LONDON, 25 June 2007 — Securitization, whereby securities are issued backed by pools of assets, is set to take off in the Middle East and North Africa (MENA) region over the next few years, although the starting base is very low compared to the industrialized countries. For instance, the MENA region, stressed Issam Al-Tawari, CEO of Rasameel Structured Finance in Kuwait, accounts for a mere 0.2 percent of the global securitization market.
Al-Tawari, speaking at a Sukuk Summit held in London on Thursday, explained that securitization is the fastest-growing capital markets instrument in the world, and the current asset-backed securities outstanding worldwide constitute a staggering $5 trillion.
In contrast, in Kuwait alone some $20 billion of receivables are waiting to be securitized, of which $15 billion are conventional and $5 billion are Islamic receivables. In Dubai, $11.5 billion of residential mortgages have been securitized. In Saudi Arabia, there was a pool of $5 billion of real estate financing in 2004. This figure has increased since then and will increase further following the imminent introduction of a mortgage law in the Kingdom sometime during this year.
The scope for mortgage securitization is huge. Only 20 percent of Saudis currently own their own home, a figure that is set to increase over the next few years as the baby boomers of the 1970’s become households in their own right. Some 65 percent of mortgages in the Kingdom are provided by banks with restrictive criteria.
The biggest challenge for securitization business in the MENA region is the lack of legal and regulatory infrastructure.
According to Al-Tawari, only Lebanon has a securitization law in place, which was introduced in 2002. The Central Bank of Kuwait has introduced directives for a securitization law, but this is still in the draft stage. This will further have to be reviewed and debated in the National Assembly, and then voted on before it can be ratified and adopted as a law. In the past, legislation especially on Islamic finance has been drawn out because of a so-called “turf war” between the Ministry of Finance, the central bank and the National Assembly. Kuwaiti bankers stress that because no single party dominate the National Assembly, introduction of legislation can be a cumbersome and often a frustrating process.
Al-Tawari, however, confirmed that Rasameel and other institutions such as The Investment Dar are working closely with the Central Bank of Kuwait to get the securitization and Sukuk laws drafted and presented to the National Assembly. “At least we are moving in the right direction,” he told delegates at the Sukuk Summit.
The difference between securitization and Sukuk is that the former is asset-backed securities while the latter is asset-based securities.
David Testa, head of International Institutions at the London Branch of WestLB, revealed that the landmark 479 million sterling pound acquisition of the iconic Aston Martin Car Company from Ford Motor Company may involve a further Islamic facility — a long-term Musharaka (equity participation). The acquisition was completed a fortnight ago whereby Kuwait’s The Investment Dar (TID) acquired 50 percent of the equity of Aston Martin; Kuwait’s Adeem Investment some 27.78 percent; and two individuals, David Richards and John Sanders — minority stakes.
Ford Motor Company retained a 15 percent stake in Aston martin, which has been sold to generate revenues to partly offset huge loses which Ford sustained in 2006 especially through the loss-making Jaguar car.
The transaction was financed through a 60 percent equity contribution from the consortium and a Murabaha facility of 225 million sterling pound — broken down into a 200 million sterling pound term facility and a 25 million sterling pound revolving facility. The profit rate for the facility is 295 basis points over 3 to 6 months LIBOR. WestLB was the mandated lead arranger and sole bookrunner, with Bahrain Islamic Bank, European Islamic Investment Bank (EIIB) and Standard Bank as participants in the syndication. The Murabaha agent was BIDCO and the underlying commodity trading is on the London Metals Exchange. The facility has an 8-year final maturity with a 5-year put option, because according to David Testa, “it maximizes the strong appeal to Islamic investors.”
The Musharaka structure typically may involve the identification of the asset pool by Aston Martin Lagonda (AML) which may include things such as a state-of-the-art robot (which alone costs $25 million) and other equipment. These are incorporated into a Musharaka joint venture managed by AML, which then sets a purchase price for any interest in the asset pool.
The Investment agent and AML co-own the assets, with the balance of cash to Musharaka to apply to the co-owned assets, which in turn are transferred to the Musharaka.
The investment agent leases its interest in its proportion of the co-owned assets back to AML. This is further backed by a purchase undertaking that is exercisable.
Badlisyah Abdul Ghani, executive director and CEO of CIMB Islamic Bank in Malaysia, on the other hand, stressed the impressive growth that the Sukuk market has experienced. It has taken five years, he stressed, for the Islamic bond market to get where it is today, compared to 12 years for the Eurobond market.
Malaysia, he warned, is pressing ahead with its drive toward establishing a wide-spectrum Islamic capital market. Bank Negara recently introduced the Islamic Derivatives Master Agreement (IDMA), a formal market, whereas elsewhere some products have been developed on an ad hoc basis.
He revealed that an Islamic credit swap derivative is currently being developed for the Indonesian market and that CIMB has already structured Islamic profit rate swaps and Islamic cross currency swaps. CIMB on Wednesday signed also a Forex Forwards/Forex Swap agreement with the European Islamic Investment Bank in London.
The IDMA agreement allows various structures using the concepts of Arboun, Salam, Inah and Tawarruq on the basis of “whatever Shariah rulings the institutions are comfortable with.” Malaysian banks, he added, would press ahead and could not wait for the whole world to agree with them.