Monday, July 23, 2012

Kazakhstan's first sukuk and the potential public benefit from government sukuk issuance

The Development Bank of Kazakhstan (DBK) issued its first sukuk, the first for the country.  The sukuk, for MYR240 million ($76.6 million) was issued in Malaysia (where 82% of subscribers were pension funds who are facing a shortage in sukuk).  For a market new to Islamic finance, the issuance by a development bank may provide a good starting point for opening the market for other sukuk issuers because of the development bank's connection to the government

The DBK is part of the government, but will still have to navigate the country's rules for fixed income offerings, and the associated challenges (but likely not any difficulties with taxation).  This should focus the government's attention on making changes to its laws that would otherwise block sukuk, which will benefit private issuers, who would otherwise have to find ways to convince the government to change on their behalf, which is likely a challenging proposition in any country. 

In addition, there are few forms of intellectual property protection for financial instruments, so the sukuk structures used by the government should be able to be adopted by private issuers, benefiting from the extra cost the development bank will have to commit to issuing its own sukuk.  There is also likely to be additional information available for pricing a corporate sukuk if a government entity has already issued a sukuk: investors can use both the corporate issuer's conventional debt, the government's conventional debt and the government's sukuk pricing as guides and the more sources for this pricing are available, the greater the potential for corporate issuers to lower the additional spread it will have to pay for sukuk versus conventional debt.

This does create additional costs for the government when it issues its sukuk, but if the government is committed to increasing the opportunities for sukuk issuance in the country, as Kazakhstan's is based on its public statements, having the additional cost be borne by the government could be a boon for the development of both a sukuk market, as well as Islamic banks who are otherwise going to have to look abroad for government-issued assets to use to fill a portion of their balance sheet. 

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