Global Arab Network – With recent news of a planned new Islamic bond issue, Bahrain’s economy may be set to receive a welcome boost. The issuance may also come as a boon for the Gulf state’s financial services sector, which is a central part of its Economic Vision 2030, the long-term plan to promote the country as a leading regional and international financial centre, Global Arab Network reports according to OBG.
Bahrain faced ratings downgrades after civil unrest in February, followed a month later by the delay of a planned $1bn sovereign bond issue after debt insurance costs hit 18-month highs.
However, on September 19, state news agency BNA reported the government had set up a framework to issue up to BD3.5bn ($9.3bn) in bonds, earmarking the proceeds of the bond sale to help bridge its budget deficit, which stands at about 5% of GDP.
“The finance minister is authorised to issue in accord with Bahrain’s Central Bank up to BD3.5bn ($9.3bn) in public treasury bonds … called development bonds and Islamic sharia-compliant instrument in the kingdom or abroad,” said a decree issued by Bahrain’s King Hamad bin Isa Al Khalifa, BNA reported.
Indeed, Islamic bond issuances in particular could prove to be the strong point of Bahrain’s efforts to attract financing.
The king gave no timeframe for the issuance, but during a September 25 interview at the International Monetary Fund (IMF) in New York, Central Bank governor Rasheed Al Maraj said that Bahrain had hired Standard Chartered, Citigroup and BNP Paribas to advise on a $1bn sukuk (Islamic bond) sale, scheduled for October.
Global sales of sukuk climbed to more than $17bn in 2011, compared with more than $10bn in 2010, according to data compiled by Bloomberg.
“Our reading into the market is that there is still growing demand for sukuk, especially from Asian markets, regional markets in the Middle East and possibly European markets,” Al Maraj said. “There has been an absence of sovereign issuances of sukuk for quite some time. Now the market is ready to have a new issuance.”
According to Al Maraj, Bahrain has received positive feedback from investors for the planned sukuk issue, whose maturity could range from seven to 10 years.
Following fast on the heels of the government’s announcement of the bond sale, too, Albaraka Banking Group – Bahrain’s biggest publicly traded Islamic lender – and its Turkish unit unveiled a plan to raise a total $500m in sukuk this year, its CEO, Adnan Ahmed Yousif, said in a September 24 interview with Bloomberg.
Albaraka Turk Katilim Bankasi is in the process of hiring banks to manage the sale of about $200m in Islamic bonds by November, Yousif said. He also added that the parent bank may sell about $300m by the end of 2011.
Yousif predicted strong demand after Albaraka Turk raised $350m in a syndicated loan in September. “There are many institutions that [would] like to diversify their portfolio to include sukuk,” he said. “We asked for $150m and we got $350m.”
Albaraka is looking to expand its presence in countries such as Algeria, Egypt, Tunisia and Pakistan, as well as Indonesia, where Yousif said an acquisition is planned. The proceeds from the bond sale will be used to finance these planned expansions. Albaraka is currently targeting about three institutions. “Most banks available for sale are very small and they are traditional banks that we are going to acquire and convert into Islamic banking,” he said.
Not to be outdone, Bahraini Islamic investment bank Elaf Bank has revealed that it has sukuk mandates worth $1.5bn. During an October 10 conference, Elaf Bank’s chief executive, Jamil Jaroudi, told reporters the mandates were from three Malaysian firms. Although Jaroudi declined to name the issuers, he did reveal that the sukuk are being planned for the first quarter of 2012 and are of varying sizes, ranging from $100m to $1.2bn.
Initially, Elaf Bank will be the exclusive arranger of the three sukuk in Malaysia, but it is possible that other banks could be allowed to join the deal at a later date. The company secured a licence to open a branch in Malaysia in June.
These and other positive developments in the kingdom’s banking sector were highlighted during an October 9 reception hosted by the Bahrain Association of Banks (BAB) for Bahrain’s delegation to the annual IMF/World Bank conference in Washington.
“The kingdom of Bahrain is indisputably a regional leader in the financial sector and BAB has played an important role in consolidating this position, despite the downturn of the global economy,” BAB chairman Abdulkarim Bucheery said in a press release after the gathering.
No matter how the bond issuances fare, Al Maraj thinks investors should not write off Bahrain’s economic and financial prospects. “Bahrain has been a financial centre for almost four decades. We have gone through many crises before,” he said. (OBG)