Kerala plans Islamic bond as Dubai may curb funds

Kerala, which relies on West Asian remittances for a quarter of its economy, plans to sell the nation’s first Islamic bonds next year to help pay for infrastructure projects.

“The way we see it, it’s another form of venture capital,” Finance Minister Thomas Isaac said in an interview in Thiruvananthapuram. “We need long-gestation funds to build airports, high-speed trains and expressways. Islamic finance promises unexplored potential in that context.”

Kerala’s government is helping start Al-Barakah Financial Services Ltd to sell the rupee-denominated bonds and create investment funds that comply with Shariah law’s ban on interest, Isaac said. The venture will tap Indian Muslims and money sent home by workers living in Gulf countries, even as a debt crisis in Dubai threatens to shrink the remittances, he said.

Islamic finance may help India raise the $500 billion it needs to spend on infrastructure by 2014 as it seeks to sustain the second-fastest pace of growth among major economies, according to national government estimates. Islamic bond sales almost doubled to a record $31 billion in 2007 on Arab oil earnings before plunging last year as the collapse of Lehman Brothers Holdings Inc shuttered credit markets, according to data compiled by Bloomberg.

Crude oil will climb to $82 a barrel in the first quarter of next year from about $71 now as demand from emerging markets increases, Goldman Sachs Group Inc forecasts.

‘Big prize’
Islamic bonds, also known as sukuk, are asset-based securities that pay a profit rate to investors to comply with Shariah’s prohibition of interest and speculation.

“India, if opened up for Islamic banking, is the big prize,” Afaq Khan, Dubai-based Chief Executive Officer of Standard Chartered Plc’s Islamic banking unit, said in an interview. “Its large Muslim population and strong growth promise excellent opportunities for releasing a lot of funds into the documented economy.”

India’s economy expanded 7.9 per cent in the quarter ended September 30, the second-fastest pace of expansion among major economies after China. The South Asian nation’s growth averaged 8.5 per cent in the six financial years through March.

Muslims make up approximately a quarter of Kerala’s population and 13.4 per cent of India’s 1.1 billion people, according to government data. Only Indonesia and Pakistan have more inhabitants who adhere to the religion.

Indonesia Sukuk
Indonesia’s first sale of dollar sukuk in April drew bids for seven times the securities on offer, the head of the country’s debt management office said. Dubai, which said on December 14 that it got $10 billion from neighboring Abu Dhabi to help state-owned Dubai World meet its obligations, raised $1.93 billion from its first sovereign Islamic bonds in October.