Sukuk Summit Stresses Initiatives to Take Sukuk Origination to the Next Level through Sustainability, Innovation, Overcoming Regulatory and Other Challenges.
In an environment of excess liquidity in core markets and the encroaching impact of capital and liquidity requirements under the new Basel III Concordat, the proliferation of Sukuk issuances led especially by Sovereigns both from traditional and new markets continues unabated.
The sustainability of Sukuk beyond the US$100 billion mark in 2015 seems assured given that in the first five months of this year the volume of primary issuances had already surpassed US$33.7 billion. According to Standard & Poor’s (S&P). If we add the spate of issuances led inter alia by sovereign Hong Kong and Indonesia, and by The Saudi British Bank and Dubai Islamic Bank, then the figure pre-Ramadan is nearer to the US$45 billion to US$50 billion mark.
All these developments offer encouraging opportunities for the maturing and sustainable global and domestic Sukuk market, which these days is also highlighted by exciting new innovation in structures and in terms of Shariah governance. This was the overriding message to emerge from speakers at the 2015 London Sukuk Summit, which was held on the 3rd and 4th June at the Jumeirah Carlton Tower, under the pertinent theme: ‘Globalising Sukuk Beyond Traditional Markets, Structures &Asset Pools’.
Setting the scene for the inaugural keynote session, Mushtak Parker, the session Chair, highlighted the various developments in the global market over the last year. These include a spate of sovereign issuances (both international and domestic); corporate issuances (one again in the international and local currency markets); the increasing origination of Sukuk in the aviation sector highlighted by the recent US$930 million issuance by Emirates Airlines backed by a guarantee from the UK Export Finance, the export credit agency of the UK Government and the US$500 million Sukuk by Garuda Indonesia; the increased US$10 billion Islamic Development Bank Sukuk Programme for 2015 and beyond; the various developments in terms of regulatory and prudential standards under the Basel III regime; the role of Sukuk in liquidity management; the consolidation of the Malaysian International Islamic Financial centre (MIFC) as a Sukuk origination platform with the issuance of the latest Sukuk by Kuveyt Turk Participation Bank; the continued buoyancy of the three largest markets – Malaysia, Saudi Arabia and the UAE – especially with new entrants including Noor Bank; the issuance of the first SRI Sukuk under the new Sustainable and Responsible Investment (SRI) Sukuk Regulatory Framework of the Securities Commission Malaysia (SC) by Khazanah Nasional Berhad; and of course the inclusion of Sukuk and Infrastructure on the agenda of the upcoming G20 Summit in Antalya, Turkey in November this year.
The keynote speakers comprised Jeremy Fern, Head of City Affairs – Economic Development Office, Corporation of London and a member of the UK Government Task Force on Islamic Finance; Jaseem Ahmed, Secretary General of the Islamic Financial Services Board; Prof. Datuk Rifaat Ahmed Abdel Karim, CEO of the International Islamic liquidity Management Corporation (IILM); and Dato’ Dr Nik Ramlah Mahmood, Deputy CEO, the Securities Commission Malaysia.
Mr Fern highlighted the current status of the UK proposition on Islamic finance and the encouraging developments since the issuance of the country’s debut GBP200 million Sukuk in 2014. The UK and the City of London is serious about consolidating London into a major centre for Islamic finance, investment and trade.
Indeed, following the re-election of the Conservative Government in May this year, and the appointment of Sajid Javid as the new Secretary of State for Business & Enterprise, there would be continuity in the UK Islamic finance proposition. Mr Javid of course was the Financial Secretary to the Treasury in the erstwhile Coalition Government under whose watch much of the work for the UK’s debut Sukuk was done and the go-ahead for the ECA-backed Emirates Sukuk was given. Mr Javid also oversaw the establishment of GIFIG during the World Islamic Economic Forum (WIEF) in London in 2013.
Secretary General, Jaseem Ahmed highlighted the rapid growth of the Islamic financial services industry (IFSI) post the global financial crisis. The Islamic banking sector, he revealed, expanded at a CAGR (compound aggregate growth rate) of 16.04% during 2008-2014; Sukuk issuances and outstanding grew at a CAGR of 33.9% for the same period; Takaful contributions are estimated to reach US$21.4 billion as at First Half 2014. Not surprisingly, the Sukuk sector has replaced the Islamic banking sector as the fastest growing industry segment on a pure growth basis.
The industry development is also encouraged by the emergence of large Islamic finance sectors in key economies. For instance, Sudan, Saudi Arabia, Kuwait, Yemen, Brunei, Qatar, Malaysia and Bangladesh are among markets where Islamic finance has near systemic importance. But, deep seated reforms are underway in jurisdictions where this sector is still small.
The growth trends for Sukuk are encouraging too surpassing the US$100 billion market for the last three years. In 2014 Sukuk issuance totalled US$118.8 billion, almost the same as in 2013, and global Sukuk outstanding reached US$300.3 billion in 2014. During 2014, sovereign and quasi-sovereign Sukuk were issued in a record 12 countries, with five debut issuers. He commended the increasingly diverse role played by Sukuk especially in infrastructure funding and more recently the emergence of socially-responsible Sukuk. Sukuk is also a potential source of funding as well as of high quality liquid assets.
He also discussed the latest developments in the Global Financial Reform Agenda including the coordinating work the IFSB is doing with international standard setters such as the Basle Committee for Banking Supervision, IMF/Financial Stability Board (FSB), IOSCO and the IAIS. The IFSB is interested in the orderly growth of the IFSI and the promotion of its stability with the global financial system and the economies of the host countries. The Board has issued seven key standards over the last few years including the Core Principles for the Supervision of Islamic Banking and a Guidance note on Quantitative Measures for Liquidity Risk in April 2015.
The latter two presents immense challenges for the Islamic finance industry, especially a lack of high quality liquid assets (HQLA), whereby qualifying highly-rated Sukuk have been included for the first time under the Liquidity Coverage ratio (LCR) of the Basel III process.
He stressed the need for regular sovereign Sukuk issuances including short-term offerings by central banks, albeit the availability of HQLA will improve especially through the short-term Sukuk issuance programme of the IILM.
Indeed, the lack of short-term liquidity management instruments for the IFSI was aptly highlighted by Prof Rifaat Abdel Karim of the IILM, who stressed the challenges and increased demand for such instruments by Islamic banks the world over.
The IILM was specifically established in 2011 as a multilateral institution to facilitate the above through short-term US dollar denominated Sukuk issuance, which are backed by a minimum single ‘A’ rated sovereign assets, which in turn underpins the credit quality of the underlying asset pool. Thus far IILM Sukuk outstanding is US$1.85bn, and since its first issuance in 2013, a total of US$9.98 billion Sukuk have been issued and reissued by IILM after auctions.
Despite the fact that IILM is not rated, S&P has assigned a ‘A-1’ rating to the IILM’s short-term Sukuk programme, which according to the Corporation, is a landmark rating because, inter alia, it combined aspects of structured finance rating methodology with Sukuk distribution channels that were more akin to how central banks distribute their own short-term papers.
Going forward, the Corporation will explore new avenues to support enhanced liquidity management and financial stability for Islamic financial institutions, but the work of the IILM is not enough to address all the liquidity management needs of the IFSI or to protect against future liquidity stress for Islamic banks.
Dr Nik Ramlah of the Securities Commission discussed recent regulatory and market developments, stressing that in 2014 Malaysia accounted for 66% of global Sukuk issuance 57% of Sukuk outstanding. The Malaysian Islamic capital market is now worth RM1.64 trillion with an annualized growth rate of 12% over the last five years.
The drivers of innovation in the Sukuk market is to keep pace with the sophistication of the global financial market; to achieve the true objective of Maqasid al Dhariah; and to ensure the link with the real economy. The Malaysian Capital market Master Plan (CMP2) recognized the role of capital market in mobilising investments for sustainable development and the increasing convergence between ethical and Islamic finance, given that socially responsible investment is also gaining traction globally. Other innovations in the Sukuk market included Structured Covered Commodity Mudharabah Sukuk, Basel II Compliant Sukuk and Exchangeable Sukuk.
Perhaps the most socially edifying Sukuk in 2015 is the RM300 million SRI Sukuk issued in May by Khazanah Nasional Berhad, the Malaysian sovereign wealth fund, via a Malaysian-incorporated independent special purpose vehicle, Ihsan Sukuk Bhd, under its RM1 billion Sukuk programme. The RM300 million issuance is the first tranche under the Programme and the first such Sukuk approved under the SC’s Sustainable and Responsible Investment (SRI) Sukuk framework.
The proceeds of this Sukuk, according to Khazanah, will be channelled to Yayasan AMIR, a non-profit organisation initiated by Khazanah in 2010, to manage its cashflow for the deployment of its Trust Schools Programme under its financial and social inclusion initiative.
There were of course several robust sessions on various aspects of the Sukuk industry by speakers from NBAD, S&P, CIMB Islamic, Amanie Advisers, the Debt management Office of the Government of Sharjah, Rasameel Structured Finance, DDCAP Group, Oasis Group, Trowers & Hamlins, UK Export Finance, the London Stock Exchange, Cagamas Berhd, KFH Investment, Path Solutions, the Capital markets Board of Turkey, GIB, FWU Group and BLME.
The Summit culminated in the regular annual Shariah Scholars & Issuers Panel Discussion, which highlighted Shariah governance issues; the Shariah view of ‘hold to maturity’ by Sukuk holders and whether that constituted hoarding; implications of non-Shariah-compliance risk; and creating the conditions for future innovation in the Sukuk market.
Culled from the ICG – Sukuk Summit Press Release