Investment gif
Things looked bright on 21st October 2009, as the IFC announced its issuance of sukuk that went on to be listed on both NASDAQ
Dubai and the Bahrain Stock Exchange. Apart from it being worth the landmark figure of US$100 million, the issuance was so special because IFC was the first non-Islamic financial institution to issue a sukuk for term funding in the GCC. At the time the IFC said it hoped the move would inspire other issuers to enter the sukuk market’ accelerating its growth within the GCC region in particular
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sovereign one, issued in September 2003. As for Saudi Arabia, just a couple of months ago Saudi Hollandi Bank raised US$193 mil- lion from the sale of its second sukuk. Islamic finance academic Mohammed Khnifer tells Global Islamic Finance Magazine, “this is a Long term sukuk issuance which is some- thing hard to come by nowadays. This is good for the industry because many takaful com- panies prefer such issuance. And I wouldn’t be surprise if many of them were the sukuk holders”.
Popular Sukuk Structures in the Gulf As explained in Project Finance Sukuk (Nas- sif, November 2007), various sharia’a-prin- ciples determine the structure of sukuk, cre- ating a number of sharia’a-compliant sukuk structures. Gulf issuers use a variety of these structures. Below is a table of high-profile is- suances, the structures used and what these structures involve:
Each of these issuances are considered high- profile for a different reason. The regularity of the recurrent CBB sukuk keeps it in the head- lines, helped by the fact that the offering is of- ten oversubscribed. The Qatar Global Sukuk is known for partially being used to finance the construction of the Hamad Medical City.
The Emirates Airlines Sukuk was the first to be issued by an airline, whilst the Al Safeena Sukuk was the first ship finance sukuk, with the ship Venus Glory as the underlying asset. The Dubai Civil Aviation Authority Sukuk was, at the time, the world’s biggest single issu- ance in terms of size. The sukuk is known for financing a Financial Centre that consti- tutes the first phase of the Bahrain Financial Harbour project. At the time of issuance, the Dubai World sukuk became the world’s larg- est and the DP World Sukuk made DP World the first issuer to list both conventional and Islamic debt securities on the DIFX. The use of a range of structures by diverse and high- profile issuers within the Gulf has hitherto been a sign of the type of flexibility and in- novation that was expected to help the Gulf sukuk market flourish.
Impact of Dubai and AAOIFI on the
Market However, as a result of Nakheel’s problems, experts and analysts have now adopted a
more conservative perception of the health of the Gulf sukuk market. In what ways is the Dubai crisis thought to have impacted upon the industry segment? The crisis has mainly acted as a wake-up call to those who thought the market was without complications. The threat of court cases being brought against Dubai by sukuk holders has alerted those in the know to the fact that the Gulf’s various legal systems are not conducive to standard- ises legal sukuk practices.
As the Gulf sukuk market is still in its early stages of development, its legal structure has never been tested in court. This is particu- larly problematic given that many of the GCC region’s Islamic financial transactions are structured according to English common law, yet are also subject to regional laws, which in themselves are far from standardised varying wildly from Gulf country to Gulf country.
Then we move on to how the crisis has af- fected the way sukuk compares with conven- tional debt instruments. The way the sukuk holders were taken by surprise by the drama made them question whether or not they knew how they would be treated in the event of a default, in comparison to conventional bondholders. The answer was, they weren’t sure. With current Gulf sukuk holders so publicly unsure of where they stand, there are concerns this will put off potential future creditors, which in turn will discourage poten- tial issuers from attempting to raise finance using sukuk. Such a lack of both supply and demand would of course be a major setback to the GCC’s sukuk sector.
Although Abu Dhabi’s bail-out has probably eliminated the chances of a court case re- garding Nakheel sukuk, the same questions still stand and it is likely that important play- ers will avoid the market until a test case has been brought to a Gulf court. A further cloud of uncertainty on the market’s horizon is that of the Accounting and Auditing Organi- zation for Islamic Financial Institutions (AAO- IFI). In early 2008, the organisation made its stance on sukuk crystal clear; unfortunately it was not a stance particularly conducive to the popularity of any sukuk market. Through leading sharia’a scholar Sheikh Taqi Usmani, AAOIFI issued a statement declaring that a number of sukuk did not comply with sharia’a
principle. In Sukuk: Defaults Destabilise a re- viving market, the Financial Times quotes a top Islamic finance lawyer as stating, “Many of the leading scholars disagree with Sheikh Taqi Usmani, but cannot say so openly. It’s becoming a big problem for the market now that the credit markets are reopening.”
It is indeed a big problem for sukuk markets worldwide, especially that of the Gulf. The sukuk structures AAOIFI condemns indeed include Sukuk Al Mudaraba and Sukuk Al Musharaka, which, as we have seen, are some of the structures of choice for the most prominent Gulf sukuk transactions. AAOIFI’s explicit demand of the legal and lawful trans- fer of ownership rights (in terms of both ju- risdiction and sharia’a permissibility) could potentially be bad news for the GCC region’s sukuk market. As stated in Revisiting Islamic Bonds (Gassner, April 2008), ownership on assets for foreigner is currently restricted. The good news, however, is that AAOIFI au- thorises the purchasing of a leased asset at face value by the lessee, meaning the even more popular Sukuk Al-Ijara structure is ex- empt from any proposed changes.
Those Gulf entities using real Musharaka transactions for their sukuk are also in AAO- IFI’s good books as the organisation believes this mode of profit and loss sharing is a legiti- mate way of achieving sharia’a objectives. As for the sukuk structures AAOIFI proposed ex- tra constraints for, however, their popularity, and thus the Gulf sukuk market, could take a nosedive if the regulatory body eventually gets it way.
Perhaps if the AAOIFI proposals had been in place from the start of the segment’s emer- gence, the market would still have been able to progress along the same trajectory as it has. As it is, any major changes now to the way sukuk is dealt with in the Gulf could lead to a major disruption from which such a nas- cent market could have difficulty recovering.
The overall global sukuk market, in fact, is al- ready in a state of fluctuation, and has been for the past few years, due not only to AAOIFI and Dubai, but also to the credit crunch and consequent global recession and Dubai prop- erty slump.
gif 2010 October Global Islamic Finance 19
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