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Mon 1 Nov 2010 11:53 AM

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Bahrain seeks tools for banks to manage funds

Kingdom plans to issue additional securities to help Sharia-compliant banks invest their money

Bahrain seeks tools for banks to manage funds
ISLAMIC FINANCE: Bahrain is the only GCC member state to issue three- and six-month domestic Islamic bills.

Bahrain, the only country in the Persian Gulf to sell Islamic debt due in six months or less, plans to issue additional securities to help Sharia-compliant banks invest and manage their money.

Regulators from Bahrain to Malaysia are trying to increase the tools available to Islamic banks as a dearth of money-market instruments forces the lenders to keep excess cash with central banks or locked into longer-dated securities.

Bahrain’s product should “like any other conventional money-market instrument, easy and standardized,” central bank Governor Rasheed Al Maraj said in an Oct 27 interview in Marrakesh, Morocco. “This is something that has been in the making for a while, and we are now confident that we have reached a level where we can bring it to the industry.”

Bahrain is the only one of the six Gulf Cooperation Council countries to issue three- and six-month domestic Islamic bills. The International Islamic Liquidity Management Corp., which is being set up by 11 central banks in Kuala Lumpur, will sell its first short-term bills in dollars and the next issue in euros, Malaysian central bank governor Zeti Akhtar Aziz said Oct 28.

The United Arab Emirates is seeking to enable the government to issue bills, central bank governor Sultan bin Nasser Al Suwaidi said in March. Islamic lenders in Indonesia were keeping as much as 20 percent of their excess cash with the central bank, compared with 2.1 percent at non-Islamic banks, according to a 2006 study by the Islamic Financial Services Board, a standard-setting body. In Pakistan, the figure was 3.8 percent against 0.3 percent. Global assets held by Sharia- compliant financial institutions may climb to $1.6 trillion in 2012 from about $1 trillion, the body said in April.

 “These are very timely initiatives” as many banks are “hesitant” to invest in long-term paper, said Abdul Kadir Hussain, who manages $2bn of mainly Persian Gulf assets as chief executive of Mashreq Capital DIFC Ltd in Dubai. “Islamic banks can’t park their liquidity in the overnight market because it’s not Sharia-compliant,” he said in an interview yesterday.

Global sukuk returned 12.1 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Index. Bonds in developing markets gained 16.4 percent, JPMorgan Chase & Co’s EMBI Global Diversified Index. Islamic bonds in the GCC returned 12.5 percent, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed 12 basis points, or 0.12 percentage point, last month to 361 on Oct. 29, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 was unchanged at 2.49 percent last week, data compiled by Bloomberg show. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s widened nine basis points to 394, according to data compiled by Bloomberg.

The International Islamic Financial Market, founded by the central banks of Bahrain, Indonesia and Malaysia, plans to create Sharia-compliant repurchase agreements to help Islamic banks manage funds and boost trading, chief executive Ijlal Ahmed Alvi said in August.

Transactions in Islamic finance are based on the exchange of assets rather than interest to comply with Sharia principles. Global sales of sukuk fell 27 percent to $13.5bn so far this year from $18.5bn, according to data compiled by Bloomberg.

Improving risk appetite in the Gulf after state-owned holding company Dubai World’s agreement with creditors this year to restructure $24.9bn in debt bodes well for sukuk sales in 2011, HSBC Holdings Plc and Moody’s Investors Service said last week.

“Islamic banks don’t have liquid instruments to deploy their short-term” funds, al-Maraj said. “This is one of the handicaps they face. We wanted to have a product that is liquid, Sharia-compliant, marketable and has enough flexibility.”

Bahrain plans to issue global sukuk next year, al-Maraj said. The smallest oil producer among the six GCC states raised $750m by selling five-year Islamic securities in June 2009, according to Bloomberg data. The alliance also includes Saudi Arabia, Kuwait, Qatar, Oman and the United Arab Emirates.

The yield on Bahrain’s 6.247 percent sukuk due June 2014 fell two basis points to 2.51 percent in October, according to Bloomberg prices. The yield reached a record low of 2.408 percent on Oct. 8, as investors bought emerging market debt.

“The idea is to keep issuing sukuk and conventional” debt, al-Maraj said. “Over the last two years, Bahrain managed to borrow at a very competitive price.” (Bloomberg)

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