The 3rd November 2015 marked a watershed moment for the Sultanate of Oman in the Islamic finance space: it successfully launched its inaugural sovereign Sukuk paper to overwhelming demand and market excitement. Creating a currency benchmark and setting a precedent in the Islamic capital market, industry experts believe the issuance would spur the Omani Sukuk market particularly from the corporate segment while the government, at the IFN Oman Seminar 2016, confirmed that it is working on its second Sukuk sale: a US dollar-denominated Ijarah paper expected to be launched in the second quarter of 2016.
Coming to market with a sovereign Islamic bond instrument is the natural step forward for the Omani government in developing its nascent Islamic finance and banking industry which has seen encouraging progress in the banking and Takaful sector.
“The perception of people has changed in that they are increasingly gravitating toward Islamic financial instruments, hence we thought it was timely for the government to issue Sukuk in 2015,” explained Mohammed Jawad Hassan, from the Ministry of Finance and Government of Oman Sukuk Committee.
Initially planned for OMR200 million (US$517.77 million), the government decided to upsize the Ijarah offering to OMR250 million (US$647.22 million) at an annual cut-off yield of 3.5% after receiving firm commitments of OMR336 million (US$869.86 million) from a wide array of investors from both the conventional and Islamic arena from banks, Islamic windows as well as institutions.
“This gives us the indication of the appetite of the market – there is indeed a lot of demand from the Islamic banking community,” said Mohammed, who emphasized the importance of creating an avenue to contain liquidity in the Sultanate as pent-up demand, as well as the lack of proper instruments, has led to an outflow of liquidity into other Islamic financial facilities outside of Oman.
A key commercial factor which led to the Omani government deciding to utilize an Ijarah structure – a global favorite – and its success, was its overall acceptance.
“We wanted this to be an all-inclusive exercise,” shared Dr Caroline Bolle, the head of investment banking at Bank Muscat – a lead arranger to the sovereign deal. “We also looked at other structures but given that this was the first issuance, we wanted to educate the retail market and Ijarah was easier to explain and translate to the market.”
Wakalah was another structure considered. “However, Wakalah is not really accepted across all boards in Oman, which is why we decided with Ijarah as it has unanimous acceptability from a Shariah perspective,” said Salman Ahmed, a partner at Trowers & Hamlins, who advised the government on the issuance.
“There has been a lot of interest from corporates since the sovereign Sukuk,” confirmed Salman, who opined that it is likely that more institutions would tap the Islamic capital market. Dr Bolle agreed adding that she is cautiously optimistic for corporates to follow in the footsteps of the government and it is hoped that Sukuk as a welcomed instrument in the capital markets would spur more development in the fixed income space.
“The Omani capital market is such that it is weighed more heavily toward equities with fixed income commanding a smaller composition with only a handful of issuers comprising non-banking financial companies and financial institutions,” explained Dr Bolle. “Sukuk would be the perfect tool to develop this market.”