The global Sukuk market, which is having a record year in 2011, remains constrained by limited corporate issuances while its performance in 2012 hinges on developments in the Euro debt crisis and the global economy, said top bankers on Issuers Day of the IFN 2011 Issuers & Investors Asia Forum.
“The good news is that 2011 has been a record year in terms of Sukuk issuances, even before the year has ended, amounting to around US$63 billion in September with about 11 countries participating; including new entrants such as Jordan, Yemen and Iran. We have also had a fair share of Middle East as well as Asian issuances,” said Syed Alwi Mohamed Sultan, the head of Islamic finance for Asia Pacific at BNP Paribas Malaysia.
However, the outlook for the global Sukuk market in 2012 remains uncertain due to the unrest in the MENA region and the financial turmoil in Europe. “For that matter, in 2012, there will be some form of flight to quality. Credit will become an issue,” said Steven Choy, the president and CEO of Malaysian mortgage corporation, Cagamas.
Nonetheless, he noted that some optimism remains for next year on expectations that sovereigns will continue to tap the market amid the low interest rate environment. This optimism was also shared by Rafe Haneef, the CEO of HSBC Amanah Malaysia, who said that if the Eurozone survives its current crisis, the market should see significant growth of Sukuk next year.
He added that by the end of this year, there will be a “few interesting issues” in the US dollar market, including some project financing Sukuk.
The speakers also discussed the recent flurry of Middle East issuers in Malaysia (see our cover story in IFN Volume 8, Issue 41), which also gave rise to a discussion on Middle East investor profiles.
Mohamad Safri also pointed out that for the Sukuk market to evolve beyond the Malaysian hub, demand must be expanded to beyond the five to seven-year threshold.
He also noted that: “Unless we get buy-ins from the G20 countries, it’s going to be difficult to call ourselves part of the global financial market.”
Taking Sukuk to the next level
Issuers Day also saw a discussion on Islamic capital market products, challenges and opportunities. Mohammad Farrukh Raza, the managing director of Islamic Finance Advisory & Assurance Services, noted that while the European market has lagged Malaysia and the Middle East in terms of Sukuk issuances, the Eurozone debt crisis presents a new opportunity for the Islamic finance industry to grow in the market.
“Now the time has come that we go to a second level, which is communicating the message to corporates and giving them details on how they can use Sukuk as an instrument for their business needs and to consider it as a real alternative for their funding needs,” he added.
Going forward, Nadim Khan, partner at Herbert Smith, noted that the market will begin to look at Sukuk instruments differently, highlighting a transaction in the UK last year where Sukuk was used as a private equity instrument.
“I expect more innovative thinking as to how instruments may be used,” Nadim said.
Mohd Effendi Abdullah, the director and head of Islamic markets at AmInvestment Bank, said that the Sukuk market has entered a new phase.
“There will be a lot more cross-border financing structures which are much more challenging in terms of products, jurisdictions and markets,” he said.
Meanwhile, Amar Meher, a senior associate at Vinson & Elkins, noted that in the next six to 12 months, potential issuers must be mindful of offering different types of asset classes which investors have not been exposed to and making efforts to provide credit enhancements to their issuances.
Opportunities and challenges
Speakers also discussed opportunities in growing Islamic capital markets through cross-border transactions and secondary market trading, with Neale Downes, a partner at Trowers & Hamlins noting that while the Arab Spring dampened business sentiment in Bahrain, the domestic market is now looking for investment opportunities outside the region and to tap liquidity and positive investor sentiment in markets such as Malaysia.
Addressing secondary market trading, Andrew Leamon, a director of trust and securities services at Deutsche Bank Dubai discussed the importance of trusts and the special purpose vehicle system, highlighting that the recent financial crisis has brought these issues to the fore. “Confidence is one of the key factors; knowing what will happen in good and bad times,” he said.
At a panel on ratings, risk management, taxation and liquidity management in the Islamic capital markets, speakers discussed, among others, the standardization and harmonization of Shariah and legal issues.
Associate Professor Dr Asyraf Wajdi Dusuki, the head of research affairs at the International Shariah Research Academy for Islamic Finance, noted that this has been a prolonged issue in Islamic finance, highlighting that: “If you hope to have standardization of fatwa or rulings, this is impossible until the end of days,” while Megat Hizaini Hassan, a partner and head of Islamic finance at Lee Hishammuddin Allen & Gledhill, said that although there is some tension between Shariah scholars and legal advisors, the parties are usually able to reach a compromise. — EB