Thursday, November 30, 2006


The line up for the 2007 Sundance Film Festival has been announced and we are pleased that seven of our clients have had their films selected:

Writer/Director Craig Brewer whose film “Hustle & Flow” was a big hit at Sundance two years ago, returns with “Black Snake Moan” starring Samuel Jackson, Justin Timberlake and Christina Ricci. Desire is a burning sickness for Rae, while making her the white-trash sexual target of every man and boy in her small Tennessee town. When her true love leaves for military service, Rae plunges into wild excess. Beaten and left for dead, she is taken in by a reformed bluesman, a private self-contained black man who nurses a deep anger of his own and who is fiercely committed to his task of keeping her alive. World Premiere.

“The Ten” produced by Jon Stern is comprised of ten stories, each inspired by one of The Ten Commandments, that illustrate the perils of modern life via extreme comedy. World Premiere.

“Padre Nuestro” produced by Ben Odell will be shown in Dramatic Competition. Fleeing a criminal past, Juan hops a truck transporting illegal immigrants from Mexico to New York City, where he meets Pedro, who is seeking his rich father. World Premiere.

“Expired” / U.S.A. by Director and Screenwriter Cecilia Miniucchi and producer Anthony Stutz: When a lonely, gentle meter maid meets a troubled fellow parking officer, their love affair becomes an awkward dance of attraction and antagonism. World Premiere.

“Fido” / Canada by Producers Blake Corbett and Mary Anne Waterhouse will be shown in the Park City at Midnight section. This zombie dog movie is about a six-foot tall zombie named Fido who eats the next-door neighbor. It is a boy-and-his-dog movie for grown ups.The film will be distributed by Lion’s Gate. Park City at Midnight . U.S Premiere.


According to the FCC, the Jay Leno's interview with California Governor Arnold Schwarzenegger on the "Tonight Show" was exempt from the equal time rule because it was a bona fide news segment. A FCC complaint was filed by the Angelides for Governor Campaign on behalf of Phil Angelides, the Democratic candidate for Governor of California, against eleven television stations. The Angelides campaign alleged that he was entitled to equal opportunities from the stations pursuant to Section 315 of the Communications Act of 1934. If a station allows a legally qualified candidate for public office to use a broadcast station, it must afford equal opportunities to other such candidates for that office to use its facilities. But there is an exception to this rule: appearances by legally qualified candidates on bona fide news programs.

While the Tonight Show is clearly more of an entertainment oriented program, than a typical newscast, it often airs newsworthy interviews. When adopting these exemptions, Congress indicated that, to qualify as a bona fide news interview program, a program must be regularly scheduled; the content, format, and participants must be determined by the licensee; and the determination that programming is a bona fide news interview must have been made by the station “in the exercise of its bona fide news judgment and not for the political advantage of the candidate for political office.”

Although Congress did not define “news” when adopting these exemptions, the Commission has found that interviews with elected officials and candidates for elected office are newsworthy subject matter. The FCC concluded that the interview segments of “The Tonight Show with Jay Leno” qualify for the bona fide news interview exemption and are therefore exempt from equal opportunities. In the Matter of Equal Opportunities Complaint Filed by Angelides for Governor Campaign, Federal Communications Commission Order (Oct. 26, 2006) source

Wednesday, November 29, 2006

Islamic Financial Services - Current Developments

This is the last in this series. I hope you have found it useful and informative.
Since the late 1990s the Islamic banking world has stepped up efforts to standardize regulation and supervision. The
Islamic Development Bank is playing a role in developing internationally acceptable standards and procedures and strengthening the sector’s architecture in different countries. Several other international institutions are working to set Shari’a-compliant standards and harmonize them across countries. These include the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Finance Service Board (IFSB), the International Islamic Financial Market, the Liquidity Management Center and the International Islamic Rating Agency.

Accounting Standards

A number of countries and institutions have adopted accounting standards developed by the AAOIFI, which are designed to complement the
International Financial Reporting Standards. The IFSB aims to promote the development of a prudent and transparent Islamic financial services industry and provides guidance on the effective supervision and regulation of institutions offering Islamic financial products. The IFSB has recently finalized standards on capital adequacy and risk management, and has made progress in developing standards on corporate governance. Once developed and accepted, these international standards will assist supervisors in pursuing soundness, stability, and integrity in the world of Islamic finance.

Liquidity Management

Another issue concerns the design of Islamic instruments for monetary operations. In countries with a dual banking system, the lack of non-interest bearing securities has limited the scope of monetary management. The liquid nature of banks’ liabilities, related to the predominance of deposits of short-term maturities, predisposes the system to hold substantial liquid assets and excess reserves. This, in turn, inhibits financial intermediation and market deepening. Difficulties in defining rates of return on these instruments have also constrained the development of money and interbank markets.
Developing these markets is indispensable for the conduct of monetary policy and financial market deepening. The inadequate development or absence of these markets in many countries constrains central bank intervention through indirect instruments and has occasionally encouraged the use of direct controls on credit. The absence of well-organized, liquid interbank markets, that can accept banks’ overnight deposits and offer them lending to cover short-term financial needs, has exacerbated banks’ tendencies to concentrate on short-term assets. Effective liquidity management requires the adoption of a comprehensive, integrated approach to developing money and securities markets.

Areas for future development

Other issues include the lack of aggregate data making it virtually impossible to compare Islamic banks across countries, which, together with the absence of common reporting and accounting standards, complicates the work of supervisors.
The markets for Islamic instruments and government securities remain shallow and an organized international Islamic financial market is still nascent. The sector must improve the range and sophistication of asset and liability classes and develop new instruments and financial techniques that would enable Islamic banks to diversify their balance sheets.
Finally the adoption of a common position on certain financial instruments would help develop Islamic finance and improve its competitiveness globally. For example, a number of issues relating to speculation and the use of derivatives must be resolved before a fully functioning Islamic stock market can evolve. While arbitrage and short selling are not acceptable under Shari’a, other financial transactions appear to be, in practice, subject to varying interpretations. For instance, transactions involving the purchase and sale of debt contracts in secondary markets are permissible only in Malaysia.

The Future

The Islamic financial services sector should continue its recent compound annual growth for some time to come. It is a valuable addition to the more conventional, Western, style of financial services. Because of the nature of the products issued, it should also have some appeal beyond the Muslim community and some of its products could well be adopted by the financial community at large.
There are, however, many issues to be faced. Most of these issues are related to the relative immaturity of the market and the steep learning curve being faced by all participants in the market: the institutions, the regulators (including the interpreters of Shari’a) and the consumers, many of whom are uncertain of which products may comply with their interpretation of Shari’a.
For the foreseeable future, supervisory authorities will continue to face the dual challenges of understanding the industry and striking a balance between providing effective supervision and facilitating the industry’s legitimate aspirations for further growth and development. These conditions would create a level playing field and provide the infrastructure needed for the industry’s market-driven development. A sound, well-functioning Islamic financial system can pave the way for the regional financial integration of the countries involved. It can also contribute to their economic and social development, by financing the economic infrastructure and creating job opportunities.
Any source

Tuesday, November 28, 2006

BVI Keeps its Place in the Top List of Foreign Investors in HCM City

Ho Chi Minh City officials have reported on a four-fold increase in foreign direct investments in the city's economy. This year HCM City has so far licensed 215 foreign invested projects valued at US$1.37 billion. These figures include 163 wholly foreign-invested projects, with a combined investment capital of about US$768 million, 49 joint-venture projects with US$589 million, and three co-operative contracts that are worth over US$14 million.

The results confirmed strong positions of the British Virgin Islands, which were among the first five foreign investors' countries in Ho Chi Minh City during the first seven months of the year 2006. In accordance to the seven month results, the British Virgin Islands invested into the 7 projects, with US$36,5 million. Currently, being the investor of 10 projects, BVI rank between Taiwan, with 16 projects, and Hong Kong with 4.

First places in the list of foreign investors are occupied by the closest neighbours of Vietnam - the Republic of Korea, with 51 projects valued at US$102,7 million, and Japan with 37 projects.

The largest amount of projects is in the industrial sector, followed by the sector of real estate development and consultation services. Other sectors that gained popularity among the investors are the construction sector and the transport sector.

Ho Chi Minh City also licensed 102 operating foreign-invested projects to increase investment capital; so far the total new and added investment in the city this year has reached over US$2 billion, 3,4 times over the corresponding period last year.

Now there are 2,014 foreign invested projects operating in the city with a combined investment of nearly US$13.9 billion, increases of 230 projects and US$1.87 billion against 2005.
Article any source

Parliament throws out modulation plan

The European Parliament has thrown out a plan agreed at the 2005 summit of EU heads of government to allow the transfer of funds from Pillar 1 expenditure on farm subidies to Pillar 2 rural development to be increased up to a maximum of 20 per cent. Only the UK was planning to use the full amount, given that it receives low levels of rural development funding and wants to find money for its ambitious agri-environmental schemes. The Parliament can only delay the eventual decision, as it is not part of the co-decision procedure.

The motion was carried by 599 votes to 64. The Parliament believes that such a high rate of voluntary modulation would jeopardise subsidies to farmers and would also repersent a further step towards renationalisation of the CAP with farmers in different member states receiving differing amounts of cash. The Commission itself would prefer a higher rate of compulsory modulation to a range of voluntary rates.

Because of the summit deal the EU will receive on average 30 per cent less funding for rural development between 2007-13 compared with the current funding period. The Commission asked for €88.75m but this was cut by more than 20 per cent to €69.76m. This will be partly offeset by compulsory modulation, but this was intended to provide additional funds for rural development, not offset cuts made in a budget deal.

Spending more money on rural development compared with traditional farm subsidies is seen as a way of building a more diversified, dynamic and yet environmentally friendly rural economy in Europe.Any source

Monday, November 27, 2006

UK to become net milk importer?

Two separate respected sources, Sir Stuart Hampson and Kite Consulting, have claimed that the UK could become a net milk importer within a few years. Such a story is manna to the supporters of farm subsidies on food security grounds. It also has a good populist feel, allowing papers to run stories about British tea being drunk with French milk if they so wish. But what is the substance behind these claims?

Sir Stuart Hampson, having just finished his year long stint as chair of the respected Royal Agricultural Society of England, argued that the UK could become a net importer of milk within five years if small dairy farmers continued to be forced out of business.

Sir Stuart made his remarks as Defra released figures showing that England lost on average one dairy farm a day in 2005. He argued that supermarkets had a responsibility to pay a 'fair' price for milk, pointing out that up market Waitrose (part of the John Lewis Partnership of which Sir Stuart is chairman) paid a 3p premium to all farmers.

He commented, 'The price paid to the farner is too low, it is not meeting the cost of he farming. I am trying to draw attention that this is a market that has a fair price. [I am not quite sure what such a price is other than a market clearing price]. The decline in incomes of dairy farmers does give me cause for concern.'

Kite Consulting's Milk Forecasts report warned that the UK is heading for its largest ever under quota position. The report's co-author John Allen said, 'The exodus from the dairy industry is running at 7% and accelerating. In the next three years one in five dairy farmers will quit.' With annual demand at 12.6bn litres if the decline continues supply will be as low as 12.68bn by 2011. That meant that by November of that year, when supply is seasonally at its lowest, the UK could see a real milk shortage.

The government and the processing industry hit back

The government was quick to point out that of the 13bn litres produced annually, only 7bn litres went into fresh milk. Robert Wiseman Dairies said the problem for the milk industry was not that it was producing too little milk, but that it was producing too much. 'Unfortunately the volume of milk produced by the dairy farming sector in the UK is such that three in every 10 litres is having to be sold in commodity markets.'

Arla chief executive Tim Smith said that importing liquid milk was unlikely. 'Anyone contemplating importing milk is committing financial suicide. The eye-watering costs of transporting milk from abroad make it unviable. The market price will be adjusted as we near the balance of supply and demand. But it is all down to market forces. We are still in a position of over supply.'

An overview

We should remember that this sector still receives substantial CAP subsidies, even if they are reducing. There is also a distinction between the number of farms going out of production and the volume of production. If smaller (and often unavoidably less efficient) farms mainly go out of production, the effect on volume will be muted, indeed other producers may expand if the price is sufficiently attractive. Of course, a decline in the industry in, say, western England could have landscape and social effects, but that is another matter.

The price UK dairy farmers receive is the lowest in Europe and this in part no doubt reflects the market power of retailers, but that same market power has led to falling food prices and hence a positive effect on the overall level of inflation. Dairy farmers sometimes claim that they are making a loss, but this may be after labour costs (mostly those of the family) have been paid out of the business.

There is no doubt that dairy farming is a particularly demanding type of farming and the rewards are not that great for smaller enterprises. But whatever is done we should not increase the level of subsidy. Production would have to fall a long way before fresh milk supplies are threatened.Any source

OTCC meeting in London

On November 21-22, 2006, the Overseas Territories Consultative Council (OTCC) held its 8th meeting in London at the Foreign and Commonwealth Office Corruption. Among the issues to discuss on the agenda were good governance, criminal justice, human rights and climate change.

Established in 1999, the Overseas Territories Consultative Council is held in London every year to provide a forum for consultation with British Government Ministers. The meeting was attended by Premiers, Chief Ministers and other senior politicians from Britain's Overseas Territories, except Gibraltar.

Overseas Territories Minister in the Foreign and Commonwealth Office, Lord Triesman, who hosted the 8th meeting of the Council, emphasized the importance of the event. He was delighted with the productivity of the discussions. By the way, it is the 2nd time when the meeting was hosted by Lord David Triesman. The BVI delegation included Director of the BVI London Office Ms. Dawn Smith, 7th District Representative Dr. Kedrick Pickering (also the Team BVI founding member), Permanent Secretary in the Chief Minister’s Office Mr. Clyde Lettsome and Executive Director of the BVI International Affairs Secretariat Mrs. Lorna Smith.

The annual OTCC meeting was also attended by Chief Minister Dr. D. Orlando Smith and Governor David Pearey.

Both UK and Overseas Territories representatives agreed that the UN Convention Against Corruption would be extended to the Overseas Territories as early as possible. The BVI had already expressed its agreement, and the other territories also suggested their agreement to work together on implementing a strategy for each of the Overseas Territories to integrate the work of all the parties in the criminal justice system.

Besides the British Virgin Islands, the territories represented at the OTCC were Anguilla, Bermuda, Cayman Islands, Falkland Islands, St Helena, Ascension Island, Pitcairn, Turks and Caicos Islands and Montserrat.
Article any source

Lifting the burdens of injustice

Most people are good at compassion, responding with money and time when they realise the plight of the unfortunate. Cash giving after the tsunami last year was enormous. At the 2005 G8 summit in Edinburgh religious groups in particular - Christians, Moslems and Jews - were noted for having been a critical factor in leading to the decisions to forgive third world debt.

It is easier to spot poverty in a distant country and a strange culture. But what about poverty nearby? Obvious poverty can be seen following random misfortune such as a tsunami, harvest failure or epidemic, but poverty close to home is often so familiar that it escapes our notice or we dismiss it as inevitable.

The Jewish, Christian and Moslem faiths hold Moses in great esteem for his Law. The phrase that Jesus said summed up the Law of Moses was 'Love your neighbour as yourself' and he said that it was to be an essential guide for his followers. Despite being a 'Christian' country the way the UK economy is run pays little respect to basic Mosaic Law, and incidentally ignores similar crucial insights of the Classical Economists. The result is that millions will never escape from the poverty trap that our current laws keep them in. Something is drastically wrong and charity and welfare cannot give permanent solutions. Read The Free Lunch - Fairness with Freedom to understand poverty at home, wherever you live in the world, and see how this injustice could be lifted.

To buy the book:

Any source

Saturday, November 25, 2006

Deloitte Announces on Establishing Caribbean/Bermuda Cluster

Deloitte Touche Tohmatsu chief executive William G. Parrett in the middle of October has reported that six Deloitte member firms have intention to join together to create Deloitte Caribbean/Bermuda. The announcement was made at the inaugural Deloitte Global Forum in Buenos Aires, Argentina. The above-mentioned members of Deloitte, which is globally known auditing and professional services firm, are located in the Bahamas, Barbados, Bermuda, the British Virgin Islands, the Cayman Islands and Jamaica. The plan for the cluster of offices has the purpose to strengthen their position in the Big Four firm's Americas region, while expanding opportunities for growth.

Creation of this structure followed the establishment of Deloitte LATCO that includes member firms from Latin American Countries, and Deloitte ASEAN containing member firms from Singapore, Malaysia, Indonesia, Thailand, the Philippines and Guam. Deloitte Caribbean/Bermuda will include more than 30 partners and 600 professionals and will be leaded by Frank Paredes, the audit and risk regional managing partner of Deloitte Latin America/Caribbean. Daily operations will be conducted by the managing partners of existing member firms.

Frank Paredes said that the structure would help reduce many of the difficulties connected with coordination of service activities across borders by separate member firms, and that Deloitte Caribbean/Bermuda plans to expand operations to other countries of the region.
Article any source
Can Islamic Banking Survive? A Micro-Evolutionary Perspective Mahmoud El Gamal

Download Pdf : An Economic Explication of the Prohibition of
Riba in Classical Islamic Jurisprudence - Mahmoud A. El-Gamal

Any source

Friday, November 24, 2006

Thursday, November 23, 2006

Media in Islamic finance

Hitting the right formula for a successful Islamic finance publication has been the elusive goal of a number of publishers for a number of years. Paul McNamara share some thoughts on why and suggests a possible answer.

It sometimes comes as a surprise to people who do not work in the media to discover that the industry works much like any other. It is all about making money.
Your favourite newspaper or magazine or website does what it does to make a profit There are essentially three models of publishing for profit.
  • The first is where the subscriber pays. Typically this covers the newsletter market. Such products are often niche and expensive.
  • The second is where the advertiser pays. Typically this would cover a wide range of B2B magazines. The advertiser wants to reach a specific niche (like doctors or lawyers) and will pay to do so.
  • The third model is a hybrid of the two - where the subscriber pays and the advertiser pays too. This kind of model is at work in many daily newspapers.
It doesn't matter which media you pick, the economic drivers are always the same.

How does this affect the world of media in Islamic finance?

It goes some way to explaining why there is a relative paucity of good products out there covering the world of Islamic finance. There is a range of titles, from magazines to newsletters to e-newsletters to web based services, but while some are good, the rest are far from good and there isn't one really good strong title that can be taken as the benchmark across the globe. I mean no disrespect to the many Islamic finance journalists and editors who pour their hearts into every issue they produce, of whatever sort, since they are all we have got. But the lack of funding behind almost all of these efforts is plain to see.
None of the major financial publishers have taken a committed leap into the area.

Why would that be?

The reason is fairly plain to see. There isn't any money in it.
From a purely business point of view, you can hardly blame the media for failing to bring out a product that will lose them money. It is not why they are in business. As outlined before, they need to look at revenues from one source or another and unless they can be assured of making some money, even in the medium term, then they will hang back. And hang back.
Which leads us to the question:
Why is there no money in it?

Let's look at advertising spend to begin with.
There are lots of Islamic finance institutions out there. Practitioners. Banks. Investment banks. Lawyers. Consultants. Advisers. Educators. Regulators. The list goes on. There are at least 700 of these institutions and they are spread across the globe. We have a high concentration in Asia, particularly in Malaysia, Indonesia, Pakistan, Brunei, Singapore and even some in Thailand. There is an equally high concentration in the Middle East and North Africa. Then we have quite a number in the UK and the USA.
Some of these institutions are big and some are small. But almost all of them have one thing in common. They won't spend money on advertising in publications. Of course some will spend a bit here and there, but cumulatively it wouldn't amount to very much at all. My guess is that if you put together all of the expenditure in Islamic finance titles it would amount to something between $500,000 and $1 million. This does not include the amounts of money that they spend at retail level in newspapers of a general nature and elsewhere.
To put that in context, a single B2B title in the conventional finance field could book that kind of revenue and more in a single issue.
Here are some verbatim comments from multimillion dollar companies which Islamic finance publishers have forwarded to me in the past two months which typify the approach of these institutions:
  • "Further to your invitation for us to participate in your new publication, we would like wish you luck on the launch of your new publication. Although we were very keen to participate, unfortunately we will not be able to take part in this year's edition."
  • "We get offers like this all the time. We are only interested in UK. We have a limited budget and have spent it all."
  • "We would be interested but unfortunately due to staff shortage during the coming weeks it may not be possible."
  • "We regret to inform you that we will not be able to support your publication at this time. However, we would like to take this opportunity to wish you success in your new venture and look forward to receiving your first publication. Thank you for your interest in (company name)"
So if they don't spend money in publications devoted to the industry, where do they spend it? You only have to look at the conference calendar to see where the money goes. It goes on promoting the company at conferences and exhibitions which take place all over the globe.
Walk down the street in Dubai and you see Emirates Islamic Bank painted on the sides of buses and of course Dubai Islamic Bank is a leader in the field. So some of the banks are becoming more savvy about consumer marketing.
But many companies will still not spend in specialist media. Why is that? The answer is pretty plain. Why would they want to talk to a geographically disparate bunch of people whose only common link is working, in however peripheral a way, in the same industry. In other words, a Gulf bank does not want to talk to a consultancy in Kuala Lumpur.
So what does that leave us with?

It leaves us with the circulation income model. Pretty much the only model that works under this structure is the newsletter one. It is low cost, high price and low volume. In other words, you need to sell a small number of copies for a high price while using a small staff and without spending a fortune in advertising and marketing.
This has been tried on more than one occasion and it doesn't work in this industry either. The reason it doesn't work is that the same companies who don't want to advertise also don't want to pay for a subscription that is $500 or more. There seems to be an acceptance that, since they have never relied on information of this sort in the past, they will not need to do so in the future.
This is a terrible error. The reason that the world of conventional finance is so healthy and robust is because practitioners share information and read about each other's developments. The same is true in the legal profession, the medical profession and every other profession.
It is, to use a well worn cliché, a chicken and egg situation. Publishers publish this material because the reader needs the data and so will pay for it and so the publisher makes money. The driver is the need for data - not the need for profit.
The Islamic finance industry needs the same level of data interchange and they simply don't have it because they won't pay for it. This is one of the reasons why the industry is still small and growing slower than it should.
So what is the solution to the problem?

Someone has to carry the torch and show the way. Someone has to be the hero and spend the money.
Like who? Well like the Islamic Development Bank which spends so much money on infrastructure projects but much less on assisting the industry itself to develop.
Another option would be one (or more) of the big players in the industry from the banking or investment banking side of things. Many of these companies are announcing record profits this year. If the top 20 companies pooled $50,000 each we could see the birth of a true vehicle for the industry. It wouldn't be partisan. It wouldn't have an axe to grind. It would be an organ that speaks for the industry to the industry. It would cover trade finance, project finance, sukuk, murabaha, takaful, retail products. Everything.
What kind of statement would it make about one of the big players if they were to fund a publication themselves? Not for profit, but to show what good (Islamic) corporate citizens they are? And of course once you have one such publication, others would follow, driven by profit and the industry as a whole would benefit.
Then maybe we would see the beginnings of a healthy Islamic finance media where we could see the healthy interchange of ideas between academics, practitioners, regulators. The entire gamut.

Any source

Wednesday, November 22, 2006

BVI Again the Second in the Chinese Foreign Direct Investors Rating

The Ministry of Commerce of China has announced on last Wednesday that realized foreign direct investment (FDI) on the territory rose in October, after the slight decline which took place in the previous months and was the result of the changes in legislation about acquisition of Chinese companies by foreign investors.

In October the amount of foreign direct investments grew 16% to US$5.99 billion, and 3,047 foreign-invested ventures were approved. From January to October, the country attracted US$48.58 billion in FDI – up 0.34% if compared to this period of 2005. During the same period 33,068 foreign-invested enterprises were approved, down 6.32% from the previous year. The amounts of contracted FDI were not revealed in the report.

From the Ministry's report it also becomes clear that the British Virgin Islands continue to keep their position of the second largest foreign investor in China. The 2nd leading position of BVI has been already confirmed in the first two quarters of the year 2006, each time China published the updated information on FDI. The first place is with Hong Kong – the Special Administrative Region of China.

In the current report, Hong Kong remains the first among the foreign direct investors, and it is followed by the British Virgin Islands and Japan.

Gao Hong, a researcher from the Chinese Academy of Social Sciences, has said that the total FDI amount, compared to the last year, increased very slightly, but the average value of each investment rose a lot. This is probably the result of Chinese government's policy of paying more attention to the quality of foreign investments than to the quantity.

Investment flows to the financial sector, which have been a major destination of FDI since last year, were not included in the figures released by the commerce ministry.

Article any source

Tuesday, November 21, 2006

Reasons to issue Sukuk and the structures behind them

Sukuk is the hot topic in Islamic finance, and we will soon see the industry reach a value of some tens of billions, as Michael Saleh Gassner from writes.

Islamic finance has for some time missed investment opportunities for Muslims that offer a predictable return with low risk. The majority of investment opportunities are based either on stock markets with high volatility or on real estate transactions. The investment galaxy for the Islamic investor is lacking the variety of instruments to create an efficient portfolio in line with portfolio theory and financial planning. Sukuk certificates meet the pressing need for a medium term investment and reached, in 2004, a market volume of nearly US $7 billion. This volume will multiply in coming years to tens of billions of dollars annual volume. Already a number of world-class borrowers have used the new Islamic Sukuk market: Germany; the IMF Group; and Sovereign states like Qatar and Malaysia.

Sukuk are securitised assets and therefore belong to the category of Asset Backed Securities. Unlike conventional ABS structures, Sukuk need to have an underlying tangible asset transaction either in ownership or in a master lease. The securitisation of pure cash flow streams from credit portfolios as undertaken in the mortgage market, for instance, cannot be structured in the same way. A properly made Sukuk limits the debt to the value of the underlying assets. A solid investment policy of the borrower results and the vicious circle of raising debts and running after them in hard times is handled in an ethical and socially more convenient way. This allows the borrowers time sort the situation out. This is important for modern states as many of them borrow money to be repaid by future generations without regard to whether any assets cover the debt or not.

Different types of Sukuk

The Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI) issued standards for 14 different Sukuk types. The most common in 2004 were Sukuk Al Ijarah based on leasing transactions. In Malaysia the Sukuk bithaman Al Ajil (Murabaha based) is very popular but not so for Middle Eastern investors. Furthermore Sukuk Al Istisna’a had been used to raise financing facilities for real estate development.
A good example of Sukuk Al Ijarah is the German US$ 100 million Sukuk issued by the federal state of Saxony-Anhalt. The federal state is among the new states of Germany after reunification and their debts are guaranteed by the whole federation of Germany. Consequently the Sukuk received an excellent rating of AAA by Fitch and AA- by Standard & Poor’s. The bond was priced plus 1 basis point 6-month EURIBOR (European Interbank Offered Rate), which was chosen as the benchmark. Citigroup was appointed as Lead Manager and Kuwait Finance House as Co-Lead Manager. The Shari’ah Board of Citi Islamic Investment Bank certified the Sukuk from the Shari’ah point of view.
The underlying transactions are a certain number of specified buildings owned by the Ministry of Finance. The master lease was sold for 100 years to a Special Purpose Vehicle (SPV) which in turn rented it back for 5 years to the Ministry. The SPV was registered in the Netherlands since German law is not yet fully developed regarding securitisation, especially from a tax perspective. Choosing the Dutch foundation the Sukuk remains competitive in regard to municipality tax which would not apply for a conventional bond. The certificate holders receive a variable rent benchmarked to the EURIBOR over the period of five years. After repayment the Ministry could decide to use the SPV a second time for a new issue. The paper is listed at the Luxembourg Stock Exchange.

How do you benchmark to an interest rate reference such as LIBOR or EURIBOR? Scholars, such as Sheikh Nizam Yaquby from Bahrain or Sheikh Taqi Usmani from Pakistan, explain it by using the example of two brothers working in drinks, one in alcoholic drinks and the other in soft drinks. The brother dealing in soft drinks take over the pricing of his brother dealing in alcohol. Although it is not ideal, it is regarded as acceptable. Nonetheless Yaquby has suggested that economists, students and bankers should find an alternative.
The reasoning of the federal state of Saxony-Anhalt in issuing an Islamic certificate was to broaden the investor basis to gain access to different sources of funding with a long-term view. Furthermore the state is also looking for investors and entrepreneurs interested in going into Germany and choosing Saxony-Anhalt as their new location. The German Sukuk demonstrates their open-mindedness and interest in Muslim investors worldwide. The message which was widely heard.
Another structure was applied by the private sector arm of the International Monetary Fund, the International Finance Corporation (IFC). The IFC issued the Wawasan RM 500 million (US$132 million) Bond in December last year on the Islamic principle of Bay bithaman Al Ajil, which means a deferred payment. The basic feature of the underlying transaction is a sales contract resulting in debt and not a lease. The Joint Lead Managers first purchased the assets from the issuer at RM 500 million and then sold the assets back at the deferred sales price plus profit. The exceptional rating of a supranational entity will clearly strengthen the local Malaysian bond market and complement the yield curve.
The Malaysian Sukuk bithaman Al Ajil structure is controversial in the Islamic finance industry. It results in a debt and could not therefore be traded other than at face value as debt and money cannot change value with passage of time. The majority of Middle Eastern Islamic scholars declare such an action as belonging to the definition of the forbidden Riba. Consequently the IFC did not list their Sukuk on any stock exchange in the world and there is no intended secondary market. It is likely that future issues in Malaysia will consider applying the tradable Ijarah type of Sukuk to enable secondary market trading worldwide and foster the acceptance in the Middle East markets for Malaysian Sukuk. Otherwise the Malaysian issuers will face higher pricing expectations as non-tradable Sukuk will carry an increasing premium.
The Wawasan Ringgit Sukuk by IFC was rated at AAA by S&P and Aaa by Fitch. The profit rate of the issue was fixed at 2.88 % for a three-year maturity. The Joint Lead Managers were HSBC Bank (Malaysia) and Commerce International Merchant Bankers Berhad (CIMB), Malaysia. Shari’ah certification was undertaken by the CIMB Fiqh Council and Dr. Mohd Daud Bakar.
Sukuk can be used for project finance as the US$ 120 million Durrat Sukuk of Bahrain demonstrated. The Durrat Al Bahrain is a major real estate development project. The current Sukuk partly finances the US$ 1.2 billion project of world class leisure and tourist destination. The project company Durrat Khaleej Al Bharain BSC is jointly owned by the Government of Bahrain and Kuwait Finance House (Bahrain).
The issue was oversubscribed by US$ 32.5 million. The Sukuk matures in five years and pays a return quarterly. The issue was priced at 125 basis points above three-months LIBOR. Arranger and Placement Agent for the fundraising was the Bahrain based Liquidity Management Centre (LMC), an institution holding an Islamic investment banking license which was established in 2002 to manage the secondary market and short term investment needs of Islamic financial institutions. Among the underwriters are Dubai Islamic Bank, LMC, Bahrain Islamic Bank, Islamic Development Bank, Emirates Islamic Bank, Bank of Bahrain and Kuwait, General Organisation for Social Insurance Bahrain, National Bank of Sharjah and Arab Islamic Bank (Palestine). The Shari’ah endorsement was managed by the International Islamic Financial Market also based in Bahrain.
The Sukuk will be listed on the Bahrain Stock Exchange to enable trade and secondary market for its investors. Since a Sukuk Istisna’a is not a tradable security by Shari’ah as the underlying asset does not yet exists, the goal to be tradable set by the issuer needs to be met in a pool securitisation. Contemporary Islamic scholars accept a security as tradable as long as the underlying tangible assets are of 51% of market value.
The proceeds of the issue (cash) will be used by the Issuer to finance the reclamation of the land and the development of Base Infrastructure through multiple project finance (Istisna’a) agreements. As the works carried out under each Istisna’a are completed by the Contractor and delivered to the Issuer, the Issuer will give notice to the Project Company under the Master Ijara Agreement and will lease such Base Infrastructure on the basis of a lease to own transaction. If the Sukuk is listed during the Istisna'a period, the Istisna'a receivable (amounts held as cash) shall be traded only at par value. Any appreciation or depreciation in the value of the Sukuk will represent a relative change in the value of the Base Infrastructure.

Summarising these three case studies, it is obvious that Sukuk can serve a variety of different needs to finance and at the same time meet the need of investors. As proper conventional portfolios of wealthy clients always comprise a percentage of bonds, so will be the portfolios of Islamic investors. Considering the figures of US$ 260 billion with Islamic financial institutions according to the General Council of Islamic Banks and financial institutions and a similar number managed with Islamic windows according to the estimations of Noriba a total volume of about US$ 150 million is likely to be reached over the coming years without any growth of the industry, simply by restructuring the portfolios. On top of this the appetite of conventional institutional investors needs to be added. Most likely 2005 will show us an annual volume of the Sukuk market exceeding for the first time the US$ 10 billion benchmark and then quickly expand to multiple of that amount in the following years.

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Islamic hedge funds

Islamic hedge funds: Recipes, merits and critics

In a unique report, Islamic finance consultant Michael Saleh Gassner delves into the history of Islamic hedge funds.

In the last five years hedge funds have become the fashion of the finance industry since the stock markets have been underperforming.

Hedge funds were originally invented in 1949 by Alfred Winslow Jones, a journalist and sociologist, while researching an article on the latest techniques used for analysing and forecasting the stock market for Fortune magazine. He thought he could do a better job than the professionals at this time and so raised an initial amount of $100,000 to start what is now called a hedge fund. His strategy was to buy stocks long where he was positive on them and sell stocks short which he thought would underperform. On top of the funds raised he used credits to 'leverage' the results. In addition his compensation was benchmarked to his success. All the same features are still in place with modern hedge funds. Beside Islamic finance, hedge funds are the growth sector of the financial industry. More than 8,000 funds exist nowadays and providers of such funds show impressive charts that offer returns and risk profiles that should be better than other asset classes like real estate, long-only mutual funds and many other investments. Capital market theory suggest that long/short strategies could eliminate or reduce the so-called market risk and offer absolute returns depending on the selection success, independent of the market trend. Market risk is known by practioners as the way that stocks tends to follow the general market trend despite specific company achievements. But the hedge funds went beyond long/short strategy into other strategies to identify market anomalies, which could be done mainly as they are defined as non-regulated funds for savvy investors (rather than a regulated retail product). Each strategy is practically a different financial product and it is misleading to put them all under the umbrella of the term hedge fund. Many invest in equities, some in fixed income and others in emerging markets. The total number of strategies is over a dozen. Among them low risk and extreme risk strategies could be applied - hedging and stretching. It is best not considered as a single asset class.

This leads to the question of whether is there a place for hedge funds in Islamic finance. The question needs to be looked at from different angles; from the Shari'ah, from the prospective investor's needs as well as the quality of supply. The Shari'ah opinions of many strategies are short and simple: Haram (forbidden). Muslim investors following the rules will not go for hedge funds active in conventional fixed income sectors, with conventional leverage and without a screen on the business activities. But is there a way to start, as the hedge fund industry started, with a simple long/short strategy? First of all an investor has to decide whether or not conventional stocks could be compatible with his or her investment strategy. Since 1999 there have been commonly accepted rules about debt levels, interest income and industry activities in which a Muslim may invest. The Dow Jones Islamic Index uses these screening criteria as do most of the Islamic mutual stock market funds. However, not all Shari'ah scholars do agree to compromise, considering time and circumstances in regard to debt levels and interest income. Each single investor needs to decide on his own which position to follow and many still feel uncomfortable discussing whether stock investing is similar to gambling and whether or not Shari'ah scholars accept it. If the answer is positive regarding stocks, the question of the short sale arises.


Do not sell what you do not own

A conventional short sale is selling a stock which you have borrowed; a transaction which would violate the general Islamic rule of 'do not sell what you do not own'. However, in Islamic contractual law there is another transaction called Salam, which replicates a similar economic outcome. It was used for example to sell wheat on a future date against payment today. As an exception to the general rule, it is subject to certain conditions, which the Shari'ah scholars on the board have accepted will be applied if the contracts and documentation is properly adjusted. Salam fixes the price I get for wheat at 100, which I receive today. I could buy the commodity in three months for 90 if prices are falling, making a profit of 10. If the price goes up, I have a loss.
To reach the high water mark, the high return goals set, hedge funds typically use leverage techniques; borrowing money from their broker. Money, however, cannot be accepted to be lent against money. The way Islamic hedge fund operators look at this point is to apply a Murabaha contract for the long position, which replicates economically the standard margin facility. Similar to normal margin finance, the Murabaha deal gets liquiditated with losses if the price goes down below the level at which the bank would no longer be protected. There is no waiting period. The stocks are used as collateral immediately. The leverage for the short position is much more delicate. A Salam contract requires that the full amount be paid immediately and therefore leveraging does not take place and the short position is not replicated as it would be in a conventional hedge fund. The fund of fund concept of Eric Meyer from Shariah Capital therefore uses the Arbun contract. Arbun could be translated as downpayment. The buyer pays 10% of the price for the stocks as a down payment. If the price in the future is below 90% of the price on the transaction date, the buyer will buy the stock cheaper in the market place. His downpayment remains with the seller. If the price goes up instead, the seller has to buy the more expensive stock and take a loss.
With Arbun there are two concurrent sayings of the prophet (pbuh), one permitting and one forbidding Arbun and consequently the different schools of thought interpret Arbun differently. The Hanbali School generally accepts it while the Hanafi school seems to declare it Haram. Any Muslim investor seeking to look into such a model should therefore ask for clarification of how the majority of the school he aims to follow interpreted this issue.

First market neutral fund in 1997

Islamic hedge funds have been a hot topic for some years now on the Islamic conference circuit. The International Investor (TII) launched in 1997 the Al-Khawarizmi Market Neutral Fund managed by Axa Rosenberg. A market neutral fund uses 50% long and 50% short, so that the market risk is eliminated, while a long/short fund manager may decide to hedge the market risk to a lesser degree if he is positive about the trend. The next hedge fund for Muslims was offered by SEDCO in Saudi Arabia called Al Fanar Hedge Fund, using the long/short strategy with the Salam contract managed by a single manager. Many other asset managers apply long/short strategies to individual managed accounts without going public; among the less known is the GAFM Global Asset - and Fundsmanagenent AG in Switzerland. Such accounts may or may not have a dedicated Shari'ah approval. GAFM might come up at the end of the year with a repeatedly used Islamic hedge fund approved by a Shari'ah board. Deutsche Bank announced their Islamic hedge fund tracker certificate, which is by definition not a hedge fund, but the returns achieved through a not yet disclosed structure are benchmarked to the HFRX Global Hedge Fund Index. We hear that other big names in the market may follow with other offerings.
Eric Meyer's attempt to launch an Islamic hedge fund has been discussed for quite some time publicly and might be the most known product in the market. The final launch of two funds is due for September. Having previously employed UBS as placement agent and Noriba as Special Advisor this partnership has now been ended. Eric has invested over $3 million in these products already since 2000 and gained Shari'ah approval from Sheikh Nizam Yaquby, Yusuf Talal DeLorenzo and Dr. Mohammed Daud Bakar. Eric offers a principal protected, liquid market neutral fund as an alternative short-term instrument. Indicated returns should be 200-300 basis points above Murabaha based products. It will be interesting to see whether such anomalies in the markets really do exist.

His second product is the Shari'ah Long/Short Master Fund, gathering a number of selected fund managers using the Murabaha/Arbun long/short techniques for a screened stock market universe which goes beyond the limits of the current Dow Jones Islamic Index including a wider number of candidates, screening them with the most current online annual reports and widening the investment universe which is an important approach as capital market theory suggests that a smaller investment universe would result in lower returns.
Risky investment or proper hedge

Hedge funds commonly claim to have low risk and prove this with charts showing an animal called 'historic volatility' measured in days, months or years. Historic volatility could be explained with the illustration of waves on the sea. For a certain beach, the size of waves are limited, let's say, to one metre in 66% of the cases and in 95% of the cases they will not exceed two metres. However, once in a century there may be a tsunami that the historic wave volatility did not indicate might arrive. Leveraged portfolios like the typical hedge fund suffer most, and the market neutrality feature can be abolished if the wave comes first from the stocks which are long and does not push down those which are short. The entire portfolio will quickly be executed. Leveraging is not a good idea for this reason and the amount of leverage needs to be adjusted to the portfolio of the investor to match their personal risk appetite (which leveraging increases and not hedges). Any investor needs to know the exact exposure of leveraging for his own optimal portfolio, whether margin facilities are applied, other borrowed money, and debt inside the stocks (on- and off-balance sheet).
The US Central Banker, Greenspan warned at the beginning of June that hedge fund managers take too much risk to generate the high returns they promised at a time of unsually low market returns. He is convinced that it will not affect the financial system; however, he thinks that the industry will shrink and many wealthy fund managers and investors could become less wealthy. The job of the active fund manager is to achieve outperformance above market risk. If he is achieving returns based on market risk or leverage, this risk/return profile could be obtained much cheaper from an investor's point of view.
Is there a long/short hype?

The current media perception and the trend to sell hedge fund products to retail clients show a boom which is quite advanced. A hedge fund is an actively managed portfolio which looks for anomalies. An investor should be convinced of the superiority of their trading approach, and be aware that too many managers using long/short techniques are typically coming to an end of the historic out performance of such a strategy. Nowadays the rational way is to decide on the quality of the fund manager since he is dedicated to achieving the indicated results in future.
Hedge funds are considered to be an alternative investment class which lowers the entire portfolio risk as it is not correlated with other investments. Following the old strategy of not putting too many eggs in one basket, diversification could be reached by other alternative asset classes as well, which have a different nature from the 'standard' long/short hedge fund.
Other alternative investments

The Appleton Crescent Currency Fund from Chicago-based Crescent Capital Management domiciled in Cayman Islands was launched in 2003. The fund manager is Appleton Capital Partners in Dublin. The investment strategy follows an approach to buy sets of currencies that look undervalued by mathematical modelling; a long only, no-leverage strategy so far.
In 2000 the UBS SEDCO Shari'ah Compliant Timber Fund launched a long term, uncorrelated and absolute returns product, which is a serious investment for pension funds and insurance funds because of predicable returns, lack of leverage and is not related to any current hype in the markets which sets it apart from any bubble.

Islamic hedge funds might be structured alongside a long/short strategy; it raises some Shari'ah concerns which need to be made transparent to the investor especially if he is following a specific school. The market cycle may not currently favour investing in hedge funds as too many people are following the same strategy and consequently the returns might not be too exciting in the foreseeable future. The hedging of risk is linked to historic volatility. Leverage always leads to higher risk even if limited by a long/short strategy and this is definetely to be taken into account when assessing the personal risk appetite of the individual investor. Alternative investments could be undertaken in other areas and these should be analysed to see if these do not offer potentially better returns and to serve the overall objectives of Shari'ah with regard to society, environment and wellbeing.

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Dealing with record profits

Record profits are all well and good, but they raise the question; what to do with it?
Go regional, argues Robin Wigglesworth

July and August are traditionally when banks report their first half profits, and they have generally made entertaining reading for shareholders and managers alike.

Islamic banks are no exception, having capitalised on the tremendous boom in the Middle East in general, and Islamic banking in particular. Take some of the larger players as examples: Qatar Islamic Bank (QIB) made $129 million, Dubai Islamic Bank (DIB) made $192 million, Kuwait Finance House (KFH) made $259 million, Bank AlJazira made $359 million, and Al Rajhi Bank made a staggering $941 million.

However, the banks are not resting on their laurels. All are aware that, as the recent stock market tumble showed, nothing can last forever, and to use a old clich‚, if you stand still you are moving backwards.

According to Adnan Yousif, CEO of AlBaraka Banking Group (ABG), Sheikh Saleh Kamel was the first person to raise the issue of the need for an Islamic 'megabank', a view he shares with his chairman. "The Islamic financial system needs a big banking institution, because truly to matter on the global stage you have to be big."

Most of the major Islamic banks in the region are investing tremendous resources into becoming regional, even international, banking players. Bahrain-based ABG is probably the most geographically diversified Islamic bank, with subsidiaries in Egypt, Lebanon, Sudan, Tunisia, Turkey, Jordan, Algeria, and South Africa, and has invested in the Islamic Bank of Britain and the European Islamic Investment Bank. It is all part of Sheikh Saleh's vision of a global Islamic bank, present in all predominantly Muslim countries.

ABG recently issued a $430 million IPO with the express intention of using the capital to bolster its subsidiaries, and expand internationally into new markets, particularly Malaysia, Indonesia, India and Syria, and "hopefully Europe soon", according to Adnan.

QIB has entered into a joint venture with Islamic investment banking big-hitters Gulf Finance House (GFH), based in Bahrain, and established Qatar Finance House (QFH), a Shari'ah compliant Qatari investment bank with $1 billion in authorised capital and $500 million in paid-up capital, with each bank owning 15%. QFH has already applied for a license to operate from the Qatar Financial Centre, and the board of directors is a veritable who's who of Qatari and Bahraini investors.

DIB, the world's first Islamic bank, has also spread its geographical wings, primarily in Sudan and Pakistan. Together with Abu Dhabi Islamic Bank, Sharjah Islamic Bank, and the Islamic Development Bank (IDB), DIB has taken over Al Khartoum Bank, Sudan's first bank, renamed it Emirates and Sudan Bank, and given it a paid-up capital of $113.5 million and an authorised capital of $200 million.

Interestingly, DIB also holds a significant stake in Bosna Bank in Bosnia, as does IDB. Though it is still a miniscule market, Bosna Bank could, with the right backing and economic conditions, potentially become a leading Islamic bank in Eastern Europe.

There are also reports that DIB is in the final stages of acquiring MNG Bank in Turkey for $160 million, and converting it into a fully Shari'ah compliant institution. Due to the secular constitution in Turkey, Shari'ah compliant banks must call themselves 'participation banks', but with a buoyant, thriving economy and an EU membership on the cards, a presence in Turkey is potentially extremely lucrative.


DIB's move into the Pakistani Islamic banking market is perhaps even more significant. In a Memorandum of Intent, DIB has committed to opening 70 branches across Pakistan over the next 18 months, making it one of the largest foreign banks in the Islamic republic. Explaining the move, Saad Abdul Razak, CEO of DIB, revealingly said that it would enhance DIB position "leading Islamic financial institution on the global scene".

It is a title that is likely to be contested, not least by KFH and Al Rajhi Bank. KFH in particular has a well-established pedigree outside the Kuwaiti borders. For many years, KFH was regulated directly by the Ministry of Economy, and was able aggressively to expand abroad, most notably in Turkey through its Kuveyt Turk subsidiary, Bahrain through KFH Bahrain, and the UAE through its 20% stake and management contract with Sharjah Islamic Bank.

It is also present in more far-flung areas, and not only through its real estate investments in the west. It operates in Malaysia through its wholly-owned subsidiary KFH Malaysia, which has a $100 million in paid-up capital. KFH Malaysia caught the attention of the Islamic financial world when it announced plans to bring a $200 million Islamic bond to the market, backed by Chinese energy infrastructure assets. It would be the first Chinese Sukuk, and KFH is also reportedly looking at issuing Sukuk on the behalf of Indonesia and the Philippines as well.

However, the largest Islamic bank in the world is predictably a Saudi one. Al Rajhi Bank is the second largest bank in the Middle East, and the largest Islamic one by some distance. Its sheer size allows it to take risks some smaller banks might shy away from, and uniquely for the largest Islamic banks, its focus is squarely on retail banking.

"This was our model from the very inception of the bank. We wanted to be the people's bank, and the strategy of the bank was built around this vision," says Saeed Mohammed Al Ghamdi, head of retail banking at Al Rajhi. It has announced plans to open 50 branches in Malaysia, arguably the world's most advanced country within Islamic finance, and as in Saudi Arabia, Al Rajhi's focus in Malaysia will be on retail.

The retail sector in Malaysia is very competitive, and Shari'ah boards in Malaysia are sometimes accused of taking a 'mercantile' approach to Shari'ah compliance. As Al Rajhi will still be relying on its own, Saudi board, this might disadvantage it vis-…-vis Malaysian competitors like RHB Islamic, Bank Islam, Bank Muamalat and CIMB. However, its venture into the Malaysian market should be applauded, and considering the tremendous financial backing and extensive retail experience accrued from years as a top player in Saudi Arabia makes it a well-calculated venture.

Saeed is certainly convinced that it will prove successful, and says once Al Rajhi are successfully established in Malaysia, it will use it as a springboard to other Muslim markets nearby. "We don't want to limit ourselves to one area or another, and all Muslim countries represent an opportunity for us. After we are successful in Malaysia we will closely study all the other regional markets, and determine the best way to expand in those in due course. We want to be a leading, global Islamic bank."

The larger players obviously have the advantage when it comes to expanding outside core markets, but wary of the dangers of standing still, smaller GCC Islamic banks are also looking around for opportunities. Often, their domestic markets are dominated by the larger banks, and though nimble, they cannot compete with their economies of scale, making regional expansion increasingly attractive.

Bank Boubyan in Kuwait has to face domestic giants KFH, and has decided to look abroad as well, having acquired a significant stake in Bank Muamalat Indonesia. "The bank has a very interesting history, has an excellent track record, good profitability over the past three years, and excellent future potential," says Fuad Al-Shehab, deputy general manager and head of investments, who wants to use the bank as a window into the Far East markets, particularly Malaysia and Japan.

"Malaysia is very advanced in terms of Islamic banking, but Japan has no knowledge of Islamic banking. Our investments in Japan are restricted to buying real estate, but we have found that Japan is very willing to entertain the concept of Islamic transactions," says Fuad. With Islamic banking and finance thriving in Malaysia, Singapore attempting to become an Islamic finance hub, and Indonesia the world's most populous Muslim country, Fuad thinks that South East Asia will attract a lot of attention from capital-rich Islamic banks in the GCC.

There are also many opportunities closer to home for more cautious banks. Take International Islamic in Qatar. It was a founding partner of Islamic Bank of Britain, is establishing a Takaful company in Pakistan, setting up an Islamic bank in Syria, and is in the early stages of setting up another bank in Morocco.

However, regional consolidation, whilst the good times are rolling, is all well and good, but some true Islamic 'megabanks', capable of competing with the multinationals, would be a boon to the industry, and help it move forwards. Ernst & Young did a survey with ABG, and found that 85% of all Islamic banks do not have capital exceeding $25 million, only 12% of Islamic banks have more than $100 million in capital, and despite abundant liquidity, there is not a single Middle East bank among the top 100 banks in the world, ranked by Tier 1 capital.

Perhaps the larger regional players, awash with budget surpluses, should rather look for merger and acquisition possibilities closer to home. There are several Islamic banks that, due to their size, look like ideal possibilities for an ambitious and capital-flushed bank, and due to the complicated ownership structure of Middle East companies, many banks are owned by the same government or family office.

Take for example Emirates Islamic Bank, wholly owned by the Emirates Bank International Group, in turn owned 76.8% by the government of Dubai, which also controls DIB. Furthermore, the government also owns Dubai Bank through Dubai Holding and Emaar Properties, and Dubai Bank is currently in the process of converting into a fully Shari'ah compliant institution.

There is also a case for cross-border consolidation in the Islamic financial sector. KFH could certainly afford fully to acquire Sharjah Islamic Bank, thereby getting a foothold in the lucrative UAE market, and a bank like Bahrain Islamic Bank has little chance of competing against the giants of Bahrain, and would have much to gain from, for example, a Saudi patron bank. Arab Islamic Bank's general manager Atiyeh Shananier certainly makes no secret of his desire to see an Islamic bank from the GCC investing in the Palestinian bank.

With most banks doing well, the price of consolidation might very well be extortionate, but the stock market downturn has made acquisitions a bit more palatable, with shareholders no longer asking for unrealistic valuations. As regional Islamic banks expand further, and become locked in increasingly tough competition, the smaller players will see their margins tighten, and an even stronger case might be made for M&As.
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Monday, November 20, 2006

CEO of the Telecommunications Regulatory Commission David Iverson to Explain the New Telecommunications Act 2006

Mr. David Iverson, recently appointed to be the first CEO of the new Telecommunications Regulatory Commission, will give comments and explanations of the new Telecommunication Act 2006 and the liberalization of telecommunications in the BVI. The luncheon organized by BVI Chambers of Commerce & Hotel Association (BVICCHA) where Mr. Iverson is invited as the guest speaker will be held on November 22. The arrangement will be sponsored by Cable and Wireless, which has recently reported on preparing numerous exciting products and services that would be introduced to the British Virgin Islands.

The BVICCHA invites to the luncheon all interested persons who wish to be informed on the Telecommunication Act 2006, and, moreover, to hear first-hand details from Mr. Iverson. All the guests will have the opportunity to ask questions concerning the Act and related issues. The time for networking will start from 12.00pm, and lunch will be served at 12.30pm.

The BVI Chambers of Commerce and Hotel Association is the largest civil society organization in the territory, which includes representatives of the business community and hotel industry sector, both from the BVI and from other countries. The association was created with the general purpose to actively promote a positive business and social environment, for the benefit of the territory, sustaining the unique advantages of the BVI. Some of the CCHA community works include: the Spring Regatta, BUYBVI Trade Show, Junior Achievement, Right Start programs and the Culinary program. Now this private sector organization accounts 250 members.

The BVICCHA regularly holds luncheons at member establishments, which can add to the competitive and strategic positioning of the BVI businesses in the local and international environment.
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Divided Nation

Will house-price falls in Europe bring economic misery to the UK in the next few years? So wonders Anatole Kaletsky in The Times (UK) today. But if we all suffer because a recession has been brought on by a property price crash, at least most home-owners will still keep a large part of their house-price gains of the past 14 years. Pity the home-renters who may also be lumbered with unemployment but not have the comfort of their own home with its substantial value to fall back on if they need it.

Being poor can mean that you have difficulties in obtaining a basic bank account says Caroline Merrell, also today in The Times. She says this can affect the ability to get a job or start a business. Of eight banks, profits have risen from 9% to 37 % for seven, with only one having a fall. For the top earning bank, profits for 6 months were £6.5bn. In The Free Lunch - Fairness with Freedom there is an explanation of how banking works, how this banking profit arises and for suggestions as to how we could move to a fairer society by funding a Citizen's Income from banking profit (see Blog: 20 Oct).

The rich/poor divide has not improved during New Labour's first 10 booming years. A report in the paper from Paul Donovan of UBS the investment bank, prompts Gary Duncan to suggest that due to globalisation the poor in the industrial nations will get poorer still in future. The poorest 10% of households have lower disposable incomes than 10 years ago, have to pay the increased prices for food and fuel and are likely to suffer high crime rates in their neighbourhoods.

We are a shockingly divided nation. The Free Lunch - Fairness with Freedom exposes the way our society's economic system skews future wealth gains in favour of those some wealth already. It suggests how reform could give back to the economically downtrodden of our society the resources and human dignity that is their due. The book is for anyone who hopes that 'Love your neighbour as yourself' might be more than a religious platitude. (http//
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Sunday, November 19, 2006

New world wines continue their challenge

Santiago, Chile. Yestredya I visited a vineyard here in Chile´s central valley not far from Santiago. This vineyard was founded in 1880 and is currently producing 19 million litres a year. I have seen similar operations in Australia, although not on this scale.

A German in the party asked about the concept of terroir which is very much emphasised by European wine producers giving a wine its distinctiveness. However, this was clearly of no importance in Chile. As in Australia (now suffering from a glut of wine), Chilean vineyards produced drinkable and affordable wines for the world market. They then keep the best wines for themselves, as in Australia. At a reception at the presidential palace in Santiago, I had one of the best reds I have ever drunk.

There is no appellation system in Chile, only reserve wines finished in oak barrels and other wines. The New World wine countries have eight years to come up with a system, but this is proving difficult.

Our guide was less emphatic than those in Australia about the merits of screw top bottles or synthetic corks but pointed out that the rising price of natural cork meant that it could cost as much as the wine.

As the discussions about the reform of the European wine regime meander on, there is no sign here in Chile that the marketing challenge they present to European producers is going to diminish.Any source

Friday, November 17, 2006

Islamic Banking and Finance: A Snapshot of the
Industry and Its Challenge Today (KPMG)

In publishing this paper on challenges and opportunities in Islamic banking and finance our aim at KPMG's network of firms is to provide perspective on these issues and, hopefully, have it serve as a catalyst for a discussion on change, opportunity, and growth.

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Conyers Dill & Pearman Establishes its Middle East Office in Dubai International Financial Centre

It was already discussed in previous posts in connection with Conyers Dill & Pearman law firm that BVI offshore services can achieve more popularity in the countries of the Arabian world. Quickly expanding construction business, the boom of the infrastructure projects and related financings, are expected to provide major opportunities for offshore law firms having business in this region. Conyers Dill & Pearman, which is the leading offshore law firm and one of the major players in the BVI, has celebrated on November 14 the opening of its Middle East office with a reception office at the Emirates Towers. The company's new office is based at the Dubai International Financial Centre (DIFC).

Conyers Dill & Pearman specialises in company and commercial law, commercial litigation and private client matters. The firm offers comprehensive multi-jurisdictional offshore legal services and actually is the introducer of concept of multi-jurisdictional offshore law. It is the only law firm in the region to provide advice on the laws of British Virgin Islands, Bermuda and Cayman Islands.

The British Virgin Islands has proved to be a popular jurisdiction for holding companies as well as a preferred jurisdiction for joint venture vehicles, while Bermuda and the Cayman Islands have very active shipping and aircraft registries.

The Middle East office of Conyers Dill & Pearman will start with consultations on corporate and commercial law, cross-border investment funds (hedge funds, private equity and venture capital funds), project financings and securities.

It is managed by partner Roger Burgess. In his comments he said, “We have decided that the Middle East is a region where we need to be and we are committed to the region for the long-term ... The Middle East has traditionally been underinsured, and as development continues apace, demand for sophisticated insurance products will grow considerably. Given our expertise in the offshore insurance market, we expect to become involved in this line of business … With the experience we bring to the region we will also be looking to play a role in the development of Islamic insurance products.”
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Non-Smoking Measures Passed by BVI Legislative Council

Important information for smokers traveling to the BVI.

The British Virgin Islands' Legislative Council unanimously passed the Tobacco Control Act on November 15, 2006. According to this Act, smoking will be banned in public places in the BVI, including offices, restaurants, bars, etc. People will not be allowed to smoke in enclosed public places or within 50 feet (15 meters) of a door or window to such a place.

The Tobacco Control Act will also regulate the promotion, distribution and use of tobacco products in the British Virgin Islands. The measures implemented ban selling tobacco to minors and give the authority to regulate tobacco advertising and sales to the government. The smokers will be given a six-month period to adjust to the ban measures.

These restrictions are implemented despite concerns about their effect on tourism in BVI. Ronnie Skelton, the British territory's minister of health and social development, has commented on the objections that "The concern for public health obviously outweighs any of the other concerns''.

Presenting the bill for its second and third reading, Mr. Skelton said he was happy that the bill got the needed support to pass through Legislative Council. The new measure will soon be signed by Gov. David Pearey. The government still has to determine the penalties for violations.

It should be noted that some other territories, including Puerto Rico and Bermuda, have recently imposed prohibitions on smoking.
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