Qatar Islamic Bank (QIBK), the country’s biggest Shariah-compliant lender by assets, plans to raise as much as $750 million by issuing Islamic bonds, its first sale since 2010.
The Shariah-compliant bank hired HSBC Holdings Plc (HSBA), Standard Chartered Plc, QInvest LLC and Deutsche Bank AG to manage the issuance of at least $500 million of debt, the lender said at a shareholders’ meeting in Doha today. The securities, which are known as sukuk and comply with Islam’s ban on interest, may have maturities of as much as seven years, Ahmad Meshari, the bank’s acting chief executive officer said today.
The proceeds from the sale will be used for local projects, the bank said today, after the board approved a $1.5 billion- sukuk program. The Doha-based lender last raised $750 million from the sale of five-year Islamic bonds in September 2010, according to data compiled by Bloomberg.
Islamic bond sales in the six-nation Gulf Cooperation Council, which includes Qatar and Saudi Arabia, are headed for a record year after borrowing costs reached lows. Sukuk sales climbed to $17.7 billion so far this year from $4.8 billion in the year-earlier period, according to data compiled by Bloomberg.
The average yield on sukuk in the GCC declined two basis points, or 0.02 of a percentage point, to 3.08 percent on Sept. 14, the lowest on record, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index show.
Qatar Islamic’s first-half profit rose 5 percent to 737 million riyals ($202 million), the lender said July 11. The bank’s shares have declined 7.5 percent this year to 78 riyals, compared with a drop of 2 percent for the QE Index.
MUSCAT — The upcoming launch of sharia-compliant financial products and services in the Sultanate augurs well for the growth of sukuk – the Islamic equivalent of bonds, says a leading expert on Islamic Banking.
Khalid Yousaf, Director — Islamic Finance Advisory Services, KPMG Oman, envisions significant demand for sukuk in the financing of, among other things, infrastructure projects, housing schemes, real estate ventures, tourism resorts, and other development projects. Additionally, sukuk will open the way for new fund-raising opportunities via the Capital Market and provide a new investment vehicle for investors in the Sultanate.
“Prospects for the development and growth of sukuk in Oman are particularly strong. Oman’s GDP is approaching $70 billion and the government has made a strong commitment to infrastructure projects like the new Muscat International Airport, gas-fired power generation, road networks and other projects adding up to $30 billion. These projects will require financing lasting for several years,” Yousaf stated in an interview to the Observer.
As Islamic deposits swell in size, liquidity in Islamic Banks and Islamic Windows will inevitably increase. “Placing this liquidity into building Retail, SME and Corporate asset portfolios will take time. Sukuk can therefore, bridge the gap and channel the excess liquidity from Islamic Banks and Windows to infrastructure projects,” he explains.
The expert lists a number of sectors that are expected to benefit from sukuk upon the introduction of sharia-compliant products and services in the Sultanate. “Institutions like Oman Development Bank and Oman Housing Bank can access the sukuk market to finance their projects over the medium-to-long term.
The private sector too will also find sukuk a useful and flexible instrument to replace their bank financing at cheaper rates. The real estate sector in particular can raise fresh financing for major development projects like shopping malls, holiday resorts and hotels through sukuk. In general, it is anticipated that sukuk will provide new Capital Market fund-raising opportunities to issuers and a new investment vehicle for investors in Oman,” he notes.
Globally, the sukuk market has grown phenomenally over the past decade and currently grosses around $103 billion, says Yousaf. Malaysia, with a share of $77 billion (369 issues), dominates the market, followed by the GCC region. Within the Gulf, Saudi Arabia’s sukuk market is valued at $9 billion. Other key markets are that of the UAE ($5.3 billion), Qatar ($4 billion) and Bahrain ($1 billion).
All of the large-size sukuk have however come from UAE and Saudi Arabia (Aldar Properties $2.53 billion; Nakheel $3.52 billion; PCFC $3.5 billion; Dubai Global $1 billion; and Sabic $800 million).
“Domestic sukuk issues dominate the market over international issues by $90 billion to $13 billion. Malaysian Ringitt, US Dollar and Saudi Riyals dominate the currencies of issuance. Also, most of the issues have been made by Government or Quasi-government institutions followed by Transportation and Financial Services Sectors. Turkey has recently announced the issuance of a 2-year Turkish
Lira-denominated sukuk, the first of its kind and is aimed at attracting surplus capital from petro-dollar economies,” the expert added.
Unlike bonds, which are essentially debt instruments, sukuk (plural ‘sak’) is a legal instrument or voucher that represents a proportionate beneficial ownership in the underlying asset, giving the holder the right to the benefits of the income stream of the underlying asset. The yield is usually linked to a return on an underlying asset through an Islamic structure e.g. lease (Ijara).
It is priced, listed and rated as a bond, although it is more akin to a participation in a collective investment scheme. Sukuk therefore, is not a debt instrument, even though its characteristics resemble those of a conventional bond.
Al Baraka Turk Participation Bank, the Turkish subsidiary of Bahrain-based Al Baraka Banking Group, has concluded a record Islamic finance deal in Turkey worth $450 million with the participation of a group of major international banks.
Thirty-two banks from 16 countries covering the main financial centres in the world took part in the facility, including Standard Chartered Bank, Noor Islamic Bank, ABC Islamic Bank and Emirates NBD.
Bank Islam Brunei Berhad Darussalam and Al Hilal Bank were nominated as mandated lead arrangers.
"The success of the murabaha syndication deal of the bank this year, provides further evidence of the bank's distinctive reputation and position in the Turkish market, based on the strong financial position and the growing financial performance over the previous years, and it is also a global certificate of the distinctive reputation and prestige, which ABG enjoys regionally and globally," said Al Baraka Banking Group chairman and chief executive Adnan Ahmed Yousif.
The law, which had been in development since 2010, was passed by the lower house of parliament earlier this month and approved by the upper house at the end of last week. It may take effect in about 30 days, after the government promulgates it, Sufian Elhassan, director of the research and information department of the house of representatives, said by telephone.
A sovereign sukuk would broaden Jordan's sources of funding, giving it access to a huge pool of Islamic investment funds in the Gulf. Its need for external financing prompted it to agree with the International Monetary Fund in July on a $2 billion stand-by loan arrangement.
State finances are under pressure after Jordan hiked subsidies and wages to limit social discontent in the wake of the Arab Spring uprisings, and because it is having to absorb tens of thousands of refugees from Syria's civil war.
The government is struggling to keep its budget deficit to around 5 percent of gross domestic product this year. In July, Standard and Poor's said its BB credit rating for Jordan had a negative outlook because of the vulnerability of the economy to regional shocks and "limited fiscal flexibility".
It is not clear when Jordan might issue its first sovereign sukuk, and hurdles remain, including the choice of an asset pool for the sukuk and arranging for the central bank to manage payments on it, said a senior Islamic banker in Amman, who declined to be named because of his bank's briefing rules. Because of Islam's ban on interest, sukuk instead pay returns on funds invested in a pool of assets.
The government is keen in principle to tap the domestic and international sukuk markets, the banker said. "The assumption is that Islamic banks (within the country) would buy 400 million dinars ($565 million) of government issuance."
Last week, Jordan's finance minister said the country was discussing the issue of a seven- to 10-year sovereign, conventional Eurobond worth between $750 million and $1.5 billion to foreign banks.
Because global investor demand for sukuk exceeds supply, Jordan might be able to issue Islamic bonds more cheaply than it could sell conventional bonds.
Jordan has a small but growing Islamic finance industry. Last year local company Al-Rajhi Cement issued an 85 million dinar, seven-year sukuk, the first in the country. Jordan Dubai Islamic Bank began operating in January 2010.
In order to facilitate corporate issuance of sukuk in Jordan, the securities commission may seek amendments to the company law and set up a committee to study issues such as compliance with sharia law, a source at the commission said.
The committee would include experts on both sukuk and finance in general as well as representatives from the securities commission, the central bank, the ministry of finance and the ministry handling awqaf (Islamic endowments), the source told Reuters.
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