Subprime crisis stalls Islamic securitization

By Dayan Candappa and John Irish

The global credit crisis has diminished the Arab appetite for securitization, delaying development of a potential $250 billion market that would drive growth in Islamic finance, industry officials said on Monday.

From governments to ratings agencies, officials had been talking of an impending boom in securitization in the Middle East and North Africa, turbo-charged by surging real estate prices, new mortgage laws and rapidly growing populations.

The Islamic finance industry, which favors investments backed by physical assets, was poised to be the main beneficiary, and Gulf mortgage firms and banks were scrambling last year to announce sales of asset-backed bonds.

Then the market for securities backed by U.S. subprime mortgages imploded, forcing banks around the world to write down at least $80 billion in losses and borrowers to scrap plans to sell bonds.

Mortgage-backed bonds have come under especially intense scrutiny.

"We are dealing with more suspicious investors," said Ashraf Bseisu, chairman of the Bahrain Insurance Association, a grouping of 39 insurers, brokers and reinsurers.

"People are going back to the drawing board to make sure that the structure of the securitization is more palatable and more sellable," he told the Reuters Islamic Finance Summit in Manama.

DEMAND FOR HOUSING

Securitizations in Arab countries were just getting off the ground when the subprime crisis struck. About $2.5 billion of securities backed by mortgages and other assets securities had been sold by July, the Dubai International Financial Centre estimated.

Among them was a $350 million bond sold in 2005 by Emirates National Securitization Corp in a government-sponsored deal that was intended to kickstart sales, so deep was the belief that the region needed to develop a market for asset-backed loans.

Securitizations allow investors to buy bonds that are directly tied to mortgages, auto loans or other income-producing assets. The loans move off the balance sheets of banks, freeing them to lend more and drive growth in mortgage markets, which in turn helps meet demand for housing.

Saudi Arabia, the largest Arab economy, is planning a mortgage law to help fund a market for new homes that according to Dubai-based mortgage firm Tamweel needs 200,000 units a year.

The Emirates National Securitization bonds were backed by a cash deposit, which investors could turn to in the event of default on the home loans they had financed. That triggered a race for the Gulf's first "real" securitization.

The securitization market had the potential to be worth $250 billion by 2010, Nasser al-Saidi, chief economist of the Dubai International Financial Centre, said in July.

The market still has the potential, but will probably take longer to live up to it, officials said.

"securitization as a means of making risks opaque has fallen out of favor," said Duncan Smith, Arab Banking's global head of Islamic financial services at Bahrain's Arab Banking Corp.

Since Saidi's prediction in July, Dubai-based mortgage lender Amlak Finance AMLK.DU said it was delaying plans to sell mortgage-backed bonds because of the credit crisis.

Tamweel TAML.DU sold asset-backed bonds in July, but said on Monday it had no immediate plans for another sale.

Both Tamweel and Amlak are competing with banks in the United Arab Emirates, where the value of home loans doubled in the year to March 31.

Unlike banks, mortgage firms cannot take deposits and are under greater pressure to free up cash for lending.

"If we are not able to tap the securitization market before the first half of 2009, it would be a concern," Feras Kalthoum, Tamweel's head of investments, said at the summit in Dubai.

The nascent nature of the Middle Eastern securitization market makes development more difficult in times of risk aversion. Relatively few Gulf Islamic bonds are assigned credit ratings. Fewer still are broken up into tranches that allow ratings agencies to assess the risk of specific types of assets more accurately, said Smith.

Bseisu and other officials view the fallout from the subprime crisis as a temporary setback.

A Reuters poll of analysts last week showed most believed Securitizations would be the most important product for Islamic banks, which comply with a ban in Muslim law on trading debt and lending on interest.