First UAE AED1.1bn (US$300m) Sovereign Treasury Sukuk Attracts Robust Demand with 7 Times Oversubscription with Regular Issuances to Follow to Build Dirham Yield Curve

The ringing of the market-opening bell on 15th May 2023 by UAE Minister of State for Financial Affairs, Mohamed Bin Hadi Al Hussaini, to mark the listing of the maiden dirham-denominated Islamic Treasury Hybrid Ijarah/Murabaha Sukuk (T-Sukuk) on Nasdaq Dubai, with a benchmark auction size of AED1.1 billion (US$300 million), issued by the UAE Ministry of Finance (MoF) in collaboration with the Central Bank of the UAE (CBUAE) as the issuing and paying agent, assumes much greater importance in a market segment poised to take that great leap forward over the next few years. 

Only a few weeks earlier on 26th April 2023, the UAE MoF and CBUAE announced the launching of the T-Sukuk, which according to Minister Al Hussaini “reaffirmed the UAE’s keenness to strengthen the Islamic economy and build a pioneering investment infrastructure to boost it as one of the key pillars of the national economy. The T-Sukuk are Sharia’a-compliant financial certificates, and they will be traded to reflect the local return on investment, support economic diversification and financial inclusion, as well as contribute to achieving comprehensive and sustainable economic and social development goals.”

The launching of the T-Sukuk, he added, incorporates a series of issuances, in order to attract a new category of investors and support the sustainability of economic growth. The issuance of T-Sukuk, thus is also aimed at enhancing the UAE’s economic competitiveness by providing high-quality Islamic assets at competitive prices. This will support the CBUAE in managing liquidity within the banking sector and boosts the size of financial investments, which will reflect positively on the country’s economy, investment environment, per capita income and gross national income.

In addition, issuing the T-Sukuk in local currency would contribute to building a local currency bond/Sukuk market, diversifying financing resources, boosting the local financial and banking sector, providing safe investment alternatives for local and foreign investors, as well as helping build a UAE Dirham-denominated yield curve, thereby strengthening the local financial market and developing the investment environment.

Until recently, with Malaysia being a notable exception, there has been a disconnect between the Islamic banking policies and aspirations of IsDB member states with market practice at the regulatory and supervisory levels especially in managing the short-term liquidity requirements of Islamic banks and Islamic Banking Windows (IBWs) at conventional banks, and the management of the capital and other statutory reserves of authorised financial institutions in their respective jurisdictions.

Malaysia has always led from the front with Malaysian Government Securities, sovereign domestic Sukuk and a range of other Sharia’a compliant Treasury instruments going back to the 1980s, steered by a proactive government and a forward-looking Bank Negara Malaysia (the central bank), especially under Governor Dr Zeti Akhtar Aziz. In recent years, Bahrain, Indonesia, Brunei, Saudi Arabia and to a lesser extent Türkiye have similarly become regular issuers of domestic sovereign Sukuk precisely for the short-term liquidity management needs of Islamic banks and IBWs in their jurisdictions and the parking of their statutory capital and reserve requirements.

In these markets where Islamic banking is of systemic importance, the development of the local regulatory liquidity management architecture based on domestic Sukuk instruments has been a major boost, albeit has taken a few decades to get there. The fact that the UAE has now joined this core cohort of countries with regular issuance of Sharia’a compliant sovereign domestic liquidity and investment management instruments is important to institutionalise this vital practice and service for the orderly and effective development of the Islamic finance market and its depth.

The challenge is how to co-opt the middle tier and nascent Islamic finance markets to do the same, without which these markets cannot flourish. They include Pakistan, Qatar, Kuwait, Oman, Bangladesh, Egypt, Morocco, Nigeria and Iran.

In fact, Khaled Mohamed Balama, Governor of the Central Bank of the UAE, acknowledges the importance of issuing Islamic treasury Sukuk in developing local Sukuk markets, diversifying financing resources, and strengthening the infrastructure to support investment options and alternatives that are compatible with the provisions of Sharia’a financial principles, in a way that contributes to the development of the Islamic financial sector and improves the investment environment.

The issuance of Islamic treasury Sukuk comes within the framework of the UAE’s commitment to developing capital market activities and consolidating its position as a global financial hub. “This issuance,” he noted, “reaffirms the strength and stability of the financial system and the confidence of local and international investors in the UAE’s ability to develop the financial sector in accordance with monetary policies and strategic plans. With the development of an effective infrastructure for the financial markets, we are confident that this issuance will contribute to supporting the market for Sukuk denominated in the local currency and issued by the public sector in the country.

“It will also enhance the competitiveness of the local financial markets and enable market participants in the UAE to maintain a single, transparent, diversified and sustainable liquidity pool in Dirhams. Furthermore, it will contribute to the implementation of the new Dirham Monetary Framework (DMF) and support the ongoing work to establish the Dirham risk-free pricing benchmark (yield curve), which would stimulate more domestic market activities to support the sustainability of the country’s economic growth.”

The T-Sukuk, according to the MoF, will be issued initially in 2/3/5-year tenors, followed by a 10-year Sukuk at a later date. The MoF and the CBUAE worked with relevant government entities and international financial bodies to ensure best practices were followed when structuring the T-Sukuk. This allows for further development of Islamic finance in the country.

The structuring of Islamic Sukuk has been approved by the Higher Sharia’a Authority at the CBUAE, which cooperates with the relevant authorities to standardise and unify the practices of Islamic financial institutions to be compatible with internationally recognised Sharia’a standards and best practices.

To facilitate the smooth implementation of the T-Sukuk initiative, the MoF published a robust Primary Dealers code and onboarded eight banks, namely Abu Dhabi Islamic Bank, Dubai Islamic Bank, Abu Dhabi Commercial Bank, Emirates NBD, First Abu Dhabi Bank, HSBC, Mashreq and Standard Chartered, as Primary Dealers to participate in the T-Sukuk primary market auction and to actively develop the secondary market.

The first auction under the T-Sukuk issuance programme for 2023 did not disappoint. According to the MoF, the dual tranche AED 1.1 billion (US$300 million) auction witnessed strong demand through the eight primary bank dealers, with bids received totalling AED 8.3 billion (US$2.26 billion) – an oversubscription by 7.6 times.

The first tranche of UAE550 million has a tenor of two years. The lowest bid for the two-year tenor was at 3.90%, with the weighted average bids at 3.96% and the final uniform coupon rate fixed at 3.97% per annum. The second tranche of UAE550 million has a tenor of three years. The lowest bid for the three-year tenor was at 3.3.62%, with the weighted average bids at 3.66% and the final uniform coupon rate fixed at 3.7% per annum. The first auction will be followed by a series of subsequent periodic auctions, in line with the proposed 2023 issuance plan.

According to Sheikh Maktoum bin Mohammed, Deputy Prime Minister and the Minister of Finance, “T-Sukuk issuances will offer high-quality Islamic assets at competitive prices due to the increase in the investor base, which reflects positively on the country’s economy and investment environment.” This success reiterates the confidence enjoyed by investors in the UAE’s investment structure and local economy, which is reflected in the attractive market driven prices that were equivalent to US Treasuries with similar maturities, he added.

The T-Sukuk programme, says the MoF, was developed in uniform pricing (the Dutch Auction) for final bid acceptance of bids and final allocation amounts, regardless of the lower-priced bids received, to ensure full transparency in accordance with global best practices for Sukuk structuring. These Sukuk will provide safe investment alternatives for investors which contributes to developing the UAE’s investment environment.

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