Finance

Basel III to test treatment of PSIAs on liquidity and funding

In a report laying out the Basel III rules that will impact Islamic banks, in advance of the final Islamic Financial Services Board (IFSB) standard on liquidity expected in early 2015, S&P’s Credit Analyst Mohamed Damak said it would “test the treatment of profit sharing investment accounts (PSIAs) from a liquidity and funding perspective [because] shar[ing] any losses […] could increase their volatility and liquidity coverage requirements and reduce their role as stable funding sources.”

Damak’s comments reflect the differences in how Islamic PSIA deposits are perceived by depositors and their legal status as profit-and-loss bearing instruments which makes the current regulatory treatment of displaced commercial risk more of a double-edge sword under new regulations.

In Islamic banking today, PSIAs represent one of relatively few products where Islamic banks—in theory at least—are incorporating profit-and-loss sharing into their balance sheets. It is almost the only remaining element from the back-to-back mudaraba construct that was held up as one way to organize Islamic banks during the early stages of transitioning from the ideas of Islamic economics to the practice of Islamic finance. Since the first Islamic banks opened, the realities of working within a regulatory system designed around interest-based institutions required much greater use of debt-based and synthetic products. (more…)

Weekly Investment Banking Scorecard

deals intelligence

A trio of multi-billion dollar mergers announced this week pushed global deal making to $2.40 trillion for year-to-date 2014, a 75% increase compared to a year ago and already besting full year 2013 M&A levels ($2.38 trillion). Led by targets in the Americas, 72 deals over $5 billion have been announced this year, a 56% increase compared to full year 2013 when 46 large-cap deals contributed to the annual total. Healthcare deals accounted for 13 worldwide large-cap deals followed by energy & power (11) and telecommunications (8).

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Islamic Economy Award nominations are now open

The Islamic economy is too often characterized around its biggest silos: the multibillion dollar banks recycling petrodollars across the world and the expansion of global and regional conglomerates into the halal food market as their indigenous market growth slows to a crawl. SMEs are always either the next big thing in the $1.1 trillion halal food market and $1.35 trillion Islamic finance market, or the acquisition target, but they rarely get recognized in between.

In the future, the evolution of the Islamic economy will be dictated by not just small and medium-sized enterprises (SMEs) but microbusinesses that start with an idea and end up creating and capturing a niche market. The Islamic Economy Awards are looking to find these idea-driven SMEs. Last year, the awards highlighted, among other winners:

  • Tanamera, a small natural products manufacturer in Malaysia
  • Saffron Road, an American halal food producer that equally values the sustainability of its products for a broad consumer base
  • TimeZ5, which designed and manufactures the first physiological prayer mat offering pain relief and improved posture  (more…)

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Development of Islamic venture capital: Key considerations for investors

The need for growth–oriented entrepreneurial ventures in every society is a must, and it is especially needed in the Muslim world. Venture capital forms a great influence in any economy because it creates innovations, new jobs, income and wealth.

Venture capital is not a new phenomenon; examples of entrepreneurs raising capital from private investors were found in the Babylonian era, in the early age of Islam and early medieval Europe. These and contemporary examples show that venture capital is not unique to the United States, where it thrives today.

The idea of venture capital originated from muḍārabah contract and made its way to Europe with the spread of Islam (Cizacka, 1996: 10). Nevertheless, venture capital and private equity industry was, in its initial decades, a predominantly American phenomenon. The phenomenon has been pivotal in transforming innovative ideas from universities and research and development laboratories in the US into high growth companies such as the Intel Corporation, Cisco System, Microsoft, Oracle, Amazon.com, Yahoo! and others. (more…)

Bringing illicit trade and crime out of the shadows

shadows

Illicit trade and organised crime is something that that surrounds us all. While the illicit economy is by its nature difficult to measure, one of the more staggering estimates is that it is as large as 20 to 30 percent of the global economy or about $50 to $70 trillion dollars.

Illicit trade and related terrorist or criminal activity is not something that just operates in the shadows. An economy of this size is not something that can be stuffed under mattresses. It is extremely complex and equally sophisticated. Illicit funds reenter the licit world through routine activities like real estate investments, the sale of high value goods like antiquities and art or financial transactions, not to mention more nefarious activities like wildlife crime or human trafficking.

Governments and regulators have already zeroed in on banks as the first line of defence, placing stricter requirements that impose more due diligence checks on clients’ relationships in order to help prevent terrorist financing and other financial crimes. (more…)

Simplifying shipping

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IILM – Thomson Reuters Liquidity Management Roundtable

The participants in the International Islamic Liquidity Management corporation (IILM) Roundtable on Liquidity Management which concluded on Thursday in London reviewed the success of the IILM in issuing $3.19 billion in total sukuk with $1.35 billion currently outstanding. Beyond this success, the event, which was organized by IILM with Thomson Reuters, spent far more time looking forwards to the challenges that the Basel III liquidity rules will create for Islamic banks.

Participants were in agreement that the IILM, with its A-1 rating, would certainly count as a high quality liquid asset (HQLA) under the Basel rules. Acceptance of the IILM sukuk has grown since its first issuance last August but there is still a lack of liquidity caused by the product’s newness as well as the huge gap between demand for liquid assets and the relatively small supply.

One idea to provide an alternative way to create liquidity for the IILM sukuk in the absence of trading would be for central banks to add it to the list of eligible collateral for any Islamic banks wanting to use the sukuk as a HQLA. The Basel Rules, as amended in January 2013, give national supervisors flexibility to define “alternative HQLA” which Islamic banks can hold in lieu of traditional HQLA like U.S. or their own government’s Treasury Bills which are not sharia-compliant outside of a few countries. (more…)

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Weekly Investment Banking Scorecard

deals intelligence

A trio of multi-billion dollar US-dollar denominated corporate bond offerings topped the list of weekly offerings and pushed the volume of US marketplace investment grade corporate bond offerings to $712.9 billion for year-to-date 2014, an increase of 10% compared to a year ago and the strongest year-to-date period since records began in 1980. Led by bank issuance which accounts for 32% of year-to-date volume, US issuers make up 60% of this year’s volume, followed by Canada, the United Kingdom and Japan.

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