Lack of Rules Hinders Islamic Financing
After 40 years of delays, the Philippines still faces hurdles in a renewed push to attract Shariah-compliant investors to Muslim Mindanao, its poorest region, according to Islamic lenders.
The Southeast Asian nation lacks regulations and talent to develop the market, said Kuala Lumpur-based Asian Finance Bank Bhd. and CIMB Group Holdings Bhd. Al-Amanah Islamic Investment Bank in Manila, the sole lender dedicated to the industry, was forced to postpone a sale of what would have been the country's first sukuk last year because it wasn't making a profit.
The government announced over the past month that it would draw up a list of Shariah-compliant stocks and revisit a plan to sell bonds complying with the Koran's ban on interest, after signing a peace treaty with rebels to end a four-decade insurgency in the resource rich south. Now is an opportune moment to promote legislation for Islamic finance, Treasurer Roberto Tan said in an Oct. 18 interview in Manila, adding that it would help integrate the Muslim community.
"What remains to be seen is whether the Philippines can develop a tax-friendly regulatory framework and muster the political will to raise awareness of the benefits of Islamic financing," Malek Khodr Temsah, vice president of treasury and investments at Albaraka Banking Group BSC in Bahrain, said in an Oct. 24 interview. President Benigno Aquino's commitment to "lay the groundwork to develop Islamic finance isn't in doubt," he said.
The Philippines has toyed with proposals to draft a Shariah finance bill since 1973 as it seeks development funds for the autonomous region of Mindanao, home to most of its five million Muslims. Idiosa B. Ursolino, Al-Amanah's senior vice president, said in an Oct. 24 e-mail that the bank has no immediate plan to sell sukuk even after it trimmed losses last year.
The government may consider selling Islamic bonds to raise cash for Mindanao, Finance Undersecretary Rosalia de Leon told reporters in Manila on Oct. 17.
Issuing sukuk may be more expensive than debt that doesn't comply with religious tenets. The yield on the Philippines 4 percent non-Shariah-compliant notes due in 2021 dropped 140 basis points, or 1.40 percentage points, to 2.33 percent from the year's high of 3.73 percent reached in January, according to data compiled by Bloomberg. That compares with record-low borrowing costs for global Islamic securities of 2.86 percent, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows.
Sergey Dergachev, a senior portfolio manager at Union Investment Privatfonds in Frankfurt, said he would buy a sukuk from the Philippines as sovereign Islamic bonds are rare and they would offer diversification. Albaraka's Temsah said he isn't interested as valuations aren't compelling.
"I would assume that a Philippine sukuk would be strongly supported by local banks and dedicated sukuk investors, making this deal very interesting," Dergachev said in an e-mailed reply to questions on Oct. 24.
Global issuance of Islamic bonds climbed 79 percent to a record $39.4 billion in 2012 from a year earlier, data compiled by Bloomberg show. The notes returned 8.5 percent this year, while debt in developing markets jumped 16.3 percent, according to separate prices on the HSBC/Nasdaq index and JPMorgan Chase & Co.'s EMBI Global Composite Index.
Average yields on sukuk have dropped 113 basis points this year, narrowing the spread with the London interbank offered rate by 91 basis points to 182 basis points as of Oct. 24, the HSBC/Nasdaq index shows. …