MANAMA May 30 Growth in cross-border Islamic
bond issues points to greater convergence in an industry that
has been divided by tensions between the Middle East and Asia
over sukuk rules, opening the door to a much wider pool of
The Islamic finance industry is centred in the Middle East
and southeast Asia, but for the most part those regions have
developed independently of each other.
The past year, however, has seen a number of cross-regional
sukuk, mostly by Gulf issuers tapping Malaysia's highly liquid
market, the world's biggest for sukuk issuance. Malaysia's
sovereign wealth fund has also launched a Chinese yuan sukuk.
"Diversification of funding sources is extremely important,
that is a big driver for cross-border sukuk," said Ahmed Abbas,
chief executive of Liquidity Management Centre, a Bahrain-based
Islamic investment bank.
National Bank of Abu Dhabi tapped the Malaysian
market with a 15-year, 500 million ringgit ($164.4 million)
sukuk in November, its third issue in that currency.
Bahraini sovereign wealth fund Mumtalakat issued
a five-year, 300 million ringgit sukuk in September.
Sukuk are investment certificates which follow religious
guidelines, including a ban on interest and pure monetary
speculation, and pay a profit rate based on an underlying asset
rather than an interest rate as in the case of conventional
However, their structures are not standardised, and some
Gulf-based sharia scholars have objected to certain structures
used in Asia, a region which has proven to be more flexible in
"Malaysia and Singapore are far more open and forgiving on
sharia aspects," Abbas said.
In the latest cross-border sukuk, Al Bayan Group, a private
holding company, became the first issuer from conservative Saudi
Arabia to tap the Malaysian market, with a small 200 million
ringgit ($65.7 million) private placement last month.
The development of sharia-compliant hedging tools is making
it easier for issuers to invest in foreign currency assets, said
Ijlal Ahmed Alvi, chief executive of Bahrain-based International
Islamic Financial Market (IIFM), an industry body which develops
specifications for Islamic finance contracts.
Last year, IIFM launched a standard contract template for
Islamic profit rate swaps, with others in the pipeline including
cross-currency swaps and FX forwards, Alvi said.
Sukuk issuance in the Middle East outside of the Gulf is
also becoming more attractive, notably Turkey, which was
recently elevated to investment grade credit status and is
bidding to develop an Islamic finance industry.
"Turkey is a market to watch - they are developing their
regulations to allow issuers to use a variety of sharia
structures," said Alex Roussos, counsel at law firm Norton Rose
"Turkish issuers are highly attractive credits for
Cross-border issuance is benefiting from clarity on the
legal documentation required for such transactions.
"In terms of global offerings, sukuk will continue to be
predominantly English law-governed because of the certainty and
predictability that this legal system offers," Roussos said.
"North African countries I believe will make their presence
felt during 2013/2014 as they are nearing completion of the
process of creating the legal infrastructure that will enable
their sovereigns to tap the markets."
Egypt this month announced a $12 billion bond programme that
will include sukuk issuance in early 2014, which would be
Irish-listed and governed under English law.
Malaysian issuers have started testing other currencies, in
particular the Chinese yuan, although they have yet to tap the
"Cross-border issuance has been one-way traffic, mostly to
tap Malaysian liquidity, but conceptually there is nothing wrong
with the other way around," said Sabeen Saleem, chief executive
of the Bahrain-based Islamic International Rating Agency.
Malaysian telecom firm Axiata issued a two-year, 1
billion yuan ($163.22 million) sukuk in September, following on
the heels of Malaysia's sovereign wealth fund Khazanah Nasional
, which issued a 500 million yuan sukuk in 2011.
Malaysia is also promoting overseas investment by its
takaful firms (Islamic insurers) as it seeks to internationalise
its Islamic finance industry.
To encourage cross-border Islamic business, the Malaysian
government has said takaful firms will be allowed to invest
abroad without limit, lifting a current requirement for them to
hold at least 80 percent of assets locally.
These firms, with 19 billion ringgit ($6.1 billion) of total
assets as of the end of last year and 60 percent of it in debt
securities, are major investors in domestic sukuk.
Any shift into foreign-denominated issuance could open the
sukuk market to an additional pool of liquidity, although
takaful firms are highly risk averse and may be reluctant to
expand into new markets too quickly.
($1 = 6.1267 Chinese yuan)
(Editing by Susan Fenton)