UK - BLME - Capital markets in a capital city

Bank of London and The Middle East (BLME) recently responded to strong public demand by creating an Islamic capital markets desk. Massoud Janekeh, the newly appointed Head of Islamic Capital Markets for BLME, spoke to Isla MacFarlane about his new role

Prior to becoming Head of Islamic capital markets at BLME, Janekeh was Head of Trade and Business Finance at the bank. In his new role, Janekeh will be responsible for managing the capital markets desk, as well as balance sheet management for BLME. According to Janekeh, a successful Islamic capital market needs robust and commercially attractive products that can provide a genuine alternative to conventional financing instruments. He explains that his new appointment will enable him to combine his experience in structured Islamic finance and BLME's access to London markets to offer BLME's customers a new funding source.

Why did you decide to create the Islamic capital markets desk now?
Islamic capital markets is a new business for BLME in response to market demand for high quality Islamic assets and Sukuk issued by established issuers. BLME is providing a focal point for its clients and market counterparties in the capital markets, as well as investing in its capability for balance sheet management.


What value will the Islamic Capital Markets desk add to the Islamic finance industry?
The development of Islamic capital markets is critical to the growth of global Islamic banking. The desk will focus on origination of fixed income Islamic instruments, such as Ijarah Sukuk and syndicated Murabahas, in order to provide other Islamic financial institutions with access to international issuers that are regularly present in the London market. This will allow Islamic financial institutions in key Islamic markets such as the Middle East and Malaysia to diversify their investment portfolio by enabling exposure to Islamic investment grade assets in US dollars, euros or British pounds.


"THE INTERNATIONAL FINANCING REVIEW ESTIMATED THAT THE EUROPEAN CORPORATE BOND MARKET IS ESTIMATED AT €100 BILLION ($139.2 BILLION) IN 2010 (A FRACTION OF THE VOLUME IN 2007), OF WHICH THE UK'S ISSUES COULD ACCOUNT FOR UP TO A QUARTER"

What are the driving factors behind the demand for Sukuk and Islamic assets?
The drivers for Islamic institutions are not different from other investment houses: there is a need for liquidity, diversification and portfolio management. Presently most Sukuk assets are concentrated in the Middle East and Malaysia, and many in the Middle East are backed by real estate. This combination creates an unacceptable concentration risk for investors. In the absence of international Sukuk issues, Islamic investors mitigate this risk by turning to the equity capital markets or private equity investment, which inherently carries higher risk. Sukuk can be regarded as a fixed income instrument that in principle should provide a lower risk alternative to the equity market.


How much of your demand do you expect will come from the UK?
The UK has a mature and established debt capital market. The International Financing Review estimated that the European corporate bond market is estimated at €100 billion ($139.2 billion) in 2010 (a fraction of the volume in 2007), of which the UK's issues could account for up to a quarter. If we accept an estimate of $20 billion of global Sukuk issuances in 2010, then attracting large capital markets such as European centres can only boost the volumes. Following the banking crisis and liquidity shortages in the global markets, the UK's finance directors are looking to diversify their current funding source to new sources of liquidity. This presents a good opportunity to attract established issuers in the UK to issue Sukuk in order to access a new class of investor. One per cent of the UK corporate bond market could account for two per cent of the international Sukuk market.


What advantages can London's capital markets offer?
London's capital markets offer more depth and diversity that can help to overcome sector issues such as liquidity and risk management. As the largest Islamic wholesale bank in Europe, BLME is well positioned to bring established European issuers and Islamic investors together for the issuance of Sukuk and distribution of Islamic investment products.


How important is the development of Islamic capital markets to the Islamic finance industry?
Islamic banks need a strong fixed income (non-equity) capital market to grow and become more efficient in their liquidity management.


What are the main challenges facing the development of Islamic capital markets?
There are a number of challenges that need to be overcome to grow the market in Europe. The first is to educate the market and in particular the issuers so they can confidently enter into the market with an Islamic instrument. The second is to make sure there are no legal hurdles (and in particular taxation hurdles) that would put the Islamic investors at a disadvantage. The third is to develop the Islamic product so that it is simple and transparent for all parties. Many Islamic products appear highly structured and in the current market this can reduce the investment appetite (or increase the premium for investment).

Finally, the distribution needs to widen so more investors, including fund managers and pension funds, can use the instruments to develop investment products. To achieve this, there needs to be a greater focus on investment grade issues.


How can a lack of liquidity andsecondary market best be remedied?
By creating depth in the market. Many institutions do not invest unless the issue is in excess of $250 million. Predominantly, investors have a minimum investment threshold (which is around $10 million) and do not invest more than five per cent of the issue.


Do you think that IIT's debut Sukuk will lead the way for further corporate issuances in the UK?
The IIT Sukuk was a relatively small transaction ($10 million) more akin to a private equity deal. To position Sukuk as an alternative to a corporate bond, the market is still looking for a listed issue, preferably structured as an Ijarah Sukuk, by an established issuer. I think we are on the way to achieving this.


Do you think that the industry is regaining confidence after the recent Sukuk defaults?
The market is still too volatile, and we still need to wait for the dust to fully settle on some of the Middle Eastern Sukuk issues that defaulted on their payment. However, I think the market will respond positively, as it did with the GE Sukuk, if a well-structured and good credit quality Sukuk is issued in the market.


Do you think there is a need to move towards asset-backed Sukukstructures, as opposed to asset-based?
I think asset-backed structures, such as Ijarah Sukuk, will be important in rebuilding confidence in the market. I also think the structures are much easier to understand for investors and therefore have a better likelihood of investor appeal.


What are your main objectives for the next 12 months?
Our focus in 2011 is to establish the team and invest in more market awareness and origination activity to get the 'new funding opportunity' message across to both our existing and prospective customers.

Source : http://www.cpifinancial.net/v2/Magazine.aspx?v=1&aid=2479&cat=IBF&in=57