On the surface, the Islamic finance industry in the Gulf has never been healthier. When Emirates Airline looked at the markets last year to secure financing for yet another tranche of new aircraft, it decided against its traditional option; the European banks.
“We were kind of planning for finance from European banks, but it’s just a bit difficult now,” Emirates president Tim Clark told Reuters in November. “We still have the Islamic finance market to go with, and other funding options are always open for us.”
That kind of approach is telling. As European finance houses wilt under the pressure of the continent’s sovereign debt crisis, fast-growing emerging markets firms are in dire need of liquidity that Islamic banking institutions apparently stand willing and ready to provide.
Another example of the industry’s popularity was investment banking behemoth Goldman Sachs, which announced last October that it was planning to issue as much as $2bn through sukuk. Recent reports indicate that the Goldman sukuk could well be received positively, particularly by Saudi investors.
And in November last year, the launch of the Islamic interbank benchmark rate (IIBR) was another sign of the growing maturity of the local industry. A result of the collaborative approach taken by Islamic finance institutions, industry associations and sharia scholars, the IIBR finally offers a proprietary benchmark that decouples the sector from more conventional pricing.
Global sukuk issuance exceeded $85bn last year, more than 90 percent higher than the previous year, according to Kuwait Finance House Research Limited (KFHR). Its monthly report on the Islamic bond market also said issuance during December fell below the average, hitting $5bn.
The report showed that sovereign issuance was the main catalyst for the sukuk market last year, making up $59bn, while companies' issuance reached $19bn. The 2011 total to $85.1bn represented a year-on-year increase of 90.2 percent compared to 2010, KFHR added. The global sukuk secondary market also reached an all-time high of $178.2bn by the year-end, a 24 percent increase on 2010, the report said.
On a monthly basis, December was a quiet month for issuances outside of Malaysia. However, the primary market still recorded a year-on-year increase of 0.7 percent.
The largest issuance for the month was the third issuance of the year for Pakistan Domestic Sukuk Company Limited which issues on behalf of the government. The $781.1m sukuk Ijarah was structured with a three-year tenure. The vast majority of primary market issuances were domiciled in Malaysia with only one sukuk each arising from Pakistan and Bahrain, the report added.
However, while the sharia-compliant industry is clearly popular, it still faces plenty of criticism. Is the industry simply seeing success by default due to the problems being faced by more traditional sources of finance, or is the trend on merit alone?
While acknowledging the key role that Islamic finance institutions are now playing in terms of delivering liquidity to governments and corporations who need it now more than ever, ratings agency Standard & Poor’s last month warned that systemic opacity still remained a concern.
“Until the Islamic finance industry overcomes its long-term problems, we do not expect sukuk to become a mainstream asset class,” S&P wrote, in a report entitled ‘Global Crisis Boosts Growth In A Lively But Fragmented Sukuk Market’. “The huge variety of sukuk structures continues to deter some investors, in our view.
“The process for resolving defaults and restructuring sukuk also remains uncertain; although an increase in the number of issues that have been listed has increased pricing transparency,” the report added.
The Goldman sukuk has been something of a case in point. While the issuance may well be welcomed by many, experts have already pointed to alleged flaws in its structure, suggesting that due to a series of technicalities, the sukuk may not be sharia-compliant. Needless to say, Goldman has denied the accusation, but the fact remains that different scholars tend to have different assessments about the viability of sukuk.
Another factor that is affecting the industry is the relatively small size of the market. According to Reuters, global Islamic finance assets total nearly $1 trillion, while the market for sukuk is equivalent to roughly one percent of global bond issuance.
That being said, 2012 looks like being a positive year. HSBC is forecasting global issuance of sukuk to total $44bn in 2012, about $14bn of which will emanate from the Middle East. Saudi Arabia gave the market a particular boost earlier this year, when it issued its first government-backed sukuk (see box out) — the proceeds of which will go to develop Jeddah’s airport. The move is being seen as many as a government bid to get behind the Islamic bond market ahead of a slew of expected issuances this year.
Following a major issuance by Saudi International Petrochemical Company (Sipchem) on the Saudi bourse last year, much is expected of the kingdom’s corporates in 2012. Dairy giant Almarai said in November last year that its board had approved a sukuk as the company plans a $1.1bn investment in the poultry sector. And Saudi Aramco-affiliated companies alone need to raise as much as $26bn to fund refinery and petrochemicals projects, according to National Commercial Bank (NCB).
Meanwhile, in the UAE, Emirates NBD is currently considering its maiden sukuk, although Dubai’s biggest bank has also diversified its debt issuances via the lender’s first ‘dim sum’ bond in March. Other corporates that are also believed to be preparing for sukuk issuance are Al Hilal Bank, Tamweel, mall developer Majid Al Futtaim and Emirates Islamic Bank, while Nakheel will be hoping to issue the second tranche of its sukuk in the first half.
“There is little in the current market conditions to suggest that the recent strong momentum in sukuk issuance will slow down in the near term,” a research note from NCB states. “The resilience of the market benefits from a greater uniformity of structures, more robust regulations and practices, as well as product innovation, which has made it possible to issue sukuk in areas such as project finance.”
Omani Islamic lenders mull IPOs
Bank Nizwa, Oman’s first Islamic bank, is likely to launch a OMR60m ($155m) initial public offering (IPO) in April, it was reported on Monday last week.
Sources at the bank told The Times of Oman newspaper the lender will offer 40 percent capital as part of the IPO, which will be managed by Oman Arab Bank and will be unveiled for subscription for one month.
While the Capital Market Authority (CMA) said that the bank had not yet filed any paperwork, there was still time for it to do so in order to launch an IPO in April.
“We haven’t received anything from them. However, if the bank fulfills the requirements, there will not be any problem for them to come out with an IPO next month,” a CMA source was quoted as saying.
Islamic rival Al Izz Bank International is also planning an IPO and the CMA confirmed a draft prospectus had already been received. Al Izz Bank International is planning to float a OMR40m ($103.89m) IPO, which will be managed by BankMuscat.
Yemen plans sukuk issuance
Yemen, the Arab world’s poorest country, plans to issue Islamic bonds soon to finance government projects, Central Bank governor Mohamed Awad Bin Humam said in an interview.
“We have plans with the Finance Ministry to issue Islamic bonds to finance government projects and other sukuk,” Bin Humam said in a telephone interview from Sana’a. “We will try to do so as soon as possible.”
Middle East and Asian governments are turning to local sukuk investors to finance infrastructure projects as European lenders reduce overseas exposure amid the region’s sovereign debt crisis. Global issuance of so-called sukuk, or Islamic bonds, increased to $84.5bn in 2011, a 64.5 percent rise on the previous year, S&P said in a report this month.
Yemen last sold Islamic bonds, which pay profit rates to adhere to the religion’s ban on interest, at the start of last year. Bin Humam declined to elaborate on the size or timing of the next sale.
Bin Humam said Yemen’s foreign reserves now stand at $4.6bn, down from $5.9bn in December. “We used the money to finance petroleum products, government services and to buy wheat, flour and sugar,” he said.
More than half the country’s population of 23 million is under 20 years old and about 40 percent of the people live on the equivalent of less than $2 a day, according to the
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