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Sukuk gif


conventional equity-linked transactions. For 2010, Malaysia remains a frontrunner in the global Sukuk issuance, contributing 77.7 percent of the total Sukuk issued in 2010. Meanwhile, countries that do not have a majority Muslim population also showed in- terest, such as the United Kingdom and Ja- pan, in engaging in global Sukuk issuance.


The Government of Malaysia recently is- sued the second benchmark dollar sover- eign Sukuk for Malaysia’s domestic funding needs. The Government’s investment arm, Khazanah Berhad, recently issued a Singa- pore dollar Sukuk out of Malaysia through its existing multi-currency programme. The Islamic Development Bank has also closed the book-building exercise for a 500 million US dollar benchmark Sukuk issue in Malay- sia for developmental projects of member countries.


In addition, the Dubai Government’s De- partment of Finance is proposing to launch a multi-currency Sukuk programme soon. Malaysia, therefore, is well-positioned as a multi-currency issuance platform for Sukuk. In the area of capacity building, Malaysia has also given priority to two areas, one being human capital development and the second being catalysing mutual recognition of Shariah interpretations.


The International Centre of Education in Islamic finance (INCEIF) was established in 2006 for advanced education for practi- tioners in Islamic finance, and in 2008, the International Shariah Research Academy (ISRA) was established to conduct applied Shariah research on the contemporary Is- lamic finance issues and to provide a plat- form for active international engagement among Shariah scholars.


Malaysia will also continue to collaborate with other regulatory authorities to ensure financial stability in the Islamic financial system. This will be through Malaysia’s ac- tive involvement in the Islamic Financial Services Board (IFSB), the Islamic Financial Stability Forum (IFSF), the initiatives by the Islamic Development Bank (IDB), and finally in the newly formed International Islamic Li- quidity Management Corporation (IILM).


Secondary trading in the Malaysian Sukuk market has increased the depth and liquid- ity of the market with the participation of more companies, including foreign-owned companies’ continued use of this market for funding purposes. A large number of corporate issuances is to finance long-term funding needs. The diversity and size of the Sukuk transaction and the increasing value proposition is attractive to investors who want to diversify their asset portfolios, thus creating a vibrant secondary market. gif


Rushdi Siddiqui, Shari’ah Advisor for Thomson Reuters, USA


The Sukuk industry is growing at an unprec- edented rate. Do you


expect this growth to be consistent? The Sukuk product has become the poster child for Islamic finance. Sukuk became a global phenomenon on the back of the petro- liquidity spike - and as many expect oil prices to remain above USD80 per barrel for the for- seeable future, and as GCC and Arab Spring countries still need to build out their infrastruc- ture, Sukuk is here to stay, continually growing and developing as a financing and investment tool. Sukuk illustrates an interesting aspect of Islamic finance: its position in financing real economies.


One interesting recent development is the actions taken by some GCC entities to raise money in Malaysia. These funds the ‘regula- tory Sukuk efficiency’ of Malaysia, combined with available liquidity. It seems to me that the development of Malaysia’s Sukuk market development can be loosely compared to the early days of the Eurobond market: it has be- come efficient in the ‘shelf registration’ model. For example, Kazanah’s recent exchangeable Sukuk, priced negatively, is a good example of the innovation the industry aspires to. The industry is on track to expand the breadth of its offering, allowing it to compete with conven- tional institutions.


Sukuk defaults are actually good for develop- ment, as these will result in the future in better documentation and tighter pricing of Sukuk, as some of the ‘uncertainty’ premium is removed. Finally, Thomson Reuter’s launch of its ‘IIBR’ (Islamic Interbank Benchmark Rate) will even- tually allow lenders and borrowers to reference Sukuk prices from an indigenous benchmark designed to reflect different geographies’ indi- vidual funding costs.


Why is Sukuk becoming an increasingly pop- ular commodity within Islamic finance and banking? Much like conventional finance, Islamic finance is biased towards the debt capital markets. At USD180 billion, the Sukuk market makes up about 18% of the USD1 trillion debt capital in- dustry, where Islamic funds are estimated to make up only 5%. (However, this figure makes the incorrect assumption that Islamic funds all relate to the Islamic equity capital mar- ket.) Entities raising capital, whether these are sovereign entities, corporate entities, or quasi-sovereign entities, find it easier to com- prehend Sukuk when the asset is explained as an equivalent to a ‘bond,’ asset-based and asset–backed. Under this parallel, the ‘Islamic’ aspect becomes a collateral issue of compli- ance. And if I’m a seeker of capital, I want the widest range of available financing options on


my dashboard - i.e., GE in 2009. I argue that the excess liquidity which petroleum prices have caused in the GCC should be deployed. Within and without the GCC, capital seekers currently have limited options, in light of the financial implosion in Europe. Sukuk presents an ‘agnostic’ opportunity to raise capital in a world which is not doing ‘business as usual’. Frankly, the Islamic finance industry needs to do more to educate the whole non-Islamic financial community about the benefits of Su- kuk. Currently, the industry focuses too much on Sukuk’s weak point: supply!


Capital-raisers should lobby as stakeholders for regulations, including taxation where ap- propriate, in order to level the playing field for Sukuk. These are typically the first order of business.


What do you think about Turkey’s entrance to the Sukuk market in 2012? Turkey, a secular Muslim democracy - i.e., a non-cheerleader of Islamic finance - has taken a ‘go slow’ approach to Islamic finance, due to its history with ‘Shari’ah law.’ To start with, Tur- key does not call this financial model ‘Islamic’ or ‘Shari’ah’ banking, but ‘Participation’ bank- ing – a term which actually captures the es- sence of this USD1 trillion industry rather well. Secondly, it has learned an appropriate ‘bank- ing’ model for the country.


Turkey’s model seems to be aligned to the more holistic approach to Islamic banking taken in Malaysia. Finally, Turkey has not made an overt declaration of intent to be a hub for Islamic, but seems more inclined to develop as a facilitating platform for an inclusive capital market approach.


Turkey’s efforts can be seen as a ‘kite-flying exercise’ for Islamic debt capital market de- velopment within the country and in the CIS region. Turkey’s influence in the region cannot be denied, and so the ‘traction’ of Sukuk in Tur- key presents a compelling opportunity in (com- pliant) financing of the infrastructure build- out within CIS, possibly aided by the GCC’s petro-liquidity. Additionally, Turkey’s entrance into the Sukuk market further refines Islamic finance, adding the impact of a European influ- ence, which will build bridges towards the de- velopment of the industry in capital-challenged (eastern) Europe.


What makes Shari’ah-compliant Sukuk unique? The answer to that depends on who you’re ask- ing. From a Shari’ah scholar to a banker, from an issuer to a buyer to a trader, each has his or her unique prospective. As the industry has not arrived at a universally defined standard for Sukuk, the appropriate contract relies on the needs of the issuer. As a capital-raising instru- ment, Sukuk is tied to a four-part issue includ- ing: (1) the underlying compliant asset (2) the structure (modality of the contract), (2) use of the proceeds and (3) trading (if appropriate).


2012 April Global Islamic Finance 55


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