First Philippines Sukuk Planned by Al-Amanah: Islamic Finance

The Philippines’ state-owned Al-Amanah Islamic Bank may sell the nation’s first Shariah-compliant bonds to finance development in Muslim Mindanao, the poorest region and base of Abu Sayyaf separatist militants.

“There’s a lot of money in the market for sukuk that we can tap,” Al-Amanah President Armando Samia, whose bank is the only one in the Philippines with a mandate to sell Islamic notes, said in an interview yesterday. “We’re still in the very exploratory stage. Getting the first one out is difficult.”

A lack of regulations governing issuance makes it difficult to sell securities in the Philippines that comply with the religion’s laws banning payment of interest, according to Samia. The Autonomous Region of Muslim Mindanao had per capita gross domestic product that’s about 23 percent of the national average.

BNP Paribas Investment Partners, which manages the equivalent of $700 billion globally, said investors will be interested in the bonds. Global sales of debt that conform to Shariah law fell 29 percent to $6.65 billion this year, according to data compiled by Bloomberg.

“There is a need for wider geographical diversification in the sukuk market,” Rafael Martinez Dalmau, director of Islamic investment at BNP Paribas Investment, the asset management unit of Paris-based BNP Paribas SA, said yesterday in an interview in Singapore. “An issue coming from a new country is always welcome.”

Spreads Narrow

The state-run Islamic Bank of Thailand plans to sell sukuk to expand financial services for minority Muslims, while Tokyo-based Nomura Holdings Inc. is raising $100 million in its first sale in Malaysia as it develops a Shariah-compliant business. Muslims in the Philippines account for about 10 percent of the country’s 100 million population, Al-Amanah’s Samia said.

The average spread on notes sold from Indonesia to Saudi Arabia narrowed five basis points yesterday to 416 percentage points, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The difference shrank 27 basis points in July, the biggest monthly decline since March, as Dubai World, the state-controlled investment company, moved ahead with a debt restructuring.

The yield on Malaysia’s 3.928 percent Islamic note due June 2015 fell four basis points to 3.08 percent today, according to prices from Royal Bank of Scotland Group Plc. The yield over similar-maturity U.S. Treasury debt narrowed to 141 basis points from 180 basis points when the bonds were sold on May 27.

Sovereign Sukuk

Samia said investment banks have offered services to help sell the securities, declining to give details on the possible size or structure. The Philippines is rated BB- by Standard & Poor’s and Ba3 by Moody’s Investors Service, the ratings companies’ third-lowest non-investment grades.

“Sovereign sukuk are more attractive compared to corporates because these have attractive yields and lower perceived default risk,” Ahmed Talhaoui, head of portfolio management at Royal Capital PJSC, which is 44 percent-owned by United Gulf Bank BSC, an investment bank in Bahrain, said in an interview yesterday. “The Philippines is trading at a spread, which is a bit tight compared with other countries.”

The average spread on Philippine dollar bonds has shrunk to 196 basis points, or 1.96 percentage points, above similar-maturity Treasuries, from 291 a year ago, according to JPMorgan’s EMBI Index. The gap was the lowest since May 3. The overall average spread on the EMBI+ index is 281 basis points.

Per Capita GDP

Al-Amanah has $21 million of Islamic banking assets, compared with $93 billion in Malaysia, where Muslims make up the majority of the 26 million population.

Eight of Al-Amanah’s nine branches are based on the southern island of Mindanao, which has a per capita GDP of 3,572 pesos ($78), the lowest among the 17 regions in the Philippines and compared with the national average of 15,686 pesos, according to the website of the government’s National Statistical Coordination Board.

Mindanao is a base of the Abu Sayyaf, which is linked to al-Qaeda, and some members of the communist New People’s Army, according to a U.S. government watch list for international terror organizations.

Bangko Sentral ng Pilipinas Governor Amando Tetangco said the Philippines is drafting a bill to facilitate the expansion of the Islamic finance industry as the government diversifies funding sources.

“There is currently no regulatory framework for Islamic banking,” Tetangco said in a text message response to questions yesterday. “What we have is the charter of Al-Amanah Bank.”

President Benigno Aquino, who took office on June 30, estimates the 2010 budget deficit will widen to 325 billion pesos, compared a record high of 298.5 billion pesos last year.

“The Philippines is a country that is definitely on our radar screen,” BNP Paribas’ Dalmau said. “Investors are going to put extraordinary efforts into understanding the structure, ratings and pricing” of the sukuk, he said.

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