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Conventional Banks to Tap Rich Islamic Investors
World Economy

Conventional Banks to Tap Rich Islamic Investors

Islamic bond programs from a trio of big conventional banks are set to expand the boundaries of Islamic finance, helping open the market to first-time issuers while testing the banks’ ability to win over industry purists.
Since June, France’s Societe Generale, Bank of Tokyo-Mitsubishi UFJ (BTMU) and Goldman Sachs have set up sukuk programs, aiming to tap the pool of cash-rich Islamic investors.
They are treading a fine line, having to reconcile the fact that their businesses mostly depend on conventional banking practices – interest payments, and to some degree monetary speculation – which Islamic principles forbid.
An abortive plan by Goldman to issue sukuk in 2011 showed the obstacles which conventional banks can face in the market. Some in the industry accused Goldman of failing to follow Islamic principles, and it never went ahead with that issue.
But if the three banks are successful and become regular sukuk issuers, they could help to widen Islamic finance beyond its core markets in the Middle East and southeast Asia.

 Non-Muslim Countries
Governments in non-Muslim countries are already issuing sukuk; Britain and Hong Kong made debut issues earlier this year, while South Africa and Luxembourg are next in line. The entry of conventional banks into the market may be needed to prompt significant numbers of Western companies to issue.
“It builds credibility in an industry that is attracting many new participants,” said Khalid Howladar, Moody’s Investors Service’s global head of Islamic finance.
“Key financial institutions represent volume issuers in mature markets. They will improve liquidity and encourage more global investor participation.”
Year-to-date, sukuk issuance totals $88.9 billion through 475 deals globally, up from $76.4 billion through 574 deals a year earlier, according to Zawya, a Thomson Reuters company.
But the market remains stubbornly reliant on sovereign and quasi-sovereign issuers, who represent a combined 77 percent of the total; most corporate sukuk come from Malaysia.
Only a few companies from non-Muslim countries have so far issued sukuk, including GE Capital, which in 2009 raised $500 million through five-year Islamic bonds backed by interests in a portfolio of aircraft, and Japanese brokerage Nomura Holdings, which in 2010 issued $100 million of two-year sukuk in Malaysia.

 Credentials
HSBC is the only non-Islamic bank to have issued sukuk, through a $500 million deal in 2011. Market acceptance of that deal was ensured in part by the fact that HSBC operates a major Islamic retail brand, HSBC Amanah.
SocGen and BTMU, Japan’s largest lender, do not have Islamic retail banking brands. So they have been building their Islamic credentials by establishing strategic relationships with heavyweight Islamic financial institutions.
BTMU, which set up its $500 million multi-currency sukuk program in Malaysia in June, signed in April a cooperation agreement with the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the Islamic Development Bank.
Last week, BTMU extended $100 million in murabaha financing to the ICD, marking the first time that the ICD had raised cash from a non-Islamic financial institution. Murabaha is a common cost-plus sale arrangement in Islamic finance.
The participation of conventional banks in Islamic finance is positive as long as they ensure adherence to sharia principles in a way that is acceptable to the market, the ICD said in a statement to Reuters.

 

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