Sukuks to enjoy double-digit growth until 2010

February 19 , 2008

Growth in new sukuk, or Islamic bond, issues is expected to remain in double-digits in the next two years despite current constrained liquidity, according to a latest research report.

US-based firm Morgan Stanley said in its industry report on Islamic banks that it expects sukuk, one of the fastest growing financial instruments globally, to be the largest contributor to sustained double-digit growth in Islamic finance.

Although it does not expect the cost of debt to retract significantly from the current levels this year, the global financial services firm said GCC firms cannot afford to postpone their expansion plans for much longer.

The firm expects Gulf banks – particularly the Islamic banks – to emerge as sukuk issuers since growth in customer deposits has been lagging growth in assets.

"Competition for deposits has also intensified in a negative real interest rate environment," the report said.

Morgan Stanley also forecast a "high 'teens CAGR [Compound Annual Growth Rate] in assets in the next few years", which it said should push banks to raise more sizeable medium to long-term funding.

Outstanding issued sukuk are at more than $90 billion (Dh330bn) today – almost 40 per cent of which are international issues – up from less than $1bn in 2002, the report said.

Sukuk worth $40bn were issued in 2007.

The report said that the figures would have crossed $50bn had international liquidity crunch not taken its toll on the industry in the second half of last year.

"A dozen or so deals were postponed to the first half of 2008 as issuers did not accept the wider spreads in the second half of 2007."

Although sukuk has been dominated by Malaysia and the UAE, which issued 55 per cent and 20 per cent of sukuk to date, the trend is increasingly going global to non-Muslim countries.

China, Japan and Thailand plan to issue sovereign sukuk this year, and the United Kingdom's Treasury said on Sunday it will probably support plans to issue sterling Shariah law-compliant bonds, amid continuing debate about the application of Islamic laws in the UK.

According to the Morgan Stanley report, international banks dominate the top rankings of sukuk lead managers, while Gulf banks are more subscribers to sukuk than issuers.

This is because complex sukuk structures involve challenging regulatory and legal procedures, and require extensive and costly advisory services.

"The distribution and transaction costs involved in pioneering such instruments are very high relative to conventional issues," the bank said in the report.

However, it added that Dubai Islamic Bank is ranked in the top 10 lead managers on cumulative sukuk issues since 2002 due to Dubai-based property developer Nakheel's $3.52bn convertible Ijara sukuk – the largest to date – issued in late 2006.

Sharia mortgage market continues to grow

Feb 19 2008

The presence of Sharia-compliant mortgages in UK finance is becoming stronger, according to Waqar Ahmed, sales and marketing officer at Islamic finance provider Alburaq.

According to Ahmed, the 2 million strong presence of Muslims in the UK signals positive growth potential for Islamic retail banking, as well as facilitating the Muslim community with financial services that do not compromise their religious beliefs.

"The UK market continues to evolve and Alburaq has approved over £100 million worth of mortgage business in the last 12 months and is set to see the total market grow to over £1 billion by 2009," he said.

Sharia-compliant mortgages combat the problem of paying interest – the main financial issue conflicting with the Islamic faith – by allowing Muslims to rent back properties bought by mortgage lenders. Typically, a lender will pay for up to 90% of the cost over a period of 25 years. The borrower then rents the property and pays purchase installments over the 25-year period, leaving them as the owner by the end of the term. Economically, the numbers involved are not dissimilar to an interest-only mortgage but the legal structure and contracts are completely different, ensuring that no interest is payable.

SEBI okay may see Islamic funds enter Indian realty

27 Feb, 2008, 0358 hrs IST, TNN

MUMBAI: Booming Islamic finance is likely to acquire assets in India through Islamic Real Estate Investment Trusts. According to a report by Moody's although IREITs are not in existence in India, the draft IREIT guidelines issued by SEBI may pave the way for these funds into the Indian property market.

With high oil prices funnelling billions of dollars to the Middle East, there is an increased demands for Sharia-compliant finance products. According to Moody's, Islamic finance is now estimated to be worth around $700 billion globally while Sukuk, or Islamic bonds, are the fastest-growing segment, with volumes worldwide reaching $97.3 billion till 2007.

Moody's pointed out that the property boom in the Middle East makes IREITs a much-needed product and a useful investment tool, given the existing favourable investment and regulation environment. Moreover, there has been a growing appetite for the real estate asset class among regional institutional investors as the region boasts of world's highest concentration of high net worth individuals and family businesses, which in the GCC alone is estimated at over $1.3 trillion.

In terms of the money raised through Sharia-compliant instruments, Sukuk bonds continue to remain at the centre stage, with more than $19 billion in Sukuk issuances in '07 in the GCC region. The UAE and Saudi Arabia have accounted for more than 87% of the total.

The just-released report on Islamic Finance is authored by Dominique Gribot-Carroz, a Moody's assistant vice-president in Hong Kong, and Faisal Hijazi, an Analyst in London. "From a global point of view, we anticipate that overall Sukuk issuance should continue to increase in '08 by approximately 30-35% per annum," said Gribot-Carroz, adding that new funds would be raised mostly in Gulf Cooperation Council countries, North Africa and Asia-Pacific.

More specifically, Moody's new report pointed out that Asian currency-denominated Sukuk outstanding grew by close to 50% to $65.3 billion in '07 from $43.6 billion in '06, adding that growth has become even more sustained since the summer of 2007.

Malaysia continues to lead the way in terms of offering an attractive environment for Islamic finance and remains the biggest domestic market worldwide. Ringgit-denominated Sukuk issued in '07 amounted to the equivalent of $64.4 billion, or 66% of the global outstanding as on December 31, 2007. The prospects for Islamic finance in Asia-Pacific are generally good, the report said. For example, the Japanese government is planning its first sovereign Islamic Sukuk in 2008, valued at between $300 million and $500 million.

Moreover, in the rest of Asia, economies such as Singapore are contemplating issuing their first Sukuk in 2008, while in Hong Kong the authorities are fully supportive of the development of Islamic finance. At the same time, Moody's expects the small, but growing Sukuk markets in Pakistan and Indonesia to grow significantly over the coming years.

Even though the total assets of Islamic banks in Indonesia may still only represent a minor portion of the country's total banking assets, Moody's believes they are expected to grow significantly, and that this could also encourage Sukuk issuance.