Zawaya/Hawkamah Report on Sukuk

 

Zawaya and Hawkamah have teamed up to produce a 130 page report on the Sukuk market.  You can get your copy by registering here.

The report contains articles on a variety of topics as well as numerical analysis of the state of and trends in the Sukuk market by Ernst and Young.

One very interesting section is on the core weaknesses in the Sukuk market.  I think that is where the prudent investor should begin as understanding risk is the key to a good investment decision.  

One article in that section that caught my eye was a discussion by two attorneys from Vinson and Elkins on some of the legal issues associated with sukuk structures and default:

1. "In conventional finance and investment markets, the post-default path is well worn. For this reason, much of the process of structuring and documenting transactions, particularly in common law jurisdictions, accounts for the possibility of a worst case scenario. Precedents indicating what such a scenario may entail are readily available in the context of conventional transactions. The same cannot be said for Islamic transactions."
2. "Another factor contributing to the uncertainty surrounding post-default Sukuk is that many are subject to partially or wholly non-Shariah based legal regimes."

I had written earlier on this topic (here and here and here).  It seems we share some of the same legal concerns.

Hawkamah Corporate Governance Conference - Important Documents Released

Hawkamah held its Fourth Annual Conference "Building Middle East Markets and Corporate Governance Imperatives" the 9th and 10th at the DIFC, Dubai.   Event was in partnership with the OECD.

As usual, a worthwhile event.

Two solid documents issued:

1. Policy Brief on Improving Corporate Governance of Banks in the Middle East and North Africa Region
   
2. Study on Insolvency Systems in the Middle East and North Africa   

The Study covers 11 jurisdictions:

DIFC, Egypt, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, UAE and Yemen.

There are some global comparables on recovery rates (Page 5) based on another study the World Bank "Doing Business 2009".

As you might expect, the MENA region has lower claim recovery rates than other major countries.  Japan at 92.5% , the OECD at 68.6% versus MENA at 29.99%.  Bahrain came in with a respectable 63.2%

Anyway:  A hat tip to Hawkamah.  More evidence of  regional institutions helping develop the GCC/MENA market.

Corporate Governance in the GCC - The BASIC Score

What's the current state of corporate governance in the GCC?

Is the trend in the right direction?

How are companies being encouraged to do more than the minimum?

Harking back to my earlier post today about the key role played by research and professional institutions in market development, I'd like to answer the above questions by reporting on the efforts of three local institutions to analyze and further corporate governance in the GCC:

1. The National Investor Abu Dhabi, a privately owned investment and merchant bank
   
2. Hawkamah, an institute devoted to corporate governance
3. Mudara, an institute focused on developing the professionalism of board members

Rather than use more electrons to describe them, I'll let them speak for themselves.  This link  provides a short "bio" of each of them as well as contact details.

 

They have devised an analytical process to analyze the liquidity (trading), volatility, and transparency of some 607 companies listed on the GCC stock exchanges.  Regional companies' performance against 43 data points are benchmarked against eight international companies to anchor results to best international practice.  Final summary results are expressed in a single number - the Behavioral Assessment Score for Investors and Corporations ("BASIC").    The effort began in 2008 with BASIC 1 and has now been expanded in 2009 with BASIC 2. 

BASIC is a tool that investors can use to make more informed decisions.  It is also a guide to rated corporations on how they might improve their score.  It is also (or should be) a highly useful device for regulators, stock exchanges and auditing firms.

Access to the BASIC report is via this link.

Some of the key findings:

1. There has been improvement in the average BASIC score since 2008.  The trend is favorable.
   
2. Despite their size, Bahrain and Oman tend to dominate in the aggregate averages as well as the top ten rated companies (each has 3 listed).  
3. Given greater regulatory requirements on the financial sector, as a general matter companies from this sector tend to score well.
   
4. Kuwait has the weakest overall score at 2.95 compared to the GCC average of 3.87 and as well has the dubious distinction of being the home of 7 of the bottom ten rated companies.
5. Rankings are:  Oman (5.05), Bahrain (4.62), Abu Dhabi (4.38), Qatar (4.36), Dubai (4.16), Saudi Arabia (3.06),  and Kuwait (2.95).  For those not familiar with the GCC, trading volumes on the Kuwaiti and Saudi stock exchanges are high relative to the rest of the GCC. 
   

As with any analytical tool, one might want to tweak this or that aspect, but what is more important is the work that these three institutions are doing and the salutary impact it apparently has and will have on the GCC.

The Role of Institutions in Market Development

Institutions play a critical role in the development of financial markets.

It's easy to see the importance of those who establish the regulatory and operational architecture of the system:

1. Legislators who establish the laws
2. Regulators who translate those laws into specific regulations and procedures and then enforce them
3. Accounting Standards Setters - IASB, FASB and particularly relevant to the GCC because of its specialist focus on Shari'ah compliant financial institutions  AAOIFI
   
4. For listed securities, exchanges who establish listing and trading rules and provide a forum in which buyers and sellers can conduct transactions
5. Various professional groups that establish conventions for dealing
6. Brokers and custodians
   
7. The Reuters and Bloombergs out there who provide the instruments through which market information is made available and often the mechanism for conducting trades

But there is another group with a key role, those who provide information to investors to help them make more informed investment decisions and those who take actions to set or encourage the development of industry practice and standards:

1. Research firms - not only for company research but also research on sectors, individual countries and macro trends as well as investment strategies
   
2. Rating agencies - Fitch, Moody's, Standard and Poors and those with a particular GCC focus: Capital Intelligence,  Islamic International Rating Agency
   
3. Professional Development Associations - CFA Institute, ISDA,  Hawkamah, Mudara  and others.
   

 The work these groups do can have a profound effect on not only the behavior of individual companies but overall market conduct as well.