Qatar Cup to Lift Shariah Loans Off 5-Year Low: Islamic Finance

Islamic loans in the Middle East will rebound in 2011 from a five-year low, said HSBC Holdings Plc, this year’s biggest lender, as accelerating economic growth and Qatar’s building for the soccer World Cup boosts spending.

Syndicated loans dropped 18 percent this year to $6.5 billion, according to data compiled by Bloomberg. Loans peaked at $24 billion in 2007, before the worst financial crisis since the Great Depression. Borrowers from the Middle East dominated the market in 2010, receiving all but one of the 14 loans tracked by Bloomberg in Europe, the Middle East and Africa.

“We have a number of transactions in the pipeline” which may close in the first half of next year, Mohammed Dawood, Dubai-based director of debt capital markets at HSBC Amanah, said in a telephone interview from Abu Dhabi on Dec. 15. “We’ll definitely do more loan deals in 2011 compared to this year.”

The debt restructuring in September of Dubai World, one of the emirate’s three main holding companies, helped restore confidence, said John Tofarides, a banking analyst at Moody’s Investors Service. Moody’s and Standard & Poor’s announced a combined nine upgrades this quarter for the region, outnumbering the pair’s downgrades for the first time since the three months ended June 30, 2008, according to data compiled by Bloomberg.

Banks in the United Arab Emirates have improved their financial position by lowering debt-to-equity levels, Dubai-based Tofarides said in an interview Dec. 16. A slump in U.A.E. property prices and canceled investment projects deterred lenders this year, he said.

‘Sustainable Growth’

“We expect to see more mature and sustainable loan growth in the U.A.E., especially in Dubai which was at the epicenter of the property crisis,” said Tofarides. “We don’t expect to see pre-crisis lending growth levels again because that was triggered by excess liquidity and a totally different perception on credit risk.”

HSBC was the biggest arranger among 36 lenders for Islamic financing this year in Europe, the Middle East and Africa, lending $1 billion, according to data compiled by Bloomberg. Standard Chartered Plc was second with $914 million.

Dubai World agreed with creditors to alter terms on $24.9 billion of liabilities. Concern the company would default on its debt contributed to a 24 percent drop in sales of Islamic bonds, or sukuk, which pay assets returns to comply with the religion’s ban on interest, to $15.1 billion this year.

Europe Crisis

The extent of the recovery in the Shariah-compliant loan market next year will depend on the size of regional development projects and whether Europe can avoid further contagion from its debt crisis, Moinuddin Malim, chief executive officer at Dubai-based Mashreq Al Islamic, said in an interview Dec. 16.

Moody’s said on Dec. 15 it may cut Spain’s Aa1 credit rating on concern it will join Greece and Ireland in seeking a bailout from the European Union. Spain was already reduced by Moody’s in September.

“We expect the majority of the projects to come out of Qatar, Saudi Arabia and Abu Dhabi next year,” Malim said. “Banks in the region may assume that the worst is behind them and are more likely to participate in syndicated loans.”

Saudi Electricity Co., the state-controlled utility, signed a 5 billion-riyal ($1.3 billion) Islamic finance agreement with National Commercial Bank, Saudi British Bank, Banque Saudi Fransi and Samba Financial Group on Dec. 13. Abu Dhabi Islamic Bank PJSC was lead arranger for 1.14 billion dirhams ($310 million) of syndicated Islamic financing for Majid Al Futtaim Group, the bank said in an e-mailed statement Dec. 14.

Gulf Growth

Economic growth in the Middle East and North Africa will accelerate to 4.1 percent this year and 5.1 percent in 2011, from 2 percent last year, the International Monetary Fund said Oct. 6.

Qatar’s economy will expand 20 percent next year, the IMF said last week. Getting the Persian Gulf sheikhdom ready for the 2022 world cup, the most-watched sporting event around the globe, will cost as much as $65 billion, Merrill Lynch estimates.

Shariah-compliant bonds returned 1.1 percent this month, while debt in developing markets dropped 1.2 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The spread between the average yield for sukuk and the London interbank offered rate narrowed 61 basis points this month to 300 as of Dec. 17, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The extra yield investors demand to hold Dubai’s dollar sukuk rather than Malaysia’s 3.928 percent Islamic note due June 2015 has narrowed 42 basis points to 349 in December, according to data compiled by Bloomberg. The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 dropped 2.2 basis points to 6.57 percent on Dec. 17, the data show.

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