Islamic RMBS is heading our way now…

The headlines that grabbed my attention was ‘Deutsche Bank and Saudi Investors launch Shariah mortgage Financing company targeting Saudi Arabia’. DB and retail home loans and that too of a Shariah compliant variety was a bit of a surprise. I told a colleague of mine ‘…the brand does not necessarily have top of the mind recall in the mortgage industry…’ Before I could finish he said ‘..but remember they have some fabulous expertise in packaging mortgages off as nifty products and selling them back to us in those halcyon days.’

What I found hilarious was that the moment this was said, my eyes hit upon the huge quote by the Managing Director and Global Head of Residential Mortgage Backed Securities Lending and Trading at DB. He said ‘We are pleased…..Islamic Home Finance is going to boom!..DB will be partnering with local big big biiig Saudi family…. etc’. ..ok I got it! So more than the CEO and COO of the Finance company, we had the MD of RMBS who was drolling all over the press release.

To make the press release more balanced DB had pulled out some moth eaten complex research saying ‘the total outstanding home finance provided by the private sector in Saudi Arabia aggregates to less than 1% of GDP compared with well over 50% in most developed countries, and approximately 6% in Kuwait and 7% in the UAE’. Ok, so now I get it, that’s why you guys started a home finance company in Saudi. Darn!

I mean it is so obviously evident that DB is only interested in the securitization part of this whole game and has no interest whatsoever in the loan business

Inherently by launching it in Saudi Arabia, a few things are taken care :
- Credit Risk: Surely would be low in these loans. Credit scorecard validation algos would be a fairly easy to set up and unless your name is George Bush, most of you who have the right name will get a loan. (and if you or me get this loan and default, you don’t want me to tell you the gory details of what can happen if you don’t pay your Shariah compliant loans off in Saudi Arabia…do you?)
- Pricing: Residential prices are pretty sensible in Saudi Arabia (the last time I asked an estate agent for a nice duplex in Riyadh, he told me I was searching for it in the wrong country, he said the whole middle east quota got completed in a 3 sq km stretch in Dubai)
- Early Redemption risk: The super rich taking to the novelty of the home loan concept for their new pad on the hand bag shaped building in Riyadh, may just forget about the loan linked to their bank account. I mean who will bother changing from a variable rate loan to a lower fixed rate loan in the future etc. so don’t fret on your prepayment risk and interest rate risk on your MBS

So overall we’re all set up nice and cozy on this whole Shariah complaint loan thingy being launched by BD.

So what are the plans for 2012: Shariah compliant securitization, Shariah compliant Residential mortgage backed securities, Shariah compliant collateralized mortgage obligation with a guarantee against home owner default risk with full faith and guarantee from one of the richest families in Saudi Arabia.

...and if anything goes wrong, DB has only put in USD 44 Million of initial capital into this experiment

Small change for creating a new world order in the Kingdom and the world of Islamic Investment management

Exchange Traded Funds (ETFs) – Middle East's Flavour of the month

National Bank of Abu Dhabi lists its ETF on ADX on 25th March– First in the region screamed the headlines. Back in Riyadh there were some grumbles at Falcom Financial Services for losing out on the ‘first’ tag because of a technicality that they listed their ETF on 28th March. So now UAE and Saudi Arabia join the elite club of 36 countries where there are ETFs listed in their exchanges.

It was a coincidence that I was sitting with an executive of one of these firms, when the regulator faxed across the ETF approval to their office. There were whoops of joy, shoulder pats and a general sense of achievement across the office. A few days after that eventful day, I got a call from a fund house asking me how the heck will they manage to generate an iNAV( Intraday NAV) for the ETF. (We figured out how they could do that in quick time, but that is too boring for an average reader to know)

In a region where 9 out of 10 fund houses have no clue on how to generate an NAV every day, and will never manage to generate one even if they wanted, managing an ETF’s iNAV ( Intraday NAV) will be a steep learning curve. This got me thinking on how infantile ETFs are to the region and may be one of the reasons why every fund house CXO I bump into nowadays wants to launch its own ETF yesterday.

It is also a strange correlation, that as I write this blog today, the European ETF industry celebrates its 10th anniversary this exact week. It also needs a mention that the European ETFs which are only 10 years old have been outpacing the AUM growth over their American cousins who started off way back in 1993.

I knew about the existence of ETFs (Exchange Traded Funds) as an investment class, but when a certain private banker shared an ETF handbook with me about 6 months back, I never expected him to give me a 200+ page A4 sized book listing all the global ETFs in the industry for reading (Barclays Global Investors Handbook, though I think the name of the hand book for 2010 may have got changed to BlackRock in 2010).

As per Barclays Global Investors/ BlackRock latest compiled data (As of December 2009)

- Global Exchange Traded Funds (ETFs) assets under management total a whooping $1 trillion (US$1,032 Bn) at the end of December 2009 – 45.2% above US$ 710.9 Bn at the end of 2008, according to the latest figures from BlackRock published today in its ETF Landscape Year End 2009 preview report.

- The global ETF industry had 1,939 ETFs with 3,775 listings from 109 providers on 40 exchanges around the world at the end of December 2009.

- Over the past decade the compound annual growth rate for ETF assets globally was 56.3% (I rechecked it.., there’s no typo mistake here),it was 58.1% in the United States, 53.1% in Canada and 90.5% in Europe

- As of December 2009 – Exposure type of these 1939 ETFs could be broadly divided into Equity ETFs– 1,545 ; Fixed Income ETFs – 279 ; Commodities ETFs – 62 ; Currency ETFs – 14, Mixed ETFs – 37 and 2 Alternative ETFS (If you’re interested in the actual document with further break up of this info, drop me a message or leave a comment on this blog post with your mail ID and I shall mail you the link to get access to this detailed document)

Here we are sitting in a market place where you and I have over 1900+ ETFs to choose from. From a simple equity ETF to a mind boggling Alternative ETF (I have no idea how this ETF is being run), there are so many options available.

Though there are so many types and variants available, My personal reading on ETFs is highly bullish for the Middle East region

- Shariah Compliant ETFs :Malaysia may have taken the leads on Sukuks before the Middle East region, but clearly the Shariah Compliant ETFs wave is eomthing that Middle East can claim as its own. There are some amazing Shariah investment managers in this region, they could take the reins from some lip service Islamic ETFs available in the European market. Clearly, there is a potential to launch Islamic ETFs in the market and the product would have quite a few takers.

- Institution focussed Mutual Fund market: Mutual Funds market space in GCC is still very institutional focussed and has still not become retail’esque. ETFs are perfect fit for such a largely institution dominated mutual fund market.

- Regulations on ETFs: Unlike the European market space which has kept ETFs out of regulatory red tape, the American Regulatory industry regulated ETFs quite well. (which is also why you find a huge amount of complex ETF products in Europe against Americas). From the way things look regulators in the Middle East don’t want to leave ETFs outside their regulatory purview, which is very good for a nascent and developing ETF Market space.

If you have managed to read through this blog post till this line, here’s one more for the road… ‘What the caterpillar (Mutual Fund) calls an end of the world, the master calls a butterfly…(ETF)'

A warm welcome to the world of Middle East ETFs