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Tue 12 Oct 2010 10:32 AM

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Shariah money markets expand with global bills

The first global Shariah-compliant money-market securities may be sold early next year

Shariah money markets expand with global bills
MONEY MARKETS: IFSB is stepping up its efforts to bolster money markets after Lehman Brothers Holdings Inc. went bankrupt in September 2008. (Getty Images)

The first global Shariah-compliant
money-market securities may be sold early next year, providing Islamic banks
with more opportunities to invest reserves and boost profits.

The bills to be issued by Kuala
Lumpur-based International Islamic Liquidity Management Corp. will help improve
investment across borders, according to an Oct. 7 statement from the Islamic
Financial Services Board, a standard-setting body. The new organization will
start selling the notes on a regular basis from “early next year,” Zeti Akhtar
Aziz, Malaysia’s central bank governor, said in an interview in Washington on
Oct. 10.

IFSB is stepping up its efforts to
bolster money markets after Lehman Brothers Holdings Inc. went bankrupt in
September 2008, causing a global credit crunch. Dubai World roiled markets last
November seeking to delay payments on $24.9 billion of debt. The
Shariah-compliant products will fill a hole in the $1 trillion industry,
Shehzad Janab, head of asset management at Daman Investments PSC, said in an
interview yesterday.

“It’s one big missing piece of the
pie,” said Janab at Dubai-based Daman, which has over 5 billion dirhams ($1.4
billion) of securities under management. “If we can start getting instruments
which are short dated in maturity, then definitely it will fulfill a big need.”

The new securities will enable
lenders and investors to match the maturity of assets and liabilities and
deploy idle funds, according to Riyadh-based Saudi Investment Bank and Albaraka
Banking Group based in Manama, Bahrain.

A dearth of money-market instruments
has forced Islamic lenders in Indonesia to keep 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 IFSB. In Pakistan, the figure was 3.8
percent against 0.3 percent. In Bangladesh, the ratio was 57.3 percent versus
24 percent. Such deposits earn little or no interest.

Siham Ismail, a spokeswoman for the
IFSB in Kuala Lumpur, declined to comment on the agency’s launch when contacted
by telephone yesterday and said no new data was available for the money parked
with the monetary authorities. The new entity will be formally established on
Oct. 25 in Kuala Lumpur, according to the statement from the IFSB, which
comprises regulatory and supervisory agencies in about 40 countries.

“It’s a breakthrough,” said Zeti at
Bank Negara Malaysia, who is an IFSB council member. “They are short term, and
they will be, we expect, highly rated instruments and therefore, there would be
strong demand for them. This would enhance the competitiveness of Islamic
finance,” she said.

Global issuance of sukuk, which pay
asset returns to comply with the religion’s ban on interest, fell 16 percent to
$11.8 billion so far this year from the same period in 2009, data compiled by
Bloomberg show.

Sukuk returned 12.7 percent this
year, according to the HSBC/NASDAQ Dubai US Dollar Index, while bonds in
developing markets gained 15.7 percent, JPMorgan Chase & Co.’s EMBI Global
Diversified Index shows.

The difference between the average
yield for global sukuk and the London interbank offered rate narrowed nine
basis points yesterday to 344, according to the HSBC/NASDAQ Dubai US Dollar
Sukuk Index. The spread shrank 123 basis points this year.

The yield on Malaysia’s 3.928
percent dollar-denominated note was little changed yesterday at 2.45 percent
after reaching 2.44 percent on Oct. 8, the lowest level since the debt was sold
in June. The spread with the Dubai Department of Finance’s 6.396 percent sukuk
due November 2014 has narrowed 18 basis points to 353 this month, Bloomberg
data show.

The Islamic finance industry has
been growing 20 percent annually since 2000, bringing it into direct
competition with non-Shariah-compliant global banking, without offering a
comparable level of liquidity and returns, according to an IFSB report issued
in April. It estimated assets will reach $1.6 trillion by 2012 compared with
$660 billion in 2007. Revenues may rise to $120 billion from $53 billion, it

“There’s a lack of creation in
Islamic money-market instruments and the market needs a lot of them,” said
Khalid Abu Khadra, assistant treasury manager at Saudi Investment Bank.
“There’s also a problem with the mismatch of maturity, so if this could work in
harmony across all jurisdictions, then we have one less barrier to growth.”

Malaysia, the world’s biggest market
for Islamic bonds, Bahrain and Indonesia sell bills to help soak up cash in the
financial system and set benchmarks for short-term bond sales.

Pakistan plans to sell sukuk
maturing in a year or less in the domestic market as it seeks to double Shariah
banking and attract investors from the Persian Gulf, spokesman Syed Wasimuddin
said in an e-mail in July. The United Arab Emirates is looking at issuing
short-term bills that comply with religious principles once regulations are
passed, central bank Governor Sultan bin Nasser al-Suwaidi said in March.

The U.A.E.’s eight Islamic banks
held $49.8 billion of deposits at the end of 2009, or about 19 percent of the
total, according to the central bank. Malaysia has 21.8 billion ringgit ($7.03
billion) of Shariah-compliant bills outstanding, according to the central
bank’s website.

“If you are going to fund your
long-term investment with short-term liabilities like customer deposits, you
run an asset- liability mismatch,” Malek Temsah, a treasury and investment
manager at Albaraka Banking, said in an interview yesterday. “This, as the
global credit crisis showed, is dangerous. You could end up in a liquidity
freeze.” (Bloomberg)