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Thu 16 Oct 2008 12:10 AM

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Saudi Hollandi seeking $400mn in Islamic funds

Move draws admiration but interbank market 'slightly better' option, says analyst.

Saudi Hollandi bank said on Wednesday it would seek shareholder approval to sell 1.5 billion riyals ($400 million) of Islamic bonds, the second Saudi firm to announce bond plans amid a global liquidity crisis.The bank said in a statement on Wednesday it would hold a shareholder meeting to discuss the bond sale proposal on Nov. 11. It did not elaborate.

Hollandi is the second Saudi firm this week to announce plans for a sukuk issue after property developer Dar Al-Arkan, Saudi Arabia's largest property developer by market value.

"I would admire them for going out to the market in current conditions," said one Dubai-based Islamic banker who declined to be identified. "The interbank market is slightly better, but one sunny day is not going to make a summer," he said.

Three-month Saudi interbank lending rate inched higher on Wednesday to about 4.66 percent, still a long way off early June when it was less than 2 percent.

Interbank lending across the Gulf has slowed drastically in recent months as the world's largest oil exporting region begins to feel the pinch from a the global financial turmoil.

Islamic bonds, or sukuk, replace coupons with payouts backed by tangible assets. Islam prohibits the receipt of interest and requires transactions to be linked to assets, thus deterring the kind of complexities prevalent in conventional financing.

Islamic finance is based on the sharia or Islamic law. It requires that gains be derived from ethical and socially responsible investments and frowns on interest-based banking and sectors such as gambling and pornography.

Officials at Saudi Hollandi were not immediately available for comment. (Reuters)

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