Arabian Gulf banks say they are more ready to accept Asian Islamic debt as Shariah-compliant, allowing them to invest in a market that has issued twice as much sukuk as the Middle East this year.
Institutions from the two regions are working to overcome differences over whether southeast Asian notes comply with Islam’s ban on interest, according to Albaraka Banking Group, Bahrain’s biggest publicly traded lender, and Asian Finance Bank, the Malaysian arm of Qatar Islamic Bank. Last year, Saudi Arabia’s Al Rajhi Group helped Cagamas Bhd, Malaysia’s largest mortgage holder, structure a sukuk after Gulf investors balked at debt sold by the same issuer in 2009. (source)
The co-operative approach is a change for investors from the Gulf who are seeking to diversify their investments amid political upheaval in the Middle East. It may also help Malaysia to raise more funds from oil-rich nations to support a 10-year $444bn development plan announced last year.
“Gulf investors aren’t allergic to Asian sukuk anymore,” Malek Khodr Temsah, assistant vice president of treasury and investments at Albaraka, said in an interview from Manama on June 2. “Middle East and Asian financial institutions have a better understanding of each other’s regulatory framework so we are more comfortable with exposure to Asian credits.”
Sales of sukuk from Asia have amounted to $5bn so far this year, more than double the $2.2bn from the Gulf, according to data compiled by Bloomberg.
Malaysia accounts for about 60% of the global Islamic debt market. Issuance of ringgit-denominated Islamic bonds increased 70% to 13.9bn ringgit ($4.6bn) this year, the data show. Malaysia and Indonesia plan to issue sovereign global Islamic bonds in 2011.
Albaraka’s Temsah said he bought Malaysian government sukuk in the fourth quarter of last year to diversify his holdings and take advantage of Southeast Asia’s economic growth. Both Albaraka and QIB, the Gulf nation’s largest Shariah-compliant lender, said this year they plan to acquire Islamic banks in Indonesia.
The “Shariah gap” between Malaysia and the Middle East has started to narrow but there are still significant differences, Rohit Chawdhry, who helps manage $350mn of assets at Bahrain Islamic Bank, the country’s second-largest Islamic lender, said in an interview.
“I’m sure that within the next six to 12 months the issues will be sorted out,” he said. “It’s a general recognition from the Malaysians that they need to make some compromises if they want to attract Gulf investors, but there is also an understanding that regional investors are starting to warm up to the norms in Malaysia.”
Qatar plans to spend $88bn on building roads, hotels and other infrastructure before it hosts the soccer world cup in 2022, QNB assistant general manager Enrico Grino, who oversees project finance, said on May 16.
Malaysian companies seeking to win contracts in Qatar may need to raise funds in the Middle East, Mohamed Azahari Kamil, Kuala Lumpur-based chief executive officer at Asian Finance Bank, said in an interview.
“We’ve been discussing with Malaysian companies how to take advantage of the infrastructure projects in Qatar,” he said on June 4. “There’s abundant liquidity in the Middle East for these companies to tap. Malaysian firms would need to structure the sukuk and loans to meet the Shariah standards required by the scholars in that region.”
The lack of standardisation has hindered growth in the Islamic finance industry, which has around $1tn of assets and is expanding by about 15% a year, according to the Kuala Lumpur-based Islamic Financial Services Board. Scholars at the Auditing and Accounting Organisation of Islamic Financial Institutions, a standard-setting body based in Manama, are making efforts to develop global rules for the industry.
Global sales of sukuk reached $7.7bn so far this year, from $6.2bn in the same period in 2010, according to data compiled by Bloomberg. Offerings reached a record $31bn in 2007.
Shariah-compliant bonds gained 5.4% this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. Debt in developing markets rose 4.4%, JPMorgan Chase & Co’s EMBI Global Diversified Index shows.
Dubai Department of Finance’s 6.396% note due November 2014 widened three basis points to 238, data compiled by Bloomberg show.
“The fundamental Shariah issues aren’t going to change,” Jawad Ali, the Dubai-based global deputy head of the Islamic finance practice at King & Spalding, said in an interview on June 6. Islamic finance fatwas, judgments of scholars based on their interpretation of Shariah, from Malaysia aren’t generally accepted in the Middle East, he said.
“Gulf-based Islamic finance institutions penetrating the Malaysian market will no doubt help bridge the gap between the two Islamic finance centers,” he said. “Whether this understanding is going to lead to more harmonisation will depend on the particular product in question.”
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