News on Securitization: Islamic Finance Growing

October 6, 2013:

With the backdrop of conventional financing methods going bust and investors burning their hands, global markets are seemingly wanting to get a taste of Islamic finance. Further, ever since the sub-prime crisis of 2007, time and again there have been discussion on need for finding alternative modes of financing and Islamic finance has been ever increasingly accepted as the next best alternative known.

The need of funds for infrastructural development are one of the factors leading countries to scout for funds and are now wanting to attract Middle East investors by adopting Shariah compliant products. From business perspective as well Islamic structures are gaining popularity because ownership structures offered in Shariah compliant products are less risky and more ethical following the proponents of Islam.

In Africa, several countries have made sukuk issuances in 2012 for infrastructural development. The need for development in the continent demands funds and African nations are looking to tap investors from Middle East [1]. Being in the embryonic state of developing capital markets, the intent of tapping funds through Shariah compliant products may establish the Islamic Finance industry in the continent.

African governments are beginning to address the legal obstacles to Islamic finance by putting in place the necessary regulatory measures. However, having appropriate regulations in place alone is not sufficient. For any African country looking to establish itself as an Islamic finance hub of the future, that country must overcome a number of other challenges to create an environment conducive for Islamic finance to take root, including investing in education, capital markets infrastructure and political stability.

India too has opened gates for Islamic Finance with the recent decision of Reserve Bank of India to allow Kerala based non-banking financial company to develop Shariah compliant business. With a large Muslim population, India embracing Islamic finance was a no brainer.

On the other hand, Scotland is positioning itself to be potential hub for Islamic Finance. Scotland is becoming the niche market for Shariah compliant products with an estimated growth of 15-20% annually. Acceptance of the Shariah compliant products is well established in Scotland and its popularity is increasing particularly in the limited access to conventional sources of funding in the market. With a strong fundamental to Islamic Finance in Scotland and growing demand of Islamic finance products amongst businesses and consumers in Scotland, the country may indeed be the centre for Islamic finance activity.

With U.K hosting the World Islamic Economic Forum, setting up an Islamic Finance Task Force and eyeing to become the Western Capital of Islamic Finance, Islamic Finance is increasing gaining recognition and is here to become the next big thing in the capital markets.

[ 1 : According to a Reuters report on Oct 2, 2013, Nigeria’s Osun State issued a 10 billion naira ($62 mn) sukuk yielding 14.75 percent. It is the first Islamic bond from a major economy in sub-Saharan Africa. ]

 Reported by Nidhi Bothra

 

News on Securitization: US Federal Agencies Propose “Revised” Risk Retention Requirements

October 7, 2013:

Right after the financial crisis the regulators had geared up to tighten the regulatory noose for securitisation transaction. The retention of skin in the game was considered to be critical for sustenance of securitisation transaction. In this pretext, in the U.S., the risk retention requirements were coined in 2010 and were deliberated upon. The proposed rules (“Original Rules”) formed a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In the Original Rules, it was proposed that the excess proceeds from the sale of commercial mortgage through securitisation should remain in a “premium capture cash reserve account” and shall remain subordinated to other bonds to be captured over a period of time. Thereafter several countries took cue from the proposal and either adopted the risk retention requirements or made a proposal for a regulatory amendment.

Several of the industry players had expressed concerns on the Original Rules stating that the rules will lead to increase in cost for sponsors significantly discouraging new securitisation transactions. Considering the industry players concerns, very recently, in August, 2013 the six federal agencies — Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities Exchange Commission in the U.S. proposed an amendment to the risk retention requirements and have relaxed the rules governing risk retention in certain ways.

Comparative Analysis of the Original Rules and Revised Proposal:

Original Proposal

Revised proposal

Issuer to retain a 5% piece at par value and could be a vertical or horizontal piece or L-shaped piece in 50-50 proportion

The residuary interest is to be calculated on fair value instead of par value and the residuary interest can be held in any combination of vertical and horizontal piece. The fair value calculation would be determined as of the day on which the price of the ABS interests to be sold to third parties is determined [1]

The retained piece to be held for the life of the transaction

The parties will be able to trade in the retained piece after 5 years [2]

For a residential mortgage loan to be treated as a QRM, it would have to have a maximum 80% loan-to-value (“LTV”) ratio, a minimum 20% down payment, front-end and back-end debt-to-income(“DTI”) ratios of 28% and 36% or less respectively, and meet certain credit history requirements.

The proposed rule links the definition of QRMs to the definition of a “qualified mortgage” as defined by the Consumer Financial Protection Bureau. The QM rule does not include underwriting based on credit history, loan-to-value (LTV), or down payment. It does, however, include an analysis of the borrower’s ability to repay, with a maximum DTI of 43 percent. Loan terms could not exceed 30 years. The QM definition also prohibits interest-only loans, balloon payments, and negatively amortizing loans. The new proposal also requests comment on an alternative definition of QRM that would include certain underwriting standards in addition to the qualified mortgage criteria. [3]

ABSs to be excluded from the proposed rule’s credit risk retention requirements include (1) commercial loans, (2) commercial mortgages, and (3) low credit risk auto loans,

Same as original proposal

Unsecured REIT loans not be classified as commercial real estate loans

Same as original proposal

Full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities as meeting the risk retention requirements while Fannie Mae and Freddie Mac are in conservatorship or receivership and have capital support from the U.S. government.

Same as original proposal

Only CLO manager to retain risk

Lead arranger in the underlying loan also permitted to retain risk. [4]

Several of the industry players had expressed concerns on the proposed rules stating that the rules will lead to increase in cost for sponsors significantly discouraging new securitisation transactions. Considering the industry players concerns, very recently, in August, 2013 the Federal regulators in the U.S. proposed an amendment to the risk retention requirements and have relaxed the rules governing risk retention.

The revised rules are open for comments till 30th October, 2013.

Notes :

  1. To read more on this, see http://www.crenews.com/top_stories_-_free/federal-regulators-relax-proposed-risk-retention-rules.html
  2. http://www.fdic.gov/news/board/2013/2013-08-28_notice_dis_a_res.pdf
  3. See, http://www.fdic.gov/news/board/2013/2013-08-28_notice_dis_a_res.pdf
  4. See, http://www.federalreserve.gov/newsevents/press/bcreg/20130828a.htm

Reported by: Shambo Dey

News on Securitization: Is Britain the new capital for Islamic Finance?

November 3, 2013 :

London recently hosted the 9th World Islamic Economic Forum at Excel Center, where UK revealed its plans to become the first country outside the Muslim world to sell Shariah-compliant Islamic bonds (sukuk) as early as 2014.[1] Sukuk would be valued at about 200 million pounds ($320 million).[2] In addition, the London Stock Exchange will be creating an Islamic Market Index.

Approximately 40 percent of the world’s 25 fastest growing markets are within Muslim-majority countries.[3] About 60 percent of the world’s sukuk is issued from Malaysia.[4] Outside the Islamic world, London is ranked as the number one centre for Islamic finance- it is the European base for several Middle East banks and a major centre for Middle East investors.

Britain first announced plans for a sovereign sukuk 5 years ago, but that issue never materialised as the country’s Debt Management Office decided the structure was too expensive and would not going to be value for money.[5] However, several projects in the UK in the recent years such as Thames Water, Barclays, Sainsburys, Harrods and the Olympic Village had significant contributions by Islamic financiers. The government established an Islamic financial task force in March 2013 to review subjects ranging from banking regulation to standards for Islamic finance education.[6] Britain also has more banks compliant with the principles of Islamic finance than any other Western country.[7] Britain has taken steps to support new businesses to grow across the Islamic world such as the formation of government partnership with the Shell Foundation to create a new 4.5 million pounds grant to boost the work of the Nomou initiative,[8] a growth fund that provides skills and finance to small businesses across the Middle East and the Gulf.

Through sukuk issuances, UK might come at par with Dubai and Kuala Lumpur in Islamic finance.

Notes :

  1. https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech
  2. https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech
  3. http://www.aawsat.net/2013/10/article55320863
  4. http://www.bnm.gov.my/index.php?ch=en_speech&pg=en_speech_all&ac=281&lang=bm
  5. http://www.thedailybell.com/printview/params/id/34707/printview/
  6. https://www.gov.uk/government/news/government-launches-first-islamic-finance-task-force–2
  7. https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech
  8. .http://www.9thwief.org/CMSPages/GetFile.aspx?guid=e30e987a-54eb-4024-a4df-337ad71bcdf6

Reported by: Shambo Dey