Rising interest rate unlikely to impact sukuk market
Posted on December 14, 2010, Tuesday
KUALA LUMPUR: The sukuk market is unlikely to slow down next year against a backdrop of rising interest rates, says International Treasury Services (ITS) Consultancy Sdn Bhd.
“There are still good opportunities as there is still a big pool of investors looking for value.
“My concern is that demand might be cautious because in a rising interest rate environment, if we do not have something to preserve value, people would step back,” said managing director Nic Weston.
He was speaking to reporters after opening a two-day seminar on hedging strategies using Islamic products organised by Bank Islam Malaysia Bhd here yesterday.
Weston said raising interest rates could be the trend for next year as global central banks were making the same decisions to address domestic risks, adding China and Australia have started the trend.
“For the next cycle, the interest rate is likely to be higher than lower,” he said.
Weston said sukuk was a tremendous form of investment if interest rates fall, however, its value would deteriorate if the interest rates were on a rising trend.
“If the rates are more likely to go up, then you need to be cautious or have a plan to protect the value of the bonds with a hedging strategy,” he explained.
On whether demand for sukuk would slow due to rising interest rates, Weston said, “I do not think so because as in any kind of capital raising, this is a great opportunity with low interest rate for investors to broaden their capital base and tap the opportunity in sukuk financing.
“But on the other side, those investors who are purchasing sukuk, need to have the comfort so they can protect the value of their investments, going forward.
“I do not think the market will necessarily slow down,” he added.
On the growth of the sukuk market, Weston said it was hard to predict the outlook as markets, globally, were cautious over economic developments while there was still demand from corporates to meet their financing needs.
Meanwhile, Bank Islam managing director Datuk Seri Zukri Samat said it was critical for sukuk holders and investors of other fixed income financial products to have access to hedging solutions to counter challenges in a rising interest rate environment.
In his keynote address, Zukri said attention must also be given to the development of Shariah compliant hedging solu-tions in line with the growth of financial products in the primary market.
The text of his speech was delievered, on his behalf, by the bank’s assistant manager Hizamuddin Jamalluddin. — Bernama