More sukuk details, Malaysian High Court challenges BBA

The reports that sukuk issuance fell significantly in the first half of 2008 continue to slice and dice the details of changes within the market for sukuk. A recent report from the Islamic Finance Information Service (IFIS) shows that in addition to a fall in issuance by 54% in the first half of 2008 compared with the same period in 2007, the issuance of sukuk are coming more from the GCC, denominated in local currencies, particularly the UAE dirham, and are significantly smaller than older sukuk. Highlights from the report include:

• 61 (valued at $11.55 billion) in H12008 versus 111 ($25.0 billion) in the same period in 2007 and 77 ($13.67 billion) in H12006;
•More sukuk were issued in the GCC than in southeast Asia and the Malaysian Ringgit fell behind the UAE dirham, albeit only slightly, as the currency of choice for issuers;
• In the first half of 2008, only 2 sukuk were issued for more than $1 billion compared with 14 during the full year 2007. Most sukuk in the GCC were greater than $100 million, while Malaysian issues tend to be smaller than $100 million.

The Malaysian High Court ruled that a common product used for home finance, al-bai' bithamen ajil (BBA), is not Shari'ah-compliant and therefore contrary to the country's Islamic banking law passed in 1983. The BBA transaction involves the sale to the bank at par with a resale back to the customer with a deferred repayment. The criticism of the BBA by the High Court was that the sale involved in the transaction was not a 'true sale' but was merely conducted to create a financing activity. There was some disagreement between industry players and academics about whether this ruling would force the restructuring of BBA home finance products. The use of Shari'ah standards that are more liberal than in the GCC has hampered the ability of Malaysia to internationalize its Islamic finance industry as much as other countries. This High Court ruling may be an attempt to force the domestic Islamic finance industry to adopt more conservative standards to better place Malaysia for growth within southeast Asia as countries seem to be adopting more conservative GCC Shari'ah standards.

Diversification of assets and liabilities continues to pose a significant problem for Islamic banks. There are not enough Shari'ah-compliant assets available to diversify to mitigate risk from over-concentration in one asset class and geography.

There is a special feature in MEED on Islamic finance. In the introductory article, MEED writes: "In the first seven months of 2008, $73bn worth of sukuk were issued worldwide" citing a Standard & Poors report. The report showed $14 billion in sukuk through the first eight months of 2008 (through August 31, 2008). The remainder of the article was behind the subscriber wall, so I was not able to see whether there were additional mistakes in the rest of the special report.

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