Tuesday, April 12, 2011

Geopolitical tensions in MENA to shift capital flow to Malaysia

KUALA LUMPUR: Malaysia's Islamic finance market could receive a substantial portion of capital from or originally destined for the Middle East following the geopolitical tensions in the Middle East and North Africa (MENA) region, says RAM Rating Services Bhd.

The rating agency said on Tuesday, April 12 the geopolitical tensions could see a shift in attention to Malaysia's Islamic finance market due to its well-developed Islamic finance market, coupled with the sound legal, regulatory and investor-friendly environment.

RAM Ratings' head of Islamic Ratings, Zakariya Othman said Gulf-based banks and companies are increasingly looking towards Malaysia, the world's biggest sukuk market with a vast pool of investors.

To this end, Kuwait-based Gulf Investment Corporation ('GIC') has just issued its maiden ringgit-denominated sukuk equivalent to US$164 million in February 2011 - an inaugural issue under GIC's US$1.1 billion Islamic medium-term note programme.

'There are bound to be more issuers and investors seeking the stability of the Malaysian Islamic market,' said Zakariya.

He was presenting a paper 'Sukuk in the Middle East: What revisions need to be made to create a market revival?' at the First Annual Middle East Islamic Finance & Investment Conference in Dubai.

Zakariya said continued geopolitical tensions have nonetheless caused potential issuers to postpone their plans to enter the Islamic debt capital market. Moreover, some regulators have also shelved their plans to speed up tax breaks on sukuk.

He said sukuk issuance from the Gulf Cooperation Council (GCC) countries was poor and below expectations in 1Q 2011.

'This comes as no surprise as the region has been undergoing multiple revolutions. Bahrain, traditionally a major issuer of sukuk both on the corporate and sovereign levels, has not had any major deal so far this year, and will probably not see any for some time given its non-conducive landscape,' he said.

Apart from the political instability and heightened violence in the region, he raised concerns about the lack of a clear regulatory framework in the GCC debt market, besides the need to enhance the breadth and depth of the debt market with diversified and regulated products.

Investors' sentiment has been shaken by high-profile events such as the disputes associated with the Investment Dar's US$100 million TID Global Sukuk, as well as the Dubai World debt moratorium. Both cases, he pointed out, have heightened market uncertainty and raised broader concerns about sukuk structures.

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