Islamic finance needs new assets beyond property

MANAMA (Reuters) - The Islamic finance industry will need to look for new assets on which to base its structures as investors shun real estate after the sector took a hit during the financial crisis, executives at a Reuters summit said.

The sukuk, or Islamic bond market, particularly in the Gulf Arab region, had been dominated by real estate developers before a regional building boom came to an end in 2008 after the crisis kicked in and oil prices slumped.

"Firstly, land and real estate assets are probably not considered to be a very stable asset at the moment, and secondly, there is further scrutiny on the asset-backed structures of sukuk," said Safdar Alam, head of Islamic structuring at J.P. Morgan, told the Reuters Islamic Banking and Finance Summit.

"This means the industry will have to look quite hard at other kinds of assets to use for sukuk," he said.

Sukuk -- or sharia-compliant bonds -- rely on returns from tangible assets such as rents from properties to produce cash flows -- not interest -- to pay investors.

The use of real estate as an underlying asset will continue to play a role in the sector, but there may be a short break, said Sameer Abdi, head of Islamic finance at Ernst & Young.

"It was an easy asset class to structure around because of its availability, the appetite for it, so I think those two aspects will come back to the market," Abdi said.

In the meantime, the industry could find alternatives including ship financing, and ship and aircraft leases.

"These are all available and there are Islamic products out there that are based on such leases. There could be a focus on those underlying assets going forward," he said.

Other options could include the securitization of receivables by companies in the telecom and services sectors, said Abdul Rahman Tolefat, chief executive of Allianz Takaful.

His industry -- the Islamic insurance industry, or takaful, is struggling to find suitable long-term investment opportunities.

"We speak a lot about receivables. They are a good opportunity for investment banks and they could encourage the telecom and the service sectors to securitize their receivables," he said.

(Reporting by Frederik Richter, Dinesh Nair and Raissa Kasolowsky; Editing by Rupert Winchester)