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IDB eyes $1b sukuk for megabank project

Last updated: Thursday, May 17, 2012 3:41 PM
JEDDAH — Islamic Development Bank (IDB) is seeking partners to bring investment in a Shariah-compliant megabank, as it plans to issue $1 billion worth of Islamic bonds or sukuk in June to fund the project, the bank’s president Ahmad Mohamed Ali said late Tuesday.
"IDB practice is usually a five-year issue in the amount range between $500 million and $1 billion, so in June it will be in this range, as usual," Ali said.
He said the Jeddah-based operation was currently in talks with the banks that will arrange the deal that would be global, indicating the sukuk would be 144a-compliant and, therefore, open to investors from the US.
The financial institution, to be established with Riyadh-based Dallah Albaraka Group and the Qatari government, will issue securities that Islamic lenders can buy to manage excess funds, the IDB president said. The three parties signed a memorandum of understanding in April to set up the bank in Doha, Qatar, to fund roads, ports and power plants.
"An Islamic megabank will be a significant development," Afaq Khan, Dubai-based chief executive officer of Standard Chartered’s Islamic unit, said. "Such a bank would have the balance sheet, the capital and the underwriting capabilities to undertake significant projects of size."
"A megabank would certainly need to have a credible credit rating internationally and this in turn would create another avenue for Shariah-compliant liquidity to be effectively deployed," Syed Abdull Aziz Jailani Syed Kechik, chief executive officer at Kuala Lumpur-based OCBC Al-Amin Bank, the Islamic unit of Singapore’s Overseas-Chinese Banking Corp, said. "A credible megabank would have catalytic benefits for the overall market."
"The main objective of this bank is to invest in big projects and to help Islamic banks manage their liquidity," said IDB’s president. That is one of the biggest challenges facing lenders, he added. There is no consensus that the industry needs a megabank, Megat Hizaini Hassan, a partner and head of the Islamic finance practice at Kuala Lumpur-based law firm Lee Hishammuddin Allen & Gledhill, said.
"The megabank may not necessarily be the best or only solution to the existing problems and issues in Islamic finance," Megat said. "Funding of large-scale projects may be done by syndication involving several Islamic banks or by sukuk sales, while liquidity problems may be resolved via more issuance of short- or medium-term papers."
Assets in the $1 trillion Shariah-compliant industry are projected to almost triple to $2.8tn by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board, a standards setting body.
A shortage of sukuk has driven yields on global Islamic bonds down 30 basis points, or 0.30 percentage point, in 2012 to 3.69 percent Monday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. That compares with an average of 4.16 percent last year, 5.87 percent in 2010 and 9.51 percent in 2009.
The difference between average sukuk yields and the London interbank offered rate, or Libor, widened two basis points Monday to 252 basis points, the HSBC/Nasdaq index shows.
Global Shariah-compliant bonds returned 3.6 percent in 2012, according to the HSBC/Nasdaq index, while debt in developing markets climbed 5.5 percent, JPMorgan Chase & Co’s EMBI Global Composite Index shows. — SG/Agencies
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