Category Archives: Islamic products

Abu Dhabi Islamic Bank issues world-first Basel III compliant Sukuk

Abu Dhabi Islamic Bank issues world-first Basel III compliant Sukuk

Source: http://www.ifre.com/adib-pushes-sukuk-boundaries-via-perp/21051902.article

Investor appetite for bank capital issuance from emerging market lenders shows no signs of abating, with Abu Dhabi Islamic Bank printing a blowout deal last week that was the first Basel III-compliant sukuk issue.

The innovative Hybrid Tier 1 non-call six perpetual note offering raised US$1bn at 6.375% on the back of an incredible US$15bn book from 330 orders as private bank accounts, predominantly in Asia as well as in other regions, European fund managers, and even the odd sukuk investor scrambled to get their hands on the paper.

“There was a huge response to the roadshow, which underpins the groundbreaking nature of the transaction,” said James Nelson, director, bond syndicate at Standard Chartered, which co-led the deal with HSBC, Morgan Stanley and NBAD.

Rival bankers were critical of the execution process that saw pricing ratchet down by 62.5bp from initial guidance of the 7% area. “Investors are not happy when the pricing is dragged so tight and the books get so big in the process,” said one official.

While acknowledging that the tightening was aggressive, bankers close to the deal argued that it was in line with the performance of other recent bank capital transactions.

Gazprombank’s US$1bn perpetual non-call 5.5-year note issue started in the mid to high 8% range and was priced at 7.875%, for example, while a US$575m perpetual non-call six issue for Friends Life began in the mid-8% range before also pricing at 7.875%.

“It was key to engage every investor in this price discovery process and test yield sensitivities, given the innovative nature of this trade,” said Souhail Mahjour, an official on the EMEA debt syndicate desk at HSBC.

Part of the challenge for the leads was the wide range of investor views during the roadshow, with one account arguing that the notes should come at low to mid-5% at one extreme, while others sought 8% at the wide end. “You could drive a bus through investors’ views,” said one banker.

One way to calculate fair value is to take ADIB’s outstanding senior 2016 notes, which were trading at a bid yield of 2.80% earlier last week, and work backwards.

Assuming that a new 10-year non-call five Tier 2 issue from the lender would come 80bp back of that for the subordination and then a another 30bp or so for the curve extension, fair value for that bond offering would be in the high 3% area. Adding a further 150bp–220bp for the difference between Tier 2 and old-style Tier 1 for some emerging market banks takes fair value from high 5% to low 6%.

Private anchors

As expected, private banks anchored the trade, taking 60% of the allocation, followed by fund managers at 26% and banks at 11%. By geography, Asia was the biggest recipient with 38%, followed by the Middle East at 32%, Europe at 26% and US offshore at 4%.

The sukuk investor base was a marginal participant in the trade.

“The local investor base – dominated by banks – wasn’t expected to play as big a role as they usually do for a sukuk issue as they have limited scope to buy other banks’ capital instruments,” said Mahjour. “Only the most overcapitalised banks had the power to buy pieces of this trade.”

Key features of the structure include an issuer call option in year six and on every periodic payment date thereafter, coupon resets (without step-ups) every six years and non-cumulative coupon suspension (optional and mandatory), subject to a dividend stopper.

One banker added that the Tier 1 structure was perfectly attuned with Sharia principles, given that the flexibility to cancel coupons and the perpetual maturity provided equity-like features to the instrument. The deal is unrated. ADIB’s senior ratings are A2/A+; Moody’s/Fitch.

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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.”

IFSB issues draft capital guidelines for Islamic banks

IFSB issues draft capital guidelines for Islamic banks 

Source: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=340953

DUBAI: The Islamic Financial Services Board (IFSB) released new draft guidelines on capital adequacy for Islamic banks and the risk management of takaful (Islamic insurance) companies, the industry body said yesterday.

The Kuala Lumpur-based IFSB sets global guidelines for Islamic finance, although national financial regulators have the final say on how they apply these.

The IFSB released its original guidelines on capital adequacy in December 2005, based on Basel II standards which regulators were then applying around the world. Since then, global regulators have agreed on stricter Basel III standards which will be phased in over the next several years.

Sukuk issued against assets owned by an Islamic bank, may be used by that bank as additional capital to meet regulatory minimums, the draft guidelines state.

The minimum maturity of the sukuk should be five years, and it should not have step-up features, such as periodic increases in the rate of return, giving an incentive to the issuer to redeem it. These provisions align the IFSB with Basel III. Any capital raised through sukuk issues cannot be counted as part of the capital buffers mandated by Basel III, since sukuk are not common equity.

Because Islamic finance is more closely linked to real assets than conventional finance, it is less prone to credit bubbles, and Islamic banks do not engage in highly speculative trading, the IFSB said.

But it also noted that Islamic finance was in some ways vulnerable to cyclical swings in economies – for example, many Islamic instruments are based on commodity prices. So it makes sense for Islamic banks to build up countercyclical capital buffers in good times, the IFSB concluded; these buffers are one of the major provisions of Basel III.

The draft guidelines state how capital requirements should apply to banks’ Islamic windows, and assign risk weightings to Islamic transactions such as musharaka and mudaraba.

MasterCard for Muslims points way to Mecca

MasterCard for Muslims points way to Mecca

sign-to-mecca

Source: http://bottomline.nbcnews.com/_news/2012/10/12/14372544-mastercard-for-muslims-points-way-to-mecca?lite

A Gulf state-owned bank has rolled out a new MasterCard that not only complies with Islamic laws banning loans with interest but also includes an embedded compass pointing the way to Mecca.

The new card from Al Hillal bank in United Arab Emirates is the latest in a growing array of banking products aimed at the world’s 1.6 billion Muslims that comply with Shariah, or Islamic law.

“We continue to see a growing demand, especially in the Middle East, for Islamic banking in general, and more specifically in our case, for cards that are Shariah-compliant in accordance with the tenets of the Islamic faith,” MasterCard spokesman James Issokson said.

Shariah forbids “riba” or the charging of interest on loans because it could enable the rich to exploit the poor, encourages risk, and creates social and economic disharmony, according to Abed Awad, an expert on Islamic law who teaches at Rutgers and Pace universities.

Scholars say Muslims can pay interest when there are no other options to get the funds they need. Credit card operators get around the prohibition by charging users fees instead of interest rates.

In addition to the electronic compass that helps users orient themselves toward for prayers five times day, the new MasterCard offers other benefits. Card users are eligible for travel vouchers that can be used to pay for the Haj pilgrimage to Mecca, which Muslims are required to do at least once in their lifetime if they can afford it.

A percentage of the money spent using the card is donated to local charities, said Issokson.

Islamic banking is a huge industry with more than 500 Shariah-compliant funds around the world holding $1.5 trillion in assets, a third of which were launched in the past seven years, according to the Gulf Daily News, a publication based in Bahrain. Some of the products are available in the United States, where there are about 2.5 million Muslims.

Michigan-based University Bank offers Shariah compliant home financing, deposit products and commercial financing through its University Islamic Financial Corp business. Guidance Residential, which is based in Reston, Va., offers residential mortgages in more than a dozen states, according to its website.

Pakistan’s Meezan Bank launches ‘Laptop Financing’

Pakistan’s Meezan Bank launches ‘Laptop Financing

 

 

Meezan Bank has launched a new consumer financing product that will allow customers to purchase laptops on easy installments. The new product called Laptop Ease is being offered for repayment periods ranging from 3 months to 24 months. The bank will not charge any profit or return for customers who opt for the 3 month or 6 month installment plan. The product has been launched in collaboration with M/s. New Horizon and is available for only HP laptops. M/s. New Horizon will provide two years warranty with parts along with nationwide after sales services at the customers’ doorsteps.

 “Meezan Laptop Ease” through which customers can purchase Hewlett-Packard (HP) laptops, equipped with the latest features under a Halal financing scheme, is another step towards achieving Meezan Bank’s Vision of making Islamic banking the banking of first choice. Through this Riba-free facility, customers will be able to acquire laptops at easy installments for periods ranging from 3 to 24 months.

Laptop Finance is based on the concept of Musawamah which is a general and regular kind of sale in which price of the commodity to be traded is bargained between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus, it is different from Murabaha in respect of pricing formula. Unlike Murabaha, seller in Musawamah is not obliged to reveal his cost. Both the parties negotiate on the price. All other conditions relevant to Murabaha are valid for Musawamah as well.

An MoU for this arrangement was signed between Meezan Bank and New Horizon at Meezan Bank’s Head Office.  Mr. Mohammad Raza, Head of Consumer Banking of Meezan Bank and Mr. Rahim Eqbal, COO of New Horizon signed the MoU.

 Speaking at the occasion, Mr. Raza said that Meezan Bank has an active focus on developing customer-friendly, Islamic alternatives to conventional banking products, in line with its Mission to offer a one-stop shop for innovative value-added products and services to the customers within the bounds of Shariah.

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/

 

Pakistan Mutual Funds Push for More Sukuk Issues to Invest Cash

Pakistan Mutual Funds Push for More Sukuk Issues to Invest Cash

Fund managers in Pakistan are urging the government to increase offerings of Islamic debt, saying a 13-fold rise in sukuk sales this year isn’t enough for them to invest inflows of cash.

The central bank plans to auction 45 billion rupees ($525 million) of three-year sukuk in the domestic market on March 1 and another 55 billion rupees in the three months ending June 30. The sales will take the total for the fiscal year to 189 billion rupees, compared with 14.4 billion rupees in the previous 12 months.

Pakistan’s Islamic banking assets climbed an average 30 percent annually in the past four years to 411 billion rupees as of June 2010, 6 percent of the financial industry’s total, according to a central bank estimate in October. Pakistan aims to double that share to 12 percent by 2012 and plans to issue two more Shariah banking licenses that will take the total to seven, the monetary authority said in October.

“The government has relied too much on the conventional debt market without realizing how much liquidity is in the Shariah-compliant industry,” Sajjad Anwar, who helps manage the equivalent of $187 million at NBP Fullerton Asset Management Ltd., a unit of the nation’s biggest lender National Bank of Pakistan, said in a Jan. 11 interview from Karachi. “Islamic funds and banks are just waiting.”

Banking Licenses

Pakistan needs to finance a budget deficit that may reach 6 percent of gross domestic product, or 1 trillion rupees this fiscal year, exceeding the government’s target of 4 percent, according to a report from the State Bank of Pakistan on Oct. 25. The shortfall was 6.3 percent last year, according to data on the Finance Ministry’s website.

The yield on the three-year debt will rise to 13.89 percent from 13.39 percent at the prior offering on Dec. 13 as the central bank may increase interest rates to temper inflation, said Karachi-based Abdullah Ahmed, treasurer at Meezan Bank Ltd., the nation’s biggest Shariah-compliant lender.

“In an environment when everyone is expecting a hike in interest rates, the demand for such paper will remain high,” Ahmed said in an interview on Jan. 12. “Islamic banks are desperate to deploy their funds.”

Inflation stayed above 15 percent for a fourth month in December after unprecedented floods in August destroyed roads and damaged crops worth $3.3 billion.

Inflation to Slow

“The inflation rate will start falling from next fiscal year to average 13 percent as the government aims to reduce borrowing and impose additional tax measures,” Mohammed Sohail, chief executive officer at Topline Securities Ltd., said in an interview yesterday from Karachi.

The State Bank of Pakistan increased its discount rate by half a percentage point to 14 percent on Nov. 29, the third policy tightening since July. The central bank has raised borrowing costs from a record low 7.5 percent in 2005. Policy makers will increase the rate by 50 basis points to 14.5 percent at the Jan. 29 meeting, according to Meezan Bank’s Ahmed, who said he will buy sukuk at the next auction.

Pakistan’s central bank uses the yield on its six-month non-Islamic treasury bills as a benchmark for pricing debt. The yield rose to 13.55 percent at a sale on Jan. 12, nine basis points more than the previous offering. The rate was 12.05 percent a year ago, Bloomberg data shows.

Global sales of sukuk, which pay asset returns to comply with the religion’s ban on interest, fell 15 percent to $17.1 billion in 2010, according to data compiled by Bloomberg. Issuance reached a record $31 billion in 2007.

Islamic Debt Returns

Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in developing markets gained 12.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate shrank eight basis points this month to 281, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Average yields dropped 13 basis points to 4.61 percent.

The yield on Malaysia’s 3.928 percent sukuk maturing in June 2015 rose two basis points to 2.8 percent today, according to prices from Royal Bank of Scotland Group. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed one basis point to 330 today, Bloomberg data show.

Government Debt Sale

The government sold 37.2 billion rupees of Islamic securities on Dec. 13 and got orders for 57.7 billion rupees. At the previous sale on Nov. 8, it raised 51.8 billion rupees after receiving offers of 64.7 billion rupees. Pakistan had local- currency debt of 5.35 trillion rupees outstanding, including 94 billion rupees of sukuk as of November 2010, according to the central bank’s website.

Pakistan is attracting investors even as the country battles an eight-year insurgency with militants in its border region with Afghanistan. The U.S., a major financial donor, is pushing President Asif Ali Zardari to intensify that crackdown. A policeman assassinated secular politician Salman Taseer on Jan. 4 for opposing an Islamic blasphemy law.

Albaraka Banking Group BSC, Bahrain’s biggest publicly traded Islamic lender, boosted its branch network to 90 after acquiring Pakistan’s Emirates Global Islamic Bank Ltd. in 2010. Meezan Bank, controlled by Kuwait’s Noor Financial Investment Co., plans to open 225 new outlets in the next four years.

The central bank predicts the economy will expand 2.5 percent this fiscal year, faster than last year’s 1.2 percent. The Karachi Stock Exchange KSE100 share index reached a 2 1/2- year high today. The gauge rallied 28 percent last year after soaring 60 percent in 2009.

“For Islamic banks, sukuk will remain attractive because the sovereign notes offer the least risk and high returns,” Pervez Said, chief executive officer of Dawood Islamic Bank, 35 percent owned by Bahrain’s Unicorn Investment Bank BSC., said in an interview yesterday from Karachi. “Political and security problems have always been associated with Pakistan. The issue is where do we invest?”

Source: http://www.bloomberg.com/news/2011-01-17/pakistan-funds-push-for-sukuk-to-invest-cash-islamic-finance.html

To contact the reporter on this story: Khalid Qayum in Singapore kqayum@bloomberg.net; Haris Anwar in Islamabad at Hanwar2@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.