By Joseph Edwin
Of DOW JONES NEWSWIRES
KUALA LUMPUR (Dow Jones)--To attract investment from oil-rich Gulf Arab states, U.S.-based Dow Jones Islamic Market Index Group is planning an Islamic bond index for the growing Islamic capital market, a top official of the group said Thursday.
"What we're trying to do (with the Islamic bond index) is the next step in building the capital market," said Rushdi Siddiqui, global director of U.S. based Dow Jones Islamic Market Index Group, told Dow Jones Newswires in an interview.
The plan, still very preliminary, represents the group's efforts to develop the potentially lucrative Islamic capital market further and will complement its equities-based Islamic index, which will be launched at 0900 GMT later Thursday.
Under shariah or Islamic law, payment of interest or riba is banned as is investment in companies involved in activities deemed unacceptable, such as gambling. For that reason, Islamic bonds, known as sukuk, are typically structured as profit-sharing transactions.
The amount of Islamic funds available for investment overseas is huge with some estimates putting the size at US$800 billion to as much as $1.5 trillion. About $270 billion has already been invested globally in Islamic products, with the amount growing at 10%-15% per year.
Growth could have been faster but for a lack of an international standard of Islamic compliance. Islamic councils in the Middle East and elsewhere which approve Islamic bonds for sale to Muslims hold slightly different interpretations about what is acceptable, making Islamic investors nervous about buying bonds from outside their jurisdiction.
"We're working on a sukuk (Islamic bond) index with a shariah (also known as Gulf) standard," said Siddiqui, adding that the index is expected to include both sovereign and quasi-sovereign Islamic bond issues.
The global Islamic bond market kicked off in 2002 when Malaysia issued the first global Islamic sukuk government-backed $600 million five-year sukuk with a yield of 0.95 percentage point over Libor. The underlying transaction consisted of a sale-and-leaseback involving state-owned land located around Kuala Lumpur.
Since then, sukuk issuers have included real estate, aviation, construction and petrochemical companies in countries including Malaysia, Pakistan, U.K., Singapore, Bahrain and the United Arab Emirates.
The most recent international sukuk is a five-year US$500 million bond, issued off a US$1 billion medium term program by the Islamic Development Bank, the Saudi Arabia-based arm of the Organization of the Islamic Conference.
That was IDB's second international Islamic offering; it sold a US$400 million sale in July 2003. The IDB is expected to tap the market for another $500 million later this year.
Later Thursday, RHB Research Institute and Dow Jones & Co. Inc. (DJ) will jointly launch an investment index covering mainly Malaysian-listed companies that comply with Islamic Shari'ah law. Some 45 Malaysian-listed, largely blue-chip, companies will be on the index.
The index is likely to see good response as it will help benchmark investments. Said Zaha Rina Zahari, chief executive officer of RHB Securities, which is a unit of banking group RHB Capital Bhd. (1066.KU), separately, "They (Gulf investors) want to diversify their portfolio and they want to come here (to Malaysia)."
The index will also help RHB Capital, which owns the research institute, to introduce new Islamic products and services, scheduled for later this year. Its 70%-owned RHB Bank Bhd. recently launched a wholly-owned Islamic banking unit, RHB Islamic Bank Bhd.
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