Islamic debt restructuring. To that end, there are at least three main approaches: 1) haircut, 2) extending the maturity of Sukuk/loans, and 3) debt/equity swap. 

Haircut 
The haircut approach does not guarantee the recovery of the principal. Worse, they will recover 70-80% without any profits. The haircut approach is when the capital providers (ie Sukuk holders) agree to make a discount in order to get early settlement (Tanazul). 
Sometimes, certificate holders are forced to go down the haircut route when the originator is in severe financial distress, ie there is hardly any cash flow from the underlying assets of the Sukuk (the asset-based type). 

Therefore, extending the maturity of the Sukuk is not an option. To give an example from the conventional financial system, Argentina once offered a 66% haircut on its defaulted bonds. 

Extending maturity
Certificate holders opt for this approach when the financial position of the company is relatively strong. Nonetheless, this will raise the issue of opportunity cost for Sukuk holders. 

Should the same situation happen with bonds, the originator will increase the interest rate on the coupon payment in order to compensate them for the opportunity cost. 

However, with Sukuk, this is not permissible. So, the question is how do we come up with a Shariah compliant solution for the opportunity cost?

It depends on the nature of the Sukuk. If they are Sukuk Ijarah, then extension means extending the lease contract, which can be on new conditions which may include a higher rental payment. If they are Sukuk Musharakah, then the term can be extended and the ratio of profit-sharing may be changed.

Debt for equity swap
In a debt for equity swap, a company’s creditors generally agree to cancel some or all of the debt in exchange for equity in the company. Debt for equity deals often occur when large companies run into serious financial trouble, and often result in these companies being taken over by their principal creditors. 

While we have ‘hybrid/clustered’ Sukuk where debt is involved, most of these notes are equity as you take ownership in the underlying assets. In case of default, you can convert the equity (of the underlying assets) into another form of equity (of the originator) at a formula agreed to by both parties.

  @MKhnifer

Brexit? What Brexit?

This article serves as the last of my Brexit trilogy, which could be summarized as follows:

  • ‘Brexit the brave?’ — The vote is going to be too close to call, but don’t worry, Islamic investors seem keen to still invest even if we vote to leave.
  • ‘Brexit from 6,500 miles away’ — What just happened! We have voted to exit, but Malaysian Islamic investors seem okay with it and Islamic finance is already a global business.
  • And now ‘Brexit? What Brexit?’

It’s now two months since the vote to leave the EU that shocked many of us. However, the mood within much of the UK property industry is largely business as usual and it really hasn’t dissuaded Middle East investors, whether investing Islamically or not; in fact, ironically it seems to be encouraging even more overseas investment…not what was anticipated.

One of the most significant acquisitions over the summer was the reported purchase of insurance giant Prudential’s City of London headquarters at 12 Arthur Street, with the Oman state oil fund stumping up GBP80 million (US$103.6 million) and seemingly taking a positive view on the prospects of the UK finance and insurance sectors post-Brexit.

Meanwhile, an as yet unnamed private Middle Eastern investor has committed to purchase 5 King William Street, again in the financial heart of the City of London, for a reported GBP90 million (US$116.56 million). Hardly a sign of nervousness. 

Finally, such investment activity is not confined to London alone, with a Qatari investor purchasing a GBP43.2 million (US$55.95 million) retail park in Telford, more than 130 miles from the center of London.

Of course, the fall in the value of the pound sterling has certainly helped. Having spent much of the last seven years fluctuating around a midpoint of US$1.5 or so to the pound, now at US$1.3 a number of our Shariah compliant investors have cited this as a major driver of their investment wishes and are taking a view that the pound sterling will come back over the next five years.

So, as we at 90 North have been saying since the vote: “Onwards and upwards!”

Philip Churchill is the founder and managing partner at 90 North Real Estate Partners. He can be contacted at pchurchill@90northgroup.com.

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