Category Archives: Growth

Surge in sukuk demand outpaces the issuance

Surge in sukuk demand outpaces the issuance

Source: http://www.ft.com/intl/cms/s/0/7c6fef80-2293-11e2-8edf-00144feabdc0.html

The numbers look good for the Islamic bond market.

Issuance hit a record high in 2011 and figures for the first half of 2012 show that volumes are already up another third. It is widely expected that issuance of sharia-compliant bonds, or sukuk, will top the $100bn mark before the year is out.

Despite this rise, however, questions remain as to whether the increase in issuance is enough to match investor demand. According to consultancy Ernst & Young, the answer is no.

It says the global supply of sukuk is less than half that of investor demand and the gap may widen further unless more institutions emerge capable of launching new issues.

The consultancy says current outstanding demand for Islamic bonds totals some $300bn, and is expected to grow to $900bn by 2017. “One of the foremost challenges faced by the sukuk market is the supply side constraint, as demand continues to outpace new issuance,” says Ashar Nazim, Islamic finance services leader at Ernst & Young.

He says the exponential rise is primarily a result of double digit growth of the Islamic banking industry, and the increasing appetite for credible, sharia-compliant, liquid securities.

“The demand comes from Islamic financial institutions as well as fund managers and high net worth individuals. Conventional institutions are also showing renewed interest in investing in sukuk as a result of the eurozone debt crisis as these Islamic products are backed by real assets,” says Mr Nazim.

Rafael Dalmau, head of sharia-compliant portfolio management at BNP Paribas Investment Partners, agrees: “The organic growth rate of the market is on a clear upward trend, with no signs of slowing down in the near or medium term.”

He says: “In addition to the natural demand for sukuk, non-Islamic investors have also taken notice of the sound returns that this sector has delivered over the last three to five years. Liquidity used to be a deterrent for non- Islamic investors but, nowadays, liquidity is in line with conventional bonds of similar credit profiles.”

Just last month Qatar Islamic Bank, the Gulf Arab state’s largest sharia-compliant lender, returned to the debt markets with a $750m Islamic bond sale.

Order books for the issue were reportedly in excess of $6bn ahead of launch and much of this is said to have come from cash-rich Islamic investors held back by limited sukuk supply in the market. The hope is more issuers will follow suit.

“Issuance can certainly meet demand if more conventional issuers choose to structure their bonds in a sharia-complaint manner as GE and Nomura have chosen to do in the past,” says Nigel Denison, head of wealth management at Bank of London and The Middle East. “We expect to see more issuers entering the market.”

For those many entities whose remits are suitable for Islamic securitisation, adds Mr Dalmau: “There is a widespread view that costs may be higher and/or structures deemed to be too complex” when launching sharia-compliant paper.

“In order to overcome these perceptions, the investment banking industry, both Islamic and non-Islamic, needs to be more proactive in inviting global multinational companies to diversify their funding sources,” he says, adding that the global sukuk market is already being used by a large global AA-rated multinational company and a couple of large global banks.

“We will see this trend [of new issuers coming to the market] continuing, albeit at a very slow pace. But signs are encouraging and a good example is the Republic of Ireland’s recent efforts in bringing new sukuk issues – both sovereign and quasi-sovereign – to market.”

According to figures for the first six months of 2012, Malaysia issued more than 70 per cent of global sukuk, while Saudi Arabia grabbed second spot with a 13 per cent share of global issuance. The first sukuk were issued by Malaysia in 2000.

Mohammed Dawood managing director, global capital finance, HSBC Amanah, says: “Yes, the sukuk market has really taken off in the past 12 to 18 months, particularly in the [Gulf Co-operation Council] and Malaysia. We’re seeing it becoming a preferred mode of financing.

“But there are still challenges in structuring a sukuk – those being the availability of sharia-compliant assets as well as the legal and taxation frameworks in different jurisdictions. In some cases, the legal and tax frameworks still render sukuk issuance uneconomical.”

Mr Denison adds: “The sector is still considered niche by some issuers, and the apparent additional complexity of meeting sharia standards may be assumed to be costly.

“Until awareness spreads of the standard structures used in sukuk, traditionally conventional investors and issuers may continue to shy away.”

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Shariah financings in Indonesia up by 40%

Shariah financings in Indonesia up by 40%

Record car sales in Indonesia helped fuel 50 percent growth in Shariah-compliant banking assets last year and Islamic lenders are setting up booths at automobile shows to further develop the market.

Bank Muamalat Indonesia, the country’s oldest Shariah-compliant lender, said consumer loans jumped 40 percent in 2010 after taking part in exhibitions last year.

BCA Syariah, the Islamic unit of Indonesia’s biggest financial services company by market value, is offering a rate of 11 percent on a five-year car loan. Bank Syariah Mandiri is also attending the shows.

Tapping Indonesia’s burgeoning consumer loan demand will help the country’s Islamic finance industry catch up to neighboring Malaysia, the world’s largest sukuk issuer. Shariah banking assets in Indonesia make up 3.2 percent of the total, compared with about 20 percent in Malaysia.

“The retail market is where banks are focusing as the margins are good and it is profitable,” Adrian Gunadi, the head of retail banking at Bank Muamalat in Jakarta, said on Saturday.

“The sukuk market will take time to pick up because of regulatory challenges.”

Islamic banking assets in Indonesia, Southeast Asia’s biggest economy, grew to Rp 100.2 trillion ($11 billion) as of Nov. 30 from Rp 67 trillion at the end of 2009, Mulya Siregar, the head of Shariah banking at Bank Indonesia, said on Thursday.

The central bank aims to increase the amount to Rp 130 trillion this year, he said.

Car Sales Jump

Consumer financing made up 32.4 percent of the total of Rp 65.9 trillion of Shariah-compliant loans disbursed in the first 11 months of last year, according to central bank data.

Automotive sales surged 57 percent last year and Indonesia may overtake Thailand as Southeast Asia’s biggest car market by 2014, said Jody Jodjana, chief executive officer at Toyota distributor Auto 2000, Indonesia’s largest car dealer.

Indonesia passed a law in July 2008 to allow financial institutions to offer services that comply with Shariah principles, 25 years after Malaysia. Indonesia now has 11 Islamic banks.

Sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, rose 56 percent in Indonesia to Rp 26.2 trillion in 2010, according to Bloomberg.

Sale Next Month

Indonesia will sell three-year Islamic bonds to individual investors next month, Rahmat Waluyanto, head of debt management at the Finance ministry, said.

The government failed to raise the targeted amount in 12 consecutive local-currency sukuk auctions in 2010 as investors demanded higher yields, saying the debt was riskier because of a lack of secondary-market trading volume.

Global Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 12.2 percent, according to a JPMorgan Chase index.

Growing Economy

Bank Indonesia forecasts the economy will expand as much as 6.5 percent this year from an estimated 6 percent in 2010.

“The Indonesian economy is expanding and gross domestic product per capita has surpassed $3,000,” said Winang Budoyo, an economist at Bank CIMB Niaga. “Demand for non-food items, including cars, will be trending up.”

Shariah-compliant auto financing in Indonesia is offered using a murabahah contract where the bank buys the car from the dealer and sells it at a mark-up, roughly equivalent to current interest rates, to the customer.

Financing Rates

Car financing currently makes up 35 percent of Bank Muamalat’s total consumer loans, up from only 20 percent in 2009, Gunadi said. BCA Syariah, which started operations nine months ago, set up its first motor show booth in November, said Soegiarto Pribadi, head of business.

The company offers five-year car loans, compared with three-year non-Shariah-compliant loans offered by parent, Bank Central Asia.

“Before the road show we had no customers applying for our car loans,” Pribadi said. “Now, 15 percent of BCA Syariah’s consumer loans are for cars.”

Source: http://www.thejakartaglobe.com/business/shariah-loans-up-40-percent-on-surging-car-sales/419014

Dubai Exports Islamic Finance to Europe

Dubai Exports Islamic Finance to Europe

While the conventional financial system is recovering from the fallout of the international financial crisis Islamic finance on the other hand is growing rapidly. Statistics show that global Islamic banking assets have grown approximately 10% per annum from the mid 1990s when they were about US$150 billion.

Today, global Islamic financial assets stand at approximately US800 billion. Industry experts claim that over the next decade the sector may reach US$4 trillion. The growth of Islamic Financial Services has been driven by a growing Islamic population that is enjoying a rapid rise in purchasing power, due to better education and employment opportunities. This has been supported by financial engineering and innovation in the provision of Islamic financial products and services.

No longer is Islamic finance limited to simply the provision of interest free bank accounts but includes a whole spectrum of such as fund of funds, exchange traded funds, hedge funds and real estate funds are gaining wide acceptance. These new products have increased investor awareness of Islamic products. The same is true in the corporate sector whereby Islamic financial innovation has developed products while being shariah compliant meet the needs of the modern business.

The financial innovation has been greatly assisted by financial centers and their regulators who have understood the importance of the sector and its unique structure. In this respect Dubai has become the leader and pioneer with the first recognized Islamic bank being established in the country, the first Islamic stock exchange and not only does it have the greatest number of listed Islamic bonds or sukuks, but also the largest ever sukuk issued.

Moreover, with its business clusters such as the Dubai International Financial Centre (DIFC), this has been a catalyst for the development of diverse range shariah compliant products. The Centre has allowed a number of Shariah compliant firms to develop their products and services. In terms of regulation Dubai through the Dubai Financial Services Authority has developed advanced level of regulation to supervise the firms within the DIFC. Dubai has shown that it can be innovative through the development of new shariah compliant products to meet the needs of an ever increasing and sophisticated investor.

"The expertise of Dubai in the area of Islamic Financial Services is something that we hope to capitalize through our export facilitation services"’ commented Engineer Saed Al Awadi, the CEO of Dubai Exports, an agency within Dubai Department of Economic Development. Al Awadi continued to state that, "we have carried out two very successful trade missions in Islamic financial services which have linked our firms with opportunities in foreign markets".

Dubai Exports held a seminar to highlight Islamic Financial Opportunities in Germany and France which are two of the main economies within the Eurozone. The seminar was aimed at the very senior management within the Islamic financial services sector.

The German market poses great opportunities for Islamic Financing, with a population of 4 million Muslims that holds wealth of up to €25 billion. This potential is further bolstered by a significant rate of saving in Muslim households, which at 18% is nearly double the national average. Almost 83% of the total Muslim population identifies as religious, and consequently serves as an ideal customer base for products offered in Islamic Financing. This is even with a large demographic of young residents, where a 77% majority of the Muslim population falls between the ages 14 to 49 years.

"More than 70% of Muslims in Germany responded in a survey last year that they are interested in Islamic Finance products, and of these nearly 60% of respondents would consider availing of such services if offered by an existing German bank," stated Dr Baltz, who is a senior lawyer with Amereller legal Consultants and one of the speaker’s at Dubai Exports’ seminar.

Dr Baltz further added that, "A chief advantage for the development of Islamic Financing in Germany is the absence of any restrictive regulations that could hinder the practices and products of Islamic banking. This is partially because the Federal Financial Services Authority (BaFin), Germany’s banking regulator did not recognise Islamic Financing until much recently, and thus there were no specific regulations surrounding Islamic banking products. "

Meanwhile, Dr Goepfrich, CEO of AHK Germany announced that, "Dubai with its expertise in the area of Islamic Financial services is an ideal partner for Germany firms seeking to enter the sector."

Although, foreign expansion is natural for Dubai’s financial institutions they must however be aware of the implications of their domestic regulatory commitments. Judy Waugh from Al Tamimi and Company spoke at the seminar regarding this aspect. Waugh stated that, "sensible foreign expansion implies that firms adhere to both the home regulation as we alls that of their host country."

The door to foreign expansion has been possible as in recent years, a number of countries have taken the initiative of making the necessary changes to their legal and regulatory systems so as to allow Islamic financial institutions to be established and recognized at par with conventional financial firms.

"These changes provide considerable opportunities to our firms and we hope to capitalize on them" commented Al Awadi who also announced that AHK and Dubai Exports will be leading a Trade Mission consisting of financial institutions from Dubai to Germany and France in April of this year.

Source: http://ae.zawya.com/story.cfm/sidZAWYA20110125105229

Islamic finance in the US: Interview with Devon Bank executive

Islamic finance in the US: Interview with Devon Bank executive

Interview with David Loundy, vice-chairman and head of religion- based financing at Devon Bank. Devon is a Jewish community bank in Chicago, offering Islamic finance.

My comments: It is interesting to see David’s answer to the first question on how Devon, a Jewish community bank, got into Islamic finance: due to demand from the community. This shows that while a top-down demand approach is popular, grassroot-level demand that is effectively and appropriately communicated is often equally productive. Western Muslim communities should follow the example of the Chicago Muslim community and press their local banks to start offering Islamic financing options.

QUESTION: How did a Jewish-owned family bank, Devon, in Chicago, get involved in Islamic finance?

Answer: Although many of our shareholders are Jewish, we are a community bank. We were created by a community to serve the needs of that community. That community is in constant flux. Once, it was predominantly Jewish. It is a “new immigrant community”. People move in, get established, bring family from the old country, and then move on.

Our headquarters is supposedly in the most ethnically diverse neighborhood in the Americas. Indian, Pakistani, African, Eastern European, some Arab. This includes a large Muslim population. They asked us for help. We helped. This is part of our mission-serve members of our community in the ways they need to be served.

Our Islamic finance programme derives from a customer who wanted to open a bookstore. They asked if we could help, but without riba. At the time, we said no, and the group found financing from the United Bank of Kuwait (UBK). When UBK was acquired, it sent away all of its US customers. The customer came back and asked for help again. At that point, the head of our International Department convinced management that there was an unmet need.

The bank started looking into options. As word got out, the demand exploded showing there really was a need, and we were in a good position to help. We had done non-interest-based financing before for the observant Jews, but the strong Muslim demand for such products surprised us.

Q: What have been the challenges internally, community and with the regulators?

A: Internally, our biggest challenge has been to line up needed liquidity. We turn away a million dollars of businesses a day. Some of this we are looking to manage with two prospective sukuk issuances. We would like to put in place a larger permanent solution, but it requires raising quite a bit of funding in a bad market. Our second internal challenge is resource allocation. All bank functions must run well, conventional and Islamic.

We are striving to triple our mortgage volume (conventional and Islamic) in the next 18 months, but that requires an investment in staff, technology, and processes to handle higher volume.

The community is not homogenous. 2010 was the bank’s 65th anniversary. We are generally known and respected in the community. People with prejudices do not respect that we are trying to serve the WHOLE community. I laugh at those that think that any entity providing Islamic finance has to, by definition, be donating to terrorist groups. A local synagogue soup kitchen or the Salvation Army are acceptable recipients for any donations.

The worst prejudice comes from competitors who publicly inquire as to how a non-Muslim institution can be an acceptable source of Islamic products. Answer: Because our products are better. Some in the community see our Islamic finance programme as a step towards peace and understanding. Our Muslim customers are just grateful that someone cares about their needs and is accommodating them.

Regulators are also not a homogeneous group. Banking regulators are largely supportive-they see us as “banking the unbanked” – a good thing. After 65 years in business, our regulators know us. They know we are experienced and careful, bankers. However, I often say that “Islamic finance is easy, dealing with the secretaries of state is the bane of my existence”. The amount of detail that goes into fitting the square peg of Islamic finance into the round hole of a conventional regulatory system, which can vary in each of several thousand counties, can be extreme.

Q:. The sub-prime induced credit crisis devastated the mortgage market, how were the Islamic mortgages impacted in Devon’s portfolio?

Devon Bank didn’t do sub-prime mortgages. Our Islamic portfolio has been performing VERY well compared to larger averages and even our conventional portfolio. In our 7.5 years of providing Islamic product, our write-offs have amounted to less than 90 basis points on originations-mostly due to a fraud and not credit loss. We have been careful in our underwriting, but if a customer losses a job, we both have a problem. An Islamic product has restrictions on what workout options are available, but we have been able to successfully arrange several restructurings.

The sub-prime mess disrupted entire markets. It negatively affected property valuations, and thus reserve requirements. It has scared investors, even in the face of great opportunities. A number of vendors are just plain gone. Things are starting to normalise a bit now, but the reverberations from the meltdown will take years to work out of the system.

Q. What is the profile of your typical Islamic mortgage customer, both residential and commercial?

It is fairly broad across the income spectrum. Usually first- or second-generation immigrants. Initially predominantly Indo-Pak, but now covering a much wider geographic origin. Because of our compliance level, we tend towards the more conservative end of the religious spectrum, but we get a broad range here too. We have forced industry pricing down so customers don’t feel punished for their religious observance. Our customers tend to have family networks helping with the purchase. Credit scores are a bit higher, but are often “shallow”.

Down payments are often either particularly high or low-depending on whether customers were saving to buy with cash or assuming they never would be able to buy at all.

On the commercial side, because we are a small bank, our size and location constraints produce some customer selection. They tend to be small business operators and investors; frequent masjid financing inquiries; an occasional inquiry from a Gulf investment bank.

Q: Has the time arrived for a licensed deposit-taking Islamic bank in the US? If not, what are the challenges?

We are between windows of opportunity. Devon Bank made two attempts to buy a bank to convert to Islamic. One was geographically located in a community where it would have also reached a sect of Christians that follow their religion’s prohibitions on interest as well as accommodating Jewish and Muslim prohibitions. US$6-US$9 million (US$1 = RM3.06) would have bought either institution. We could have cleansed the balance sheet and had the bank operating as a “proof of concept” pending further regulatory discussions. Our regulators were willing to see us try and make it happen in the beginning. We did not, however, have investor support.

A new charter is practically impossible to create, and largely un-economic to buy. When the right opportunity comes along, you have days in which to strike and consummate a deal. It takes a special investor who can work that fast on something novel. Now, the regulators are too busy with failing and flailing banks to put the resources into figuring out how to handle an Islamic bank. They know it WILL happen, but they don’t even know what questions to ask. It will happen, but it will be easier in a few years than it will be today.

The more interesting question is about customer demand. A subset of people will only deal with an “Islamic” bank, either out of prejudice or out of concerns over the “purity” of money coming from a conventional bank.

While we do not respect the first view, the second is one of religious conviction that we must acknowledge. There are solutions to this concern besides the creation of an Islamic bank. An end-to-end syariah-compliant bank would need to start small and demonstrate market demand. I believe there is sufficient demand for such an institution, but most plans are from people who don’t understand the US banking market and how it is regulated.

Q: What kind of interest and inquiries have you received from a Gulf or Malaysia-based institution in Devon Bank and its Islamic portfolio?

All of our businesses and funding so far have been from “onshore” sources. To date, we have not had good contacts in Malaysia. They just don’t know us-it has simply been a mismatch of networks. We have had more visits and potential businesses from Indonesians. We have had a number of contacts from Gulf entities, and I have taken several trips to the UAE, but they have been frustrating.

To some, we are a novelty (Oh look! An American doing Islamic finance! Isn’t that cute!). Others see our potential, but we have been the wrong thing at the wrong time. It is a frustration when you schedule a due diligence trip only to have the next eruption in the financial meltdown scare investors and kill discussions; or you read in the news about your potential partner defaulting on a few billion dollars worth of its debt during your discussions. Others are so fixated on winning the biggest prize that they don’t look at the merits of the race – for example, they are more interested in buying a trophy property rather than smaller more profitable ones.

The right people with the right vision WILL line up with the right time. We believe we have a compelling story and Grand Plans capable of execution – just bad timing. When those in the Gulf and in Malaysia are ready for us, we are ready for them. Our performance speaks louder than our “wasta”. In the mean time, we are not waiting – we have added capital to the bank and are adding more. We expect our business will continue growing.

Q: If you had to start all over for Islamic mortgages, what would you do differently?

I would have been more aggressive about developing infrastructure faster – vendors, staff, technology, business partners, etc. We started our programme slowly to make sure everything worked as it should and that our regulators didn’t see problems we were missing. However, it meant that resources weren’t lined up when needed.

The global credit crisis put an awful lot of plans on hold for a lot of people, and it prevented us from moving more quickly to the next stage. If we had shifted our entire timeline nine months earlier, we could have been functionally several years ahead of where we are now.

Q: What could the state of Islamic finance in the US be in 2020?

There will be an Islamic bank. A major US provider would have been long gone (five minor players pulled out of the market in the last two years). There will be a larger menu of investment options that many will not even know are syariah-compliant.

There will be “crossover” products that are syariah-based and valued for their performance characteristics, not because they fit a moral code, though they will not be widely used.

Many Islamic finance projects will continue to be done quietly in the background. The scope of product offerings will increase as providers stop trying to fit square pegs into round holes as much and develop legitimate de novo alternatives.

The Bigot Brigade will still be warning that Islamic finance is the road to Armageddon – without doing any more fact-checking than they have done today. The market will go from under-served to adequately served, though “adequately served” will not mean (fortunately) what people might have wanted it to mean three years ago.

Source: http://www.btimes.com.my/articles/jewbi/Article/

 

US legal win to boost Islamic finance: Case against insurer AIG’s Islamic investments dismissed

US legal win to boost Islamic finance: Case against insurer AIG’s Islamic investments dismissed

Lawyers said a U.S. court decision to dismiss a case alleging AIG’s <AIG.N> sharia-compliant businesses promoted religious doctrine, will boost confidence in the industry and lift sales of Islamic products in the longer term.

A Michigan district court rejected on Friday a claim filed by Marine veteran Kevin Murray in 2009 that the U.S. government violated the constitution by allowing funds from insurer American International Group’s $40 billion bailout to be used to fund its Islamic insurance businesses.

Lawyers say the case is significant for the industry in the United States, which has struggled with a backlash against Islam, and is looking for support from the courts and government to promote Islamic finance as a legitimate business.

“The decision … debunks the myth that Islamic finance is unacceptable and unlikely to withstand legal challenges to its validity in court,” said Megat Hizaini Hassan, head of Islamic finance at Malaysian law firm Lee Hishammuddin Allen & Gledhill.

“Once the financial services industry in the US realises that there should be no major legal issues, then hopefully this may help to make Islamic finance more acceptable in the mainstream.”

Islamic finance has been plagued by criticism in the U.S. that it is a means of funneling funds to terrorists or a plot by Muslims to spread a system of Islamic principles known as sharia has plagued the industry in the U.S.[ID: nLDE6971BO]

In his opinion, District Judge Lawrence Zatkoff, said the plaintiff did not prove that AIG’s sharia-compliant businesses engaged in religious indoctrination.

The distinction between sharia-compliant business as a financial model and overall Islamic law, is a positive step for Islamic finance growth in the U.S., lawyers said, but is just one battle won as the industry seeks to grow.

“The case helps the industry by putting the fringe element that is fearful of sharia in its place,” said Isam Salah, partner at King & Spalding in New York. “But I expect we’ll see more of these kinds of cases as we see a multi-pronged effort to combat all things Islamic in the U.S.”

An appeal of the ruling has already been filed to the Sixth Circuit Court of Appeals, said David Yerushalmi, Murray’s attorney and general counsel for the Center for Security Policy.

“Sharia compliant finance is a religious endeavour, there is no way you can separate it from political Islam,” Yerushalmi said. “Sharia can’t be cut up and diced, it’s an integral whole.”

Source: http://ph.news.yahoo.com/rtrs/20110118/tbs-lawsuit-islamic-7318940.html

French Banks Plan to Develop Islamic Finance

French banks plan to develop Islamic finance

France plans to develop Islamic finance and attract investment from the Gulf to its economy, State Secretary for Foreign Trade Pierre Lellouche said.

“We’ve had some delay, compared to the British particularly,” Lellouche said in an interview inAbu Dhabi today. “The legal mechanisms are getting in place and French banks are very capable and they are at it.”

The first Islamic bond from France may be sold in early 2011 after the government introduces guidelines for sukuk offerings, Thierry Dissaux, chief executive officer of the French Deposit Guarantee Fund said in an interview Dec. 15.

France is seeking to increase investment in its high-tech industry from Gulf states includingKuwait, Qatar and the United Arab Emirates, and aims to boost exports to the region by coordinating them with small- and medium-sized enterprises, Lellouche said.

“We should better organize the association between the large groups and small and medium enterprises” when seeking contracts, he said. “We are less efficient than the Germans who hunt in groups, and the Italians too; they are more cohesive.”

The total wealth of the Middle East’s more than 400,000 millionaires grew 5.1 percent in 2009 to $1.5 trillion, Cap Gemini SA and Bank of America Corp. Merrill Lynch said in June 2010.

Source: http://www.bloomberg.com/news/2011-01-17/french-banks-plan-to-develop-islamic-finance-lellouche-says.html

To contact the reporter on this story: Maher Chmaytelli in Dubai atMchmaytelli@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Global issuance of Islamic bonds will take another year to reach pre-crisis levels as new markets in Europe and Asia have yet to make up for the slump in the Gulf, said Deloitte’s head of Islamic Finance on Tuesday.

Underwritten issuance of Islamic bonds, or sukuk, reached $14.3 billion last year, according to Thomson Reuters estimates, well below the $20-30 billion in annual issuance before the global financial crisis.

Malaysia, the industry’s biggest market, held up well in 2010 but issuance in the Gulf Arab region has been hurt by some sukuk defaults and investor confidence has yet to return.

“I think it’s going to be another year or so before (sukuk issuance) gets back to pre-crisis levels,” said Daud Vicary Abdullah, head of Islamic finance at advisory firm Deloitte.

He said that new markets will help a come back in sukuk issuance, as governments in Brazil, Australia, Western Europe and Central Asia are considering issuing sukuk to tap the Muslim wealth pool and nurture their own Islamic financial industries.

He said that American re-insurers are considering entering Islamic re-insurance business, or re-takaful, which would also increase demand for Islamic bonds.

The global financial crisis popped a Gulf real estate bubble in 2008, severely hitting regional investors and pushing the region’s business hub Dubai to the brink of default.

Investors are still holding back their funds as the full extent of the damage took long to surface due to a lack of strong and transparent regulations in the region.

“This market is always much more sensitive to economic ups and downs…there is still some ground to make up and people are sort of nervous about what they have seen in Dubai,” said Abdullah.

The Gulf saw a modest revival in sukuk issuances in the last quarter of 2010 but market experts fear it could be a fragile recovery with investors fearful of any more bad news. [ID:nLDE69618P]

Sukuk issuance has also been hurt by a debate about the compliance of some of its structures with Islamic law. Sukuk are structured around underlying assets, from which returns to bondholders are derived.

Estimates of sukuk issuance can vary significantly depending on the methodology applied.

Experts polled by Reuters in October estimated that sukuk issuance will likely be less than $25 billion as Gulf debt restructurings and state deficit constraints dampen borrowing.

Source: http://sg.news.yahoo.com/rtrs/20110111/tbs-sp-islamicfinance-sukuk-7318940.html