Observer / Eman El-Shenawi: Islamic finance stalled?

The $1 trillion Islamic banking industry has stalled while legal uncertainties cloud the role of sukuk (a form of Islamic bonds) as funding tools, according to top banking officials that will meet to discuss these issues in Singapore this week.

When the global crisis hit in 2008, Islamic banking was hailed as a viable alternative to conventional banking, prompting investors to search for alternative sources of finance.

But now, interest in the industry as a new market has become stale and a number of legalities, particularly Britain, Hong Kong and Australia – core Islamic finance markets -- have put on hold sukuk issuance plans and proposed regulatory changes to accommodate Sharia banking.

Sukuk are a broad class of Islamic financial certificates designed to replicate the economic function of bonds, or sovereign bonds in the case of a sovereign sukuk.

The legal uncertainties contributed to a slump in Islamic bond issuance last year, bankers have said. Sukuk sales fell 26 percent to $14 billion in 2010, according to Thomson Reuters data.

In the first meeting of top officials since the Middle East political unrest began, Gulf and Asian regulators and bankers will gather in Singapore over Wednesday and Thursday to restore confidence in sukuk as fund-raising instruments, Reuters reported.

But companies in the Middle East have shown vast interest in bonds and sukuk, as issuers from the region are now returning to credit markets. This comes as the region’s political turmoil changes course and becomes less of a concern globally.

“As momentum starts to build and appetite starts to come back, more issuers will return to market,” Christopher Niehaus, the regional Chief Executive Officer for UBS Investment Bank told a Gulf daily.

HSBC Middle East recently sold $500 million of five-year sukuk, the largest Sharia-compliant issuance by a conventional issuer, The National reported.

Elsewhere, Sharjah Islamic Bank also recently sold $400 million of sukuk, while Islamic Development Bank raised $750 million,

“There’s still a lot of backlog here. Earlier in the year, the political situation had slowed down the momentum,” said Mr. Niehaus.

Bond and sukuk issuances from the Middle East had almost ground to a halt during the region’s political unrest in the first quarter of 2011.

(Eman El-Shenawi, a writer at Al Arabiya English, can be reached at: [email protected])