Prior to the current financial crisis in Dubai, sukuk issuance had started to revive following two difficult years since the August 2007 peak. New issuance for the year to November 2009 exceeded $17.5 billion with 69 separate offerings. Confidence was demonstrated by the announcement on November 19 by General Electric that it was to raise $500 million through a five-year sukuk–the first Western industrial company to raise such financing.
Liquidity. There are many varieties of sukuk, some–such as the short-term sukuk issued by the Government of Bahrain–being a substitute for treasury bills with a three-month maturity. Such sukuk are attractive for Islamic banks to hold, as they cannot hold conventional treasury bills paying interest, and the alternative of holding cash means they receive no return. Bahrain’s regular sukuk bill issuance continued throughout the credit crisis, but the amounts raised are modest–$40 million on average.
Still profitable. Although Islamic capital market activity was negatively affected by the global financial crisis, the impact on Islamic banks has been limited, largely because most are focused on retail business:
–Dubai Islamic Bank, for example, has reported a decline in third quarter earnings for 2009 of 33% compared to the same quarter of 2008, but this was 8% above market expectations.
–Trade financing through murabaha–in which a bank buys a good on behalf of a buyer, and sells it on to them in installments at a marked-up cost–has remained buoyant, as has personal financing for vehicles and household goods.
Real estate has been the most troublesome, with mortgage lending reduced. In many instances, the value of property has fallen below the amount of credit outstanding. This only becomes an issue in the case of defaults and the bank acquiring the property, which has rarely arisen in the case of Dubai Islamic Bank, or indeed Al Rajhi Bank in Saudi Arabia or Kuwait Finance House. As Islamic banks in the GCC had more conservative housing finance policies than their conventional competitors, they have been less affected by the fall in real estate prices.
Takaful insurance. One sector which has continued to expand throughout the crisis is takaful insurance based on the principle of mutual risk sharing rather than risk transfer:
–Dubai Islamic Bank has developed Al Islami Takaful products, which it has cross-sold to its clients since May.
–Savings plans are offered with either regular or lump sum contributions made to an endowment fund from which family members can receive compensation in the event of the death of the policyholder.
–If the policyholder lives to the maturity of the policy, they receive a substantial lump sum plus a terminal bonus.
Outlook. Most sukuk issuance is concentrated in Malaysia, which is not likely to be directly affected by the Dubai crisis. Moreover, if the Dubai case is tested in the courts, this could clarify the legal position of sukuk investors with regard to their rights to the underlying assets backing the issuance. Although this may be painful for Dubai World subsidiary Nakheel in the short run, a court ruling in favor of investors would increase confidence in sukuk in the longer term. Overall, the global Islamic finance industry seems well positioned for recovery in the longer term with further sukuk issuance, a widening of products to include takaful and the continuing buoyancy of Islamic retail banking.