Thursday, March 27, 2014

First Shariah Exim Bank to Test Bullish Dubai

Dubai’s plan to start the first Shariah-compliant export-import bank is set to be an early test of its ambition to be the capital of the global Islamic economy. The unrated emirate, which rolled over $20 billion of debt last week, would need to ensure the bank is capitalized and has a credit rating, according to Rizwan H Kanji, Dubai-based partner at King & Spalding LLP, reports Bloomberg (24 March 2014).

The Middle East business hub on March 19 said it appointed Noor Investment Group to study the feasibility of the lender.

“This project goes to the heart of Dubai’s Islamic drive,” Kanji told the newswire by phone from Dubai March 20. “There’s a gap in the market” for more trade financing options, he said, and the rating would be needed to bolster the credit-worthiness of borrowers.


Dubai is working on a Shariah board to develop regulations and a center for corporate governance as it seeks to become the capital of the world’s Islamic economy by the end of 2016. Shariah-compliant banking assets worldwide probably exceeded $1.7 trillion in 2013, according to Ernst & Young LLP. The emirate seeks to tap a growing demand for financing from Muslim countries that led the Islamic Development Bank to boost its sukuk program by more than 50 percent to $10 billion last year.

Dubai’s sukuk, Islamic bonds which comply with the religion’s ban on interest, have rallied this year as the emirate benefits from a resurgence in trade and tourism that boosted economic growth to 4.9 percent in 2013. The yield on its $750 million notes due January 2023 tumbled 45 basis points to 4.28 percent March 21, compared with a 23 basis-point drop  to 4.41 percent for Middle East sukuk on average, according to JPMorgan Chase & Co. indexes.

 Currently “there are a couple of conventional Exim banks that provide guarantees and options that comply with Shariah,” Kanji said.

Export-Import Bank Malaysia Bhd last month issued the first dollar-denominated sukuk from an Exim bank, according to a statement on the Malaysian National News Agency. The lender -- which offers Islamic cross border financing, trade financing and guarantees, according to its website -- sold $300 million of five-year notes with a yield of 2.874 percent.

IDB provides similar support to an Exim bank for its member countries, according to Kanji. The development bank in February approved more than $700 million for projects in nations including Egypt, Azerbaijan, and Burkina Faso.

Dubai’s bank “will complement what IDB does,”  Afaq Khan, chief executive officer of Standard Chartered Saadiq, said by phone yesterday. It could be one of many Exim banks to come in the next decade because there is so much room to grow in the industry, he said. For Dubai “The opportunity is there to be first and best and this will change the underlying economy of the country,” he said.

Dubai, one of seven sheikhdoms that make up the United Arab Emirates, last year set a three-year timetable for its Islamic ambitions. The emirate struck a deal March 16 to roll over $10 billion in loans owed to neighboring Abu Dhabi and the same amount in bonds due to the U.A.E. central bank. It plans to spend $8 billion on infrastructure as it prepares to host the World Expo in 2020.

“An Exim bank could play a key role in infrastructure improvement, as well as credit enhancement for other jurisdictions,” said Kanji. “Many Islamic states need financing and want it in a Shariah-compliant manner, but don’t have the credit worthiness.”