GCC-Asia sukuk, a trend in right direction
Manama, September 12, 2012
The issuing of several recent corporate and infrastructure sukuk in Malaysian ringgit by companies in the Gulf may signal the start of a trend that could help develop and globalise the market, a report said.
In an era when the world's conventional banks are producing fewer and shorter loans and companies are considering other options for finance, Islamic financial instruments could become a key funding source, especially in the GCC countries and Asia, said the Standard & Poor's Ratings Services in a report titled, "Beyond Borders: The GCC And Asia Could Rev Up Their Economies--And The Islamic Finance Market."
These regions, with established Islamic financial regulatory bodies, are centres of the growing estimated $1 trillion market. At the same time, Asia and the GCC are seeking huge amounts of capital to pay for their soaring needs for new infrastructure.
"We consider the market for Islamic infrastructure in both regions to have reached an inflection point in terms of new issuance after a relative lull from 2009 to 2011. What's more, we've seen the emergence of the first project finance sukuk within the infrastructure asset class.
"The GCC market reached over $19 billion of issuance as at July 2012, about the same as for all of 2011. Of that, infrastructure represented 30 per cent, compared with just 7 per cent the previous year," said Standard & Poor's credit analyst Karim Nassif. "The reasons for the surge are low yields, relatively high liquidity, large capital expenditure needs, and strong investor appetite."
"Total sukuk issued out of Asia reached $57.9 billion in July 2012, compared with $64.9 billion for all of last year," said Standard & Poor's credit analyst Allan Redimerio.
"Malaysia is now the world leader in sukuk issuance. Political will, recognition of beneficial ownership, tax incentives, and a rising investor base have all supported the country's continued growth trajectory," said Redimerio.
Tapping the sukuk market could help improve the capital structure and liquidity profiles of GCC and Asian companies, particularly those operating in capital-intensive industries such as infrastructure. It could provide such companies the longer-term funding they need via a different funding source. This source is becoming more liquid as it reaches across border and becomes more global and grows in scale.
Over the past year or so, GCC companies have been crossing the figurative border into Asia for infrastructure finance. Abu Dhabi National Energy Co (Taqa) and Bahrain-based Gulf Investment Corp are the first to issue sukuk in Malaysian ringgit. The ringgit is attractive because of Malaysia's established regulatory framework for Islamic finance and the wide pool of investors active in that market.
These types of cross-border deals are more than a smart funding solution, S&P said. "They could also develop the trade relationship between the countries of the GCC and Asia to their mutual benefit. But what is also compelling is that such transactions could be a bellwether for the further standardization and globalization of the Islamic finance market," the report said. - TradeArabia News Service