Islamic finance in bloom

Last week, the Islamic finance industry received another boost when Bloomberg launched its Malaysian Ringgit corporate sukuk index, a move that further cements Malaysia as a major player in the niche sector.

Investor demand for Shariah-compliant products, both corporate and sovereign, has grown significantly in recent months. In particular, sukuks (financial certificates seen as the equivalent of Islamic bonds) have been issued at record amounts on the back of cheap borrowing costs.

Bloomberg’s new index, developed with the Association of Islamic Banking Institutions Malaysia (AIBIM) and the stock exchange Bursa Malaysia, aims to offer a benchmark for investors in Ringgit-denominated sukuks in Malaysia, a country that has styled itself as a global hub for Islamic finance. Malaysia accounted for nearly 60% of global sukuk issuances in 2011, dwarfing its nearest rival Qatar by over a factor of six (see chart below).

Islamic finance promotes an economic order that conforms to Islamic scripture, namely the Koran. It prohibits interest on debt, which is deemed a form of exploitation under Shariah law, and promotes a close link to the real economy. Islamic financial contracts need be backed by (or at least tied to) real assets or transactions. Purely speculative investments are banned.

“Malaysia has become a centre for Islamic finance, in part because it has spent the last 30 years building (and providing incentives for) Islamic finance,” says Blake Goud, Principal of Sharing Risk, a website that provides analysis of current issues in Islamic finance.  “It has addressed some of the questions regarding the different Shariah standards with the Gulf Cooperation Council (GCC), which has encouraged issuers from that region to enter sukuk markets.  The launch of this index is probably just confirmation of this growth.”

“Sukuk issuance is still growing from a small base – compared to conventional bonds – and the growth will probably continue,” notes Goud.  “That is the main factor, but a withdrawal of European banks from lending in the GCC has probably contributed to growth in sukuk issuance and Malaysia's markets have become more attractive to issuers because it provides a more liquid secondary market than markets in the GCC (which have been improving).”

In a press statement, Bloomberg was keen to stress that it “will track and measure the performance of the most liquid and credit-worthy Islamic corporate bonds in Malaysia” – a comment perhaps placed to alleviate some investors’ uncertainty of Shariah-compliant products.

But the demand for sukuks, or Islamic bonds, is getting ever stronger.  Sukuk issuance in the first half of 2012 alone was over $67 billion, a record number for half-year issuances, according to the business information company Zawya.  Four decades ago, Islamic finance was usually the preserve of Muslim businesses wishing to tap the capital markets in accordance to religious principles.  Now sukuks are a practical funding alternative.  A Deutsche Bank report back in November 2011 estimated that Islamic finance industry could be worth $1.8 trillion in assets by 2016 as corporates continue to think outside the box and seek unconventional methods of funding.

Bloomberg’s initiative is one of several recent developments favouring the growth and acceptance of Shariah-compliant financial products.  Thomson Reuters has launched its own index to monitor the performance of the sukuk market in line with the Bloomberg release.  The Islamic financial sector also benefits from a growing Muslim population; more market players introducing degrees of competition and liquidity; and a recent commodity boom, which has generated large revenue surpluses in several Middle East economies.


http://treasurytoday.com/2012/09/islamic-finance-in-bloom