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Sukuk Drought Poised to End on First-Time Sales: Islamic Finance

Badlisyah Abdul Ghani, Chief Executive Officer of CIMB Islamic Bank Bhd., said people now see the timing as more conducive for sukuk issuance. Photographer: Goh Seng Chong/Bloomberg. Photographer: Goh Seng Chong/Bloomberg
Badlisyah Abdul Ghani, Chief Executive Officer of CIMB Islamic Bank Bhd., said people now see the timing as more conducive for sukuk issuance. Photographer: Goh Seng Chong/Bloomberg. Photographer: Goh Seng Chong/Bloomberg

Aug. 28 (Bloomberg) -- First-time sellers of bonds that adhere to Islam’s ban on interest are poised to revive an industry suffering its worst quarter in more than four years.

Luxembourg and Hong Kong aim to market debut offerings of sukuk next month, while Kenya, South Africa, Bangladesh and Tatarstan have announced plans for maiden issues. Islamic bond sales have fallen 82 percent to $2.6 billion this quarter compared with the previous three months, their lowest level since the first three months of 2010, according to data compiled by Bloomberg.

“All are seeking their share of fast-growing Islamic financial services activity,” Khalid Howladar, global head of Shariah-compliant finance at Moody’s Investors Service in Dubai, said in an Aug. 26 e-mail interview. “Initial sovereign issuances test and sometimes force the development of a legal environment conducive to Islamic finance.”

Offerings of Shariah-compliant bonds may top last year’s $43.1 billion and challenge the unprecedented $46.5 billion sold in the previous 12 months, according to CIMB Group Holdings Bhd., as an increasing number of non-Muslim countries tap the market. The U.K. sold its first sukuk in June, drawing bids for more than 10 times the 200 million pounds ($332 million) on offer.

Forcing Development

Islamic bond offerings were subdued in August due to the summer holidays and the month-long Muslim fasting period of Ramadan. At $828 million, it’s the worst month in a year. Sales so far in 2014 gained 27.6 percent to $27.7 billion.

Issuance will start to pick up, said Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd., a unit of CIMB Group.

Luxembourg is planning to raise 200 million euros ($264 million) by the end of September, according to an Aug. 11 e-mailed statement from the finance ministry. The Hong Kong government will meet investors from Asia, the U.S., Europe and the Middle East from Sept. 1 for as much as $1 billion of Shariah-compliant securities, the central bank said in a statement today.

“Sukuk has gained in popularity as an alternative funding tool,” Angus Salim Amran, the Kuala Lumpur-based head of financial markets at RHB Investment Bank Bhd., a unit of RHB Capital Bhd., said in an e-mail interview yesterday. “The growing pool of Shariah-compliant liquidity available to the global market is the impetus for these issuers.”

‘Main Challenge’

Pakistan is seeking to sell its first dollar-denominated Islamic bonds since 2005 in September. The federal republic of Tatarstan, located 800 kilometers (500 miles) east of Moscow, is aiming to debut $200 million in an unspecified timeframe. That sale was originally targeted for 2013.

While sales of Islamic bonds have increased about five-fold in the past decade, the securities are still only equivalent to 1.6 percent of the $1.7 trillion in Shariah-compliant banking assets worldwide. Ernst & Young LLP forecasts those holdings will double by 2018.

“People now see the timing as more conducive for sukuk issuance,” CIMB’s Badlisyah said in an Aug. 26 phone interview from Kuala Lumpur. “The main challenge remains the same, which is the lack of an enabling framework in many jurisdictions.”

South Korea’s plan to introduce tax laws for Islamic bonds met with opposition from Christian groups, while an initiative by Australia has stalled. Thailand, France and Ireland have introduced legislation though none has issued sukuk.

Attractive Yields

The Philippine government is reviving its ambitions to sell Shariah-compliant debt after trying for more than 40 years. Egypt’s regulator proposed new rules this month.

Borrowing costs are falling. Average global sukuk yields declined 61 basis points, or 0.61 percentage point, this year to 2.81 percent, according to an index from Deutsche Bank AG. They reached a one-year low of 2.78 percent in May, below the five-year average of 3.42 percent.

“The fact that governments and corporates can issue at such low yield levels at the moment has made sukuk particularly attractive,” Thomas Christie, head of fixed income at Prometheus Capital Finance Ltd., said in an Aug. 25 phone interview from Dubai. “Equally, with little sukuk supply out there, there isn’t much else for investors to look at.”

To contact the reporters on this story: Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net; Yudith Ho in Jakarta at yho35@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net Simon Harvey

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