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Thu 3 Feb 2011 05:02 PM

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Saudi spending to drive loans from five-year low

Global sales of sukuk fell 15% to $17.1bn last year; issuance this year at $1.6bn

Saudi spending to drive loans from five-year low
SLOWING DOWN Syndicated loan growth in the $1 trillion Islamic finance industry has slowed every year since reaching a record high of $23.7bn in 2007 (ITP Images)

Saudi Arabia will lead a rebound in Islamic loans from a five-year low in 2011 as accelerating economic growth and development spending boost financing needs, Banque Saudi Fransi and Standard Chartered say.

Syndicated loans that comply with Islam’s ban on interest declined 23 percent to $6.2bn in 2010 for Europe, the Middle East and Africa, compared with a 59 percent increase in total lending to $916bn, according to data compiled by Bloomberg. Borrowers from the Persian Gulf dominated the market last year while HSBC Holdings Plc and Standard Chartered were among the top 36 arrangers, the data show.

Demand for Islamic loans and sukuk will climb in Saudi Arabia this year, with borrowers tapping the financial markets to fund expansion, said John Sfakianakis, the Riyadh, Saudi Arabia-based chief economist at Banque Saudi Fransi, in an interview February 1. The Arab world’s largest economy will expand 4.5 percent this year, from an estimated 3.4 percent in 2010, the International Monetary Fund reported on October 6.

“Given that the economy and private sector are returning back to the fold, and growth is picking up, certainly I think appetite for sukuk and loans will be there much more than the last two years when it was very modest,” said Sfakianakis.

Syndicated loan growth in the $1 trillion Islamic finance industry has slowed every year since reaching a record high of $23.7bn in 2007, data compiled by Bloomberg show. Banks lent $8bn in 2009 and $14.8bn in 2008.

Saudi Arabia announced a SAR1.44 trillion ($384bn) five-year development plan in August as the kingdom seeks to bolster growth through spending on human resources, housing, education and transportation. The programme is 67 percent larger than the previous one.

Saudi International Petrochemical Co said December 14 it may sell as much as SAR2bn of Islamic bonds in the first quarter. Saudi Electricity Co, a state-controlled utility, plans to raise funds to help pay for more than SAR30bn in projects this year, CEO Ali Al Barrak said in a December 14 interview.

Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, fell 15 percent to $17.1bn last year and issuance this year is $1.6bn, according to data compiled by Bloomberg. Arabian Gulf offerings declined 32 percent to $4.5bn in 2010, with $500m sold this year.

Malaysia, a regional hub for Islamic finance, will also see increased demand for loan financing as the government embarks on a $444bn development plan over the next five to ten years, according to Standard Chartered, which arranged $914m of Sharia-compliant loans last year. Prime minister Najib Razak has identified 67 billion ringgit ($22bn) of private- sector investment projects as part of its spending initiative.

“Saudi Arabia and Malaysia offer exciting opportunities because they have major spending plans,” Afaq Khan, the Dubai- based CEO at Islamic unit Standard Chartered Saadiq, said in an interview January 31. “Both have deep Islamic markets where customers prefer to go for Islamic products.”

The IMF estimates economies in developing Asia will expand 8.4 percent this year from 9.3 percent in 2010. The Middle East and North Africa will grow 4.6 percent compared with 3.9 percent, the Washington-based fund forecast in its outlook report on January 25. The US will grow 3 percent and the euro- region 1.5 percent.

Sharia-compliant bonds returned 0.1 percent last month and 12.8 percent in 2010, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets lost 0.6 percent in January and gained 12.2 percent last year, according to JPMorgan Chase & Co’s EMBI Global Diversified Index.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate has widened 28 basis points this year to 317 as of yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The yield on Malaysia’s 3.928 percent sukuk maturing in June 2015 was at 2.96 percent today according to prices from Royal Bank of Scotland Group. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s widened two basis points to 355, data compiled by Bloomberg show.

Islamic loans and sukuk sales fell in 2010 after property prices dropped about 50 percent in Dubai from their peak in August 2008, forcing banks to curb lending. Real estate developers were forced to renegotiate loans and bonds, prompting ratings companies to downgrade credit rankings and making borrowing more expensive.

Dubai World, one of three main state-owned holding companies, reached an accord with all its creditors to restructure $24.9bn of debt in October. Nakheel PJSC, a property unit of Dubai World, paid a total of AED3.9bn ($1.06bn) to its trade creditors as it sought to delay payments on at least $10.5bn of loans and bills, according to a company statement January 2.

“With more infrastructure projects, there will be more project financing, which will support syndicated financing,” Rafe Haneef, CEO of HSBC Amanah, the Islamic unit of Europe’s largest bank, said in an interview from Kuala Lumpur January 26. HSBC arranged $1.1bn of Islamic loans last year.