AFTER the 1997 Asian crisis, Malaysia, bruised by what its government saw as the buccaneering spirit of Western capitalism, threw itself into Islamic finance with renewed vigour. Bahrain hopes to follow a similar path. The credit crunch did not come a moment too soon, as far as Manama was concerned. It has breathed new life into a regional market for bonds—both Islamic and conventional ones—and Bahrain has ambitions to be a hub for issuance and secondary trading. “We really needed a crisis like this,” says Salman bin Isa Al-Khalifa, the executive director of Bahrain’s banking operations.
Until now the Gulf’s bond markets have been anaemic. Debt securities make up 33% of world capital markets but only 3% in the Middle East. The growing popularity of Islamic finance over the past decade has provided a small boost. Issuance of sukuks, which comply with sharia law prohibitions on interest, grew to $43 billion in 2007, though that is a sliver of the $50 trillion-plus global bond market. But last year global sukuk sales more than halved. Companies hunkered down after the credit crisis, taking out bank loans when they could. And oil-rich governments had no need to borrow.
But debt finance can provide large amounts of liquidity quickly in moments of crisis, says Rohit Chawdhry of Bahrain Islamic Bank. Governments learnt this lesson too late when they suddenly found themselves with rising deficits or, in the case of the United Arab Emirates, with what is believed to be a fall of 75% in foreign-currency reserves. They have been forced to sell large amounts of paper.
Abu Dhabi, Dubai and Qatar, some of the world’s richest sovereigns, have issued billions of dollars-worth of conventional bonds in recent months. Bahrain is expected to offer a $500m sukuk shortly, its first in 2009, and hopes to hold regular bond auctions afterwards. Other Gulf countries including Kuwait and ultraconservative Saudi Arabia may follow. At the same time quasi-government institutions are seeking credit ratings so they too can issue debt.
These are not isolated acts. Regional governments are co-ordinating efforts to develop secondary bond trading; in the past creditors tended to hold the few bonds that were issued to maturity. The new government issuance will help develop a yield curve, which will make for more efficient pricing and give corporate issuers a benchmark to price against (Bahrain hopes that firms will follow the government lead). Aldar, one of the largest Emirati property developers, has reportedly retained advisers to consider issuing bonds.
Nor should the region be particularly discouraged by the high-profile default of a sukuk this month when Investment Dar, the Kuwaiti part-owner of Aston Martin, James Bond’s favourite car, missed a $100m payment. A bona fide default just makes the sukuk market look even more like its Western equivalent.
