Tuesday, May 11, 2010

Rushdi Siddiqui interviews four scholars, sukuk update

First, thank you to those who have responded with feedback about a possible email newsletter of blog postings (and maybe other commentary). I would appreciate any other feedback, either as a comment to this post or in an email to blake@sharingrisk.org.

I think that Rushdi Siddiqui's latest article, an interview with four prominent Shari'ah scholars, Dr. Hussain Hamid Hassan, Dr. Mohammad Daud Bakar, Yousuf Talal DeLorenzo and Dr. Mohammad Akram Laldin is one of the most important articles for everyone interested in Islamic finance to read. It contains insights into how Shari'ah scholars see their role, the role of Shari'ah governance and the integration of younger less well-known scholars into the Shari'ah advisory role. It contains the most candid reflections of Shari'ah scholars that I have seen published about their own role both as advisors to Islamic financial institutions and as teachers and mentors of the Shari'ah scholars who will someday fill their shoes.

There is a good chunk of news about sukuk from the last couple days. The forward looking news starts with a $1.9 billion sukuk issued by Saudi Electric Company, which was issued at 95 basis points over SIBOR. As I wrote about in July 2009, the last sukuk from SEC was at a significant premium (160 bps over SIBOR) compared to it's (pre-crisis) sukuk issuance which was priced at 45 bps over SIBOR. The current sukuk is still at a premium to its 2007 sukuk, but by a far smaller margin. The shrinking yield premium for highly-rated issuers could lead to other non-high-grade corporate issuers to re-enter the sukuk market. The last estimate I have seen of the sukuk pipeline (sukuk planned but not issued) from Standard & Poor's was $50 billion, which likely includes lower rated corporates waiting for yield spreads for new issuance to decline.

Issues of sovereign sukuk, both domestically and internationally, remains active with Malaysia issuing a three-year, $311 million (MYR 3 billion) Sukuk 1Malaysia 2010 for domestic investors. In the wake of the Greek debt crisis, Indonesia is trimming but not cancelling the sukuk issuance expected in June or July of this year, but reiterated guidance that it would be a "benchmark" size, which typically means at least $500 million. The previous announcement was that the sukuk would be for $750 million. The Dubai Multi Commodities Centre just redeemed its $200 million, five-year sukuk issued in May 2005 with a final $20 million repayment. The certificateholders of Nakheel's $980 million Nakheel Development 2 sukuk have been told informally that the sukuk will be repaid on time. The funds necessary to repay the sukuk are reported to have been provided by the Dubai Financial Support Fund. This could spark some controversy among other Dubai World subsidiaries' creditors groups who have not yet finalized a debt restructuring which could see the other debt maturities extended and a 1% interest rate paid to creditors.

An article tackling the oft-debated issue of standardization in Islamic finance provides a very interesting view on the issue and what the current issues raised by tawarruq and the TID v. Blom Bank case. Reuters adds a factbox about the regulation of Islamic finance globally.

PricewaterhouseCoopers raises the issue, likely to confront Asian issuers of sukuk, about whether the illiquidity (and possible fluctuations) in their currencies will hamper the development of their Islamic finance appeal outside of the region. The issue has been confronted to some degree with Indonesia's dollar-denominated global sukuk issue last year and talk about a 10-year Malaysian dollar-denominated sukuk. There should remain a focus on developing domestic markets for Islamic finance, particularly within Indonesia where Islamic finance remains less developed. However, the internationalization of Islamic finance within Southeast Asia (and potentially South Korea, Japan and China) will strengthen the industry as a whole by providing additional geographical diversification for investors in dollar (and euro and pound and yen) denominated sukuk.

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