gif Report on Sukuk
an issue of US$1.25bn had ratings of A1 by Moody’s and A+ by S&P; Aldar Properties Sukuk II with an issue size of US$3.75bn carried ratings of A3 by Moody’s and A- by S&P; and DEWA Sukuk with an issue size of US$3.2bn carried ratings of A1 by Moody’s and AA- by Fitch.
Shari’ah Compliance Risk Besides other risks related to financial prod- ucts and services, Islamic financial products carry a specific risk termed Shari’ah compli- ance risk (broadly abiding to Shari’ah laws). Specifically, the risk refers to the loss of as- set value as a result of the issuers’ breach of its fiduciary responsibilities with respect to compliance with Shari’ah.
There could be several such instances of wilful or innocent breaches. The dissolu- tion clauses of the Sukuk prospectus define events that will make the Sukuk deed null and void due to Shari’ah non-compliance.
For example, if the Sukuk is based on a hy- brid of Ijara and Istisna’ assets, Ijara must always be more than Istisna’ in the pool, oth- erwise the Sukuk deed will dissolve.
Thus broadly speaking, Shari’ah compliance risk must be defined as a rate of return fore- gone in comparison to the market rates, as a result of complying with the Shari’ah. The issue hence is that of competitiveness and survival in capital markets as a Shari’ah compliant asset class.
A recent controversy that has raised concern in the international markets for the growth of the Sukuk market has been following the news that a group of Islamic scholars de- creed that most bonds were not Shari’ah- compliant.
Increasing popularity among non-Muslims Sukuk offerings, while still concentrated in the Gulf States and Malaysia, are rapidly growing businesses with involvement by pri- vate companies, state enterprises, sovereign governments, Islamic financial institutions, and also non-Muslim international institu- tions. The increasing interest of non-Muslim participants in Islamic Shari’ah-compliant fi- nancial system, further promotes the growth of such facilities.
The World Bank issued its first local-curren- cy dominated Malaysian Ringgits 760mn (around US$200mn) Sukuk in 2005. A note- worthy and pioneering sovereign Sukuk of- fering was carried out by the provincial gov- ernment of Saxony Anhalt in Germany. The German Sukuk raised €100mn from both Middle Eastern and European investors. Ex Prime Minister Gordon Brown from the United Kingdom, is said to have remarked
14 Global Islamic Finance October 2010
on making London the ‘gateway’ for Islamic finance in Europe during his tenure. The demand for Islamic financial investment structures continues, particularly related to the property sector. In a global first, the Sin- gapore listed Cambridge Industrial Trust is being transformed into an Islamic property trust.
The National Australia Bank has also shown interest to invest US$35mn for a stake in
Diagram 1: How a murabahah sukuk transaction would normally be arranged
Investors Periodic
Payments Limited to 6%
$ 500m Trust
Rab al-maal 99%
Mudarabah Agreement
Mudarib 1%
Purchased Assets used in XYZ Trading Company`s business
XYZ Trading Company
Shareholders
$ 50,000 share capital
XYZ Sukuk LTD Charity
With the increasing number of international financial institutions participating in the Islamic finance industry, the product and service innovation will benefit both corpo- rates and consumers. Such ventures will not only benefit the development of the Islamic financial system but will also enable the ma- jor world economies to tap capital from the oil-rich Muslim states.
Looking to the future Islamic bond offerings may accelerate in the next 18 months, led by first-time issu- ers in Asia after the region accounted for the most sukuk sold this year, Standard & Poor’s said.
Diagram 2: How an ijara sukuk transaction would normally be arranged
Ijara Sukuk Charity
Issue sukuk
Periodic Payments representing SPV`s profits
Special Purpose Vehicle
Sell building
Pay price
Owner Investors Pay issue price
While issuance of securities that comply with Shariah law are down 17 percent glo- bally this year, Asian borrowers issued $5.3 billion, about 68 percent of the total $7.8 bil- lion worldwide, according to data compiled by Bloomberg.
Sales from companies in the Persian Gulf dropped 24 percent to $2.5 billion so far in 2010, the lowest level since 2005, after Du- bai World, one of the United Arab Emirates three main state-owned business groups, announced plans to restructure debt in No- vember.
one of the world’s first listed industrial prop- erty trusts according to Shari’ah law. It will be the first publicly listed Shari’ah-compliant Real Estate Investment Trust (REIT) in Sin- gapore.
Hong Kong is among the latest to announce its incursion into Islamic finance and plans to send missions to Kuwait, Saudi Arabia and United Arab Emirates to more closely work on such projects. It is also been report- ed that the Hong Kong Airport Authority is considering a Sukuk issuance. In Japan, the
“Sovereigns, particularly from Asia, are pushing for the revival of the sukuk market,” Mohamed Damak, Paris-based credit ana- lyst and co-chair of the Islamic finance work- ing group at S&P, said in an interview. “We expect additional countries, or issuers domi- ciled in countries new to Islamic finance to tap the sukuk market in the near future, within the next 18 months.”
Khazanah Nasional Bhd, Malaysia’s state in- vestment company, sold S$1.5 billion ($1.1 billion) of Islamic bonds, its first in Singapore, the company said in a recent statement. The Philippines’ state-owned Al-Amanah Islamic Bank is exploring a sale, according to the lender’s President Armando Samia.
Financial Services Authority has proposed an amendment to the banking law that will allow Japanese banks to offer Islamic finance products through a subsidiary. Glo- bally, it is during the last decade that multi- national financial institutions like Deutsche Bank, Citigroup, Barclays, and HSBC have also entered the sector.
Going forward, it is expected that Islamic finance instruments especially Sukuk will maintain its growth trajectory. However, as the industry grows, more transparency and uniformity (as per the compliance to Shari’ah rules) is required in the Islamic fi- nancial products.
Lease
Pay rent periodically
Sukuk Certificates
$500m to buy assets
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