LONDON, 22 May 2006 — The recent launch by New York-based Dow Jones Indexes and Citigroup Corporate and Investment Banking of the first global Islamic bond (Sukuk) index, the Dow Jones Citigroup Sukuk Index, has been given a cautious welcome by bankers stressing that the move “is a positive development in the right direction.”
However, many bankers are wary of the barriers to entry to the index such as a minimum issue size of $250 million, minimum maturity of one year and a minimum rating of BBB-/Baa3 by leading rating agencies. “I would have liked to see a broader index because most of the current crop of Sukuk issuances is automatically excluded. As such the index does not reflect the current market situation. The LMC (the Bahrain-based Liquidity Management Center) is one of the largest arrangers of Sukuk and yet none of their issues are included,” explained one Sukuk specialist.
Others still are wary that the index components could be dominated by Sukuk issuances in which Citigroup were involved as arrangers or lead managers. As such they would like to see the emergence of other Sukuk indexes because “competition would be good for the industry.”
The Index at the onset is tracking seven Sukuk issuances — the sole fixed-rate $400 milion AAA-rated IDB Solidarity Trust Services issue; and six floating rate issuances including the BBB/Baa2 rated $600 million Malaysia Global Sukuk; the $250 million A- rated BMA International Sukuk; the $700 million A+ rated Qatar Global Sukuk; the $350 million A-rated Sarawak Corp. Sukuk Inc.; the $1 billion A+ rated Dubai Global Sukuk (the largest Sukuk to date); and the $500 million AAA-rated IDB Trust Services Ltd. issue.
To be included in the Index, a Sukuk must in addition comply with the Bahrain-based Auditing & Accounting Organization of Islamic Financial Institutions (AAOIFI) standards for tradable Sukuk. This, however, excludes most of the Malaysian corporate issuances, which are primarily Islamic private debt securities (IPDS), which are based on sale of receivables. Issues that are backed by sale of so-called debt, are frowned upon by the scholars in the Gulf and Pakistan, but Malaysian scholars have okayed them. The Malaysian IPDS market is by far the largest Islamic corporate issuances market. At the beginning of 2005 outstanding IPDS issues in the market totaled just under RM90 billion. Currently, IPDS issues account for some 45 percent of the Malaysian corporate bond market.
The Dow Jones Citigroup Sukuk Index, according to the promoters, seeks “to measure the performance of global bonds complying with Islamic investment guidelines. The index was created primarily for use as the benchmark for investors seeking exposure to Shariah-compliant fixed-income investments”.
However, the major anomaly here is that secondary trading of Sukuk is almost non-existent. Trading, and as such market making, is essential to ascertain pricing of the Sukuk. The recurrent story in the Gulf is that banks are keen to buy and trade in Sukuk issues, but “no-one wants to sell. Everybody is holding on to their certificates.” Sukuk holders stress that they prefer to hold on to their certificates because of a lack of attractive equivalent investment vehicles. This betrays a fundamental and immature understanding of the nature of the bond market and its operations.
The promoters of the Dow Jones Citigroup Sukuk Index are implicit in the acknowledgement of the above anomaly. “The index,” they stress, “may serve to increase secondary market trading in this growing asset class and facilitate cross-market relative value trading among different asset classes.”