Are Western Islamic Bonds even necessary?

As I understand it, the selling point of the sukuk or Islamic bond is that investors who wish adhere to Shariah principles can invest in them. Sound good right? Well as posted in our breakfast links, the yields on the ones issued from the West will not be attracting any Middle Eastern tycoons anytime soon.

As expected, when it comes to choosing between God or money, most of us spend more time at the office. The yields on these things are sad especially if you compare the Islamic bonds being issued out of Malaysia or Saudi Arabia. What is even more tragic is that they seem fairly redundant. The major parameter is that they are not allowed to charge or pay interest. The other parameters would include that the income be generated from a hard asset and not cash. This of course excludes lots of the movements in face values thereby excluding repos, strips, or trade receivables (I’m still confused on the last one).

The whole concept is to shoehorn a market into a system of rents. This should increase demand for lease backed notes. If nothing else, bankers should focus less on creating Western Islamic bonds and putting more effort into increasing offers for equipment lease certificates. I’m assuming that they are using capital lease backed structures to bypass the question of buying on credit. Such a huge demand would help lower the cost of leasing for many corporations which can then become valuable investments for the population.

The West has very little to offer Muslim investors in terms of Islamic bonds, the focus should be on marketing Western securities that will fit into the Shariah parameters. The majority of corporate issues seem to be coming from Malaysia.

Western investors should take a closer look at Islamic bonds some which are offering fairly attractive yields. The market is beginning to slowly become more cohesive as HSBC begins its Index into the market. High quality corporates are very attractive. Some of the offerings for 2007 include:

GFH Sukuk Ltd (Bahrain) 3m Euribor + 125bps
National Industries Group SAK (Kuwait) 3m Libor + 105bps
Dar Al-Arkan International Sukuk Co (Saudi Arabia) 3m Libor + 225bps
Jimah Energy Ventures Sdn Bhd (Malaysia) Expected yield 9.3%

The issuance of the bonds are slowing down worldwide as the American liquidity issue has made investors par back their holdings of exotics. This might represent the time to look seriously at Islamic bonds as a means of adding a non-correlated fixed income item into your pool. It is certainly beating out US receivables bonds but then again your repo options might be higher with the more familiar US issue.