LUXEMBOURG - Appetite for Islamic Bonds rises despite "Grexit"-fears

news.xinhuanet.com - DUBAI, May 26 (Xinhua) -- While the Euro zone crisis has been weighing on investors' sentiment and on global economic prospects, the issuance of Islamic bonds witnesses a renaissance in East and West likewise.
Global issuances of Islamic Bonds, known as Sukuk, surged 55 percent year-on-year in the first quarter of 2012, reaching 43.5 billion U.S. dollars, according to market research agency Zawya.
Despite the escalation of the Euro zone debt crisis in Greece and Spain, where banks suffered withdrawals worth 800 million Euros (one billion dollars) and one billion Euros (1.25 billion dollars) respectively, weighing on global stock indices in recent weeks, new Sukuk issuances are in the global pipeline.
Last May 22, Fernand Grulms, CEO of Luxembourg for Finance, an initiative which promotes Luxembourg as the second largest hub for investment funds, said in Manama at the World Islamic Funds Conference, that the Grand Duchy plans to issue Islamic bonds. These would be the first Triple-A rated Sukuk issued by a Euro zone sovereign issuer.  (source)


In contrast to conventional bonds, Sukuk do not pay interest to bondholders, but they let investors participate in periodic profit distribution. Islam denies interest, short-selling and favors instead profit sharing models. In addition, Sukuk cannot create profits out of pure monetary streams, but they must be issued based on tangible assets.
Grulms did not give a specific date for the first "Lux-Sukuk" to be launched, but said that Luxembourg's Ministry of Finance was working on a detailed plan. Luxembourg, Germany, Finland and The Netherlands are the sole four Euro zone countries (out of 17 member states) which enjoy the highest investment grade rating Triple-A, given by Standard and Poor's and Moody's. Grulms added that chances are high that last year's total issuances of 87 billion dollars globally for Islamic bonds can be topped in 2012.
Elsewhere in the world, Dubai Islamic Bank successfully launched last Tuesday a Sukuk worth 500 million dollars with 5 years maturity. The issuance has been four times oversubscribed, mirroring strong interest among international investors.
On April 2, London-based Ethical Investment Company launched the first UK-based investment Sukuk and aims to raise 200 million Pounds Sterling (313 million dollars) within the next 18 months. London is home of five stand-alone Islamic banks, and the London Stock Exchange has 31 Sukuk worth 19.5 billion dollars listed. Because of this the UK is considered the beachhead of Islamic finance in Europe.
Also last Tuesday on May 22, Sheikh Ahmed Bin Saeed Al-Maktoum, President of the Dubai Civil Aviation Authority told Xinhua that the planned expansion of Dubai airports with 7.8 billion Dollars until the year 2020 "might be done with the issuance of Islamic bonds."
Meanwhile, the Islamic Development Bank in Jeddah, which finances projects based on Islamic law or Shari'ah in Islamic states, announced it eyes the launch of a one billion dollars- Sukuk in June. However, the Sukuk market in South-East Asia and in particular in Malaysia, and not in the Gulf Arab countries, remains the largest geographical area for Islamic bonds.
Despite the overall blooming prospects for new Sukuk issuances, speculations of a return of the old Drachma currency in Greece (" Grexit"-fears, an anagram of the words Greece and exit) took its toll on Sukuk pricing as the yield curve of the HSBC NASDAQ Dubai U.S. Dollar Sukuk Index shows.
The gauge tracks the return of an emerging portfolio, consisting of 36 floating rated vanilla Sukuk denominated in U.S. dollar, Pound Sterling, Japanese Yen and Euro. The measure's combined yield rose slightly in the last four weeks from around 3. 60 percent to 3.78 percent.
Bond yields perform inversely to the prices of bonds. The euphoria about Shar'iah-compliant way of finance cannot hide the fact that the market is still tiny compared to interest-based or conventional financing. In 2011, bond issuances based on the greenback amounted to 5.4 trillion dollars.

Source: http://news.xinhuanet.com/english/business/2012-05/27/c_131612993.htm  - May 27, 2012