Dubai-based Mashreq Capital has said it would set up an Islamic fund of up to $100 million to invest in sukuk offering high returns, as the bottoming out of the Islamic bond market triggers more interest among investors.

The unit of Mashreq bank aimed to raise between $50 million and $100 million in the next 18 months for the fund which would focus on sukuk in the region and could offer yields of 11 to 15 per cent, chief executive Abdul Kadir Hussain said.

"We are essentially sitting now in a situation where the yields on some of the sukuk issuances are extremely attractive," Hussain said.

According to Hussain, the fixed income and bond markets were "pretty close" to bottoming out, although the market for new sukuk, commonly known as Islamic bonds, has completely dried up since the start of the global financial crisis.

The open-ended fund, in which Mashreq unit Badr Al Islami invested $20 million, would target sukuk sold by firms that could include Aldar Properties, Dubai Electricity & Water Authority (Dewa) and Saudi firm Dar Al Arkan.

A $3.52 billion Islamic bond issued by Dubai developer Nakheel - the world's largest sukuk - would offer yields in excess of 20 per cent, while those of Dewa and Aldar of between 9 and 12 per cent, he said.

"The valuation in the asset class are pretty interesting," Hussain noted.

The perceived default risk of holding debt issued by companies linked to the Dubai government, meanwhile, has receded substantially since the emirate sold $10 billion to the UAE central bank earlier this year.

Those funds would be used partly to help state-linked companies meet debt and other financial commitments.

At the same time, Hussain, a former Credit Suisse banker, said retail investors were eager to find alternatives to equity investments after regional stock markets slumped as much as 70 per cent in 2008, in the case of Dubai.

"I think a lot more people are looking at it," Hussain said of interest among regional investors in fixed-income products.

"I moved to this region in 2006 and I haven't had more interest at any point in those three years than I have now."

Still, it may take some time before regional investors have the liquidity to put into fixed-income funds, especially since they have tended to be biased toward investing in equity or debt assets directly rather than through funds.

"Retail investors and institutions are still in a situation where they would rather invest in an individual bond even though its probably hard to do that and more dangerous to do that," Hussain said.

Mashreq Capital is also in the early stages of planning a second sharia-compliant fund, likely to be $50 million to $100 million in size, to invest in both fixed-income and equity products in the region with sister firm Makaseb, he said. – TradeArabia News Service