December 2011

December 25  |  December 18  |  December 4


DECEMBER 25, 201

An article in The National about the prospects for “green sukuk”–those used to finance renewable energy projects (the article focuses on Dubai)–makes a lot of sense.  Islamic finance has not been much involved with renewable energy, despite its focus on being ‘ethical’ finance and in particular, with the belief that mankind is not given ownership over the earth, but just appointed as trustees.  Yet, despite this potential, Islamic finance has not employed any environmental screens into the ethical screens used to determine permissible investments.
The article also makes a few other good points about why sukuk are becoming better tools for funding renewable energy projects in the GCC.  Most of it revolves around funding: with the European crisis, EU-based banks are less willing to extend financing and carbon credits are trading significantly lower in European markets.  This should be a perfect opportunity for the GCC to take a lead on renewable energy to generate electricity for the region in which 4 countries are represented in the top 10 countries in terms of carbon emissions per capita (Qatar, UAE, Bahrain, Kuwait).
With renewable energy still a large focus globally and the GCC countries ranking high in terms of carbon emissions per capita, there is an opportunity for growth in electricity from renewable sources to take off in the GCC, where the desert climate provides ample opportunities for solar electricity.  The sukuk markets–with the stated focus on providing ethically-based financing–would get a boost by being affiliated with renewable energy.  The European crisis provides an opportunity to step in as a large financing mechanism for new renewable energy projects in the GCC.

DECEMBER 18, 2011

Apologies for no issue last week or this week.  I have been busy with a few projects, as well as covering the UM Financial Inc receivership for The Islamic Globe, as well as the holiday season.  The newsletter will return next week.


One of the interested developments that has occurred (mostly since the financial crisis and the Dubai debt crisis) is that GCC-based banks have turned their sights to Malaysia, either as a source of funding from a more liquid sukuk market or as a potential market for their Islamic banking products.  Yet, the general idea that makes it into news stories and opinion pieces is that the Shari’ah standards are too flexible in Malaysia to be accepted by GCC-based investors, who use a slightly different interpretation.  This may be true with some products like BBA, but it over-simplifies the linkages that are developing between the GCC and Southeast Asia in Islamic finance.
After reading an article that Noor Islamic Bank is considering whether to expand into Malaysia, I went and looked through the list of Islamic banks in Malaysia and there are already four banks (Asian Finance Bank, owned by Qatar Islamic Bank and other GCC-based banks, Kuwait Finance House, Al Rajhi Banking & Investment Corporation and Alkhair International Islamic Bank (formerly Unicorn)) which operate in Malaysia.  It seems that these banks have found ways to make it work under the more lenient standards that are often referenced by people focused on the differences between Malaysia and the GCC for Islamic finance.  I would expect that if the Shari’ah standards were not approved by GCC Shari’ah boards, then the Shari’ah boards of these four banks would not permit a subsidiary to operate in Malaysia if the contracts that subsidiary would use were not acceptable to the board.
This should not be used as evidence of a total convergence of the Shari’ah standards in the two regions, but it should at least be evidence that the differences are relatively minor and that it is possible for a bank to operate in both regions without it becoming problematic.
Before the crisis, the Islamic banks in the GCC were heavily exposed to real estate within the GCC (and some banks held most of their exposure domestically).  This lead to a much harder hit when the real estate boom turned to bust and could have been mitigated to a degree if the banks were more geographically diversified.  Every bank does not have to expand to both regions, but there should be greater linkages between the two regions where Islamic finance is centered.  If GCC-based banks are able to grow substantially in Malaysia and Southeast Asia, they could ‘export’ some of their geographical diversification back to the GCC by issuing global sukuk backed by Southeast Asian assets.