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Sukuk; Equity or Bonds?

Sukuk a relatively infant financial instrument, designed to be a Shariah compliant alternative to conventional bonds, however much debate has been raised on the nature of the instrument, particularly in cases of default, where sukuk holders designation was confused between equity holders and debtors. There are many reasons behind the confusion; however Sukuk is indeed equity and not a bond. A sukuk can be structured on a debt based model such as Ijarah or Murabaha, yet certificate holders still are owners of the underlying asset that is leased to the beneficiary. So either the sukuk is structured on an equity based model where sukuk holders partner with the originator in a completely new venture or in already existing business or based on a debt based model, the sukuk holders are always and surely equity holders and not debtors.

Because of some common characteristics with bonds and few other reasons, Sukuk are classified as fixed income and sold in debt capital markets. It is very much like fitting a square peg into a round hole. It is a continuous attempt to sell an equity based instrument in debt markets, and to be able to complete the in-consistent sale, sukuk issuers and arrangers had to innovate features or mechanisms that shift the structure of sukuk towards bond. Those mechanisms commonly referred to as credit enhancers implicitly guarantee capital and profits. It is with these credit enhancers come the Shariah violations, these credit enhancers added to the structure violate its core objective which is to have the sukuk holders as owners whose revenue depends on the actual performance of the underlying asset, and not independent of it as the case with bond holders.

Sukuk have suitably evoluted throughout the last decade, and indeed the next step is on the Shariah front, how compliant is a sukuk structure and how compliance differ among diverse mandates or Shariah schools of thought. For this purpose IdealRatings have innovated a sukuk screening solution, which associated with a unique, accurate research methodology, screens over 120 Shariah issues pertaining to the various structures utilized in global sukuk.

The web-based solution has successfully produced compliance status of outstanding sukuk in the market, the compliance is variable depending on the Shariah opinions adopted and rulebook followed. The solution is embedded with all Shariah standards available worldwide, so that every user can include/exclude the Shariah rules constituting his mandate.

Ghada Essam

IdealRatings is participating at Al Baraka 33rd Symposium for the Islamic Economy organized by Al Baraka Banking Group (ABG) in Jeddah in the period 6-7 Ramadan 1433H, corresponding 25-26 July 2012.

Mohamed Donia, CEO of IdealRatings, will participate with a presentation on Shariah Compliant Securities rating.

For more details click here

We’ve just released our Android version on Google Play, this app follows our highly rated “Islamic Investor” for iPhone which has several thousand happy users in 20 countries.

The free App is the only Android application that tells you if a stock is Shariah compliant or not, gives you a detailed report explaining why, and alerts you if it changes status, it is designed for personal use by individual investors and is loaded with features that enable its user to:
-Find out, instantly, if a stock in your local market is Shariah compliant or not.
-Learn why by reading a detailed report.
-Explore Shariah compliant stocks from the Top Stocks and Featured sections.
-Track the compliance of your favorite stocks.
-Receive an alert if a stock changes compliance status.
-Share your findings with your friends and colleagues.

Click Here to download it from Google Play.

The IdealRatings research team has just posted the following new reports online:

Yelp! Inc (NYSE YELP)

Major Cineplex Lifestyle Leasehold PROP (Stock Exchange of Thailand (Bangkok) MJLF)

Hektar Real Estate Investment Trust (Bursa Malaysia HEKTAR)

The Bahraini Saudi Bank BSC (Bahrain Stock Exchange BSB)

Filtrona PLC (London Stock Exchange FLTR)

Borusan Mannesmann Boru San. ve Tic. AS (Istanbul Stock Exchange BRSAN)

Bolu Cimento Sanayii A.S. (Istanbul Stock Exchange BOLUC)

Navarre Corporation (NASDAQ NAVR)

The reports are available immediately and free of charge at IdealRatings Research

IdealRatings client, Jadwa Investment, was named “Best Fund Manager” at the Euromoney Islamic Finance Awards 2012, one of the most prestigious awards ceremonies in the global fund management community. “Best GCC Equity Fund for their Jadwa GCC Equity Fund”, and “Best MENA Equity Fund for their Jadwa Arab Markets Equity Fund” at the Lipper Fund Gala 2012.

We are very proud to have Jadwa Investment as a long standing client, their impressive achievements validate our message of enabling great managers to excel in a volatile and competitive market.

To read the full announcement click here

The IdealRatings research team has just posted the following new reports online:

Alstom SA (Euronext Paris ALO)
Aseer Trading, Tourism & Mfg. Company (Saudi Arabian Stock Exchange, 4080)
Embraer SA (New York Stock Exchange ERJ)
Green Mountain Coffee Roasters Inc. (NASDAQ GMCR)
Questcor Pharmaceuticals, Inc. (NASDAQ QCOR)

The reports are available immediately and free of charge at IdealRatings Research

The IdealRatings research team has just posted the following 5 new reports online:
LVMH Moet Hennessy Louis Vuitton SA (Euronext Paris MC)
Emirates Telecommunications Corporation (Abu Dhabi Stock Exchange ETISALAT)
Kuwait Food Company Americana KSC (Kuwait Stock Exchange FOOD)
Saudi Basic Industries Corporation (Saudi Arabian Stock Exchange 2010)
Plus Expressways Berhad (Bursa Malaysia PLUS)

The reports are available immediately and free of charge at IdealRatings Research

We’re publishing many reports that our team usually delivers exclusively to our clients on our web site, and they’re free of charge. We’re doing this to help investors understand the compliance status of some of the most popular companies that are also challenging to screen.

Effective immediately, the research reports for these companies are available at www.idealratings.com/research: Apple Inc. (NASDAQ AAPL), Microsoft (NASDAQ MSFT), LinkedIn Corporation (NYSE LNKD), Vodafone Group plc (London Stock Exchange (LON) VOD),Woolworths Limited (Australian Stock Exchange (Sydney) WOW)

We’ll be updating the list of companies weekly, to stay updated with the new releases, subscribe to one of our feeds or Twitter @IdealRatings

For more details go to www.idealratings.com/research

IdealRatings is participating at the seminar “The Role of Sukuk in Development” organized by the World Bank as part of the World Bank-IMF Annual Meeting on the 25th of September 2011 in Washington D.C.

Dr. Shehab Marzban, Head of Research and Product Development Director of IdealRatings, will participate in the panel: “Unlocking the Potential of Sukuk Markets”. The panel includes senior officials from the World Bank, IMF, IFC as well as HSBC Amanah.

We will be presenting IdealRatings’ view regarding rating Sukuk and their relevance in increasing access to Islamic Finance investors to Shariah-compliant equities through restructuring companies’ current non-compliant capital structure.

For more details click Here

IdealRatings is participating at the Durham Islamic Finance Autumn School in organized by the Durham Centre for Islamic Economics and Finance (UK) from the 19th to the 22nd of September 2011 in Istanbul.

Dr. Shehab Marzban, Head of Research and Product Development Director of IdealRatings, will give a lecture about Islamic Asset Management and Shariah Screening Systems.

For more details click here

Practitioners and Academics from Egypt, the United Kingdom, the United Arab Emirates and Germany met at the German University in Cairo to discuss the Islamic Finance status and road ahead globally and in Egypt. One of the main aspects discussed within the conference was the relation between Islamic finance and ethics and how Islamic Finance can grow in the future.

Since we at IdealRatings are witnessing growth in terms of client inquiries both from new funds launched as well as wealth management accounts managed in accordance to Shariah, our answer would be that there is growth but to reach the next level, Islamic Finance has to expand in terms of multi-religious as well as ethical perspectives.

New York, 53rd Street with 6th Avenue a Fast food stand can be found called “Halal Guys” which does not differ from any other fast food or hot dog stand you see across New York downtown corners, except for the fact that this stand is always crowded and queues form on a daily basis by hundreds of New Yorkers and tourists alike. The men serving the food are Middle Eastern long bearded Muslims and their products are labeled as Halal food which might at first seem appealing for Muslim Americans, but actually the queued mass in front of the stand is there because of the food quality and pricing which results in attracting all type of New Yorkers and not just Muslims.

Imagine Islamic finance and especially the Islamic fund industry to be cross-religious by providing qualitative investment products in terms of return, risk, liquidity as well as ethical credibility which appeals to both Muslims and non-Muslims similar to the concept of the “Halal Guys” in New York. In the case of the “Halal Guys”, the Islamic reference in their labeling does not bother the New Yorkers, so the question is if Islamic Finance could have the same effect or not.

Instead of focusing on the labeling we have to focus on expanding market reach through providing ethical and cross-religious products that would turn Islamic Finance to a mainstream industry. So one of the recommendations are to focus on ethical principles rather than technical requirements which will result in achieving cross-religious acceptance as well as socially responsible requirements. This will result in a broader acceptance of Islamic Finance products that can also be considered Abrahamic Finance products.

Dr. Shehab Marzban

The Islamic Investor – June 2011 is out, click Here to check it out.

Halal food is a crucial part of the day to day life of Muslims world wide since it ensures that the food and beverages they consume do not conflict with their religious belief in terms of having the meat and poultry slaughtered in accordance to Shariah and food and beverages free from alcohol and pork to name the main criteria for Halal food consideration.
Since the Muslim population is spread across all continents and their purchasing power is not to be underestimated, the food industry even outside Islamic countries starts to address these needs through providing products compatible with Muslims.
So companies like Nestle, Unilever as well as fast food chains such as KFC in the western world offer a variety of their products labeled as being Halal.
On the other hand, Islamic Finance has grown tremendously during the last two decades resulting in the offering of financial products and especially capital market instruments such as equity investments that are Shariah-compliant and accessible for Islamic investors.
The interesting element in the Halal industry and Islamic Finance is that from a Shariah perspective Muslims might be allowed to consume the food of a company but are not allowed to invest it in and vice versa! How come?
So a company might only produce Halal Food but financed its operations through interest-bearing debt that from a Shariah perspective if exceeding specific thresholds is non-compliant and thus cannot be invested in.
Therefore IdealRatings, Thomson Reuters and the World Halal Forum partnered to provide the first investment universe that contains constituents that are both consumable and investable from a Shariah perspective for Islamic investors.
The Socially Acceptible Market Investing, or SAMI, Halal Participation Index currently contains more than 200 equities of companies domiciled in Islamic countries, which produce and serve Halal food and pass a series of Shariah screening criteria as defined by AAOIFI. To capture global demand we will be extending the Halal universe beyond Islamic countries.
The SAMI Halal Index series has been launched during the World Halal Forum this month in Kuala Lumpur in Malaysia and has gained huge attention in the Malaysian market due to the uniqueness and relevance of such a product to promote both the Halal Food industry and also Islamic Finance.
On one side, investment professionals perceived the index as an excellent investment opportunity since a product based on such an index would be easily understood by Islamic Finance investors since they can identify themselves with the investments to be conducted because it would be based on companies whose products they buy from the shelves of supermarkets or consume their goods.
On the other hand, it has also been indicated that this product can support in promoting Islamic finance since it is inconsistent to be able to consume a companies’ product but not allowed to invest in it from a Shariah perspective. Therefore an opportunity exists that these companies change their current conventional financial structures in terms of debt financing and excess cash investments to be also Shariah-compliant from an investment perspective.
Therefore, the partners of the SAMI Index series considered this the beginning of the fully-fledged Islamic Food Supply Chain Process “The 4 F’s: financing, farm, fork and again financing”.

Shehab Marzban

Sharia products fail to get due diligence

An expert in Islamic financing has warned that some Sharia-compliant products in Europe do not actually comply with the strict teachings.

Shebab Marzban, product development officer for Egypt-based Ideal Ratings, said that many western fund managers fail to carry out correct due diligence on Islamic finance products.

Speaking at the three-day World Islamic Banking Conference in Bahrain, he said that many holdings for Sharia funds do not adhere to strict rules of not investing in firms that make a profit from using interest or selling pork or alcohol-related products.

He said those that do generate profits from these industries can still be classed as Sharia-compliant, as long as the total wealth from the non-permissible products is less than 5 per cent. However, many Europe-based Islamic funds do not even meet that rule.

Mr Marzban said: “There is a lack of awareness on what is truly a Sharia-compliant product. Many funds have got a stamp on them that they comply with the principles from a Sharia body, but then they do not follow through with the correct screening.

“The problem is most fund managers outsource due diligence to index providers and they rely on that information to be correct and up to date. The problem comes when you look on a firm’s financial sheets and it may say they invest in food, but won’t necessary say pork.

“You also get some firms that just jump on the bandwagon and sell so-called Sharia products without doing the relevant checks.”

Mr Marzban said that the existence of diluted Islamic products in the western world is an inevitable part of the industry while it grows.

He added: “The Islamic finance industry is still young – only a few decades old. The industry is still developing and while it finds it feet this will unfortunately happen. But I do believe we will get there in the end.”

During the first day of debates, many experts voiced their opinions on the steps that the Islamic financial world needs to take to achieve a global appeal.

David McLean, managing director of Mega Brand, said: “Islamic finance continues to be one of the fastest-growing segments in the global financial markets and has become increasingly important in several countries. Although the Islamic banking and finance industry has achieved considerable success and growth over the past few years, a key challenge is to sustain this growth against the backdrop of this challenging global economic environment. This requires a thorough revision of key strategies and business models, taking into consideration the new realities in the global financial landscape.”

Oiriginal article link:

http://www.ftadviser.com/FinancialAdviser/Investments/Sector/EthicalAndSRI/News/article/20101125/e2b3173e-f646-11df-a28b-00144f2af8e8/Sharia-products-fail-to-get-due-diligence.jsp

IdealRatings is a proud sponsor of the Global Islamic Finance Forum 2010. GIFF 2010 is a high-level multi-track event that brings together regulators, scholars and financial industry players who are key drivers in shaping Islamic finance globally.

All the major index providers have a Shariah compliant offering, this started in the late nineties with Dow Jones debuting its Dow Jones Islamic Market Index℠ family, then FTSE Group developed the FTSE Shariah Global Equity Index Series, Standard & Poor’s introduced the S&P Shariah indices, MSCI Barra MSCI Islamic Index Series, and Russell Investments launched the Russell Jadwa Shariah indexes.
These are the global leaders of indexes, and IdealRatings provides the screening to most of these index providers, and their Shariah guidelines are diverse and have very respected and widely recognized Shariah scholars, so why would any portfolio manager need to create a custom index you may ask?
The answer is in the matching of an index’s geographic coverage focus, equity selection methodology, and Shariah guidelines with the manager’s strategy and Shariah board guidelines, in many cases these overlap perfectly, but in many other cases, managers look for an index with the closest fit of coverage and guidelines, and use it as a benchmark and a starting point for a portfolio’s investable universe, this creates an interesting situation where a manager is benchmarked a universe that is not perfectly aligned with his strategy, and so the performance could deviate due to the manager’s inability to invest in the highest performing components of the index and appear to be underperforming the benchmark.
With the markets being as tough as they are, investors’ appetite for underperforming managers is even less than what it used to be in the good old times, and every basis point counts for capital raising, differentiation, and churn reduction.
Managers with a strategy and a board not perfectly fitting an existing index now have the capability of creating a custom benchmark of their own, which could be based on one of the existing index providers’ universe and adapted to the manager specific requirements, or from scratch, resulting in a logical alignment of the benchmark’s methodology and the manager’s own.
The resulting outperformance numbers should be easily attainable, as the talent is focused on what matters:Making timely intelligent investment decisions that outperform the underlying benchmark.
Youssri Helmy

We’re very proud to present our research methodology at this highly regarded conference, it’s humbling to know that one is speaking after a Nobel Laureate and a who’s who list of Islamic finance, the recognition of being selected to present feels very rewarding for all the effort we’ve done, and congratulations to the IdealRatings team.
For more details follow this link
Mohamed Donia

Compliance, be it Shariah, green, environmental, social, and governance (ESG), has the same workflow since they all revolve a client requiring the elimination of certain investment vehicles based on certain criteria, and since these customer requirements have been around for a long time, one would expect a certain level of maturity of the technologies, processes and workflows involved in the task to simplify the process, reduce its cost, and eliminate the errors. Surprisingly, that not what I’ve seen at all. Glue on solutions with a mesh of Excel sheets at the foundation form the basis of what most firms use for compliance today, and the result is that this part of the investment system is not stable, you have subject matter experts with minimum transparency delivering a spreadsheet that is bolted on a trading system then updated manually.
We chose to deliver our compliance results using a web based platform that includes automates the compliance cycle, managers synchronize their positions and securely collaborate with their compliance teams, and the audits, even third party audits, are supported by the system. Clients love that because it goes above and beyond what a spreadsheet based solution could ever do, and because they have a full audit trail of the whole investment cycle, all while maintaining security and privacy.

So when you think of compliance, think of all the things a compliance solution should be able to offer on top of timely accurate data to help you run efficiently.
Youssri Helmy

In social responsible investments you only need to track whether companies are engaged in certain business or not, but in Shariah compliant investments you need to identify the investment constraints, including the value of good sold in a non allowed business segment. We often see very detailed rule books with sophisticated metrics that vary depending on a company’s core business as well as its location.

As our sole focus is providing the most elemental numbers that enable the formulation of any recipe, we have to keep a close eye on the developments, trends, and expectations of changes in these rule books, and we a long time ago settled on the operational model of “when in doubt, track it”, which means, as soon as we see an interest in a new revenue stream, we separate and track it, this lead us to the establishment and tracking of 30 revenue streams, and that’s a lot, and we don’t think our work is done, we’re seeing more on the horizon, and I doubt these will be the last ones we add.

The audience responses vary when we mention the number 30, from “that’s impressive” to “what do you do with all these sources?”, the feedback always depends on the amount of time and number of rule books the audience has to manage, those with 1 rue book don’t think they need all this complexity, those with 5 rule books immediately realize the value provided by this level of granularity, they will never have to spend another weekend in spreadsheet hell guessing how to classify a multinational with 10 subsidiaries according to 2 different interpretations of *good Vs bad intent of a cash deposit. We even track the source of loans and see if these loans are compliant or not, for example, estimating the revenue of yahoo’s in segments like dating services, music, videos, gaming is definitely a complex and expensive exercise.

We believe there’s value for the single rule book managers, we believe this granularity ultimately means accuracy, accuracy in executing the rule book as intended, accuracy to remove only the companies that do fall outside the rules, and accuracy to include companies that should be included, think of it as using a surgeon’s scalpel Vs a table knife in an operation, we often see companies that simply should not be there, either in or out of the investable universe, and it’s mostly due to someone using a table knife to make the decision.

So, I like to think of us as a 30 caliber scalpel now, and looking forward to moving to higher grade of stainless steel or new scalpel technologies.

Youssri Helmy
San Francisco

When Mohamed and I first looked at creating a screening service for the Islamic finance market, we thought it was a relatively simple problem that could be solved using mostly software and algorithms, the definition of a compliant company appeared fairly straightforward, we had licensed the best data feeds in the world which included business activity classification in several standardized formats, and running the financial ratios was a breeze, we in fact used Excel to prototype the first working models, and it was all running very smoothly in a couple of weeks, and we gave the output to small number of friends who worked as analysts reviewing Shariah compliant equities in various markets. We felt this was an overly easy task, in fact we felt it was too good to be true. We were right, it was in fact too good to be true because it wasn’t true.

We started doing our own exploring of the resulting companies, and we found some blatant examples of companies that passed our screening that simply should not be there like GM (NYSE:GM) and GE (NYSE:GE) for example, we personally knew that these companies had a substantial portion of their revenues from financial activities yet they magically slipped through our sieves, we also couldn’t find several companies like Chiquita (NYSE:CBQ) and Hershey (NYSE:HSY) that we were expecting to see on the list, at the same time, we started getting similar feedback form our analyst friends, each from his own experience on issues with the lists we sent.

We had to pause and rethink our approach, with all the mergers and acquisitions and diversification strategies that public companies are pursuing, a large number of companies was involved in various lines of business, but since the legacy classification code had only one pigeon hole to put a company in, we realized that relying on these classification codes was an oversimplification of the problem we were trying to solve, and that we had to go back to the drawing board.

After weeks of thinking, we came up with a bulletproof methodology, we’ve continued to refine our processes since then, and accounted for Sukuk and other Shariah compliant structures, but our framework remained intact, the hybrid model has proven its value in supporting a scalable and accurate research platform, and it yielded the largest accurate investable Shariah compliant universe.

After this experience, we’ve learned that in addressing a complex problem one has to anticipate unexpected complexities as few things are in fact what they appear to be.

Let us know your thoughts on our methodology and service if you’re a user of our system or if you’re involved in Islamic finance or other RI products.

Youssri Helmy
San Francisco