The Shard of Glass, under construction in London, and Bahrain’s World Trade Centre, the Gulf states’ landmark twin-tower and luxury shopping complex, are two high-profile property developments out of thousands around the world financed by Islamic investors.
But other areas of finance and products are being developed, as the sector starts to revive following the financial crisis and disputes between scholars over what complies with rules that ban paying interest on investments.
Sukuk, or Islamic bonds, have started to regain the momentum they saw before the financial crisis in August 2007. Issuance of sukuk this year has risen to $13.1bn, according to Dealogic, the data provider. Although this is much lower than the record of $27.1bn seen in 2007, it is twice as much as 2006 and shows that investor faith in the product is returning.
Research from Zawya, the data analysts, estimates that global sukuk issuance will surpass the 2007 record, if not this year, then soon, as more countries are considering tapping into this product. Nigeria and Senegal, for example, are planning to issue their first sovereign Islamic bonds next year.
Exceptional deals in the market this year include the debut sukuk issues by Qatar Islamic Bank and Kuveyt Turk, the Turkish bank. This was the first Islamic bond issued in Turkey, which could be a trigger for other deals in a country with a large Muslim population.
Anzal Mohammed, a partner at Allen & Overy, says: “We’ve seen a gradual pick-up in the market for sukuk this year. The year ahead is going to be busier. Not only are there more debut credits [issuers] in the pipeline, but we’re also going to see a wave of refinancing, as the sukuk issued at the height of the market three years ago reach maturity in 2012.”
Sukuk deals typically have a maturity of up to five years. According to Euromoney, there is about $28bn of debt, both conventional and Islamic, in the Gulf that will need refinancing in 2012.
There has also been an increasing use of Islamic derivatives, as lawyers and financial engineers become more inventive in the way they replicate products in the conventional markets. Financial engineers have looked at creating Islamic credit default swaps and developing hedge fund products, although many Islamic investors say these are difficult to produce in an asset class that bans speculation and interest.
Critically, a standardised framework (the ISDA/IIFM Tahawwut Master Agreement) has underpinned the market for Islamic derivatives, although it is still to have a material influence on deal activity. ISDA and IIFM are working on a template for currency swaps, options and profit rate swaps, which are likely to be published next year. Last month, ISDA published template documentation for credit default swaps on sukuk.
There has also been some activity and innovation in structured products, although the market has not bounced back to levels seen before the financial crisis. Investment banks are continuing to offer structured securities programmes, which use underlying Islamic instruments. A problem for structured finance is a lack of Islamic scholars, which has slowed the development of products.
Elsewhere, commodity murabaha, Islamic finance’s equivalent of short-term lending, where a commodity is used to back a deal to avoid the use of interest payments, has also seen healthy flows this year, particularly in London, one of the main centres for deals.
Project finance and trade finance have also seen growth, while takaful, or Islamic insurance, has become more popular in Asia and the Middle East.
A further development is the growth of Islamic exchange-traded funds, an investment fund often traded on a stock exchange that holds assets such as equities or commodities. These have become popular with many investors who want to avoid the higher fees of active fund managers. An exchange-traded fund is a passive product, as it tracks the movement on a stock exchange or the course of the assets in its underlying basket.
Islamic investors also remain faithful to stocks, which must be screened to exclude anything that is linked to the military, the financial sector, entertainment, alcohol or tobacco. Favourite sectors for investors include technology and pharmaceutical stocks. Most analysts say that Islamic investors are unlikely to tire of equities, which – with property – have traditionally been a popular way to invest.
Separately, the retail sector is also seeing growth in the Middle East and Asia, with current accounts, mortgages, car loans and even Islamic credit cards becoming more popular, as people in these countries become wealthier and more sophisticated.
There are even hopes that these products can be developed in North Africa, which is seen by some as the next frontier in the evolution of the market.
Source : http://www.ft.com/cms/s/0/0a7a3a58-064c-11e0-976b-00144feabdc0,s01=1.html#axzz184tvvAbF - Dec 13, 2010
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