LONDON, 11 October 2004 — First it was Abdul Rais Abdul Majid who resigned as head of the International Islamic Financial Market (IIFM) and at end September it was the turn of Ebrahim Hussain Ebrahim who resigned as head of the Liquidity Management Center (LMC) — supposedly a sister organization of the IIFM and both based and promoted by the Bahrain Monetary Agency (BMA).
Abdul Majid, a respected banker, has returned to his native Malaysia. Two managers seconded to the IIFM — one from Malaysia and the other from Bahrain have also left. Ebrahim on the other hand has left to join Gulf Finance House (GFH) and has been appointed as the new general manager of GFH’s new $80 million capitalized Islamic commercial bank which is also based in Manama.
Both institutions are currently rudderless with little haste in appointing quick successors. There are even suggestions that the two organizations could be merged with other entities such as the two standard-setting organizations, the Bahrain-based AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and the Kuala Lumpur-based IFSB (Islamic Financial Services Board). But any such dramatic moves would depend upon the approval of the respective boards of each organization. Malaysia, for instance, has a thriving and well-established domestic Islamic capital market, complete with a vast pool of locally-denominated, regulated and rated Islamic issuances (both government and corporate) worth over RM45 billion outstanding at end 2003. No other market has such an Islamic capital markets industry in place.
“There is currently no global Islamic capital market,” stresses Badlisyah Abdul Ghani, head of CIMB Islamic, the dedicated Islamic capital markets and corporate finance boutique of Commerce International Merchant Bankers (CIMB), the largest investment banking franchise in Malaysia. “You cannot have an active secondary market until you have probably 100 issuances. The more issuance the better. We are trying to encourage the market. Part of CIMB Islamic’s objective is to educate issuers and investors. We meet and share knowledge, and if they wish we can assist them on how to amend or change the necessary legal system to facilitate a Sukuk (Islamic bond) transaction.” Indeed, Badlisyah and his colleagues have been in talks with Turkey and several Asian governments on the possibility of them issuing Sukuk.
There are reports that both the EUR100 million sovereign Sukuk issued by the German land of Saxony-Anhalt which closed in June 2004, and the $65 million corporate Sukuk issued by Emaar Properties in July 2004, both struggled to make the subscription cut. Bankers stress that unless there is a dramatic rise in the number and diversity of corporate Sukuk in the market, the Islamic securities market will struggle even to maintain the tag of a primary market of substance. They urge diversifying away from the Sukuk-Al-Ijara to other types of issuance such as Sukuk Al-Istisna; Sukuk Al-Mudaraba; Sukuk Al-Musharaka; and even Sukuk Al-Murabaha.
The fact that local Gulf institutions hold on to the Sukuk because they are Triple A rated and no incentive for them to be traded because of a lack of equivalent investment vehicles in the market, is effectively pre-empting the development of critical mass and capacity-building toward eventual secondary trading. Contrast this once again with Malaysia, where secondary trading of Islamic issuances is quite active. At current levels, it is just under RM1 billion per day.
To date, there has only been one attempt to structure a Shariah-compliant hedge fund equivalent (the operative word is equivalent) based on the Salam (forward selling) contract. The Alfanar US Equity Hedge Fund, promoted by Worms & Co. in the US and the Saudi Economic Development Company (Sedco), is a modest and uphill attempt with a mere $24 million under management. Other pretenders in the market have been talking about launching an Islamic hedge fund for the last three years with the potential of tapping a trillion dollars. But at the end of last week, there was no sign of any such launch nor any of the Islamic largesse.
One disturbing feature that emerged at the conference was a paper given by Tariq Sansal, a former equity analyst, on the “fundamental problems, remedies and a vision for the future’ for Islamic investment funds. The catchlines are meant to shock: ‘Shariah funds found invested in Alcohol’; ‘Investment procedures are problematic’; ‘Are Islamic Indexes really compliant?’ and so on. Yes, some of the issues raised are pertinent, but it is highly unlikely that Sansal was privy to the Shariah compliance sessions and procedures of the funds that he was rubbishing. The funds he is attacking include some of the big names in the Islamic equity universe, all of whom have highly reputable Shariah advisors.
It is not clear whether he discussed these issues with the Shariah boards of the respective funds. But some of the objections raised betray an oversimplified view of the application of Shariah compliance and its sociological context in a modern but still-nascent Islamic financial system and a highly complex and developed global financial system.
Sansal of course is now managing partner of SM Management in the US, which is establishing its own Shariah-compliant fund to invest in international “small-cap” stocks, and which no doubt will be the mother of all Shariah-compliant equity funds.
