Islamic securitizations are still gaining some traction. However, the current credit crunch will keep any real activity under wraps, at least in the short term.
In the meantime, issuers are focused on the Islamic region's domestic markets.
Before the credit crunch, the large liquidity available in the Gulf Cooperation Council (GCC) region meant that there was a limited need for securitization. The local funding environment, however, has changed as a result of the ongoing crisis.
"There is still interest [in] Islamic finance," a law firm source said. "It's kept a pretty steady pace, and over the summer last year, we saw four deals come through - from lease commercial mortgage deals to residential deals. I think that there remains some real optimism, but the market has become more domestic now. The good news is that the domestic market has cracked some of the legal issues and we are seeing a number of different attempts to get deals started."
To be sure, local regulators have taken note of the potential for ABS financing. According to Moody's Investors Service, the Dubai International Financial Center Authority (DIFCA) has recently passed legislation facilitating the creation of the special purpose vehicles (SPVs) that are essential for structured finance transactions. Government entities in Kuwait and Saudi Arabia have also been considering laws to help facilitate such transactions in their own markets.
One of the key drivers behind the future growth of a securitization market in the GCC is that home finance is still relatively new to the region. Moody's said that the long-term demand for housing is expected to grow steeply given predicted demographic and immigration patterns. Real estate is still key to the future growth of many of the governments in the region.
"Both the public and private sectors in the GCC have been heavily focused on the supply side of the real estate equation, but the demand side too needs major funding - especially in the current environment," said Khalid Howladar, a Moody's vice president and senior credit officer. "Funds are needed for the construction of these homes, but many local banks are over-exposed to the sector. As a result, the market, including securitization, is likely to cover an increasing portion of the financing going forward."
Moody's also noted that the loan and equity market has so far been the dominant form of financing in the GCC.
"Currently, the local debt/Sukuk capital market is small at around $70 billion, of which only around $4 billion are securitization transactions," Howladar said. "This compares with the $12 trillion of outstanding asset-backed financing globally. The local bond market, in all its various forms, including Sukuk and securitization, is essential to the region's future development."
Securitization also offers banks means to meet their financial/balance sheet objectives, such as risk transfer and reducing asset/liability mismatches.
However, Islamic finance has also felt the credit crisis pinch as a result of a shortage of liquid instruments and the lack of an Islamic interbank market. Moody's said it expects growth in Islamic banking assets to slow sharply this year, to around 10% to 15% from a range of 20% to 30% in 2008.
According to market reports, Amlak Finance PJSC and Tamweel PJSC, Dubai's largest mortgage lenders, will be taken over by a government-owned bank. The new Islamic bank is expected to boost the real estate sector in the United Arab Emirates (UAE), so more housing loans should be available for UAE nationals.
"Tamweel and Amlak PJSC were the original captive financing arms for the two (initially) state developers Nakheel and Emaar, respectively," Moody's analysts said. "They have since evolved into the two dominant providers of home finance in the GCC and have recently announced merger discussions. However, both lack the 'cheap' and stable retail deposits of some of their newer competitors that have become more active in the country since land registration laws were passed in 2007."
As a result, Moody's said that both companies might probably need to raise alternative financing in the form of equity and unsecured debt and the securitization markets might become key to their long-term business models. The same is true for the newer lenders that are being set up in the region - where Saudi Arabia is currently the most active, the rating agency said.
Despite the continued optimism for growth opportunities on the securitization front, much of the activity won't take place in a public market format. After the credit crunch, the majority (90%) of recent securitization transactions in EMEA have been retained by the originators and used for repo at the Central Bank to obtain liquidity.
"I think it's fair to say that post Lehman (Brothers), Sharia compliant securitizations are dormant for the foreseeable future," said Farmida Bi, a partner at Norton Rose. "The last deal in the market that we are aware of is the Sorouh securitization which closed in August 2008 but no others are expected in the foreseeable future. Some warehousing activity was taking place in the last quarter of 2008, but that is pretty limited."
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