News Column

Mistaken perceptions bedevil swift growing finance

May 23, 2014

DUBAI: Islamic finance has been one of the fastest-growing sectors in global finance, but the industry has yet to shake off perceptions about high costs and complexity that are holding back some issuers.

Sukuk, or Islamic bonds that follow religious principles such as a ban on interest and speculation, are now a major funding tool for companies in the Middle East and South-East Asia, and are becoming increasingly attractive to sovereign issuers.

Britain, Luxembourg, Hong Kong and South Africa are all keen to make maiden sukuk issues, to diversify their funding sources and tap liquidity provided by increasingly wealthy Islamic investors.

Those plans are not new: the Luxembourg government first mooted |a sukuk issue in 2010, followed by South Africa in 2011, while Britain has been considering an Islamic bond since 2007.

These and other plans have been delayed by factors including double-taxation on some sukuk structures and a difficulty in identifying assets to underpin the transactions, although Islamic finance experts say such drawbacks have largely been overcome.

Jurisdictions such as Hong Kong and Luxembourg have enacted legislation in the past few years to remove double or even triple tax duties that sukuk can attract due to multiple title transfers required.

Rising demand for sukuk has also depressed costs.

"These recent developments strongly signal growing international acceptance and will facilitate future issuance," said Badlisyah Abdul Ghani, chief executive of CIMB Islamic, one of the industry's top sukuk arrangers.

As a result, first-time issuers that would have expected to pay a premium on their sukuk in previous years can now achieve levels comparable to conventional bonds, he said.

"Issuers that have existing conventional bonds will have a benchmark curve to refer to and the sukuk |should be priced flat, if not potentially lower, than the conventional points of reference.

"They should not pay a premium when raising sukuk."

Issuance of sukuk globally hit an all-time high of $134.3 billion in 2012, but fell to $114.3 billion last year as jitters about US monetary policy constrained emerging market assets.

Growth of the market is expected to pick up again this year as the pool of Islamic funds in the Gulf and South-East Asia continues to expand. A Thomson Reuters study predicts sukuk issuance of as much as $130 billion for this year.

Increased clarity on sukuk structures has helped: the design and approval process has become generic as more sharia advisory firms have entered the market, pushing down costs, said Noel Lourdes, Dublin-based executive director at Amanie Advisors, a Malaysia-based Islamic finance consultancy.

"It is a lot cheaper now. For corporates, it is broadly in line with Eurobond or private dollar-denominated placement transactions," he said. - Reuters

Cape Argus

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Source: Cape Argus (South Africa)

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