LONDON: The global Islamic finance sector is optimistic that next year will indeed be a watershed year for the estimated $3 trillion industry. A major component of this optimism is in the Islamic capital market through the expected issue of a debut sovereign benchmark sukuk by the UK Treasury, and other potential sovereign issuers including Japan, the Hong Kong Monetary Authority (HKMA), Thailand, Saudi Arabia and a number of others.
At the 2008 London Sukuk Summit a few days ago, Professor Rifaat Abdel Karim, secretary general of the Islamic Financial Services Board (IFSB), the Kuala Lumpur-based transnational organization whose mandate is to set prudential and supervisory standards for global Islamic banking and finance, stressed, “The rapid growth of the sukuk market and the increasing interest in the issuance of sukuk amongst the corporate fraternity, and perhaps more importantly, amongst sovereigns in recent years, are indeed very encouraging for the future expansion of the Islamic financial services industry on a financially sound and stable basis.”
Even UK Treasury secretary and city minister, Kitty Ussher, was optimistic and strongly hinted that the hope is that by this time next year the UK Treasury would be in the position to issue the country’s debut sukuk in the London wholesale market. The treasury has just commenced its latest consultation on the SDLT (Stamp Duty Land Tax) and SDRT (Stamp Duty Reserve Tax) and to see these could be tax neutral for corporate sukuk issuances. The treasury is due to report on the outcome of this consultation inn the autumn of 2008.
However, as the IFSB’s Professor Rifaat further reiterated, there are major challenges for the Islamic capital market especially the management of balance sheet liquidity due to the lack of Shariah-compliant capital and money market instruments. “Given that the asset structures of a majority of Islamic financial institutions are illiquid and long-term in nature, while their contractual obligations to holders of profit-sharing and loss bearing investment accounts mean that funds can be withdrawn at any time, the lack of short-term instruments and a liquid inter-bank market imposes limitations on these institutions with respect to dealing effectively with liquidity mismatches between asset and liability portfolios,” he added.
In most Muslim countries, the issuance of Islamic securities are not part of the regular government securities issuance program; nor are the monetary operations of the central banks in these countries supportive of the Islamic finance industry simply because of this lack of instruments and infrastructure. Edmond Lau, executive director, money management, at the HKMA, rued the fact that the Islamic finance industry had not been accelerating fast enough to match the growth in Islamic wealth, which he stressed is estimated at $4 trillion. “The development of Islamic finance therefore,” he advised, “calls for new entrants into this market and needs to take on a new dimension of promoting greater financial intermediation across jurisdictions in different regions. This is why Hong Kong is seeking to become an important player in the booming Islamic finance arena by providing a platform for Middle East investors to access investment opportunities in the Asia Pacific region,” he explained.
Lau was adamant that the Hong Kong government is committed in its engagement with Islamic finance, especially the Islamic capital markets, and is currently, like the UK Treasury, consulting regarding the introduction of tax neutrality for Islamic financial and capital markets instruments. Hong Kong, he said, can also leverage on its experience, innovation and market diversification to serve as a capital-raising center for Middle Eastern issuers to tap the funds made available by the high savings rate in the region, in particular China. “We are confident that the development of Shariah-compliant financial markets can take off in environments in which the domestic Islamic community is relatively small, simply because investors nowadays are looking beyond domestic boundaries and traditional finances as financial activities gravitate toward the Middle East and China,” he added.
Hong Kong is the third largest financial center after London and New York in terms of size of stock exchange and market capitalization of companies listed. It sees Islamic finance a component of the global financial services, and as such necessary to have and promote as part a complete financial services offering into and out of Hong Kong.
Another financial center which was keen to emphasize its commitment to the development of regional capital markets, including Islamic capital markets, is the Dubai International Financial Center (DIFC). According to Nasser Al-Shaali, chief executive officer of the DIFC, Islamic finance is the fastest growing segment of the global financial services industry.
The Islamic finance industry is in its “exciting early days” and thanks to the credit crunch and the direction of trade and investment, there is also a shift in the center of gravity of the global capital markets. “These trends,” stressed Al-Shaali, “provide tremendous opportunities — and challenges — for both international and Islamic financial centers. These centers, and cities, will succeed or fail based on their ability to help the industry grow, innovate and develop the products and services that clients, investors and issuers require. As a representative of an international financial center that is committed to the development of this industry, I look forward to working with other centers, as well as other industry participants, to help grow Islamic capital markets and the Islamic finance industry in the years and decades ahead.”
The summit also pioneered the first sukuk issuer’s roundtable which included senior executives from Saudi Basic Industries Corp. (SABIC); Dar Al-Arkan Real Estate Development Company in Riyadh; and the UAE’s National Gas Cooling Company (TABREED) — all of which have issued at least two sukuk issuances over the last few years. Mutlaq Al-Morished, senior vice president, corporate finance at SABIC, confirmed that the world’s largest petrochemical company in terms of value of assets, is committed to the Islamic finance industry, and plans to go back to the market in the future to raise funds as and when the need demands. The SABIC-I and SABIC-II sukuk issuances were both domestic issuances, but in future the corporate may well raise funds in the global markets with an international sukuk issuance.
SABIC like others is keen to see greater Shariah compliance standardization in sukuk structures and a much more developed and established legal and regulatory framework for Islamic capital markets instruments in general.