Middle East bulges with cash, needs more scholars

By Daniel Bases

LONDON (Reuters) - Investment banks searching for ways to tap the deep pockets of cash, primarily from the Middle East, are increasingly looking to Islamic finance, says JP Morgan's head of debt and equity capital markets.

Investors in emerging markets are cash rich and hunting for high returns, while yield spreads on sovereign and corporate issues have been squeezed toward record tight levels and stock prices are on the rise as confidence in these economies grow.

"I think the strength in the Middle East lies in the liquidity they have more than any remarkable companies that can come to market," Viswas Raghavan told the Reuters Investment Banking Summit in London this week.

"I respect, or rather I am in awe of their ability to provide liquidity to the capital markets that is probably more stable, longer-term, less knee-jerk liquidity compared to some of the liquidity sources in Western Europe and the U.S.," he said.

Raghavan highlighted that by increasing the amount of bonds that are Sharia-compliant, there will be increasing amounts of Middle Eastern money buying international paper.

Devout Muslims who invest along Sharia guidelines will not purchase assets that pay interest or that derive profits from such things as alcohol, pork or gambling.

PROFIT-SHARING

The sector is fuelled in large part by the recycling of petro-dollars from the Gulf region, is believed to be anywhere from $200 billion to $400 billion in size globally and is built around the concept of profit-sharing rather than charging interest.

"Don't just look at Islamic finance on a vacuum basis, whereby you pay a lot of money to a Sharia council to kind of certify that a certain bond is, well kosher for lack of a better word," said Raghavan.

"You have a set of parameters, and if you can solve for that set of parameters, then there is no reason why that liquidity cannot be available to the global capital issuers," he said.

One stumbling block, however, is the variations in what is and what is not a Sharia-compliant investment. That has tended to limit investor choice and bifurcate the Islamic liquidity pool as different Sharia scholars have different opinions about what is and is not allowable.

But that is only just part of the problem.

"Basically you cannot get enough Sharia councils. There are about 20 guys; they all know each other," Raghavan said.

"Even in that discipline, there is a bid/offer between what works in some places and what doesn't work in other places. It is more than a fad. A lot of banks are spending time evaluating the risks and rewards (of Islamic finance.)"

A lack of choice and the illiquid nature of Islamic finance has forced a buy-and-hold mentality, which for now Raghavan says is an advantage.

"In a market saturated with similar investor profiles, this class of investors provides a more resilient, less volatile aspect to your capital structure than the usual guy, who may flip at the first sign of spread-widening or the first sign of a sector collapsing where they just dump the stock," he said.