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Islamic bond issues seen dropping further

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Points of Essence:

  • Sukuk issuance is  facing a tough year ahead as the worst is not yet over with the weakening global economy and shattered confidence in the Islamic bonds throughout last year are still looming in the background. The proposed issuances by Japan, Indonesia and Thailand have been put on hold amid these uncertainties thus further painted a bleak future for the Sukuk industry. It’s still uncertain whether the recently launched Singaporean Sukuk will survive the rough tides.  The Financial Times has the report.

By John Burton in Singapore

The issuance of Islamic, or sukuk, bonds is expected to drop for a second consecutive year in 2009 because of the global credit crisis, dashing the hopes of the Islamic finance industry that problems in the western banking systems might benefit its products.

The sukuk market had been affected by the rising cost of borrowing, lack of investor interest in debt instruments and disputes over the compliance of some sukuk bonds with Islamic, or sharia, law, said Moody’s, the ratings agency.

Global sukuk issuance fell 56 per cent to $14.9bn last year from a record $30.8bn in 2007, according to an estimate by Standard & Poor’s, the ratings agency. Malaysia, the world’s biggest sukuk market, was hardest hit with a 59 per cent fall in sukuk issuance, followed by the Gulf states with 55 per cent, said Moody’s.

CIMB, the Malaysian financial group that was the world’s largest underwriter of sukuk bonds last year, forecast sukuk issues may decline to $13bn this year.

Interest in the sukuk market among Middle Eastern investors, the biggest buyers of the bonds, weakened as a result of the sharp fall in oil prices last year, which drained capital from the market.

Indonesia, Japan and Thailand have delayed sukuk issues because of the weak market, although the Singapore government this week proceeded with a $200m issue in an effort to develop its nascent Islamic financial industry. S&P estimated, however, that more than $45bn of sukuk issues were still waiting to be issued.

Higher yields on sukuk bonds, which have climbed to 11.1 percentage points above the benchmark London interbank offered rate, have deterred corporate issuers, which are mainly in Malaysia and the Gulf states.

In addition, the alternative nature of sukuk bonds has deterred western investors during the financial crisis.

But Adulla Hasan Saif, chairman of Singapore’s Islamic Bank of Asia, said the situation also created an opportunity for Islamic institutions to fill the financing gap left by conventional banks. “This creates a need for alternative sources of financing,” he said.

One advantage of Islamic finance is that credit must be backed by physical assets such as property or commodities rather than by financial assets, which reduces the risk of lending.

Sukuk bonds are secured by property and other assets that produce income or profits to pay investors in compliance with sharia law, under which interest is banned.

Moody’s believes that disagreements about the sharia compliance of some sukuk bonds contributed to a fall in issuance last year.

A Bahrain-based body that sets standards for Islamic securities in the Middle East ruled that sukuk issuers must transfer ownership of assets to bondholders rather than share profits or provide income streams. The ruling by the Accounting and Audit­ing Organisation for Islamic Financial Institutions covered about 85 per cent of sukuk bonds.

This has affected the sukuk market in Malaysia, where local Islamic authorities have issued their own rules on sharia compliance on sukuk bonds.

Copyright The Financial Times Limited 2009

Source: http://www.ft.com

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Written by Suapi Shaffaii

January 23, 2009 at 12:34 pm

Posted in Islamic Capital Market

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