Imran's Kifli.net

Background of Sub-prime

The sub-prime meltdown which began in August 2007 has brought down several of the long established and large financial establishments in the US and Europe. Major banks and other financial institutions around the world have reported losses of approximately US$540 billion as of September 2008, and this has continued to increase. Despite concerted efforts by governments and central banks worldwide to cut interest rates and inject massive liquidity into the stock market and the banking system, the global crisis has yet to show any sign of abating. Countries are already experiencing recession while the more resilient economies are revising their economic growth downwards.

Cause and effect

The sub-prime crisis was mainly due to collateralized loan obligations (CLO), collateralised debt obligations (CDO) and mortgaged-backed securities (MBS) which were bundled and repackaged and combined with swap and options (swaptions). They then led to the creation of the sub-prime loans when interest rates were low which then fuelled an artificial mortgage growth, leading to a property bubble. In some cases, the derivatives originated by the investment banks surprisingly found their way back into the originators’ books. Thus, this time round, the investment banks themselves became victims of their own doings. In the early months preceding the crisis, proponents of Islamic finance were quick to point out that the crisis would not affect Islamic banks because Islamic finance transactions are asset based and shuns gharar – excessive risk or lack of transparency. Critics on the other hand say that the reason is simply because Islamic finance has not achieved the level of sophistication of the conventional finance and therefore, not exposed to derivatives.

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Sept. 24 (Bloomberg) — Thailand plans to raise $600 million from its first sale of Islamic bonds as it seeks to attract funds from the Middle East to pay for public works.

“We want to tap petrodollars as Middle East countries have lots of money,” Dheerasak Suwannayos, president of the state- owned Islamic Bank of Thailand, told reporters in Bangkok today.

Islamic Bank plans to sell seven-year Islamic bonds in the third quarter of 2009, Suwannayos said. State companies will use money raised from the securities, known as sukuk, to help finance their projects.

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KUALA LUMPUR: The sukuk (Islamic bond) market has felt the impact of the deteriorating global credit conditions, according to a recent report by the Islamic Finance Information Service (IFIS).

In a statement, IFIS said the report, titled Sukuk in HI 2008: Key Trends and Highlights, indicated that issuance had fallen by 54% in the first half of 2008 (1H08) compared to 1H 2007. It said this was the first such drop since 2001, when the sukuk market started to take off.

In 1H08, the total number of sukuk issued was 61, compared with 111 in 1H07 and 77 in 1H06. In terms of value, 1H08 tallied US$11.55 billion (RM40.08 billion) compared with US$25 billion in 1H07 and US$13.67 billion in 1H06.

IFIS, owned by global publishing giant Euromomey Institutional Investor, said the impact of the credit crunch on Islamic markets had been severe, contrary to its own expectations at the end of 2007.

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KUALA LUMPUR, Sept 10 (Bernama) — The sukuk market is picking up again and the issuance is expected to exceeed US$20 billion (US$1=RM3.43) this year, Standard & Poor’s Rating Services (S&P) said in a report.

The report, ‘Sukuk Market Continues To Grow Despite Gloomy Global Market Conditions’, said the appetite from issuers in a large number of countries — Muslim and Non-Muslim — was growing.

In a statement here today, S&P said entities located in more than 15 countries, predominately non-Muslim, had expressed interest or announced their intention to issue sukuks.

S&P credit analyst, Mohamed Damak, said more than 50 percent of sukuk issued in the first half of 2008 were “ijara” (lease financing), most probably as a direct consequence of the debate among some syariah scholars regarding the syariah-compliance of most sukuks previously issued.

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KUALA LUMPUR: Malaysian Islamic financial institutions (FI) are strongly urged to set up offices abroad, especially in Gulf Cooperation Council (GCC) countries to take a bigger slice of the oil money.

The oil windfall already has the new generation of Gulf leaders coming up with more investments and economic development plans to channel the excess liquidity.

“When it comes to infrastructure alone, there’s US$600 billion worth of project financing to be done in GCC for the next few years,” said Dubai International Financial Centre (DIFC) executive director of Islamic Finance, Nik Norishky Thani.

DIFC is one of the fastest-growing financial centres. A full-fledged onshore capital market, it offers participants 100% foreign ownership and zero tax on income and profits as part of its many financial incentives.

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Sept. 3 (Bloomberg) — The fastest-growing part of the global bond market is faltering, and it has nothing to do with subprime mortgages or the credit crunch.

Sales of Shariah-compliant debt, which financed Dubai’s Palm development, the world’s largest man-made island and where David Beckham and Donald Trump have homes, fell 50 percent in 2008 and prices dropped an average 1.51 percent, according to HSBC Holdings Plc index data.

The so-called sukuk market, which has doubled each year since 2004 and grown to $90 billion, is declining after a Bahrain-based group of Islamic scholars decreed in February that most bonds ran afoul of religious rules. Only one that complies with the edict has been issued, pushing up borrowing costs on projects including $200 billion of real-estate developments in the United Arab Emirates capital.

“In times of distress, the first thing investors sell are the credits they don’t fully understand,” said James Milligan, Dubai-based head of Middle East fixed-income trading at HSBC, the biggest underwriter of sukuk bonds in the Gulf last year. “This has hit spreads hard in the region,” he said, referring to the relative level of the Islamic bonds’ yields.

The bonds satisfy Islam’s ban on interest by allowing investors to profit from the exchange of assets, rather than money. Sales of the debt fell to $11 billion from January to August, from $21 billion in the same period of 2007, according to data compiled by Bloomberg. They peaked at $38.6 billion last year, growing from virtually nothing six years earlier, the International Monetary Fund said. The decline in prices is worse than the 1.25 percent drop in U.S. corporate bonds, HSBC data show.

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KUALA LUMPUR, Aug 12 (Bernama) — The Securities Commission (SC) has approved 22 Sukuk issues totalling RM17.7 billion in the first half of this year, accounting for 31 percent of the total bonds approved during the period.

Sukuk issuances here whether in Ringgit or in U.S. dollars are expected to remain attractive as Malaysia has a strong domestic investors base to anchor the distribution of major sukuk issues, said its chairman Datuk Zarinah Anwar.

“Sukuk pricing for Malaysia-originated issues are highly competitive and there is also strong availability of expertise as well as an established regulatory framework which meets both Syariah and legal requirement,” she said.

Malaysia pioneered the development of the global sukuk market with the launch of the first sovereign five-year global sukuk in 2002.

Since then, the country’s sukuk market had experienced unprecedented growth with Malaysia firmly established as one of the largest issuers of sukuk over the years, she said in her keynote address at the Malaysian Islamic Finance Issuers and Investors Forum 2008.

Last year, 76 percent of bonds approved by SC were sukuk. — BERNAMA

LONDON: Currency swaps, exchange traded funds (ETFs), collateralized debt obligations (CDOs), hedge funds and credit protection transactions until a year or so would have been unthinkable in the global Islamic finance market. No longer.

Hot on the heels of the recent launch by Daiwa Asset Management Company, the second largest asset manager in Japan after Nomura Asset Management, with funds under management of $96.34 billion, of the Daiwa FTSE Shariah Japan 100 ETF, comes the launch at end June of the Islamic Fund of Hedge Funds by Barclays Capital and Shariah Capital Inc. of the US off the Al-Safi Trust alternative investment platform.

Such is the latent appetite for value-added alternative Islamic financial products, that the Dubai Multi Commodities Center Authority (DMCC), an agency of the Dubai government, saw fit to seed the Islamic Fund of Hedge Funds investing a total of $250 million – $50 million in five hedge funds through the Al-Safi Trust alternative investment platform, established jointly also by Barclays Capital and Shariah Capital Inc. in Cayman Islands.

The first five funds on the Al-Safi platform are long-short equity funds focusing on energy, resources and soft commodities and managed by US-based hedge fund managers – Tocqueville Asset Management (gold); Lucas Capital Management LP (energy); Zwelg-Dimenna International Managers Inc. (resources); Ospraie Management LLC (agriculture); BlackRock Inc. (resources & mining) respectively. But the promoters are confident that the platform would attract a whole range of alternative investment products hitherto absent from the Islamic capital and fixed-income product market, in addition to additional long/short equity hedge funds; 130/130 funds as well as specialized investment funds.

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