Persian Gulf Islamic bond sales are beating Shariah-compliant loans in the Middle East, Europe and Africa for the first time since 2006 as borrowers seize on tumbling yields to finance roads and airports.
Sales of sukuk in the Gulf Cooperation Council have almost quadrupled this year to $18.5 billion as Saudi Arabia’s state- run Civil Aviation Authority and Qatar’s government sold $4 billion each, according to data compiled by Bloomberg. Loans that comply with Islam’s ban on interest, by comparison, have risen 57 percent to $11.4 billion in EMEA.
Borrowers in the GCC, home to about a third of global oil reserves, will rely more on Islamic bonds after yields dropped to a record, Standard & Poor’s said in a report on Oct. 8. GCC sukuk sales make up about half of this year’s record $38.3 billion of global sales. The average yield on global sukuk fell 103 basis points, or 1.03 percentage points, in the period to a record 2.96 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
“Sukuk are becoming a legitimate competitor for traditional Islamic loans and you will see them staying like that for a while,” Abdul Kadir Hussain, chief executive officer of Mashreq Capital DIFC, which had $265 million in assets under management in June, said by phone from Dubai yesterday. “It’s now a product that is more known to investors and issuers.”
Qatar International Islamic Bank (QIIK) and Riyadh-based Kingdom Holding Co. (KINGDOM), the investment company of Saudi billionaire Prince Alwaleed bin Talal, are among those that plan to tap the sukuk market. The yield on GCC Islamic bonds slid 121 basis points this year to 3.1 percent, according to the HSBC/NASDAQ. It fell to a record 3.08 percent Sept. 14.
Increased crude production and “robust” growth in the non-oil economies will lift economic growth among oil exporters in the Middle East and North Africa to 6.6 percent this year from almost 4 percent in 2011, the International Monetary Fund said in its World Economic Outlook report yesterday.
Economic expansion creates a “fertile environment for credit growth, particularly in the Gulf’s oil-exporting economies,” according to S&P, which rates Qatar and Abu Dhabi AA, the third-highest investment grade and one level above Saudi Arabia, the world’s biggest oil exporter.
“We also expect the project finance sector, including real estate and transport projects, to increasingly rely on sukuk issuance to fund transactions,” said S&P’s credit analyst Karim Nassif.
Companies and government agencies in Saudi Arabia, the biggest Arab economy, have raised a record $8 billion from sukuk this year as the state spends more than $500 billion to create jobs, build airports, roads and houses. The aviation authority said in May it plans to issue a second tranche of sukuk to fund the expansion of Riyadh’s airport. Kingdom Holding secured shareholder approval in March to raise as much as 3.75 billion riyals ($1 billion).
Qatar Islamic Bank SAQ (QIBK) raised $750 million from the sale of dollar-denominated sukuk this month at the lowest rate for similar sales by GCC banks this year. Qatar International Islamic Bank said Oct. 4 it mandated HSBC Holdings Plc, Standard Chartered Plc and QNB Capital for a possible sale of dollar- denominated debt.
Shariah-compliant bonds pay returns based on asset values because of the religion’s ban on interest and often involve a sale and purchase agreement. The debt structures need to be reviewed and approved by Shariah scholars to ensure they comply with the religion’s finance rules.
Challenges of arranging the securities’ structure “are very much still there” and the industry needs to widen its investor base beyond banks, said Hussain of Mashreq Capital. Tamweel PJSC (TAMWEEL) said in July “market feedback” prompted the Dubai-based provider of Islamic home loans to cancel the sale of $235 million in residential mortgage-backed bonds, abandoning what would have been the first such transaction in the Middle East since the onset of the global credit crunch.
Sales of sovereign Islamic bonds in the Middle East have been limited to Qatar, Dubai, Ras Al Khaimah and Bahrain, according to data compiled by Bloomberg.
The yield on Dubai’s 6.396 percent sukuk due November 2014 tumbled 273 basis points this year to 2.85 percent today, data compiled by Bloomberg show. The premium investors demand to hold Dubai’s sukuk over Malaysia’s investment-grade 3.928 percent notes maturing in June 2015 narrowed 148 basis points this year to 139 today, the data show.
Sukuk pricing “right now is very good for issuers,” Samer Mardini, vice president of fixed-income and Islamic finance products at Dubai-based SJS Markets Ltd, said by phone Oct. 9. “Sukuk issuances are going strong now and will continue to do so in the future.
TUNIS, Oct 10 (Reuters) - After decades of secular rule, Tunisia's government aims to develop Islamic banking in the country, but some suspect the government's motives are more political than economic: it wants to win the support of voters.
Governments across North Africa are promoting Islamic finance in the wake of last year's Arab Spring uprisings, which ousted regimes that neglected or discouraged the business for ideological reasons.
The change of policy could bring economic benefits, giving the countries more access to a huge pool of Islamic investment funds from the Gulf. But as the controversy in Tunisia shows, there are political complications.
"Tunisia is looking to become a regional center for Islamic finance," Tunisian Prime Minister Hamadi Jbeli declared in June.
Jbeli, a member of the moderate Islamist Ennahda movement which leads Tunisia's government after the overthrow of president Zine al-Abidine Ben Ali last year, said authorities would ensure that Islamic banks were able to compete on a level playing field with conventional banks.
But some of Ennahda's political rivals accuse the movement of using the issue to attract fresh support and head off any challenge from hardline Islamists in parliamentary elections expected next year, regardless of economic considerations.
Ploughing scarce resources into Islamic banking could end up hurting the economy if it dilutes state support for conventional banks, and creates new Islamic lenders that increase competition while not being fully viable themselves, critics argue.
"The focus on talking about Islamic finance over the past few months is only political propaganda before the next election," said Adel Chaouch, an official in the Nida Touns, a secular party. "Talking about Islamic banks may increase divisions among Tunisians."
Ennahda says Islamic finance, which obeys religious principles such as bans on the payment of interest and pure monetary speculation, will help the economy recover from the damage it suffered during Ben Ali's overthrow.
Nearby countries have similar hopes. Egypt's Muslim Brotherhood wants to promote Islamic finance and Morocco, also led by a moderate Islamist party, says it plans to become a regional hub for the business.
Morocco's General Affairs and Governance Minister, Najib Boulif, told Reuters in March that the government was drafting a bill that would include regulations covering Islamic financial products.
In Tunisia, there are currently only two Islamic banks because of the Ben Ali regime's coolness towards the industry.Their assets total 1.4 billion dinars ($893 million), or just 2.5 percent of the combined assets of all Tunisian banks, according to the central bank; in Gulf Arab countries, Islamic banks are estimated to hold about a quarter of banking assets.
Committees set up by the finance ministry, religious affairs ministry and the central bank are now working on a law that would facilitate the creation of more Islamic banks.
Nadia Kamha, director-general of the central bank, said the bill would be ready "within weeks" and that it would then be presented to the government for approval.
"Islamic finance can accomodate large groups of Tunisian people who have not been absorbed by traditional banks," said central bank governor Chadli Ayari. Tunisia plans to issue its first sovereign Islamic bond early next year as it diversifies its sources of funding, Ayari told Reuters late last month.
Access to another pool of capital would be welcome; Tunisia expects to run a budget deficit of 5.9 percent of gross domestic product next year, when the government will need to raise an officially estimated 4-4.3 billion dinars.
But sceptics argue the government's vision of an Islamic banking boom in Tunisia is fanciful. Fethi Jerbi, an economics professor at the University of Tunis, said it was unclear whether the economy could support more Islamic banks.
"The conditions for success in the Gulf countries are not available in Tunisia for Islamic banking products," because Tunisia is not as rich as Gulf economies and its financial system is not as well developed, he said.
He also said authorities' focus on promoting Islamic banking risked neglecting conventional banks, which could have serious consequences for the banking sector and the economy.
In a report last month, credit rating agency Standard & Poor's said Tunisia's banking sector faced "very high risk" in areas such as funding of the system.
It added that although the government had been supportive of banks, it had limited capacity to provide emergency aid to the sector in the event of a major crisis.
Noureddine Bhiri, Minister of Justice and an Ennahda leader, strongly denied that the Islamic banking drive was a political ploy.
"Turning to Islamic finance does not fall within political propaganda. The Tunisian revolutionary government does not need propaganda to attract voters," he told a seminar.
Kamha said that while there was disagreement over whether conventional banks should be allowed to offer Islamic products, the central bank was inclining towards allowing this, by permitting the banks to operate "Islamic windows" which would segregate the money from conventional operations.
"This would increase the spread of Islamic finance in the country and make the banking sector more competitive.
Such windows allow conventional banks to offer Islamic financial services, provided that clients' money is segregated from the rest of the bank.
Last year the central bank banned Islamic windows in the onshore banking system, requiring conventional banks to close or divest their sharia-compliant businesses. Its motive was apparently to ensure a level playing field for Islamic banks.
Extending the ban would ensure that conventional banks could not take advantage of the QFC to skirt the ban. "The Regulatory Authority's proposal would create a consistent approach to Islamic windows within the State," the regulator said in the consultation paper, which is open to responses from the public until Nov. 12.
"Adopting this policy will align Qatar with international standing-setting bodies whose aims are typically focused on reducing regulatory arbitrage."
Islamic windows present disadvantages because of difficulties in properly supervising risks and the complexity of financial reporting, the statement added. But it said the amount of business conducted through Islamic windows in the QFC was already limited.
"The amount is very small. It's never been something that the QFC has gone out of its way to attract. This appears to be more of an attempt to achieve coherence across the financial sector in Qatar, rather than something that is business-driven," said a Doha-based analyst, declining to be named.
The proposed ban would also extend to insurance companies, although there are currently no conventional insurers operating an Islamic window in Qatar.
Alfalah Consultingis NOT providing any kind of loan to finance project etc and asking for a fee. If you've received any email claiming to be fromAlfalah Consulting, offering loan to you, please ignore it or inform us for further actions. Our official email is email@example.com. If you've received an email from firstname.lastname@example.org, that's NOT from us. Be cautious!