Islamic finance awards 2007: Pushing beyond the boundaries

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By:
Chloe Hayward, Guy Norton, Sudip Roy
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Demand for Islamic finance products is high. At last supply is starting to meet investors’ needs. The challenge for the industry is to ensure that the market’s infrastructure develops sufficiently quickly so that more companies and entities continue to embrace Shariah-compliant techniques. And on the following pages Euromoney profiles the winners of the latest ­Islamic finance awards.

Award Winners
Best international Islamic bankBest Islamic bank in the Middle EastBest Islamic bank in Asia
Best Islamic finance dealBest sukuk dealBest murabaha deal
Best project finance dealMost innovative deal
Most improved Islamic bank in AsiaMost improved international Islamic bankMost improved Islamic bank in the Middle East
Best commodities houseBest sukuk houseBest private equity house
Best structured product houseBest project finance houseBest takaful house (life and general)
Best assurance and advisory houseBest liquidity managerBest legal adviser
Best new productOutstanding contribution to Islamic financeList of Islamic finance award winners

2007 Islamic finance awards photos

TWO YEARS AGO an imbalance existed in the Islamic finance market. Although demand for Shariah-compliant products was high there was a significant deficiency of supply. Today that imbalance is starting to be redressed. Over the past 12 months all areas of Islamic finance – at retail and corporate banking levels, in project finance and real estate, in capital markets and private equity – have seen greater supply and product innovation.

Nothing better exemplifies this change than the sukuk or Shariah-compliant bond market. In 2006 issuance volumes more than doubled on the previous year, with $25.98 billion-worth of deals, according to data provider Ifis. The surge in volume was partly a result of strong demand. Last year the two biggest sukuk bonds were issued: a $3.52 billion transaction for the Nakheel Group and one worth $3.5 billion for Dubai Ports. Both are subsidiaries of Dubai World. Greater supply, though, was also evident. There were 241 sukuk transactions out of the Middle East and Asia in 2006 compared with 126 in 2005. Corporates in the Middle East, in particular, are becoming more comfortable tapping the capital markets, establishing benchmark bonds, diversifying their investor bases and funding their international expansion. Moreover, chief financial officers are willing to experiment if it makes sense. Last year the first convertible and exchangeable Islamic bonds were issued.

It’s not just the sukuk market that is seeing greater innovation. In commodities, for example, banks such as Deutsche Bank and UBS have been busy pushing the boundaries. In 2006 the Swiss bank, for example, launched a range of commodity-linked certificates that are the first of their kind to be tradeable.

Deutsche Bank built on its success of 2005 in designing more principal-protected, commodity-linked Islamic products based on various techniques – a combination of multiple murabaha and salam or based on the wa’d contract. The German bank has also developed other structured products, including an Islamic CDO and a Shariah-compliant money market solutions.

All of these products are aimed at improving one of the biggest limitations that has traditionally afflicted Islamic capital markets instruments – a shortage of liquidity. Too often investors end up holding their assets because of a lack of buyers and a shortage of alternative instruments. Lack of liquidity is symptomatic of the structural inadequacies of the market. The sukuk market, for example, falls short of being a true capital market because there is little secondary trading. One way to boost the capital markets would be to encourage securitizations that appeal to both Islamic and conventional investors. But Shariah-compliant securitizations are a rare beast. In this instance the problem is not a lack of interest among corporates – potentially, a number of firms would like to do a true-sale securitization. The biggest hurdle is a weak legal system in many Muslim countries, which means that companies are unable to receive an international credit rating.

Regulators, investment banks, lobby groups and legal firms are working together to improve the legal environment to encourage greater Islamic finance activity in the Middle East. This is also true for other parts of the world. For one area to keep an eye on over the next two years is the possible globalization of the Islamic industry. So far, Shariah-compliant activity has been largely contained within Muslim countries in the Middle East and Asia.

There have been instances of transactions in non-Muslim countries or involving non-Muslim entities. In 2004, the German state of Sachsen-Anhalt issued the first sukuk bond from Europe. Last year, HSBC Amanah completed the first UK Shariah-compliant private ­equity investment, with a $31 million management buyout of Amtech Power Software. This year Aeon Credit Japan promises to be the first Japanese company to launch an Islamic bond, albeit through its Malaysian subsidiary. But these are isolated examples. More global players need to embrace Islamic finance if it really is to enter the mainstream.

TWO YEARS AGO an imbalance existed in the Islamic finance market. Although demand for Shariah-compliant products was high there was a significant deficiency of supply. Today that imbalance is starting to be redressed. Over the past 12 months all areas of Islamic finance – at retail and corporate banking levels, in project finance and real estate, in capital markets and private equity – have seen greater supply and product innovation.

Nothing better exemplifies this change than the sukuk or Shariah-compliant bond market. In 2006 issuance volumes more than doubled on the previous year, with $25.98 billion-worth of deals, according to data provider Ifis. The surge in volume was partly a result of strong demand. Last year the two biggest sukuk bonds were issued: a $3.52 billion transaction for the Nakheel Group and one worth $3.5 billion for Dubai Ports. Both are subsidiaries of Dubai World. Greater supply, though, was also evident. There were 241 sukuk transactions out of the Middle East and Asia in 2006 compared with 126 in 2005. Corporates in the Middle East, in particular, are becoming more comfortable tapping the capital markets, establishing benchmark bonds, diversifying their investor bases and funding their international expansion. Moreover, chief financial officers are willing to experiment if it makes sense. Last year the first convertible and exchangeable Islamic bonds were issued.

It’s not just the sukuk market that is seeing greater innovation. In commodities, for example, banks such as Deutsche Bank and UBS have been busy pushing the boundaries. In 2006 the Swiss bank, for example, launched a range of commodity-linked certificates that are the first of their kind to be tradeable.

Deutsche Bank built on its success of 2005 in designing more principal-protected, commodity-linked Islamic products based on various techniques – a combination of multiple murabaha and salam or based on the wa’d contract. The German bank has also developed other structured products, including an Islamic CDO and a Shariah-compliant money market solutions.

All of these products are aimed at improving one of the biggest limitations that has traditionally afflicted Islamic capital markets instruments – a shortage of liquidity. Too often investors end up holding their assets because of a lack of buyers and a shortage of alternative instruments. Lack of liquidity is symptomatic of the structural inadequacies of the market. The sukuk market, for example, falls short of being a true capital market because there is little secondary trading. One way to boost the capital markets would be to encourage securitizations that appeal to both Islamic and conventional investors. But Shariah-compliant securitizations are a rare beast. In this instance the problem is not a lack of interest among corporates – potentially, a number of firms would like to do a true-sale securitization. The biggest hurdle is a weak legal system in many Muslim countries, which means that companies are unable to receive an international credit rating.

Regulators, investment banks, lobby groups and legal firms are working together to improve the legal environment to encourage greater Islamic finance activity in the Middle East. This is also true for other parts of the world. For one area to keep an eye on over the next two years is the possible globalization of the Islamic industry. So far, Shariah-compliant activity has been largely contained within Muslim countries in the Middle East and Asia.

There have been instances of transactions in non-Muslim countries or involving non-Muslim entities. In 2004, the German state of Sachsen-Anhalt issued the first sukuk bond from Europe. Last year, HSBC Amanah completed the first UK Shariah-compliant private ­equity investment, with a $31 million management buyout of Amtech Power Software. This year Aeon Credit Japan promises to be the first Japanese company to launch an Islamic bond, albeit through its Malaysian subsidiary. But these are isolated examples. More global players need to embrace Islamic finance if it really is to enter the mainstream.

Award Winners
Best international Islamic bankBest Islamic bank in the Middle EastBest Islamic bank in Asia
Best Islamic finance dealBest sukuk dealBest murabaha deal
Best project finance dealMost innovative deal
Most improved Islamic bank in AsiaMost improved international Islamic bankMost improved Islamic bank in the Middle East
Best commodities houseBest sukuk houseBest private equity house
Best structured product houseBest project finance houseBest takaful house (life and general)
Best assurance and advisory houseBest liquidity managerBest legal adviser
Best new productOutstanding contribution to Islamic finance