Download - Islamic Finance Bulletin May 2013
Islamic Finance Bulletin
May 2013
lums.lancs.ac.uk/research/centres/golcer
Gulf One Lancaster Centre For Economic Research
Page 2
From the Editor
The keynote of market developments in April was the continuing uptrend of stock markets, fuelled
in the West by the ongoing commitment of central banks to providing liquidity impetus, a degree of
rotation from wavering bond accounts, and the demise of gold as a safe haven. Risk aversion gave way to
improving confidence about the US economy especially, and its trade-related and dollar-related associates
in Asia and the Gulf region.
Doubts remained, however, as to whether the eurozone will eventually escape its structural impasse
between creditor and debtor, essentially northern and southern, members, and whether China’s relapse
in manufacturing activity can be dismissed as a temporary phenomenon. Japan’s newfound policy
dedication to reflation, and aspiration of cyclical reactions in inflation and growth, initiated another phase
of stimulus-based sentiment, until uncertainties crept in.
Sukuk markets were loaded still to the primary side, with issuances in likely locations continuing to
be well received, demand outstripping supply, to the point where secondary trading and prices were
disappointing by comparison. As we note in a viewpoint piece, the structural support for Islamic fixed-
income nevertheless may have to contend with the benchmark lead given by developed-country sovereign
bonds, whose outlook appears potentially brittle.
Besides tracking those trends, and regular news items on the Sharia-compliant sector, in this edition we
reflect on the range of opinions aired at an Islamic finance conference in Dubai, whether scholarly or
market-oriented in origin, as to the probable or preferred future for the industry. We focus also on gold,
whose status as both monetary and real asset means it is a special case in asset allocation, but which for a
mixture of reasons tumbled in the month.
ContentsHIGHLIGHTS (p.3)
RECENT DEVELOPMENTS (p.4)
VIEWPOINTS (p.6)
STOCK MARKETS (p.10)
COMMODITIES (p.13)
BOND AND CDS MARKETS (p.15)
ACCOUNTANCY ISSUES (p.18)
PERSPECTIVE (p.19)
DIARY OF EVENTS (p.20)
Page 3
Gold: The yellow metal fell drastically in April, and
has struggled to recover since. Its price movements
are generally in reaction to a range of fundamental,
economic and market factors, but in this instance
it probably cracked under the pressure of lacking
a running investment yield compared to equities,
which have surged this year, as well as prolonged
sideways trading. Also, the efforts by Western central
banks to spark growth by monetary means have
produced lacklustre results, and not prompted much
of an apparent inflation threat.
Global supervision: The Islamic Development Bank
(IDB) has called for the creation of a global Shariah
supervisory board, to bring greater uniformity to the
Islamic finance industry. While country-level boards
have been installed and initiated in Malaysia, originally,
and subsequently among GCC states, Pakistan and
Nigeria, the notion remains favoured of a globally-
accepted committee that can require a single set of
standards. The dispersion of practices to date has
prompted concerns about conflict of interest and
confusion among investors.
Asset allocation: While stock markets have
surged on waves of liquidity, bonds have shown
nervousness, and commodities have suffered against
an unconvincing background of global economic
recovery. Sukuk trading, meanwhile, has also
reflected (regional) liquidity, and yet remains exposed
to international, fixed-income benchmarks. With the
potential for economic and financial upset still so
obvious, investors in these Islamic instruments have
to be aware of the global dangers that could damage
even diversified portfolios.
Highlights
Recent Developments in the Islamic Finance IndustryGlobal adviser for Islamic finance?
The Islamic Development Bank (IDB), a Jeddah-based
multilateral institution, is calling for the creation of a
global Shariah supervisory board, which would offer
greater uniformity for the Islamic finance industry.
Islamic scholars are likely to be experts in financial and
religious law, but they are not certified or accredited as in
other professions. Regulators nowadays are increasingly
developing ways to ensure the hiring of experienced and
financially-literate scholars.
Supervision over Shariah-compliant banking products is
gaining acceptance across the globe. Malaysia pioneered
the country-level Shariah board. Recently, several
countries have introduced central boards of their own,
including Dubai, Oman, Pakistan and Nigeria.
Some countries, like Oman, have imposed term limits on
the Shariah scholars who are members of these boards,
while also requiring they abide by a code of conduct.
Still, however, there needs to be further investigations
into acceptable references for the industry that would
enable the concept of a globally-accepted Shariah
committee with the aim of helping all Islamic financial
institutions operating across the world, bringing them in
line with a uniform standard to be able to meet or beat
conventional counterparts.
Source: The Arabian Business News, May 16th
It seems to GOLCER that with the wide expansion of the
industry, regulators are seeking to standardise industry
practices and improve consumer perceptions. That trend
is justifiable, considering the wide dispersion of practices
in Islamic banking and finance worldwide, alongside
its expanded acceptability in many countries after the
global financial crisis and the perceived weaknesses of
the conventional banking system in intensifying the
credit crunch. Leaving Shariah advisors in individual
Islamic banks and financial firms to decide whether their
products and activities obeyed religious principles is
an approach adopted in many countries that has been
criticised for inviting potential conflicts of interest,
and producing conflicting rulings that have confused
investors.
Kuwait investment firm launches Islamic finance fund
Kuwait-based Asiya Investments, whose largest
shareholder is the sovereign wealth fund Kuwait
Investment Authority, has launched an Islamic trade
finance fund worthing $20 million, providing seed
capital for small Asian manufacturers. Asiya’s Cayman
fund offers short-term financing through Murabaha
contracts, where the fund buys and sells merchandise
on behalf of the company and shares a portion of
the profits. Asiya is striving to fill the gap left by
conventional banks which are severely scaling back
their trade finance business, making credit scarce
for small and medium-sized firms. It aims to engage
with those companies that are already banked but
whose credit lines are limited, so as to complement
their financing needs. The retreat of conventional
banks follows the impact of the global financial crisis,
and the higher capital requirements of the upcoming
Basel III regulations. Some 20% of the business could
thereby be opened to non-bank institutions.
Source: Reuters, May 6th
GOLCER believes that, though Islamic finance has
been flourishing worldwide, the industry has been
ignoring merchandise trade and allowing dominance
over trade finance by conventional banks. It also
seems that Islamic institutions across the Gulf are
working to diversify their money market transactions.
Initiatives by firms like Asiya could help in promoting
the range of industry practices.
UK’s largest Islamic bank targets the Gulf
The Bank of London and The Middle East (BLME),
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Recent Developments in the Islamic Finance Industry
representing Britain’s largest standalone Islamic
bank, is working hard to attain this year 15% growth
in assets, while seeking the help from its Dubai office
to boost its capital markets and wealth management
offerings. BLME offers corporate banking and wealth
management services. The bank was founded in
2006 with the backing of Kuwaiti investors, including
Boubyan Bank. It has succeeded to carving out a
niche in middle-market transactions, while benefiting
from the reduced activity of large British banking
groups. The bank is planning a greater presence in
the emirate’s financial district this year, hoping to
attract regional business from the biggest resource-
rich countries such as Qatar and Saudi Arabia.
Source: The Arabian Business News, May 17th
Qatar attempting to help Islamic Bank of Britain
Islamic Bank of Britain (IBB), which narrowed its
losses in 2012, is expected to fund an asset growth
and transformation programme following the raising
of £10m ($15.5m) from majority shareholder Qatar
International Islamic Bank (QIIB). QIIB, which now
owns 91% of IBB, has been in discussions since June
last year to sell a controlling stake in the British bank.
IBB has struggled to turn a profit since its inception
in 2004, posting a loss of £6.99 million pounds in
2012 versus a loss of 9 million pounds in 2011. The
gap was narrowed by nearly doubling the home
financing business to £117m pounds in 2012 from
£61m a year earlier.
Source: The Arabian Business News, April 30th
GOLCER finds IBB’s reported financial figures
during the last year as sending a poor signal for the
operation of the Islamic banking industry in one of
Europe’s largest countries. However, with the high
population of Muslims living in the UK, and the
majority seeking Shariah-compliant financing for real
estate, instead of conventional mortgages, the bank
still has the prospect of competing in that area of
business.
Launch of Islamic insurance by London firm
London-based firm Cobalt has developed a
Shariah-compliant insurance platform that uses a
syndication model to help spread risk across a panel
of underwriters. The purpose is to design an Islamic
alternative in London for Islamic insurance, allowing
multiple insurers to pool their capacity. Each insurer
can subscribe to the desired level of risk though
individual Islamic windows wherein policyholder
funds are segregated from conventional funds,
without affecting their rating levels, and helping price
the risk competitively. Cobalt aims to address capacity
constraints in the takaful (Islamic insurance) industry,
which is based on the concept of mutuality.
Source: Reuters, May 16th
GOLCER sees this initiative as a novel method that
could boost capacity in the Islamic finance industry in
the UK, where the industry seems to be struggling to
compete with conventional counterparts. Within this
format the risk is priced by a lead insurer, and other
firms must then subscribe under similar terms, akin
to the subscription model used in London’s insurance
market.
Indian Stock Exchange launches Islamic Index
Mumbai’s stock exchange (BSE) has launched an
Islamic equity index based on the broad-based S&P
BSE 500 index. This offers a new benchmark for
Islamic investors in one of the world’s largest stock
exchanges. The new index draws on the largest 500
companies in the BSE, out of more than 5,000 listed,
while fitting Islamic finance principles such as bans on
investing in alcohol, tobacco and gambling-related
businesses.
Source: Reuters, May 6th
GOLCER recognizes the obvious interest towards India
as one of the large stock markets and an economy
of such potential. Substantial challenges still await
the Islamic finance industry in that country, which is
of limited size to date. These are likely to restrain the
rapid development of the sector, as well as prevent
entrants to the business from making quick profits.
Page 5
Viewpoint
Why gold’s image has been tarnished
by Andrew Shouler
Gold shocked markets with a steep dive last month,
when prices plunged to around $1350 an ounce,
having begun the year near $1700. A rebound of
some ten per cent was subsequently seen, without
threatening the $1500 level. Another slip has
followed, and the rebuilding of confidence has been
a delicate affair.
The metal has clearly lost its lustre, at the same
time displaying a degree of volatility that itself
compromises a key part of its traditional appeal for
those seeking safety in turbulent times.
To discern why, a combination of fundamental,
economic, and market or technical influences needs
to be digested.
Firstly, the supply of gold is naturally constrained,
whether mined, or released from stocks, or
replenished by a certain amount of annual recycling.
Meanwhile, demand reflects the cultural devotion of
some societies to jewellery, but otherwise responds
to price in a fairly conventional way.
The modest recovery in prices to around $1400 an
ounce has owed substantially to the opportunism of
traditional consumers and industrial users, such as
from India and China, whose interest is abiding and
recurrent, but still price-sensitive.
Secondly, gold had been propelled higher following
the global financial crisis because of the dangers of
economic chaos and/or inflation.
In particular, the finances of Western developed
countries became so overstretched, as banking
bailouts swelled accumulated indebtedness, that they
seemed out of control, and gold represented a safe
haven in the event of a desperate reflation of money
in circulation by the authorities.
The various programmes of quantitative easing
(QE) by key central banks in the US, UK and now
remarkably Japan have fulfilled part of that
expectation.
Page 6
Thirdly, financial markets are well-known for being
prone to overshooting, the result of speculative
forces and momentum trading. Since gold pays no
income (yield), it relies on capital growth (price) for
the return on investment, which is enough to make it
vulnerable to sharp swings. Moreover, the breaching
of floors and ceilings of various chart levels can
trigger even sharper movements up or down. That
occurred with the break below the $1520 marker
during April.
It seems plausible that gold’s recent plunge, and
struggle to revive, could be attributed to two drivers
in particular.
Because a sideways pattern had been sustained for
quite a while, market patience wore thin in waiting
for gold’s climb back towards its peak of September
2011, beyond $1900 an ounce. A relative collapse
in price was an accident to some extent waiting to
happen.
Also, while governments are indeed trying to reflate
their way out of trouble, they have made relatively
little headway. So insipid has been the response of
real growth, particularly in Europe, that inflation has
not resurfaced as vigorously as feared.
Growth is difficult to revive promptly when the
underlying failings are on the supply side of the
economy, requiring structural reforms, yet demand-
side management is the main chosen remedy.
QE’s deliberate suppression of both short and long
interest rates has had much more of a monetary than
real effect. It may even have damaged credit creation
and the profitability of the banks by flattening the
Page 7
2002 2004 2006 2008 2009 2010 2011 20130
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Gold
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yield curve. That could be a relatively unpublicized
but very seriously pertinent aspect of the huge policy
experiment that is being so forcefully conducted.
It seems reasonable to suppose that gold succumbed
to these market and economic factors especially.
Without a change in international policies, it may
take some time to regain its sparkle.
Viewpoint
A doubtful crossroads for asset classes, including sukuk
by Andrew Shouler
Equities have outperformed in recent market trends.
Bonds have trodden water, having approached
what many consider to be the limit of their inherent
potential; commodities such as copper have
reflected the sluggishness of the world economy
in its recovery phase, overhung by sovereign debt
burdens; gold has slumped, having run out of
reasons to be held in the absence of running yield or
inflation (see adjoining article).
For investors in sukuk, there is an obvious downside
to beware, in relation to the vulnerability of
benchmark US Treasuries, especially as the American
economy seems on the rebound and the Federal
Reserve is publicly contemplating tapering its (QE)
programme of asset purchases. The pool of regional
liquidity that upholds the Islamic fixed-income paper,
in the Gulf especially, is an offsetting comfort of sorts.
Ricky Husaini, chief investment office at Trading
Portfolio, told an Islamic finance conference in Dubai
earlier this month that it was only a matter of time
before sukuk portfolios would be unwound. In this
regard, a detailed examination of the correlation
factors behind the surge in these instruments had
shown that sheer liquidity was by far the most
important, so in that sense there was ongoing
support. Indeed, US interest rates were only 0.25 per
cent inversely correlated with sukuk prices.
Still, the international background would not be so
benignly irrelevant in future, he implied. At some
point, yields and credit spreads would rise, and
sukuk would not avoid the fallout. While economic
recovery had been slow to this point, a pick-up in
growth and inflation would eventually be achieved,
even though the perversity of QE – namely that
suppression of rates across the yield curve means that
banks return deposits to the central bank rather than
boost their lending – had dragged on that prospect.
Page 8
In fact, so overextended is the Fed’s exposure to
the US Treasury market, including the extension of
maturities, that a small hike in rates would lead to
an eightfold decline in portfolio value, something
that should concentrate the minds of bond investors,
budget watchers and taxpayers alike. With a huge
debt overload to be worked out, the US is nowhere
near out of the woods financially, with implications
for all asset classes and any investor exposed to the
US dollar or related currencies, such as occupy key
investment pockets across Asia and the Gulf.
So scrutiny has to be all the more careful now,
it seems. “Global credit markets are nervously
watching the gyrations in US Treasury markets,” said
Standard Chartered Bank in recent research. “With
spreads across credit markets having tightened
over the past couple of years, the cushion is very
thin.” That said, it believes a sweet spot for the bond
market may persist a while.
As for stock markets, also evidently riding a wave
of official liquidity stimulus, the hope must be that
underlying economic conditions are genuinely
improving, whereas the fear would be that the
bubble which burst so dramatically several years ago
is now being pieced painstakingly together again,
potentially only to explode into another, maybe even
greater, crisis.
The grim, recently adopted determination of the
Japanese authorities to provoke inflation in an
effort to promote growth -- in the face of a potential
debt morasse, deteriorating demographics and a
zombified economic system -- belongs to the same
mode of thinking that is afflicting central banks
and governments in the Western world. Both the
Nikkei and the JGB markets have already sensed that
Page 9
something is badly wrong, and Japan is the example that
the other leading countries seem destined to follow.
When policymakers don’t appear to know what they are
doing, putting the growth horse behind the inflation
cart, investors have to be especially on their guard to
get smartly off the merry-go-round at the right moment.
For frontier and emerging markets, the fact there are
localized factors which may cushion the shock doesn’t
mean it’s an experience worth sharing.
GCC
Though dipping sharply in mid-month on an
aggregate basis, equities overall in the Gulf
reasserted their upward bias in April. The move
was led by the UAE, and qualified by a lagging
performance by the Saudi bourse. Dubai’s DFM
index surged by 16.7% on the month, driven
by a banking sector which soared by 27% as
first-quarter earnings impressed, far exceeding
expectations. According to GIC, the market
seemed to be re-rating an industry that had
previously been disfavoured, priced at a steep
discount compared to fair-value estimates. Abu
Dhabi’s ADSM index rose by 8.2%, with banks
and telecoms again at the forefront. Emirates
NBD reported that UAE bank profit margins and
returns on equity continued to improve. The
Saudi Tadawul, meanwhile, barely moved, with a
mixture of performers against a backdrop of some
disappointment over oil prices.
MENA
Non-GCC stocks lacked impetus in April, reflecting
a mixed tone internationally, as epitomized
by Turkey’s index retreating slightly, despite a
background of continually declining interest
rates. Egypt’s bourse, due in fact to merge with
Istanbul’s later this year, continued with mixed
fortunes, upon the persistence of both political
and economic concerns, and the feeling that
the government, inexperienced and under
pressure, does not have stock market sentiment
as a priority. Turnover remained slack, with
both new issuance and foreign investors in
abeyance. Reuters reported positive signs,
however, as the stock exchange took technical
steps seeking to restore volumes, and a
parliamentary committee decided to reverse
a tax charge on a controversial takeover
deal. Uncertainty nevertheless seemed set to
prevail, including over the proposed merger of
investment firm EFG-Hermes with QInvest of
Qatar. The IMF’s critical loan remained pending,
but a cabinet reshuffle made it plain that this
target was firmly in sight.
01−Feb 19−Feb 09−Mar 27−Mar 14−Apr 30−Apr68.5
69
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70
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71
Isla
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97
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102
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0.981924Correlation (1 mth)
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NA
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0.371888Correlation (1 mth)
Stock Markets
Page 10
Far East
South-East Asian stocks were essentially upbeat
in April, typically recording gains of 2-5%, to
an extent tracking world benchmarks. Markets
were lifted by expectations that the US Federal
Reserve and European Central Bank would retain
their determined, accommodative monetary
stances, as well as by strong quarterly earnings
releases regionally that prompted uptake of
blue chips. Malaysia, benefiting noticeably from
foreign inflows, and Indonesia reached record
high levels. Thailand, with key energy stocks
boosted by oil prices, and Taiwan jumped by over
5%; Singapore’s bourse rose to a 5-year high.
Across the board, however, a measure of concern
prevailed over growth-related statistics emerging
from China, and consequently the durability of
global growth signs.
Rest of the World
Among key equity benchmarks, Japan’s ascendant
indices stood out last month, driven by the new
government’s overriding concern to provoke
inflation and growth, and its effective diktat to the
central bank to that effect, aiming to create a tidal
wave of monetary liquidity to boost consumption
and asset markets. Investors in developed
and dependent emerging markets continued
to be encouraged by the apparent economic
recovery in the US, accompanied by low interest
rates and tempered inflation, complemented
by corporate earnings beating estimates and
jobs data outstripping forecasts. Europe,
however, remained a mixed influence, as weak
manufacturing and business confidence figures,
even in Germany, provoked an ECB rate cut.
Policy easing was seen also in countries ranging
from Australia to Vietnam.
Sources: GIC, Emirates NBD, Reuters
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1.09
1.1
1.11
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0.130731Correlation (1 mth)
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&P
50
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730
Eu
ron
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t 1
00
World Conventional Benchmarks
0.591338Correlation (1 mth)
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DJ
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1820World Islamic Benchmarks
FT
SE
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rld
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0.996657Correlation (1 mth)
Page 11
Islamic or Shariah compli-ant indices exclude indus-tries whose lines of busi-
ness incorporate forbidden goods or where debts/
assets ratios exceed 33%. The increasing popular-ity of Islamic finance has
led to the establishment of Shariah compliant stock
indices in many stock markets across the world, even where local Muslim populations are relatively
small, such as in China and Japan.
Volatility is a measure of un-certaincy of market returns. It is calculated as the standard
deviation of the returns in the reported month. The formula for the standard deviation is:
σ=E[(X-μ)2]1/2
Islamic Stock Indices
Conventional Stock Indices
Evolution of Islamic Stock Markets in April 2013 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Prices represent the closing price of the respective index at 30/4/2013. Percent-age Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Evolution of Stock Markets in April 2013 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Price represent the closing price of the respective index at 30/4/2013. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Page 12
CommoditiesOil
Oil prices dipped quite sharply in mid-month, but
recovered as trading positions rebalanced. Notably,
Brent troughed below $100, as demand from European
refiners declined, also in sympathy with the plunge
in gold prices. Opec, the IEA and US EIA all reduced
their forecasts for demand this year, referring to global
economic weakness. Both US and Chinese requirements
have slipped. Meanwhile, supply is comparatively firm.
The shale revolution in the US has seen crude exports rise
to their fastest for over a decade, and Iraq and Libya are
producing solidly again. High trading volumes reflected
the unwinding of speculative positions earlier in the year,
with some sign of momentum. A quieter geopolitical
environment has also tempered price expectations. The
WTI-Brent spread narrowed to around $10, as traders bet
on its volatility, rather than for any significant change in
the transport bottlenecks in the US that have driven the
discrepancy.
Natural Gas
The Henry Hub (HH) natural gas price index once again
gained substantially during April, contrasting with
the downforce upon other major commodities. It hit
a localized peak of $4.43/mmbtu in the middle of the
month upon cold Midwest and Texas US weather forecasts
promising elevated heating demand, as well as sliding
stocks data. Inventories were already below normal as
the result of an unexpectedly cool spring, limiting storage
injections. Buyers appeared again as prices breached
technical levels. However, late in the month profit-taking
kicked in, the market recognizing that climbing gas
output will actually keep supplies comfortable. Sellers
also saw further chart points failing to be breached.
Moreover, utilities were likely to be driven to use coal
rather than gas at such price levels.
Gold
Gold took a conspicuous dive in April, prompting much
soul-searching among investors and commentators, and
doubt about future direction. The apparent muddling
through of the US economy, without inflationary impetus,
and declining sense of crisis in the eurozone, combined
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Page 13
to quash the metal’s key attractions, and the onset
of volatility itself created harm. A slip below $1520
broke an important technical level, leading to bearish
momentum. Investors had showed signs of growing
tired of waiting for the recovery of higher levels
previously seen, losing out compared to the income-
yielding returns of equities in the year to date, as well
as their capital growth. Reactive buying from industrial
users and Chinese and Indian consumers brought a
turnaround late in the month, but gold’s spell seemed to have
been broken.
Copper/Base MetalsCopper hit an 18-month low during April, with production
rising at its quickest rate in a decade, as past mining
investments are realized. Chile’s output has been boosted by
the expansion of Escondida, the world’s largest copper mine.
Traders were concerned that producer profitability at current
prices meant that the downtrend could easily be sustained.
Stocks of the metal at LME warehouses have almost tripled
since last autumn. The sluggishness of manufacturing activity
in China, and its knock-on to global trade, added to the
concern, although later in the month a hint of optimism from
Chinese consumers came through to moderate sentiment.
Sugar/Agriculturals
A likely bumper cane crop depressed sugar prices, overriding
harvest delays owing to heavy rains. Record output from the
dominant centre-south region of Brazil is due, and speculators
drove prices down through technical supports. A huge
delivery against the US May futures contract compounded the
trend by adding to the global surplus, despite strong demand
from Asia and the Middle East. The price tumble might be
checked by mills switching to making ethanol, the biofuel
alternative to uptrending gasoline prices. With cane planting
creating a multi-year effect, however, the key props for sugar
would still appear mainly to be a weather event or change in
Brazilian energy policy, specialists advised.
Edible Oils
Palm oil dropped again in April, with concern prevailing
over the health of China’s economy, and supply continuing
to outpace demand. However, inventories in Malaysia, the
world’s second-largest producer, declined as exports held
above production, generating some hope of price rebound.
Bargain-hunting emerged late in the month, alongside a
rally in soybeans as demand for US product grew as Brazilian
exports slowed. However, prices were checked by the news
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3700
3800
Ba
se M
eta
ls A
gg
reg
ate
Ind
ex
Copper
Base Metals Aggregate Index
01−Feb 19−Feb 09−Mar 27−Mar 14−Apr 30−Apr17.5
18
18.5
19
19.5
US
D c
en
ts/l
b
610
620
630
640
650
660
Ag
ricu
ltu
re A
gg
reg
ate
Ind
ex
Sugar
Agriculture Aggregate Index
01−Feb 19−Feb 09−Mar 27−Mar 14−Apr 30−Apr760
780
800
820
840
860
Pa
lm O
il (
US
D/M
T)
13.8
14
14.2
14.4
14.6
14.8
15
So
yb
ea
n O
il (
US
D/B
sh)
Palm & Soybean Oil
Soybean Oil
Evolution of highly traded commodities in March 2013. MTM Change and Percentage Volatilities. US $ and US c indicate United States Dol-lar and United States cent repsectively. bbl = billion barrels, MMBTU = Million British Thermal Unists, MT = Metric Tonne, LB = Pound and Bsh=Bushel. Prices represent the price of the respective commodity at 29/3/2013. Source: DatastreamPage 14
that Indonesia, the world’s largest producer, cut export
taxes, liable to limit Malaysian shipments.
Sources: Financial Times, Wall Street Journal, OPEC, Bloomberg, Daily Telegraph
GCC
Gulf bonds progressed even higher in April in line
with a continuing sense of global economic weakness,
impeding any inflationary threat that might put
pressure on yields, which continued to drop. In
common with Dubai’s outperformance in stocks on
the month, CDS spreads tightened the most in the
emirate. Regional credit markets overall headed
sideways for much of the month, focusing on new
issuances and concentrated at the longer end of the
curve, particularly in investment-grade, although
additional investments veered towards the shorter
end to contain any duration risk. Regional liquidity
provided much bolster, but uncertainty had increased,
with doubts growing about the efficacy and longevity
of the US Fed’s easing and asset purchase strategy.
Late in the month, however, the ongoing support from
the US and European central banks appeared to be
reaffirmed, giving another shot in the arm to global
fixed-income, GCC instruments included.
Egypt / MENA
In contrast with GCC bonds, others in the Mena space
fared less well during the month, dominated by the
turbulence of Egypt, where unpromising private
sector activity continued to reflect continued political
dissensions and economic uncertainty. Nevertheless,
a degree of stability was brought by Qatar’s pledge of
another $3bn in purchasing the country’s sovereign
bonds, following the precedent of the $5bn committed
last year. Concerns for further devaluation of the
Egyptian pound, and diminished official reserves, were
alleviated, while agreement with the IMF remains an
outstanding and critical component of a concerted
recovery in sentiment. Tunisia meanwhile managed to
secure preliminary approval for a $1.75bn facility from
the Fund. Even so, recourse to bailouts and associated
terms can hardly given confidence to investors looking
beyond speculative investment to the medium term.
Malaysia / Far East
Yields fell on the month in response to overseas
benchmarks. Moreover, later in the month Asian
01−Feb 19−Feb 09−Mar 27−Mar 14−Apr 30−Apr3.3
3.4
3.5
3.6
3.7
3.8
Yie
ld t
o M
atu
rity
(%
)
137
137.5
138
138.5
139
139.5
140
140.5
141
Bo
nd
Ind
ex
Bahrain Bond Yields & Prices
01−Feb 19−Feb 09−Mar 27−Mar 14−Apr 30−Apr6.5
7
7.5
8
8.5
9
Yie
ld t
o M
atu
rity
(%
)
190
195
200
205
210
215
220
225
230Egypt Bond Yields & Prices
Bo
nd
Ind
ex
01−Feb 19−Feb 09−Mar 27−Mar 14−Apr 30−Apr1.65
1.7
1.75
1.8
1.85
Yie
ld t
o M
atu
rity
(%
)
275.5
276
276.5
277
277.5
278
278.5Malaysia Bond Yields & Prices
Bo
nd
Ind
ex
Bonds and CDS markets
high-yield benefited in the same way as their US
counterparts, as relative risk-aversion in earlier weeks
was reversed. Asian local currency bond markets
performed well as weak global economic data,
concerns over sharp declines in commodities prices
and aggressively easy monetary policies provided solid
backing. Bank of Japan announced a quantitative
and qualitative easing programme that surpassed
Page 15
Credit Default Swap Markets
Sovereign Bond Markets
Evolution of Bond Markets in April 2013 relative to the previous month. The table reports the price index on which the MTM Change is calculated (month-to-month) and the Yield of sovereign bond maturities typically between 6 months and 25 years. Data as at 30/4/2013.
Evolution of CDS Spreads in April 2013 relative to the previ-ous month. The index reported here represents the average ba-sis points (bp) of a 5-year CDS for protection against sovereign bonds. Data as at 30/4/2013. MTM Change refers to the change relative to the previous month.
01−Feb 19−Feb 09−Mar 27−Mar 14−Apr 30−Apr1.6
1.7
1.8
1.9
2
2.1
Yie
ld t
o M
atu
rity
(%
)
150
151
152
153
154
155
156
157
158US Bond Yields & Prices
Bo
nd
In
de
x
expectations. News that Japan is investing in ASEAN
bonds also gave support to regional markets. Asian
currencies generally rose in April, and inflation
data eased, both assisting sentiment. Malaysian
government securities advanced steadily, with local
accounts relatively undisturbed by election fears,
which were reflected instead by an interruption to
funds flows from abroad.
Global Benchmarks
Key bond markets were well supported in April,
giving a firm lead across the fixed-income universe,
owing to a succession of relatively poor economic
statistics around the developed world, in terms of the
rate of activity, with corresponding cuts to the IMF’s
respective forecasts. For example, US Q1 growth
data came in below expectation, though reasonably
positive at 2.5%, while Spanish unemployment data
highlighted the grim state of the eurozone. Both
US and European headline inflation figures fell.
Investors’ increasingly desperate hunt for income
led to higher returns among riskier assets, including
floating-rate and high-yield, corporates and
peripheral sovereigns, rather than safe havens. To
illustrate the point, Apple successfully issued $17bn
of debt, the largest such transaction ever.
Sources: GIC, Invest AD, Broker Reports
Page 16
Islamic Bonds (Sukuk)
GCC fixed-income trading was positive with a
tightening of spreads in April, according to GIC, with the
conventional space outperforming sukuk (1.51% versus
+1.07%). The HSBC Nasdaq-Dubai GCC USD Sukuk/Bond
TR Index (GCCB) rose to 160.2 from 158.0, to yielding
3.2%.
Deal flow was quiet. Among primary issues reported by
Reuters, Sharjah Islamic Bank (SIB) sold a $500 million
five-year sukuk at tighter pricing than initially indicated
owing to the strength of bidding from the Gulf Arab
region.
Maturing in 2018, and priced at par with a profit rate
of 2.95%, the issue’s order book was over $2 billion
when the official guidance was released. Traders noted,
however, that the it offered only a fractional premium for
an extended maturity, that might lead to a weakening
in secondary markets, as had already been seen on a
number of occasions.
GIC remarked that the deal attracted a wide range of
investors across geographies and investor types, as SIB
correctly positioned the credit, besides the scarcity value
of such a reputable name.
A $500 million sukuk from Turkiye Finans was the latest in
a series of international debt issues from Turkey. Middle
Eastern investors dominated, taking just over half the
deal, which was nearly four times oversubscribed.
Islamic banks in Turkey have followed the sovereign’s
lead, and sales of Turkish sukuk to Gulf investors may
increase as Istanbul extends its offerings, currently
working on new regulations to allow a range of
sukuk structures, designed for project finance and
infrastructure development.
Riyadh-based Al Bayan Holding became the first Saudi
Arabian company to issue an Islamic bond in Malaysian
ringgit (200m, $65.4m), as the first tranche of a 1 billion
ringgit programme. Companies in the Gulf are targeting
Malaysian investors to diversify funding sources and tap
Asian demand for Middle East debt. The sukuk was in
the form of wakala; certificates issued by an originator
through an SPV that buys assets given to an agent for
management.
01−Feb 19−Feb 09−Mar 27−Mar 14−Apr 30−Apr2.8
2.9
3
3.1
3.2
3.3
Yie
ld t
o M
atu
rity
(%
)
99.6
99.8
100
100.2
100.4
100.6HSBC−NASDAQ Dubai Sukuk Index (SKBI)
Cle
an
Pri
ce
Sukuk is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities
are structured to comply with the Islamic law and its investment principles, which
prohibits the charging, or paying of interest. Financial assets that comply with
the Islamic law can be classified in ac-cordance with their tradability and non-
tradability in the secondary markets.
Source: HSBC Nasdaq Dubai
Page 17
Indonesia’s finance ministry raised 1 trillion rupiah
($102.9m) worth of project-based sukuk, below
itsntargeted 1.5 trillion, at 6.8%.
Dana Gas received shareholder approval for refinancing of
its US$ 1bn trust certificates. New sukuk of US$ 850m (half
a convertible tranche, half ordinary, with 5-year maturities
and an average profit rate of 8%) were subsequently listed
on the Irish Stock Exchange, following a US$70m cash pay-
down and cancellation of another US$80m.
Kuwait Finance House (KFH) research showed the volume
of sukuk issued in the first quarter of 2013 to have reached
$34.2bn, up 21.5% on the quarter. Sovereign issuances
continued to dominate. Total issuance is expected to reach
$275bn by year-end. Global outstanding sukuk reached
$235.4bn, up 2.6% from $229.3 bn at year-end 2012 and
16.7% on the year.
Sources: GIC, Reuters
Accountancy Issues, Rules and Regulations
Liquidity guidance for Islamic banks due
The Kuala Lumpur-based Islamic Financial Services
Board (IFSB) is planning to issue strict guidance for
Islamic banks on the adoption of liquidity standards
by 2014, having already issued a draft guideline
in March 2012. That advisory warned lenders
lacking high-quality assets to meet new regulatory
requirements under Basel III, focusing on the liquidity
coverage ratio provision, designed to help meet short-
term obligations. The IFSB sets global guidelines for
Islamic finance which are combined with those by
national financial regulators. A separate guideline on
capital adequacy is currently under revision, hoped to
be issued at the end of this year.
Source: Reuters, May 15th
GOLCER believes this guidance for Islamic banks needs
to be finalized as soon as possible, as the industry
is urged to develop instruments to meet the Basel
III criteria, given that guidance has already been
issued for conventional banks. Liquidity is an area
where Islamic banks are seriously challenged, given
limited access to liquidity tools generally compared to
conventional banks, and specifically the lack of liquid
Shariah-compliant instruments that can meet Basel III’s
stringent requirements. To date, most countries have
a shortage of Shariah-compliant financial instruments
that can be classified as “level 1 assets” under Basel
criteria. Worse still, sukuk issued in countries with
a sovereign rating lower than AA- would not meet
the requirements for “level 2 assets”. It is urgent that
the industry find a speedy solution, innovating the
necessary instruments, which should also take into
account the avoidance of concentration of risk that
would otherwise place pressures on bank margins and
financing rates.
Innovative opportunities in Malaysia
Investors worldwide are increasingly attracted to the
lucrative opportunities that Malaysia exhibits in the
many different sectors of Islamic finance. The country
is spurring the sukuk sector forward while achieving
growth in various other sectors such as takaful, real
estate, Islamic equity, agriculture, transport and more
besides. Malaysia has become world-renowned as an
unprecedented Islamic financial hub. As long ago as
1999 the Kuala Lumpur Stock Exchange (now known
as Bursa Malaysia) launched its Shariah Index (SI) to
facilitate participation in equity investments to be
compatible with the Islamic principles of Shariah. The
Bursa Malaysia SI is a weighted-average index, initially
made up of 276 main board companies designated as
Shariah-approved securities by the Shariah Advisory
Council (SAC) of the Securities Commission of
Malaysia.
Source: The Global Islamic Finance Magazine, May 13th
GOLCER finds that the global growth of Islamic capital
market products and services in Malaysia has been
tremendous in recent years, with the development of
the stock market’s Sharia Index and the offering of a
holistic range of innovative Islamic market products,
from equities, derivatives, and commodities to debt
securities, across all sectors and industries.
Pakistan sets up Shariah Advisory Board
Pakistan’s securities commission has established a
nine-member Shariah supervisory board, with the
aim of overseeing Islamic finance instruments in
the world’s second-most populous Muslim nation.
A country-level approach to supervising Shariah-
compliant products was pioneered by Malaysia, and
recently other economies have introduced central
Shariah boards of their own, including Dubai, Oman
and Nigeria. Pakistan’s regulators are rolling out new
rules in an effort to grow Islamic banks’ share of the
total banking sector to 15% by 2017.
Source: Reuters, May 9th
The creation of the Shariah supervisory board was
predicted by GOLCER in previous issues of the bulletin
this year, since an accumulative and centralised
approach for regulating Islamic banks was understood
to be increasingly needed for adoption worldwide.
Page 18
Perspective
At a conference in Dubai on Islamic finance recently, it
was clear that the subject can be approached in very
different ways, not only in the frequent divergence
between some scholars and many bankers, but in
the varying assessments among themselves as to the
motivating forces by which the industry should grow.
Lead speaker Harun Kapetanovic, economic adviser
to the Dubai government, effectively made the point
in his remark, “Islamic finance has a dilemma. Does it
want to converge with international practices, or does
it want to integrate with economic development?”
He noted that the sector itself wants to converge with
certain established norms, “because the demand is
so strong”, but argued that it needed also to serve a
broader perspective in advancing prosperity, in line
with Dubai’s own aspirations to become an Islamic
economic (not merely financial) hub.
There is a distinction generally between those
voices seeking to identify basic principles and settle
universally upon them, and those who treat theoretical
purity as implausible in the world as it is today,
particularly as Sharia-compliant institutions compete
with traditional banks for funds.
Dr Azeemuddin Subhani, head of Islamic finance
at Ajman University, told the audience his
research found that “Sharia is one and final, but its
interpretation differs from scholar to scholar, region
to region, country to country”, and the chances of
standardisation, frankly, were nil. His exposition on
the meaning of riba, and the prohibition on money
begetting money, clearly defaulted to the attempt
to find a common scholarly understanding to inform
the whole of Islamic finance. Equally clearly, he was
not hopeful that the problems of a spectrum of views
would be solved.
Another speaker, from Malaysia, cited that he had
worked for four different banks, each harbouring its
own version of Islamic finance. That diversity was not
a source of difficulty, though, in his opinion. Indeed,
“that’s part of its beauty”, as to the sector’s possibilities
and range. There can be greater harmonization in terms
of regulatory requirements and documentation, but not
global standardization as such, he ventured.
Beyond that, representatives from banking, particularly
those from the conventional sector with Islamic
windows, made it clear that their main concern was to
meet the expectations of customers and clients.
One practitioner explained how even those people
wishing to retain Sharia-compliance were bringing
requests to achieve high yields from investment-grade
instruments, using leverage to enhance, for instance,
the slight yield premium paid on sukuk compared to
traditional fixed-income bonds. It can be done, he said,
but the gestation of the necessary paperwork can take
months, and the cost is correspondingly higher.
Thus, assorted pressures impinge on the evolution
of Islamic finance, which could be summarised most
briefly by highlighting whether the emphasis is on the
first or second element of the term. One leans towards
a commanding concept, implying uniformity; the other
acknowledges flexibility and a marketplace already in
existence, and takes a practical or pragmatic approach
to that challenge.
Spectrum of views tests Islamic Finance’s way forward
by Andrew Shouler
Page 19
Diary of Events
June: 10-11, 2013
AIx-en-Provence, France
Infinity Conference on International Finance
The 11th INFINITI Conference on International Finance: “The Financial Crisis, Integration and Contagion”, is
organised by SciencesPo Aix, Trinity College Dublin and Euromed Management Marseille, in coordination with
the Aix-Marseille School of Economics.
Keynote Speakers:
René M Stulz, The Ohio State University, USA
Geert Bekaert, Columbia University, USA
Contact: Linda Soriton: [email protected]
More information: http://www.infinityconference.com/
June: 26-28, 2013
Nottingham, UK
5th International IFABS Conference
This year, IFABS will be celebrating its 5th Anniversary in Nottingham at the East Midlands Conference Centre.
From the 26th -28th June, experts from over 60 countries around the world will come together in this historic
city to consider, collaborate and create ideas and solutions for the coming years. More information and a call
for papers (deadline is March 15) can be found online.
Contact: Ms Sandra Hopkins: [email protected]
More Information: http://www.ifabsconference.com/
July: 1-5, 2013
Durham, UK
Islamic Finance Summer School
The intensive five-day programme, organised annually, will enhance and develop your knowledge and skills to
help place you in an advantageous position for entering and working in the Islamic financial sector.
More information: [email protected]
Register now at: http://www.durham.ac.uk/dcief/ifss
Training Courses:
GOLCER Training Courses in Finance, Management and Statistics:
More Information: http://www.lums.lancs.ac.uk/files/coursesnew.pdf
Page 20
Research Team
Gerry [email protected]
Vasileios [email protected]
Rhea [email protected]
Marwa El [email protected]
Marwan IzzeldinDirector
DISCLAIMER
This report was prepared by Gulf One Lancaster Centre for Economic Research (GOLCER) and is of a general nature and is not intended to provide specific advice on any matter, nor is it intended to be comprehensive or to address the circumstances of any particular individual or entity. This material is based on current public information that we consider reliable at the time of publication, but it does not provide tailored investment advice or recommendations. It has been prepared without regard to the financial circumstances and objectives of persons and/or organisations who receive it. The GOLCER and/or its members shall not be liable for any losses or damages incurred or suffered in connection with this report including, without limitation, any direct, indirect, incidental, special, or consequential damages. The views expressed in this report do not necessarily represent the views of Gulf One or Lancaster University. Redistribution, reprinting or sale of this report without the prior consent of GOLCER is strictly forbidden.
Andrew ShoulerEditor