Islamic banking and capital markets to develop hand in hand
Dubai: As Dubai aspires to become the global hub for Islamic economy, Islamic banking and Islamic capital markets are expected to grow simultaneously, said Adnan Chilwan, CEO of Dubai Islamic Bank.
Clearly Islamic capital markets are relatively new phenomena. Earlier it was much simpler that if someone needed finance they would go to a bank and the bank would leverage its balance sheet and give a loan. Then it started becoming a little more sophisticated by many banks joining in together to do a syndicated deals. Then a stage came where banks started to participate in cross border deals.
Conventional debt markets are relatively old compared to Islamic bond markets. Over the last decade a number of corporates and sovereigns have started raising funds in the bond markets.
“Corporates around the world have realised that bank funding is available, while the availability of funding from capital markets is function of a number of factors such as global macro economic policies, geopolitical situations and such other events and that market may not be available infinitely. So purely from an opportunistic point of view, issuers are using both these markets depending on the prevailing market conditions,”
Over the last few years a number of sovereigns and corporates have started to lean towards Islamic capital markets. This is happening not because it is cheaper or because it is more secure but for the simple reason that it is a larger investor base. When a company decides to tap convectional capital market it automatically excludes a huge group of investors, but on the contrary if they go for a sukuk issue it is bringing into the fold both conventional and Islamic investors — naturally expanding the investor base.
There is a large pool of Islamic liquidity available. A larger liquidity pool generates larger demand which means the potential to drive price increases. The global financial crisis taught everyone a lot of things. People have now started looking at this industry as more resilient because there are clearly defined underling assets. They are carved out to support the bonds and it gives natural stability to this asset class and there is a secondary market which is performing well. With all these factors put together now people are keen to tap the Islamic capital markets.
The industry is relatively nascent and also Islamic capital markets is now gaining popularity it is also a function of how liquid the secondary markets are performing. For an issuer to issue an Islamic paper also depend on demand. Of course, on the supply side, the major concern for corporates is the availability of Sharia compliant assets that can be ring-fenced. Islamic finance is asset backed and asset based.
“Supply is also a function of demand in the market. Nobody wants their issue to be under performing. When the issue is trading at a premium it simply means that there is demand for that paper in the secondary market,” said Chilwan. Additionally, he believes that as the market matures issuers should strive for better corporate governance and better disclosure standards.
The MSCI upgrade of UAE and Qatar markets to emerging markets this year is expected to increase asset allocation foreign institutional investors in these markets. “When a country is in the MSCI basket, the issues from that countries are also looked at very positively. So it is not just the equity markets, but the bond markets also benefit from this positive market vibes. Of course, ratings that comes along with issuances are also helping international investors to gain confidence in companies and markets,” said Chilwan.