DUBAI // South Korean banking officials are in talks with local lenders to launch South Korea’s first sukuk as international demand for Islamic debt instruments grows.

The Islamic bond could be worth between Dh1.83 billion (US$500 million) and Dh3.67bn, and would be launched by the Korean government or a quasi-governmental organisation, bankers involved in the negotiations say.

Last few weeks were dominated by the news of Europeans looking to take advantage of the Islamic finance market; and now the Koreans are looking to come on board as well. While this growth in the uptake of Islamic finance is terrific, those of us in the field should remind ourselves often that this isn't necessarily because Islamic finance is finally understood by the world.

Far from it.

The interest in Islamic finance right now is for one reason alone: the Middle Eastern markets are awash with capital when the rest of the world is still struggling to come out of its credit crunch.

It is a good opportunity to tap the biggest parked credit resource in the world. It might also be a good opportunity to diversify. Can this also become a good opportunity for Islamic finance principles of risk sharing to influence how things work?

More work is needed on that front.

When talking about rates of return nowadays, 375 bps over benchmarks is not exactly cheap. But when you consider that Dubai is having a lot of trouble with the Nakheel issue and about $80 billion of debt that is coming due in December, it is simply amazing that investors would let Dubai borrow at such low rates.

As much as this is an indicator of Middle Eastern investors' appetite for investments, it also shows the kind of risky behaviour that got Dubai into a big mess in the first place. Hopefully with more regulatory oversight, things will be different this time around.

Dubai’s $2 billion sukuk, just placed on October 28, may have bought property company Nakheel some breathing room.  That said, Nakheel’s experience shows that risks and disclosure really do matter. 

One of the curiosities of the Middle Eastern sukuk is the lack of disclosure requirements. Prospectuses like Nakheel's clearly stated that the company will not produce any financial statements, will not get them audited, and will provide no guarantee that if financial statements were prepared they will match financial numbers disclosed elsewhere. What is more is that Nakheel, a subsidiary of Dubai World, offers no guarantees that the accounting will be done properly.

All these are indicators of poor oversight and excessive risk for investors. The Westlaw Business article quoted above would seem to suggest that the investors haven't yet learned their lessons.

This will open the doors for other multilateral institutions to issue sukuk in the region and this will serve as a benchmark for sovereign and corporates internationally and locally who wish to issue sukuk," Saidi said.

The IFC sukuk issue is getting a lot of media coverage in the Middle East. The assertion by IFC that the sukuk process is more complicated and expensive than the conventional process is sure to result in many improvements -- bringing down the overall costs for future issues.

KUWAIT - The World Bank's International Finance Corporation (IFC) plans to raise about $100 million in Islamic bonds, three bankers familiar with the deal said on Wednesday.

HSBC, Dubai Islamic Bank, Kuwait Finance House Bahrain and Liquidity Management House have been mandated to arrange a roadshow for the sukuk, the bankers said.

"It's not to raise cash, they would like to show their commitment to the region ... they're doing some financing on an Islamic basis here," one of the bankers said.

"They have only a few ijara contracts, that's really the limiting factor," he said.

The roadshow will start on Oct 18 and will visit Riyadh, Abu Dhabi, Dubai and Bahrain, they said.

Islamic bonds do not pay interest, with returns being derived from underlying assets instead.

Moody's on Tuesday assigned an "Aaa" rating to IFC's vehicle to issue the sukuk.

IFC said in June it plans to issue $3 billion in short-term debt to increase funding for development activities in poor countries.

The global sukuk market this year has been upheld almost entirely by issues from sovereigns and supra-national institutions such as the Islamic Development Bank (IDB), after it got caught up in the global liquidity freeze last year.

Abu Dhabi's Tourism Development & Investment Co was the latest government-linked entity to sell sukuk after it said on Tuesday it had raised $1 billion.

The five year sukuk, priced at 230 basis points over mid swaps, was almost seven times oversubscribed, lead manager HSBC Amanah said in a statement on Wednesday.

Private sector issuance is expected to pick up significantly during the remainder of the year and early 2010.

Despite the economic downturn, the Sukuk market has been doing relatively well. It saw some declines from previous years, but those were more corrections than anything else. And now almost everyone around the world is wondering whether there is an opportunity here for them to raise some funds in the Middle East.