Sukuk surge

The global sukuk market is big business. With a value predicted to hit $70 billion by mid-2008 and continue on to as much as $225 billion by 2010, the major financial institutions are starting to take notice. As one of the biggest operators in the field, Barclays Capital is perfectly placed for a good view of the economic landscape. BM spoke with BarCap’s Arul Kandasamy to find out more.

BM. Could you tell us something about how you and Barclays capital got started out in Islamic finance?
AK. I joined the French investment bank Calyon in London in 2002 to work in asset-backed securitization. Whilst I was there the government of Malaysia issued the first ever international sukuk, using an ijara (sale and lease bank) structure.

So on the back of that, some colleagues in the bank approached my then boss and said, "This looks like something interesting that we should pursue as we have clients who are interested. Can you allocate some resources to this?" And given that I was Malaysian and I've done structured finance and am a lawyer by training, my boss said, "Look, Arul, you run with this."

That's essentially how I got started and made the fortunate shift from securitisation to Islamic finance.

Barclays Capital has been involved in Islamic finance for more than 10 years. In 2006, we decided to ramp up our involvement in the sukuk space. We have built a fantastic team over the past year and thanks to the support of our clients, we have achieved a market leading position very quickly.

BM. You moved to Barclays Capital fairly recently, how have your early experiences been?
AK. It's been fantastic. We have a great platform at BarCap. Essentially, we are one of the top banks in the world for bond, fixed income instruments. On the back of that, we've managed to build a number one, market-leading franchise in sukuk. Barclays Capital is responsible for the three largest sukuk ever issued. In the last 18 months or so we’ve arranged more than US$10 billion in sukuk. No other bank has done that much that fast, so right now, we’re at the top of the league table.

What’s interesting about the way we are doing things at BarCap, is that it’s very different from many of our competitors. Basically, it's not driven by a person or an Islamic unit. In BarCap, the Islamic expertise is integrated within our product teams.

I am part of the Financing Solutions Group, which is made up of 60 people divided between our office in London and three of us here in Dubai. All the Islamic deals are executed in the exactly same way as conventional deals and are staffed on that basis. For example, if it was a straight sukuk it would be done by conventional bond origination, sales and trading teams with the involvement of one of the three of us here in Dubai. So, we are part of a wide-ranging, multi disciplinary team. We each have specific expertise but we share that expertise across the bank.

BM. Are there any other major differences between BarCap and other financial institutions operating in the Middle East? A lot of companies now have Islamic finance options, so what is it that really differentiates you?
AK. I think the first key point is the fact that BarCap has a market leading position in the conventional markets. We leverage on that to bring our Islamic finance customers the distribution, the structuring and the pricing capability that we have successfully built on the conventional side of our business. If you look at the deals we have done, the reason why they've been such large deals is because of our global platform and the fact that we're fully integrated in terms of delivering the product to the customer. Our existing position in the conventional space has enabled us to quickly become a major player in the Islamic space..

The second point I would make is that the way we view our clients is very specific. We're very targeted in who we work with. When we do choose the clients, we actually offer them the entire range of what BarCap can do. It's a very client centric or client-focused approach, as opposed to a product-focused approach. So to the extent that we identify what the client needs and what he requires, we give him that and not try and sell him something else. We’re really focused in catering to client needs and facilitating their requirements rather than aggressively selling products. This is not something that is restricted to our Islamic finance side, but which runs throughout BarCap’s operations. It actually works very well in relation to Sharia compliance because, in Sharia, you are expected to treat your client fairly and equitably. You should propose only the right things, so it all fits together very well.

Also we've been in this region in one way or the other since 1925. So we have a very good understanding of what goes on and what people need. I think one of our strengths the fact is that our main focus is on debt and risk management. We are not distracted compared to other international banks who may have IPO or cash equity capability, so we're better able to provide specialist financing and risk management solutions. It’s another way in which we’re different: we don't do the entire sphere of investment banking.

I think the other element that distinguishes us in terms of the sukuk we have done is that we play on the convergence between Islamic finance and conventional finance. So we make it a point to structure the sukuk to appeal to international investors and to international standards.

BM. So you make sure that your conventional products are consistent with Sharia law?
AK. No, it's the other way around. We make sure that the Sharia products are consistent with what goes on in the conventional world. After all, the conventional world is very much bigger than the Islamic world. So to our investors, a sukuk is viewed and priced in the same way as the equivalent conventional instrument. They offer the same degree of protection, risk and reward that you would see in a conventional instrument. For example, if you were to do a Eurobond and there were certain regulations that you had to adhere to, we make sure that our sukuk also come up to that same standard. This means that we can sell it to a widest possible market. This is beneficial to our clients. When you can sell to as many investors as possible, you always get the best terms and the best prices.

BM. Given the early success BarCap has experienced in the Islamic finance sphere, do you have plans for further expansion?
AK. Well, I think the first thing is to expand our franchise here in the Middle East. At the moment we've been doing deals in the UAE. We've recently closed the first ever convertible out of Kuwait, and what’s more we did it as a Sukuk. So the first part of our growth strategy is to apply what we have done in UAE to Qatar, to Kuwait, Saudi Arabia, Bahrain and so on. We’re looking to expand in the GCC and North Africa and to a lesser extent Southeast Asia.

The second angle of growth is in terms of widening the actual client base. Right now our client base is growing, so we want to increase the depth and breadth of clients. The third area in which we are looking to expand is through new product innovation. We're constantly coming up with new products that we can market and therefore gain advantages over our competitors in terms of what we do.

BM. Islamic banking seems to be going from strength to strength and 2007 is predicted to be its most successful year yet. What do you think are the key drivers behind this increased popularity?
AK. I think there are quite a few reasons. Post September 11, a large amount of cash came back into the region. Secondly, the rise in oil prices has resulted in an increase in liquidity. So you now have a lot more money in the Middle East. Combine that with the social and geo-political changes that have occurred post-September 11, where people have become a bit more conservative or religiously oriented. There is also the desire by the governments trying to promote places like Dubai or Bahrain as international financial centers. In that context, one of the differentiating factors is to promote them as Islamic financial centers.

I think these factors have led to a critical mass. Ten years ago, there weren’t that many Sharia compliant products, whereas today there is quite a wide range. Given that these products are just as good as their non-religious counterparts, it makes sense that many people are choosing to take the Shariah option.

BM. Do you see the influence of Islamic finance spreading beyond generally Muslim territories
AK. As long as you offer a good product that is well priced, customers will naturally flock to it, whether it's Sharia compliant or not. So to the extent that Islamic products are competitive and offer the right risk, reward and benefit ratio, you will definitely see non-Islamic customers using those products. But then you also need to think that if you are in a predominantly non-Muslim country, then the drivers will be different. Then you need to be better than a conventional product in order for people to use you.