Tuesday, May 17, 2011

Differences in sukuk markets within the GCC

As I mentioned in an earlier post, the sukuk market is not a unified market. It is made up of many different markets, each with their own characteristics. In that earlier post, I broke down the sukuk market into 4 separate regional markets for sukuk: GCC, South Asia, Malaysia and primarily non-Muslim countries. However, even within these regions there are stark differences in the factors which impact the sukuk market health and today I saw four different article that demonstrate the differences within half of the GCC countries: Qatar, Bahrain and the UAE.

In the UAE, the sukuk markets could be on the verge of coming back strongly with what is reported to be a heavily oversubscribed $400 million sukuk issued by Sharjah Islamic Bank. The sukuk, which is in the mid-range in terms of size from the expectation is rated BBB+ by S&P and Fitch, at the bottom end of the investment grade rating category. The order book is reported to have attracted $5 for every $1 in sukuk being issued ($2 billion reported order book). Given the overwhelming dominance of sovereign sukuk issuance in the years since the markets froze up, it is a positive development to see corporate issuers, particularly one with a low-investment-grade rating to see strong reception for its sukuk. In part, this could be due to the UAE being viewed as a safe haven having not seen the protests that spread across much of the region, including the financial hub of Bahrain.

In Bahrain, the government's harsh crackdown on protests and assistance from Saudi troops stationed in the country has restored some level of calm in the markets with the yield on the sovereign sukuk from the Central Bank of Bahrain at its lowest yields since the protests began in mid-February. However, there remains a lot of uncertainty about whether the grievances which led to the protests will be dealt with or whether the calm is just a lull created by the government crackdown on protesters. For example, the US government lifted its 'voluntary departure' status for US embassy staff also noted that "potential for spontaneous civil and political unrest continues" and "Clearly, fears have subsided to an extent but given current spreads and CDS levels the market is telling you things are not back to normal" according to a director, Akber Khan, of Al Rayan Investments as quoted by Bloomberg from Qatar. Bahrain, which had become a large hub for finance--including Islamic finance--in the region has lost its status as a stable country, at least for the time being. Still, it will remain at the center of a good deal of Islamic finance in the region due to its accommodative central bank and the presence of international organizations like the International Islamic Financial Market (IIFM) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). However, the reputation for stability has not (and probably cannot entirely) return to the pre-protest levels, which will impact future sukuk issuance coming out of Bahrain.

Qatar is much closer to the UAE in terms of having seen continued stability but having some 'baggage' like the UAE does with Dubai World (although not nearly to the same impact). Its central bank surprised bankers in the country by requiring conventional banks to shut their Islamic 'windows' by the end of 2011 and thus handing that market over to banks that are fully Shari'ah-compliant. The conventional banks being forced to abandon their Islamic windows have asked the central bank to allow them to hold their Islamic assets through to maturity instead of being forced to divest them entirely by the end of 2011. Qatar Islamic Bank, one of the country's Islamic banks, is reported by Gulf Times to be planning a five-year sukuk in the third quarter. This is not surprising given the boost that Qatari Islamic banks are expected to receive by having the competition in the country dramatically reduced by the central bank's order, although there could end up being a way for the conventional banks to continue to compete in the Islamic banking by launching separately licensed Islamic subsidiaries that are regulated alongside the wholly Islamic banks and separately from the conventional parent banks. However, there remains a lot of uncertainty about what the central bank will (and will not) allow.

Just as there is significant differences between the markets for sukuk--and other areas of Islamic finance--between the regions in which it is growing, there is significant heterogeneity within the regions based on the different political, regulatory and financial climates for Islamic banks and for issuers of sukuk. The protests which spread across the region and the Qatari Central Bank order relating to Islamic windows both demonstrated the uncertainty of anticipating future developments, there is likely to be continued activity in the primary market for sukuk in the UAE as well as among Islamic banks in Qatar (and Islamic subsidiaries of conventional banks if the central bank allows that possibility). There will also likely to be stiff competition between Qatar, the UAE and Saudi Arabia for the financial firms that decide to relocate from Bahrain.

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