Wednesday, October 7, 2009

Islamic-Bond Market on Verge of a Revival

Posted in the Wall Street Journal by Ditas Lopez:

Indonesia, Pakistan and South Korea are lining up to sell Islamic bonds offshore in separate offerings that will add diversity to a niche area of finance and spur the revival of a market that had a severe setback during the global credit crisis.
[Growing Numbers]

The deals, likely to be initiated next year, could net the three governments a total of $2 billion and would reflect a growing recognition of sukuk as an alternative source of funds for governments in Asia. Investors appear hungry for investments that comply with Shariah, or Islamic law.

"There is a shortage of Shariah-compliant instruments for a number of funds," said Lum Chung Kuan, head of fixed income research at CIMB Group in Kuala Lumpur. "Definitely this will be good news for them."

The planned return of these Asian governments to the sukuk market comes amid signs that the global credit crisis has dissipated and that the global economy is on its way to recovery.

Instead of interest, sukuk make payouts derived from underlying assets typically sold to a separate vehicle that is the issuer of the paper.

Global issuance of sukuk gained much ground in the third quarter, with the value of offerings rising 82% from a year earlier to $6.2 billion, data from's Sukuk Monitor show. The Sukuk Monitor is a comprehensive database tracking major sukuk issued globally that is run by Zawya, a Dubai-based business-information company.

The outlook appears robust as demand for capital rises in step with the rebound in the global economy. Increased stability in prices of physical assets, such as land and buildings, should also make it less difficult to value underlying sukuk assets, paving the way for more deals.

Indonesia's planned Islamic bond would follow its first global sukuk sale in April, which raised $650 million and reopened the international sukuk market after it was shut by last year's crisis.

Jakarta plans to sell up to $1 billion of global sukuk by the second quarter of 2010, according to people familiar with the situation.

Dahlan Siamat, head of Islamic finance at Indonesia's Finance Ministry, said last week that the Parliament has approved a plan to expand to 25 trillion rupiah ($2.6 billion) a pool of assets that may be used to back global and domestic sales of the Islamic bonds this year and next. This is about double the previous size of the asset pool.

Pakistan, the only other Asian nation to have issued offshore Islamic bonds, has just $600 million outstanding from its 2005 sale. It is looking to raise $500 million in Islamic bonds next year.

The Karachi government aims to begin the process of hiring the arrangers for the bond sale by the first week of November and offer the issue by February, a finance ministry official said late last month.

South Korea is looking to sell what would be its first ever sukuk as it continues to refine its tax laws to facilitate issuance. It wants to attract capital from Islamic markets to diversify its funding sources and reduce its refinancing risks. The Korean government plans a road show in Malaysia and the United Arab Emirates in November.

Since the start of this year, $8.1 billion of Islamic bonds out of the Asian-Pacific region have priced, exceeding the $6.4 billion volume in the same period last year, according to data provider Dealogic.

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