Wednesday, March 18, 2009

Islamic investors snap up sukuk ijara as risks grow

KUALA LUMPUR: As the global downturn drags on, battering investor confidence and asset values, Islamic finance markets are expected to increasingly favour the certainty of lease-based bonds over profit-sharing structures to minimise risks, reports Reuters.
With key sectors such as Dubai property and Malaysian manufacturing in a slump, Islamic banks have grown wary about financing through the once-popular musyarakah structure that requires lenders to share a project's risks and rewards, it added.
The report, dated Mar 17, quoted Rodney Wilson, an Islamic finance specialist with the Qatar Foundation, as saying: "Musyarakah-based sukuk involves market exposure and not solely exposure to default risk as with ijara sukuk.
"Given the current uncertainty in equity markets, I do not believe many potential sukuk investors would want musyarakah sukuk in present circumstances. If the market revives and confidence is restored, this may change, but this is unlikely in 2009."
Issuers and investors are expected to lean towards ijarah or rental-based financing where possible, or look to create new lending structures in the US$100 billion (RM370 billion) sukuk, or Islamic bonds, market, it added.
In musyarakah, parties contribute capital to a venture with profits to be shared according to an agreed ratio, while losses are generally divided as per the capital contribution ratio. Sukuk ijarah, rental bonds that are embraced by syariah scholars worldwide, were the most popular form of Islamic bond last year, according to rating agency Moody's.
The report also said Standard & Poor's estimated that more than 45% of Islamic bonds issued in 2008 were structured according to the ijarah principle.
Ijarah is a lease where a bank buys an asset and rents it to its client for a fee that includes the purchase price and the profit rate to be earned by the bank during the rental period.
Favoured for its relatively simple structure and widespread endorsement by syariah scholars, the popularity of sukuk ijarah received a boost after an industry regulator cast doubt on the validity of sukuk mudharabah and musyarakah.