Moody’s Shows Sharjah Coming of Age With Sukuk: Islamic Finance
As Dubai works toward its ambition of becoming the global capital of the burgeoning Islamic economy within three years, neighboring emirate Sharjah is also getting bigger in Shariah finance.
The third-biggest sheikhdom in the United Arab Emirates has approached banks about a debut sukuk sale, according to two people with knowledge of the matter, who asked not to be identified because the information is private. Moody’s Investors Service last week gave state-backed Sharjah Islamic Bank PJSC an A3 rating, one step above Dubai’s flagship Shariah-compliant lender, citing its strong capital buffers.
Banking assets that adhere to Islamic regulations are set to double to $3.4 trillion by 2018 from last year as investors seeking vehicles that meet the religion’s ban on interest pour in cash, according to Ernst & Young LLP estimates. While Moody’s said that Sharjah’s economic growth this year is expected to be 0.5 percent, a 10th of Dubai’s, the ratings company also pointed to the government’s low levels of debt and strong finances.
“Sharjah is making progress growing in the Islamic industry, and SIB is leading the way,” Rizwan H Kanji, a Dubai-based partner at law firm King & Spalding LLP, said by phone yesterday. “They’re looking to diversify the economy, and are doing it in the right way by focusing on an active and growing pool of funding in the Islamic space.”
The emirate, which hasn’t yet sold debt, received an A3 rating from Moody’s in January, four levels from junk. SIB, about 30 percent of which is owned by the government, has two outstanding notes. The yield on its $500 million issue due April 2018 has dropped 98 basis points this year to 2.52 percent, according to data compiled by Bloomberg.
Sharjah is the Organization of Islamic Cooperation’s capital of Islamic Culture for 2014, which recognizes the emirate for preserving and promoting the religion in arts, sciences and education. The city has also hosted a summit on the future of trade in the Muslim world, a symposium on Islamic banking and finance, and a private sector meeting for OIC members on advancing trade this year.
The Sharjah Media Centre didn’t respond to a call and e-mail seeking comment on its potential sukuk plan. A spokesman for SIB didn’t respond to two calls.
“As Sharjah and SIB grow and become more active on the international stage, the rating becomes more important among institutions that don’t know them,” Khalid Howladar, Dubai-based global head of Islamic Finance at Moody’s, said by phone yesterday. “They have their own development ambitions. Raising external finance will be part of those efforts and that’s where the rating will come in.”
Sharjah’s economy is well-diversified, with strong manufacturing and a more affordable cost of conducting business than in Dubai or Abu Dhabi, according to Moody’s. Total assets at SIB grew about 19 percent in 2013 compared with 13 percent average growth for U.A.E. lenders, the ratings company said.
Growth in Islamic finance has also helped drive sukuk yields to near historic lows. The average yield of Islamic bonds in the Middle East fell 45 basis points to 4.19 percent this year through July 7, according to JPMorgan Chase & Co. indexes. That compares with a 33 basis-point drop to 4.08 percent for the yield on conventional bonds in the region.
Sharjah has been overshadowed by economic activities in Dubai and Abu Dhabi, according to Howladar. The economy of Dubai may expand 4.7 percent this year, according to government forecasts.
The emirate’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, set a three-year timetable in October to become the capital of the Islamic economy, seeking to overtake hubs such as Malaysia. Dubai Islamic Bank PJSC, the world’s oldest Shariah-compliant lender, is rated Baa1 at Moody’s.
“Dubai is not the competition,” Kanji said. “Sharjah will benefit from that Islamic drive. It’s riding the wave of Dubai in an upturn.”