INTERVIEW-StanChart sees sukuk market weathering tough times

KUALA LUMPUR (Reuters) - Global sales of new Islamic bonds are unlikely to shrink next year despite difficult markets, as new borrowing needs keep the market afloat, London-based bank Standard Chartered STAN.L said.

In contrast to conventional credit markets, the Islamic bond issuance has slowed but not completely dried up although there are concerns that the sharia banking industry has yet to feel the full wrath of the financial market meltdown.

While conservative lending principles have barred Islamic lenders from risky subprime financing, the $1 trillion sector is expected to be hurt as the full effects of falling commodities and property prices hit home.

But Standard Chartered is upbeat on the Islamic bond market, one of the most popular segments of the industry, saying that new issues next year could match or even top 2008’s level.

“People are waiting for right levels of price to launch but nothing has happened to the sukuk (Islamic bonds) market fundamentally,” Afaq Khan, Standard Chartered’s global Islamic banking chief said, in an interview.

“Everybody will come up with a new plan for next year so we will be part and parcel of that plan.”

Khan was in Kuala Lumpur to launch the bank’s first Islamic subsidiary.

Standard Chartered estimates that new sukuk issuance totalled $13.9 billion from July 2007 to July 2008.

Sukuk are designed to comply with an Islamic ban on the receipt of interest. Instead, returns are derived from underlying physical assets, such as property.

Malaysia has the world’s largest sukuk market, with $66 billion or 62.6 percent of global outstanding sukuk issuance as at end June 2008.

BNP Paribas said on Tuesday that issuance is expected to pick up in 2009 and could beat 2007 levels after a dip this year.

But Malaysian lender CIMB Islamic, the world’s top arranger of sharia bonds, has warned that the credit crisis would cause new sales to slow.

Companies such as Malaysian toll road firm Projek Lintasan Shah Alam and Saudi developer Al-Oula have announced plans to issue sharia bonds but Indonesia’s government has said its first global sukuk would likely be delayed by tough market conditions.

Khan said sharia finance would be hit by any global slowdown but demand would remain healthy, with Malaysia, Indonesia, Hong Kong and Singapore the fastest growing Asian markets.

“The mitigant is that there is so much focus and attention on Islamic banking now to look at it as an alternative model that I think that will far exceed any slowdown.”

(To read more Reuters stories on Islamic finance, click on [nISLAMIC])

Editing by Jan Dahinten