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A Dow Jones report published last week quoted Standard & Poor’s Financial Services as theorizing that the $700 billion global Islamic finance industry would “weather the financial crisis” and moreover would resume its growth on the support of “high demand for Shariah-compliant products, which are considered less risky than conventional debt.” While the global issuance of sukuk fell 35% to $5.3 billion in Q2 compared with last year, a 164% surge in volume in this year’s second quarter compared to the first signaled renewed and robust interest, according to analysts. In fact, Standard Chartered Bank’s CEO of Islamic banking predicts a primary market of “close to $10 billion” by year’s end. The biggest sukuk issuers YTD have been Malaysia and Indonesia, followed by Bahrain and Saudi Arabia, the largest Middle East economy.
Facilitating sukuk’s global growth will be certain legal changes (i.e., tax system overhauls) currently under advisement in countries such as France, Hong Kong, Kenya and Nigeria to assist the introduction of Islamic financial products, which includes not only sukuk but also Murabaha (cost-plus-financing), which is used primarily in commodity finance. According to French authorities, such “tax neutrality” laws will put Islamic products on equal footing with similar, more conventional products, and thus promote equitable tax treatment while boosting their commercial viability.
For example, under new law, a financier’s taxable profit from the deferment of payment granted to the purchaser under Murabaha would be spread evenly throughout the period during which payment is deferred. And in the case where said financier does not reside in France, but his customer is a French national, the profit in question would be exempt from the French withholding tax. And K.C. Chan, secretary for financial services and the Treasury, Hong Kong government, noted earlier this year that changes would be made such that Islamic-derived profits would be made exempt. Hitherto, Hong Kong didn’t impose tax on interest payments, but taxed profits earned, putting Islamic bonds at a disadvantage. Chan added that Hong Kong sees itself as a “gateway for Islamic finance to opportunities in mainland China and other countries in the region including Taiwan, Korea, Vietnam, Laos and Kampuchea.”
An anonymous fund manager weighed in today with his (or her?) “trading picks” vis a vis Nigeria’s All Share Index, which rallied 35% in Q2 after a 37% plunge in Q1 that caused it to be labeled the ‘world’s worst performing market’ at the time. The index remains down roughly 15% YTD, however. New additions to, and current holdings in the manager’s portfolio include:
- Access Bank: A “high-growth story”; well capitalized, undervalued and “an aggressive management team that has proven itself adaptable to current market challenges.”
- BCC: A top pick in the construction and real estate sector due to “its widening market opportunity, new installed capacity and significant likely earnings-growth momentum in 2009.”
- Continental Reinsurance: A stock that has been “excessively trampled” over the past three months (down 53% to a record low) yet still maintains “an attractive valuation.”
- Diamond Bank: The second-tier player with a middle market and SME focus is “one of the new niche players in the Nigerian banking space,” whose management is “highly regarded.”
- Ecobank Transnational Incorporated: A “significantly misunderstood and mispriced [stock] by the market,” ETI is a “uniquely pan-African bank with 91% of its SSA profits coming from outside Nigeria [that] operates in 27 countries with over 11,000 employees from 29 countries across Africa.”
- GT Bank: A “strong franchise with a focus on blue-chip corporates and a reputation built on high operating standards,” GT Bank is “the only bank in our universe to publish under international financial reporting standards (IFRS).”
- Guinness Nigeria: Nigeria’s second-largest brewer is a “niche brand with solid margins (EBITDA +30%) and a growing market opportunity.”
- Oando: The largest downstream petroleum marketer in Nigeria has “a portfolio of lucrative upstream oil and gas assets that are increasingly becoming a larger part of its revenue mix significantly enhancing its margins.”
- Standard Alliance Insurance: Potentially “strong premium income growth underlined by a robust direct sales network.” Because it is trading at a “significant discount” (approximately 60%) to its adjusted book value, “its forthcoming results could be a solid catalyst.”
- UBA: For a retail bank in an underdeveloped market, UBA has an extensive network in Nigeria as well as 80 branches in 10 other African countries.
