LONDON, 4 June 2007 — Kuwait has drafted a Sukuk law, but bickering among politicians has thus far prevented the law from reaching the statute book, Adnan Al-Musallam, chairman and managing director of The Investment Dar (TID), one of the most proactive Islamic financial institutions (IFIs) in the GCC region, said.
Al-Musallam, a pioneer in Islamic banking with an experience of over two decades since he started out at Kuwait Finance House (KFH) in the early 1980s, said it is ironic that Kuwait has no Sukuk nor any securitization laws on the statute book, while the UK for instance recently introduced new guidelines for the tax treatment of Sukuk so as to enhance origination out of London.
“The UK market is very mature,” Al-Musallam said. “Although, the Kuwait market has matured more than many others in the region, we are still behind the UK and the EU. The Central Bank of Kuwait is trying very hard to formulate the Sukuk regulations. There are three players in this process —Central Bank, Ministry of Finance and National Assembly.
The Central Bank of Kuwait, Al-Musallam said, is very keen to get the Sukuk and securitization laws passed by the National Assembly. “The Central Bank of Kuwait normally consults the market when it plans to introduce new regulations and laws. On the Sukuk issue, they have been consulting the various market players. The Sukuk issue has been there for a long time. The Central Bank of Kuwait has done its bit in drafting these laws. It is up to the Ministries of Finance and Commerce to take them to the National Assembly and get them adopted and ratified,” he added.
Arab News can confirm that several Kuwaiti IFIs have been helping the Central Bank of Kuwait in the above endeavor. One of the main parties has been Rasameel Structured Finance KSC, which has a license to structure and arrange Islamic securitizations and Sukuk, even though such laws do not currently exist. Rasameel’s CEO Essam Al-Tiwari confirmed to Arab News that he and others have been helping the Central Bank of Kuwait in drafting the Sukuk and securitization legislation. The market for Islamic receivables, according to Al-Tiwari, in Kuwait alone is in excess of KD1.5 billion. So the potential for securitization and Sukuk is huge.
The Investment Dar Chairman also lauded the UK Treasury for its Sukuk initiative. The Treasury is consulting the market about issuing Islamic papers such as Sukuk in the wholesale sterling market.
Such an issuance would be a very attractive investment for IFIs, according to market players.
“I appreciate and salute the UK Treasury for taken this step. TID, being one of the most most innovative players in this market having pioneered the Musharaka and convertible Sukuk, would like to help in this direction. The UK being a highly rated sovereign issuer is not a problem in terms of pricing. It depends on the product, the structure, the timing and the reason for going to the market,” he explained.
And what of Sukuk should the UK Treasury opt for, if it does decide going to the market? “There are many things to consider before giving such advice. We have to look at the purpose for issuing a Sukuk; the tenor; the assets to be securitized; the tax implications, etc. If we assume that the debut Sukuk would be a benchmark issuance, you have to consider governments don’t pay taxes. When we as investors look at Sukuk issuances, we have to consider the tax treatment,” he said.
The impact of a debut UK sovereign Sukuk issuance on the global Islamic capital market will be important, given that the London market has always been the most respected, regulated and conservative market. A UK Sukuk issuance would encourage other markets to follow suit and would help in the development of an Islamic capital market and in the secondary trading of such issuances, he said.
“The world needs the City of London because of its financial expertise and history. The UK is a highly regulated, sophisticated and respected financial and regulatory market. A UK Sukuk issuance would be a major step toward developing and stimulating a Eurosukuk market. It would encourage other markets to follow suit, and investors in turn would follow suit in droves,” he added.
2006 has been one of the best years, if not the best, for The Investment Dar. The IFI achieved an equity of $1 billion at end of 2006, balance sheet assets totaling KD1 billion and net profits of KD92 million (about $300 million This has resulted in a 10 percent return on assets (ROA), 140 percent return on capital (ROC) and a 30 percent return on equity (ROE). This performance, according to TID, has also put the IFI on a stronger platform to face the various challenges in 2007.
Al-Musallam is confident that TID is complying with the risk and capital provisions under Basel II, although he hopes that local regulators do not overwhelm local financial institutions with more regulations that would stifle competition.
To him, the main weakness of the Islamic banking sector is the emergence of players who come into market, and they have no commitment to and nor understand what Islamic banking is.
“The danger is they don’t know how to play the game. They might do things that will later on destroy the name of Islamic banking. On the other hand, we are seeing a lot of developments, projects, and innovations in the global sector. The testimony to the efficacy of Islamic banking is that it is attracting big names in the international financial markets to the sector. They will try to protect their names and their history. This is some relief and comfort. Looking at the statistics, we think the Islamic banking market is currently growing between 15 percent to 20 percent a year,” he said.
TID does not intend to follow other Kuwaiti banks such as KFH and Boubyan Bank in expanding abroad. “Our investment strategy is not to follow others. Kuwait Finance House went to Bahrain, Turkey and Malaysia.
Others have ventured into Sudan, Syria, Pakistan, Lebanon and elsewhere. It is not that we don’t trust these markets. It is a matter of finding the right partners and projects in these countries,” Al-Musallam added.
