Islamic Financing Steps into Breach ; as European Banks Take a Breather, Gulf Countries Are Issuing More Sukuk

By Hamdan, Sara | International Herald Tribune, March 29, 2012 | Go to article overview

Islamic Financing Steps into Breach ; as European Banks Take a Breather, Gulf Countries Are Issuing More Sukuk


Hamdan, Sara, International Herald Tribune


In the first three months of 2012, $6 billion of sukuk were sold in the six countries of the Gulf Cooperation Council, almost as much as in the whole of 2011.

As European banks have pulled back from overseas exposures to concentrate on cleansing their balance sheets and strengthening their core businesses, Middle Eastern and Asian borrowers have turned to local investors and alternative forms of financing, analysts say, with issues of Islamic bonds, or sukuk, notably on the rise.

In the first three months of 2012, $6 billion of sukuk were sold in the six countries of the Gulf Cooperation Council, approaching the total of $7.3 billion issued in the whole of 2011, according to data from the Dubai bank Emirates NBD.

"Many issuers who could have raised funds from European banks are now issuing sukuk and conventional bonds," said Eric Swats, head of asset management at Rasmala Investments in Dubai. "Without the avenue of European financing available, they are turning to the loan markets."

European banks lent about $237 billion into the G.C.C. region in the first nine months of 2011, according to a new report by Moody's Investors Service, which said that Moody's now expected to see "a sustained reduction of lending at a time when the G.C.C. faces sizable funding requirements."

The six Gulf countries have an estimated $1.8 trillion of capital investments under way or planned over the next 15 years, the report noted.

Saudi Arabia, Kuwait and Oman, which have relatively low exposures to European lenders, are likely to be less materially affected by their retrenchment than the United Arab Emirates, Qatar and Bahrain, it said.

Much of Qatar's rapid growth has been, and continues to be, financed domestically from oil and gas revenue through a banking system that effectively recycles government deposits into loans to government-related entities and contractors. But despite the country's huge wealth, analysts say foreign banks remain a main source of financing, particularly for coming World Cup 2020 infrastructure projects.

As of September 2011, the cumulative total of European bank lending to Qatar amounted to about $43 billion, equivalent to 25 percent of Qatar's $173 billion annual gross domestic product.

European bank financing of the U.A.E. economy as of September last year amounted to $99 billion, or 28 percent of the country's $358 billion annual G.D.P.

"The U.A.E. economy, particularly Dubai, has a significant reliance on foreign funding," said Khalid Howladar, an analyst at Moody's in Dubai. …

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