Bahrain- Sukuk comeback 

(MENAFN - Oxford Business Group) Bahrain's Islamic banking sector is showing positive signs amid the global slowdown, and recent events seem to indicate an uptake in investors' appetites for sukuk, or sharia-compliant bonds.

A recent report from Global Investment House (GIH), a Kuwait-based investment company, predicted continued growth in sukuk issuance in 2009 as a result of the increasing number of Islamic financial institutions setting up shop in Bahrain. In 2008 and in the first two months of 2009, the country saw the launch of a number of sharia-compliant institutions.

Bahrain recently welcomed the newly established Capinnova Investment Bank, the sharia-compliant investment arm of the Bank of Bahrain and Kuwait (BBK), and the introduction of Standard Chartered Saadiq, the global financial institution's new Islamic bank.

Additionally, the world's largest Islamic bank is set to be launched in June. Though details have yet to be disclosed, the Bahrain-based bank would have a paid-up capital of $11bn, with the Islamic Development Bank as its largest shareholder, Sheikh Saleh Abdullah Kamel, the chairman of the General Council of Islamic Banks and Financial Institutions, was reported as saying. The bank, which has yet to be formally named, has been in the pipeline for several years and is currently undergoing final review on its capital input.

But like other economies dealing with the economic slowdown, the sukuk market in Bahrain faced a difficult year in 2008. The GIH report showed that the amount raised by sukuk issuances in Bahrain dropped from a total value of $1bn in 2007 to $700m in 2008.

The country did, however, maintain its fourth position worldwide, behind Malaysia with $5.47bn; the UAE, with $5.3bn; and Saudi Arabia, with $1.87bn. Out of these four countries, Bahrain's year-on-year drop was the lowest, while Saudi Arabia and Kuwait recorded the biggest slumps, down 67.2% and 77.2%, respectively.

These results reflect a larger trend, as global sukuk issuance fell 54.5%, from $33.1bn in 2007 to $15.1bn in 2008. Issuances in the fourth quarter of 2008 were particularly weak. During the first three quarters of last year, a total number of 139 sukuk were launched worldwide through which $14.3bn was raised, averaging $4.8bn per quarter. However, during the fourth quarter, the number dropped to 26, raising just $800m. The decline is partly attributable to deteriorating market conditions worldwide, causing investors to hold on to their cash.

The decline was further exacerbated by a widespread misunderstanding of comments from the head of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) that lead to headlines suggesting that 85% of all sukuk were actually not sharia-compliant.

On the flip side, the GIH report noted that the issuance of sukuk is likely to grow as a result of conventional financial institutions' increased efforts to diversify their finance portfolios, but standardisation of the sector seems vital. Different interpretations of sharia-compliant products sometimes leads to confusion among investors, and a lack of standardisation hampers rating agencies from effectively evaluating products, which in turn hinders engagement from the conventional sector.

"Standardisation is a requirement for the success of the system. Without standardisation we cannot really spread our products across the world and it would be too confusing for the average investor or consumer to deal with," Mohamad Nedal Alchaar, the secretary-general of the AAOIFI, told OBG.

Earlier this month, the Central Bank of Bahrain (CBB) announced that the monthly issue of Sukuk Al Salam Islamic securities had been oversubscribed by 300%. Subscriptions worth BD18m ($47.8m) were received for the BD6m ($16m) issue, which carries a maturity of 91 days. The expected return on the issue, which begins on March 4 and matures June 3, is 1.07%.

The country's banks seem to have sufficient short-term liquidity, as not one has called upon the CBB's Islamic sukuk liquidity instrument, designed to enable financial institutions, both conventional and Islamic, to access short-term liquidity.

"We created this should any reason arise [and] there is a shortage of liquidity," Ahmed Buhijji, the director of banking services at the CBB, told the local media in February. "No bank has called upon the facility yet as Islamic banks in Bahrain do not suffer from liquidity problems," he added.

The fact that sharia law prohibits interest-based financial products, which have hurt the financial profiles and performances of many conventional banks, has helped Bahrain's Islamic institutions. As Alchaar told OBG, "Islamic banking refrains from aggressive transactions such as speculation, investment in derivatives, involvement in uncertain transactions or trade in debt."

The GIH's report estimates that more than a hundred sukuk issues aiming to raise more than $38bn have been announced worldwide. While some of these may not materialise as a result of the financial turmoil, the figures show that the industry is likely to take off once markets recover. As a global centre for Islamic finance, Bahrain has the opportunity to capitalise on its reputation and particularly that of its esteemed regulatory framework. The Islamic finance sector looks to be an important area for future growth.