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Growing Interest in No-Interest Bonds
Querubin J. Minas, Arab News

 

http://www.arabnews.com/?page=6&section=0&article=105891&d=20&m=1&y=2008

 

JEDDAH, 20 January 2008 ” The events of Sept. 11 raised the profile of all things Islamic. And now every major financial institution is quickly forming its own Shariah-compliant department.

Since 2001, the Islamic banking industry has boomed as more of the world's 1.3 billion Muslims seek financial services that comply with Islamic law, which bans interest. Islamic finance, instead, pays a return derived from underlying physical assets.

Seizing the opportunity, some 300 Islamic financial institutions are now spread among 75 countries compared with almost none 30 years ago, Kuwait's Global Investment House (GIH) said recently in a report. And as economic developments go full blast, especially in oil-producing countries, something brought about by the quadrupling of oil prices in the last six years, the demand for cash ” both by the investors and consumers  grows more intense.

Islamic financial services are gaining popularity that even conventional banks and financial institutions patronize. Gulf investors are also attracted by higher returns from Islamic finance over conventional banking, while Western investors are drawn to Islamic investment products as a way to diversify their portfolios, said the GIH report.

One of the much sought-after Shariah-compliant financial instruments is the Islamic bond, or sukuk. In finance, a bond means a debt paper in which the authorized issuer, usually banks or governments, owes holders a debt and are obliged to repay the paper at a later date, termed maturity. Bonds enable the issuer to finance long-term investments with external funds.

Hence, Islamic bonds are those that operate under Islamic rules. Sukuk are attractive, as they bring a new source of funds at a favorable rate, as they adhere to Shariah law.

As there is a great deal of surplus cash in Islamic institutions waiting to be tapped by new financial instruments, sukuk can allow this pot of gold to be unlocked.

Management consultants McKinsey & Co. in December predicted the assets held by Islamic banks would hit $1 trillion by 2010.

According to the latest GIH reports, the United Arab Emirates was the world's top issuer of Islamic bonds during the last seven years, contributing 36.2 percent of global sale value. The world's largest Islamic bond, worth $3.52 billion, was sold by Dubai property developer Nakheel in 2006.

Global sales of sukuk have surged during the past year due to greater demand from Muslims and from Western and Asian investors looking to tap Gulf economies that are booming.

Analysts say that Gulf-issued sukuk overtake their Malaysian counterparts amid a perception that the principles used to structure their products are not as stringent as in the Gulf. Some sukuk structures are popularly accepted in Malaysia but not necessarily in other jurisdictions, they said.

One factor that is limiting sukuk issuance in Malaysia from growing substantially and acquiring a global investor base is the fact that most issues out of Malaysia are denominated in Malaysian ringgit due to tax incentives, they added.

While Malaysia's sukuk market is mainly domestic, foreign investors have bought as much as 80 percent of recent Gulf sales, which are generally denominated in dollars.

Corroborating the GIH report, Moody's Investors Service said Gulf Arab sales of Islamic bonds overtook those in Malaysia for the first time, rising to $13.2 billion so far in 2007.

At the end of August last year, sales by governments and companies in the UAE, Bahrain and four other Gulf countries accounted for 55 percent of the global total for bonds that comply with Islamic law. That compared with $9.7 billion sold in Malaysia, Moody's Middle East and Islamic Finance analyst Faisal Hijazi said earlier.

Malaysia, which along with the Gulf is one of the world's Islamic banking hubs, came second, contributing 32.1 percent of Islamic bonds by value, though Malaysia issued far more individual bonds, it said.

The Middle East, mainly the Gulf, is progressing quickly to become a global leader in the provision of Shariah-compliant sukuk structures and products, Hijazi added.

However, at present there is a catch here blocking the growth of the Islamic financial industry.

The report said the main obstacles to the growth are a lack of awareness among Muslims of the products and services on offer, and a lack of standardization of the laws governing Islamic banks.

Unless there is a general consensus among the major players of Islamic banking on creating a universally accepted set of regulations that are clear to the masses ... the popularity of this concept will become a lingering challenge, said GIH.

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