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Saturday, 18 August 2007

Sukuk issuance reaches critical mass, says Moody’s Investors Service

The issuing of asset-backed Islamic bonds is likely to surge in the Gulf as growing assets and new laws allow many of the region’s rapidly expanding firms to borrow more cheaply, Moody’s Investors Service said this week. To date, most Islamic bonds, or Sukuk, have been asset-based; returns are derived from underlying assets to comply with Islam’s ban on interest. However, noteholders only have recourse to the borrower, not the assets, in case of a default. In the case of asset-backed, or securitised bonds, including Sukuk, the noteholder has recourse to the assets, potentially making the debt more attractive, lowering the cost of borrowing. “Conventional and Islamic securitised debt is likely to grow significantly,” Moody’s Middle East and Islamic Finance Analyst Faisal Hijazi said. “Islamic finance is particularly suited to securitisation. In the securitisation world you always have recourse to assets, and this is one of the key points in Islamic finance.” A Gulf loans and real estate boom has provided ideal assets with which to securitise debt, bankers said. “There is a significant increase in securitisable assets, real estate and loans. They have reached a critical mass which you can securitise,” Ehsun Zaidi of Dubai Islamic Bank said. Growing demand from Muslims for financial products, such as mortgages, that comply with their beliefs, is likely to mean more of those assets, and hence potential asset-backed debt, will comply with Islamic law, he added. New laws in some Gulf states which ease the creation of those assets, including property and foreign investment laws, have given securitisation further impetus, Hijazi said. Moody’s declined to forecast future Gulf securitisations, but the Dubai International Financial Centre told Reuters last month the debt market has the potential to be worth up to US$250 billion in two to three years, from about US$2.5 billion to date. Last month, Dubai-based mortgage lender Tamweel issued what Moody’s said was the Gulf’s first internationally rated asset-backed securities that comply with Islamic law. Tamweel used lease-to-purchase contracts on residential properties, which comply with Islamic law, to back its debt. “Securitisation will grow significantly in the medium term, particularly in this region where you have lots of property and land deals,” Moody’s senior credit officer Phillip Lotter said. The assets used in a securitisation can be rated independently of the borrower, potentially giving their bonds a higher debt rating than for the borrower themselves, making borrowing cheaper. The structure is particularly suited to firms which have significant assets, or those hoping for credit enhancement over a lower rating the company itself might otherwise achieve, Lotter said. Due to the complexity of structured finance almost all securitised debt is rated, Hijazi said. Crucially for banks, the securitisation of loans they have made removes them from their balance sheet, providing an instant cash injection and allowing them to lend more. In a climate of rising global interest rates, more firms are likely to opt for securitisation, in a bid to make borrowing cheaper, Hijazi said. “Once you have an increase in interest rates, many borrowers will find it expensive to tap normal money markets,” he said. - (BIME, 17 Aug 07)

1 comment:

Unknown said...

It is good that there is this website that has so much up-to-date information on Sukuk. I would like to know whether sukuk is a suitable mode of financing for acquisition of land by, for example, urban redevelopment agencies which undertake the role of "site assembler" i.e. by acquiring dilapidated properties within a designated site and then tender the assembled site to developers to redevelop. If Sukuk is a suitable mode of financing for this activity, which type of sukuk is the most appropriate? Ijara? Mudaraba?

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