The Islamic bond market is set to grow sharply in the next few years as more Gulf Arab firms follow the example of Malaysian counterparts and sovereign issuers like Qatar and Bahrain.
Cash-rich investors seeking assets compliant with Islamic laws that bar interest payments, and pressures on Middle East companies to move away from traditional bank financing which is costly, are factors that could promote annual growth of more than 20 percent in Islamic bond issues known as Sukuks, analysts say.
Investors are looking particularly at Saudi Arabia as a potential growth market as the kingdom prepares to activate a long-awaited law to regulate the market, even though the Saudi government has yet to issue its own Islamic bond.
Qatar and Bahrain have launched Sukuks to the tune of $700 million and a little over $1 billion respectively, to raise the world stock of sovereign Islamic bonds to around $2.7 billion.
"The new (Saudi) capital markets law is going to be something like discovering oil in Saudi Arabia, you will see so many companies step forward to list themselves and raise capital," said Dhafer al-Qahtani, investment manager at the Cayman Island listed Al-Tawfeek Co for Investment Funds.
"The securities market would have to develop to support Sukuks...the market will ask for it," he added.
Rushdie Siddiqui, global director of Dow Jones Indexes Islamic business development group, said he was using a proposal to create a Sukuk index as a "trial balloon" and the response from conventional and Islamic bankers was favourable so far.
The Islamic corporate bond market is at its infancy in the Middle East compared with Malaysia where the value of outstanding Islamic corporate bonds stood at nearly $16 billion as of March 9.
In the realm of non-Islamic bonds, General Motors broke the record for a corporate bond sale last June when they sold the equivalent of $17.6 billion of bonds. The total global issuance of corporate bonds alone in 2003 was some $160 billion at today's exchange rates.
In the Middle East, National Central Cooling Co (Tabreed) in the United Arab Emirates recently raised $100 million via a corporate Sukuk, the first such issue listed in Luxembourg.
Another Dubai-based firm has said it would launch a $50 million Islamic bond.
The Tabreed Sukuk maturing in 2009 carries a fixed 5.5 percent coupon, a return based on principles approved by Islamic scholars.
Christian Mouchbahani, a director at The National Investor which co-lead managed the Tabreed bond, said the Sukuk was also marketed and explained to conventional bond buyers.
"We tried to take it to people outside the box."
Islamic investors like Yousef al-Ghusain, asset manager at the Kuwait Finance House, said he was happy to buy the Tabreed issue, relying on the company's reputation even though it was unrated - as with most Gulf Arab firms.
Tawfeek's Qahtani says the lack of ratings should not be a drawback, with the better known Gulf family companies and "big names" marketing their paper easily to regional investors.
Ratings would be needed by lesser-known firms, or if Gulf Arab firms wanted to sell the papers internationally.
Mouchbahani believes the Middle East - where personal wealth is estimated at $1.1 trillion - could also be a place for rated global companies willing to issue Islamic bonds.
Rodney Wilson, economics professor at the University of Durham in Britain and recognised Islamic finance scholar, said the best estimate of the size of the Islamic banking market was $270 billion and growing at an average 15 percent annual rate.
"The Sukuk market could grow much more rapidly than the 15 percent overall growth of industry," Wilson told Reuters.
"You could see important Sukuks start to take off at 100 percent growth, but once the industry gets established, I think it is possible to get 20 percent growth plus."
Besides the need to raise money and tap pools of investment available to Islamic institutions and investors, a move by institutions or even highly-indebted sovereigns like Saudi Arabia to convert conventional debt to Islamic paper would also boost the Sukuk market, Wilson said.
Bahrain has said it is converting part of its debts into Islamic bonds and an official told Reuters the Bahrain Monetary Authority (BMA) had converted $300 million worth of conventional bonds into leasing Sukuk over the last year, and planned to replace maturing bonds worth $106 million with Islamic debt. He gave no overall figures for the conversion operation.
Mouchbahani believes the increase in Sukuks will happen slowly given the newness and complexity of the process.
"Hopefully it will be a clean and natural evolution," Mouchbahani said, adding that mistakes in the nascent industry could scare off potential investors.
"A lot of people come and say, I tried to raise money and it didn't work, so why don't I make it Sukuk...but if it is the wrong structure, the wrong company the wrong disclosure and it goes bad, then the whole market gets a negative," he said.
Comments
Comments are closed.