Retail sukuk bonds a hit with investors

By Aditya Suharmoko , THE JAKARTA POST

The volume of the new government retail sukuk (Islamic bonds) absorbed by individual investors is exceeding government expectations.

That was according to official figures released by the Finance Ministry on Monday.

The government managed to book orders of up to Rp 5.56 trillion (US$ 496.4 million) of retail sukuk in less than a month, or about 3 times its initial target of Rp 1.77 trillion as originally submitted by 13 designated selling agents.

“It’s an example of how dynamic the financial market conditions are ... “ Finance Minister Sri Mulyani Indrawati said in a press conference.

It was the first retail sukuk bond ever issued by the government.

The selling agents are .

They had set a low target taking into account potential concerns of investors over financial instruments during a financial downturn.

“We’ll sell our bonds as long as the price is rational, and the profile won’t burden the state budget. We’ll always cope with the dynamic market conditions,” Mul-yani added.

The retail sukuk is part of the government’s effort to plug the budget deficit, which is forecast to reach Rp 136.9 trillion, or 2.6 percent of the gross domestic product, this year.

According to the Finance Ministry, 14,295 investors have so far ordered retail sukuk, 42 percent of whom are residing in Jakarta.

A large proportion of these investors, 46 percent of them, ordered a retail sukuk purchase of less than Rp 100 million in total.

The retail sukuk is sold at Rp 1 million per unit, with a minimum purchase of Rp 5 million. The yield is 12 percent, maturing on Feb. 25, 2012.

Most of the investors are working as civil servants, private employees, housewives and entrepreneurs. Private employees ordered the largest bulk of purchases, equivalent to about 39 percent of the total volume of the retail sukuk, so far.

Mulyani said the largest single purchase of retail sukuk amounted to Rp 35.3 billion, while the lowest single purchase was Rp 5 million.

The Finance Ministry named Mandiri and HSBC as the best selling banking outlets, and then Trimegah and Andalan Artha as the best securities outlets.

The retail sukuk will be on offer until Feb. 25. It can then be traded after being listed on the
Indonesian stock exchange as of Feb. 26.

The government is still also considering selling international sukuk bonds and medium term notes (MTN) in the coming months.

Bond issues are a government option for securing funds to help cover the state budget deficit.

DIFC chief economist urges Gulf gov'ts on sukuks

by Soren Billing

There has never been a better time for Gulf governments to start issuing Islamic bonds (sukuks), despite existing issues trading at “outlandish” prices, the chief economist of Dubai International Financial Centre (DIFC) has said.

“This is the time for governments to start introducing sukuks as part of public finance,” Dr Nasser Saidi told reporters at a press conference.

By using sukuks to finance major projects such as power plants, roads and ports, GCC governments would help the region consolidate its position as an international centre for Islamic .

“This is the time at which governments should be active with their central banks to create money markets in Shariah compliant instruments that the central banks can then use for assisting and providing liquidity to Shariah compliant institutions,” he said.

By simply running down the surpluses accumulated during the six year oil boom governments would risk losing investments that could continue to earn them an income, he noted.

Dr Saidi estimated the total size of that surplus to be around $950 billion.

"As governments develop the debt market, it will encourage the private sector to start issuing debt again," Dr Saidi said.

Asked about the low price of Gulf sukuks in the secondary market, he said prices are likely to return to more reasonable levels within the near future.

“I think this is a temporary phenomenon. I think the pricing is unrelated to the fundamentals,” he said.

“It doesn’t make a great deal of sense to me that you are pricing UAE debt as being more risky than Iceland…. This current pricing is outlandish.”

The amount raised globally from sukuk issuance decreased by 54.5 percent in 2008 from the year before to $15.1 billion, while the number of issues rose to 165 from 129, Global Investment House said in a research note on Thursday.

“The decline in sukuk issuance is due to the credit crunch that forced investors to step aside from the fixed income market, including the Islamic one,” the investment bank said.

“As evident of the credit crunch effect on sukuks, issuances in the fourth quarter of 2008 were weak when compared with other quarters in the same year.”

In the first three quarters of last year, the amount raised from sukuks averaged $4.8 billion per quarter, compared with only $0.8 billion in the fourth quarter.

GCC countries and Malaysia continued to be the largest markets, accounting for 55.5 percent and 36.3 percent respectively of the dollar amount issued.

Source : ArabianBusiness.com

GCC set to see $30bn Islamic bonds issuance

by Andy Sambidge

GCC financial institutions and industrial companies are soon set to issue Islamic bonds worth $30 billion, according to Moody’s Investor Services, the ratings agency.

Companies had delayed bond issues due to general economic conditions but should move forward by mid-June this year if there is prudent government involvement and an increase in oil prices, said Faisal Hijazi, business development manager and finance analyst for Moody’s, during an interview with CNBC Arabiya.

Hijazi confirmed that Islamic bond issues fell by more than 50 percent in 2008 compared to 2007.

He pointed out that the value of bonds issued in 2008 was just over $15 billion, while in 2007 it amounted to more than $32 billion.

“Factors behind the bond issue decline were based on the global financial crisis and the lack of investor confidence in the financial markets,” Hijazi said.

He added that new standards by accounting and auditing bodies of Islamic financial institutions also raised doubts on the legality of some Islamic bonds.

Source : ArabianBusiness.com

India's Financial Tech to launch new boarse in Bahrain

MANAMA, Jan 22 (Reuters) - India's Financial Technologies Ltd (FITE.BO) will launch a new bourse in Bahrain that will provide a secondary market for Islamic bonds, a company executive said.

The new exchange, called Bahrain Financial Exchange, has been licensed by the Gulf state's central bank and plans to start operations in the first quarter of next year, Financial Technologies' director Arshad Khan told Reuters.

Unlike conventional bonds the Islamic bond market, or sukuk, lacks a strong secondary market and most buyers hold the asset to maturity.

"This will be an opportunity to establish a secondary market where the transfer of ownership can keep happening, from buyer to seller," Khan, a director for business development in the Middle East and North Africa, said in an interview late Thursday.

"When a sukuk comes onto the market (today), banks will try to absorb it in their own portfolio, or sell it to their customers", he said.

The exchange will provide a trading platform for both Islamic and conventional products in equities, derivatives, commodities and currencies.

A strong secondary sukuk market could attract other important institutional investors such as pension funds to the sukuk market, Khan said.

"In so far, sukuk has gone to big financial players or high-end individuals, it has not gone to the retail market," he said.

Sukuk volumes dropped dramatically in 2008, hit by the global liquidity crunch. Total sukuk issuance stood at $14.9 billion, down 56 percent from 2007, according to ratings agency Standard & Poors.

Khan said he still sees fundamental demand for sukuk despite the current financial crisis. He said sovereign sukuk issuers, in particular, would be a key driver in reviving the market.

Singapore on Monday announced its first sukuk programme with a volume of $134 million to promote the growth of Islamic finance in the South East Asian city-state.

Islamic banks cater to investors who want to avoid earning or paying interest.

"There's a lot of money being aggregated or collected in Bahrain, but because local investment (opportunities) don't exist, it goes out," he said.

The small island kingdom of Bahrain has established itself as a regional banking centre on the back of Saudi oil wealth that uses Bahraini banks to invest on international markets. (Reporting by Frederik Richter; Editing by Kazunori Takada) (For Reuters content on Islamic finance, click on ISLAMIC)