Plan to selll Islamic securities with maturities of less than 12 months.
The UAE, the second-largest Gulf economy, may follow Malaysia, Bahrain and Indonesia in selling Islamic securities with maturities of less than 12 months as legislators consider establishing a local debt market, according to Royal Capital PJSC.
Islamic bills would give Shariah-compliant banks more investment options, said Ahmed Talhaoui, Abu Dhabi-based head of portfolio management at Royal Capital, which is 44 percent-owned by United Gulf Bank BSC, an investment bank in Bahrain. The nation’s eight Islamic banks held $49.8 billion of deposits at the end of 2009, or about 19 percent of the total, central bank Governor Sultan bin Nasser al-Suwaidi said at an Islamic banking conference in Singapore on June 14.
Banks that adhere to Shariah principles “are facing a maturity mismatch,” Talhaoui said in an interview this week. “They are keeping a lot of deposits but their options are limited. Some banks are playing a dangerous game, which is essentially to match short-term liabilities with investments in sukuk,” or Islamic bonds, which have longer maturities.
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. Lawmakers in the UAE are considering a proposal to establish a government securities market by the end of the year, al- Suwaidi said in March.
“Short-term liquidity management at Islamic banks and other financial institutions,” is a challenge, al-Suwaidi said this month in Singapore. “This is not a straightforward issue and has been under discussion between Islamic banks and the central bank. There is now a reasonable proposal to advance a solution for this issue.”
Transactions in Islamic finance are based on the exchange of assets rather than interest to comply with Shariah principles. Global sales of sukuk fell 23 percent to $6.48 billion so far this year, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year, up from $14.1 billion in 2008.
The average gap between yields on Islamic bonds and the London interbank offered rate widened 2.4 basis points, or 0.024 percentage point, yesterday to 433. The difference has narrowed 37 basis points so far this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
The difference between the average emerging-market yield and Libor narrowed four basis points yesterday to 583, based on the EMBI+ index from JPMorgan Chase & Co. It shrank 52 basis points so far this year, or 15 basis points more than the average spread for sukuk.
The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 fell one basis point today to 3.50 percent, the lowest level since the bonds were sold on May 27, according to prices from Royal Bank of Scotland Group. The difference over similar- maturity US Treasuries has narrowed six basis points to 174 since then.
Malaysia’s central bank sold 500 million ringgit ($155 million) of 91-day Islamic bills at a weekly auction yesterday. The yield on the securities rose four basis points to 2.68 percent from last week. Malaysia began weekly auctions of Islamic central bank bills in 2006.
Bahrain auctions 91-day and 182-day Islamic bills and the country has 96 million dinars ($255 million) of the notes outstanding, according to central bank data.
Pakistan plans to start issuing Islamic Treasury bills and will announce an auction schedule before June 30, Syed Wasimuddin, a central bank spokesman, said in an e-mail yesterday. The nation had 42.2 billion rupees ($494 million) of outstanding domestic sukuk as of April 30, less than 1 percent of its 4.6 trillion rupees of regular debt, according to data from the central bank.
“It’s fundamental to the industry,” said Harris Irfan, head of Islamic products at Barclays Capital in Dubai. “Right now we rely on using the London interbank offered rate as a benchmark and that has its inherent criticisms. But what alternative is there? There is no Islamic Libor.”