Wednesday, 14 January 2009

Islamic Bonds Issuance Suffered Drop of 56 Percent in 2008, Following Confusion Over Shariah Laws, Impact of Credit Crunch

The value of Sukuk, or islamic fixed-income securities, issued last year tumbled 56 percent last year to $14.9 billion, according to a report by Standard and Poor's. Sukuk have emerged over the past three decades (especifically since 1975) as a relevant asset class that has enabled islamic companies to raise capital without breaking the basic principles of the Shariah (let's remember that, in the islamic world, Shariah prohibits the payment of fees for the renting of money.) Sukuk are, therefore, a form of commercial paper in which an investor has ownership of an underlying asset.

The decline in sukuk issuance last year, as well as that of exotic instruments and asset-backed securities, resulted from the fallout in global credit markets, the increase in borrowing costs and the subsequent decline in liquidity levels, and uncertainty. But one very reason that put sales of sukuk at a grounding halt for a great part of the year was due to confusion about the Shariah compliance of some sukuk by the Accounting and Auditing Organization for Islamic Financial Institutions, says S&P. Ijara, or the sukuk used for project and lease financing, was the favourite type of Sukuk issued last year (it made up for 45 percent of all issuances.)

I read last year in a report by a big international bank that the stock of debt represented by sukuk financing tops $250 billion (or, more than $250 billion of sukuk debt has been sold since 1975.) It's a relevant market -- once I talked to the capital markets head of Arab Banking Co.'s Brazilian unit just when the crisis began (around Feb. 2008) and she told me that demand in Brazil for this type of instruments was growing 15 percent a year.

As most specialised securities markets, sales of this asset class won't gather momentum until after the second half of 2009 or early 2010, according to S&P. The same should happen in Latin America to Brazilian FIDCs, or the Colombian mortgage-backed bonds sold by Titularizadora Colombiana. Investors remain on a ''wait-and-see´´ attitude, and it is still hard to assess the damage inflicted by the crisis to the collateral linked to asset-backed bonds in circulation.

One interesting aspect is that the U.S. dollar lost its place as the currency of choice for sukuk last year, according to S&P. The sukuk market will ''continue being skewed toward issuances in local currencies, at least in the foreseeable future,´´ says the rating company. Unfortunately, in the case of Latin countries, that didn't quite happen -- in Brazil the market for FIDCs is shuttered; Mexican issuers are scaling back plans to sell debt; Colombians are only buying AAA or AA rated paper, with issuances only reserved for the biggest borrowers.

1 comment:

  1. Loser .. nadie se interesa por ese mercado. Escriba otra cosa. que guevonada este blog