Asia Beats Europe as Gulf's Shariah Lenders Seek Growth: Islamic Finance

Al Salam Bank BSC, Bahrain’s fastest-growing lender by revenue in the past year, plans to invest $500 million of Islamic funds in Asia, joining Saudi Arabia’s Al Rajhi Group in tapping the region’s growth.

Al Salam Bank will put funds into real estate, agriculture and food in the next five years, focusing on Malaysia, Indonesia and Singapore, Yousif A. Taqi, chief executive officer at the Manama-based bank, said in an interview on Aug. 5. Al Rajhi is looking to invest $200 million in Asian property, Jonathan King, director at AEP Investment Management Ltd., which is 80 percent owned by the Saudi group, said on Aug. 2 in Singapore.

“Asia is a very fertile land for Islamic banking as this is where the growth is,” said Taqi at Al Salam, adding that capital had increased to $2 billion in 2009 from the bank’s inception three years earlier. “Our existing investment in Asia is $200 million and in Europe it won’t exceed $100 million.”

Banks and financial institutions in the Persian Gulf are turning to Asia to profit from the economic recovery and rising property prices. Dubai real estate has dropped more than 50 percent from a peak in August 2008, according to estimates from Colliers International. Prices in Malaysia rose 3.3 percent in the past year, 25 percent in Singapore and 2.5 percent in Indonesia, according to the Global Property Guide website.

The International Monetary Fund said on July 7 that developing economies in Asia will expand 9.2 percent in 2010, compared with 2.6 percent growth for advanced countries and 4.5 percent for the Middle Eastern economies.

Non-Islamic

Singapore’s gross domestic product may increase 13 percent to 15 percent this year, Prime Minister Lee Hsien Loong said in a televised National Day message on Aug. 8. Indonesia’s economy may expand more than 6 percent, Slamet Sutomo, deputy for national accounts and statistical analysis at the Central Bureau of Statistics, said in Jakarta on Aug. 5. Malaysia’s Prime Minister Najib Razak said on May 19 that the nation’s GDP may rise 6 percent in 2010.

Islamic law bans investment in casinos, gambling, some forms of entertainment and alcohol. It requires funds to be invested in products and businesses that don’t pay interest or are deemed to be halal, or permissible by the religion.

AEP is looking to tap wealth in Singapore, which has a Muslim community that is small relative to its Southeast Asian neighbors, accounting for 15 percent of a resident population of about 3.7 million, according to the central bank. In Malaysia, the proportion is 60 percent, the statistic department’s website shows, and 86 percent in Indonesia, according to U.S. government data.

Loans, Bonds

“We are looking at Islamic capital in non-Islamic markets and across the Asia-Pacific region,” AEP’s King said. “Our investors will come from Singapore, Brunei, the Middle East, Saudi Arabia and Qatar.”

Riyadh-based Al Rajhi Bank, the world’s largest publicly traded Islamic banking group with $46 billion of assets, started providing banking services that comply with religious tenets in Malaysia in 2006.

Shariah-compliant loans slumped to a five-year low in Europe, the Middle East and Africa this year on credit-ratings downgrades and falling property prices.

Islamic syndicated loans declined 56 percent to $2.3 billion, compared with a 9.8 percent increase in total lending to $402 billion, according to data compiled by Bloomberg.

Global issuance of bonds that comply with the religion’s ban on interest has also dropped this year, limiting investments for Shariah-compliant banks. Asian sales are double those of the Middle East so far in 2010 as real-estate borrowers struggled to raise funds.

‘Lot of Liquidity’

Sales of sukuk fell 28 percent to $7.9 billion, according to data compiled by Bloomberg. Asian issuers sold $5.4 billion, compared with $7.7 billion in the same period a year earlier, and sales in the Middle East were $2.5 billion from $3.2 billion.

“There is a lot of liquidity and Islamic commercial banks don’t know where to deploy the cash,” Al Salam’s Taqi said. “We have $400 million ready for investment, but there aren’t enough opportunities. Malaysian sukuk this year was over- subscribed. We will be happy to help any organization sell sukuk.”

Malaysia sold five-year Islamic bonds on May 27, attracting orders for more than five times the $1 billion originally sought from the dollar-denominated notes. It was the nation’s first overseas debt sale in eight years.

Shariah-compliant bonds returned 9.3 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets gained 11.4 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

‘Huge Potential’

The spread between the average yield for emerging-market sukuk and the London interbank offered rate has narrowed 54 basis points, or 0.54 percentage point, to 389 since the end of June, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The difference reached this year’s low of 369 on April 15.

The yield on Malaysia’s 3.928 percent note due June 2015 fell two basis points to 2.86 percent today, the lowest level since the securities were sold in May, according to prices from Royal Bank of Scotland Group Plc.

Asian Finance Bank Bhd., a unit of Qatar Islamic Bank SAQ, the Gulf state’s biggest Shariah-compliant lender, is helping its parent expand overseas, Mohamed Azahari Kamil, chief executive officer at the Kuala-Lumpur-based bank, said in an interview yesterday.

The Middle Eastern lender is looking to acquire an Islamic bank in Indonesia to take advantage of the “huge potential for growth and its large Muslim population,” Azahari said.

Asian Finance plans to focus on financing infrastructure projects in Malaysia, and oil and gas in Malaysia and Indonesia, according to Azahari.

“There’s a lot of potential for business in Asia,” he said. “There’s a lot of diversity in terms of property and manufacturing in Southeast Asia.”

To contact the reporter on this story: Khalid Qayum in Singapore kqayum@bloomberg.net.

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