LONDON: Judging from activity in the global Sukuk market over the last few weeks, we are probably witnessing the green shoots of a revival as opposed to a full-grown mushrooming of the Islamic capital market. There is a caveat through. To get any clarity or make any sense of some of the developments, the market needs to differentiate between fact and fiction — in other words between wanton misinformation, disinformation and hype on the one hand and modest but encouraging activity on the other.
It is a fact that the Sukuk market dried up in 2008. This is hardly surprising given the contagion of dissipating market confidence as a result of the fallout of the credit crunch and the global financial turmoil in the conventional banking and capital markets. Many investors in Sukuk certificates did take a hit in terms of the decline in asset valuation especially involving real estate pools and parcels and mortgage-backed securities. Even commodity-backed securities have been affected given the volatility of commodity prices over the last six months. Not surprisingly there has been downward pressure on pricing especially in the third quarter 2008. This led to panic selling with the result that many Sukuk certificates are undervalued. Not surprisingly, institutions such as Emirates NBD have launched Sukuk funds to capitalize on the subsequent current high yields. BNP Paribas similarly is contemplating the launch of a similar fund.
Two cautious yet considered trends seem to be emerging. There is a modest revival of the sovereign issuance market albeit in domestic retail issuances by debut issuers such as the Indonesian Ministry of Finance and the Monetary Authority of Singapore (MAS); and a host of corporate issuances including one each originated out of Jersey and Kazakhstan but structured by UK and Swiss-based investment banks. There is a shift in origination demography, albeit a modest one, away from the monopoly markets of the GCC (Gulf Cooperation Council) and Malaysia. Bankers in London are also reporting two possible corporate Sukuk issuances out of the UK during 2009, one possibly to the tune of 1 billion pounds sterling.
Two weeks ago MAS announced the completion of a Singapore dollar-denominated Sukuk issuance facility to provide Shariah-compliant regulatory assets for local and regional Islamic and other interested banks. The facility is being issued on a reverse enquiry basis — based on the demand of financial institutions operating in Singapore. Heng Swee Keat, managing director of MAS, first confirmed this approach at the annual summit of the Islamic Financial Services Board (IFSB) in Amman in May 2008. As such, the Singapore initiative is an enabling facility as opposed to a sovereign issuance in the international financial markets. At the Sukuk facility launch, Heng Swee Keat said, “Singapore is committed to the development of Islamic finance. The financial industry has encouraged us to develop Shariah-compliant financial services by building on our existing strengths in banking, trade finance, capital markets and asset management. We are committed to a level playing field by ensuring that Islamic financial activities with the same underlying economic essence are accorded the same regulatory treatment as those in conventional finance. In this regard, we have already implemented several measures, including removing the double-imposition of stamp duty for Shariah-compliant financing structures, and refining our rules to allow banks to offer Murabaha financing and deposits.”
The Sukuk Al-Ijarah facility, which was jointly arranged by the Standard Chartered Bank and the Islamic Bank of Asia (IBA), as such is the Shariah-compliant equivalent of Singapore Government Securities (SGS) and is of the highest credit standing. The facility, stressed MAS, will be given equal regulatory treatment as SGS, such as qualifying as an asset in the computation of capital and liquidity requirements, and as eligible collateral for tapping MAS’ liquidity.
According to Heng Swee Keat, “MAS is committed to the facility, issuing to meet the needs of financial institutions that are carrying out or plan to carry out Shariah-compliant activities in Singapore, as this will strengthen their ability to meet their capital and liquidity requirements.” The size, maturity and pricing of each issuance will be determined in line with investor requirements and prevailing market conditions. Thus it will be a demand driven issuance to satisfy the needs of investors.
IBA Chairman Abdulla Hasan Saif, former finance minister of Bahrain, confirmed that his bank would shortly place an order under the Sukuk program for regulatory requirements to facilitate the development of a range of Singapore dollar, Shariah-compliant products catering to the needs of its customers. The initial size of the Sukuk program, according to local bankers, is S$200 million although this would be increased depending on demand for securities; and the underlying asset pool for the Sukuk facility are bundles of office units at the headquarters of MAS.
MAS also announced that with immediate effect, Singapore-based banks might enter into Murabaha interbank placements and offer Ijara Wa Iktina (lease purchasing) financing. These changes, stressed MAS, would enable financial institutions offering Islamic finance a wider range of instruments in their management of liquidity and in their matching of assets and liabilities.
At the same time, the Indonesian Finance Ministry issued a retail rupiah Sukuk at the end of January which would be marketed till Feb. 20. Under its own borrowing limits, the government can raise up to 13.6 trillion rupiah through Sukuk issuance, which carries a yield of 12 percent, which is far more attractive than the conventional government bonds. However, the initial launch target for the Sukuk is 5 trillion rupiah. At the end of January 2008, Gatehouse Bank PLC, the latest Islamic investment bank to be authorized by the UK’s Financial Services Authority (FSA) announced that it arranged a $1 billion Sukuk program for Milestone Capital PCC, a Jersey-based orphan protected Cell Company. The first Sukuk issue under the Milestone platform was successfully completed recently.
David Testa, CEO of Gatehouse, said, “Given the strength of interest in the Milestone platform, we are considering increasing the program limit significantly, and look forward to using it to produce tailored products for our clients.”