Tapping Islamic financial markets may help offset tightening global liquidity conditions, giving governments around the world new sources of cash amid rising borrowing costs, credit rating firm Moody’s Investor Service said.
In a report this week, Moody’s described 2014 as a “landmark” year for the market for so-called sukuk bonds, which are debt securities that comply with Islamic shariah laws. Three major non-Muslim countries have either issued or are finalizing plans to issue sukuks this year.
“(These) transactions indicate a significant change in the potential size, depth and liquidity of this market,” Moody’s Global Head for Islamic Finance Khalid Howladar said in a statement.
Moody’s said the tightening global financing conditions, a result of the US Federal Reserve’s scaling back of its monetary stimulus, should drive demand for sukuk issuances, which Muslim investors are more than willing to take up.
Driving sukuk issuances are investors’ growing comfort with relatively complex Islamic instruments, the increasing financing needs and leverage appetites of some Muslim countries, “as well as a desire for stronger investment links with the faster growing economies in the Gulf and Asia,” Howladar said.
Unlike regular debt securities, sukuk bonds should be backed by existing money-earning assets. These assets’ earnings replace interest payments, which are banned under shariah law.
By the end of this year, outstanding sukuk bonds issued by governments are expected to grow in value to $115 billion. About $30 billion of this will have been issued this year.
Earlier this year, the United Kingdom launched its first sukuk issuance.
This month, Hong Kong and South Africa are expected to complete their own.
National Treasurer Rosalia de Leon last May said the Philippine government was interested in having its own sukuk issuance as it seeks to tap additional sources of funding, if and when it needs to do so.
Unfortunately, existing regulatory conditions make it impossible for the Philippines to issue sukuk bonds.
Rules governing Islamic banking in the Philippines are practically non-existent. The law only allows for one Islamic bank in the country—state-owned Al Amanah Bank.
The Bangko Sentral ng Pilipinas (BSP) is drafting rules for the creation of a new regulatory framework for Islamic banking which, among others, may open up the industry to foreign players.
Moody’s vice president and senior analyst Christian de Guzman noted that there was no pressure for the Philippines to issue its own sukuk bonds, given the deep pool of liquidity that the government could tap to fund its deficit.
In an interview with the Inquirer, De Guzman said having the regulatory framework that would let the Philippines tap Muslim investors may benefit the Philippines, in case other sources of financing dry up.
“But that’’s not an issue for the Philippines at the moment because of the large pool it has,” he said.