Sharia-compliant structures could help revive the securitisation market tarnished by the global financial crisis, providing a fresh source of funds for companies, a top official from Malaysia's Securities Commission said. Policymakers are keen to revamp securitisation, or packaging loans into bonds, which has struggled to regain credibility after some of the products turned sour in 2007, triggering a chain of events that threatened to lead to a global financial meltdown. Because Islamic finance shuns outright speculation it could offer the benefits of securitisation minus the weaknesses that led to the sub-prime mortgage crisis, said Nik Ramlah Mahmood, deputy chief executive of Malaysia's Securities Commission."There is a golden window of opportunity for Islamic securitisation to lead the way," Mahmood said in a speech at an Islamic finance legal seminar in Brunei. While still at an early stage of development, the features of Islamic securitisation could help re-open a market that can fund a wide range of activities, including mortgages, car loans and working capital for businesses."The exclusion of complex structures such as CDOs (collateralised debt obligations) for instance, acts as a natural risk mitigant that offers an enhanced value proposition for investors."Despite the sector's small size, several deals have proven the concept works, although existing legal and taxation issues have hindered greater transaction volume. One issue relates to lack of legal certainty of the bankruptcy remoteness of special purpose vehicle (SPV) used in Islamic securitisation, with some jurisdictions allowing this through trust law while others use corporate law, Ramlah said."Whatever the means of achieving it, legal clarity with regard to the status of the SPV is critical."
Taxation issues are also prevalent in cross border deals, while streamlining procedures could help minimise risks typically linked to the sector, she added. Such issues are now being discussed by regulators which convened this week in Brunei for a series of seminars organised by the Kuala Lumpur-based Islamic Financial Services Board, which sets global guidelines for Islamic finance. CASES Malaysia's regulators have led the way in securitisation, introducing guidelines on asset-backed securities (ABS) in 2001, revised in 2004, which also covers sharia-compliant ABS, but more work remains, Ramlah said.
"Streamlining and tightening the corporate governance regime at every level of transactions could minimise the risk typically linked to securitisation."This could help boost volumes. Between 2004 and 2013, the Securities Commission approved 44 ABS proposals, nine of them Islamic, compares with 940 private debt securities proposals submitted for approval during the same period. Despite deal scarcity, Islamic structures have proven useful in securitising various types of assets, including housing loans by Malaysia's national mortgage corporation Cagamas. Cagamas has issued two Islamic ABS, the first one in 2005 using residential mortgage-backed securities in turn secured by government assets. Telekom Malaysia Berhad, issued an ABS sukuk in 2008, allowing it to monetize non-core assets with a value of just over 1 billion ringgit ($303 million).
Last year, Munich-based FWU Group issued a $20 million Islamic bond backed by insurance policies, the first tranche of a $100 million programme arranged by EIIB-Rasmala, a venture between London-based European Islamic Investment Bank and Dubai's Rasmala Group. In 2012, FWU also issued a $55 million Islamic bond backed by intellectual property rights. The market has also seen the emergence of covered sukuk, which provide recourse to a pool of assets if the originator becomes insolvent, with examples in both Malaysia and Britain. London-based Gatehouse Bank, a subsidiary of Kuwaiti firm Securities House, issued a 6.9 million pound ($10.4 million) covered sukuk backed by a property in Basingstoke in 2012. Malaysia Building Society Berhad issued a 495 million ringgit covered sukuk last year, the first from a 3 billion ringgit programme."With its dual recourse, the structured covered sukuk would appear to be more attractive to investors," Ramlah said. Bankers and scholars have long called for the industry to move from asset-based structures towards asset-backed ones, which they see as closer to the risk-sharing principles of Islamic finance.
* Bank deposits at record high* Excess money at c.bank's deposit facility soars* Immediate policy action not expected - analysts* Bigger T-bill auctions could drain excess liquidity* Fast lending growth concerns some analystsBy Martin DokoupilDUBAI, Aug 2 Qatar may issue a sovereign bond to local banks and consider tweaking monetary policy in coming months if excess liquidity in its banking sector continues rising. Banks in the world's top liquefied natural gas exporter are already awash with deposits, which rose nearly 7 percent from a year ago to a record 378.3 billion riyals ($104 billion) in June, latest central bank data show. Despite breakneck credit expansion - total loans jumped 33 percent on average in January-June - the overhang of unused money in the banking system has prompted some lenders to park large amounts of excess funds at the central bank's low-yielding deposit facility. The facility offers a 0.75 percent overnight interest rate but some funds placed there do not earn any interest at all, because the central bank last year introduced limits on the amount of money eligible for interest. In June, funds deposited at the facility almost tripled from a year ago to 142.7 billion riyals, the highest since April 2011, when the central bank (QCB) cut its overnight deposit rate as one in a series of steps to deal with excess money. Meanwhile, loose liquidity has pushed the average three-month interbank lending rate down to a one-year low of 0.93 percent in June from a March peak of 1.75 percent, central bank data show. The ballooning amount of money sloshing around the interbank market and kept at the central bank might eventually become a risk for the economy. Any quick shift of the funds into the stock or real estate markets, for example, could potentially destabilise them or fuel inflation."Increasing use of the interbank market is a bit of a concern, but has not yet reached alarming levels to cause a policy action at this stage," said Apostolos Bantis, emerging markets credit analyst at Commerzbank in London.
"Obviously, if this trend continues over the next quarter and through the end of 2012, we may see some government intervention."The share of interbank lending is still manageable at around 22 percent of non-equity liabilities as of end-June, Bantis said, but he added: "Should this level start to inch towards the 30 percent range, this may trigger some action."Philippe Dauba-Pantanacce, senior regional economist at Standard Chartered, said excess liquidity could become problematic when the economy was overheating and inflationary pressures emerged, but Qatar was not in such a situation yet. A poll of analysts in July forecast Qatar's economic growth would slow to a still-robust 6.3 percent in 2012 from 14.1 percent in 2011. Inflation is expected to climb to 2.7 percent from 1.9 percent, remaining far below a 2008 record high of 15 percent. LOCAL BOND
Qatar's central bank is no stranger to the problem of excess funds. In December 2010, funds parked at the central bank's deposit facility reached a peak of 634.3 billion riyals. The rise prompted it to make a series of cuts in the rate on the facility: by 50 basis points in August 2010, and by a combined 75 bps in April and August 2011. The central bank said it aimed to encourage the use of money for lending in the real economy, and wanted to bring its rate closer to its U.S. benchmark, the Federal Reserve's fed funds target range of zero to 0.25 percent. Since the Qatari riyal is pegged to the U.S. dollar, the central bank can't keep too large a gap with U.S. rates without inviting fund inflows. The QCB also took other steps to mop up excess money. In January 2011 it issued a 50 billion-riyal bond directly to local banks, and in May and August, it launched monthly auctions of 91-, 182- and 273-day Treasury bills. Analysts said a domestic bond sale to local banks, which could immediately lock up a large amount of funds for years, would be the most effective measure should the central bank again start feeling uneasy about the amount of excess funds in the economy."Probably the best way of mopping up that liquidity would be through the issuance of more government local paper," said Farouk Soussa, Citigroup's Middle East chief economist. Dauba-Pantanacce predicted the QCB would focus on T-bill auctions for liquidity management: "I think this is a pattern they will continue to follow."
QCB governor Sheikh Abdullah bin Saud al-Thani said last October that the bank was selling 2 billion riyals of T-bills every month; in April he said monthly issuance had risen to 4 billion and the bank would continue that volume. Any further increase in issuance volume would suggest the QCB was increasing its efforts to limit liquidity. The QCB did not reply to requests for comment on its monetary policy. LENDING SOARS Issues of T-bills and bonds would only address the symptom, not the root of the problem, however. Citigroup's Soussa said the authorities might also encourage the revenue-generating public sector to seek out a wider range of investments in the economy and abroad, instead of depositing funds in banks. A pipeline of government projects in preparation for Qatar's hosting of the 2022 soccer World Cup sent credit to the public sector soaring 80 percent in June. That was slightly down from May's 99 percent, which was the highest annual growth since July 2010, but some analysts expressed worries about such rates - especially lending related to some residential projects, since the residential real estate market is believed to be oversupplied in some segments."I do not know what the government policy is, maybe they are trying to encourage more lending to the public sector because they have got all these projects on...but I view it as a risk because viability of some of these projects has been unproven," Citigroup's Soussa said. One way to rein in lending growth while soaking up excess liquidity would be to raise the proportion of funds which commercial banks must keep as reserves; it is now 4.75 percent of their total deposits. Commerzbank's Bantis said the public sector would continue to fuel credit growth this year and even more in 2013 and 2014, but he did not expect new projects to materially impact the banking sector's asset quality."Furthermore, the government has the flexibility to slow down/postpone the pace of the new projects should the macro situation start to get challenging," he said. Qatar has said it expects infrastructure spending to average more than 10 percent of GDP ahead of the soccer tournament.