Starved of bonds, Islamic firms bet on property

By Daliah Merzaban

MANAMA (Reuters) - Islamic banks and insurers, starved of long-term bonds, are being forced to invest in Gulf Arab real estate in an increasingly risky bet on stable returns after a five-year rally in property prices.

With about $700 billion in assets, according to consultancy Mckinsey, Islamic financial institutions are struggling to park their cash without violating religious rules that exclude interest bearing bonds and speculative investments.

Islamic bonds, which pay profits rather than interest, suit their needs best. There was about $82 billion worth of Islamic bonds, or sukuk, outstanding in July before a global credit crisis virtually dried up sales. Most mature in five years.

At longer maturities the choice narrows further. Not one sukuk has a maturity of 30 years, the typical term of an investment that matches potential liabilities such as a life insurance policy.

"Where is Islamic money?," said Sameer al-Wazzan, chief executive officer of Solidarity, the world's largest Islamic insurance firm by capital. "It's all in buildings and housing," Wazzan told the Reuters Islamic Finance Summit.

Actually most Islamic banks invest in deposits with conventional banks, which have units complying with sharia, or Islamic law. Some of their cash is also invested in equities and other asset classes.

"The problem we face is the availability of long-term Islamic investments," Wazzan said.

REAL ESTATE FUNDS  Continued...