LONDON, 11 March — At the end of February, the Bahrain Monetary Agency (BMA) launched its second issue of Islamic leasing bonds (Sukooks) worth $70 million. As expected, the issue was quickly oversubscribed by local, regional and international banks based in the emirate.
This follows the successful launch of the first issue worth $100 million in September 2001. Earlier, the BMA had also launched a series of Bai Salam bonds worth $25 million an issue. The leasing Sukooks are listed on the Bahrain Stock Exchange, and perhaps it is too early to assess the appetite and depth of market for the Sukooks.
Across the Indian Ocean in Southeast Asia, First Global Sukook Inc., a special purpose vehicle (SPV) set up in the Malaysian offshore banking center Labuan by Kumpulan Guthrie Berhad, one of the largest plantation owners in Malaysia, issued in January the first tranche worth $150 million of a $395 million Serial Islamic Lease Fixed-Income Securities.
The issue was listed in February on the Labuan International Financial Exchange (LFX) and initial reports suggest a similar story to the Bahrain experience — good appetite for Islamic securities and oversubscription of the issue.
In Saudi Arabia, the Jeddah-based Islamic Development Bank (IDB) has confirmed that it is preparing to launch its debut issue, a $500 million Islamic counterpart of a medium term note (MTN) — not to raise funds but to test the market and set a benchmark price for such an issue. The IDB has already appointed SSB Citigroup to lead manage the debut issue.
These three issues must be music to the ears of those who have been beckoning the development of an Islamic secondary market which would create a much-needed short-term liquidity market for Islamic financial institutions and investors to tap into.
But then three swallows do not make a summer. At best these issues represent a mere making of a nascent Islamic capital hence secondary market, which has still a long way to develop to the market depth and diversity of conventional secondary trading.
At worst, these issues represent a flimsy and belated effort to launch a series of Islamic securities and to create a trading market on an ad hoc basis. After all, both the Bahrain and the Labuan issues are minuscule in size.
The Bahraini Sukooks, for instance, mature in 2005 and 2006 with a rate of return of 5.25 percent and 4.25 percent per annum respectively.
The cynics will say that this is an exercise in futility because Islamic finance is simply not a serious enough phenomenon, which cannot even get its rules and regulations in order. Malaysia, for instance, they point out, allows Islamic private debt securities, whereas the Gulf states do not because they maintain that only asset-backed securities are currently acceptable from a Shariah-compliance point of view.
Now imagine, if the top twenty IDB member countries (out of 54) were to issue government Sukooks of whatever denominations and tenors, and they are all listed and rated — not only on their domestic stock exchanges but on regional and international ones, then you have a powerful and virtually an instant depth in secondary market.
If a selected group of top utilities or corporates in these countries — Aramco and SABIC in Saudi Arabia; Petronas in Malaysia; Kuwait Oil Company and Kuwait Petrochemnical Company; Qatar National Oil Company, Qatar Fertilizer Company; Aluminum Bahrain (Alba); Pertimina in Indonesia; and similar entities in Turkey, Iran, Egypt, Libya, Morocco, Oman, the UAE and others were to do the same, then, the market not only has depth and size, but also quality. These assets are cherrypicked and could be easily securitized, with or without the help of Western managers.
These two scenarios would almost instantly stimulate further secondary market product development, foster good alliances and create the right environment for further issues.
Most importantly, they could be a much-needed recylcing vehicle for Muslim funds on our own terms. We hear such a lot about a witch hunt against Islamic financial institutions and funds held by people with Arabic-sounding names post 9/11. We also hear of capital flows of private investors from the Gulf states coming back to the region from the West.
At least such Islamic secondary market issues would go some way in absorbing this returning liquidity instead of being parked in some Arab financial institution or fund, which will simply place them again with international banks and funds, because these by far have the largest capacities to absorb billions of dollars of liquidity at short notice because of their technical and operational superiority.
No doubt, the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which is organizing a major conference on asset securitization in Islamic finance in Beirut next week, will discuss several of these issues, and perhaps issue a standard on Islamic securitization. But alas, AAOIFI has no power to enforce such a or any of its already published standards worldwide.
But there is a light at the end of the Islamic finance tunnel. For the $150 million Sukook issue listed on the LFX in Labuan, one of the lead subscribers was the Bahrain-based Shamil Bank, a subsidiary of the Dar Al Maal Al Islami (DMI) Group. This is the first US dollar denominated international Islamic issue to be listed in Labuan and is also the first one to have attracted the participation of a Gulf financial institution — whether Islamic or not. This augurs well for cross-border participation in Islamic securities between the MENA and ASEAN countries and is a start in the task of bridging the Islamic legal gap between the two regions.
More importantly, an International Islamic Financial Market, comprising an International Islamic Money Market (IIMM), which will set the ground rules for Islamic secondary trading; a liquidity management center, which will act as a market maker an invite other players to participate; and an Islamic rating agency, which will assign ratings to issues according to international rating criteria in cooperation with a major Western credit rating agency such as Moody’s or Standard & Poor’s, has been set up in Bahrain. Among the main sponsors are Saudi Arabia, Bahrain, Malaysia, Brunei, Sudan, the IDB and other major Muslim countries.
The IIMM is in the process of appointing a CEO and should be operational within a month. The rating agency is in the process of being incorporated in Bahrain. The board of the IIMM would comprise representatives of key subscription members, Islamic financial institutions, and Western regulators such as the UK’s FSA and conventional banks with Islamic banking units. The aim is to give the IIMM greater membership depth and credibility.