GCC sukuk markets slow to recover, new AAOIFI rules on Shari'ah scholars may be coming

The headline is promising: "GCC bond and sukuk market bounce-back in Q2". The article--which reflects data from National Commercial Bank in Saudi Arabia--continues to show data that supports continued weakness in sukuk markets in the GCC (particularly compared to Asia). After a rosy headline of a bounce-back, the press release describes that "the primary sukuk market also picked up, lead by sovereign issuances, and reached a total value of $3.4bn, a significant rise over the same period last year." (emphasis added) This type of comparison--regardless of the data being reported--is relatively easy to make at the current time because one year ago, the global economy was just exiting a severe financial crisis. Reading further, "Sovereign sukuk issuance totaled $1.5bn during the quarter, whereas activity proved much more lackluster in the corporate sukuk space with the notable exception of a landmark issue by Saudi Electric Company". (emphasis added). The press release quantifies this weakness. There were eight sukuk issues from the GCC region in the second quarter of 2010, seven of which ($1.5 billion worth) were issued by sovereigns (Qatar and Bahrain), which leaves only the Saudi Electric Company sukuk from the corporate space (making up the $1.9 billion remainder). The details of the press release confirm that the market for sukuk--at least in the GCC--is still open primarily to governments. The corporate sector has not returned in the wake of the credit crisis, which saw defaults by Saad and Algosaibi, The Investment Dar, International Investment Group and the near-default of Nakheel increase uncertainty about sukuk. I would expect the third quarter sukuk issuance to be similarly slim, but it will be interesting to see what deals currently in the pipeline are brought to market after Ramadan.

Bloomberg is reporting that the Secretary General of AAOIFI, Mohamad Nedal Alchaar, said that the body is considering placing rules on Shari'ah scholars to minimize potential conflicts of interest. The rules may limit the number of boards on which a scholar may sit and may also limit the scholar's ability to have investments in those institutions as well. It will be interesting to see whether there is push back, both from scholars, but especially from Islamic financial institutions. My expectation is that the financial institutions--particularly the mid-size ones--will complain (in some cases validly) that the limitation on Shari'ah scholar's participation on multiple boards will harm them because there is a shortage of well known scholars and the multi-national financial institutions will be able to draw the most recognizable scholars. This is probably a valid concern (depending on how low the bar is set as far as the maximum number of boards each scholar can sit on). In the longer-term, it will be beneficial by helping younger scholars become more well recognized, but there will be a cost in the interim where the mid-sized institutions that have thus far been able to have well regarded Shari'ah boards may get priced out of their services by multinational banks. But until there is a firm proposal on the table from AAOIFI, this is just speculation.

Other News

• Falling yields on sukuk issued by Malaysia and Indonesia may be the result of their rising currencies against the US dollar which has attracted foreign investors, reports Bloomberg.
  
• Cagamas issued RM230 million ($72.8 million) in three-year, variable rate commodity murabaha sukuk.
  
• There is a good article in Arab News about a conference held at the George Washington Law School. The conference featured Frank Vogel, Yusuf DeLorenzo, Umar Moghul, Aamir Rehman and Ibrahim Warde.
  
• Deutsche Bank's Saudi-joint-venture Deutsche Gulf Finance launched its Islamic mortgage product that offers home financing for up to 30 years, according to a press release.
  
• A Malaysian expressway company is planning to issue new sukuk to redeem their outstanding sukuk because the tolls will be insufficient to cover the first repayments later this year.
  
• Indonesia sold 2.855 trillion rupiah($319 million) in 4-year sukuk to the government's Islamic Haj Fund. The planned global sukuk sale was cancelled because the deficit is smaller than expected and the government had trouble attracting investors at yields it would accept. The illiquidity of the sukuk were cited as the reason for higher yields.
  
• Qatar Islamic Bank (which owns Asian Finance Bank in Malaysia) is reportedly searching for a partner to expand into Indonesia. There have been quite a few Malaysian Islamic banks that recently announced interest in or completed acquisitions to enter the Indonesian market.