LONDON, 6 September 2004 — Whether it is a sign of greater international acceptability or the competitive pricing and structure of the issue, the Sukuk or Islamic bond is fast becoming established as a capital market instrument, with both tenors and size also on the up. But the number and frequency of issuance is still far short of the prerequisite of a global Islamic capital market.
In the West, the successful closure of the first Islamic Euro-denominated bond, a 100-million-euro floating rate note, to be issued out of Europe by the German state government of Saxony-Anhalt has sparkled interest from other potential sovereign or corporate issuers in the European Union and Eastern Europe.
Several top European banks with established Islamic finance units confirm increased interest from such potential issuers. One banker confirmed that European issuers like the Sukuk structure “although they would ideally like more flexibility in the use of the asset that is being securitized. In the Sukuk Al-Ijara the asset is tied to the transaction until maturity.”
The City-based international law firm, Trowers & Hamlins, similarly stresses that Sukuk are becoming more popular among conventional issuers as they seek to diversify their holdings away from the G-7 borrowers who are suffering from increased public deficits. “The coupons,” stresses the law firm which has an established Islamic finance practice, “are also attractive, although as more issues occur and the Sukuk market matures pricing will certainly become finer.” The pricing for the Saxony-Anhalt issue was EURIBOR + 1 basis point. Neil Downes, Partner at Trowers & Hamlins, explains that there is also a growing feeling and acceptance among conventional investors that “Islamic financial instruments (such as the Sukuk) can compete with conventional financial tools.”
But the biggest activity in Islamic capital market activity remains in the GCC and in Malaysia. The holding company of the ambitious Bahrain Financial Harbor (BFH) project, for instance, has just mandated the Bahrain-based Liquidity Management Center (LMC) to arrange a $150 million Sukuk. The funds raised will be used to finance the first phase development of the BFH comprising the Financial Center, which in turn includes the Dula Towers, the Financial Mall, and the Harbor House. The LMC is also currently arranging a 50-million to 70-million euro Sukuk for Bahrain-based First Islamic Investment Bank; and recently closed a $65 million issuance for Emaar, the UAE-based property developer.
In the UAE also, Abu Dhabi Islamic Bank has mandated HSBC and Barclays Capital to lead arrange a $200 million Sukuk. But the biggest mandate todate has been given to Dubai Islamic Bank, which is lead arranging a 5-year $750 million Sukuk for Dubai’s Department of Civil Aviation (DCA), the proceeds of which will be used to part finance the $4.2 billion expansion and upgrarde of Dubai International Airport, especially the infrastructure for the new Terminal Three Building, Concourse 2 and 3. When closed, it will be the largest single Sukuk — either sovereign or corporate — to be issued to date.
Corporate and utility issuers in other GCC countries such as Saudi Arabia, Qatar, Kuwait and Oman are conspicuously absent from the Sukuk sector.
However, with the region flush with liquidity, is this emergence of Sukuk issuance a tool of expediency for corporates keen to tap flexible and competitive financing for expansion or for re-financing conventional debt; or is it genuinely contributing to the development of an Islamic capital market?
“The development of the global Islamic capital market,” says Badlisyah Abdul Ghani, the head of CIMB Islamic, a division of Commerce International Merchant Bank (CIMB), one of Malaysia’s largest investment banks, “has been slow because people are unwilling to take the necessary steps. We started our Islamic capital market industry with ABBA (Al-Bai Bithaman Ajil) issues. We took a conscious decision to start the industry based on this principle, though the Shariah basis may be weaker than other Shariah alternatives. As the market has progressed (over the last few years) and become active, complete with secondary trading, people have become excited about the market. Slowly we get them to accept the more enhanced structures (such as the Sukuk Al-Ijara). We have done Sukuk Al-Ijara outside Malaysia because we knew that it would be accepted in the Middle East market.” In fact, CIMB was one of the co-arrangers for the $700 million Qatar Global Sukuk in 2003 — the largest sovereign global Sukuk issuance to date.
Abdul Ghani stresses that the entry of HSBC, Citigroup, Barclays Capital in lead arranging Sukuk is good for the sector. The more players in the market, he maintains, the better. But there is a need to differentiate between the local and the global markets; and between local currency and international currency-denominated issues.