Islamic Finance Bulletin

Transcription

1 Islamic Finance Bulletin April 2012 Conventional Stock Markets 2 Islamic Stock Markets 4 Bond and CDS Markets 6 Commodities 8 Accountancy Issues 10 Recent Developments 11

2 Stock Markets Tension in the euro zone spilt over markets elsewhere in the world. The MENA region was the riskiest to invest in and the far eastern markets were the least risky. Table 1: Evolution of Stock Markets in March 2012 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 23/2/2012. Percentage Month-to-Month(MTM) Returns, Percentage Volatility, Percentage Value-at-Risk(VaR). Volatility is a measure of uncertaincy of market returns. Value at Risk (VaR) estimates the worst possible return that can happen tomorrow with a given confidence (here 95%). Source: Datastream * Value at Risk (VaR) estimates the worst possible return that can happen tomorrow with a given confidence (here 95%). Page 2

3 Regional Indices: GCC Kuwait fell by about 7 percent in April owing to the stir related to the upward pressure on private and semi private sector salaries in the nation. The wage rise is expected to cost the private sector a pretty penny (approx. 90 million KWD per year), which could lead Kuwait into a deficit. The stable rise in Oman crude prices are reflected in the Oman stock markets returns as it rose by about 5 percent. The average volatility and VaR in the GCC region over April were at 0.89 percent and -1.7 percent respectively. MENA The ongoing distress in the EU has led to the fall of indices in Egypt. The returns wend down by about 6 percent. There were signs of revival in the Tunisian economy after Qatar extended a USD 1 billion loan. The markets rose by 4 percent. The average volatility and VaR in the MENA region were at 1.5 percent and -3.5 percent respectively. Far East Asian stocks had negative returns in April owing to the weak employment numbers in the US and EU, leading to a dim economic growth. In Taiwan, the market fell by about 5 percent as investors remained pessimistic over the insecurity in the EU. Thailand and Philippines were the only markets which showed positive gains of 1 percent and 0.5 percent respectively. The average volatility and VaR in the region were at 0.6 percent and -1.2 percent respectively. Rest of the World Markets elsewhere showed mixed results. Owing to a boost in corporate earnings in the US, South Korean markets rose by 2 percent. China jumped by 3 percent as the manufacturing industry boosts. China s PMI increased to the highest level in 13 months, signalling further recovery. As the demand for dollar increased from oil importers, and as Stock Markets Page 3

4 Stock Markets the tension in EU rose, Indian rupee has fallen significantly. The Indian market fell by 4 percent. The Dj Islamic and the FTSE Shariah world indices fell by about 1 pecent. Source: FT, Bloomberg, Reuters, WSJ. Table 2: Evolution of Islamic Stock Markets in March 2012 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 23/2/2012. Percentage Month-to-Month(MTM) Returns, Percentage Volatility, Percentage Value-at- Risk(VaR). Volatility is a measure of uncertaincy of market returns. Value at Risk (VaR) estimates the worst possible return that can happen tomorrow with a given confidence (here 95%). Source: Datastream Islamic or Shariah compliant indices exclude industries whose lines of business incorporate forbidden goods or where debts/assets ratios exceed 33%. The increasing popularity 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. Page 4

5 Islamic Index Bahrain Conventional & Islamic 220 Islamic Index Islamic Index Oman Conventional & Islamic Saudi Arabia Conventional & Islamic 900 Figure 1: Evolution of GCC Stock Markets (Conventional and Islamic) in January March Source: Datastream Conventional Index Conventional Index Conventional Index Islamic Index Islamic Index Kuwait Conventional & Islamic Qatar Conventional & Islamic 6200 Islamic Index UAE Conventional & Islamic Conventional Index Conventional Index Conventional Index Stock Markets Page 5

6 Bond and CDS Markets Bonds and CDS markets The bond market is an environment in which the issuance and trading of debt securities occurs. The bond market primarily includes government-issued securities and corporate debt securities, and facilitates the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions and ongoing operations. A credit default swap is one which is designed to transfer the credit exposure of fixed income products between parties. A credit default swap is also referred to as a credit derivative contract, where the purchaser of Table 3: Evolution of Bond Markets in March 2012 relative to the previous month. The index reported here represents the average yield of sovereign bond maturities typically between 6 months and 25 years. Yield represents the yield as at 23/2/2012. MTM change refers to the change in the yield relative to the previous month. Table 4: Evolution of CDS Markets in March 2012 relative to the previous month. A credit default swap (CDS) is an agreement that the seller of the CDS will compensate the buyer in the event of a loan default. The buyer of the CDS makes a series of payments (the CDS fee or spread quoted in basis points) to the seller and, in exchange, receives a payoff if the loan defaults. Riskier economies will have higher CDS spreads. The CDS spread can be more informative on the risk of the country as the CDS market is more liquid than the bond market. The index reported here represents the average basis points of a 5-year CDS for protection against sovereign bonds.basis Points are the latest value of every index at 23/2/2012. MTM change refers to the change relative to the previous month. Page 6

7 Yield to Maturity (%) Yield to Maturity (%) Yield to Maturity (%) Bahrain Bond & CDS Indices Thailand Bond & CDS Indices Qatar Bond & CDS Indices Figure 2: Evolution of Important Bond and CDS Markets in January March Source: Datastream CDS Mid Spread (bp) CDS Mid Spread (bp) CDS Mid Spread (bp) Dubai Mid Spread (bp) UAE CDS Indices 330 Yield to Maturity (%) Malaysia Bond & CDS Indices 2.3 Yield to Maturity (%) Egypt Bond & CDS Indices Abu Dhabi Mid Spread (bp) CDS Mid Spread (bp) CDS Mid Spread (bp) Bonds and CDS Market Page 7

8 MENA Region Markets the swap makes payments up until the maturity date of a contract. Payments are made to the seller of the swap. In return, the seller agrees to pay off a third party debt if this party defaults on the loan. A CDS is considered insurance against non-payment. A buyer of a CDS might be speculating on the possibility that the third party will indeed default. CDS markets are more liquid than bond markets and thus give a clearer reflection of the existing market scenario. The CDS in most countries is now linked to the euro crisis at least in about 5 percent. Gas prices continue to be risky with volatility and VaR at 3 percent and -4 percent. Gold As S&P downgraded Spain s ratings and as Asian markets cut down on buying the bullion, Gold prices dipped by about 0.2 percent. The precious metal had a volatility of 1 percent and VaR at -2.5 percent. the short term. Commodities Crude Oil Oil prices fell last month as production in the Middle East is expected to rise. There has also been an increase in demand as the US economy showed signs of recovery. Natural Gas A cooler spring has led to a rise in the demand for natural gas. Prices rose by Copper Copper prices stepped up by about 1 percent as the stock levels outside China, its biggest importer has fallen. Further to this, China has announced to export the metal so as to ease the squeeze of the red metal. Risk indicators show that copper was highly risky last month with volatility and VaR at 1.7 percent and -4 percent respectively. Palm Oil There weren t any fluctuations in the price of palm oil in April in spite of Page 8

9 concerns about a weak global economy. This was due to the increase in exports which jumped by about 10 percent. Palm oil had a volatility of 0.69 percent and its VaR was at percent. Sugar Sugar prices fell by 12 percent last month as India removed export restrictions on the crop. This was coupled by the start of harvest in Brazil. Sugar had a volatility of 1.3 percent and its VaR was at -3 percent. Source: FT, Bloomberg, Reuter, WSJ. Commodities Table 5: Evolution of highly traded commodities in March MTM Percentage Returns, Percentage Volatilities and Percentage VaRs. US $ and US c indicate United States Dollar and United States cent respectively. bbl=billion barrels, MMBTU=Million British Thermal Units, MT=Metric Tonne and LB=Pound. Source: Datastream 130 Crude Oil 2.8 Natural Gas 1800 Gold Natural Gas Gold USD/barrel Brent Oil Dubai Oil WTI Oil USD/MMBTU USD/Troy Ounce Copper Copper 1200 Palm Oil 26 Sugar Sugar USD/MT USD/MT USD cents/lb Palm Oil Figure 3: Evolution of highly traded commodities (prices) in January March Source: Datastream Page 9

10 Accountancy Issues Issues on the Accountancy Rules and Regulations for Islamic Banks and Islamic Finance New IFSB guidelines focus on Islamic bank risk: The Islamic Financial Services Board (IFSB) has published new guidelines on liquidity and stress-testing. The objective is to reduce the balance sheet risk of Islamic financial institutions in line with a tightening of standards in conventional banking. The guidelines are not mandatory. They should be effective in The IFSB calls for closer scrutiny of maturity mismatches, more attention to avoiding excessive concentration of funding sources, and better measurement of unencumbered assets, or assets on which there are no claims. We believe that the IFSB s new standards are part of a series of initiatives in the last several months to address the issue of risk in the industry. Early in May the Accounting and Auditing Organisation for Islamic Financial Institutions (AAO- IFI), another standard-setting body based in Bahrain, proposed more detailed accounting standards for real estate while increasing disclosure for Islamic banks investment accounts. The IFSB appears to be working on a detailed guidance in response to the global financial crisis. Source: Reuters BIBF signs a key Islamic finance deal with IFSB: The Bahrain Institute for Banking and Finance (BIBF) has signed an important memorandum of understanding (MoU) with the Islamic Financial Services Board (IFSB). IFSB is responsible for the issuance of global prudential standards and guiding principles for the industry. The fundamental purpose of the MoU is to obtain an international cooperation between the two organisations. This would include the development of joint research and publication for the Islamic financial services industry, and building awareness of conferences, seminars, workshops, roundtables, trainings or other events relating to the Islamic financial services industry. We perceive this collaboration as a key step toward the harmonization between professional practice as well as education from one side and the regulatory setting in the industry from the other side. This is likely to emphasize on the Page 10

11 continuous development in the Islamic finance sector through creating greater awareness and facilitating the implementation of the IFSB standards. Source: Gulf Daily News AAOIFI proposes Islamic Finance Accounting Changes: The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) proposed more detailed accounting standards for real estate. It also emphasised on the need to increase disclosure for Islamic banks investment accounts. AAOIFI proposed merging two of its existing standards for Islamic banks investment accounts in order to eliminate accounting arbitrage. The investment accounts are the equivalent of deposit accounts at conventional banks, and are a major source of funds for Islamic banks. Islamic investment houses across the Gulf have been under increased investor scrutiny over their exposure to the real estate sector and their approach to valuing those assets. The new real estate standards focus on valuation methodology, clarifying the differences between mark-to-market values and book values, and specifying how to treat buildings that are still under construction. Source: Reuters Malaysia Islamic Banks heading towards Basel III: It seems to us that Malaysian Islamic banks are ready to adopt Basel III capital requirements. Malaysia is working towards gradual implementation of the more stringent capital requirements between 2013 and 2015 while additional capital conservation buffers will be addressed between 2016 and This is in line with the Central Bank s Basel committee s recommended phase-in requirements. More immediately from June this year Malaysian Islamic banks will start reporting their leverage ratio positions according to Basel III requirements. Specified leverage ratios are to be met by Source: The IslamicGlobal.com Accountancy Issues Page 11

12 Recent Developments Recent Developments in the Islamic Finance Boosting Liquidity in the Islamic Finance Industry: East Expansion: London Islamic Bank and Middle Gulf institutions are currently planning The Shariah-compliant Bank of London and the Middle East (BLME) is to spur development of the Islamic finance industry by setting up a bank that targeting the Gulf to boost its corporate and private banking business. will boost liquidity in Shariah-compliant markets. The Islamic Development This is the largest Shariah bank set Bank (IDB), a Jeddah-based multilateral institution, signed a memorandum ence in the Middle East, although ex- up in London. It does not have a pres- of understanding with the Qatari government and Saudi Arabia s Dallah Al- term plan. The banks is waiting for pansion into this was part of its long baraka Group during May to launch an regulatory approval to start operations Islamic bank based in Doha. The bank in the Gulf, initially with a representative office this year, and a branch will aim to facilitate Islamic interbank trade, develop liquidity-management or subsidiary in the longer term. The solutions and launch an Islamic securities market. The bank will also become lamic principles, was founded in 2006 bank, which fully complies with Is- involved in infrastructure projects and with the backing of Kuwait investors, standardising Islamic financial products. including Boubyan Bank. Source: The Arabian Business News Although this bank s ambitions are Yemen Closes subscription to YR50 expected to address some of the main billion Islamic Bonds: weaknesses of the Islamic finance industry. Liquidity is a major issue. However, we would argue that the mandate May the subscription to Salam Sukuk The Central Bank of Yemen closed in of this bank is so wide that it may struggle to have an impact early on. lion. The Islamic bonds were issued worth YR50 billion, over $230 mil- Source: Gulf Daily News upon orders from the Finance Ministry and were aimed at the local Islamic banks. The Salam Sukuk were the Page 12

13 first since Yemen started the Sukuk program last year and they will go to buy oil products to meet local shortages. Source: The IslamicGlobal.com Malaysia Airlines Plan to issue Islamic Bonds: Malaysia Airlines planned to rise up to 2.5 billion ringgit ($800 million) in Islamic bonds as part of its plan to escape financial difficulties. The airlines lost 2.52 billion ringgit last year largely due to soaring fuel costs. The new funding plan comes after budget carrier AirAsia and Malaysia Airlines scraped their controversial share swap deal early this month. The plan is to drawdown the first tranche of 1.0 billion ringgit of the proposed sukuk sometime in June 2012 once all regulatory approvals are cleared. Source: Bloomberg.com Faisal Islamic Bank is up for Sale: Faisal Islamic Bank has been struggling since the collapse of property schemes in the Gulf and beyond. The bank is currently offered for sale after failing to raise enough money to meet the Basel II minimum capital requirements. The first Islamic private bank, is talking to three potential suitors. The bank management seeks a new shareholder to take a majority position, and have identified several interested parties over the last five months. Source: The Arabian Business News UK Fund launches Equity Sukuk: London-based Ethical Asset Management has launched the first investment sukuk, aiming to resolve a major area of controversy in Islamic finance. Ethical Asset will invest money raised by the sukuk in income-generating student housing in Britain, projecting annual net returns of 4 to 6 percent, and give investors ownership of those assets. This is likely to make the instrument closer to an equity product than debt. The sukuk s maturity is expected to be 5-7 years. The nature of the equity sukuk means that investors will directly face risk in the student housing market, and there is no guarantee that they will receive returns of 4 to 6 percent. Source: Bloomberg.com Double-Digits Growth for HSBC Islamic Hedging Investment in 2011: HSBC PLC Islamic risk management business posted double-digit growth last year on rising demand for Shariah- Recent Developments Page 13

14 Recent Developments compliant hedging and investment products. The bank has more than 100 Islamic hedging and investment products, from about 10 products two and a half years ago. Forecasts reflect similar growth in the bank s Islamic hedging and investment business in Source: Bloomberg.com Dubai Islamic Bank s Massive sukuk Issuance: Dubai Islamic Bank (DIB) has mandated five banks for an Islamic bond, sukuk, issued by the end of May. The lender chose HSBC, National Bank of Abu Dhabi, Emirates NBD, Deutsche Bank and itself for the deal. Tthe sukuk was likely to be a benchmark-sized, five-year issue. Benchmark usually means at least US$500m. Strong regional interest and significant global Islamic liquidity are likely to support any potential issue from the bank. Source: The Arabian Business News Banque Saudi Fransi Sets an Islamic Bond Program: Banque Saudi Fransi, a Saudi Arabian lender part-owned by Credit Agricole, set up a $2 billion Islamic bond program as part of the Riyadh-based lender s plans to diversify its sources of financing. The $2 billion program might be used during different phases over the next five years. Islamic bond sales in Saudi Arabia, the world s largest oil exporter, rose to a record $6.55 billion during 2012 as the government s spending plan encourages companies to raise funds to invest. Banque Saudi Fransi last sold bonds in 2010 when it raised $650 million from selling fiveyear debt. Source: Bloomberg.com Afghanistan Considers issuance of Sukuk: Afghanistan intends to sell Islamic bonds as it braces for a possible sharp fall in Western financial support as the war against the Taliban winds down. The sale of short-term sukuk is still in the planning stage, but could be a new way of raising money for the government. One of the world s most unstable countries is seeking financial creativity based on Islamic Shariah law. The sukuk are expected initially to be issued in the Afghani currency and offered to local banks within the next year. They may gradually be expanded to medium- and long-term bonds. Source: Reuters Page

15 The Gulf One Lancaster Centre for Economic Research (GOLCER) was established in May 2008 by Lancaster University Management School and Gulf One Investment Bank. The centre is funded by a donation from Gulf One Bank. The main purpose of the Centre is to conduct empirical research focused on key economic and financial developments in the Middle East and North Africa (MENA) region, with special emphasis on the Gulf region. This region includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates, countries that form the Gulf Cooperation Council. GOLCER s research agenda will include, as primary topics, energy economics, Islamic banking and finance, telecommunication and infrastructure economics. Recent developments in these fields will be assessed in the light of their impact on the economy of the Gulf region. In addition to its research activities, GOLCER will provide tailored training courses in specialised areas, including quantitative methods and applications of state-of-the-art econometric and statistical software packages to economic and financial phenomena. GOLCER will also provide consultancy services. David Peel Director, GOLCER d.peel@lancaster.ac.uk Marwan Izzeldin Director, GOLCER m.izzeldin@lancaster.ac.uk Gerald Steele Editor g.steeele@lancaster.ac.uk Research Team Vasileios Pappas Doctoral Student (GOLCER) v.pappas@lancaster.ac.uk Rhea George Doctoral Student (GOLCER) r.george@exchange.lancs.ac.uk Marwa El Nahass Doctoral Student (GOLCER) m.elnahass@lancaster.ac.uk 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. Page 15