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Manama: The issuing of asset-backed Islamic bonds is likely to surge in the Gulf as growing assets and new laws allow many of the region's rapidly expanding firms to borrow more cheaply, Moody's Investors Service said.
To date, most Islamic bonds, or sukuk, have been asset-based - returns are derived from underlying assets to comply with Islam's ban on interest. However, noteholders only have recourse to the borrower, not the assets, in case of a default. In the case of asset-backed, or securitised bonds, including sukuk, the noteholder has recourse to the assets, potentially making the debt more attractive, lowering the cost of borrowing.
"Conventional and Islamic securitised debt is likely to grow significantly," Moody's Middle East and Islamic Finance Analyst Faisal Hijazi said.
"Islamic finance is particularly suited to securitisation. In the securitisation world you always have recourse to assets, and this is one of the key points in Islamic finance."
A Gulf loans and real estate boom has provided ideal assets with which to securitise debt, bankers said.
"There is a significant increase in securitisable assets, real estate and loans. They have reached a critical mass which you can securitise," Ehsun Zaidi of Dubai Islamic Bank said.
Growing demand from Muslims for financial products, such as mortgages, that comply with their beliefs, is likely to mean more of those assets, and hence potential asset-backed debt, will comply with Islamic law, he added.
New laws in some Gulf states which ease the creation of those assets, including property and foreign investment laws, have given securitisation further impetus, Hijazi said.
Moody's declined to forecast future Gulf securitisations, but the Dubai International Financial Centre told Reuters last month the debt market has the potential to be worth up to $250 billion in two to three years, from about $2.5 billion to date.
Last month, Dubai-based Tamweel issued what Moody's said was the Gulf's first internationally rated asset-backed securities that comply with Islamic law.
Tamweel used lease-to-purchase contracts on residential properties, which comply with Islamic law, to back its debt.
"Securitisation will grow significantly in the medium term, particularly in this region where you have lots of property and land deals," Moody's Senior Credit Officer Phillip Lotter said.
The assets used in a securitisation can be rated independently of the borrower, giving their bonds a higher debt rating than for the borrower themselves, making borrowing cheaper.
The structure is particularly suited to firms with significant assets, or those hoping for credit enhancement over a lower rating the company itself might otherwise achieve, Lotter said.
Giving noteholders another recourse
To date, most Islamic bonds, or sukuk, have been asset-based - returns are derived from underlying assets to comply with Islam's ban on interest. However, noteholders only have recourse to the borrower, not the assets, in case of a default.
In the case of asset-backed, or securitised bonds, including sukuk, the noteholder has recourse to the assets, potentially making the debt more attractive, lowering the cost of borrowing.
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