Islamic bonds benefit from non-oil infrastructure spending
Islamic bonds appear to be all over the news these days as Middle East corporate banking entities, businesses, governments and investors all vie with each other to grab a piece of the action. The rise in popularity of the bonds – or sukuk – comes at a time when some of the largest oil producing countries in the MENA (Middle East and North Africa) region are looking to diversify away from their reliance on crude oil revenues.
Saudi Arabia is the largest oil producer in the world and is in the middle of a mind-boggling $514 billion infrastructure expansion program which is expected to help its non-oil industries expand 6.5 per cent in 2012, according to IMF figures. The pace of the expansion is the second-fastest in the six-nation Gulf Cooperation Council after Qatar. Issuers Almarai Co., the Kingdom’s biggest publicly traded food producer, and Saudi Hollandi Bank have both announced plans to sell Islamic bonds. This year alone has seen a total of $8 billion of Islamic bonds sold in Saudi Arabia, a record and more than in any other Arab country.
Across the region as a whole, bond sales this year have amounted to some $30 billion. According to ratings agency Standard & Poor's (S&P), the $1 trillion global Islamic finance industry is expected to grow 20% by 2015, doubling in size over the period. Stuart Anderson, Managing Director & Regional Head, Middle East at Standard & Poor's believes the global crisis faced by conventional finance has led to Islamic Finance increasingly being viewed as a credible alternative. He said, “Issuers and investors have realised that the risk-reward balance in both conventional and Islamic Finance are not fundamentally different.” Islamic Finance growth is currently led by countries in the GCC and Asia, says " S&P", which represent half of the global industry. Young, fast-growing Muslim populations; robust macroeconomic environments; and large infrastructure projects that require financing are the main drivers of this increasing growth. Malaysia leads the global industry while Saudi Arabia leads in the GCC.
Over the last few years, the industry has taken major strides to achieve a broader consensus on Islamic banking structures. Mr Anderson added, “We have also seen stronger and more active support from domestic authorities, particularly through the creation of regulatory and tax frameworks, ensuring a level playing field between conventional and Islamic instruments.” A key development expected to drive globalisation and expansion of Islamic banking outside Asia and the GCC is the increasing attractiveness of sukuk among global investors. At a time when conventional banks appetite for term loans is declining, S&P believes that sukuk could become a key funding source. Sukuk issuance looks set to cross the $100 billion threshold in September 2012, and is projected by S&P to grow 25% over 2012-2015 to reach about $200 billion a year in 2015. Malaysia, Indonesia, and the GCC are expected to account for a combined 85%-90% of issuance mainly to finance infrastructure-related projects. Sukuk (the singular is sakk, a legal instrument or deed) is an Arabic word commonly used to refer to the Islamic equivalent of bonds. Such bonds are structured to comply with Islamic law, which prohibits the charging or paying of interest.
