The two landmark Sukuk issuances in the Omani market: the 2013 corporate OMR50 million (US$129.44 million) paper by Tilal Development Co – the first Shariah bond sale out of the jurisdiction – and the most recent inaugural sovereign Sukuk by the government in November 2015, have been widely credited as successful in terms of subscription, creating a local currency benchmark for the Omani market as well as enhancing public confidence in Islamic debt capital market instruments.
“The sovereign issuance was important as it showed quasi sovereigns and corporates that the framework is now ready for Sukuk issuance in Oman in the same way as it is ready for a conventional bond sale,” explained Ahsan Ali, the managing director of Standard Chartered Saadiq, a joint lead manager to the maiden government Islamic bond sale. “This means that all regulatory, taxation and Shariah hurdles have been cleared and Sukuk are on par with conventional debt and equity instruments.”
Mansoor Jamal Malik, the managing partner of legal firm AMJ, concurred: “The launch of these two instruments provided the market with a lot of confidence.”
Yet despite the clarity and reassurance the sovereign Sukuk sale has provided to the market, the issuance was not without its challenges (as expected); and coming to market was, as experts put it, a good learning experience for the issuer and valuable lesson for potential issuers.
“It was a good learning curve for everyone notwithstanding the fact that we have seen the first corporate Sukuk from Tilal,” said Kemal Rizadi Arbi, an advisor to the Capital Market Authority (CMA). “A lot of questions arose because we didn’t have dedicated regulations in place but nevertheless what we’ve done is that we do have an existing bond regulatory framework which allows for any issuances of any fixed income instruments and we had the necessary Shariah governance requirements in place.”
Explaining the move to facilitate the Shariah requirements as something the CMA was flexible about, Kemal nonetheless noted that the first sovereign Islamic issuance was indeed relatively more time-consuming in terms of setting up the SPV, identifying assets and determining valuation. He, however, added that: “It should not be an impediment to further government Sukuk issuance moving forward once we’re done with the first issuance.”
Flexibility is key
The CMA has indeed been accommodative when it came to setting up a Sukuk program, taking in view the absence of a dedicated Sukuk legal framework then. Such flexibilities include doing away the need for a mandatory credit rating requirement for issuances, and leaving the Sukuk structure in the hands of issuers instead of dictating the underlying contract, as well as accepting Fatwa issued by Shariah committees at the issuer level instead of by a centralized Shariah board as required by certain jurisdictions.
Above all these flexibilities accorded to issuers, Kemal highlighted that: “We take note that for any issuer, two things are of main concern: time and money.”
While fees to issue/list Sukuk are competitive and comparable to other markets according to Kemal, Jonathan Fried, a capital markets partner at Linklaters, however, highlighted that as existing regulation are more geared to equity issuance, procedural hurdles remain. This include time to market, the need for an Arabic prospectus in addition to an English one and the mandatory requirement for the advising law firms and managers of the Sukuk transaction to sign responsibility statements in the prospectus.
Time to market
Unlike in other regional markets and international jurisdictions, it could take up to two months to settle a Sukuk deal taking into consideration the fact that there is a 30-day offer period requirement and a two-week review period by the CMA to approve the prospectus. This excludes an additional five days post-offering period.
To this end, it is important to note under Omani regulations, a distinction is made between retail and private placement issuance, whereby the 30-day offer period requirement is made mandatory for retail issuances; private placement transactions, however, have more leeway. Without dictating the mechanism for privately-placed Sukuk, the process, according to Kemal, makes it “quite open and flexible”.“At the end of the day, the rules were designed more on a principle-based approach rather than prescriptive – and that is the policy we intend to move forward with,” said Kemal.
Arabic prospectus requirement
“Oman regulations are probably geared toward domestic retail offerings, [and we] appreciate that these should be applied to such offerings because you need to give them dual language prospectus to enhance understanding,” commented Ahsan. “But exemptions need to be given for international offerings or institutional/professional offerings.”
Ahsan is right in that the dual language requirement is designed for the individual retail investor. In the case of institutional Sukuk and bonds however, this requirement is silent with room to manoeuvre, and this flexibility is reflected in the new Sukuk regulation. “As long as the draft is approved, we will go on a case-to-case basis,” elucidated Kemal.
Mandatory responsibility statement by managers
Counterintuitive to international practice where the burden of responsibility lies on the issuer, Omani regulation requires advising law firms and deal managers to also assume that responsibility by having them sign responsibility statements in the prospectus. While it may seem cumbersome, however, the rationale behind that extra layer of stringency is: investor protection.
“We always try to benchmark against international standards, but at the same time we need to protect investors,” explained Kemal. “And this is the role of the regulator – to try to balance two approaches: taking into consideration the time and money perspective while at the same time ensuring investors are equally protected as well as ensuring fairness and transparency.”
It cannot be denied that the CMA has taken great strides to develop the Sultanate’s Islamic capital markets, laying down a solid foundation for the industry while maintaining the flexibility to allow the fledgling sector an opportunity to take off. And just as in any new emerging Islamic financial market, there is still room for improvement.
Making it cheaper to issue
For starters, cost is still an issue.
This was the case in the country’s first corporate Sukuk issuance by Tilal. Abdul Rahman Barham, a board member of Tilal, explained that although the firm was satisfied with its Sukuk issuance, the paper was (unfairly) priced against discounted deposit rates due to the absence of a sovereign benchmark at that time.
“Now the situation has changed and this will attract more corporates to go ahead with a Sukuk program, but the overall cost of issuance is still high as Sukuk structures are more complex with the additional Shariah screening layer and what not,” Abdul Rahman elaborated.
Understanding that cost of funding will improve once volume is generated and scale of business built, Abdul Rahman also proposed to ease rules concerning banks in order to circumvent cost issue. “Sukuk have a great future in Oman but we need to allow banks to play the role of market players. If we restrict banks’ participation especially in the early stage[s] of undertaking, that could be a major setback – I highly recommend the Central Bank of Oman to relax that restriction.”
Issue in foreign currency
Internationalization of the Omani market is also imperative, especially in light of the current liquidity crunch brought on by weak oil prices.
“We need to raise funds not only in rial but also explore international markets with dollar Sukuk,” emphasized Abdul Rahman. “This should be the next step for the government as it should not be relying on the local market to attract international investors in Oman.”
Ahsan concurred adding that to develop and integrate the market with the international environment, a non-rial issuance is vital. “In order to help open the domestic market, we also need to consider a different set of marketing rules for international issuance,” he reckoned.
Revisit Company Law
There is also a call to further consolidate and streamline the regulatory framework, particularly with regards to the Company Law of Oman as there may be inconsistencies that may delay the process of establishing SPVs.
“The CMA may want to look at bringing [the] oversight of SPVs within its own jurisdiction instead of other regulatory authorities,” suggested Mansoor, who also brought to attention the need to consider the extent of having different rules made applicable to conventional bonds and Sukuk. One issue raised as an example is the matter of size of issuance, where bond issuers are allowed to float in excess of paid capital of the company, which Mansoor stressed cannot be made applicable to Sukuk. “Clarity on such issues will expedite the issuance process,” he said.
Strengthening the investor/institutional base
A common challenge faced in many emerging markets is the reliance of the corporate world on the banking market, which creates a disadvantage for the capital markets.
To rise above that, Ahsan had this to say: “At a more strategic level, we need to have the investor base – this will motivate issuers to move away from the banking market as they now see an alternative to funding.”
Kemal added: “We need to develop the wholesale market first to strengthen the institutional base and to do that, we need to impose less restrictions on financial institutions to allow them to come to market. But at the same time, let’s not lose sight on strengthening the investment fund side which will add liquidity and create demand.”
Although there has only been two Sukuk issuances in Oman thus far, it is recognized that the Omani Islamic capital market has progressed significantly since the first sale to the next, and it has paved the way for future offerings. The government and authorities are committed to developing the Islamic capital market for the reasons Dr Ashraf Al Nabhani, the chairman of the Muscat Securities Market, outlined: its development is essential for economic growth as it will create employment and reduce dependency on oil. Nonetheless, despite the progress, industry stakeholders are cognizant that there is still a long way to go before the market reaches the maturity and sophistication desired. From optimizing cost efficiency and reducing time-to-market, to developing the investor side of the equation, certain regulatory enhancements are needed. In the case of Oman, the regulators are not only willing, but also resolute in creating a favorable environment for Shariah capital market activities which explains why the segment has taken off in such a positive way despite the youth of its Islamic finance industry. And with such solid regulatory support and strong political will from the government plus eagerness from market players, the industry is poised for further growth.