Islamic banking on the roll despite challenges

 Sorouh Real Estate Company based in Abu Dhabi completed the world’s largest shariah compliant securitisation on Thursday last week. This transaction may set the pace for future Islamic financing transactions and serve as a model for issuers of shariah compliant products.

This transaction is unique as it is Middle East’s first true sale Islamic securitisation as well as the premier in securitisation of sales receivables.

It is Abu Dhabi’s first asset backed securitisation and the highest rated issuance from a non-sovereign in the region.

Securitisation in Islamic financing takes three main forms and is the issuance of certificates of ownership against an investment pool.

The securitisation may occur within a trust, equipment leasing or cost plus financing transaction. Securitisation within a musharakah (cost plus financing) transaction is common with project financing where large capital outlay is required and where only a limited number of people can subscribe.

Each investor is issued with a separable share and a certificate of ownership, which can be traded in the secondary markets. A securitised murabaha ( trust) cannot create a negotiable instrument tradeable in the secondary markets, as the certificate issued is only but evidence of debt.

Securitisation is common in ijara transactions (equipment leasing) where the certificates of ownership are tradeable and exchangeable.

Should the lessor in an ijara securitisation opt out, then he may trade his certificate to a new party who will take over all his rights and obligations as if he were the original lessor.

The concept of Islamic banking is relatively new in Kenya. There is no clear-cut legislation  regulating the issuance of shariah compliant products. The banks are licensed by the Central Bank of Kenya and the statutes regulating the banking industry are applicable to them.

Calls have been made for a clear-cut legislation on Islamic banking to support the sector. The reference of “interest” in some of the statutes has posed a problem to both the regulator and the issuers as one of the core principles of Islamic financing is the absence of riba (interest).

Globally the AAOIFI organisation, (Accounting and Auditing Organisation for Islamic Financial Institutions), has provided some sort of guidance for the sector.

Re-financing of loans
However, the concept is picking up in Kenya. The main Islamic banks are First Community and Gulf African Bank.

The Gulf African Bank offers shariah compliant products and services including equipment and vehicle financing, re-financing of loans, musharakah transactions in real estate and murabaha transactions in the petroleum sector.

The bank is expanding and shall soon offer shariah compliant services and products for the construction industry and will soon commence securitisation transactions.

Issuers in Kenya are, however, happy with the support granted by the regulators, in the absence of a clear-cut legislation for the sector.

According to one issuer, “The regulators have been supportive so far and are working with us to ensure growth of the industry despite the lack of regulation, which may otherwise cause confusion.”

The advantages of Islamic finance are mainly due to the fact that planning and cash flow forecasting is clearer due to the absence of interest. The customer knows before hand the amount of instalments payable.

The instalments are fixed regardless of the economic situation at hand. This advantage is unique to Islamic banking unlike conventional banking, where the instalments are pegged on inflation, political, financial and bankruptcy risks.

The risk of defaulting is higher in conventional banking than sharia banking as proper planning can take place.

With housing transactions, the bank upon the customer’s instructions, buys the house in its name and enters into a musharakah with the customer.
The customer pays fixed instalments over a period of time while increasing his ownership in the house.

Meaning that with time the customer takes on a higher share in the house eventually taking 100 per cent ownership.

In the event of default, the bank sells the house and refunds the customer’s share.

aibim 

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