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Sukuk market’s recovery not likely until H2 next year; volumes to stay

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Points of Essence:

  • The strong tide against sukuk may not be over yet as it still faces the challenging battle ahead. It is not expected to ride out of the slump in the second half of 2009 as the global credit crisis worsens.
  • CIMB Islamic Bank has re-prioritized its banking business to consumer banking due to the economic crunch and minimize its investment activities to project more growth in the upcoming years.

KUALA LUMPUR: Demand for Islamic bonds, or sukuk, may not recover until the second half of 2009 at the earliest, as the global credit crunch crimps appetite for such financing, the head of the world’s largest sukuk arranger has said.

Badlisyah Abdul Ghani, chief executive of CIMB Islamic, the Islamic arm of Malaysia’s second-largest lender by assets, Bumiputra-Commerce Holdings Bhd, said the volume of new sukuk issuance in 2009 may about the same as the roughly $16bn so far this year.

“This is the best case outlook,” Badlisyah said in an interview with Dow Jones Newswires. Despite “huge interest” by potential issuers, the credit crunch is putting a damper on plans.

The market for Shariah-compliant bonds grew exponentially from 2004, reaching a high of almost $47bn in new issuance in 2007 before falling off sharply this year as demand has dried up.

Many potential issuers have postponed sukuk sales to next year, thinking the market will improve in the second half, Badlisyah said.

“But whether it is better, nobody quite knows. People expect it, they are hoping for it, and to a degree, signs are showing (better conditions) may return… but this is really crystal ball gazing.”

In the interim, Badlisyah said many potential sukuk issuers will probably take syndicated financing. “So there is no pressure for them to refinance in the bond market that quickly … they’ll probably do it 12 months down the road, in 2010, when the market is more stable.”

The change in market conditions has also affected the way CIMB Islamic does business. Badlisyah said the Islamic banking operation could have to rely more on consumer than investment banking for growth in the coming years. In fiscal 2007, Islamic banking contributed 170mn ringgits, or approximately 5% of Bumiputra-Commerce’s pre-tax profit.

He said the transformation of the business in 2005 from one focused on investment banking to one with a more balanced portfolio of consumer, corporate and investment banking “has allowed us to better manage the impact of a slowdown in the capital markets.”

“We are now supported quite significantly by our consumer banking as well as our asset management business.”

Almost half of CIMB Islamic’s profits come from consumer banking and asset management, with the remainder coming from investment banking, Badlisyah said.

He said that over the longer term, consumer and corporate banking will likely account for up to 70% of earnings, overtaking the contribution from investment banking, which will fall to 30%.

The growth potential in Islamic banking and finance has made expanding the division a priority, Badlisyah said. The next step will be to expand CIMB Islamic to the group’s Indonesian operations under the newly merged PT Bank CIMB Niaga, and to the recently approved Thai acquisition, BankThai PCL.

“We are looking at growing our Islamic franchise across those networks,” he said.

Indonesia, the world’s most populous Muslim-majority nation, shows “tremendous potential,” with the Islamic banking penetration rate still very low. Indonesia’s Islamic banking assets as a proportion of total banking assets is about 2%, compared with 18% in Malaysia, he said. He said that if Islamic banking gains another 3% to 5% of Indonesia’s total banking assets of about $250bn in the next five years, “that is ample business growth for us.”

Thailand, with about 10mn Muslims, also has a “latent market” for Shariah-compliant products, he said.
There is also room for growth even in Malaysia, where the market for Islamic financial products is “more mature,” Badlisyah said. Eventually, more than half of Malaysia’s total banking assets could be Shariah-compliant, he said. – Dow Jones Newswires


Written by Suapi Shaffaii

November 22, 2008 at 9:01 pm

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