Islamic bond sales lag fund growth: CIMB-Principal

Islamic bond sales are failing to keep pace with industry growth and companies in the Middle East need to step up issuance, said Malaysia’s CIMB-Principal Islamic Asset Management Bhd and MIDF Amanah Asset Management Bhd.

“We have a sukuk portfolio to manage but we don’t have enough sukuk to invest in,” said Noripah Kamso, chief executive officer at CIMB-Principal in Kuala Lumpur, a unit of the second- biggest underwriter of Islamic bonds in 2009. “The experts in shariah law need to evolve products on a fast-track basis to meet demand.”

Issuance of Islamic bonds, or sukuk, dropped 3 per cent to $6.1 billion this year, data compiled by Bloomberg show. By contrast, the $1 trillion industry for financial services complying with Muslim law, or shariah, is growing at 15 per cent per year. Assets managed by 680 specialist funds climbed 27 per cent last year to about $70bn, according to Singapore-based research firm Eurekahedge Pte.

The two funds, which oversee a combined $6.7bn in assets, say growth in issuance is slowed by a lack of common global standards for shariah-compliant products. That has made it harder for other nations to take up the slack as Malaysia slows issuance for infrastructure investment, they said. Ringgit-denominated sukuk still accounted for 68 per cent of outstanding debt as of June 11, the data show.

Industry specialists converge on Singapore on Monday for the World Islamic Banking Conference, the first to be held in Asia. Topics will include the “harmonisation” between Asia and the Middle East, according to the agenda. Participants include central bank governor of the United Arab Emirates, Sultan Bin Nasser Al Suwaidi, and his counterpart in Bahrain, Rasheed Al Maraj.

Shariah-compliant bonds have weathered the European debt crisis better than conventional notes in emerging markets, the US and Europe so far this year. Islamic bonds returned 5.5 per cent, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while regular debt in developing markets gained 3.2 per cent, JPMorgan Chase & Co’s EMBI Plus Index showed.

Demand for investments that comply with the religion’s ban on interest is increasing as the wealth of Muslims rises, spurred by export-led Asian economic growth and crude-oil income in the Gulf. Malaysia sold $1.25bn of five-year sukuk last month, receiving bids for $5.5bn, more than five times the $1bn on offer.

To ensure Islamic investments meet shariah principles they have to be vetted by recognized scholars. Transactions are based on the exchange of asset flows rather than interest.

A shortage of shariah-qualified bankers and institutions developing “replicas” of more traditional banking services, are the main challenges facing policy makers, Salim Ullah, director for Islamic banking at the State Bank of Pakistan, the central bank, said on June 2 in an interview.

MIDF Amanah’s Chief Executive Officer Scott Lim said the company faced difficulties in marketing Islamic investments because there are no common standards.

“The guidelines have to be in place and implemented across different regions,” Kuala-Lumpur-based Lim said in an interview on June 10. “The products side is shallow at the moment and growth in the industry will be held back.”

Gulf Arab states may have a single shariah board for the region’s Islamic financial institutions by 2013 to standardise the industry, Hussain Hamed Hassan, head of Dubai Islamic Bank PJSC’s shariah committee and chairman of the shariah Coordination Committee of the Islamic Financial Institutions in the United Arab Emirates said last week. “It will happen, but it’s a question of time.”

Islamic bonds from Middle Eastern governments are attractive due to their “credit worthiness” and new issuances from the United Arab Emirates warrant an “allocation,” BNP Paribas Investment Partners said.

“Our preferences are for sovereign and quasi-sovereign credit,” Rafael Martinez Dalmau, director of emerging markets and Islamic investments at BNP Paribas Investment, the asset management unit of BNP Paribas SA, said in an telephone interview from Singapore. “We feel that those are two sectors that we like in terms of credit worthiness.”

The Islamic finance industry’s assets may reach $1.6trn by 2012, according to the Kuala Lumpur-based Islamic Financial Services Board, a standards setting body.

Global sales of sukuk rose 43 per cent to $20bn in 2009, from $14.1bn the previous year, according to Bloomberg data. Offerings of the notes reached a record $31bn in 2007.

Supply will pick up in the second half of this year to match last year’s issuance, as industry leaders develop more investments, said CIMB-Principal’s Kamso.

“Turkey, Korea, Japan are all looking to offer sukuk and we have seen interest from investors in Australia, Switzerland and Canada,” according to Kamso.