Bahrain: The international Islamic banking hub

Khalid Al Bassam, deputy governor of the Bahrain Monetary Agency spoke to Arabian Business about the Kingdom's aspirations and initiatives in the Islamic banking industry.

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By  Massoud Derhally Published  October 7, 2002

|~||~||~|AB: Could you talk a little about the regional bond market with the issuance of $700 million worth of bonds by the end of 2003?

KB: We are very much keen to establish a regional bond market. We have issued a debt paper calendar until the end of 2003 and this includes a series of bond issuance mostly denominated in US dollars with a fixed interest rate and different maturities that range between 3-7 years. They will be a mixture of conventional bond and Sukuk compliant issues.

AB: What is the goal of this bond market?

KB: That it will bring better clarity to the market participants, cater to Islamic financial institutions and other investors in general in both Bahrain and outside Bahrain.

AB: Why will people be attracted to it?

KB: There is no foreign exchange risk and transaction costs would be limited because a good part of the investment is already in the market and bonds are in US dollar. We decided to issuel our bonds in US dollars because there is an official peg by all GCC states to the US dollar with the exception of Kuwait which we hope to come quite soon and all the issues will be listed on the Bahrain Stock Exchange (BSE) to help create liquidity and encourage the secondary market.

AB: Why a bond market?

KB: We have seen very strong demand for bond issues be they conventional or Islamic paper. In recent issues we have been oversubscribed. To give you an example, the last government paper was subscribed by 210%. I believe there is an opportunity not just for government issued papers but also corporates, and this coincides with S&P and Moody’s ratings of Bahrain.

AB: What in your opinion are the benefits of the International Islamic Financial Market to the Islamic banking industry and to Bahrain?

KB: This market was established after continuous discussion and coordination between Bahrain Monetary Agency, Islamic Development Bank, and monetary authorities in Malaysia, Brunei, Indonesia and Sudan. It has a Shariah board from all around the world and a market and product development committee.
The very main reason for this market is to help institutions to issue debt papers that are traded and are Shariah compliant; to address the liquidity needs, be it on the surplus side or the short side. Institutions can buy these papers and use them as investment opportunity, keep them in their box, trade them at the same time. If there is a shortfall through this market we try to encourage listing and trading that creates liquidity in the secondary market.

AB: How big will this market be?

KB: When it comes to size we are confident that as we go on, we will see a good response from the market. We have already issued in Bahrain three medium term leasing bonds and some short term three month papers called Sukuk al Salam and this is just an example. In Malaysia we have seen a US $500 million global Sukuk, which was successfully, completed a couple of months ago. The Islamic Development Bank [Saudi Arabia] has mandated Citi Islamic Bank here in Bahrain to issue a global Sukuk of US $300 million. With our calendar until the end of 2003 there is good room to issue more, not just by any one particular country, but a good number of institutions and governments can also explore this field, as it is a good means for raising finances.
IIFM caters to the Shariah endorsements of products to create harmonisation between different countries so that products that are issued in Bahrain can be accepted in Malaysia and vice versa, and products issued in Kuwait are accepted in the UAE. It is a growing market, the appetite is there and the very crucial thing is that the demand is there.

AB: Do you think the IIFM, increased liquidity and the bond market will attract firms who may want to have a physical presence in Bahrain, for instance like Noriba of UBS and do you expect this to happen more often?

KB: Definitely all those big international firms when they come, they look at the industry as a whole, which is growing at a very good rate and as in any business, everything must be economically viable, and it is currently viable to penetrate into this market further.

AB: What is the accurate estimate on the rate of growth of the Islamic finance industry.

KB: It varies from year to year, but if you take it on average 15% annual growth is reasonable.

AB: There has been a lot of speculation about large quantities of Arab and Islamic money that is invested in US equity markets being repatriated back to the Middle East and some analysts say the reason there has been buoyant growth in some Arab markets is because money has actually come back, what is your opinion on this, is it because of September 11 or a decline in US markets?

KB: This has a political dimension. I would personally think that capital tends to flow from one place to another depending upon opportunity and the economic situation and financial markets plays an important part, but I really don’t think because of September 11 there has been any repatriation. American markets have the depth and wide possibilities for investors. ||**||

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