The International Islamic Liquidity Management Corporation (IILM) is an international institution established on the 25th October 2010 with the primary objective of providing short-term Shariah compliant financial instruments to facilitate effective liquidity management for Islamic financial institutions through Sukuk issuance.
The IILM’s current members comprise nine shareholders including eight central banks (Bank Indonesia, Central Bank of Malaysia, Central Bank of Mauritius, Qatar Central Bank, Central Bank of Nigeria, Central Bank of the Republic of Turkiye, Central Bank of Kuwait, and Central Bank of United Arab Emirates) and one multilateral institution (Islamic Corporation for the Development of the Private Sector).
2. IILM SUKUK MARKET SNAPSHOT 2022
A. PRIMARY MARKET
During 2022, the IILM has achieved year-to-date cumulative issuances totalling US$13.88 billion, through 37 Sukuk series. The IILM Sukuk issuance averaged US$1 billion monthly across varying tenors: one-month, three-month, six-month Sukuk and the newly introduced 12-month tenor in 2022. In total, 10 different tenors have been issued since inception to cater the liquidity needs of institutions offering Islamic financial services. Currently, the total amount of the IILM Sukuk outstanding is US$3.51 billion.
Demand for short-term instruments including the IILM Sukuk increased significantly across all tenors in 2022, due to the continued US Treasury yield curve inversion making the IILM profit rates higher, hence more attractive. On average, the bid-to-cover ratio for IILM Sukuk issued in 2022 was 167%, with the blended weighted average yield spread over LIBOR around 14bps. This figure is relatively steady compared to 2021 issuances, amid sharp increase in the short-term yield during 2022.
The allocation of the IILM Sukuk in 2022 was mainly distributed across five regions where the Middle East received the highest allocation of 55%, followed by Asia, Africa, Europe, and others at 39%, 2%, 1% and 3% respectively.
By country, Kuwait, Brunei Darussalam, the UAE and Malaysia have had the biggest allocation at 38%, 23%, 11%, and 10% respectively. Among the countries, allocation to Brunei Darussalam increased significantly in 2022, compared with 8% in 2021.
Based on the investor type, banks had the highest allocation (68%) including 91% for Islamic banks, followed by supranational/sovereign wealth fund (SWF)/Ministry of Finance (MoF)/central banks, and pension funds/asset managers at 27% and 4%, respectively.
Islamic investors dominated the primary market in 2022, accounting around 85% of total allocation across the tenors, compare with 15% allocated to conventional investors.
B. SECONDARY MARKET
The IILM Sukuk secondary market performance has continuously improved over the years. The total value of traded IILM Sukuk in 2022 surged up by 43% to US$2.23 billion compared with US$1.55 billion traded in 2021, and the number of executed transactions for IILM Sukuk in 2022 reached 291 deals compared with 150 transactions executed the year before. This improvement in secondary market trading volume reflects the growing acceptance of the IILM Sukuk in the market, not only because of its high quality of asset but also due to a constant high tangibility ratio (79%) as well as its wider investor distribution over the last 10 years.
The presence of significant inter-regional trades in the IILM secondary market suggests an improvement in the cross-border liquidity of the IILM Sukuk. The highest inter-regional trades recorded were from Asia to the Middle East representing 13% of the trade volume, mainly coming from Turkiye, which had a notable rise in trading volume compared to the previous year.
The second highest was from Middle East to Asia, with 7% of the trade volume. Furthermore, there was a considerable trade volume from Europe to the Middle East, representing 6%. However, trades from the Middle East to Europe were relatively low, representing only 1% of the trade volume. The cross-border secondary trading activity supported by the role of the IILM primary dealers has greatly contributed to an increase in the availability of the IILM Sukuk in different regions and ultimately to a greater demand for the short-term papers.
By country, Kuwait and the UAE were the most active on the secondary market in 2022 followed by Oman, Turkiye, Brunei and the UK, as shown by the investor breakdown by trading volume in Chart 7. In 2022, the IILM Sukuk managed to gain a broader presence in countries such as Palestine, Qatar, Switzerland and South Africa, despite having a relatively small volume of trades at secondary market.
By type of investors, banks remained as the most active investors on the secondary market with 62% of them being Islamic banks, while asset managers have increased their participation on the secondary market during 2022 with more than 10% of the total trading volume, who mainly came for the longer tenor. The IILM secondary market also has recorded several trades done with supranational/SwF/MoF/central banks at 5%, private banking and broker at around 1% each, as shown in Chart 7.
In order to strengthen the distribution network and bolster activities on the primary and secondary markets, the IILM has established an incentive scheme, to be effective in 2023, as part of our recognition to the primary dealers for their efforts in supporting the IILM program.
C. SPECIAL 12-MONTH SUKUK SNAPSHOT
In order to complete the short-term Islamic yield curve and improve secondary market for the IILM Sukuk, the IILM has successfully issued for the first time two 12-month tenor Sukuk in July and October 2022 with a size of US$250 million each which were oversubscribed by 1.85 and 1.98 times respectively.
In term of investor profile, banks remained the majority, while the 12-month Sukuk also attracted more asset managers compared with shorter tenors in line with their long-term investment horizon, both in the primary and secondary markets given the attractive yield for such tenors.
On the secondary market, the 12-month Sukuk series were actively traded reaching a turnover of 31% and 11% respectively, as of end of December 2022 (refer to Chart 5).
The 12-month tenor is also a key tenor to support the offering of Shariah compliant liquidity instruments in the local currency by various regulators such as the Central Bank of Oman with its Wakalah deposit in Omani rial or the Bank of England with its Alternative Liquidity Facility. Central banks have indeed currently a limited choice of high-quality long term Sukuk, such as those issued by the IsDB, to back local currency Islamic liquidity tools.
D. TRADABILITY OF THE SUKUK AND AAOIFI COMPLIANCE
The IILM asset portfolio comprises 79% tangible assets and 21% receivables in 2022, which complies with clause 8/2/2 of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)’s Standard 59: 51% tangible versus 49% receivables. This requires the IILM to monitor and maintain the tangibility ratio above 51% throughout the Sukuk’s life, rather than typically at issuance.
The compliance with the latest AAOIFI standard allows the IILM Sukuk to be tradable on the secondary market as it fits the Sukuk tradability criteria in most of the jurisdictions, which also helped to widen the availability of IILM Sukuk in the global market.
E. THE IILM’s SECOND RATING OF “F1” FROM FITCH RATINGS
- In 2022, the IILM achieved another milestone by receiving a second rating of ‘F1’ from Fitch Ratings, in addition to the ‘A-1’ rating from S&P Ratings for its short-term Sukuk program. These ratings are evidence of the high quality of the IILM liquidity management solutions, which have contributed to the impressive performance of the IILM secondary market.
- Fitch’s assignment of a second rating to the IILM program represents a significant advancement in strengthening the IILM Sukuk as a resilient and highly rated Islamic financial instrument, which greatly enhanced cross-border liquidity management.
- The IILM’s second rating has drawn in a wider range of investors on the secondary market by catering to those who prefer a specific credit agency or require assessments from multiple agencies for investment credit evaluation. This has effectively addressed the varied needs and preferences of investors, boosting their confidence to invest in the IILM Sukuk and allowing for a more thorough assessment of their investment risks.
F. ISSUES & CHALLENGES
- The IILM has identified several challenges in Shariah liquidity management. Firstly, in comparison to the conventional space, there is relatively limited number of market participants from both Islamic and conventional markets, which limits the opportunities for Shariah compliant liquidity management tools.
- Secondly, there is an increased need for short-term liquidity instruments in local and other reserve currencies (instead of US dollar) to cater to the diverse needs of investors in different jurisdictions and create a more active Islamic money market ecosystem.
- There is also a need for Shariah compliant medium-term instruments (between one and five years) to attract long-term investors who seek higher returns from their investment as well as to support the offering of Islamic liquidity tools in local currency by central banks, providing a level playing field, and enabling greater flexibility in meeting regulatory requirements under Basel III prudential rules.
- The lack of standardization of the highquality liquid asset (HQLA) treatment of the few available short-term instruments and buy-and-hold strategy also impede secondary market trading. Additionally, the IILM is continuously working on the enhancement of its program to harmonize its Sukuk’s Level 1 HQLA treatment with 0% risk weight as assigned under IFSB-15 in its Guidance Note on Quantitative Measures for Liquidity Risk Management in Institutions Offering Islamic Financial Services published in April 2015.
- There is also a need for further ESG/Green Sukuk to address the massive demand from various investors globally and support tangible projects which benefit the development of the Ummah. According to Refinitiv, ESG Sukuk grew 35% year-on-year. US$8.1 billion of ESG Sukuk were issued in 2022, up from US$6 billion in 2021.
- The IILM is dedicated to promoting the stability of the Islamic finance industry by facilitating cross-border liquidity management through the frequent offering of US dollar Sukuk in various tenors. Therefore, addressing these challenges is crucial for the growth of Islamic financial institutions to manage their liquidity effectively and efficiently.