Tuesday, November 25, 2014

Green Sukuk

Accounting and Business magazine

Certain Gulf countries, such as the Emirate of Abu Dhabi (pictured), are investing in solar power.

A recent initiative from Malaysia — one of the main Islamic finance hubs — could help turn Islamic bonds into the financing option of choice for environmentally friendly investments.

The ethical traits of sharia-compliant financing, such as not permitting interest or investments in gambling and tobacco, have made sustainable and socially responsible investment (SRI) and green funds an obvious extension for the sector. But Islamic finance is a niche market already, and its SRI initiatives have struggled. Indeed, some initiatives have not got beyond the press release stage and few have been successfully funded. However, SRI and green project funding has been revitalised by the launch of SRI sukuk (Islamic bonds) guidance this August by Malaysia, one of the main Islamic finance hubs.
The internet is awash with articles about a handful of green Islamic finance projects launched in recent years, such as an Islamic green fund issued by Malaysia's AmanahRaya Investment Bank and Asian Finance Bank (AFB), and the Green Sukuk Working Group (GSWG) set up in Dubai in 2012 to promote sukuk for renewable energy projects. But the GSWG is still a work in progress — no sukuk have been issued — and the Malaysian initiative did not take shape as expected, highlighting some of the issues faced by Islamic finance. 'Unfortunately the infrastructure was not there, nor the working capital,' says AFB CEO Mohamed Azahari Kamil.
More recently, London-based financial advisory service Simply Sharia set itself the target of raising £3m (US$4.9m) by June 2014 to build a solar energy plant through a sharia-compliant  funding structure, taking advantage of the UK government's Enterprise Investment Scheme (EIS). However, investors did not come on board in time, and legislative changes disallowed tax exemptions through the EIS as well as government subsidies, affecting the project's viability. A primary factor, however, was the performance differential between Islamic finance structures and conventional financing for the project.
'The non-sharia version had 50%-plus debt to equity whereas ours was a pre-equity play, so the debt cost 5% a year, which leveraged up the returns for equity players,' explains Faizal Karbani, CEO of Simply Sharia.
He adds: 'A key lesson for future investments is to have parity of returns for sharia and non-sharia, so returns are comparable or equal to any non-sharia investment out there. A lot of businesses that want to raise sharia finance are basically struggling as most financing is dominated by interest-bearing loans.'

Double bubble

Such experiences underline the issues that both Islamic finance and green energy have faced over the past decade — being overhyped in terms of potential and investor interest. As with Islamic finance, many green financing projects have been announced but not come to fruition, in part hampered by capital issues following the global financial crisis.
United Nations figures from January 2014 show that global clean-energy investment dropped by 12% in 2013, while Bloomberg New Energy Finance numbers show investments of US$254bn last year, significantly below the US$1 trillion a year the International Energy Agency estimates is needed to curb climate change.
'Our market soundings have shown returns on green bonds still need to be there, yet they may garner more attention by having those credentials,' says Michael Grifferty, president of the Gulf Bond and Sukuk Association (GBSA) in Dubai.
As for Islamic finance, the sector was valued at US$1.7 trillion in 2013, according to EY, dwarfed by the conventional capital markets, valued at US$64 trillion in 2012 by PwC.
'One issue with the green Islamic space is that it is a niche of a niche, so to really make that work you need to get distribution channels in place and sufficient momentum to pull away and gain maturity, which needs a push at the government level,' says Fergus McDonald, co-founder of VTA, a banking advisory firm in London.
Malaysia's August announcement is a welcome move, with its SRI sukuk framework requiring information on use of proceeds, choice of eligible projects, disclosure and reporting of various elements, and rules on appointing independent parties for deals.
Siew Suet Ming, senior general manager for structured finance at RAM Ratings in Kuala Lumpur, says: 'In green Islamic finance there has not been a lot of transparency and consistency in the numbers quoted, while green sukuk  have been fairly loosely bandied about with regard to green projects as they lack formal certification. As far as developing governing frameworks, it is quite nascent and I believe the first formal guidelines are from Malaysia.'
Malaysia is promoting Islamic finance and green projects to develop a more sustainable economy, having launched a national action plan on the subject in 2009, and in 2010 a green technology financing scheme with an initial budget of RM1.5bn (US$465m), which was subsequently expanded to RM3.5bn (US$1bn). So far, RM1.95bn (US$604m) has been distributed, almost 40% of which is in participation with Islamic financial institutions, according to Suet.

Government involvement

'Larger-scale financing has been quite limited for green sukuk to come in, and that's why the government has been involved in the framework,' adds Suet. Investment is expected to focus on green technology rather than farmland, as has been the case elsewhere in green finance worldwide, but there are challenges ahead. 
AFB's Kamil says: 'A lot of capital investment is involved, so the development of the sukuk market will play a critical role for long-term investment structures. Challenges are registration, infrastructure and capital, and more importantly the human capital expertise in this sector, especially sharia scholars with IFE [Islamic finance expert] accreditation.'
Over in the Persian Gulf, Dubai is trying to position itself as an Islamic finance hub by supporting green sukuk, while the national plans for 2030 of fellow UAE emirate Abu Dhabi and nearby Qatar both feature environmental sustainability and different kinds of capital markets.
'Green Islamic finance connects the two, and we are trying to connect them, not just on paper but in reality, to get the best choices for project selection,' says Grifferty of the GBSA, which is involved with the GSWG. To move forward, green Islamic finance will need to develop further, along with the sukuk market itself. 'Both sukuk and green bonds are getting more attention and will definitely draw in more issuers and arrangers that can bring the [green project financing] successes of Europe and elsewhere to Dubai, so it's worth keeping an eye on this space,' adds Grifferty.
 Indeed, Simply Sharia has learned from its recent experience, and is not daunted by the challenges ahead, having successfully worked on a sharia-compliant farmland project in Argentina, and currently working on a 10-year, £lbn (US$1.2bn) project on electric cars in Europe with the potential for a sukuk. 
'I think the sector is going in the right direction and while a huge amount has been said about the sector's potential,  it is time for action by marrying Islamic finance and SRI,' says Karbani. 'Our vision is that Islamic finance needs to be positioned very much as an ethical alternative for people to invest in, which is the future of Islamic finance.'

Saturday, November 22, 2014

Syrian livestock sector feels the effects of conflict

By Paul Cochrane, in Beirut, 27-Aug-2014 

The livestock sector in Syria has been seriously impacted by the country’s ongoing civil war, with poultry production down by over half compared to pre-conflict levels, cattle herds by 40%, and the number of sheep down by 30%. Meanwhile, veterinary services have almost collapsed.
In May 2013, the Syrian ministry of agriculture and agrarian reform (MAAR) estimated that less than 35% of pre-war poultry units were still operational and at least 50% of jobs in the sector had been lost. The poultry sector was 90% privately owned, and had employed over 1 million people in 2011, according to data from the Food & Agriculture Organisation of the United Nations (FAO).
Indeed, an FAO and United Nations World Food Programme study, released in 2013, estimated that poultry production had dropped 50% compared to 2011, the year when widespread protests developed into an armed revolt against the government of Bashar al-Assad. However, over the past year, as the conflict has continued, the situation has become increasingly dire.
"The situation is only getting worse, as nothing has improved since the report was published. It was a conservative estimate of 50% back then, and has dropped further as fighting has continued," said Markos Tibbo, FAO livestock officer for the Near East and north Africa.
Poultry production was particularly concentrated in the area surrounding the western Syrian city of Homs. However, the area has seen heavy fighting, resulting in production being moved to government-controlled areas on the coast in Latakia and Tartous.
Syrian Arab language newspapers have reported that imports of frozen chicken have increased to offset the fall in production, primarily from Turkey as well as Iran, with imports from the latter amounting to SYP7.183 billion (US$47m) in the first six months of 2014. However, importing, distribution and storage have proved difficult due to the conflict, power shortages, and fluctuations in the Syrian pound.
In 2010, the FAO estimated that Syria’s livestock sector consisted of 15.5 million sheep, 2.01 million goats, 1.01 million cattle and 7,000 buffalo. The FAO now estimates the national sheep flock has dropped to under 11 million, and the national cattle herd by 40% to just over 600,000. "State sheep breeding research farms have been decimated, with almost all gone," said Tibbo.
Mutton exports have also plunged, with Syria having exported between two and three million sheep (of the Awassi breed) valued at US$450m to the Gulf countries per year, but since the conflict dropping to 100,000 head, according to FAO.
Further impacting the sector is low barley production, a key livestock concentrate, which has dropped 65% due to drought and poor rainfall, although this year’s better harvest is expected to ease the situation for the year ahead.
Nonetheless, imports of livestock feed have plunged as well, from 2.26 million tonnes (mt) in 2010, to 1.4mt in 2012, and has continued to fall, according to FAO. Wheat production is currently 2.4mt, or about 40% less than before the conflict started, and 18% lower than 2012/2013, according to the FAO.
There are growing concerns about diseases and the health of livestock as vaccines are no longer produced and existing stocks are running out. Vaccines had been produced at 54 private factories, but as of May 2013, FAO estimated 40% had been destroyed and the rest had shut down.
"If you look at the veterinary sector, before the crisis it was very good in terms of veterinary supplies and services, but since the crisis it has nearly collapsed, and the government is only able to serve a handful of areas it controls. Because of this, we are really seeing a serious animal health crisis in the neighbouring countries and the situation in Syria is expected to be worse," said Tibbo.
In Turkey, there have been confirmed cases of bovine tuberculosis, peste des petits ruminants, and rabies, and there are reports of lumpy-skin disease in Lebanon, Jordan and the West Bank, all of which are suspected to have come from Syria.

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Syria Conflict Impacts Cosmetics Sales

Paul Cochrane discovers how Syria’s civil war and refugees are affecting the cosmetics sector
Soap, Perfumery and Cosmetics magazine -

The conflict in Syria, now in its fourth year, has had a major impact on the cosmetic market and industry, both in the troubled country itself and the neighbouring region. Exports to Syria and the distribution of cosmetics have been severely hampered by the civil war, while the conflict’s spillover is impacting other countries, compounded by the 2.9 million Syrian refugees currently registered in Lebanon, Jordan, Turkey and Iraq.
“Syria was a good market before the crisis and Jordanian manufacturers depended on exports to Syria and Iraq. But due to the crisis the border with Syria is often closed and goods cannot easily enter, which is the same with Iraq now. Most manufacturers are feeling the pinch,” said Ifani Igboanugo, owner of Ransel Industries in Jordan, which manufactures its own line of cosmetics for Middle Eastern and African markets.
Despite 600,000 refugees having fled to Jordan, it is only sales of low cost cosmetics that have been bolstered. “Refugees do not buy branded cosmetics, just cheap items, while the NGOs [non governmental organisations] and the United Nations are providing them with low cost shampoos and soaps. Some of it is sourced from Jordan, but it is a very small boost as margins are very low,” added Igboanugo. Lebanon has been particularly hard hit, losing a profitable export market and also sales from tourists who have been frightened away (Beirut is just 52 miles from Damascus). The conflict has caused economic losses in Lebanon of US$7.5bn, according to World Bank figures. “Gulf Arab tourists were always good for turnover and we’re affected even more by the absence of Lebanese expatriates, as they would consume a lot on their trips. The loss of both segments has made a big difference to the market,” said Fadi Sawaya, CEO of Beirut based Sawaya Group.
Over one million Syrians have fled to Lebanon, equivalent to 25% of the population, but the cosmetics market has not prospered as a result. “When the Syrians came to Lebanon we thought we would benefit from the additional population, but unfortunately that has not been the case as Syrians are getting aid from the NGOs. Very few Lebanese manufacturers have collaborated with the NGOs to provide needed items. It is not the Syrians’ fault, as the Lebanese government did not negotiate with NGOs to require them to source locally,” said Joanne Chehab, General Manager of Lebanese cosmetics firm Ch. Sarraf & Co., part of the Malia Group, which has its own line of cosmetics, Cosmaline.
The firm is still exporting to Syria, however. “We invested in brands and don’t want to withdraw as we know retailers are struggling to get foreign brands in Syria, and we wanted to ensure the continuity of our brand in the market, as we intend to come back strongly as soon as the situation
settles down,” added Chehab.
Her company is also manufacturing for Syrian companies that had to close facilities in the country due to the conflict and a shortage of raw materials. “Syrian manufacturers either brought machinery to Lebanon or outsourced production.
Although they’re competition, [we thought] if we didn’t produce at our plant, they would just go elsewhere. So we have manufacturing profits and don’t lose out on the market,” said Chehab.
Cosmetics manufacturers in Turkey have also indirectly benefited from Syrian companies closing down and being unable to meet domestic demand. In 2011, Turkish cosmetics exports were estimated at $6.6m, but in 2012 – as the conflict worsened in Syria, particularly in the north, which borders Turkey – exports dropped to $4m.
In the first half of this year, exports reached $5.8m, according to figures from the Istanbul Chemicals and Chemical Products Exporters’ Association (IKMIB). “We will close the year at $12m,” said Murat Akyüz, IKMIB Chairman. He added that figures are probably higher as cosmetics products
exported to Iraq and Iran may be re-exported to Syria. Turkish exports to both markets have surged in recent years, with exports to Iran going from $68m in 2011 to $77m last year, and in Iraq from $150m to $180m in the same period.
Syrian cosmetics manufacturers have not relocated to Turkey due to laws based on European Union cosmetics regulations. “This is why Syrian producers are not able to produce here, as Syrian and Turkish regulations are totally different, so it is not easy to set up the same facility and get a production licence,” said Akyüz.
As the conflict continues, Akyüz expects Syrians will start manufacturing in Turkey and will be forced to adopt EU specifications, which would have long-term benefits. “If Syrians set up here, they will improve production quality and this will have a positive impact on the Syrian cosmetics market in the future,” he said.