Friday, May 13, 2011

A microcosm of the sukuk market

The sukuk market is often characterized as one marketplace with a number of companies tapping it for funding. However, in reality, the sukuk markets around the world are incredibly diverse and there are many local factors which affect issuance and many reasons for companies to decide to issue sukuk. Today, when reviewing the various news around the Islamic finance industry, several companies and government announced plans for sukuk (conditional on favorable market conditions). However, the diversity of the geographical spread and issuer type provide a microcosm of the "sukuk market".

The announcement that received the most attention was not a sukuk announcement at all, but the announcement at the IFSB summit in Luxembourg that the government there had put on hold their plans for a sukuk. In part, the reason why Luxembourg would be interested in a sukuk (although this was not ever announced formally) was to establish the Duchy as a gateway into Europe, primarily for funds, many of which are domiciled in Luxembourg as a way to enter the EU market. Luxembourg has also become more involved in the Islamic finance industry globally, being the only European country that is a member of the IFSB and the central bank governor Yves Mersch was appointed as the Deputy Chairman of the International Islamic Liquidity Management Corporation, which is working on liquidity management products for Islamic financial institutions. The official reason given for the delay was that with tax receipts improving, the government did not need the funds, but this announcement follows the indefinite postponement of a UK sovereign sukuk, which suggests that European governments may be cooling on the idea of being directly involved in the sukuk markets (as issuers).

In contrast, Qatar Islamic Bank and Sharjah Islamic Bank announced plans for sukuk in the remainder of the year. QIB said it planned on the sukuk issuance to reduce debt payments, while Sharjah Islamic Bank said the sukuk was <a href="planned to continue its growth. These two issues represent a different theme than the (perhaps temporarily) waning desire to enter the sukuk market on the part of European sovereigns. In contrast, they are more opportunistic, reflecting renewed confidence in the sukuk market in the stable countries in the GCC. Qatar has remained stable and is taking a lead in aiding the rebels in Libya in their continuing fight against Ghaddafi and has thus far avoided facing widespread protests in other Middle Eastern countries. Sharjah, one of the emirates in the UAE, has also seen stability so far and is likely benefiting from a reduction of the stigma on the UAE in the wake of the Dubai debt crisis in 2009 (which can indirectly be gauged by the fall in the yield on Dubai government sukuk and the upgrade on DP World's sukuk).

There is a new dichotomy in the GCC (in particular the smaller countries on the Persian Gulf) between those like the UAE and Qatar, which have remained stable and largely isolated from the Arab Spring, and those like Bahrain (where Saudi Arabia has sent troops) that are still facing protests. Kuwait, where sukuk issuance has picked up some is still dealing with several investment bank defaults on sukuk and so represents a third group. Despite the protest and violence in Bahrain, that country has not entirely withdrawn from the sukuk market, having recently issued a 5-year ijara sukuk in addition to the short-term ijara and salam sukuk. In addition, within the GCC region, the Islamic Development Bank remains a fairly regular issuer and is reported to be planning US Dollar sukuk (supported by its AAA credit rating).

Elsewhere, the sukuk market continues to move along its previous trajectory. Pakistan's government issued another sukuk to cover a portion of its large budget deficit and to provide an investment for the growing Islamic banking market in the country. This sukuk had the added twist of coming at a time when the government fears losing its military aid from the United States following the killing of Osama bin Laden in Abbottabad. Pakistan's government has issued sukuk fairly regularly, but has remained largely focused on its domestic market.

Malaysia, which along with Indonesia, have become countries of interest for global investors, have both been active or plan to be active in sukuk issuance. The latest sukuk from Malaysia is a corporate issuer, Ranhill, raising MYR 710 million ($236 million). The Malaysian sukuk market, in contrast to the GCC and most of the rest of the world has an active market with a much more regular issuance by corporates and government-related companies like Petronas (the government issued its last large sukuk form $1.25 billion in 2010 after close to a decade without a global sukuk). Malaysia has attracted investors because of its growing economy and strengthening Ringgit, which are somewhat exogenous to the sukuk market (Indonesia has seen inflows for similar reasons).

As this brief tour of recent sukuk announcements demonstrates, the sukuk market is largely determined by factors outside of the Islamic finance industry and is also influenced by regional factors that create divergence in terms of issuance. Just like the conventional financial markets (e.g. bond markets), the reasons why sukuk are issued has much more to do with the issuer, the country where the issuer and investors are located and historical factors around the stage of development of the country's Islamic finance industry than it does to with the growth in the global sukuk market as a whole.

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