ECONOMY

Cypriots divided by 1974 war seek Shariah hub

Financiers in Cyprus, an island divided by war four decades ago, want to set up an Islamic finance hub to spur an economy that hasn’t grown in three years.

The Cyprus Investment Funds Association is calling for the government to sell sukuk to lure investment from the Middle East, President Angelos Gregoriades said in a September 23 e-mail interview from the capital Nicosia. The Cyprus Stock Exchange wants to encourage the listing of Shariah-compliant bonds and sees potential for the nation of 1.2 million to become a “gateway to the European Union” for Islamic investors, Chief Executive Officer Nondas Metaxas said in a September 18 interview.

The island, where Muslims make up 18 percent of the population and Turkey has kept troops since the 1974 conflict, is being asked by the European Union to tackle a bad-loan ratio of 45 percent after a joint bailout with the International Monetary Fund in March 2013. Cyprus would follow a sukuk sale by the U.K. and a planned offering from Luxembourg, as Ernst & Young LLP forecasts the industry’s global assets will double to $3.4 trillion by 2018.

“Islamic finance is considered as a credible alternative source of funds in light of the credit crunch worldwide,” the stock exchange’s Metaxas said in an interview from Nicosia. “The CSE’s aim is to develop a new product in its markets but at the same time, to help Cyprus overcome the present difficult and challenging economic situation.”

Still Divided

Since 1974, when Turkey invaded Cyprus in response to a coup to unite the island with Greece, it has been divided into the internationally recognized Republic of Cyprus in the south, and the Turkish Republic of Northern Cyprus. Most of the island’s Muslims live in the north, which isn’t recognized by the United Nations and faces legal restrictions on trade with the outside world apart from Turkey, although some residents can open bank accounts and trade securities in the south.

The government isn’t currently looking into developing an Islamic finance industry, Finance Minister Harris Georgiades said in a September 23 phone interview from Nicosia.

The euro-area’s third-smallest economy shrunk 2.2 percent in the three months through June from a year earlier, the 12th consecutive quarter of contraction. It had to liquidate its second-largest lender and force losses on bank bondholders and deposits of more than 100,000 euros ($127,660) last year in order to receive 10 billion euros of emergency loans.

Stress Tests

The country is now being asked by international creditors to strengthen powers of foreclosure as Cypriot banks struggle with the region’s highest percentage of bad loans and gear up for euro area stress tests. Cyprus sold 750 million euros of five-year sovereign bonds at a yield of 4.85 percent in June, the first sale of that magnitude since 2010.

“For crisis-ravaged Cyprus, this is all about rehabilitating itself in the debt markets and attracting much- needed foreign capital,” Nicholas Spiro, managing director at London-based Spiro Sovereign Strategy, said in a Sept. 19 interview. “Islamic bonds are proving extremely popular these days and right now Cyprus needs all the money it can get its hands on.”

The U.K. raised 200 million pounds ($326.4 million) from its debut Shariah-compliant debt sale in June, receiving bids for more than 10 times that amount. Hong Kong’s first sukuk sale achieved the smallest spread over similar-maturity U.S. Treasuries for any Asian sovereign excluding Japan, the monetary authority said in a Sept. 11 statement after the city sold $1 billion of the debt.

‘Good Opportunity’

“The Securities and Exchange Commission and others in government seem to be cold on the idea, not on religious grounds but simply because it is not well-known or understood by them,” Alexander Apostolides, chair of the department of accounting, finance and economics at the European University Cyprus in Nicosia said in a September 22. interview.

The chances of Islamic banks from Malaysia or the Persian Gulf rushing to set up in Nicosia are slim, Sergey Dergachev, who helps oversee $10 billion in emerging-market debt as a senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, said in a Sept. 21 e-mail interview.

“However, issuing sovereign sukuk is a very likely option,” he said. It offers “good opportunity for sovereigns to lower their funding costs and diversify their investor bases,” Dergachev said.

Worldwide sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, climbed 52 percent to $36.3 billion this year from the same point in 2013, data compiled by Bloomberg show. Issuance reached $43.1 billion last year and a record $46.5 billion in 2012.

Reunification Talks

Islamic finance development and a peace pact have come hand-in-hand in the Philippines. Authorities in Manila may offer “token amounts” of sukuk, Treasurer Rosalia de Leon said July 9, after a deal was brokered in March to end fighting with Muslim rebels in the south,

Cypriot President Nicos Anastasiades and Turkish Cypriot leader Dervis Eroglu crafted a joint statement in February on the aims of a new round of talks to reunify the island into a federal state. Negotiations since then have failed to break the deadlock. The gross domestic product of a reunified Cyprus could increase by 80 percent to 45 billion euros by 2035, compared with 25 billion euros without reunification, according to a May 29 report by Peace Research Institute Oslo.

Cyprus’s fund association has had discussions with experts from the U.K. and Middle East to identify tax and regulatory changes needed to become an Islamic finance hub, said Gregoriades, who is also chairman of KPMG LLP’s local operation.

“The ability to attract Islamic capital into Cyprus will provide a significant boost to the country’s economy and help further growth,” he said. The nation seeks to be an “additional jurisdiction for Islamic finance, offering lower costs, more direct proximity to the related markets, as well as a different risk profile and opportunities,” Gregoriades said.

[Bloomberg]