SUKUK UPDATES AROUND THE WORLD

According to the Thomson Reuters Group, the first nine months of 2014 saw sukuk issuance grow to $99.3 billion, 25% higher than the first nine months of 2013. It was also a landmark year in that four non-Muslim countries issued their first sovereign sukuk – UK, Hong Kong, South Africa and Luxembourg.

The full year, however, looks as though it will fall short of 2012’s record issuance. One of the major factors at the end of the year was the decision of Malaysia’s sovereign wealth fund to postpone a significant issue in the final quarter of 2014 until the first quarter of 2015. Analysts are also cautious about 2015 because of tumbling oil prices in late 2014 and early 2015. For example, between late September 2014 and the end of the year, Bahrain’s dollar-denominated sukuk maturing in 2018 dropped 1.3%.

This may be balanced by a number of countries who are considering first-time sovereign sukuk. These include Oman, Jordan, Kenya, Kazakhstan and the Philippines.

Goldman Sachs Try Again

Goldman Sachs failed to get sukuk issuance off the ground in 2012, when they were widely criticised for failing to observe Islamic financial principles in the proposed structure. Critics suggested that it was reverse tawarruq, which the International Council of Fiqh Academy have declared impermissible as it is a disguised form of usury. Questions were also raised about how the Irish Stock Exchange, chosen to handle the issuance, would ensure the sukuk traded at par value and thus avoid the accusation of trading in debt, which is forbidden under Shari’ah law. The last nail in the coffin was the suggestion that Goldman Sachs could well divert the proceeds of the sukuk into the financing of conventional banking activities, which again is an impermissible activity.

Details of the proposed sukuk are far from certain at the time of writing. Representatives of Goldman Sachs were due to meet potential investors in the Gulf in mid September. Reuters have reported that the issue is expected to be at least $500 million, with a tenor of between five and 10 years and backed by commodities and crude oil. The proceeds of the sukuk will, it is suggested, be used in a commodities business that is part of the Goldman Sachs group of companies.

Oman to Issue Sukuk in Early 2015

Reuters have reported that Oman is set to issue $1.3 billion worth of sovereign debt in 2015. This issue will be a mix of conventional bonds (around $800 million) and Islamic sukuk (around $500 million). A local sovereign sukuk will be welcomed by Oman’s embryonic Islamic banks, which currently have very limited choice of Shari’ah-compliant investment products

Sukuk Screening Service Launched

San Francisco-based IdealRatings, Inc. has launched what they claim is the first ever screening system for sukuk. They say that their research-based online screening service is designed for Islamic investors and treasuries aiming to balance their portfolios with low-risk, fixed-income instruments, which conform to the mandates defined by their Shari’ah boards. They believe their product addresses one of the key challenges of sukuk, which is the compliance risk due to the disparity in Shari’ah opinions and acceptance of sukuk structures and terms.

IdealRatings’ service allows investors to screen sukuk against different Shari’ah guidelines as well as defining their own custom guidelines. This will enable them to construct a portfolio of sukuk that conforms to both their Shari’ah mandate and their own investment standards. IdealRatings has also designed and launched a series of sukuk indices to support Islamic fixed-income portfolio management.

IdealRatings have developed their solutions with the help of Alinma Bank, a fully Shari’ah-compliant bank in Saudi Arabia and the most recent bank to launch in that country. Speaking on behalf of Alinma, Yasser Al-Marshde, the general manager of Alinma’s Shari’ah group, said, ‘Compiling, analysing and screening sukuk documentation is indeed an enormous effort and this intuitive, intelligent service, with its impressive technical solutions and features, helps sukuk investors screen global sukuk against the requirements set by their Shari’ah Boards.’

Bader Al-Omar, Shari’ah Group Head at Jadwa Investment, a leading Saudi investment firm and one of the principal inspectors to the new service, said, ‘Over the past two years, we have worked closely with IdealRatings to ensure the successful launch of this revolutionary sukuk screening solution. This is part of our overall strategy that focuses on supporting the advancement of Shari’ah-compliant financial and investment tools available in the industry. We are confident that this platform will contribute to a better understanding of sukuk compliance for all.’

Maybank Diversify into US Dollar Denominated Sukuk

In late October 2014 Maybank Asset Management launched the Maybank Global Sukuk Fund, the first they have issued denominated in US dollars. The Maybank Global Sukuk Fund is an open-ended fund, which will initially be available only in Malaysia, although Maybank is talking to overseas counterparts with a view to distributing the Fund in other markets. It is expected to appeal to investors with moderate risk appetite seeking regular income through a portfolio of sukuk and Islamic liquid instruments with a medium to long term investment horizon. The minimum investment amount is $100,000 (US).

The fund will invest in part in Gulf-originated sukuk. This is an unusual move given the fact that the Malaysian sukuk market accounts for more than 60% of the world total.

Indonesia Raise $1.5 billion

In early September the order book for Indonesia’s $1.5 billion 10-year sukuk was more than six times oversubscribed, reducing the yield from 4.625% to 4.35%. This was a remarkable result for a country, which 12 months earlier had been in the grip of a financial crisis that had hit several emerging economies and struggling with a current account deficit of $10 billion. The sukuk was sold to investors in the Middle East (35%), Asia (30%), The US (20%) and Europe (15%).

The success of the sukuk is being attributed in part to hopes that incoming President Joko Widodo will take firm action on the vast fuel subsidies that are considered to be a significant element in Indonesia’s economic problems. Whether he will succeed in cutting these subsidies is a moot point. His predecessor tried and was rewarded with widespread rioting.

In Brief on Sukuk

Turkey’s Dogus Group whose interests range from financial services, through construction and automotive to media and tourism, have been given regulatory approval to raise $370 million through a corporate sukuk.

In late August Hong Kong embarked on a road show taking in Singapore, Doha, Dubai and London to market the sukuk they issued in September. The effort paid off as the $1 billion five-year ijarah sukuk was nearly five times oversubscribed. The geographical split of investors was 47% Asia, 36% Middle East, 11% US and 6% Europe. Most investors were financial institutions (55%), with the rest divided between the public sector (30%), fund managers (11%), insurers (3%0 and banks (1%).

Several emerging economies are reported to be considering issuing sovereign sukuk following the success of issues by Turkey and Indonesia. Oman has already stated its intention to issue sukuk in early 2015 (see above) and others such as Jordan, Kazakhstan, Tunisia, Bangladesh, Kenya and the Philippines are rumoured to be on the cusp of announcements.

At the beginning of 2015 Bangladesh’s Central Bank launched a programme of weekly sukuk issues. The objective is to provide local lenders with a short-term liquidity tool. Auctions of the profit-sharing sukuk will be held every Thursday.

Pakistan’s Mobilink, the country’s largest mobile communications provider, plans to issue a sukuk worth nearly $70 million in early 2015. The money raised will be used to fund network expansion. The issue is unusual because it includes a partial credit guarantee amounting to about 14% of the total amount to be raised. The profit-sharing ethos of Islamic finance means that credit guarantees are rare.

In the last quarter of 2014 South Africa issued a $500 million sukuk priced at 3.19%. The five-and-three-quarter year sukuk was four times oversubscribed, with 59% of investors coming from the Middle East and Asia.


In November 2014 Pakistan sold a $1 billion five-year, ijarah, sovereign sukuk. The profit rate was 6.75%.

The issue was made through a Special Purpose Vehicle (SPV), the Second Pakistan International Sukuk Company.

Luxembourg issued the first Eurozone sovereign sukuk in October 2014. While the €200 million, five year ijarah sukuk was successful, it was only two-times oversubscribed, which have been disappointing to the Grand Duchy given that the UK’s issue was 10 times oversubscribed, Hong Kong’s five-times and South Africa two times. The profit rate at just below one-half a percent may have had something to do with this relatively modest demand.

In early January 2015 Dubai Islamic Bank issued a £1 billion perpetual Tier 1 sukuk, which was 2.5 times oversubscribed. The issue was initially priced at 7% but following the strong demand was tightened to 6.75%.

The Indonesian Government is planning to broaden the range of assets it uses to back sukuk. To date Indonesia has used infrastructure projects as collateral, but now the Government is looking at the procurement of goods and services such as computers and cars to underpin future issuance.

Aiming to strengthen governance and boost the attractiveness of sukuk to investors, Pakistan’s regulators have published new rules for the issuance of sukuk. The new rules require issuers to structure sukuk in accordance with AAOIFI (Accounting and Auditing Organisation for Islamic Finance Institutions) standards. , as well as those set by the local regulator. The rules require issuers to conduct an annual audit to ensure the sukuk conform to Shari’ah requirements. Sukuk must also carry a credit rating not lower than triple BBB.

Standard & Poor’s has updated its criteria for Islamic bonds to distinguish more clearly between issuers and sponsors of sukuk. For example, sukuk will be rated on a par with the sponsor’s senior unsecured rating if they provide contractual commitments by the sponsor to make payments that ultimately cover periodic distribution and principal amounts. The agency said it did not expect the new criteria to lead to upgrades or downgrades of the sukuk that it rates, but it might withdraw a rating if terms and conditions did not meet the criteria. It estimated this might happen in fewer than 5% of cases.

The Dubai-based Emirates airline, has hired eight banks to arrange a sukuk that will be guaranteed by Britain’s export credit agency. This is the first time that the UK’s export credit agency has guaranteed an Islamic bond. The chosen banks are Citigroup, HSBC, JP Morgan and National Bank of Abu Dhabi as the joint structuring agents, with Abu Dhabi Islamic Bank, Dubai Islamic Bank, Emirates NBD and Standard Chartered also acting as joint lead managers. It is rumoured that the issue will be upwards of $500 million, with a 5-10 year tenor.

Source: New Horizon July-December 2014 issue.