The Bahrain Monetary Agency (BMA), on behalf of the government of Bahrain, issued a US$50m Sukuk al-Ijara beginning December 15, 2003, with a three year tenor. The issue was oversubscribed to a value of US$80.4m. This is an indication that investors and banking institutions remain confident in Bahrain's economy and government issued bonds.
An interview with Atif Abdulmalik, Chief Executive Officer of First Islamic Investment Bank (FIIB) in Bahrain. The US is an important market for Islamic investments, and there is concern amongst Islamic bankers over increased regulations from the US. FIIB is expanding beyond the US market and into Europe, hopes to target the Middle East and Malaysia in the near future, and is considering offering a private equity fund in a few years.
The CIMB Muamalat Fund closed in June 2003 after raising US $86m and has now begun to invest in companies through private equity buyouts. Asia is a strong new market for investment in start-up and developing companies. Some of the issues involved in a buyout include: appropriate management of the company to be taken over, proper valuation, when to enter and exit the market, how to best promote growth, and Shariah compliance. The targeted IRR is 30% per annum, therefore the buyout companies must be able to grow to that level, and will typically be leaders in their sector of the market.
The Kuwait-based Almal Investment Company KCSC has developed the Almal US Shariah-compatible Index (USSCI) in order to offer Islamic investors a more conservative market index than the Dow Jones Islamic index (DJIM). USSCI uses a shari`a screening system with a financial debt to assets ratio of no more than 33.33%, whereas Dow Jones compares debt to market capitalization.
Islamic banking still faces several challenges: a need for uniformity on shari`a issues, insufficient liquidity management schemes, and a need for an Islamic interbank system.. Islamic banking and finance will not grow further without a more efficient capital market. Secondary markets are needed and can be created by greater market liquidity and price transparency.
Prices of precious and base metals have risen and will likely continue to do so at high rates for the foreseeable future. Negative economic conditions of the previous decade (collapse of Soviet Union, the Asian and South American market crises, global equity markets) created a foundation for an increased demand for commodities, partially due to industry consolidation. Increased demand for commodities indicates a growth in industrial production. The weak US dollar has lowered commodity prices and thus increased demand, both for industrial use and as a hedge against the weakening US dollar.
The rapid increase in the number of sovereign global Sukuks is an indication that the Islamic finance sector is taking steps to develop a more active capital market and secondary trading system. Government issued Sukuks create a short term investment market for Special Finance Houses and Islamic banks, increasing short-term liquidity. Sukuks and conventional Treasury bonds allow governments to diversify sources of funding, while also reducing the costs of such funding. The
Qatar has expanded its funding sources to include a US$700m sovereign global Sukuk, issued on September 30, 2003, primarily intended to diversify funding for upcoming natural gas projects and development. The issue was oversubscribed, mainly to new Middle Eastern investors, yet lacks major involvement from North American and European financial institutions. A sovereign Iraq Reconstruction
The Islamic Development Bank (IDB) has encountered difficulties due to the dysfunctional governance of some of its member states combined with the almost total absence of functioning democracies; yet the IDB has rarely discussed the issue of governance during its annual meetings. Good governance should be a higher priority of the IDB and the Organization of Islamic Conference (OIC), given that economic growth is linked to quality of governance, and that social progress has been impeded by government corruption.
Interview with Dr. Adnan Buyukdeniz of Albaraka Turkish Finance House (ABTFH). Confidence has been restored to the Turkish Islamic finance sector after the banking crisis of 2001. Special financial houses (SFHs) are now regulated in the same way as conventional banks under the Banking Act, though they are still allowed to operate as profit-loss institutions. SFHs in Turkey have increased the amount of deposits held in Turkish lira (TL), as opposed to foreign currency, to about 25%, an indication of growing confidence in Turkish currency.