Sunday, June 30, 2013

Dubai still not out of the woods yet, warns the IMF (BY IFN)

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UAE: Positive growth has been recorded across the main sectors of Dubai’s economy over the last few months, particularly in real estate, banking and tourism. Debt repayments by local banks such as Dubai Islamic Bank’s US$3.75 billion (US$1.03 billion) loan from the UAE Finance Ministry which was paid in full in March, as well as successful restructurings by government-related entities are also considered to be a clear sign of economic recovery in the emirate.
Just yesterday, the Morgan Stanley Capital International (MSCI) annual market classification review upgraded the MSCI UAE Index to emerging market status, an initiative which the Dubai Financial Market (DFM) is said to be heavily invested in, according to its managing director, Essa Kazim. “The reignited interest of local and foreign investors towards DFM since the beginning of the year underlines that we have catered to investors’ expectations and displayed the attractiveness of the UAE market to foreign investments,” Essa said.
However, the International Monetary Fund (IMF) has suggested that the emirate take more prudent steps this time around as the economy recovers, instead of just riding the wave of a new boom. “A faster pace of consolidation in Dubai would be desirable to address the emirate’s continued debt-related risks,” it said in its latest report on the UAE. The report also described insufficient domestic policy reforms as a risk to the UAE economy, in the event of a new “boom and bust cycle”.
Renewed optimism fuelled by rising real estate prices and loose global liquidity conditions could also spur a renewed cycle of imprudent risk-taking and re-leveraging by government-related entities, and possibly affecting banks’ balance sheet in light of their growing association with government-related entities, the IMF warned.

Saturday, June 29, 2013

A Special Epicentre Interview with Dr. Zeti Akhtar Aziz, Governor, Bank Negara Malaysia and Chairman, MIFC Executive Committee, on the resilience of Islamic finance and its role in cross-border financial stability and as a link between international financial markets and a wider range of economies.

A Special Epicentre Interview
An interview with Dr. Zeti Akhtar Aziz, Governor, Bank Negara Malaysia and Chairman, MIFC Executive Committee, on the resilience of Islamic finance and its role in cross-border financial stability and as a link between international financial markets and a wider range of economies.
Islamic finance has seen a significant surge in interest globally over the past decade and is becoming an actively used offering in the global financial landscape. Last year sukuk issuance marked a record high of USD131 billion globally with more issuers adopting this instrument as a source of funding. This continues to take place against a global climate of uncertainty. To what would you attribute this steady growth and the widespread adoption of Islamic finance in these recent times?
Experience from the global economic and financial system in this recent decade have accorded us to draw critical lessons towards building a global financial system that is more stable and resilient. Issues with systemic implications that have emerged compel policymakers to consider and develop new policy directions which would positively impact global growth and stability.

The recent crisis in the advanced economies has reinforced the importance that any financial system needs to serve the real economy with the main purpose to effectively intermediate savings and excess funds to generate economic growth. In this regard, the universal values inherent in Islamic finance can be appreciated by people of different faiths and used by all, with the Islamic financial system having experienced significant growth since the mid-1990s with total Islamic financial asset size now at more than USD1 trillion.

According to Standard and Poor's, this number is projected to grow by 20% over 2011-2015, doubling in size over this period, making it one of the most vibrant and fastest growing segments in the global financial industry. Islamic finance is an asset class that is becoming attractive for global investors to diversify their investment risks.

The core proposition of Islamic finance draws from its inherent principles found in Shariah such as profit-and-risk sharing, transparency, good governance and the avoidance of over- leveraged financial activities, many of which are in line with the universal values of fairness. These features, amongst others, bring to the economy the tremendous potential to support sustainable economic growth and promote financial stability, as they require financial transactions to be underpinned by real economic activities. Thus, financial innovation and intermediation are aligned to generating productive economic activities.

Innovation in Islamic finance has resulted in a wide range of products and services that are increasingly meeting the demands of an economy, for example, financing products offered include syndicated financing, equity financing and venture capital, a wide range of investment and treasury instruments, as well as fund and wealth management products.

Furthermore, Islamic finance products have grown beyond the traditional contracts to new hybrid contracts to serve the needs of a more dynamic market with new hybrid concepts such as bi al-istithmar wakalah (investment representative) and musharakah mutanaqisah (diminishing partnership) which are frequently being used today in the structuring of Islamic financial products.

The additional requirements in Islamic finance, which strongly discourage excessive risk taking and speculative business activities, provide additional safeguards for stability and resilience in the global financial system. There is also a rising demand for more ethical investment products which are not involved in the financing of prohibited activities and industries such as alcohol, tobacco, gambling and weapons, which is in line with the principles found in Islamic finance. All of these fundamental characteristics demand for financial institutions to focus on their core function of providing financial services that add value to the real economy. In particular, sukuk has been used to finance infrastructure projects and productive real sectors. Therefore, Islamic finance continues to internationalise its role and relevance in contributing to the global agenda to foster sustainable growth that is firmly anchored to the real economy.
You have spoken passionately about the development of Islamic finance with particular importance to the internationalisation of Islamic finance. What do you mean by internationalisation and why is this important?
The basis for internationalisation is the practice of mutual economic benefits between markets. Islamic finance provides a common basis for financial flows of international trade and investment, which continues to bridge and deepen cross- border economic cooperation as we progress through shared prosperity.

In this current global environment, emerging economies are experiencing sustained growth despite the moderation in global expansion, mainly through greater domestic demand as well as increased intra-regional trade, which provides tremendous prospects for mutually reinforcing growth from increased economic and financial connectivity. With trade among the expanding emerging economies accounting for more than half of the world's trade, Islamic finance has an important role to facilitate trade and investment flows that will be mutually reinforcing and serve the real economy. Today there are more than 600 Islamic financial institutions operating in 75 countries.

In evolving Malaysia as an Islamic financial marketplace, the goal is to be an open marketplace that is linked to a network of other financial hubs. The openness of Malaysia's marketplace has seen increased foreign participation both in terms of institutional presence and participation in the capital market. In doing so the increased internationalisation of Islamic finance would influence the patterns of global financial and economic integration, and intensify financial and economic connectivity between countries. The business environment that is conducive particularly in cross-border fund raising activities, as well as fund and wealth management activities, has also attracted many foreign corporates, financial institutions and investors to opt for Malaysia as their location of choice for Islamic financial business and investment.

In the sukuk segment, Malaysia offers a multi-currency platform for international fund raising and for investment activities by multinational entities. Malaysia's total sukuk issuance in 2012 was approximately USD97 billion, with total sukuk outstanding at USD144 billion as at December 2012. Our sukuk marketplace is delivered through players with global capabilities and connectivity to a wider investor base and supported by a robust regulatory and supervisory framework, an efficient price discovery platform and a deep primary and active secondary sukuk market, amongst others. This has enabled the cost effective issuance of sukuk as compared to that of a corporate bond in Malaysia.

To facilitate international trade, Malaysia's settlement system allows for the settlement and clearing of securities in RM, USD and RMB. Furthermore, Malaysia's progressive liberalisation of its financial and foreign exchange markets continues to facilitate the internationalisation of Islamic finance. This is reflected by the recently announced liberalisation measures to enhance the competitiveness of the Malaysian economy, which were, amongst others, aimed at promoting the development of the Islamic financial markets through greater flow of cross-border Islamic financial activities and greater use of Islamic financial intermediaries, where resident takaful operators are permitted to undertake investments abroad of any amount on behalf of their resident clients.
Malaysia has been a key driver in the implementation and development of Islamic finance. How do you see Malaysia's role in the future development of Islamic finance globally?
The internationalisation of Islamic finance forges strategic and collaborative partnerships where markets and society can benefit from economic and financial linkages. Opportunities come from jurisdictions having in place comprehensive frameworks that support the development and advancements in Islamic finance and shape the internationalisation of Islamic finance collectively. Tremendous opportunity will also come from the emerging markets where there is strong demand for effective financial intermediation. In supporting the real economy, Islamic finance can play a sustainable role, and in particular in emerging economies as they participate in a more internationally integrated financial system. All this will facilitate mutually reinforcing global growth and development.

For Malaysia's Islamic finance marketplace, the vision was articulated in our first ten-year Financial Sector Masterplan that was launched in 2001, in which the plans for building the foundations and for further intensifying the framework for the Islamic financial system were outlined. This included strengthening and diversifying the financial intermediaries in the financial system, building and developing the financial markets, and enhancing the regulatory, supervisory, Shariah and legal framework. In 2011, a new Financial Sector Blueprint was launched, charting the next ten-year path for Islamic finance to transition to become increasingly internationalised, and thus to become more integrated with the mainstream of the global financial system. Malaysia continues to contribute to the strengthening of international infrastructures in Islamic finance that support financial stability such as the IFSB (Islamic Financial Services Board) and IILM (International Islamic Liquidity Management Corporation.)

Malaysia has built a comprehensive and international Islamic finance marketplace that is accessible to the world. It is connected to support the mobilisation of higher volumes of cross-border Islamic financial flows from a diverse range of market participants. These financial flows will be channelled through innovative and responsible Islamic financial instruments, to meet the diversified and sophisticated needs of trade, investors, markets, corporations and individuals globally.
There are different schools of thought when it comes to the interpretation of Shariah in finance. How does this affect the industry globally and can Malaysia play a role in Shariah harmonisation in the global market?
Differing opinions promote deeper understanding and encourage innovation. While this is so, mutual recognition of Shariah interpretations across jurisdictions is imperative to ensure that the value proposition that Islamic finance brings to the global economy is sustained.

Malaysia's Islamic finance marketplace accords importance to mutual recognition, as this contributes to greater global financial integration. Our practice of mutual recognition accepts Shariah interpretations and practices from the four major Islamic schools of thought - Hanafi, Shafii, Maliki and Hanbali. This enables the various markets to drive Islamic finance as their Islamic financial institutions will develop products to the needs of their target markets. While differences in Islamic finance interpretation still exist, though small, there is now greater convergence in Shariah interpretations and thoughts due to an increase of dialogue globally that promotes deeper understanding and awareness of the Shariah resolutions and rationale from various jurisdictions.

ISRA (International Shariah Research Academy for Islamic Finance), continues to organise and lead international and regional Shariah dialogues such as the International Shariah Scholars Forum to nurture greater engagement, understanding and mutual respect towards Shariah harmonisation amongst scholars, thought leaders and markets. ISRA recently launched the Islamic Financial Knowledge Repository Portal 'i-Fikr' to provide a comprehensive knowledge database on Islamic finance.

Due to the increasing convergence of Shariah interpretations as applied to Islamic finance, the practice of mutual recognition in our marketplace supports the opportunities for the global financial community to innovate products that meet the value propositions offered by Islamic finance.
Apart from Shariah harmonisation, what would a marketplace need for Islamic finance to flourish?
For an Islamic finance marketplace to flourish it needs to be open, progressive and vibrant with a global focus that is cognisant of the cross-border opportunities for Islamic finance. A marketplace complete with innovative and responsible products and services, supported by a comprehensive, business-friendly infrastructure to deliver clarity and certainty for market confidence and predictability for businesses, players with global capabilities and connectivity. It must also handle a robust regulatory and supervisory framework, an efficient price discovery platform, and deep primary and active secondary markets, amongst others.

A major advancement in Malaysia's Islamic finance marketplace is the recently enacted Islamic Financial Services Act 2013, which together with other financial sector laws, including the Central Bank of Malaysia Act 2009, provides for a deeper degree of market confidence to participate in a much more complex financial landscape. Another important requirement for the continued growth and resilience of the Islamic financial industry is robust liquidity management. The internationalisation of Islamic finance, with greater frequency of cross-border transactions require effective short-term liquidity management. This is a requirement not only in stressful conditions but also in normal times.

Malaysia's approach to Islamic finance is to continue to facilitate the internationalisation of products, services and expertise, through deepening cross-border linkages and partnerships to collectively shape Islamic finance for the world thereby contributing towards the stability and resilience of the world's financial markets.

Friday, June 28, 2013

Ongoing protests might put a damper on Islamic finance activity in the republic (By IFN)

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TURKEY: Protests that have erupted in Turkey since the 1st June which was initially sparked by the government’s decision to redevelop Gezi Park in Istanbul and has escalated into an avalanche of dissatisfaction against the current ruling party’s governing tactics led by prime minister Recep Tayyip Erdogan, could possibly affect the republic’s Sukuk aspirations; a government source told Islamic Finance news. “I can say that this turbulence will definitely cause delays on any planned Sukuk issuance, but I have not heard any news on the postponement of the project to establish two government-backed Islamic windows,” the source said.
One of the two projects includes the decision in April by the country’s largest government-backed bank, Ziraat Bankasi, to launch a fully-fledged Islamic banking subsidiary. At the time the announcement was made, the bank was looking for partnerships for the venture, and was in the process of mobilizing expertise for the establishment of the entity.
Since the beginning of the year, the republic has been in the spotlight in terms of Islamic capital market activity and has made clear its intentions to grow its participation banking sector. Local construction and real estate conglomerate, Agaoglu Group announced in March that it was looking to issue the first tranche of its US$2 billion Sukuk program for the construction of the Istanbul Financial Center, while the Capital Markets Board of Turkey is also currently working on new regulations to approve a wider range of Sukuk: including Istisnah, Murabahah, Mudarabah, Musharakah and Wakalah.
The source also added that the republic’s capital markets have already begun to feel the repercussions of the 12-day protest, with a conventional company listed on the Borsa Istanbul choosing to postpone its IPO amid the unrest in Taksim Square.

Emirates Islamic Bank to reduce exposure to real estate (BY IFN)

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UAE: Emirates Islamic Bank (EIB) has revealed a new and more aggressive expansion strategy for 2013 following its merger with Shariah compliant Dubai Bank. The bank, which intends to enhance its focus on retail banking, priority private banking, SMEs and mid-corporate business, is also looking to open 10 additional branches this year, bringing the total number of branches to 58. Faisal Aqil, deputy chief executive and head of consumer wealth management at EIB said that the bank is also looking to recruit between 70 to 80 junior staff in the coming months, with an eye on new graduates.
Also part of the bank’s 2013 strategy is to lower its direct exposure to real estate, including mortgages, to less than 20% from a previous chunk of more than 40% during the financial crisis. The bank has also allocated 10% of its total assets for lending to SMEs, as it looks to capitalize on the growing number of small to medium businesses in the emirate, which is said to constitute 95% of the country’s economy. EIB is also looking to grow its retail banking business by 35% this year, mainly through personal financing and credit card schemes. According to reports, the bank’s financial statements show that it had AED13.1 billion (US$3.56 billion) in personal financing receivables as at the 31st March, accounting for more than 50% of its loan book, and representing 11.1% growth since January.
According to Faisal, UAE-based banks were over-exposed to real estate during the wake of the financial crisis; encouraging the bank to reduce its current exposure moving forward. He also said that the government should consider imposing tax on investors who ‘flip’ their properties, or sell shortly after they have acquired a development. This is said to discourage any future mismatch between supply and demand in the property market.

RAM Ratings reaffirms AA3 rating of Prai Power’s bonds

Published on 24 June 2013

RAM Ratings has reaffirmed the AA3 long-term rating of Prai Power Sdn Bhd’s (“Prai Power”) RM780 million Al-Istisna’ Fixed-Rate Serial Bonds (“the Bonds”); the long-term rating has a stable outlook. Prai Power is an independent power producer (“IPP”) that owns and operates a 350-MW combined-cycle, gas-turbine power plant in Prai, Penang (“the Plant”). 

The rating remains supported by Prai Power’s sturdy business profile, underscored by the favourable terms of its power purchase agreement with Tenaga Nasional Berhad (“TNB”). In 2012, the IPP delivered a commendable operating performance enabling the IPP to claim 99.9% of its available capacity payments (“ACPs”) and fully pass through its fuel costs to TNB. If not for the high unscheduled outage rate (“UOR”) in 2011 that had been brought forward to 2012, the IPP would have suffered no loss in ACPs.

As per our expectations, Prai Power achieved a finance service cover ratio (“FSCR”) of 1.55 times (with cash balances, post distribution) as at its last principal repayment date of 26 February 2013, underscored by a healthy cash pile of RM48 million. Based on RAM’s sensitised cashflow projections, the IPP is expected to generate between RM96 million and RM114 million of annual pre-financing cashflow, translating into a minimum FSCR of 1.50 times (with cash balances, post distribution and calculated on its principal repayment date). As represented by the management, we expect Prai Power to curtail distributions to its shareholders should the need arise, to maintain its current debt-coverage levels. Given this, we have assumed that it will optimise annual distributions, subject to meeting the requirements of its finance service reserve account (“FSRA”), a post-distribution FSCR of 1.50 times, and a 4:1 debt-to-equity ratio at all times.

Although the Plant’s operations have improved markedly in terms of its UOR, we remain cognisant of its vulnerability to breakdowns – as has happened in the past – due to the utilisation of a single-shaft system that could completely shut down the entire facility should any component attached to the generator be disrupted. Similar to all other IPPs, Prai Power is also exposed to regulatory and single-project risks.

Media contact
Cheryl Yong
(603) 7628 1072

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