The Islamic finance industry experienced mixed fortunes in 2009. The good news was that Islamic retail bank deposits continued to grow despite the recession, and that although profits declined, at least there were no losses. The bad news was an increasing number of Sukuk defaults, cumulating in the failure of the originators of the Nakheel Sukuk in Dubai to meet their contractual obligations. The ambiguity concerning the rights of Sukuk investors despite the lengthy and detailed documentation that supported the Sukuk issuances is clearly disturbing. This year will continue to be challenging for the global economy, but the outlook for Islamic finance is better than that for 2009. Growth in the core GCC countries where Islamic finance is especially strong is picking up, and prospects for Islamic retail banking and Takaful are promising. Islamic banks should be able to raise their financing margins later in the year which should restore profitability. Islamic capital market growth will remain problematic however, as clarification of the legal position of investors may take some time, which will dampen confidence in any new Sukuk issuance.
PROFESSOR RODNEY WILSON
F For me, far and away the most important events of 2009 took place in Dubai, as the global credit crunch spilled over into the widely expected default of a Sukuk issued by Nakheel which was thankfully averted. I confess I find it difficult to understand how Islamic financing of a productive asset can ever give rise to a default, since I had thought that the underlying principle of Islamic finance was of equitable sharing of risk and reward. As for 2010, the current bubble in financial assets which has been caused by the current fad for ‘Quantitative Easing’ will commence to deflate in the first half of the year, and will lead to widespread recognition of the need for a new global settlement. I agree with Nasim Taleb and Willem Buiter, whose view is that if debt cannot be repaid then it will not be repaid, and that therefore the only solution to the crisis is for a new approach to equity. In fact Buiter explicitly refers to Islamic financing as a potentially optimal approach and I concur. The current approach to Islamic finance was well summed up recently in a BBC article by this quote: “The industry does not want to alienate its products,” he (a spokesman for a UK Islamic Bank) says. “They have to be recognizable, produce the same outcome as conventional products, but remain within the guidelines of Shariah.” With all due respect to the spokesman, I cannot understand how a methodology that produces the same outcome as an unIslamic product can ever be Islamic. In 2010, I hope to see the emergence of a genuinely Islamic finance based upon true value, and partnership principles. This may be distinguished from conventional financing based upon deficit — through money created by credit intermediaries as interest-bearing debt and greed — in the form of profit maximization by shareholders at the expense of all other stakeholders. CHRIS COOK Principal, Partnerships Consulting
Generally speaking, 2009 was not the best year for Islamic finance, particularly with regards to the GCC Sukuk market where several high profile defaults have caused an inevitable downturn in market confidence in the region in general. Earlier in the year Investment Dar defaulted on its Sukuk, which was followed by the freezing of Maan Al-Sanea’s accounts, causing repayment problems for the Golden Belt Sukuk, and the bankruptcy of East Cameron Gas. Finally, Dubai World announced a six-month payment holiday on all debt including Nakheel’s US$3.5 billion Sukuk. It must be noted however that it has not been only doom and gloom in the industry. Prior to the Dubai World announcement, Sukuk issuance was re-establishing itself in the market for the first time after the increase in spreads in 2008 made them unattractive, and for a while it looked like stability had returned to the market. To be fair, the Dubai six-month payment holiday is not strictly an Islamic finance issue. Out of the total debt that was underlying this announcement, around 30% is financed in a Shariah compliant way, with the remainder being conventional finance. The lack of transparency within the GCC region, uncertainty regarding the individual states’ financial positions and the collapse of the value of real estate has affected the region and as a result, their key role within Islamic finance industry. During the first quarter of 2010 the industry will likely still be suffering from the fallout of the Dubai World announcement and the associated unease in the markets. However, with the recovery of the global economy, we should also see growth in Islamic finance return. The defaults that occurred during 2009 will likely remove at least some of the euphoria of a part of the financial industry growing at relatively breakneck speed. It will likely force the enhancement of the implementation of governance and risk management standards, a review of how the rating agencies rate Sukuk and a fresh look at standardization. Each of these will assist the Islamic finance industry in reaching a new maturity level and continue to grow. DR NATALIE SCHOON Head of product management, Bank of London and the Middle East
Key developments in 2009: In the aftermath of the crisis, the industry has deepened and diversified its business mix, especially in Islamic asset management. There has been increase in the number of dedicated global MIFC initiated Islamic asset managers and legal entities headquartered in Malaysia, 10 to date. CIMB-Principal Islamic became the first to have a dedicated Islamic license offering global Islamic capabilities in both equities and Sukuk asset classes. Lessons learned? Islamic banks have not been immune from the crisis. Liquidity remained a significant constraint for banks. There was increased competition in the war of deposits. A number of Islamic banks have been harder hit by non-performing loans (NPLs) than conventional peers and continue to face the risk from real estate concentrations. The recovery of investible assets from Sukuk structure is being tested with the default of three Sukuk — Cameroon US, Kuwait Dar and Nakheel. What does 2010 hold? NORIPAH KAMSO CEO, CIMB-Principal Asset Management
During 2009, the Islamic finance industry was forced to recognize that it was not immune from the effects of the economic downturn that was triggered by the financial crisis beginning in the US. This realization came to a head in November when Dubai World asked its creditors for a standstill agreement, which included the soon-to-mature Nakheel Sukuk. Although the Nakheel Sukuk was redeemed in full with assistance from Abu Dhabi, it placed a significant amount of negative attention on the Sukuk market as a whole. The Nakheel debacle probably represented the low point for Sukuk and Islamic finance in 2009, but it followed a resurgence in new Sukuk issuance from sovereign entities including Dubai, multilateral organizations like the Islamic Development Bank and the International Finance Corporation and international corporations including GE Capital. The lessons from the good and bad events in 2009 will continue to be realized during 2010. At the heart is that a Sukuk is only as good as the ability of its issuer (or the assets backing it) to make the payments. The industry will have to confront whether the use of unsecured, asset-based Sukuk is in the industry’s long-term interest. The use of a purchase undertaking in a default insulates investors to some degree from a fall in the value of the asset behind a Sukuk, which moves the industry away from the idea that it is based on a more equitable sharing of risk and reward than conventional finance. BLAKE GOUD Principal, Sharing Risk dot Org
Restructuring of Islamic debt instruments was a major challenging task faced by the industry in 2009. A number of Sukuk defaults confirmed my view that the Islamic financial industry was affected by any adverse shocks with a lag — about 18 months after the conventional industry. This means that it is true that Islamic finance in general is more resilient to external shocks as compared to its conventional counterpart. The new year will bring a lot of new opportunities for Islamic finance and I hope that it will prove to be a year of recovery, despite many analysts showing a gloomy picture for the financial services. PROFESSOR HUMAYON DAR CEO, BMB Islamic
Key developments in 2009 were around the financial crisis. Islamic finance kept moving forward and learned a few lessons for the future, in particular, testing the default system. In 2010 expect continued expansion. There will be positive movement in China, Central Asia and Canada. DAUD VICARY ABDULLAH Global leader of Global Islamic Finance Group, Deloitte
Key developments have been how the Islamic finance industry has been highlighted in the recent global credit crisis; how Islamic banks overall have been largely sheltered from the recent downturn; the growth of the Sukuk market after the concerns raised in 2008; the French government’s acceptance of Islamic finance; and the growth of the Islamic ETF industry. Here in Canada we released a new Islamic ETF and an Islamic MasterCard for Canada’s one million-strong Muslim community. In 2010 we should see the growth of the retail Islamic banking industry which is still under 10% in most markets; growth of the Takaful industry; and how the sector starts to diversify from real estate to other segments. We will see many more in 2010 when western corporate, quasi-sovereign and sovereign government Sukuk increase. Here in Canada we have many activities between GCC and Canadian parties working in that direction. OMAR KALAIR President and CEO, UM Financial Canada
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