Bahrain sees market in Islamic paper

July 25, 2010

BAHRAIN, the Middle Eastern country with the largest number of Islamic banks, aims to grab a greater share of trading in sukuk, or Islamic financial paper, from Britain, Dubai and Malaysia with a bourse dedicated to securities that adhere to sharia.

The Bahrain Financial Exchange, scheduled to open in October, will start trading in Islamic debt next year, its chief executive, Arshad Khan, said.

Eight sukuk valued at about $US2.9 billion ($3.3 billion) trade on the existing Bahrain Stock Exchange, compared with 20 with a face value of $US16 billion listed on NASDAQ Dubai. The London Stock Exchange has attracted $US17.7 billion from 26 securities.

Issuers are favouring the most active markets to ensure investors can trade their securities, with General Electric Capital, the world’s biggest non-bank finance company, listing $US500 million of sharia-compliant debt sold in November in Malaysia, London and Dubai.

”We are quite hopeful that we’ll see a very liquid secondary market in sukuk, which does not exist right now, whether in London or anywhere else,” Mr Khan said in Bahrain’s capital city, Manama.

The smallest oil producer among Gulf Arab states is using money from the Gulf’s energy boom to establish an exchange that would allow investors to list Islamic bonds, real estate investment trusts, exchange-traded funds and options.

It will also create an electronic platform this year that will allow banks and companies to trade commodities used to back so-called Murabahah transactions, Mr Khan said.

Sukuk are typically backed by assets and pay profit rates instead of interest, which is prohibited under sharia principles. A Murabahah contract is a sale and deferred-payment accord based on an asset, usually a commodity such as oil, sugar or metals, in which the cost and profit margin are agreed beforehand.

Last year Malaysia introduced an online trading platform for Murabahah transactions. Hong Kong, Singapore and Britain are easing rules on Islamic banks and products to woo investors from the Middle East.

Dubai responded by starting NASDAQ Dubai, previously known as the Dubai International Financial Exchange, in 2005 as the Gulf’s first bourse open to investors and issuers of any nationality.

Bahrain is ”trying to sustain a niche, which has traditionally been in the area of Islamic finance,” John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, said. ”Islamic banking is under a lot of competition from the regional competitors such as Dubai, Qatar, Kuwait and Saudi Arabia.”

Bahrain, the smallest of the six Gulf Co-operation Council states, wants to increase its share of the industry, which is estimated by the Islamic Financial Services Board in Kuala Lumpur to almost triple to $US2.8 trillion in assets by 2015.

The central bank’s governor, Rasheed al-Maraj, said in May that the economy may expand 4 per cent this year. Economic growth slowed to 3.1 per cent in 2009 as Bahrain halted about $US13 billion of projects as the global financial crisis sapped demand for real estate and prices fell across the Gulf.

Bahrain has ”dwindling hydrocarbon reserves and it needs to diversify very fast” to stay a regional financial hub, Mr Sfakianakis said. The nation’s crude oil production dropped 0.5 per cent to 66.5 million barrels last year as reserves declined.

The recovery of the financial industry may be slow as low property prices weigh on lending, Bahrain’s Economic Development Board said in its annual report on Sunday.

There were 27 Islamic banks registered in Bahrain in June, and eight in the United Arab Emirates. Malaysia, the Islamic finance hub in Asia, has 18 Islamic banks.