Investment banks are making as many of their structured product programmes
as possible sharia-compliant in a bid to attract Islamic and traditional
fixed-income investors into a growing sector.
The sub-prime fallout this summer has contributed to the surge in Islamic structured finance volume, because sharia-compliant products provide a relatively safe haven for investments.
The products have some of the same high returns of conventional structured products but with higher transparency of processing, and lower credit risk, because they trade only in physical commodities, not those whose price is derived from its credit rating, such as corporate bonds.
An investment bank source said: “It is easier to make as many structured
products as sharia-compliant as you can, because it is more efficient and turns
over more transactions.”
Barclays, Deutsche Bank and HSBC are among the leaders in integrating their Islamic financing business into their mainstream investment pool. Folding sharia-compliant operations with other parts of their business has made it easier for banks to turn over large sharia-compliant trades.
Popular structured Islamic products like sukuks, which resemble traditional bonds, and murabahas – a contract of exchange on a physically owned commodity usually between two banks, such as a swap – and bilateral contracts from Islamic and non-Islamic investors are seeing a surge in sales. This has resulted in record benchmark transactions worth up to $2bn (€1.4bn) and $500m, respectively.
In July and August sukuks raised $7.6bn, exceeding this year’s first-quarter’s $4.5bn, according to the Islamic Finance Information Service. Walkers, a global off-shore law firm, recently worked on large sukuk programmes, including a $1.5bn sukuk programme, by NIG, part of the Royal Bank of Scotland group, and Gulf Finance House’s $1bn sharia-compliant structured funding programme.
Barclays Capital has integrated sukuk enquiry and execution into its debt capital market programme, including its medium-term notes, which allows a more regular and higher turnover of Islamic structured products.
In the wake of the sub-prime fallout, investment banks are targeting their catalogue of sharia-compliant structured products at the traditional fixed-income network in addition to their traditional Islamic investors.
Denison said: “Following the credit crisis in the summer, investors are demanding much greater transparency particularly in structured transactions. By its nature Islamic finance provides this to a great degree, which is part of its appeal. Investors therefore know exactly what assets they own and what risks they are taking.”
Meanwhile, sharia-compliant funds have enjoyed a surge in volume. Eurekahedge’s Islamic fund database, which contains more than 458 sharia-compliant funds, representing 95% of the market, reported assets under management in Islamic funds were hovering between $50bn and $70bn.
All this to be taken with a grain of piquant salt!!!
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