DUBAI: Issuance of Islamic bonds will be stimulated by a tightening of yields versus conventional bonds as banks chase a finite amount of quality sukuk instruments, HSBC's Islamic arm Amanah said on Tuesday. HSBC has previously forecast global sukuk volume of $44 billion in 2012, up from $26.5 billion last year. Malaysia is expected to continue to dominate issuance with about 60 percent of the total; Malaysian toll expressway company PLUS Berhad conducted a $10 billion sukuk issue in January. Average yields on dollar sukuk in the secondary market are currently about half a percentage point lower than for conventional Middle East bonds, HSBC said in a report, which presents an opportunity for Gulf issuers. The tightening spreads are a result of high demand for sukuk and a lack of supply to satisfy the liquidity available at Islamic banks in the region, it said. "Mid-investment grade range is preferred" by investors, said Rafe Haneef, managing director of Islamic global markets at HSBC, with liquidity becoming scarcer for high-grade issuance. Hong Kong Haneef also said there was scope to develop Islamic finance in more Asian markets including Hong Kong, a key offshore yuan centre, which is considering amending the tax treatment of Islamic financial products. A consultation paper to study proposed amendments to tax and stamp duty requirements was published last Thursday by the Hong Kong Financial Services Branch. Hong Kong issuers need legislation that ensures tax neutrality for a sukuk to be economically feasible. Islamic finance transactions often require that asset ownership be transferred more than once between counterparties; this attracts additional duties in most jurisdictions, making the transactions more costly than conventional structures. The first Hong Kong sukuk was a 500 million yuan ($79 million), three-year issue from Malaysia's Khazanah in October 2011. That sukuk was granted tax-exemption as its underlying assets were in Malaysia. Meanwhile the sukuk market in Indonesia, the world's most populous Muslim nation, is expected to double in size this year from the $1.9 billion seen in 2011, said Herwin Bustaman, head of HSBC Amanah Indonesia. The government has already sold $1.5 billion of local sukuk and HSBC estimates it will issue another $1 billion to $1.5 billion in the second half of the year. Issuance remains driven by sovereign paper with conditions improving for corporates due to new regulations, Bustaman said. "Indonesia will see one or two corporates issue the country's first dollar-denominated sukuk. Previously, it was difficult to do that because of issues such as tax and the transfer of beneficiary ownership."
