MANAMA (Reuters) – Bahrain’s Arab Banking Corp ABCB.BH said on Monday it could arrange as much as $5 billion worth of Islamic bonds and loans in 2008 if the market recovers from a global credit crisis.
Several Gulf Arab borrowers scrapped sales of Islamic bonds, or sukuk, last year because of the credit crunch triggered by U.S. mortgage defaults, which made borrowing more expensive and banks more reluctant to lend.
Arab Banking’s Islamic finance unit had to shelve between eight and 10 financing deals as a result of credit market turmoil, said Duncan Smith, Arab Banking’s global head of Islamic financial services.
Most of those could return to the market beginning in the third quarter as issuers in the Gulf Arab region and North Africa raise money to finance infrastructure projects, Smith told the Reuters Islamic Finance Summit.
“We’ve hit a little bit of a hiccup because of the credit crunch and the liquidity squeeze,” he said.
“By the third quarter, things will turn around. The underlying trend in the region is still there. That market will come back particularly in the Gulf and in North Africa.”
Investors in the world’s biggest oil-exporting region have spurred demand for Islamic bonds, helped by a near five-fold increase in oil prices since 2002.
But Gulf Arab issuers had put borrowing plans on hold as spreads on Islamic bonds widened at the end of last year, more than doubling between July and October, according to HSBC data.
Dubai Electricity and Water Authority shelved $2.5 billion worth of conventional and Islamic bonds last year and bankers said the utility would raise money in a bank loan instead, partly because of borrowing costs.
While pricing levels are not likely to return to what they were before, Gulf issuers are likely to begin tapping Islamic finance again this year to finance their expansion plans, Smith said.
“The overall size of things that we may get involved in doing this year in either sukuk or syndications is somewhere between $1 billion to $5 billion,” Smith said.
“There is a desire to arrange these financings now but the global international market has a big effect on this because a big chunk of the money comes from international banks, not Islamic banks.”
Islamic banking accounts for about 6 percent of Arab Banking’s total business, a share the bank wants to double as the lender expands its commercial and retail business throughout the Arab world, in Iran and in Europe, Smith said.
“Over the last three years, we’ve made a decision to try to expand the Islamic bank because a lot more of the Arab world’s business is being done in a sharia-compliant way,” he said.
Islamic law bans interest and favors instead a return derived from underlying physical assets.