No, governments need to develop clear programs that generate predictable flows of Sukuk issuances of a similar quality; and which finance ongoing long-term needs like housing and public works. Up until now, it seems that it has been one “benchmark” issue, and then none after that. Or it is one landmark quirky deal followed by a different landmark quirky deal. A true secondary market requires predictable, repetitive, standard issues from governments, as well as quality private sector issuers.
ABDULKADER THOMAS:
Governments are amongst the biggest proponents of Islamic capital market. Malaysia, Bahrain and a few other leading countries set up the International Islamic Financial Market (IIFM) and the International Financial Services Board (IFSB) to promote the infrastructure development which facilitates Islamic financial market activities, including capital market. Since 2002, there have been more than three global sovereign Sukuk, with the first issued by Malaysia. There have also been two Sukuk issued by the Islamic Development Bank. These issuances have caused the desired excitement and established some degree of a benchmark in the global Islamic capital market to interest the corporates in jumping on the bandwagon. Nonetheless, more could be done by sovereigns, as the global market needs more benchmark issues. Currently, there are only benchmark of 5 years tenor for papers rated AAA, AA, A, BBB and BB-. We need benchmark for other tenors. There is a need for sovereigns to go to market with a 7, 10 or 15-year tenor and maybe longer. This will help the global Islamic capital market to develop further. Domestic Islamic capital market development is equally if not more important. In countries like Malaysia, the government has set benchmark Islamic papers from tenors of less than 12 months to tenors of more than 15 years. There is an effective Islamic yield curve available in the market which helps other issuers price their Sukuk. Other countries should follow Malaysia’s lead and issue more domestic sovereign Sukuk. All in all, sovereigns have been instrumental in the current development of the Islamic financial market domestic and globally, but more can be done. BADLISYAH ABDUL GHANI: Head, Islamic Banking, CIMB Islamic
In the GCC countries, the petro-liquidity has resulted in governmental budget surpluses; hence, they do not have to raise funds. Thus, we have not seen a sovereign Sukuk out of the GCC in the recent past. There are other issues coming into play, including: 1. The reference rate in such offerings has been increasing, hence, increased cost of capital. 2. The documentation costs are not comparable to conventional bond documents, as the former is still work in progress (but getting much better). 3. Shariah costs, which do not exist in conventional bond offerings, will be imputed into the offering. 4. Identifying tangible compliant assets, etc. I believe the Islamic investment bankers need to “think outside of the box,” and look at Sukuk opportunities outside of the GCC region. Bankers need to approach Central Banks and ministers of finance of Eastern European countries, Latin American countries (Hugo Chavez was recently in Iran), and parts of Asia (Thailand, the Philippines, China, Japan, Hong Kong, Taiwan, etc) and Africa (South Africa, etc) about tapping the GCC liquidity via Sukuk offering, either a private placement or a public listing. All these places want to build bridges to the GCC, and Sukuk could be the “low hanging fruit” to pick. The World Bank and the International Monetary Fund should encourage such dialogue, if they have not already, and offer credit enhancement provisions to reduce the cost of capital. Obviously, the Islamic finance world waits for the most recent entrant in the Islamic hub space, Singapore, to make a global splash, and a sovereign Sukuk would put it on the map. Additionally, a sovereign Sukuk from a G-8 country, say Canada, would be most welcomed. Here it’s not the size of the Sukuk that is important, but the fact that the Sukuk is from the aforementioned jurisdictions. This would raise the profile of this mode of financing and asset class, contribute to secondary market trading, and we, at Dow Jones Indexes, welcome the possibility of its inclusion into the DJ-Citi Sukuk Index. RUSHDI SIDDIQUI: Dow Jones Indexes
The last two years have been disappointing in terms of sovereign Sukuk issuance, with corporates making most of the running. This year has seen major Sukuk issuance by the governments of Pakistan (US$2,150 million) and Brunei (US$500 million), but nothing else apart from two of the regular, relatively small, issues by the government of Bahrain. Only the latter regularly issues Sukuk bills and notes year after year, the issuances being one-offs by other governments. Malaysia pioneered sovereign Sukuk in 2002, but has not issued any global paper since then, despite rumors about a euro-denominated issue. Many explanations have been put forward for the lack of follow up, including currency uncertainties, but the main reason is simply that the government of Malaysia does not need to borrow, as its fiscal balances are healthy. This also applies in the case of Saudi Arabia, where the government debt has fallen substantially due to record oil revenues, reducing the need to replace conventional development bonds, which are steadily being paid off, with Sukuk. Fortunately Sukuk issuance by largely state-owned companies and state corporations has taken off, as witnessed by the recent Sukuk issue by the Saudi Arabia Basic Industries Corporation for US$267 million. Such Sukuk has similar risk and return characteristics as sovereign Sukuk, and identical ratings. These issues are as good as sovereigns for investors, indeed in some ways more credible, as the funds are earmarked for specific ventures. Therefore the lack of sovereigns should not impede the development of Sukuk markets. PROFESSOR RODNEY WILSON: Director of Postgraduate Studies, Durham University
NO! The governments of Muslim countries have a great opportunity to leverage the Sukuk product both for international and domestic fundraising. The advantage is a wider distribution base which should result in tighter pricing. The need is for the issuers to think of Sukuk as a core instrument for capital raising. At present, all issuers are trying to stretch the tenors of the instruments as opposed to issuing Sukuk of short, medium and long-term tenors. This will increase the liquidity in the issues and Islamic banks will actively trade the Sukuk, as they have reasonable assurance that a new issue is about to come to market – very similar to how the conventional treasury market operates. This will also address the issues of short-term commodities Murabahahs, which the scholars approved many years ago as a stop-gap arrangement for liquidity management. It is time for the industry to replace this instrument with domestic Sukuk issues. A conference hosted by IFSB could make a difference in moving this idea forward. AFAQ KHAN: CEO, Islamic Banking, Standard Chartered
The global Sukuk market has seen considerable growth over the past few years, with a majority of Sukuk being sovereign or semi-sovereign issues. While such issues have been instrumental in establishing the global Sukuk market, the industry needs greater support from various sources. A parallel may be drawn with the development of the conventional bond market, which evolved on the back of large funding requirements emanating from infrastructure development and corporate expansion. Hence a wider source of asset origination should be sought if the Sukuk industry is to develop the requisite critical mass. To facilitate this, regulators must introduce legislation that promotes Shariah compliant capital market development. Specifically there is a need for clearer guidelines on how Sukuk assets are recognized by issuers, as well as greater transparency in transactions. Proper trust laws – necessary to give investors confidence – are also lacking in many Muslim countries. Finally, while the creation of an appropriate regulatory and legal framework will aid the growth of the primary market, governments also need to promote a secondary market through the formation of market-making liquidity management institutions akin to an Islamic bond house. Currently Sukuk holders tend to make, buy and hold investments that are enforced upon them. As the primary market grows, the secondary market will enable investors to trade their Sukuk, which will help attract retail investors. In summary, governments have much to offer if they wish to promote the Sukuk market and the role of the sovereign issuer is just the start. YAVAR MOINI: Investment Banking, Dubai Bank
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