Islamic finance may be tapped by European companies shut out of the markets by the debt crisis

A couple of weeks ago, I discussed (in my newsletter, available as a PDF) the retreat by conventional banks like HSBC from Islamic finance, primarily in smaller countries where the market is not large enough to move the needle for these massive banks.  As a result I expected smaller regional Islamic banks to take their place both in providing financing and being involved in sukuk issuance (which the large banks had only entered in a small way).  

Back in January, I thought the European debt crisis would limit any issue of sovereign sukuk by a European government because they have more pressing challenges to confront.  I wrote: "I think that a sovereign sukuk coming out of Europe in the next year or two is remote."  This has continued to hold true, but not entirely true with respects to government-owned entities like the Irish Electricity Supply Board announcing it is considering a sukuk in Malaysia (see my newsletter as a PDF for my comments a month ago).  

There haven't been any named companies from Europe following in the footsteps of the Irish Electricity Supply Board, but Mohd Effendi Abdullah the head of Islamic markets at AmInvestment Bank told Bloomberg: "We are getting enquiries from these countries because the European crisis is making it difficult to source financing in their home nations".  This sentiment was seconded by Badlisyah Abdul Ghani, the CEO of CIMB Islamic Bank who said promotional road shows in Europe by the Malaysia International Islamic Finance Centre (MIFC) were starting to bear fruit.  Neither, unfortunately named any names with respect to potential sukuk issuers.

As the resolution process of the European economy drags on as Spain weighs whether to ask for a bailout from the ESM, banks in Europe will remain hesitant to expand lending, which will lead companies to look elsewhere.  It would be a good thing in general for them to consider tapping Islamic finance with a caveat.  The financing should be provided only to those companies who in normal periods would be able to get financing locally and who are not impaired significantly in their business by the European debt crisis.  

There will be no benefit to Islamic finance if troubled European companies issue and then default on sukuk.  That will benefit no one except perhaps the management of these companies who will be allowed to limp on longer than their business performance would suggest.