Times are difficult; we are still mired in a financial crisis. And debt is the problem, somehow: subprime mortgages stated this whole mess, along with mortgage-backed securities (MBS), collateralised debt obligations (CDO) and other debt and derivatives instruments.
But how? Is debt itself the problem? Were Islamic banks and institutions affected in the same way as conventional institutions? If not, why not?
Not so long ago, governments throughout the world encouraged expansion of home ownership and property investment. It was good local politics, and also was thought to be good economic policy.
Property prices had appreciated in value for decades. Liquidity was high; banks had money to lend. Interest rates were low. People could borrow and buy. Buying increased demand, which increased property prices.
Securitisation allowed the banks to make loans and then sell them into large pools, taking them off the bank's balance sheet. The pools repackaged the loans into different groupings, or tranches, and sold the new securities (the MBS) into the capital markets.
Each tranche had a different risk profile. Those that were paid first had less risk, and thus paid a lower rate to purchasers. Those paid last had higher risk and higher rates. In theory, the capital markets allocated risk more efficiently as each buyer purchased the risk it could bear.
Because they sold the loans, the banks could make more loans: the "originate-to-distribute" model.
Subprime mortgages are loans to people that do not have the credit ratings that would allow them to borrow at "prime" rates. They have poor credit ratings, or default or bankruptcy histories, or not enough income, or perhaps they are just borrowing too much money relative to the value of the property (excessive loan-to-value).
In a competitive market, with increasing property values, low interest rates and high liquidity, it is tempting to continue to lend to subprime borrowers. After all, property values will increase, and borrowers can refinance at the same percentage of a higher value and then repay the first subprime loan.
And, anyway, the bank will sell the mortgage and someone else (the pool) will have to deal with the issue.
But the assumptions about appreciation and rates turned out not to be true. Property values stopped appreciating, and even decreased. Interest rates increased.
People could not borrow against higher-value property and refinance to pay their first subprime loan, so they defaulted on the subprime mortgage. The subprime mortgage had been sold into a pool, so the MBS on that pool defaulted in turn. That MBS had been sold into a different pool, which combined it with other debt and issued a CDO. Confused yet?
In other words, defaults led to defaults. The death spiral began. Banks could not continue to sell into pools, so they could not lend more.
People lost confidence in the entire system, leading to the second phase of the financial crisis: the liquidity seizure.
Lending stopped as banks and financial institutions, as well as many others, became uncertain about how to handle their loans and other financing with the future so unpredictable.
On the other hand, Islamic banks and financial institutions must comply with sharia law. Therefore, they cannot own any of these interest-bearing loans (or MBS or CDO) or derivatives. This is intrinsically bad debt from the sharia perspective. Some of it is also bad debt from any perspective, due to faulty underwriting assumptions, among other factors.
Islamic banks cannot own stock in other institutions that engage in interest-based financing: this is intrinsically bad equity. As a result, it appears that Islamic banks escaped much of the damage of the first phase of the financial crisis.
Their success in this period was enhanced by their high liquidity, due to high oil prices and their higher capital adequacy ratios (the relationship between their assets and the risk posed by their financing).
But things did get ugly for Islamic institutions in the liquidity phase. They had disproportionately large concentrations of outstanding financing in a few geographic regions and industries - particularly property, construction and private equity - and limited their investments outside of those few regions.
When property values dropped, construction stopped and other industries could not find normal operational financing, this usually good (and sharia-compliant) debt became ugly - and then bad - debt. But for different reasons: over-concentration and less diversification, again as a result of underwriting practices.
Early indications are that Islamic institutions suffered more than conventional institutions in this second phase.
Now, it seems, there is a slow resurgence of debt issuance. By necessity, refinancing of outstanding debt, good and bad, has begun. Sukuk issuance seems to benefit even before the conventional bond markets. Conventional lenders are inviting Islamic institutions into infrastructure and construction financing, particularly in jurisdictions that benefit from oil revenues and have continued these projects.
So the debt markets are stirring. As we head out of the financial crisis and into an unpredictable future, Islamic institutions will certainly continue their fundamental focus on good debt and avoidance of bad debt as a fundamental matter of Shariah compliance.
Their challenge will be to avoid the ugly debt by re-evaluating underwriting and other practices. That should be a manageable challenge, and it bodes well for Islamic finance.
Michael JT McMillen is a partner in the Dubai office of the law firm Fulbright & Jaworski who specialises in Islamic finance.
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Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
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Team: 15 Mike Brown, 14 Anthony Watson, 13 Ben Te'o, 12 Owen Farrell, 11 Jonny May, 10 George Ford, 9 Ben Youngs, 1 Mako Vunipola, 2 Dylan Hartley, 3 Dan Cole, 4 Joe Launchbury, 5 Maro Itoje, 6 Courtney Lawes, 7 Chris Robshaw, 8 Sam Simmonds
Replacements 16 Jamie George, 17 Alec Hepburn, 18 Harry Williams, 19 George Kruis, 20 Sam Underhill, 21 Danny Care, 22 Jonathan Joseph, 23 Jack Nowell
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Some of Darwish's last words
"They see their tomorrows slipping out of their reach. And though it seems to them that everything outside this reality is heaven, yet they do not want to go to that heaven. They stay, because they are afflicted with hope." - Mahmoud Darwish, to attendees of the Palestine Festival of Literature, 2008
His life in brief: Born in a village near Galilee, he lived in exile for most of his life and started writing poetry after high school. He was arrested several times by Israel for what were deemed to be inciteful poems. Most of his work focused on the love and yearning for his homeland, and he was regarded the Palestinian poet of resistance. Over the course of his life, he published more than 30 poetry collections and books of prose, with his work translated into more than 20 languages. Many of his poems were set to music by Arab composers, most significantly Marcel Khalife. Darwish died on August 9, 2008 after undergoing heart surgery in the United States. He was later buried in Ramallah where a shrine was erected in his honour.
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Killing of Qassem Suleimani
The specs
Engine: 8.0-litre, quad-turbo 16-cylinder
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0-100kmh 2.3 seconds
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At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
India team for Sri Lanka series
Test squad: Rohit Sharma (captain), Priyank Panchal, Mayank Agarwal, Virat Kohli, Shreyas Iyer, Hanuma Vihari, Shubhman Gill, Rishabh Pant (wk), KS Bharath (wk), Ravindra Jadeja, Jayant Yadav, Ravichandran Ashwin, Kuldeep Yadav, Sourabh Kumar, Mohammed Siraj, Umesh Yadav, Mohammed Shami, Jasprit Bumrah.
T20 squad: Rohit Sharma (captain), Ruturaj Gaikwad, Shreyas Iyer, Surya Kumar Yadav, Sanju Samson, Ishan Kishan (wk), Venkatesh Iyer, Deepak Chahar, Deepak Hooda, Ravindra Jadeja, Yuzvendra Chahal, Ravi Bishnoi, Kuldeep Yadav, Mohammed Siraj, Bhuvneshwar Kumar, Harshal Patel, Jasprit Bumrah, Avesh Khan
Why your domicile status is important
Your UK residence status is assessed using the statutory residence test. While your residence status – ie where you live - is assessed every year, your domicile status is assessed over your lifetime.
Your domicile of origin generally comes from your parents and if your parents were not married, then it is decided by your father. Your domicile is generally the country your father considered his permanent home when you were born.
UK residents who have their permanent home ("domicile") outside the UK may not have to pay UK tax on foreign income. For example, they do not pay tax on foreign income or gains if they are less than £2,000 in the tax year and do not transfer that gain to a UK bank account.
A UK-domiciled person, however, is liable for UK tax on their worldwide income and gains when they are resident in the UK.
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Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
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Pathaan
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MATCH INFO
Manchester City 4 (Gundogan 8' (P), Bernardo Silva 19', Jesus 72', 75')
Fulham 0
Red cards: Tim Ream (Fulham)
Man of the Match: Gabriel Jesus (Manchester City)
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Their favourite city: Dubai
Their favourite food: Khaleeji
Their favourite past-time : walking on the beach
Their favorite quote: ‘we rise by lifting others’ by Robert Ingersoll
Test
Director: S Sashikanth
Cast: Nayanthara, Siddharth, Meera Jasmine, R Madhavan
Star rating: 2/5
UAE's role in anti-extremism recognised
General John Allen, President of the Brookings Institution research group, commended the role the UAE has played in the fight against terrorism and violent extremism.
He told a Globsec debate of the UAE’s "hugely outsized" role in the fight against Isis.
"It’s trite these days to say that any country punches above its weight, but in every possible way the Emirates did, both militarily, and very importantly, the UAE was extraordinarily helpful on getting to the issue of violent extremism," he said.
He also noted the impact that Hedayah, among others in the UAE, has played in addressing violent extremism.
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Mountain%20Boy
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