Bloomberg
Dubai
Banks in the six-nation Gulf Cooperation Council can thank turbulence in the world’s bond markets for spurring Islamic lending to the highest in three years.
Loans that comply with Islam’s ban on interest in the GCC have risen 22% this year to $11.9bn, the most since 2012, according to data compiled by Bloomberg. At the same time sales of Islamic bonds, known as sukuk, dropped 41% to $6.9bn.
The increase in lending will be welcome for banks in the region, where oil’s more than 50% decline in the past 12 months threatens to curtail government spending and clip economic growth. Investors are demanding higher yields amid market swings, prompting companies including Dubai-based construction contractor Drake & Scull International to delay sales. Volatility in US Treasury yields is averaging the highest since 2011 after Greece negotiated a debt bailout deal, China devalued its currency and the strengthening US economy boosted the prospects of the Federal Reserve’s first interest- rate increase in almost a decade.
“Given recent volatility, the bank loan market has provided a more stable and consistent source of funding for regional borrowers versus capital markets, where windows of issuance have been more fleeting,” said Andy Cairns, the head of debt origination and distribution at National Bank of Abu Dhabi, the GCC’s biggest bond-arranger this year after HSBC Holdings.
Dubai Islamic Bank, the UAE’s largest Shariah- compliant lender, is the biggest arranger of Islamic loans in the GCC this year. Second-ranked National Commercial Bank, Saudi Arabia’s largest lender, was part of Saudi Arabian Oil Co’s $10bn multi-tranche loan closed in March.
“Islamic banks in the region have well-capitalised balance sheets and are actively looking to grow their asset base,” Anita Yadav, the head of fixed-income research at Emirates NBD PJSC, Dubai’s biggest bank, said by e-mail on August 23.
Al Rajhi Bank’s loans-to-deposit ratio, a measure of its capacity to lend, was at 81% in June, showing the world’s biggest Islamic bank could still offer another 19 riyals for every 100 riyals of deposits. Dubai Islamic Bank had a loan-to- deposit ratio of 86%. For Abu Dhabi Islamic Bank, the top-ranked Shariah lender in the emirate, it was 42%.
The syndicated loans market is becoming the “market of choice” over more costly, time-consuming capital market issues for companies, according to Amir Riad, the global head of corporate finance and investment banking at ADIB.
Borrowers are taking advantage of a low interest rate environment, the impending rate increase, and current low bank capital funding costs by accessing the syndicated loan markets to either replace older debt, pay down loans or consolidate group debt, in contrast to selling bonds, Riad said. Companies “have been able to achieve the same size and tenors in the syndicated lending markets as they would in the capital markets, as demonstrated by the ENOC $1.5bn nine- year syndicated facility,” he said.
Emirates National Oil Co, a Dubai government-owned company, raised $1.5bn in June from a group of banks including ADIB to fund expansion.
