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Tue 19 Oct 2010 02:46 AM

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Sukuk may entice Canada to issue $2bn in Shariah bonds

Deolitte advising fewer than 10 Canadian companies on possible Islamic debt sales

Sukuk may entice Canada to issue $2bn in Shariah bonds
SHARIAH BONDS: The growing demand for securities that meet Islamic religious principles may lead Canadian govts and companies to issue Shariah bonds (Getty Images)

The growing demand for securities that meet Islamic religious principles may lead Canadian governments and companies to start issuing Shariah bonds.

HSBC Bank Canada may offer $500 million and three government related borrowers from one Canadian province may issue $1.5 billion of sukuk, Omar Kalair, chief executive officer of Toronto based UM Financial, said in an Oct 14 interview. A “handful” of Canadian companies may sell C$1 billion ($980 million) of Islamic debt by 2013, said Daud Vicary Abdullah, global Islamic finance leader at Deloitte Corporate Advisory Services in Kuala Lumpur.

Egypt, Nigeria, the Philippines and Thailand have announced plans to sell their first sukuk in the past three months, partly to tap Arabian Gulf oil wealth. The combined wealth of the Middle East’s more than 400,000 millionaires grew 5.1 percent in 2009 to $1.5 trillion, Cap Gemini and Bank of America Corp.’s Merrill Lynch unit said in June.

“We would definitely be interested in a sukuk out of Canada,” Ramiz Moukarim, head of debt capital markets at Qatar Islamic Bank SAQ, who helps manages more than 1 billion riyals ($275 million), said in an Oct 17 interview from Doha.

He added: “Whether it’s regional or federal, it doesn’t matter because of the nation’s rating. We’d have to look at their approach to the market, their pricing structure and the issuance size.”

UM Financial is working with a bank in the Middle East, HSBC and Canadian provinces to help issue sukuk, Kalair said. He declined to name the Canadian borrowers or the Middle East bank because the negotiations are ongoing. Charles Clarke, a spokesman with HSBC Bank Middle East in Dubai, declined to comment when contacted by telephone yesterday.

“Canada is seeking to tap wealth in the Gulf to help diversify funding,” said Kalair of UM, a Shariah compliant financial institution offering credit and investment services. “The province’s minister of finance received a positive response from investors in the Middle East.”

Global sales of sukuk, which pay asset returns to comply with the religion’s ban on interest, fell 24 percent to $11.8 billion this year from a year earlier, data compiled by Bloomberg show. Nigeria plans to sell its first Islamic debt within a year, central bank Governor Lamido Sanusi said Sept 24.

The difference between the average yield for global sukuk and the London interbank offered rate has narrowed 20 basis points this month, the most since July, to 353, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The spread shrank 114 basis points this year.

The yield on Malaysia’s 3.928 percent note due in June 2015 has dropped 18 basis points to 2.52 percent since Sept 30, prices from Royal Bank of Scotland Group show. Its yield gap with the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 narrowed 19 basis points this month to 354.

Shariah compliant debt returned 12 percent so far this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while bonds in developing markets gained 16 percent, JPMorgan Chase’s EMBI Global Diversified Index shows.

Muslims account for about 2 percent of the 33.5 million people in Canada, which hasn’t issued sovereign Islamic bonds, according to data compiled by Bloomberg.

Canada has top AAA ratings from Standard & Poor’s and Moody’s Investors Service. Canada’s non Islamic five year note maturing December 2015 yielded 1.98 percent when it last traded on Oct 15, according to data compiled by Bloomberg.

Not all investors may buy Islamic bonds offered by Canadian borrowers because non Arabian Gulf sukuk are typically held by banks to maturity, according to Mashreq Capital DIFC.

“Institutions or investors are going to be a bit hesitant because they rely on secondary market liquidity a lot more than Islamic banks” that tend to buy and hold debt, Abdul Kadir Hussain, chief executive officer at Mashreq in Dubai said in an interview Oct 17.

Deloitte is advising fewer than 10 Canadian companies on possible Islamic debt sales, Vicary Abdullah wrote in an emailed response to questions Oct 13. Some local corporates plan to meet investors in the Gulf this month, he said, without providing details.

Canada emerged from recession faster than other Group of Seven nations as consumers, spurred by low interest rates, boosted spending. Bank of Canada said in July it’s relying on consumers to contribute about half of the 2.9 percent economic growth next year, while forecasting investment will add 0.7 percentage point to growth in 2011, up from 0.1 percentage point this year.

Economic growth in the Middle East and North Africa will accelerate to 4.1 percent this year, from 2 percent in 2009, the International Monetary Fund said Oct 6.

“There are very few Aaa sukuk out there,” Khalid Howladar, a Dubai based senior analyst at Moody’s said in a telephone interview in Dubai Oct 17.

He added: “There’s global appetite for high quality paper. Combine that with the sukuk format and Islamic financial institutions would certainly be interested in a Canadian Islamic bond.”