Bloomberg/Dubai
Two of the biggest lenders in the UAE started the first Shariah-compliant repurchase agreements between Gulf banks to improve access to shorter-term funds and boost sukuk trading.National Bank of Abu Dhabi (NBAD), the UAE’s second- biggest bank, and Abu Dhabi Islamic Bank (ADIB), the second-largest Islamic lender, signed a one-week Islamic repo contract valued at $20mn last week, they said last week. The repos will allow banks to borrow from each other for terms of one day to one year, Mark Pritchard, National Bank’s vice president and head of Islamic institutional coverage at the financial markets division, said in an interview on August 2.Regulators and banks from Bahrain to Malaysia are expanding the range of products available to institutions as a dearth of Islamic money-market securities forces them to keep excess cash with central banks or locked into longer-maturity sukuk. Islamic repos use a profit rate, unlike non-Shariah repos, where traders post securities as collateral for cash and agree to buy them back at a specified price and date, earning or paying the difference as interest.“The Islamic repo is an extra liquidity option for a holder of sukuk,” Raj Madha, a Dubai-based analyst at Rasmala Investment Bank Ltd, said by phone on Thursday. “There may be banks that have put off buying sukuk in the past that will be encouraged to do so now, knowing they can repo the bonds.”NBAD and ADIB’s repurchase transaction involved the buying and selling of Malaysian and Abu Dhabi government-related Islamic bonds, the banks said in a joint statement on August 2. The so-called Murabaha agreement uses sukuk as collateral for short-term funds, where the buyer and seller agree on a price and profit rate for the securities.NBAD is also holding talks with four other lenders on Islamic repos, with portfolios exceeding $100mn each, Pritchard said, declining to provide details.Banks in the Gulf typically purchase Islamic bonds and “don’t sell them, ever,” Pritchard said. With Islamic repos “they know they can do something with it, as opposed to just keeping it on their books or just selling it.”Global sales of Shariah-compliant bonds, which pay investors returns based on assets to comply with Islam’s ban on interest, more than doubled this year to $16.8bn from a year earlier, according to data compiled by Bloomberg. Offerings in the six-member Gulf Co-operation Council rose 51% to $3.73bn.Debt in developing markets rose 5.8%, JPMorgan Chase & Co’s EMBI Global index shows. The Bloomberg Malaysian Sukuk Ex-MYR Index, which measures foreign-currency Islamic debt sold by companies and governments in Malaysia, climbed 6.3% in the period.Managing shorter-term cash flows at Islamic banks and other financial institutions is a challenge, UAE central bank governor Sultan bin Nasser al-Suwaidi said at an Islamic-banking conference in Singapore last year. Bahrain, Malaysia and Indonesia issue Islamic notes maturing in less than a year in local currencies.The UAE central bank in June started offering Islamic repos that accept Shariah-compliant certificates of deposit as collateral, according to a circular sent to lenders on June 22. These repos are only accessible to holders of securities issued by the monetary authority, Pritchard said.Malaysia’s Islamic repo market is still at an “embryonic stage” as there are no standardised agreements or products, Kuala Lumpur-based Hang Tuah Amin Tajudin, vice president at OCBC Al-Amin Bank Bhd, said in an interview last week. Indonesia doesn’t allow Shariah-compliant banks to conduct repo transactions.The Kuala Lumpur-based International Islamic Liquidity Management Corp plans to sell between $200mn and $300mn of dollar-denominated sukuk before year-end with a likely maturity of three months, chief executive Mahmoud AbuShamma said in an interview on July 18. The agency was set up by 12 central banks and two multinational institutions in October to improve Islamic investment across borders.Demand for Shariah-compliant repos may be limited to current holders of Islamic bonds, according to SJS Markets.“Since it is largely a liquidity management tool for the Islamic interbank system, it may not attract banks that weren’t in the first place attracted to sukuk,” Dubai-based Samer Mardini, vice president of fixed-income and Islamic financial products for the Middle East and North Africa at SJS Markets, said by e-mail last week. “If the market picks up, then it could possibly draw more participants.”The Islamic repos “framework is in place, and we can roll this out with anyone we like,” National Bank’s Pritchard said. “We could easily see one deal a day, quite easily. Going forward in the future, beyond next year, this could be a well used product.”