Sukuk stays calm amid storm in convention banking

Global financial markets are in turmoil but in the calm world of Islamic finance no one looks like jumping out of the window any time soon.

As conventional credit markets seize up, forcing the biggest banks to write off billions of dollars and panicking stock markets, Islamic lenders and underwriters continue to do business.

New issues of Islamic bonds, or sukuk, have slowed down but growth remains close to vertical: in the third quarter, $37.3 billion (Dh136.8bn) in sukuk were issued, double the amount issued a year earlier, according to the Islamic Finance Information Service.

In the budding Islamic financial capitals of Dubai, Bahrain and Kuala Lumpur, bankers still have a spring in their step.

“It is a safe haven for investors,” Salman Younis, who heads the Asian operations for Kuwait Finance House, said when asked about the conspicuous calm in Islamic credit markets.

“We are investing in real assets, we are not investing in paper assets,” he told Reuters in Malaysia after signing a deal to finance a luxury condominium project in the country.

Islamic law forbids payment of interest and requires transactions to involve a specific real asset, such as a property or a commodity.

Sukuk-holders, unlike conventional bond-holders, are often technically owners of an asset, not lenders.

“When you securitise a trillion dollars worth of sub-prime mortgages, you don’t know which city, or which particular district, you are [invested] in,” Younis said.

“But here,” the ex-Citigroup executive added, referring to his condominium deal, “you can touch and feel the asset”. Even so, there are doubts that the sukuk market can long remain an oasis from the turmoil in conventional credit.

One senior Islamic banker even wonders if the exuberance surrounding Islamic finance is becoming irrational. “I think there’s a peculiar situation where there is too much liquidity, arising from petro-dollars,” Badlisyah Abdul Ghani, head of Islamic banking for Malaysia’s CIMB bank, said.

“As far as the market is concerned, the impact of sub-prime is the same between Islamic and conventional. It’s just that the behaviour of market participants is somewhat irrational, given the fact there is this critical need to have Islamic assets.”

Badlisyah feels the storm in the markets will pass before it has time to shake the sukuk market.

Local currencies preferred

The sagging US dollar is giving issuers of sukuk pause for thought. In the Gulf, companies issue sukuk in dollars as a hedge against their dollar-based assets, but investors now want local currencies instead. But sukuk have three overwhelming advantages over conventional paper: religious belief, a tidal wave of oil money and a continuing shortage of high-quality sukuk.

There is an estimated $1.3 trillion (Dh4.7trn) looking for Islamic assets. But only $41.9 billion (Dh153.7bn) in sukuk have been issued worldwide so far. (REUTERS)