The rise of the Sukuk

The financial crisis of 2008-09 once again proved that the structural flaws of conventional system result in its frequent collapse. Among the multiple quoted reasons, one of the most prominent ones is excessive leveraging and low transparency owing to the absence of the mandatory requirement of complete information. Hence, the focus in the post-financial crisis has shifted towards having greater accountability, enhancement in transparency, improvement in governance and a strict limit on leveraging. This has persuaded the world to look towards Islamic finance as a viable financial alternate.

The prohibition of usury and encouragement of risk-sharing forms a financial system that creates a direct link with the real sector. This demonstrates that there exists a strong link between the performance of the asset and return on the capital used to finance it. The asset-backed nature of Islamic financial transactions, in addition to the prohibition on speculative activities and the key pillars of equity, justice and transparency on which the Islamic financial system is based make it a more stable and prudent system than its conventional counterpart. Sukuk, the most popular global instrument of Islamic finance, is being used by many developing countries as a tool of fiscal policy for economic development.

Broadly there are two types of Sukuk: (i) Asset-based Sukuk – raising finance where the principal is covered by the capital value of the asset, and the returns and repayments to Sukuk-holders are not directly attached to those assets; and (ii) Asset-backed Sukuk – raising finance where the principal is covered by the capital value of the asset but the returns and repayments to Sukuk-holders are directly linked to the performance of these assets. In terms of structure, 14 different types of Sukuk structures have been recognised by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain-based standard Setting organization.

These structures are mainly based on the underlying modes of Islamic finance, namely murabahah, musharakah/mudharabah, wakala, istisna and ijarah among others, or combinations of these. Since its inception, various structures of Sukuk have been successfully used by corporates and governments to raise funds. Projects like roads, railways, airports and hospitals etc, which generate revenues from tangible assets and are consistent with the Islamic rules of finance, are particularly appropriate for Sukuk financing. Given the importance of infrastructure development for sustainable economic growth, there is a large demand in emerging markets for Sukuk. Sukuk enhance the stability of financial institutions by providing them with improved portfolio diversifications and liquidity. Sukuk also encourage genuine transactions as these are based on real, identifiable, existing assets. This results in the development of a stable and sound economy, founded on real assets and productive activities as opposed to artificial paper based transactions. Strict adherence to Shariah principles of ownership, transparency and risk-sharing ensure a relatively resilient position of Sukuk than conventional bonds.

 According to research, it has been proven that Islamic securitisation –particularly due to its ethical foundation and its reliance on real tangible assets if implemented – would have, arguably, reduced some of the unfavourable outcomes of the 2008 financial crisis, as real collateral limits the possibilities of speculative activities. Pakistan joined the global Sukuk market with the issuance of its first international sovereign Sukuk of $600 million in 2005. In the domestic Sukuk market, the first Sukuk was issued in 2006. Since then more than 90 Sukuk (including corporate Sukuk and Government of Pakistan Sukuk) have been issued. However, in terms of volume, GoP Ijara Sukuk dominate the overall Sukuk market of the country. Al-ijara Sukuk, the most popular structure, represent ownership of equal shares in a rented real estate or the usufruct of the real estate. For Sovereign Ijara Sukuk of the government of Pakistan, a special purpose vehicle (SPV) known as the Pakistan Domestic Sukuk Company Limited (PDSCL) was established; the PDSCL issues Sukuk.

The PDSCL raises funds from Sukuk-holders to acquire assets from the government and declare trust on these assets for the benefit of Sukuk-holders. Each Sukuk certificate represents an undivided beneficial ownership interest in the trust assets. Subsequently, the trustee leases the assets for periodic payment of rentals for the life of the Sukuk. The rentals are received periodically by the trustee and distributed to the Sukuk-holders over the life of the Sukuk. On maturity of the Sukuk, the trustee sells the trust assets and the government purchases the assets while the proceeds are paid to the Sukuk-holders. Till now the government has issued total 18 domestic Sukuk and three international Sukuk. However, the share of Pakistan in the global market is still very low. According to the International Islamic Financial Market (IIFM), in the Sukuk database of December 2015 Pakistan’s share was below three percent (the issuance of two domestic Sukuk of Rs196.6 billion and one international Sukuk post-December 2015).

Given that Pakistan has identified the country’s infrastructure needs in its Medium Term Development Framework, the financing for carrying out such developmental projects can be achieved through issuance of Sukuk. Owing to its inherent strengths along with infrastructure requirements in the world, the global Sukuk market is expected to remain buoyant. The issuance of Sukuk is a complex process, and detailed documentation is required at each stage which ensures transparency. The expansion and progression of the Sukuk industry requires coordinated efforts from all stakeholders including issuers, regulators and investors. The potential of Sukuk for economic growth, strengthening financial stability and catalysing inter-regional investment flows makes it an attractive asset class for issuers and investors. Going forward, it is hoped that the government will exploit the potential of Sukuk for broad-based development of the country. The writer is a joint director at the Islamic banking department of the SBP.

SOURCE: The News / 28 November 2016

Jordan looks to sukuk to bolster financial toolkit

Building on recent growth in Islamic finance, Jordan is expanding its funding options and tapping a rising market through the issuance of sukuk (Islamic bonds).

Two issuances

This year the Central Bank of Jordan (CBJ) issued two rounds of sharia-compliant sovereign bonds for the first time in the country’s history. 

The first offering, released in May, used a murabaha (cost-plus financing) structure and was valued at JD75m ($105.7m). The sale successfully attracted JD205m ($289m) in bids from investors at a coverage ratio of 2.73. Meanwhile, the second sukuk, issued in mid-October, used an ijara (leasing) structure and was valued at JD34m ($47.9m). The latter sale was more than three times oversubscribed.

The bonds have a five-year maturity, with expected profit rates of 3.5% and 3.01%, respectively.

While both issues have been termed sovereign, the May sukuk – which was designed to provide liquidity to finance the operations of two government-owned companies, the National Electric Power Company and the Water Authority of Jordan – is backed by the utility companies rather than the government, whereas the October issue – which will be used by the Ministry of Finance (MoF) – is guaranteed by the government.

The sales were accompanied by a move in September, when the government signed an agreement with the International Islamic Trade Finance Corporation to finance basic imports with sharia-compliant funds.

The Jordanian government expects net domestic borrowing will reach approximately JD896m ($1.26bn) this year, according to press reports.

Market snapshot

The recent sukuk offerings are part of a broadening of Jordan’s Islamic financial services industry in the past couple of years.

At the end of July last year the Governorate Development Fund (GDF) – which was established in 2011 to finance small and medium-sized projects, as well as entrepreneurial initiatives – partnered with the Hajj Fund to offer sharia-compliant financing options.

The GDF plans to use a variety of Islamic financial structures, such as murabaha, ijara and istisnah, to fund industrial and service projects that aim to increase employment in the country.

Last year also saw the Jordan Dubai Islamic Bank (JDIB) launch sharia-compliant investment certificates of deposit, the first to be offered by an Islamic financial institution in Jordan.

Earlier this year flagship carrier Royal Jordanian finalised a $275m, five-year loan facility, which will be partially funded through Islamic financing, to pay down its incurred debt and restructure the company.

Strong foundations

Islamic finance is not new to Jordan, with local lenders Jordan Islamic Bank (JIB) and the Islamic International Arab Bank operating in the country since the 1970s and 1990s, respectively.

Yet, while Jordan introduced a framework for the sector as early as 1978, with the implementation of the Jordan Islamic Bank for Finance and Investment Act No. 13, it was not until more recently that the government began to proactively encourage the burgeoning industry.

Last year the CBJ took another regulatory step, issuing the Corporate Governance for Islamic Banks Instructions No. 61, which aim to increase accountability and transparency among Islamic financial institutions.

The Islamic finance industry in Jordan, though small, has been steadily growing since 2010, when JDIB – established by the Dubai Islamic Bank and its partner Jordan Dubai Capital – began its operations. One year later local company Al Rajhi Cement offered Jordan’s first sukuk, a seven-year, JD85m ($119.6m) issue.

In 2012 Parliament passed the Islamic Finance Sukuk Law, enabling both private and public entities to issue sukuk in dinars and foreign currency. The long-awaited legislation had been in development since 2010.

Building on this, in April 2014 the government passed new by-laws specifying the structure and transfer framework for issuance of sukuk. This was followed in July of that year by the Jordan Securities Commission’s introduction of rules allowing the issuance of sharia-compliant debt.

Future growth

The legislation has helped the Islamic financial sector bolster the country’s debt market.

In May local real estate developer Al Tajamouat for Touristic Projects, also known as Taj Mall, sought to shore up its finances, with the JDIB and investment bank JordInvest jointly issuing JD45m ($63.6m) worth of sukuk on behalf of the company.

Meanwhile, the government has introduced proposals to further develop Jordan’s Islamic financial services industry.

In a bid to make sukuk available at the retail level, the MoF commissioned the establishment of the Islamic Corporation for the Development of the Private Sector last year with the objective of providing sukuk-related technical help to private sector companies.

Signalling future growth, in September the Economic Policy Council – a 15-member body chaired by King Abdullah II – proposed to expand the targeted sukuk market to individuals, as well as create a JD150m ($212m) private equity fund, to be partially financed by Islamic banks.

SOURCE: Oxford Business Group / 22 November 2016

Bahrain approaches banks about sukuk sale in Q1 2017

The Kingdom of Bahrain is in talks with lenders for an Islamic bond, or sukuk, which is expected to be issued in the first quarter of 2017, banking sources told Reuters.

No banks have been appointed yet to arrange the debt transaction, the bankers said on condition of anonymity because the information has not been made public. The size of the debt issuance will be a minimum of $500 million, one of the banking sources said.

Bahrain's Ministry of Finance was not available for immediate comment.

The Kingdom has some $5 billion-equivalent in debt maturing in 2017, mostly consisting of short-term local currency treasury bills. It has no U.S. dollar bond expiring next year, Thomson Reuters data shows.

Bahrain's latest U.S. dollar debt issuance was in October, when it sold a $2 billion comprising a $1 billion sukuk and a $1 billion conventional bond.

The $1 billion long seven-year sukuk, maturing in February 2024, carries a 5.625 percent coupon rate, while the conventional bond, with a 12-year maturity period, was issued with a 7 percent interest rate.

The bonds were arranged by Bank ABC, BNP Paribas, Credit Suisse, JP Morgan and Standard Chartered.

Bahrain is rated BB by S&P and BB+ by Fitch.

(Editing by Jason Neely)

SOURCE: Reuters/16 Nov 2016

Azimut and Maybank to jointly manage sukuk fund, seek new markets

Nov 15: Italian money manager Azimut Holding SpA will jointly manage its Islamic bonds fund with Maybank Asset Management Group to cater to growing demand for hard currency sukuk products, the two firms said on Tuesday. The partnership will allow the fund to penetrate new markets including Malaysia and Singapore, where Maybank Asset Management already operates, the firms said in a joint statement. 

Azimut, through its wholly-owned Turkish asset management arm, launched its global sukuk fund in 2013 which has over $130 million in assets. Maybank Asset Management launched a U.S. dollar-denominated sukuk fund of its own in 2014. Sukuk funds remain tiny compared to their conventional fixed-income counterparts, but the sukuk market has widened in recent years thanks to an increasing number of issuers and investors. Turkey, Pakistan, Bahrain and Malaysia are among the sovereigns that have issued dollar-denominated sukuk in the past year. (Reporting by Bernardo Vizcaino; Editing by Eric Meijer)

SOURCE: Reuters/15 Nov 2016

Saudi boost for sukuk market

The international sukuk market, of which Malaysia accounts for some 66 per cent of global issuances, received a major boost when Saudi Finance Minister Ibrahim Al Assaf confirmed at a meeting with Christine Lagarde, managing director of the International Monetary Fund (IMF), late last month in Riyadh that the kingdom’s public debt issuance programme will not be limited to conventional bonds and that sukuk will play an important role. 

The global sukuk market had a flat year in 2015, impacted by the slump in the price of crude oil and other commodities and the sluggish global economic recovery. The value of sukuk issued last year fell to US$60.7 billion (RM255 billion) from US$107 billion in 2014 partly because of Bank Negara Malaysia’s decision to stop issuing short-term ringgit sukuk. Nevertheless, the Malaysian capital market continued its impressive growth across all segments last year, expanding by 2.1 per cent to RM2.82 trillion, equivalent to 2.5 times the size of the domestic economy. Of this, according to the Securities Commission Malaysia, the Islamic Capital Market (ICM) grew by 6.7 percent to RM1.70 trillion last year, compared with RM1.59 trillion in 2014. 

The signs are of a rebound this year, with sukuk issuances already reaching US$50 billion in the first four months of the year. Since then, there has been steady traction in sukuk issuance by sovereigns in the international and domestic markets and by corporates. In this context, the Saudi announcement and those by other Gulf Cooperation Council (GCC) states, such as Kuwait, Oman, Qatar, Bahrain and United Arab Emirates, indicating that they will also tap the international sukuk and bond markets to part finance their budget deficits, augurs well for the sukuk market next year. 

The Saudi Finance Ministry had also stressed that the kingdom plans to raise US$120 billion from the international markets by 2020. The kingdom’s budget deficit last year was US$98 billion. This follows the successful issuance last month by the Saudi government of a record US$17.5 billion conventional bond through three tranches in the international market — the single largest emerging market bond sale to date, surpassing the US$16.5 billion issuance by Argentina in April. The price of oil is hovering at US$50 per barrel, which is about US$10 per barrel higher than last year. 

The IMF expects gross domestic product growth in Saudi Arabia to bottom out at 1.2 per cent this year, rebounding to 2.0 per cent next year. Given these economic and public financing dynamics, Islamic bankers in Malaysia and the GCC region I have spoken to are optimistic about the prospects for the sukuk market, especially over the next two years, given the increased demand for financing in these countries, including for infrastructure and in the GCC for allied development partly in the context of Dubai Expo 2020 and FIFA World Cup in Doha in 2022. Al Assaf recently stressed that stabilising the kingdom’s net foreign assets held by the Saudi Arabian Monetary Agency (SAMA), the central bank, is a priority and that its debt issuance programme in the international markets would be an orderly process. By September, SAMA foreign holdings totalled US$546.7 billion, which, according to Al Assaf, is in “a healthy position”. 

Saudi bankers have welcomed this first public announcement by the finance minister on the role of sukuk in the kingdom’s debt issuance programme. They expect a debut Saudi sovereign sukuk early next year and stress the need for a well-structured public borrowing policy in the international market, which will give confidence and certainty to international and domestic investors. As such, the outlook for the Islamic capital market in the kingdom looks very positive. The fact that the bond was oversubscribed to the tune of US$67 billion reflects the robust latent demand in a global market starved of such papers. This was further highlighted by the fact that the pricing was tight, especially for the 30-year tranche, which was priced at 210 basis points over United States Treasuries, the same for a similar bond issued by Qatar in May. 

The pricing for a Saudi sovereign sukuk could be even tighter because of the latent demand for syariah-compliant papers given that Islamic investors could not partake in the US$17.5 billion bond offering. The challenge for Saudi Arabia is to build up a yield curve. The best way to do this is to become a frequent issuer of government papers with varying maturities, sizes and even currencies in the international markets. Frequent issuances will make the pricing tighter and at the same time offer decent yields to investors. “The issuance was clearly aimed at international investors in China, the US and Europe, who are not familiar with sukuk. 

The Saudi authorities preferred a conventional issuance this time because this is what they are most familiar with and they wanted a quick closure. Perhaps in the next issuance they may opt for a mixed issuance, comprising bonds and sukuk tranches, or an entirely sukuk offering,” explained a senior Saudi banker. SAMA supports the development of a robust ICM in the kingdom, which is the second largest issuer of sukuk after Malaysia. Government-linked entities — such as Saudi Aramco, the largest oil company in the world, and its various subsidiaries; Saudi Basic Industries Corporation, the world’s largest petrochemicals producer and exporter; and, the General Authority for Civil Aviation, in addition to a host of corporates and banks — are regular issuers of sukuk. 

Sukuk as a unique fundraising instrument has a potential beyond its traditional markets and to become a truly globalised financing instrument for monetary policy and liquidity management, infrastructure and urban regeneration financing, and even for social causes, such as immunisation and monetising waqf assets. It’s up to Malaysia and Saudi Arabia to nurture this ambition and put sukuk on the global map! 

Mushtak Parker is an independent London-based economist and writer

Source: NST 9 Nov 2016

Sukuk issuance to drive growth in Islamic finance

Dubai: Much of the growth in Islamic finance is expected to come from capital markets business relating to sukuk (Islamic bond) according to Standard Chartered Saadiq.

“Sukuk is now mainstream component of capital markets in core Islamic finance markets such as Malaysia and the UAE. While Malaysia dominates the local currency issuance, the GCC leads in international sukuk issuance. There is a healthy pipeline of issuance across the world while we expect more issuers to come to the market over the next year,” said Ahsan Ali, Global Head of Islamic Origination.

Growing financing needs of sovereigns, sovereign related entities, corporates and financial institutions are expected to increase demand for capital market issuance across GCC in the future. Although a significant share of capital market issuance in the recent past have been dominated by conventional bond issuance and loan syndications, Ali expects GCC issuers to issue sukuks along with conventional bonds.

“Bulk of the further capital market issuances will be primarily driven by sovereigns and financial institutions. While sovereigns in the oil exporting countries will be seeking market funding for budget needs, the demand from financial institutions will be driven largely by liquidity and liquidity management needs,” said Ali.

Global sukuk issuance has been moderating since 2015 is expected to remain subdued this year and in 2017 according to rating agencies Moody’s and Standard & Poor’s.

The sukuk market experienced a correction in 2015 when Bank Negara Malaysia (the Malaysian central bank) decided to stop issuing short-term sukuk and switch to other instruments for liquidity management for Islamic financial institutions.

Challenging conditions

New sukuk issuance volumes have remained subdued so far for the first half of 2016 at $40 billion (Dh14.7 billion). This has been driven by more challenging economic conditions in emerging markets and the GCC’s move to tap conventional liquidity from international investors, as quantitative easing has been driving yields to zero or even negative rates in various markets.

The volume of issuance in the first half of 2016 was not that encouraging, particularly when compared with conventional issuance. Muslim-majority countries, such as Malaysia, Indonesia and the GCC countries account for around 90 per cent of total sukuk issuance, this is expected to remain unchanged in the near future.

Going forward, a pickup in issuance from Bank Negara Malaysia, coupled with the deficit financing needs of the GCC members and their drive to promote Islamic finance, is expected to boost issuance.

Saudi Arabia, despite strong religious affinity and a very prominent Islamic banking sector, remains relatively underweight in both international and domestic sukuk volumes. Like Malaysia, the country enjoys a deep base of local investors, issuers, intermediaries and service providers.

Source: Gulf News/19 Nov 2016

Sharjah Islamic Bank lists $500m sukuk on Nasdaq Dubai

Sharjah Islamic Bank’s (SIB) $500 million sukuk was listed on Nasdaq Dubai today.

Ahmad Saad, Deputy CEO of SIB, rang the opening bell to celebrate the listing.

The listing adds further momentum to Dubai’s growth as the global capital of the Islamic economy and underlines Nasdaq Dubai’s stature as the largest exchange in the world for sukuk listings by value, currently standing at $43 billion.

The bell-ringing took place in the presence of Abdul Wahed Al Fahim, chairman of Nasdaq Dubai, and Hamed Ali, chief executive; and senior executives of SIB.   

Saad said: “Our listing on the region’s international exchange supports our visibility among global and regional investors as well as providing first class regulatory standards. The sukuk was issued on September 8, 2016 and was oversubscribed by 3.2 times. It follows two earlier Sukuk listings by SIB on Nasdaq Dubai in April 2013 and April 2015, each of $500 million.”

Essa Kazim, Governor of Dubai International Financial Centre, secretary general of Dubai Islamic Economy Development Centre, and chairman of Dubai Financial Market, said: “SIB’s listing demonstrates the continuing growth of Dubai as the global capital of the Islamic economy, under the initiative launched in 2013 by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, UAE Vice President and Prime Minster, and Ruler of Dubai. This expansion is supported by the UAE’s long tradition of pioneering the development of Islamic finance and the depth of its expertise in the Sharia’a-compliant capital markets sector. ”

Abdul Wahed Al Fahim, chairman of Nasdaq Dubai, said: “SIB’s listing underlines the close and mutually beneficial connections that the exchange enjoys with leading Islamic financial institutions. Nasdaq Dubai is committed to further enhancing its Sukuk listing procedures and framework, to ensure streamlined access to the exchange for issuers.” 

SOURCE: TradeArabia News Service/3 Nov 2016

Djibouti sees Islamic finance sector expanding, aims for sukuk

Nov 2 (Reuters) - Djibouti expects to see new entrants in its Islamic finance sector and the government plans to work on a framework to allow the use of sukuk, or Islamic bonds, to fund infrastructure projects, its central bank governor said. 

Djibouti, a country of less than a million people located on the Horn of Africa, is a relative newcomer to Islamic finance, having introduced sector-specific legislation in 2011, but authorities hope it can increase banking penetration in rural areas while also attracting foreign investment. 

The government has established a national sharia board to help oversee the sector, appointing five members to the independent body last week, central bank governor Ahmed Osman said in an interview. 

The move could help Islamic finance by improving consumer perception of the industry and providing greater clarity on contracts which follow religious principles such as bans on interest and gambling. 

The government is in discussions with the Saudi-based Islamic Development Bank to secure a technical mission to help establish a framework to issue sukuk for either the government or state-owned enterprises, said Osman. 

"We will be looking a lot at sukuk in the next few years," said Osman, adding that there are around 10 projects which could be financed via sukuk - ranging from railways, pipelines to new roads. 

One likely candidate is the state telecom operator due to the availability of assets to structure a sukuk, Osman said on the sidelines of the International Islamic Banking Summit Africa, which the central bank is hosting this week. 

The central bank has avoided double-taxation of Islamic contracts through temporary exemptions, but it is in discussions with the Ministry of Finance to make those exemptions permanent, Osman added. 

NEW ENTRANTS 

The central bank is also in discussions with two lenders seeking to open Islamic windows of their own. Currently three of Djibouti's 10 banks are Islamic: Saba Islamic Bank, Salaam African Bank and East Africa Bank. 

The sector is attractive due to its faster growth - estimated at around 16 percent versus 10 percent for conventional banks - but also for its low levels of bad debt. 

"Islamic finance is more secure, as there is a direct link between financing and the underlying assets," Osman said. 

Islamic banks held 16.2 percent of banking assets and 14.3 percent of deposits as of September, central bank data shows. 

Their non-performing loans reached 3.1 percent of total lending as of June, compared to 19.5 percent for conventional banks. 

SOURCE: Reuters/2 Nov 2016