Treasury Sukuk – UAE AED1.1bn T-Sukuk

UAE Government Domestic Treasury T-Sukuk Auction in May Raises AED1.1bn (US$300mn) as Total Volume of Issuances for 2024 to Date Reaches AED6.1bn (US$1.7bn) Buoyed by Strong Investor Demand

The dirham-denominated Islamic Treasury Sukuk (T-Sukuk) first introduced by the UAE Ministry of Finance (MoF) in collaboration with the Central Bank of the UAE (CBUAE) in 2023 is gaining traction as sovereign domestic Sukuk issuances to regulate liquidity management and reserve requirements of Islamic financial institutions at the central banks gains momentum beyond traditional markets where Islamic finance is deemed of systemic importance in the banking system.

The Government of the United Arab Emirates acting through the Ministry of Finance completed its fourth T-Sukuk transaction of the year to date on 23 May 2024 raising an aggregated AED1,100mn (US$299.48mn) through two AED550mn (US$149.74mn) tranches. This follows a similar auction of two tranches of AED550mn each totalling AED1,100mn in March 2024.

With this latest transaction, the total volume of T-Sukuk issued by the CBUAE on behalf of the Government, the Obligor, amounted to AED6,100mn (US$1,660.77mn) in the January-May period in 2024.

According to the CBUAE’s T-Sukuk issuance calendar, the next T-Sukuk auction for Q2 2024 is scheduled to be held at the end of June 2024 for a similar AED1,100mn two tranche reissuance, which would bring the aggregate volume of T-Sukuk issuance in First Half 2024 to AED7,200mn (US$1,960.25mn). The total T-Sukuk outstanding as on 21 May 2024 stood at AED17,950mn (US$ US$4,887.01mn).

There is no doubt that T-Sukuk issuance is gaining momentum, albeit that issuance volumes will have to be increased dramatically to establish that all important yield curve for such issuances and to stimulate secondary trading and thus unleashing greater liquidity in the market. The Sukuk certificates are listed and traded on the Nasdaq Dubai Main Market and on the Official List of Securities of the Dubai Financial Services Authority (DFSA). All the T Sukuk offerings are issued under the unlimited UAE Treasury Sukuk Programme.

Traction in T-Sukuk issuance is steady if not spectacular. In FY 2023 the aggregate volume of T-Sukuk issued by the MoF/(CBUAE) in 10 auctions held during the year amounted to AED5,000mn (US$1,361.40mn) through auctions held in May, June, August, October, and November. Thus far in FH2024 the volume has already reached AED7,200mn. It is likely that the total T-Sukuk issuance for the full year 2024 could exceed AED14,400mn given the FH2024 issuance trend.

According to the final terms of the transaction, the Sukuk structure is based on Murabaha/Ijara assets with the asset pool comprising 54% Ijara assets and 46% Murabaha receivables. The UAE Federal Government Sukuk Programme Ltd is the Trustee and Lessor acting on behalf of the Government of the United Arab Emirates, acting through the Ministry of Finance – the Obligor, Seller, Lessee and Servicing Agent to the transaction.

The first tranche of AED550mn has a tenor of 3 years and a coupon rate of 4.57% per annum payable semi-annually in arrears; the second tranche of AED550mn has a tenor of 4.8 years and a coupon rate of 4.12% per annum payable semi-annually in arrears (see tables for full details).

The T-Sukuk Securities were admitted for listing and trading on the Nasdaq Dubai Market and the Official List of Securities of the Dubai Financial Services Authority (DFSA) on 23 May 2024, and will be consolidated with AED2.80bn (US$760mn) Treasury Sukuk due 2029. Through the addition of this issuance, the total outstanding value of the UAE Government’s Sukuk listings under this Programme on Nasdaq Dubai has reached US$3bn equivalent through 5 listings. “With this latest federal issuance, Nasdaq Dubai continues to solidify its position as a premier platform for Sukuk listings, enhancing its role in the growth and diversification of Islamic finance, with total value of Sukuk admitted on the exchange reaching US$89.5 billion,” said the Bourse.

According to UAE Minister of State for Financial Affairs, Mohamed Bin Hadi Al Hussaini, the introduction of the T Sukuk “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 T-Sukuk issuance programme, added Minister Al Hussaini, will contribute to building the UAE dirham denominated yield curve, providing safe investment alternatives for investors, strengthening the local debt capital market, developing the investment environment, as well as supporting sustainable economic growth.

The Sukuk were issued via eight primary dealers, with the UAE Central Bank acting as the issuing and payment agent. 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 launching of the T-Sukuk also incorporates a series of issuances, to attract a new category of investors and support the sustainability of economic growth. The issuance of T-Sukuk 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.

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,” added the Ministry of Finance, “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 tenures, followed later by a 10-year Sukuk. 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.

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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