Dubai: Islamic bonds (Sukuk) are likely to become a key tool for banks to meet tightening capital rules and this unexpected trend may be seen soon after the issue of $1 billion sukuk by Abu Dhabi Islamic Bank this month which was probably not contemplated by the founders of modern Islamic finance.
The trend could add further momentum to a global boom in sukuk issuance. It could also ease pressure on banks which find it hard to raise capital from equity issues as global financial instability depresses stock markets.
Abu Dhabi Islamic Bank (ADIB) attracted a spectacular order book of over $15 billion for this month’s $1 billion perpetual sukuk, which has no maturity date; ADIB can choose to repay the bond on certain dates from 2018 if it wishes.
The hybrid sukuk was the first to be publicly issued by a bank to meet the Tier 1 capital requirement in Basel III global banking standards that will be phased in around the world over the next several years, although the bank privately placed a $2 billion Tier 1 note in 2009.
Features such as the subordination of sukuk holders and the conditionality of payments — ADIB can halt periodic distributions to investors if it wishes — mean sukuk behave more like equity than debt, which is favored by the new Basel standards, said Alex Roussos, Counsel at Norton Rose in Dubai.
“We are likely to see more of it in this market in the near future,” he said.
Even before ADIB’s issue, sukuk issuance was rising sharply; globally, $109 billion worth of sukuk were issued in the first nine months of 2012, up 69 percent from a year ago, according to a research.
But supply still appears to be far from satisfying demand among cash-rich Islamic institutions in the Gulf and southeast Asia; outstanding global demand for sukuk totals about $300 billion, according to an estimate by Ernst & Young.
Furthermore, ADIB’s hybrid sukuk helped to open up a new investor base for Islamic bonds; private banks catering to wealthy individual clients were allocated 60 percent of ADIB’s issue, in contrast to most regional bond issues which are snapped up by other bank investors.
So its success may over the next one or two years prompt a wave of hybrid sukuk issues by banks raising capital.
“The prospects are good and ADIB’s success is a positive precedent for other banks. The ADIB issue provides a good benchmark for other GCC (Gulf Cooperation Council) issuers who are thinking of accessing this market,” said Ahsan Ali, Head of Islamic origination at Standard Chartered Saadiq.
“We expect to see the issuance of hybrid instruments over the next 12 to 18 months as implementation of new regulatory guidelines takes effect in various countries,” he added.
Some bankers said that in addition to meeting Basel III standards, Gulf banks might use hybrid sukuk to bridge the gap between rapid loan growth and slower deposit growth.
Qatari and Saudi lenders are likely candidates. Deposits in Qatari commercial banks grew 16.1 percent year-on-year in September while total credit jumped 32.2 percent, according to central bank data; Saudi bank deposits grew 11.8 percent while bank loans to the private sector climbed 14.8 percent.