Islamic finance has taken off in the oil-exporting region, including in Bahrain and the United Arab Emirates, as banks complying with sharia expanded retail lending and companies sold sukuk and took Islamic loans to raise funds for expansion. But unlike some countries in Asia, the Gulf lacks liquid lo
cal markets in short-term Islamic instruments such as sukuk, the Islamic alternative to conventional bonds.
The global financial crisis could act as a catalyst to change this, much as the Asian crisis of the late 1990s did for Malaysia, said Giambattista Atzeni, Bank of New York Mellon’s regional head of corporate trust. "Malaysia developed the market for Islamic products straight after the Asian crisis, coming out with a sukuk market, a secondary market," Atzeni told the Reuters Islamic Finance Summit in Dubai.
That was mostly a reaction to the crisis … The Gulf is a very active market, and could develop on the same lines as Malaysia." One key aspect that has hindered the development of liquid regional sukuk markets has been that Islamic debt being issued has tended to carry very long maturities, he said. "If you want to develop a secondary market for sukuk you need to also consider developing sukuk that do not have a long maturity, but matures in three, four or six months," Atzeni said.
He said setting up a Gulf Arab central bank as part of plans to establish a regional monetary union and single currency could help the Islamic finance sector develop the adequate market infrastructure. In the meantime, developing tools to help Islamic bank treasuries manage risk is one area banks have been tapping into. Banks taking part in the summit said they were creating derivatives products that comply with sharia, such as profit rate swaps and currency swaps that enable the banks and their clients to
hedge to fix the cost of production.
For its part, Bank of New York Mellon is working with several partners on developing a platform for Islamic liquidity funds which would act like conventional AAA money-market instruments, Atzeni said. "I don’t think there are that many rated Islamic liquidity funds available in the market … these are products people would be keen to tap into." "What we are trying to achieve is to develop a platform similar to what we have in a conventional space where we have a platform of almost 100 money market funds t
hat are made available to our clients for them to pick and choose what they want.
Bank of New York Mellon has 90,000 clients around the world and manages $ 11 trillion in outstanding debt in corporate trust. "We aim to offer the same level of protection, the same tools for investors, the same accessibility to products that is available in the conventional space," Atzeni said.