There is no doubt that Islamic finance has worldwide appeal. This is evident not only because of the growth of the industry in terms of volume and asset size as well as the number of Islamic financial institutions, but also because a large number of Islamic finance transactions to date are cross-border in nature. In this article, FERZANA HAQ studies the cross-border financing landscape.
The transactions typically involve multiple jurisdictions, in terms of the parties (ie the originators, the financiers, the investors and the trustees may originate from different jurisdictions), the currency of the financing, the governing law of the agreements, the location of the relevant assets or (in the case of Sukuk), the listing venue. While certain domestic markets, such as Malaysia, have grown exponentially due to the regularity and volume of transactions, the cross-border transactions tend to be much larger in scale and attract the most publicity. Moreover, the fact that a single Islamic finance transaction may span several jurisdictions shows how versatile Islamic finance can be as a financing tool. While activity in 2015 has not been robust, there have been a number of innovative cross-border transactions and large debut cross-border issuances. This trend is expected to continue in 2016 although we can expect both issuers and investors/financiers to be cautious in view of the weakening global economic outlook. The transactions in 2015 may be smaller in size, less frequent and confined to tighter windows, but are likely to be more diverse and originate from new countries or sectors.
Review of 2015
2015 stood out in terms of the number of innovative transactions which were structured not only in accordance with Shariah principles, but which also involved the laws of several jurisdictions in a single transaction. Each transaction may involve the interplay of several systems of law — the governing laws of the contracts and the law of the country of incorporation of the obligor. While this may raise additional complexities, it is a sign of the maturity of the market that this melting point of laws may in fact enhance the attractiveness of the transaction.
For example, Emirates Airlines issued close to US$1 billion trust certificates which are fully guaranteed by an export guarantee from the UK Export Credit Guarantee Department (the ECGD), in order to fund the acquisition of aircraft by the airlines from Airbus. While this was not the airline’s first Sukuk issuance, it was the world’s first Sukuk financing supported by an export credit agency. The issuance was cross-border on several levels. While the originator was Emirates Airlines, a large corporation owned by the government of Dubai’s Investment Corporation, the credit of the Sukuk certificates ultimately rested with the ECGD, an arm of the UK government, which fully guaranteed payments due to investors. The Sukuk certificates were issued to a very wide investor base, including to qualified investors pursuant to Rule 144A of the US Securities Act, and were dual-listed on the London Stock Exchange and the NASDAQ Dubai.
Another notable transaction was the issuance of US$200 million Sukuk certificates by Sapura Kencana, the Malaysian oil and gas services solutions provider, under its multicurrency Sukuk program. The transaction was novel as although the Sukuk certificates were denominated in US dollars, they were issued to a purely local investor base, making the transaction the first unrated Sukuk issuance offered onshore in US dollars (rather than in Malaysian ringgit). Another renowned Malaysian institution, Cagamas, the national mortgage corporation, made its debut issuance into Singapore through the issuance of a SG$162 million (US$113.69 million) Sukuk, which brought some activity to an otherwise quiet Islamic finance market in Singapore.
Indonesia also experienced a ‘first’ through the issuance of a US$500 million Sukuk by Garuda Indonesia, the national airlines, which was the first offshore US dollar issuance by an Indonesian corporate issuer. The transaction represents a significant turning point in Indonesia’s Islamic finance industry which had thus far been limited to domestic issuances or cross-border issuances by the Indonesian government. It is hoped that this debut issuance by an Indonesian corporate will pave the way for more issuances by large Indonesian corporates.
Preview of 2016
In view of the sluggish economic forecast, it is expected that issuers, financiers and investors will proceed cautiously in 2016. However, it is anticipated that we will continue to see more diversity in the market and that interest in Islamic finance will come from unexpected places. For example, the HNA Group, the owner of Hainan Airlines in China has already announced that it is planning its first Islamic finance transaction of up to US$150 million in October 2015 and that it expects to follow this with a large offshore Sukuk issuance in the coming year. This may only be the beginning of Chinese companies tapping the Islamic finance market especially because domestic loans are becoming increasingly expensive. In addition, China has also seen the establishment of its first Islamic finance bank, the Xining Rural Commercial Bank, which may help develop a localized retail Islamic finance market.
Crossing over to Africa, the Ivory Coast has signed an agreement with the Islamic Corporation for the Development of the Private Sector for a US$490 million Sukuk issuance, to be implemented in two tranches, between 2015 and 2020. This may be a new trend of developing African nations tapping the Islamic finance market to fund social and infrastructure development projects. Although the forecast for global markets is cautious, the Islamic finance market will continue, perhaps not in terms of size or volume, but in terms of new issuers coming to the market, particularly from developing nations. The successes of 2015, such as the Emirates Airlines Sukuk and the Garuda Indonesia Sukuk, may well set a precedent for other similar issuers to consider tapping the market using the same or similar structures. There may also be more supranational Sukuk issuances, for example by the IDB, which has announced its intention to raise financing for countries suffering from humanitarian and refugee crises. The funding raised by such transactions will not only have socioeconomic benefits but will also make Islamic finance truly global, not only in terms of its participants but also in terms of its positive socioeconomic impact on both developed and developing countries.