The increase in lending will be welcome for banks in the region, where the oil slump threatens to clip economic growth
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, which includes Saudi Arabia and the United Arab Emirates, have risen 22 per cent this year to $11.9 billion, the most since 2012, according to data compiled by Bloomberg. At the same time sales of Islamic bonds, known as sukuk, dropped 41 per cent to $6.9 billion.
The increase in lending will be welcome for banks in the region, where oil’s more than 50 per cent 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.
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 $10 billion multi-tranche loan closed in March.
“Islamic banks in the region have well-capitalized balance sheets and are actively looking to grow their asset base,” says Anita Yadav, the head of fixed-income research at Emirates NBD, Dubai’s biggest bank.
Al Rajhi Bank’s loans-to-deposit ratio, a measure of its capacity to lend, was at 81 per cent 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 per cent. For Abu Dhabi Islamic Bank, the top-ranked Shariah lender in the emirate, it was 42 per cent.
With crude oil falling 51 per cent in the 12 months through Friday, GCC countries, including Qatar, Kuwait, Oman and Bahrain, now face the risk of receding liquidity that could hamper credit expansion. Loan growth in the UAE in the 12 months through July was 8.2 per cent, outpacing deposit growth of 2.2 per cent, according to central bank data.
Still, the Islamic industry is benefiting from regional government efforts to boost Shariah-compliant financial services. Dubai has laid out a plan to become the global capital of the Islamic economy, and Saudi Arabia is turning National Commercial Bank into a fully Shariah-compliant lender over five years.
“An Islamic deal just gives you the broadest audience, since conventional investors in the region can buy Islamic products,” NBAD’s Cairns said.
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