The International Islamic Liquidity Management Corporation emerged from a period of silence to say it was 85% ready to issue between $300 and $500 million in US dollar ijara sukuk, backed by sovereign assets of its member countries. The sukuk are expected within "a matter of months" according to the IILM CEO Mahmoud AbuShamma.
It will not be a one-off sukuk, or as AbuShamma described: "It's not our mandate to issue one sukuk and go off on a holiday, we should be manufacturing a continuous supply of it". The plan is for up to $2 billion in issuance per year. This should be a minimum requirement because the IILM has spent the last 2 years preparing for issuance, a large part it describes as facing the "big challenge to ensure it complies with laws in all of the 12 countries in which its members are".
The distribution is expected to be through a dealer network, with up to 2 dealers per member country, and the dealers will be to "underwrite the issuance and create a secondary market". And that is the biggest challenge for the IILM. It will have to generate a sukuk that is both desirable for Islamic banks and also in sufficient supply to allow for secondary market activity. These to goals are, in some respect, pulling in different directions.
For the desirability, the IILM is targeting an area of the market that is not as well served by local central banks (highly-rated, US dollar issuance). And, the supply of $2 billion per year as a goal to meet demand may fall short. For example, through the third quarter of 2012, there had been $109 billion in sukuk issuance (per Zawya's Sukuk Quarterly Bulletin), and the pace will likely grow in 2013.
That means that the $2 billion per year will represent under 2% of the total market, and while the dealers should provide some liquidity to the issuance, nothing can stop the buyers of the sukuk from just holding onto their sukuk (particularly if there are delays in further issuance). That will drive up the scarcity value of IILM sukuk and lead to even higher levels of illiquidity.
The challenge to creating a liquid secondary market is based on whether there are sufficient assets that the members are willing to contribute to the IILM to use for new issuance at a high enough pace to meet market demand. It will also be interesting to see how they deal with sovereign immunity issues if the description in the Reuters article of an "asset-backed leasing structure" is accurate.
I look forward to seeing how the IILM's maiden sukuk issuance is received in the market, and to see whether a secondary market develops (and to see what maturities the IILM decides to issue). It could be an important development for the Islamic finance industry, if it is done well.