Before Sukuk, conventional bonds had been commonly used by sovereigns to raise long-term money. Sukuk are no different save for its tenure which is until today limited to five years due to investors’ appetite, typically Middle Eastern investors. There are only a handful of government global Sukuk issuers, namely Malaysia, Qatar, Pakistan and the latest to join the elite club, Indonesia. There is talk about the other countries doing Sukuk but these have not materialized yet due (possibly) to unresolved tax and regulatory issues.

To attract new issuers (to tap into the sovereign Sukuk market), its structure has to be straight forward; hence, credit risk is attributed to the sovereign itself and not the structure of the Sukuk. Had the Greek government embarked on Sukuk and conventional bond issuances few years ago, the chances are it could have defaulted on both! Sukuk provides an alternative means for issuers to raise new money from investors, especially those new sets of investors — Islamic investors — in Asia and the Middle East.  

The potential influx of Sukuk issuances by government and government related entities, if done properly, would not give birth to another fiasco in the future. The advisors, such as the bankers, need to go back to basics. A plain vanilla structure is the answer. We do not want unnecessary innovations which could lead to excessive speculations and uncertainties. The use of derivatives purely to hedge an issuer’s position is fine; unfortunately the advisers are not in a giant classroom aiming to score an A in financial management!

MOHAMAD SAFRI SHAHUL HAMID

Deputy CEO, MIDF Amanah Investment Bank

Although the 2007-8 financial crisis had its origins in the sub-prime mortgage market and the earlier 1997 Asia crisis was also the result of irresponsible real estate lending, previous crises, notably the 1982 Mexican debt default, arose as a result of excessive government indebtedness.

One answer is, of course, fixed rate Sukuk, but as governments would have to pay higher servicing costs for these in the short run, the temptation is to issue Sukuk with variable returns and hope for the best.

PROFESSOR RODNEY WILSON

Faculty of Islamic Studies, Qatar Foundation

Unrestricted private credit creation was the cause of the current crisis, and it will not make a return unless and until current wealth inequalities are rectified. This means that the only source of credit for the foreseeable future will be the public sector generally and national treasuries in particular. So, if and when there is another crisis, it can only be caused by sovereign risk.

CHRIS COOK

Principal, Partnerships Consulting

In light of current developments and the associated soaring sovereign debt levels, sovereign risk will need to be reviewed carefully in order to assess whether their risk ratings are still adequate. Generally, the market will already include this in the pricing of the paper. The holder of the paper will have to prudently assess whether he is exposed to concentration risk or higher levels of risk than initially assumed, and take the appropriate action.

However, the demand for sovereign debt in combination with significant trade imbalances may in itself be sufficient to cause further economic turmoil.  

DR NATALIE SCHOON

Head of product research, Bank of London and the Middle East

Sovereign risk factors are present for both conventional bonds and Sukuk. Sukuk, being asset backed in structure, are less risky than conventional bonds. This nature of Sukuk would prevent a financial crisis as seen in the recent credit crisis where exotic financial products such as derivatives collapsed to nothing. As an example, GM bond holders recently had their investments turn to pennies. Had GM issued Sukuk the investors would have had tangible assets as recourse for their investments.

OMAR KALAIR

President and CEO, UM Financial Canada