March 24 (Reuters) - Costs of issuing Islamic bonds in Asia are still significantly higher than the costs of issuing conventional bonds, despite the growth of Islamic finance in countries such as Malaysia and Indonesia, a study by the Asian Development Bank found.
In Indonesia, profit rates for sukuk issued by the government are on average 86 basis points higher than comparable conventional government bonds, the Manila-based lender said.
In Malaysia, which has the world’s most liquid sukuk market, profit rates for sukuk are on average 8 bps higher.
Lack of familiarity with complex sukuk structures can translate into higher advisory fees for prospective issuers, while investors demand higher yields because of limited trading activity in secondary markets for sukuk, the ADB said in the March edition of its Asia Bond Monitor.
In Indonesia, corporate sukuk accounted for only about 5 percent of trading volumes for corporate bonds in 2013.
The average gap between issuance costs for sukuk and conventional bonds in the Gulf, the other world’s other major centre for Islamic finance, is believed to be very small or non-existent - and in some cases, it has proved cheaper to issue sukuk, traders told Reuters.
This is because sukuk have become mainstream in most Gulf countries, especially Saudi Arabia, and because demand from cash-rich institutional investors often exceeds supply.
New sukuk issuance in Asia reached $91.7 billion last year, led by Malaysia with $83.7 billion. But this still pales in comparison with conventional bond markets; total outstanding local-currency bonds in emerging east Asia hit $7.4 trillion in 2013, up 11.7 percent from a year earlier, the ADB said. Indonesia posted the highest annual growth rate of 20.1 percent.
The ADB defines emerging east Asia as the 10 member countries of the Association of Southeast Asian Nations plus China, Hong Kong, South Korea and Taiwan.
Rising fiscal deficits from Asian countries and tighter liquidity in global bond markets could make sukuk viable funding alternatives in the region’s debt market, the ADB said.
A common template for structuring sukuk could accelerate their adoption across the region and help governments fund their infrastructure needs, the ADB said without elaborating on how this could be achieved.
Its study was issued at a time when the ADB is building links to Islamic finance. The AAA-rated lender is considering whether to issue sukuk of its own, a plan which could evolve into a regular issuance programme and an insurance product to help member countries offer sukuk. (Editing by Andrew Torchia)