| Rising oil prices fuelling the growth of islamic bonds |
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| 4.09.2005 | |
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Increased liquidity from the Middle East thanks to rising oil prices are leading both Western and local Islamic banks to scramble for arranging Islamic bonds, or "sukuks". In accordance with Shariah law - which forbid making money on money - a sukuk is a bond that does not generate interest payments. Using securitisation techniques, the coupon payments of a basic sukuk instead depend on the cash flows generated by underlying assets such as properties, which has traditionally been favoured by Islamic investors, or leased infrastructures. Another type of structured bonds fit for Islamic finance are convertible bonds. Those securities are traditional bonds that are convertible into Shariah-compliant company shares. The International Finance Forum estimates sukuks currently in circulation at around US$30bn following an impressive growth since the end of the 1990s. According to analysts from the Islamic Finance Information Service (IFIS), the Islamic bond market for the first quarter of 2005 was $1.08 bn with 12 issues. Pushed by record-high oil prices, sukuk issuances then underwent a tremendous increase of 474% in the second quarter with 26 new issues, leaving the market at $6.2bn. After only 6 months in 2005, the market is already closing on its 2004 performance, when it totalled $6.7bn. "The sukuk market has seen encouraging growth this year in terms of number as well as total value of transactions. We are seeing a lot more corporates, particularly from the GCC, turning to the Sukuk market for their financing needs. We believe there will be exponential growth in this segment of the market over the net five years (…)", says Iqbal Khan, the CEO of HSBC Amanah, the global Islamic financial services division of HSBC Group. Sophistication As Islamic investors become more sophisticated, Islamic financial institutions – both the Islamic subsidiaries of Western banks attracted by the pent-up demand of this market and local Islamic banks – as well as Shariah scholars are stepping up their research and development effort. The IFIS has also noticed that government and regulators where Islamic banking has taken an important market share are developing regulatory frameworks that address the specific issues of the Islamic financial system. This is the case of Bahrain Monetary Authority, which is seeking to make the Bahrain Stock Exchange the global hub for sukuk trading. In some countries, the market is taking impressive proportions. For instance, about 50% of the outstanding corporate bond market in Malaysia is in Islamic bonds. Another sign of the growing importance of the Islamic bond market is that unexpected Islamic issuers are now entering the market. Those issuers include the Asian Development Bank, Nestlé, as well the Federal state of Saxony-Anhalt – the first public European issuers to do so. The German state, which had previously dealt with investors from Saudi Arabia, issued a $121m five year floating-rate note whose cash flow is generated by government properties. Traditional issuers of sukuks in 2005 year have so far included Emirates Airlines, with a $550 million sukuk – the first of its kind to be issued by an airline company - and the Dubai Metals & Commodities Centre, which issued a gold-linked bond allowing investors to receive payment in gold bullions or US dollars according to the IFIS. Demand is also undergoing diversification. Most of the issuances so far this year have been oversubscribed due to a demand that is not anymore limited to Islamic investors: the last sukuk issuance of the Islamic Development Bank had more than half of its buyers from outside the Middle East. J.L. |
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