Sekedar sebagai informasi (dikutip dari Global Market Monitor, 21 Oct 09) Best regards,
Arlyana Abubakar Senior Economic Analyst Foreign Debt Analysis and Investor Relation Division International Directorate Bank Indonesia Sjafruddin Prawiranegara Tower, 5th Floor. Jl. MH Thamrin No. 2, Jakarta 10350, Indonesia Tel: +62 21 381 8314, Fax: +62 21 350 1950 email: [email protected] Has the crisis shown the strengths or the weaknesses of Islamic finance? As Western financial markets have gone into crisis, some have suggested shariah-compliant instruments, which are intended to be devoid of leverage, might have the potential to establish themselves as alternative, more resilient sources of finance. However, first defaults in the sukuk market and untested bankruptcy resolution mechanisms have cast some doubt on their near-term prospects. While Islamic finance is making a steady comeback from these reverses it is still hampered by the need for regulatory standardization, legal reform, and greater supervisory harmonization. Since Islamic law prohibits interest-based forms of income, financial relationships are not governed by guaranteed returns but investment gains from shared business risk in activities deemed permissible on religious grounds. Thus, Islamic finance implies direct investor participation in asset performance. Since payments can only be made in association with the temporary or permanent use of assets and not from the time value of money, asset-backing becomes an essential element of any commercial transaction under shari'ah law. Thus, shari'ah principles marginalize the possibility of underfunding through leverage and foster equity ownership (in lieu of financial leverage from debt creation without underlying asset values). Islamic law also prohibits unethical (or socially detrimental) activities (haram), including betting and gambling (maisir), preventable contractual uncertainty (gharar) and/or any association with alcohol, tobacco, firearms, and adult entertainment. Islamic finance can only be conducted if the object of exchange exists before the transfer of title takes place-i.e., sales must be immediate and absolute-and its characteristics are clearly identifiable. Recent performance and issuance trends These principles have helped Islamic products outperform some conventional markets during the crisis as can be seen from the relative performance of Islamic and conventional equity indices. Investors in Islamic products generally avoided exposure to Western banks and highly leveraged corporates. More broadly, the traditional conservatism of investors in Islamic finance-plus its relative under-development-shielded them from exposure to some of the more complex financial structures such as Collateralized Debt Obligations, which were most overvalued. However, the preference for real estate as backing for Islamic bonds has exposed investors to property market volatility, especially in the Middle East, and the ban of investing in gambling and alcohol has denied investors in Islamic products exposure to some of the sectors often seen as defensive during a market downturn. Overall, although Islamic equities have outperformed broad conventional indices, they are still down significantly, and have underperformed conventional emerging market indices. Islamic finance grew rapidly in the years to 2007 as it seemed to offer advantages to all participants. For the issuers, it opened up large pools of savings from investors who were excluded from buying conventional bonds. For investors, they offered a much wider range of investments, with, in many cases, some form of guaranteed return. As a result, the market boomed in 2006-07 (see chart). Recent developments and judgments Issuance fell sharply in 2008 and the market is now dealing with its first defaults. While defaults are familiar for bonds issued under Western law, with an established body of case law for the priority of claims following default, sukuk are defaulting for the first time. The priority of sukuk holders claims realtive to equity investors and creditors needs clarification. Opinions from influential Islamic scholars have also brought into question whether many instruments purporting to be shariah-compliant, are indeed so. This adds to the risk for investors in those bonds as whole categories that were thought ex ante to be compliant might later be deemed non-compliant. Most sukuk have been sold with a borrower/creditor guarantee to repay the full notional amount at maturity, or, in the event of default or early redemption, mirror the structure and payout of a conventional bond. Such a promise (and not the option) to repay capital violates the principle of risk-and profit-sharing under Islamic law. The debate about the general applicability of these recommendations with regard to the approval process of sukuk (and the screening of both their structure and characteristics of underlying assets) has increased uncertainty for both issuers and investors. A number of the key developments and judgment include: January 2004: In the case of Shamil Bank v. Beximco, the U.K. Court of Appeal held that English law takes precedence even though the loan contract stated that "Subject to the principles of the Glorious Sharia'a, this Agreement shall be governed by and construed in accordance with the law of England." Late 2007: Islamic scholar, Sheikh Muhammad Taqi Usmani, the head of shari'ah board of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), repeats his view that most sukuk are not consistent with Islamic teaching, and warns that Islamic financial institutions are increasingly copying the characteristics of the conventional, interest-based market. February 2008: AAOIFI rules that sukuk with principal guarantees via repurchase agreements, asset retentions by originators, and the transfer of certain proportions of debt associated with underlying assets, such as interest-bearing liens, violate shari'ah principles because they contain repurchase guarantees. October 2008: U.S.-based oil and gas company East Cameron Partners declares bankruptcy. It had issued a sukuk in 2006. Its bankruptcy is continuing to be litigated through the Louisiana courts, and the status of the sukuk holders is not yet clear. January 2009: Kuwait's biggest investment bank, Global Investment House defaults on most of its liabilities. February 2009: UAE's central bank (based in Abu Dhabi) subscribes to a $10 bn bond issued by Dubai, seen as a signal of solidarity within the UAE. Some of the proceeds of the bond said to be allocated to cash-strapped Dubai property developer Nakheel. Sukuk bond prices start to rally. March/April 2009: Qatar and Abu Dhabi each launch $3 bn sukuk sales April 2009: Indonesia issues a $650 bn international sovereign sukuk bond at 720 bps over US Treasuries. The issue complied with rule 144A, and demand from US investors said to be good. May 2009: Kuwait's Investment Dar Co. defaults on a $100 mn sukuk registered in Bahrain and in the U.S., becoming the first company from the Middle East to default on Islamic bonds. June 2009: Bahrain issues $750 mn sovereign sukuk at 340 bps over Treasuries amid strong demand. June 2009: $30 bn Saudi company Saad Group says it plans to restructure the debt of its units. Ratings agencies slash its ratings to default status, saying Saad has ceased to pay creditors. Saudi Arabia opens a bond trading platform giving foreign investors some additional access to both the sukuk and conventional bonds. Trading reported thin. Saudi-based Ahmad Hamad Algosaibi & Bros Co (AHAB) says it is about to start talks with creditors. Saudi central bank freezes AHAB's accounts after AHAB froze personal accounts of Saad Group head Maan Al-Sanea. October 2009: Indonesia's first ever auction of domestic sukuk bonds meets decent demand, but all bids are rejected as yields considered too high. Despite these challenges, issuance has rebounded in recent quarters. In particular, issuance in Q2 and Q3 this year was at a pace reminiscent of 2006-07. Potential for the growth of Islamic finance Despite the phenomenal growth of sukuk before the financial crisis, future development of the market could also be arrested by legal uncertainties, insufficient supervisory harmonization across national boundaries, and little asset diversity. The main issue for investor confidence remains the legal underpinning for many Islamic bonds. Sukuk are generally asset-based, but not asset-backed, as would be the case with a conventional securitization. The assets have not generally been transferred as a true sale to the Special Purpose Vehicle that issues sukuk certificates due to the shari'ah requirement of direct investor participation and ownership of the cash-generating asset. Moreover, transfers of property rights are cumbersome in many of the countries where the assets are located-especially the Gulf-and there are frequently limits on foreign ownership of land. The regulatory regime in a number of key countries, including Saudi Arabia and Kuwait, does not allow SPVs to be set up. The SPVs are therefore often registered in either the Cayman Islands, or Bahrain, but the SPV thus becomes a 'foreigner' in all other jurisdictions. Moreover, bankruptcy laws in Western nations are generally much more developed and tested than those in the countries where many sukuk have been issued. There are worries about the key role played by a small number of Islamic scholars and fragmented opinions of shari'ah boards, which act as quasi-regulatory bodies. This is analogous to the debate on the role of credit rating agencies as an agent of transparency and disclosure ahead of the financial crisis, with the 'shariah-compliant' label playing a similar role to the ratings agencies' 'AAA' rating. Since some scholars sit on dozens to boards, there has been concern about whether all instruments are being vetted adequately, and whether rulings may be being affected by conflicts of interest where a scholar sits on various boards. Although shari'ah rulings (fatwas) by legal scholars are disclosed, there are currently no unified principles (and no precedent) on which shari'ah scholars decide on the shari'ah compliance of new products. Most recently, however, a Joint Feedback Statement by the U.K. FSA and the HM Treasury made a crucial step towards enhanced product standards of sukuk by establishing that sukuk with the same economic characteristics as conventional debt securities issued in the UK were to be treated as so-called "alternative finance investment bonds." The sukuk market is also plagued by high originator and asset concentration. Since only a handful of large banks and managers are behind the bulk of transactions completed by a small number repeat issuers, while origination and servicer risk from a narrow asset supply poses challenges to investor diversification. An even bigger diversification issue arises from the narrow range of deal types and the absence of short-term maturity tenors in the existing market. In addition, the lack of information from private sources about securitized assets in many sukuk and the prevalence of "buy-and-hold" investors inhibit efficient price discovery and information dissemination. Overall, the crisis was a poignant reminder of the benefits of a cautious approach to investing, slowing the trend toward the replication of conventional structures that are shariah-compliant. However, it has also exposed the underdevelopment of the sector. Islamic finance is likely to continue to have a limited role as long as there is an insufficient body of uniform and binding scholarly interpretation on shari'ah compliance of financial instruments, while legal and regulatory restrictions limit the scope for the true sale securitization in line with the 2008 AAOIFI recommendations (see above). Cautious investing is, of course, perfectly possible within the conventional investment world. The range of risk management techniques already available to investors in conventional markets means it is easier and often cheaper to take a cautious view in conventional market than in Islamic markets. However, with oil prices rising, and the current account surpluses of oil-rich Muslim nations growing, there is still likely to be increasing strong demand for shariah-compliant investment opportunities. Contributors: Chris Morris, MCMGA (London), Andy Jobst, MCMGS, and Paul Mills, MCMGA. ________________________________ "This e-mail (including any attachments) is intended solely for the addressee and could contain information that is confidential; If you are not the intended recipient, you are hereby notified that any use, disclosure, copying or dissemination of this e-mail and any attachment is strictly prohibited and you should immediately delete it. This message does not necessarily reflect the views of Bank Indonesia. Although this e-mail has been checked for computer viruses, Bank Indonesia accepts no liability for any damage caused by any virus and any malicious code transmitted by this e-mail. Therefore, the recipient should check again for the risk of viruses, malicious codes, etc as a result of e-mail transmission through Internet."
