Hitherto, Islamic capital markets products especially sukuk (Islamic securities) have largely been targeted at institutional investors. Bahrain, Malaysia and Indonesia are the exceptions in that they have issued retail sukuk in their local currencies and in the case of the first two countries, these issuances are fairly regular.
During 2009, it was the Indonesian Finance Ministry, which issued a three-year Rp5 trillion ($540m) retail Rupiah sukuk at the end of January. Under its own borrowing limits, the government can raise up to Rp13.6 trillion through the sukuk issuance. The government’s first retail sukuk will carry a yield of 12 percent, higher than the average return of comparable government bonds. The Indonesian Finance Ministry at the time said that the 12 percent coupon had taken into account “the condition of the domestic financial market, and the cost that could be borne by the government in managing its debts”. The retail sukuk issuance is expected to help plug the 2009 budget deficit, which may reach Rp132 trillion, which is much higher than the Rp 51.3 trillion set for the 2009 budget.
Similarly, the Malaysian Ministry of Finance, in an attempt to stimulate savings among the young, launched a RM2.5 billion sukuk Simpanan Rakyat (SSR 1/2009) in April this year. According to Bank Negara Malaysia, the central bank, and issuer on behalf of the government, the initial amount of RM2.5bn SSR 1/2009 was fully subscribed after only two days after the sukuk was opened for sale. This was the first in a series of two 3-year RM2.5 billion retail sukuk planned by the Malaysian government in 2009.
But due to the overwhelming response from the public, the Ministry of Finance decided to upsize the issuance of SSR 1/2009 to RM5 billion. The objective of the SSR 1/2009 sukuk, which will be scripless, is to provide an additional investment instrument for all Malaysian citizens aged over 21 and forms part of the government’s financial inclusion policy. Not surprisingly, the investment returns on the sukuk are exempt from any tax. The sukuk was ultra-retail with the initial minimum investment being only RM1,000 and subsequent investments in multiples of RM100. According to the prospectus, the three-year sukuk “offers a return of 5 per cent per annum and provides the flexibility for early redemption before the maturity date”. Sukuk holders may redeem the certificates at face value on and before the maturity date, but not earlier than the first profit payment. The profit payments will be apportioned based on the number of days held.
Across the institutional spectrum, the issuance of retail sukuk is generally still lacking from the market. As the Indonesian and Malaysian experiences show, there is huge latent demand from the Muslim masses and others interested in faith-based investments.
Retail sukuk fits in ideally with financial inclusion policies and can be an effective way of raising funds and encouraging a culture of savings. In the UK, a non-Muslim country, the Labour government of Prime Minister Gordon Brown is contemplating the issuance of a retail sukuk through the National Savings (the Post Office). This is to give British Muslims and others interested in ethical products to invest in government or quasi-government issuances on an ultra-retail basis. More importantly, the Jeddah-based Islamic Development Bank, the multilateral development bank (MDB) of the 57 Muslim countries, whose mandate includes the promotion of Islamic finance globally, is also reviewing its development strategy with the specific aim of extending the reach of its investment offerings beyond the central banks, sovereign wealth funds, Islamic and conventional financial institutions and even the odd few hedge funds.
A new initiative that is under serious consideration, stresses Mohammed Tariq, head of Treasury at the IDB, “is to help the noninstitutional investors (retail and others) to participate in the IDB’s international offering of its tradable sukuk. It is likely that some banks with large client bases in selected member countries will be given the mandate to place the sukuk with those clients who may be interested and who understand the risks and rewards associated with such investment. The agent banks will have the responsibility for identifying the clients and thus meet the Know Your Client (KYC) requirements and get regulatory approvals to market the sukuk in their jurisdictions. The size or denomination of each unit for such investors is yet to be agreed but will depend on the advice of the banks and likely demand.”
This would be a major departure for the IDB in bringing its investment offerings closer to its real constituents. Indeed a pilot program may be shortly instituted to start with and further progress will depend on the outcome of such a program. Such a move would increase the profile of the IDB in the eyes of the ordinary but investor-savvy Muslim. For a multilateral development bank, the IDB has been perceived by Muslims in the street as too aloof, remote and inaccessible, with a difficult bureaucracy to boot.
The IDB has also failed to capitalize on its status as an established MDB with a AAA rating by all the three largest international rating agencies, namely Standard & Poor’s (S&P), Moody’s and Fitch Rating, and having been accorded zero risk weighting under Basel-II by the Bank of International Settlements. Indeed the success of IDB’s latest issuance of $850 million five-year international sukuk is reflected by this rating. According to Tariq, the IDB’s fund raising has two strategic objectives. Firstly, to get a good pricing for its resource mobilization in view of its status as a ‘AAA’ rated. Secondly, to attract a diversified range of investors to the sukuk, both by type and geographically. “To a large extent, these objectives were met, though there is a considerable room for further improvement in future. Ideally, IDB would like to create its yield curve by a regular issuance program of benchmark size issues and to enable dealings in its paper in secondary markets,” he added.
Tariq also revealed that the IDB’s new strategy of resource mobilization will raise funds through:
1) International offering of sukuk under the MTN Program, which is to be raised from $1.5 billion to $5 billion or higher.
2) Private placements of sukuk or debt.
3) Raising funds in non-Islamic Dinar component currencies namely USD, EURO, GBP & YEN, as long as pricing is competitive for IDB on a fully hedged basis in the currency of its choice.
4) And for IDB member countries, funds may be raised in domestic currencies.
At the same time, the IDB is keen that its sukuk meet the Shariah requirements with a clear documentation as to the issue of risk, role and details of underlying assets and has the liquidity in the market place in order that investors can easily exit or liquefy their investments at all times.
“The IDB sukuk,” explained Tariq, “is an investment product giving a good return, taking into consideration the very low level of risk, liquidity and asset backing of the underlying instruments. However, the investors are also indirectly helping the development agenda of IDB, which is the socio-economic development of a large number of countries in most continents of the globe.”
