Thailand could gain once rules on IslamIc fInancIng are finalised


Thailand could be increasingly driven by cross-border trade and investment through Islamic financing while its corporations could opt for Shariah-compliant bonds, or sukuk, for fund-raising in the international market once all laws and regulations are ready, according to Standard Chartered Bank.

"If the governing rules and regulations for Islamic financing like sukuk are put in place [in Thailand], then investors from the Middle East or Malaysia who want to invest according to Islamic principles may come and look at Thailand as a potential investment opportunity," Ahsan Ali, Dubai-based global head of Islamic origination, said last week.

The Securities and Exchange Commission agreed to amend a law allowing for the sale of and trade in Islamic bonds. The draft bill is being prepared by the Council of State for forwarding to the incoming Cabinet for approval.

Investors mainly from the Middle East have expressed greater interest in Asia, which has witnessed growing trade and investment with the Arab world.

"This opens up an opportunity for Thailand and creates flows from other countries and investors searching for Shariah-compliant products," Ali said.

Islamic financing is growing even in non-Muslim countries, ensuring that they do not lose out on this opportunity to get access to the credit, prices and yields of sukuk.

Global sales of sukuk, which pay asset returns to comply with Islam's ban on interest, totalled US$13.2 billion this year compared with $6.6 billion a year earlier, according to data compiled by Bloomberg as of July 5.

Worldwide Islamic assets are projected to reach almost $1.6 trillion with revenue of $120 billion by next year, according to Oliver Wyman's report on "The Next Chapter in Islamic Finance - Higher Rewards but Higher Risks".

The Islamic Bank of Thailand may sell $150 million of Shariah-compliant bonds overseas by the end of this year. The bank also plans to raise Bt5 billion from the sale of the country's first sukuk in the domestic market this quarter. Three real-estate firms plan to sell as much as $500 million of the notes.

The Islamic securities returned 3.6 per cent in the second quarter, the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index shows. Emerging market debt gained 3.4 per cent, the JPMorgan Chase EMBI Global Diversified Index shows.

However, Islamic financing does face challenges. Taxation and the regulatory and legal framework remain disadvantages in many countries. Shariah-compliant products are not allowed for sale by banks in many countries while these products may be taxed at different rates than conventional financial products.

"The first step in the market's development is for the regulators to ensure there is a level playing field, which means orthodox and Islamic products are equivalent counterparts. Then, they should leave it to the marketplace to develop [by itself]," Ali said.

This year, market conditions are better than last year for sukuk on the back of continuing liquidity. Sukuk issuers are looking for signs to enter the market and to what will happen in the financial markets in the next six months.

"If the markets continue with proper financial and economic conditions, then people will come to the markets because liquidity is there to absorb these issues. If there is bad news including negative political or economic matters, investors will wait before making an investment decision," Ali said.

While the market remains volatile, issuers may not like to go experimenting in the market because that may affect pricing. Greece's story has caused risk aversion in general.

"It's exactly like conventional issues," Ali said. Sukuk complies with Islamic principles but behaves like conventional bonds in terms of pricing, rating, listing and yields.

If there is no regulated system or legal system developed for Islamic financial products, this country |may lose out on that opportunity, he said.

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