On Agenda: Emaar's Islamic issue: complementarities at work

The float of a $50 million Ijarah sukuk facility for Emaar Properties by Bah-rain's Liquidity Management Centre (DMA), launched for the promotion of Islamic instruments, is a signal development both for the premier development company as well as the Bah-rain Financial Harbour.

This is the first regional corporate issue organised by DMA and it is for an entity in Dubai, which is developing its own international financial centre.

Though the Bahrain Financial Harbour and the Dubai International Financial Centre (DIFC) are pitted against each other in the bid to be recognised as the regional financial centre, there has recently been more and more stress on the complementarities rather than competition between the two.

Bahrain, a traditional offshore banking centre, is concentrating more on the development as a global capital of Islamic finance while DIFC is channelising its resources in the direction of regular investment areas, particularly from a regional context.

There may be segments of the market which would have preferred Emaar to tap the capital market through one of the many systems that the DIFC is planning. But the launch of an Islamic instrument by the prominent Dubai entity in Bahrain is a recognition of the island kingdom's strength in the niche areas that it is trying to promote. It is also a pointer to the growing market of Ijarah sukuk, pioneered by the Bahrain Monetary Agency as part of the development of its Islamic financial sector.

The Ijarah sukuk instrument, meant to mobilise resources for Emaar's upcoming developments, including its record-setting Burj Dubai tower, is issued through a special purpose vehicle (SPV) called LMC Emaar Sukuk Company, while LMC acts as the arranger.

Good value

The issue, comprising five-year notes, is seen to carry good value in terms of assets, risks and rewards. Many institutions have come forward to underwrite large tranches of the issue. Bahrain set up the Liquidity Management Centre to create new short and medium terms investment opportunities and promote an active secondary market for these instruments.

LMC's first launch was a five-year $250 million Ijarah Sukuk, the largest ever Islamic issue by the Bahrain government. The issue managed to raise $349 million, an oversubscription of nearly $100 million, showing good appetite for the product. The issue was later listed on the Bahrain Stock Exchange, which has an active bond market.

LMC reportedly plans to issue over $1 billion worth of Ijarah sukuks over a period of months.

In another pioneering move jointly with the LMC, the BMA developed two new Islamic financial contracts to promote liquidity in the Islamic market and develop the global Islamic banking industry.

These included a Sharia-compliant sell and buy back product, allowing for re-purchase transactions of Ijara sukuk issues, and a commodity investment agreement to facilitate inter-bank dealings.

Different course

Bahrain has been implementing a three-pronged strategy of developing new products, attracting new players and strengthening regulation in Islamic financial instruments. As a result of these initiatives, the size of Bahrain's Islamic banking and finance industry has more than trebled in the last five years. The total assets of Islamic banks and financial institutions operating from Bahrain were estimated at $11.6 billion at the end of 2001, compared with $3.7 billion four years ago.

Bahrain now has the highest concentration of Islamic financial institutions in the world, with 24 Islamic banks, two Islamic financial advisory and five industry-support organisations. These include the Accounting and Auditing Organisation for Islamic Financial Institutions, General Council of Islamic Banks and Financial Institutions, International Islamic Financial Centre, Liquidity Management Centre and the Islamic International Rating Agency.

So, complementarities between Bahrain and Dubai would imply the Harbour is concentrating further on Islamic finance and the DIFC following a different course. The Emaar issue's Bahrain launch is, therefore, a significant pointer.

The author is a UAE-based journalist