Growth in cross-border sukuk points to greater convergence

MANAMA: Growth in cross-border Islamic bond issues points to greater convergence in an industry that has been divided by tensions between the Middle East and Asia over sukuk rules, opening the door to a much wider pool of investors.

The Islamic finance industry is centred in the Middle East and South-East Asia, but for the most part those regions have developed independently of each other. The past year, however, has seen a number of cross-regional sukuk, mostly by Gulf issuers tapping Malaysia's highly liquid market, the world's biggest for sukuk issuance. Malaysia's sovereign wealth fund has also launched a Chinese yuan sukuk.

“Diversification of funding sources is extremely important, that is a big driver for cross-border sukuk,” said Ahmed Abbas, chief executive of Liquidity Management Centre, a Bahrain-based Islamic investment bank.

National Bank of Abu Dhabi tapped the Malaysian market with a 15-year, RM500mil sukuk in November, its third issue in that currency. Bahraini sovereign wealth fund Mumtalakat issued a five-year, RM300mil sukuk in September.

Sukuk are investment certificates which follow religious guidelines, including a ban on interest and pure monetary speculation, and pay a profit rate based on an underlying asset rather than an interest rate as in the case of conventional bonds.

However, their structures are not standardised, and some Gulf-based syariahscholars have objected to certain structures used in Asia, a region which has proven to be more flexible in its transactions.

“Malaysia and Singapore are far more open and forgiving on syariah aspects,” Abbas said. In the latest cross-border sukuk, Al Bayan Group, a private holding company, became the first issuer from conservative Saudi Arabia to tap the Malaysian market, with a small RM200mil private placement last month.

The development of syariah-compliant hedging tools was making it easier for issuers to invest in foreign currency assets, said Ijlal Ahmed Alvi, chief executive of Bahrain-based International Islamic Financial Market (IIFM), an industry body which develops specifications for Islamic finance contracts.

Last year, IIFM launched a standard contract template for Islamic profit rate swaps, with others in the pipeline including cross-currency swaps and forex forwards, Alvi said.

Sukuk issuance in the Middle East outside of the Gulf is also becoming more attractive, notably Turkey, which was recently elevated to investment grade credit status. 

(The Star Online / 03 June 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com