The International Islamic Liquidity Management Corporation (IILM) was established to develop and issue short-term Shariah compliant financial instruments to facilitate effective cross-border liquidity management for institutions offering Islamic financial services. By issuing a various range of liquid Shariah compliant financial instruments, the IILM has been enhancing cross-border liquidity flows, international linkages and financial stability of the Islamic finance industry. The IILM has been issuing its ‘A-1’-rated Sukuk since August 2013 in a wide range of tenors from two weeks up to seven months to provide the institutions offering Islamic financial services with liquidity management instruments (See Chart 1).
Review of 2020
The unexpected COVID-19 pandemic has taken the world by surprise, leading to unprecedented measures from central banks and governments such as a large accommodative monetary policy and massive fiscal stimulus. The much-needed interventions have helped to limit the impact on the global markets and stimulate a hint of economic recovery. On top of this health emergency which led to a global economic shutdown, other uncertainties have popped up and destabilized the financial markets such as the oil shock, potential no-deal Brexit, resurgence of US–China trade wars and the US elections.
Liquidity management has never been so critical than in such a period fraught with uncertainties. A thorough cash management policy is vital in times of crisis to mitigate business risk and avoid insolvency. The IILM Sukuk have become a safe-haven investment solution for institutions offering Islamic financial services to manage their excess cash during these troubled times. Despite the liquidity strain in March, the IILM was the first institution to successfully reissue its Sukuk on the 8th April 2020 ahead of sovereigns, and conventional and Islamic investors’ behavior has evolved to favor sovereign-backed liquid assets to park cash in the short term.
To address the market demand, the IILM raised its supply of highly rated Islamic instruments from US$1.96 billion in January 2020 to US$3.51 billion, crossing the 100th Sukuk mark in April 2020. As of the 30th October, the IILM has issued 30 Sukuk for a total of US$9.98 billion, offering a wide range of tenors from one month to seven months on a regular basis (see Chart 2). 2020 is expected to end with a total of 35 IILM Sukuk issued for close to US$12 billion, the highest amount ever offered.
The IILM has remained the only issuer of short-term US dollar Sukuk available internationally in the secondary market through its network of primary dealers. The IILM is one of the top Sukuk issuers around the globe during the first nine months of 2020, behind Saudi Arabia, Malaysia and Indonesia. The accumulated IILM issuances accounted for circa 30% of the total US dollar Sukuk issued globally (see Chart 3).
The issuances gathered sound demand in excess of 170% of the total amount issued on average. Several new investors and returning investors from across the globe have benefited from the IILM Sukuk as a cash management alternative. Pricing-wise, the market demand continues to pressure down the credit spread hovering around an all-time low level of 15bps on average above the benchmark.
2020 marks another milestone for the IILM as its short-term issuance program was upsized from US$3 billion to US$4 billion for the first time to accommodate the inclusion of new assets, reinforcing the IILM’s role as a frequent provider of Shariah compliant liquidity tools, with a sound pricing discovery process and a global reach to various types of investors.
2020 also marks the 10th year anniversary of the establishment of the IILM. The IILM’s track record over the last decade demonstrates its commitment to fulfill its mandate to supply high-quality, cross-border, Islamic liquidity management solutions.
The IILM now positions itself as a regular issuer in the global Sukuk market, allowing various types of investors to manage their excess liquidity and investment positioning. The high quality of the asset pool which underpins the high grade rating of ‘A-1” by S&P Global Ratings, coupled with a strong asset tangibility ratio of 79%, has promoted IILM Sukuk as a safe haven investment instrument for institutions offering Islamic financial services.
Preview of 2021
Global Sukuk issuances are expected to drop by 5% to about US$170 billion in 2020 due to the coronavirus crisis, ending four consecutive years of annual growth, according to Moody’s Investors Service. Sukuk issuance in 2020 would still be the second-highest on record despite the expected decline, as governments continue raising finances to tackle issues generated by the pandemic.
2021 could bring its share of challenges if the disconnect between financial markets and the real economy prices keeps widening as the IMF has recently warned. Volatility spike, surge in insolvencies and higher global unemployment could significantly deteriorate market liquidity.
The IILM remains committed more than ever to fulfilling its mandate to provide the Islamic financial market with varying liquidity tools. The primary dealers, as well as the end investors, are eager to have at their disposal alternative high-quality liquid asset instruments with a broader choice of maturities to manage their excess liquidity and to comply with the liquid coverage requirement regulation under Basel III.
As part of the IILM’s objectives, a larger choice of US dollar tradable liquid instruments is also expected to contribute to the development of a liquid Islamic capital market with a more active secondary market. Issuing various tenors of Sukuk would increase the depth of the secondary market infrastructure, as per the recent track record of the IILM Sukuk secondary market. Indeed, additional highly rated and liquid Islamic assets are needed to maintain the stability of the Islamic financial market.
Dr Umar Oseni is CEO of the International Islamic Liquidity Management Corporation. He can be contacted at [email protected]