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Shariah-compliant finance: A product without a market

Enormous energy is going into the creation of new Shariah-compliant finance structures for eager Middle Eastern corporates to fund themselves by appealing to Islamic investors and their growing pool of money. Every market participant expects the surging Islamic finance sector to keep on growing fast. But a key element is missing. Secondary trading in these instruments is severely limited. Sudip Roy suggests that for the recent increase in primary market activity to be sustainable, more attention needs to be devoted to trading infrastructure.

The linchpin of Islamic finance

Middle Eastern companies are increasingly using Islamic finance techniques to fund their growth strategies. The development of new structures makes it easier for corporates to raise money. Yet even as the product range grows, the Islamic capital markets remain stymied by the lack of a secondary market. How will this hurdle be overcome?

IN JULY, ABU Dhabi oil company Aabar Petroleum issued a $460 million sukuk bond to redeem part of the bridge finance for its acquisition of Singapore’s Pearl Energy. Lead managed by Deutsche Bank, the transaction proved a big success, being increased in size from an initially planned $350 million. The deal aroused great interest, not least because it was another example of a Middle East corporate deploying Islamic finance techniques to fund its expansion strategy.

Flush with cash, most companies in the region do not need to borrow money. But in recent months signs have emerged that the Middle East’s more forward-thinking corporates are looking to the Islamic capital markets to fuel their growth, whether that be through acquisitions or capital expenditure.

In January, for example, Dubai Ports executed the biggest-ever Islamic deal when it issued a $3.5

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