MARKET ALERT from ISLAMIC FINANCE ARABIA.com
Sukuk become tool in Basel III capital-raising
More banks in the United Arab Emirates are likely to issue Basel III-compliant bonds after the launch of the world's first hybrid Tier 1 sukuk from Abu Dhabi Islamic Bank, Fitch Ratings says.
We expect increasing Tier 1 issuance in 2013 by UAE and other GCC banks - both conventional and sharia compliant - to support further growth. In our view, relatively high levels of capital are necessary for GCC banks due to the difficult operating environment and the concentration of single names and sectors, particularly of real estate and government-related entities, in the loan portfolios; the rating agency believes. Any pick-up in loan growth by the banks would need to be supported by additional capital; a press statement by Fitch ratings added.
We also believe that more banks in the GCC will issue hybrid Tier 1 instruments as these are a cost-effective means of accessing a wider investor base (essentially Asia, Middle East and Europe) than common shareholders. Diversification of funding sources is important for a sector where deposit and investor concentrations are common. The broadening of the investor base, without diluting shareholders, helps preserve ownership structures where governments, government-related entities and members of ruling families often hold substantial stakes.
A Usd1 billion sukuk issue by Abu Dhabi Islamic Bank this month may start a trend that was probably not contemplated by the founders of modern Islamic finance: Islamic bonds may become a key tool for banks to meet tightening capital rules. In terms of the liquidity requirements, Islamic banks face a number of obstacles, the main one being that there are not enough liquid assets for them to invest in. Conventionally, banks invest in government bonds, but these are not considered to be Shariah compliant. Islamic government bonds Sukuk are considered Shariah compliant but are extremely illiquid. Thus, there are a number of issues that have to be addressed after which Shariah compliant liquid investments have to be made available in the market which banks can then invest in and use in liquidity calculations.
The trend could add further momentum to a global boom in sukuk issuance. It could also ease pressure on banks which find it hard to raise capital from equity issues as global financial instability depresses stock markets. The Central Bank of Bahrain (CBB) announces that the monthly issue of the Sukuk Al-Salam Islamic securities for the BD18m issue, which carries a maturity of 91 days, has been oversubscribed by 278%. The expected return on the issue, which begins on 28 November 2012 and matures on 27 February 2013, is 1.00%.The securities are issued by the CBB on behalf of the Government of the Kingdom of Bahrain. This is issue No.139 of Sukuk Al-Salam securities.
Sales of sukuk in the GCC have tripled this year to reach Usd20 billion.
Oman is about to issue its first-ever sukuk after formally introducing Islamic finance. Al Madina Real Estate will issue the bond through sister firm Tilal Development Co. in order to finance the expansion of Muscat Grand Mall. The expansion will make it the largest commercial-residential complex in downtown Muscat. The details of the sukuk are being arranged by the real estate company's financial arm, Al Madina Financial & Investment Services. It will be a five-year, 53 million-riyal (Usd130 million) bond. The sukuk will be the first-ever issued in Oman, the last of the Gulf states to develop the regulatory structure needed for Islamic finance, which allows Muslim investors to avoid profiting from interest. Oman issued two licenses in 2011 to allow Islamic banks to operate in the country, and is preparing legislation to allow non-Islamic banks to also provide Shariah-compliant products.
ADIB attracted a spectacular order book of over Usd15 billion for this month's Usd1 billion perpetual sukuk, which has no maturity date; ADIB can choose to repay the bond on certain dates from 2018 if it wishes.
The hybrid sukuk was the first to be publicly issued by a bank to meet the Tier 1 capital requirement in Basel III global banking standards that will be phased in around the world over the next several years - although ADIB privately placed a Usd2 billion Tier 1 note in 2009.
Features such as the subordination of sukuk holders and the conditionality of payments - ADIB can halt periodic distributions to investors if it wishes - mean sukuk behave more like equity than debt, which is favoured by the new Basel standards, said Alex Roussos, counsel at Norton Rose in Dubai.
"We are likely to see more of it in this market in the near future," he said. Even before ADIB's issue, sukuk issuance was rising sharply; globally, Usd109 billion worth of sukuk were issued in the first nine months of 2012, up 69 percent from a year ago, according to research by Zawya, a Thomson Reuters
Maan Barazy
Certified Shari'a Adviser and Auditor (CSAA- AAOIFI Certified) - MA Islamic Comparative Jurisprudence - BS International Economics
Managing Partner And CEO of Data and Investment Consult-Lebanon – The Centre For Islamic Finance - Consultant Researcher and Lecturer
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