Bahrain: Sukuk is solution to US sub-prime crisis

Bahrain Tribune) In the wake of on-going global credit crunch and failure of the US Fed to come up with an immediate solution to control the damage triggered by the sub-prime mortgage crisis, Islamic banking experts believe that sukuks or Islamic bonds are true solution to this persistent crisis.

Islamic bonds, carrying unique structure features, cannot fall foul of a crisis such as sub-prime mortgage crisis. Sub-prime mortgages are backed by dubiously rated collateralised debt packages which subsequently precipitated a global credit crunch, a senior banker told a global meet on sukuks which opened in Bahrain yesterday.

Chairman and managing director of the Investment Daar, said: "A crisis such as the mortgage one would technically would be unthinkable in the Islamic capital markets sector because it would be againt shariah principles to sell a debt against a debt.

"It is true that credit crunch has delayed the pricing for some planned sukuk issuances such as the one billion dollar Dana Gas Sukuk by few months and that there has been pressure on spreads and margins which have inevitably tightened and that some institutional investors especially from the West were wary of exposure to more risk but on the whole the impact of sukuk market has been eminently manageable.

Talking about the leading role in introducing the Islamic bonds or sukuks, Al Musallam said that Bahrain has had played a major role in the last seven years.

Paper titled 'International and Regional Expansion-the Next Wave for Islamic Sukuks' he said: "For the last seven years the government of Bahrain has been the most proactive issuer of sukuk in terms of number of issuances in the world, starting with the monthly local currency denominated sukuk al salam which has maturity of 90 days, followed by the regular monthly issuance of short-term local currency sukuk al ijara (leasing sukuk) with a matury of 182 days and off course long-term sovereign Sukuk Al-Ajara."

Deputy Governor CBB Khalifa Anwer Sadah, who opened the First International Conference for Islamic Sukuk said that CBB would introduce new regulations for the sukuk market.

"In the backdrop of phenomenal growth in sukuk which had reached $140 billion last year from $4 billion in less than six years time, Bahrain will introduce new regulations for these financial instruments."

He said that the new regulations would speed-up the process lunching the sukuks.

Bahrain, being a pioneer by introducing the sukuk and also the first to launch the sovereign sukuks, is keen to see a major flow of foreign funds for these types instruments in near future especially after the launch of the new set regulations.

Al Sadah said that the move would further strengthen the Kingdom's position as a leading Islamic finance centre in the Middle East.
The new regulations, he said, will enhance Bahrain's position as the pioneering centre for Islamic bonds in the world.

The regulatory regime is aimed speeding up the registration of new sukuks and are also in line with the international standards for Islamic instruments.

"These regulations will encourage more international players to enter Bahraini market," Al Sadah said, adding that CBB would continue to work closely with all organizations including AAOIFI to streamline the existing sukuk market as part of a medium to long-term strategy.

Organised by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the event has attracted over 200 experts, regulators, policy makers and bankers. The audience will have the opportunity to listen to the world class speakers on Islamic finance.
The existing size of the market is projected to further increase to over $200 billion in the next year, especially as more corporate issuances - both rated and unrated - come to the market.

In fact, the sukuk is now becoming an internationally acceptable Islamic capital market's instrument akin to the Murabaha and the Ijarah contracts. Sovereigns such as the UK Treasury and the Japanese Ministry of Finance are now seriously exploring the potential use of the sukuk as a debt management tool in the wholesale sterling and yen markets.

Moody's Investors Service in its recent forecast put the total corporate bond issuance in the GCC by governments and companies at $23.7 billion in 2007, 62 per cent more than in 2006. Nearly half of total issuance ($11.7 billion) was in the form of Shariah compliant Sukuk, including some large benchmark transactions.