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Saturday, 24 July 2010

U.A.E. Plans Shariah Money Markets After Law

June 29 (Bloomberg) -- The United Arab Emirates, the second-largest Gulf economy, may follow Malaysia, Bahrain and Indonesia in selling Islamic securities with maturities of less than 12 months as legislators consider establishing a local debt market, according to Royal Capital PJSC.
Islamic bills would give Shariah-compliant banks more investment options, said Ahmed Talhaoui, Abu Dhabi-based head of investment at Royal Capital, which is 44 percent-owned by United Gulf Bank BSC, an investment bank in Bahrain. The U.A.E.’s eight Islamic banks held $49.8 billion of deposits at the end of 2009, or about 19 percent of the total, central bank Governor Sultan bin Nasser al-Suwaidi said at an Islamic banking conference in Singapore on June 14.
Banks that adhere to Shariah principles “are facing a maturity mismatch,” Talhaoui said in an interview yesterday. “They are keeping a lot of deposits but their options are limited. Some banks are playing a dangerous game, which is essentially to match short-term liabilities with investments in sukuk,” or Islamic bonds, which have longer maturities.
Malaysia, the world’s biggest market for Islamic bonds, Bahrain and Indonesia sell bills to help soak up cash in the financial system and set benchmarks for short-term bond sales. Lawmakers in the U.A.E. are considering a proposal to establish a government securities market by the end of the year, al- Suwaidi said in March.
“Short-term liquidity management at Islamic banks and other financial institutions,” is a challenge, al-Suwaidi said this month in Singapore. “This is not a straightforward issue and has been under discussion between Islamic banks and the central bank. There is now a reasonable proposal to advance a solution for this issue.”
Difference in Yields
Saeed Abdullah Al-Hamiz, executive director of the banking supervision department at the U.A.E. central bank, didn’t immediately return e-mails or phone calls to his office seeking comment on the legislation. Governor al-Suwaidi said on March 15 that the legislation was in the final stages.
“The law will create a liquidity instrument that will carry, not the guarantee of the central bank, but assurances that the central bank will buy it for a certain price,” al- Suwaidi said at that time.
Transactions in Islamic finance are based on the exchange of assets rather than interest to comply with Shariah principles. Global sales of sukuk fell 23 percent to $6.5 billion so far this year, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year, up from $14.1 billion in 2008.
Malaysia Bonds
The average gap between yields on Islamic bonds and the London interbank offered rate widened 2.4 basis points, or 0.024 percentage point, yesterday to 433. The spread has narrowed 37 basis points so far this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
The difference between the average emerging-market yield and Libor narrowed four basis points yesterday to 583, based on the EMBI+ index from JPMorgan Chase & Co. It shrank 52 basis points so far this year, or 15 basis points more than the average spread for sukuk.
The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 rose one basis point today to 3.517 percent, according to prices from Royal Bank of Scotland Group Plc.
Bill Auctions
Malaysia’s central bank sold 500 million ringgit ($155 million) of 91-day Islamic bills at a weekly auction yesterday. The yield on the securities rose four basis points to 2.68 percent from last week. Malaysia began weekly auctions of Islamic central bank bills in 2006.
Bahrian’s central bank sold 12 million dinars ($32 million) of three-month Islamic bills yesterday. The profit rate on the notes rose to 0.88 percent from 0.85 percent at the previous sale on May 31.
The yield on Bahrain’s 6.247 percent note due June 2014 fell one basis point to 3.494 percent today, according to Bloomberg bond trader composite prices. The yield reached a year-low of 3.437 percent on June 22.
Pakistan plans to start issuing Islamic Treasury bills and will announce an auction schedule before June 30, Syed Wasimuddin, a central bank spokesman, said in an e-mail yesterday. The nation had 42.2 billion rupees ($494 million) of outstanding domestic sukuk as of April 30, less than 1 percent of its 4.6 trillion rupees of regular debt, according to data from the central bank.
“It’s fundamental to the industry,” said Harris Irfan, head of Islamic products at Barclays Capital in Dubai. “Right now we rely on using the London interbank offered rate as a benchmark and that has its inherent criticisms. But what alternative is there? There is no Islamic Libor.”
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