The GCC countries and large economies like Egypt and Turkey need to adopt efficient special purpose vehicle (SPV) rules, asset-backed securities (ABS) rules and Sukuk-specific regulation. Currently, too many Arabian and MENA economies are issuing Sukuk under traditional bond rules and splitting jurisdictions for the SPV and the business deal. This creates risks and inefficiencies that may cause issuers and underwriters to shy away from issuance opportunities.
ABDULKADER THOMAS Idon’t think anyone can answer this question. It is a great mystery. Here we have a perfectly tailored security for asset-backed financing. Yet, we still see many Muslim-oriented borrowers going to traditional bank loans and bonds. Why? Maybe it’s because there are not enough fees in issuing bonds of any kind to get investment banks excited. Remember, most investment banks are trying to come up with Islamic structured products, Islamic private equity (mostly venture capital in disguise) and Islamic real estate deals. There are huge fees in those businesses, thus probably the overly attentive focus of the big global and regional banks on them. Fortunately we are seeing more interesting Sukuk being issued, such as the recent Dar Al-Arkan deal, Saudi Arabia’s first global corporate deal. This kind of offering richens and deepens the availability of Sukuk, but at the same time has a powerful and positive demonstration effect on other potential issuers. JOHN A. SANDWICK Managing Director, Encore Management The issue is not just specific to Sukuk, but debt/bond markets in general – there is too much focus on equity finance. The region has been heavily biased towards equity for the last few years. Attracted by the very high levels of returns available, investors were not so focused on the risk, and so the comparatively low returns offered by bonds/Sukuk were not as appealing. However, since the recent corrections, investors are recognizing the need for alternative investments, and this will create more demand for bonds and hence Sukuk. On the borrower side, (previously) successful IPOs and plentiful liquidity has meant less need for debt and Sukuk finance, but as the regional capital markets mature, we will see increased volumes of Sukuk/bonds. Given that equity and debt markets are reasonably balanced in the US and Europe, I would expect the same to happen in the MENA region eventually. KHALID HOWLADAR Vice-President, Senior Analyst, Moody’s Investors Service The problem is that Islamic bonds currently fall between two stools: since they are – with few exceptions – an Islamic veneer on an un-Islamic reality. On the one hand, “western” investors expect “gearing,” returns linked to LIBOR or similar, and the unequal sharing of risk and reward inherent in many so-called “Islamic” products. Many are put off by the “Islamic” label, and the higher costs arising from the complexity and ingenuity of the financial and legal sophistry of such products. Islamic investors, on the other hand, may be prepared to hold their nose and let greed get the better of them, but a significant proportion of them are aware, deep down, that “gearing” is inconsistent with Islam. Islamic finance currently stands at a crossroads, I believe, and there are two possibilities for its development: (a) it becomes part of the mainstream, accommodating the full suite of products – including Islamic hedge funds and Islamic credit derivatives – in which case it will be recognized and rejected by a majority for what it has become; or (b) it retrenches to first principles and develops new products truly based upon Islamic, rather than “western” values. I am optimistic enough to believe that emerging “asset-based” financial products are actually superior to western “deficit-based” products precisely because they share risk and reward equitably, and that it is through such products that a new global market in ethical (aka Islamic) finance will come about. CHRIS COOK Principal, Partnerships Consulting It is important not to overestimate the importance of monthly adjusted figures, even when they are annualized. The DP World and Nakheel Sukuk, both worth over US$3 billion, had a distorting effect on the figures because of their size. Nevertheless, 46% still represents impressive growth even if it is from a low base relative to the value of global conventional bond and floating rate note issuance. Greater Sukuk issuance will depend on demand factors, but I am optimistic about this. At present Malaysia and the UAE account for most of the issuance, but with ambitious infrastructure, utility and petrochemical development in Saudi Arabia, the potential for Sukuk there is enormous. We can therefore expect a greater geographical diversification in the years ahead. Much, however, will depend on investor perceptions of the advantages of Sukuk, apart from Shariah compliance. Trading remains very limited in the Gulf and without this there is little point in securitization. Furthermore, Sukuk are seen as legally distinct from conventional securities, but with identical financial characteristics. More financial innovation is needed, the recent launch of Musharakah-based and convertible Sukuk being a welcome development. Once Sukuk have more distinctive financial characteristics they will become attractive to portfolio investors seeking securities with different risk and return characteristics. PROFESSOR RODNEY WILSON Director of Postgraduate Studies, Durham University xAn issue in tradability is limited supply at different tenors, so that treasuries can trade the same counterparty actively. Another issue is the excess liquidity in the Islamic banking system looking for scarce assets. The solution is for the issuers to issue different tenor Sukuk so the market can trade. I am aware that trading is picking up, although at a slow pace. AFAQ KHAN Chief Executive Officer – Islamic Banking, Standard Chartered Bank Since Sukuk in Malaysia is leading conventional issues in terms of market share, and Malaysia is the world’s leader of Sukuk issuance, I believe some inferences can be made in regards to what is lacking in the Sukuk market for the rest of the world. Foremost, Malaysia has solved the legal definition of Sukuk. The Securities Commission introduced guidelines on the offering of Islamic securities in July 2004 to recognize the distinct features of Islamic securities. Previously, to conform to the debenture definition, Sukuk issues were limited to those structured based on the principles of Bai Bithaman Ajil, Ijarah and Murabahah, as these issues represent a debt obligation. Sukuk based on Mudarabah and Musharakah were disqualified as they are profit and loss-sharing schemes and subscribers to these Sukuk are truly investors in a business or in an asset. The resolution of the legal issues was crucial because without legal certainty of the instruments, underwriters and subscribers to Sukuk could get into problems if there are complications or a default by the issuer. This legal impediment was effectively resolved by the guidelines. Perhaps the legal and regulatory issues are still unresolved elsewhere in the world. There is no quick fix to resolve the legal issues of a country. But, there is one for the issuer. Potential issuers should just rely on Malaysian advisers for all their Sukuk needs and raise their funds in Malaysia. The infrastructures are all here. This is one way to rectify the issue. Isn’t it? MAHADZIR AHMAD Islamic Finance Analyst, Azmi & Associates The Sukuk market has its growing pains and is first of all subject to the flux of “cheaper and more expensive” conventional finance as an external facilitator or inhibitor. Temporary setbacks and market fluctuations are to be expected and should not be evaluated too negatively. In time, specific marketing and niches will mature that will enhance development. As the products grow more and more standardized and diversified, they will also get cheaper and more accessible. However, more governments should show the way and offer Sukuk to the interested public. The filtering down to middle-sized private issue is only a question of time, as major projects are already aware and looking for ways to implement. Secondary market growth is a key factor which should be actively encouraged. Government-regulated/supervised private initiatives could be the answer. PAUL WOUTERS BENER |