Name’s Bond, Islamic Bond

Kabul Bank

Afghanistan plans to sell Islamic bills for the first time early next year, as it prepares for a reduction in international aid after the withdrawal of foreign troops in 2014. Draft laws will be submitted to the government “soon” and an offering of longer-maturity sukuk will take place at the end of 2013, Noorullah Delawari, the head of Da Afghanistan Bank, said in an interview.
Progress stalled in 2011 following the resignation of his predecessor in June over the disappearance of funds from Kabul Bank, which was the largest commercial lender, the Bloomberg reported. The nation, invaded twice in the past four decades and riven by civil war, is looking for alternative financing as it prepares to become self-sufficient by 2025, Wahid Tawhidi, a Finance Ministry spokesman, said in a June 10 interview from Kabul. Total banking assets have increased to $4 billion from $100 million a decade ago, with 10 percent complying with Islamic principles, according to data from the central bank. “Sukuk will offer the first light to the Afghan debt market,” Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt, said in an e-mail on June 9. “The good thing will certainly be that dependence on foreign grants will be lowered, and a new market will appear on the map for sukuk investors that will provide interesting diversification opportunities.” Funding Gap
The South Asian country currently sells short-term securities that don’t comply with Islamic tenets to help local banks manage their funds, and these will be replaced by the new Shariah-compliant notes, Khan Afzal Hadawal, the first deputy governor of the central bank, said in a May 28 interview.
The monarchy was deposed in a coup in 1973 and the Soviet Union invaded to support the communists’ claim to power. The nation has been ravaged by civil war ever since, with the Taliban rising to prominence in the mid-1990s until the U.S.-led invasion in 2001. Some U.S. troops will remain in Afghanistan after the 2014 withdrawal as agreed by President Barack Obama and his counterpart Hamid Karzai during the signing of a strategic partnership pact in Kabul in May. Former central bank Governor Abdul Qadir Fitrat quit and fled to the U.S. last year after investigators called him in for questioning over Kabul Bank. Siamak Herawy, a spokesman for President Karzai, said at the time that Fitrat left the country following a letter from the attorney general asking for an explanation over the scandal. Fitrat said he had resigned because he received threats from officials he had implicated, the Ariana Television channel reported. The international community has provided $56.8 billion in aid to help rebuild the country since 2001, Tawhidi said. Natural resources such as copper and coal will lift government revenue and fill the funding gap, he added.
Afghanistan has 17 banks, with seven providing Islamic services at booths, Emal Hashoor, the central bank’s spokesman, said in a June 10 interview. About 99 percent of the 30 million people are Muslim, according to the CIA World Factbook. ‘Stabilize’ Markets “Selling Islamic bonds will help stabilize Afghanistan’s capital market,” the central bank’s Hadawal said. “Sukuk is important to develop the country’s financial market because it complies with Shariah law.” Global sales of Islamic bonds, which pay returns on assets in accordance with the religion’s ban on interest, almost doubled to $16.6 billion in 2012 from a year earlier, after reaching a record of $36.7 billion in 2011, data compiled by Bloomberg show.
The securities returned 3.8 percent this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets gained 5.6 percent, JPMorgan Chase & Co.’s EMBI Global Index shows. Average yields on Shariah-compliant notes fell four basis points to 3.69 percent last week, according to HSBC. That’s 194 basis points, or 1.94 percentage points, less than developing- market bonds, a separate JPMorgan index shows. The difference between average yields on Islamic debt and the London interbank offered rate narrowed five basis points to 263 basis points. ‘Cautious’ Banking The yield on Malaysia’s 3.928 percent dollar-denominated sukuk due in April 2015 was little changed at 1.95 percent yesterday, according to data compiled by Bloomberg. The difference in yields between Malaysia’s debt and the Dubai Department of Finance’s securities maturing in 2014 shrank three basis points to 179 and has declined 33 basis points since the end of May.
Afghanistan’s introduction of Shariah-compliant banking laws should draw local investors who shun lending that doesn’t comply with Islamic tenets, Malek Khodr Temsah, vice-president of treasury and investment at Albaraka Banking Group (BARKA) BSC in Manama, Bahrain, said in an e-mail on June 10.
AMID MARKUP WAIVER, KABUL BANK UP FOR SALE: The country’s largest private sector bank is being put up for sale at a time when $34.9 million of its loan mark-ups have been written off, senior officials announced on Saturday. The Kabul Bank that the government took over after it came to the verge of collapse two years back as a result of issuing unauthorised loans has been renamed as New Kabul Bank. The bank’s outstanding loans work out at $937.7 million.
Noorullah Delawari, the central bank governor, told reporters in Kabul that bids for the New Kabul Bank’s sell-off would be called in August in line with a Cabinet decision. Afghan and foreign investors will take part in the bidding process. Khan Afzal Hadwal, Da Afghanistan Bank’s deputy chief, said that waiving off interest on loans was common practice in other countries of the world. He linked the waiver to the borrowers’ inability to pay the mark-ups. For his part, Delawari revealed that $128.2 million of the New Kabul Bank loans had been recovered so far and repayment guarantees received from the individuals who had to return $235.1 million.
But the central bank governor acknowledged that $410.4 million credit remained unaccounted for, with auditors trying to resolve the issue. He was confident that a sizeable portfolio of infected loans would be recovered. The Ministry of Finance accepted some shares of the bank after it ran into a serious financial crisis. In December, Delawari said nearly $850 million were taken from the bank in off-book loans. A high-level meeting, chaired by President Hamid Karzai, decided earlier this month to refer the Kabul Bank loan case to court. The Attorney General Office presented a detailed report on the crisis, saying properties belonging to the defaulters had been sold in Kabul and Dubai.



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