With the completion of its local currency Islamic bond program in January, the Asian republic not only proved its seriousness about being the Islamic finance hub in the region but also made history by being the first non-Muslim nation to raise a sovereign Sukuk, as AYU AZIZ learns
Singapore took another step toward realizing its ambition of becoming a hub for Islamic finance in Asia when its central bank announced the completion of its Sukuk issuance facility in January this year.Introduced as the Sukuk Al-Ijara Trust Certificate Issuance Program, the SG$200 million (US$133 million) bond from the Monetary Authority of Singapore (MAS) is a first for the island republic.
The joint arrangers were Standard Chartered Bank (StanChart) and The Islamic Bank of Asia (IB Asia) while Allen & Gledhill acted as legal counsel.
“This Sukuk is the Shariah compliant equivalent of Singapore Government Securities (SGS) and is of the highest credit standing,” said Heng Swee Keat, managing director of MAS.
He added that the ‘AAA’ rated Sukuk would be given equal regulatory treatment as SGS, such as qualifying as an asset in the computation of capital and liquidity requirements and as eligible collateral for tapping MAS’ liquidity.
The Sukuk is unique in that it is to be raised based on demand from investors (with any other type of Islamic bond issuance, the size, maturity and pricing are determined by the issuer).
MAS describes this as a “reverse-enquiry basis”, which means that the size, maturity and pricing would depend on demand from financial institutions operating in Singapore as well as prevailing market conditions.
“It will be a demand-driven issuance to satisfy the needs of investors,” said V Shankar, group management committee member of StanChart.
He explained that the Shariah structure is based on Ijarah (sale and leaseback of real estate assets), which is the most widely used and accepted structure for Sukuk issuance worldwide. In this case, the underlying assets are the office units of MAS’ head office building which are leased to third party tenants.
“The unique feature here is that since the underlying properties are already tenanted by MAS to third parties, we have used an innovative concept of forward lease to accommodate this variation,” added Shankar.
The overall structure and documentation for the Sukuk and the list of underlying assets have been vetted and approved by the Shariah supervisory committees of both IB Asia and StanChart Saadiq, which consist of renowned scholars.
“I’m confident that the MAS Sukuk will generate appetite and excitement in the global Sukuk markets, whether as an attractive investment product or as a case study for countries with Sukuk issuance aspirations,” said Abdulla Hasan Saif, chairman of IB Asia.
He believes the initiative would bolster Singapore’s efforts to become a leading Islamic financial center, and promote it as a case study for other countries with similar financial sector requirements and aspirations.
Vince Cook, CEO of IB Asia, said: “This Sukuk issuance program provides an essential instrument for the bank in the management of its local currency liquidity that will also facilitate the expansion of our client value proposition to include Singapore-dollar Shariah compliant products and solutions.”
IB Asia announced on the day of the launch that it would be the first bank to place an order for the Sukuk. While the Singapore government’s efforts to rejuvenate the Islamic market deserve praise, some felt it could have done better. In a world where the credo for Sukuk seems to be “the bigger, the better”, the size of the Singapore bonds fell short of their expectations.
Ritesh Maheshwari of Standard & Poor’s Ratings Services (S&P) agrees. “Singapore’s announcement on its Sukuk should be encouraging to other potential issuers but the SG$200 million in itself does not make a big impact,” said the senior director for financial institutions rating in Asia.
“If we saw only SG$14 billion to SG$15 billion (US$9 billion to US$10 billion) Sukuk issuance last year, SG$200 million from Singapore would not change the landscape so rapidly.”
An analyst with an investment bank said that the “reverse-enquiry basis” Sukuk would be helpful to Shariah compliant banks under current market conditions.
“In the current situation where the Sukuk market is ‘almost dead’, perhaps it would be a good move to allow investors — in this case, local banks that are involved in Shariah compliant activities — to have options, but this should not continue when the market recovers,” she cautioned.
Nevertheless, it is hard to say what kind of impact the Sukuk would have on the market. Islamic Finance Asia understands that MAS is to meet with representatives of several banks with Shariah compliant facilities that are keen to invest in the Sukuk.
This article was published in the February 2009 issue of Islamic Finance Asia