Saudi Arabia’s plan to open its $531 billion stock market to foreigners is prompting speculation that Islamic bonds will be next.
The government’s approval of overseas financial institutions to trade equities may herald a similar relaxation of rules in the local-currency primary debt market, according to Mashreq Capital DIFC Ltd. and Rasmala Investment Bank Ltd. The nation’s Capital Market Authority said yesterday that the stock-market change would take place in the first half of next year.
“Capital markets are a package, you can’t have one part without the other,” John Sfakianakis, chief investment strategist at Riyadh-based investment company MASIC, said by phone yesterday. “The fact is that Saudi sukuk eventually should also be open to everyone.”
Opening the local-currency sukuk market would give foreign investors access to companies that sold 42 billion riyals ($11.2 billion) through a dozen sales in the past year. That’s more than three times the amount of dollar Islamic bond sales, which are open to overseas buyers.
In the 12 months through yesterday, only four dollar-denominated sukuk have been sold in Saudi Arabia. Those came from two issuers, Dar Al Arkan Real Estate Development Co. and Saudi Electricity Co., according to data compiled by Bloomberg. Twelve different borrowers, including National Commercial Bank and Almarai Co. (ALMARAI), each issued a riyal-denominated Islamic security in the period.
“It’s a step in the opening up of Saudi capital markets overall, and that benefits sukuk investors because there will be more potential product if we can get access,” Abdul Kadir Hussain, who oversees about $700 million as chief executive officer at Mashreq Capital in Dubai, said in a phone interview yesterday. It will also make it easier for domestic borrowers to issue Islamic bonds, he said.
Access to the kingdom’s debt market may appeal more to investors wanting to broaden their exposure than to those seeking yield, according to Doug Bitcon, a Dubai-based fund manager at Rasmala.
“Lots of Saudi debt prices very tightly,” Bitcon said by phone yesterday. “I’m not sure how attractive that will be to international investors beyond portfolio diversification.”
The average profit rate, equal to a bond’s interest rate, of 41 outstanding sukuk from Saudi Arabia is 3.11 percent, according to data compiled by Bloomberg. That compares with 5.06 percent for 44 Islamic bonds outstanding from the neighboring United Arab Emirates, the data show.
Gross domestic product in Saudi Arabia will probably expand by 4.15 percent in 2014, versus 3.8 percent last year, economist estimates compiled by Bloomberg show.
The world’s biggest exporter of oil and de facto leader of OPEC is removing barriers to one of the most restricted major stock exchanges as the government pursues a $130 billion spending plan to boost non-energy industries. The move may lead to the country’s inclusion in MSCI Inc.’s indexes, which are used to measure performance by money managers with an estimated $9 trillion of assets.
“Opening the debt market would be part of the openness and all inclusiveness that the policy makers want to demonstrate,” Sfakianakis said.
India's central bank is reviewing regulations on Islamic banking in Asia's third-largest economy.
The Reserve Bank of India has set up an internal committee to examine the matter, unnamed sources told Firstbiz.com.
The RBI has reportedly set up a three-member panel comprising senior RBI officials Rajesh Verma, a deputy general manager with the Department of Banking Operations, Archana Mangalagiri, general manager, Non-banking Supervision and Bindu Vasu, joint legal adviser.
Islamic banking is practiced in several countries, including in the UK, which in June issued an Islamic bond that attracted orders in excess of £2bn ($3.4bn, €2.5bn) from global investors.
What is Islamic Banking?
Islamic banking follows the Shariah law. The model differs from conventional banking in that it does not accept deposits, only investments, which essentially make banking a venture capital activity. The model also encourages interest free loans in a bid to boost financial inclusion.
Islamic banking is also based on profit and loss-sharing; the model forbids the payment and receipt of interest and prohibits investment in businesses that are considered sinful – such as adult entertainment or the production of alcohol.
Speaking to IBTimes UK, H Abdur Raqeeb, General Secretary, Indian Centre for Islamic Finance (ICIF) told us how India stands to benefit from the roll out of Islamic banking.
Q: Do you think that India is a key place for growing the Islamic banking market and why?
AR: The misconception among many Indians is that Islamic banking caters to only the Muslim population. The model promotes financial inclusion. India's small farmers and petty traders for instance are still not part of the banking system despite over 40 years of nationalisation of the country's major banks. They cannot go to the capital markets to raise money. Islamic banking can cater to [the millions] outside the commercial banking system.
In addition, Muslims' savings are not being ploughed back into the Indian economy as a large section of the Muslim population here does not bank with commercial lenders.
Q: What needs to be done in terms of rolling out Islamic finance in India?
AR: Political will is necessary. The government has to take a decision on Islamic banking and the RBI has to regulate it. The central bank has to look into it.
We have been pleading with the government and have met Finance Ministry officials in the previous [Congress Party-led] regime.
Moreover, we don't have to use the term 'Islamic banking' in India. We can refer to it as alternate banking, which is what the UK calls it. Or, we could call it participatory banking, which is what they call it in Turkey.
Q: But, if India adopts Islamic finance on a broader scale, will this mean that a lot of the legal framework will have to change?
AR: Not much actually. We in India can borrow and benefit from examples of Islamic banking in the UK or in Singapore.
The question about whether India should allow Islamic banking has been debated for long.
In 2008, India's Planning Commission roped in Raghuram Rajan, the present RBI governor and a former Professor at the University of Chicago, to head its High Level Committee on Financial Sector Reforms (CFSR).
The CFSR, tasked to identify 'real sector reforms', recommended that New Delhi 'permit the delivery of interest free finance on a larger scale, including through the banking system.
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