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Dubai market makers to boost sukuk trade |
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9/6/2006 8:18:42 AM |
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Dubai: Dubai is developing a system of market makers to encourage trading in Islamic bonds, an illiquid niche market expected to be worth more than $100 billion in five years, a senior official said.
Islamic bonds, or sukuks, are almost always held to maturity, partly because the pool of outstanding issues is much smaller than the pile of cash in the hands of investors who want to comply with Islam's ban on borrowing or lending on interest. But that is changing as the cash from an oil boom fires up interest in the sukuk market, said Khalid Yousuf, director of Islamic finance at the Dubai International Financial Centre (DIFC).
The DIFC, a dollar-based offshore investment zone, is bringing together major investment banks to act as marketmakers for sukuk listed on its new bourse, the Dubai International Financial Exchange (DIFX).
"The primary objective is to create a debt capital market in Islamic finance because currently there is none," Yousuf said in an interview on the sidelines of an Islamic funds conference in Dubai.
"We will have a group of major financial institutions interested in the sukuk market that will become the underwriters and marketmakers in sukuk issues."
Marketmakers quote two prices on a security, offering simultaneously to buy at one price and sell at the other, creating a more liquid market.
He said the DIFC was expecting global sukuk issuance to top $100 billion in five years, against around $13 billion currently. Much of the growth will be driven by Gulf oil exporters, looking to invest around $650 billion a year.
Yousuf said he expected large government-owned companies in the Gulf to become major sukuk issuers and estimates that $9 billion worth of new issues will hit the market before the end of the year. The biggest sukuk in history, a $3.5 billion convertible issue by the holding company of DP World, priced this year and is among the $4 billion worth of Islamic bonds listed on the DIFX.
With the sukuk market taking off, Yousaf sees Islamic banks getting a larger slice of the bank assets pie in the Gulf, where per capita incomes are far higher than in most Muslim countries.
A growing number of conventional banks are launching subsidiaries that operate in compliance with Sharia law. Yousuf estimates that 50 per cent of total bank assets in the UAE will be Sharia-compliant by 2009, up from 15 percent now. "Qatar, Bahrain, Kuwait and Saudi Arabia would have pretty much the same route as we see in the UAE."
Islamic banks tend to be smaller than conventional banks and growth has been hampered by a shortage of instruments in which to invest funds, especially short-term funds.
Agenda
DIFC will launch expansion project next year
* The Dubai International Financial Centre will have a group of major financial institutions interested in the sukuk market that will become the underwriters and marketmakers in sukuk issues, said Khalid Yousuf, director of Islamic finance at DIFC.
* The DIFC would launch the project next year and hoped to sign up international players such as Deutsche Bank, Morgan Stanley, Merrill Lynch as well as regional institutions like Dubai Islamic Bank.
* The marketmakers will also offer repurchase agreements on sukuk, which give investors a share of profits from approved investments instead of interest.
* "The objective is to offer an exit route for investors and issuers alike. The purpose is not for these banks to be issuers only, but to be able to provide the market with a mechanism for their instruments to generate liquidity," Yousuf said.
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