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Monday, 20 August 2007

Islamic bond boom creates nascent secondary market

MANAMA – A surge in Islamic bond sales this year and strong demand from Western buyers has transformed the once stagnant secondary market in the Gulf into an increasingly active and liquid one, bankers said. Last year, most Islamic bonds, or sukuk, were bought when they were first issued on the primary market and held to maturity because they were scarce. A flurry of sales this year has made trading between bondholders on the secondary market more common. “There is now a liquid secondary market for sukuk. (It is) not up to international liquidity standards, but much greater than last year,” said Mohammed Saleem, senior vice president and treasurer at Dubai Islamic Bank. Barclays Capital said it trades sukuk worth an average of $20 million on the secondary market daily. Dubai Islamic trades between $100 million and $250 million of sukuk on the secondary market every month, Saleem said. The changing profile of sukuk buyers has been key to the development of the secondary market. Until defaults in the U.S. mortgage market triggered an exodus from emerging market debt, Western banks and institutions, seeking exposure to booming Gulf Arab economies, had become the biggest buyers of sukuk. They are more likely to trade on the secondary market, bankers said. “Now we have more Western investors, not necessarily Islamic investors. They tend to have a more active view in terms of trading in the market, and are more driven by arbitrage opportunities, interest environments,” said Geert Bossuyt, head of Middle East structuring at Deutsche Bank said. Non-Middle Eastern investors have taken up as much as 80 percent of Islamic bond issues this year from Gulf companies. Ratings agency Moody's expects Gulf firms to raise more in sukuk this year than the record of over $9 billion set in 2006. Before the credit squeeze triggered by U.S. sub-prime, or high-risk, mortgage defaults, bankers' estimates for global sukuk sales this year had ranged from $27 billion to $50 billion. BUY-AND-HOLD NO: Sukuk are backed by physical assets so that they comply with Islam's ban on lending for interest and on trading debt. Before an Islamic institution can trade sukuk, the security must be vetted by a committee of scholars for compliance with sharia, or Islamic law. Secular financial institutions, unencumbered by such requirements, have led the way in trading on the secondary market. But more sales and a growing familiarity with different types of sukuk structures used by borrowers has made it easier for Islamic banks to get investments approved by their scholars, Saleem said. “Since early 2007, there have been a lot more new sukuk, creating more approval and familiarity with products,” Saleem said. As demand from Muslims for financial products that comply with their beliefs increases, Islamic banks are expanding their treasury operations, which includes trading of sukuk, Saleem said. Sukuk which can later be converted into stock were especially liquid, bankers said, because the performance of the underlying stock spurred trading. Investors were also beginning to trade bonds of varying risk profiles, for example buying into sukuk from government-backed issuers and selling those of other company's as their appetite for risk diminished, they said. - (Reuters, Aug 07)

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