For almost a decade, the International Islamic Liquidity Management Corporation (IILM) has been at the forefront of enhancing cross-border Shariah liquidity management since its inaugural short-term Sukuk issuance in 2013. In an exclusive interview with IILM CEO Dr Umar Oseni, VINEETA TAN learns that the supranational is considering expanding the currency profile of its illustrious short-term Sukuk program beyond US dollar-denominated offerings and broadening its asset base to include green assets in a bid to widen its investor pool and support its ESG ambitions.
Driven by a significant investor appetite for a greater variety of international short-term Sukuk, the IILM is exploring the potentiality of issuing in another reserve currency, to add another dimension to its Sukuk program which has been solely denominated in the US dollar, Dr Umar told IFN.
The IILM’s move is one of several measures the supranational is working on as it looks to expand its geographical footprint and diversify its investor base in line with its mandate to enhance cross-border investment flows and boost financial stability by creating more liquid Shariah compliant financial services to support the global Islamic finance community.
Islamic liquidity management continues to be a persistent challenge for Islamic financial institutions anywhere in the world. Since the early days of Islamic finance, the severe scarcity of short-term financial tools compliant with Shariah principles has threatened the growth and sustainability of the sector.
In fact, it was in the backdrop of this urgent need to aid Islamic financial institutions manage their liquidity more efficiently that nine central banks and a multilateral financial institution joined hands to establish the IILM in 2010.
However, coming to market with a tradable high-quality asset-backed liquid Shariah compliant instrument was no easy feat. It took almost three years before the IILM debuted its landmark US dollar global short-term Sukuk program.
The US$2 billion program, which was upsized to US$4 billion in 2020, boasted many industry firsts including being the first US dollar highly rated financial tool with maturities of up to one year, the first money market instrument backed by sovereign assets in the form of Sukuk and the first program involving a multi-jurisdictional primary dealer network to facilitate global distribution.
Current picture
Since its inaugural issuance in August 2013, the IILM has cumulatively issued about US$90 billion in Sukuk, commanding approximately 37% of total global US dollar Sukuk (excluding private placement deals) at the end of November. It has also sparked secondary market activities: average monthly trading of the IILM Sukuk stands at about US$185 million, with 2022 likely closing US$2 billion in trading activities.
In the last decade, more instruments such as interbank placements and repos have come to market to aid Islamic financial institutions in managing their liquidity. The Central Bank of Qatar in October this year introduced Islamic treasury Sukuk while Bank Negara Malaysia continues to issue its diverse range of Shariah compliant money market papers to the tune of billions of dollars every month.
But despite this development, the industry has yet to really attain the desired level of liquidity management efficiency. There is also the challenge of excessive dependency on commodity Murabahah transactions.
While recognizing the benefits and the crucial role commodity Murabahah is playing in liquidity management, Dr Umar also expressed his concerns over the dependence on the structure.
“We do have some Shariah objections to this and using commodity Murabahah for structuring Sukuk has been quite controversial in light of the recent AAOIFI Shariah Standard 59,” Dr Umar shared with IFN. “I think it’s important to see the volume of trade happening on a daily basis — it’s huge. So, from the perspective of systemic risk, we do feel we should explore new products.”
The IILM Sukuk could be an alternative; however, Dr Umar is cognizant of the program’s limitation.
“The IILM only has a US$4 billion program — this is just a drop in the ocean considering the balance sheet of Islamic banks globally,” said Dr Umar, adding that the industry needs to be proactive in designing more effective cross-border Islamic liquidity management tools.
Pursuing diversification
The IILM has been steadily deepening the impact of its program. This year it extended its yield curve to 12 months and secured a second international rating for the program, both of which have attracted the attention of investors, different from its regular subscribers.
“The purpose of [extending the yield curve] is to actually address the varying liquidity needs of Islamic financial institutions across the world,” Dr Umar explained.
And it worked. The IILM’s first one-year US$250 million issuance in July, which was the first 12-month cross-border Sukuk in the world, generated an oversubscription of 1.85 times. and it was followed by a second tranche in October which was also well received by the market. Most notably, the IILM managed to diversify its investor pool, which had for years been largely dominated by banks.
“For the 12-month Sukuk tenor in particular which was issued in July 2022, we saw that the demand mainly came from the GCC region, and we have seen a higher participation from asset managers, which was about 12% of the total amount issued. Now this is quite important because this is no doubt an uptick given that asset managers generally account for less than 5% of the total issuance volume year-to-date, so this was quite encouraging,” shared Dr Umar.
The surge in asset managers is attributed to their preference for longer-tenored instruments. Banks, which account for about 72% of the IILM Sukuk investor base, vie for shorter maturities, particularly one-month papers, to manage their liquidity as per Basel III requirements. The liquidity coverage ratio standard requires banks to maintain an adequate level of unencumbered high-quality liquid assets that can be liquidated into cash to meet the needs for a 30-calendar-day time horizon.
The increase in investor interest could also be explained by the IILM’s additional rating: in September, Fitch Ratings assigned an ‘F1’ rating to its short-term Sukuk program, which is also rated ‘A1’ by S&P Global Ratings.
“We have seen some investors who actually prefer to buy a paper that has a minimum of two ratings,” according to Dr Umar.
To further diversify its investor base, the IILM is also weighing issuing Rule 144A-compliant papers which would open the Sukuk to qualified institutional investors in the US. Currently, the IILM’s Sukuk program, which is structured under Reg S, is available to investors in every jurisdiction globally except the US.
“We are getting a lot of enquiries, so the US is another good market for this kind of instrument [Rule 144a] — this is something that we are going to work on and it’s going to take some time,” Dr Umar confirmed.
The future
There is no denying that 2022 has been a productive year for the IILM which has used this past year to lay a strong foundation to scale up more meaningfully next year. Completing its yield curve and securing an additional rating are yielding positive outcomes, which have fueled the IILM’s bold resolve to further enhance global liquidity management for Islamic financial institutions.
2023 is looking to be an interesting year for the IILM.
Not only is the organization working on issuing in another currency and offering Rule 144A papers, but it also intends to enter the green space. This comes just as the IILM, like the rest of the Islamic finance industry, is grappling with the phasing out of the London Inter-Bank Offered Rate or LIBOR scheduled for June 2023. IFN understands that the IILM is in ‘top gear’ to transit smoothly into the Secured Overnight Financing Rate or SOFR by early 2023.
“There is no doubt that climate change concerns have dominated discussions at a global level. The IILM is pro-ESG generally,” emphasized Dr Umar, adding that: “We uphold this principle at a high level as we are owned by central banks, who also exhibit the highest level of professionalism and corporate governance.
“We are focused on supporting the global community to achieve the ESG goal, and we are planning to incorporate the acquisition of green assets into our portfolio anytime soon.”