Middle East banks have stayed relatively free from sub-prime write-offs as the credit crunch has rolled out around the world. But the financial crisis is making its presence felt in holding up securitisation in the region with the widening of spreads leading to the postponement of corporate sukuks and mortgage-backed securities.
"It is hard to tell when this log-jam will break," said David Mundell, Citi Vice- President for Agency and Trust, on the sidelines of the "Securitisation World" conference in Dubai this week.
"In one sense it shows just how strong the issuers are in this part of the world. They can just say securitisation has become too expensive and wait for spreads to come down. They are clearly not desperate to obtain money at any price."
However, the slowdown in securitisation – with corporate sukuks or Islamic corporate bonds down by a half in the first quarter – has surprised some commentators. Last year sukuks in the UAE grew by 27 per cent to $11.1 billion (Dh40.7bn), and this year more substantial growth was expected.
This May, Dubai World real estate arm Nakheel plans to raise up to $1bn by selling two-year dirham-denominated benchmark sukuk floating-rate notes. Yet this issue is unlikely to be enough to restore growth in sukuks for 2008 after the shortfall in the first quarter.
Earlier this month an extraordinary general meeting of Tamweel shareholders approved the issuance of its delayed Dh5.1bn sukuk. This amount includes Dh1.1bn of convertible sukuk and Dh4bn of non-convertible sukuk, including Dh1.83bn of non-convertible sukuk.
"We do think many companies will go ahead with sukuk, and are doing their due diligence to be ready when the market clears," said Mundell.
"At the moment there are issues being done, just less than before, and quite a few private ones with even just one other party involved."
It is the same story for mortgage-backed securities, hardly the flavour of the month in financial circles after the crisis over sub-prime mortgage securities, but a very different proposition in the booming real estate markets of the Middle East. Here the pressure will surely build for these issues as end-users require mortgages to buy the large numbers of units coming up for completion. "Shariah compliance is of course the main difference in this market," said Mundell.
"And we have an entirely separate Islamic treasury operation available at Citi for these transactions, something that Islamic scholars are likely to increasingly specify."
However, it seems Islamic bonds and Shariah-compliant mortgage-backed securities are suffering from the same global credit squeeze that is reducing the availability of mortgages in the UK and US at the moment. "The banks are having to put more of their capital aside to cover write-offs and that means they have less to lend with other products, and this is a vicious circle," said Mundell.
"Nobody can say how long this is likely to last or exactly what will be the solution, but it will be worked through over time."
But this is clearly bad news for the investment bankers, lawyers and other professional advisers establishing expensive new operations in places such as Dubai in anticipation of a tidal wave of securitisation. It may still come, if global capital markets settle down, and the US election this autumn is not followed by a further slump in investor confidence.
Or it may be that the Middle East will have to trim back some of its more ambitious development projects for a world in which securitisation is more expensive and therefore less useful than in the recent past. Financial innovations do tend to come and go, while the availability of local liquidity suggests that domestic funding for projects is not about to dry up anytime soon.
Mortgage-backed securities may have had their day. The disconnection between the seller of the loan and the mortgage holder is under attack because it has led to questionable selling practices in the US.