Dubai trying to give Islamic bonds trading a boost

DUBAI • Dubai is developing a system of marketmakers to encourage trading in Islamic bonds, an illiquid niche market expected to be worth more than $100bn in five years, a senior official said.

Islamic bonds, or sukuk, 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 Yousaf, director of Islamic finance at the Dubai International Financial Centre (DIFC).

The DIFC, a dollar-based offshore investment zone in the Gulf Arab region’s commercial hub, 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,” Yousaf 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.

Yousaf said 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,” Yousaf said.

He said the DIFC was expecting global sukuk issuance to top $100bn in five years, against around $13bn currently. Much of the growth will be driven by Gulf oil exporters, looking to invest around $650bn a year.

Yousaf said he expected large government-owned companies in the Gulf to become major sukuk issuers and estimates that $9bn worth of new issues will hit the market before the end of the year.

The biggest sukuk in history, a $3.5bn convertible issue by the holding company of state-owned Dubai Ports World, priced this year and is among the $4bn 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, or Islamic law. Yousaf estimates that 50 percent of total bank assets in the UAE will be shariah compliant by 2009, up from 15 per cent now.

Islam | Business | |