The Palestinian central bank is attracting local banks to its first sale of Islamic bills, part of a plan to jumpstart the Shariah-compliant finance industry.
Palestine Islamic Bank, the largest Shariah-compliant bank in the territories with $364 million of assets, will submit a bid for as much as $10 million, and Arab Islamic Bank said it probably will participate. The Palestine Monetary Authority is seeking to sell as much as $50 million of sukuk maturing in about 18 months to local banks next year in what would be the central bank’s first debt offering, Governor Jihad al-Wazir said in an interview in Ramallah on Nov. 25.
“There is strong demand for such an instrument because Palestine is a mainly Muslim area and many individuals hesitate to deal with conventional banking,” Mahmoud Al-Ram’ah, general manager of Palestine Islamic Bank, said in a telephone interview from Ramallah on Dec. 2. “Our liquidity is high. We have been pushing to invest in a government sukuk.”
Palestinian Authority Prime Minister Salam Fayyad is seeking to expand Islamic finance to reduce reliance on aid from the U.S., Europe, Saudi Arabia and others as the territory starts building institutions for a future state. These contributions have kept the $7 billion Palestinian economy afloat since the Oslo peace accords introduced limited self-rule to the West Bank and Gaza Strip in 1993.
The plan is to use as much as $20 million from the sale for the construction of a new headquarters, al-Wazir said.
Dependence on Aid
The economies of the West Bank and Gaza are heading for 8 percent growth this year, Oussama Kanaan, the head of the International Monetary Fund’s mission to the area, said on Sept. 14. That’s up from 7.2 percent in the West Bank in 2009 and 5.4 percent in Gaza, he said. While some of the growth in the territories, which have a population of 4.1 million, stems from improved investor confidence and the partial easing of restrictions by Israel, the main driver remains foreign donations, the World Bank said in a report to donor countries on Sept. 16.
The Palestinian Authority received $525 million of international aid to support its budget in the first half of 2010, following $1.4 billion last year and $1.8 billion in 2008, according to World Bank estimates.
The U.S. has been trying to coax Israel and the Palestinian Authority back to peace talks that stalled in September when a 10-month partial Israeli freeze on West Bank settlement building expired. Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas agreed in early September to try to reach an agreement on the framework for a comprehensive peace accord within a year.
The economy has the potential for annual growth of at least 10 percent for several years, provided Israel eases access restrictions, Palestinian Authority National Economy Minister Hasan Abu-Libdeh said in an Oct. 27 interview on Bloomberg Television in Marrakesh, Morocco.
“We are restructuring our economy,” al-Wazir said. “We are creating the instruments that will allow us to develop monetary policy, to build a yield curve and to stabilize the banking sector.”
Global sales of sukuk, which pay returns based on asset flows to comply with the religion’s ban on interest, fell 31 percent this year to $13.8 billion, Bloomberg data show. Issuance reached a record $31 billion in 2007.
The Islamic notes will probably be dollar-denominated because the territories don’t have a single currency, the monetary authority’s al-Wazir said. The Palestinian pound last circulated as legal tender in 1948, when the U.K. gave up its mandate over the territory.
“There could be a charitable aspect attached to investors’ interest” in a possible issue from the territories but it would be “very limited,” Ahmed Talhaoui, the Abu Dhabi-based head of investment at Royal Capital, which is 44 percent-owned by United Gulf Bank BSC, an investment bank in Bahrain, said in an interview Dec. 6. “The issue will have to be very competitive. A lot of political uncertainty which we are seeing in Palestine should be reflected in spreads.”
The difference between the average yield for emerging- market sukuk and the London interbank offered rate shrank 13 basis points, or 0.13 percentage point, to 334 points yesterday and has narrowed 39 basis points since Sept. 30, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows.
The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 was little changed at 3.05 percent today, according to prices provided by Royal Bank of Scotland Group Plc. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s widened 8 basis points to 364, according to data compiled by Bloomberg.
Shariah-compliant bonds returned 12 percent this year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 14 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The Palestinian Authority owes local banks about $880 million, according to al-Wazir. There are 17 commercial banks in the territories.
The sukuk “will just be a more secure way to make our investments because it will be backed by a performing asset which makes it less risky,” Ibrahim Abu Raidah, manager of the syndicated finance department at Arab Islamic Bank, with about $360 million in assets, said in a telephone interview from Ramallah Dec. 1. “Most of the local banks are already lending to the government.”
The Palestinian territories don’t have a credit rating and any such rating won’t be favorable because of the political risk, al-Wazir said. “The thing that investors should look at is that we were able to make so many achievements in overhauling the economy and financial system despite the political overhang.”
–With assistance from Haris Anwar in Dubai Editors: Shanthy Nambiar, Claudia Maedler
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