Corporate Bond Markets - Robust Credit Cultures a Key to Development

Post the recent global economic crisis, there has been a significant shift in powers from developed nations to emerging market economies (EMEs). The sovereign crisis of European Countries, famously called as PIIGS (Portugal, Ireland, Italy, Greece and Spain) have questioned the dominance of emerging nations. In order to boost the economy growth, several developed nations have pledged to keep their interest rates at or near zero for an elongated period. The sovereign ratings of PIIGS have been cut and their fiscal deficits have reached to a record high.

The Asian story depicts a different perspective; the strong domestic consumption especially in India and China has led to the rally in the economy which has forced the central banks and governments to roll back their accommodative measures to tame the inflation. Out of these issues, it remains an important question how developed our bond markets – government bonds and corporate bonds are and it helps in measuring the pulse of the economy.

While the Asia-Pacific countries have made a good progress in developing local corporate bond market, they have a long way to go ahead. In India, Government Securities market are fairly developed on account of large quantum of government borrowings which have led to active trading and price discovery in securities of all tenures. However, in corporate bond market, we have a long way to go.

M. T. Raju, Upasana Bhutani and Anubhuti Sahay (2004) in their working paper “Corporate Debt Market in India – Key Issues and Policy Recommendations” have rightly pointed out for the need of “Single Trading Platform” instead of different platforms operated under NSE, BSE and FIMMDA. It tells that the different platforms allow liquidity bifurcated. They also emphasized the need of repo market in corporate debt. Recently, the RBI allowed the repo trading in corporate bond which might provide the liquidity in corporate bonds.

In another commentary report by Standard & Poors – “Fostering Robust Credit Cultures Is Key to Developing Deep and Liquid Corporate Bond Markets in Asia-Pacific”, Thomas G Schiller rightly pointed out that many Asia-Pacific seek to build market maturity and sophistication so as to attract many issuers to their countries. They have been emphasizing on robust credit cultures which are built on key elements such as transparency, independent and objective credit analysis, risk-based pricing, creditors’ rights and arm’s length relationships. In his commentary, he explained about the growing and maturing corporate bond markets in Australia, Hong Kong, Japan, Korea, Malaysia, New Zealand, Singapore, and Taiwan, and emerging markets in China, India and Thailand. About India, he mentions that India is a mostly sound credit culture that is still improving in some areas such as creditors’ rights. India’s corporate bond market is small but growing rapidly. Issuance grew by about 60 per cent over the two years to end-financial year March 31, 2010. However, the recent regulatory developments are enabling bond market development, including: the easing of issuance and listing requirements; the enhancement of disclosure requirements for issuers; the clearing of bonds through stock exchanges; and the introduction of credit default swaps (CDS) and interest rate swaps. He concluded that the process of building capital markets in banking dominated environment is a long and laborious one because it involves changing of a country’s business culture.

Read more about other countries here.
Happing Reading!

- Amar Ranu

(Permission sought from S&P to post their articles on this blog)

The New Financial Landscape – Islamic Finance to fuel the growth

The economic crisis followed by the revival; world markets are poised to grow at an unexpectedly high rates barring some uneven European’s crisis and Korean’s geo-political tensions. However, Asian region capturing 50 per cent of world population has its own growth story, thanks to high consumption story. Emerging from the worst of the crisis, the global financial landscape will be a markedly different one from before. India and China’s stories support the theory.

Asia accounts about 60 per cent of world Muslim’s population which makes a case for Islamic Banking; however the industry has been facing challenges. Mr. Ng Nam Sin, Assistant Managing Director, Monetary Authority of Singapore says that

The industry faces several challenges.  Let me just highlight three key issues facing Islamic finance in Asia. Firstly, as was noted by Governor Rasheed Al Maraj, most Shariah-compliant banks like conventional banks need to continue to improve their risk management and corporate governance standards.  Asset-liability management, liquidity and risk concentrations are some of the key issues confronting financial institutions.  They need to ensure their business models are sustainable in the long-term. 

Secondly, the Islamic Financial Services Board (IFSB) has pointed out that Islamic banks need an international Islamic short-term liquidity market. This will further facilitate asset-liability management.  In Asia, we need an active pan-Asian Islamic securities market to provide more short-term liquid instruments for Islamic banks as they expand across the region.  It is encouraging that more countries in Asia are now familiarising with Islamic finance and its structures, and have expressed interest to issue sukuk.  Several are adopting the necessary legal and regulatory frameworks to enable Islamic finance to take root and grow.  More focus on growing the issuance of tradeable liquid instruments, over time, would help to improve liquidity and cross-regional flows.

Thirdly, a shortage of human capital; the number of financial professionals who are well-versed in Shariah-compliant products is still relatively small.  We need more universities and training institutes to offer better quality education and training in Islamic law and finance in order to meet the rising demands of the industry as it embarks on the next phase of growth.

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In this phase of organic transformation, Singapore has emerged as the major economy in developing Islamic Finance. Singapore boasts of largest Real Estate Investment Trust (REIT). Its Singapore Management University has set up an Islamic Law and Finance Centre, the first institution in the world to combine Islamic Law, Banking and Finance programmes in a single, multi-disciplinary university centre.

Some specific Muslims organizations have always been in focus for all wrong reasons which deteriorate their images all over the world, especially after 09/11. If they just dig their strengths and do well for their communities and bring a change in their thinking, many Muslim dominated countries will get benefitted.