Wednesday, December 12, 2012

IILM ready for maiden sukuk, but it should get ready to issue a lot more

The International Islamic Liquidity Management Corp (IILM) appears close to issuing its first sukuk for between $300 - $500 million early next year, with the issuance eventually reaching $2 billion per year.  For all the need for such a relatively low risk sukuk for banks to hold and be able to trade into a liquid market to manage liquidity, the long delay since it was established in October 2010 is disappointing and perhaps some of that delay is due to internal challenges resulting in the departure of the CEO, which has yet to be fully explained. 

One thing that I noticed when reading the plans for $2 billion in annual issuance from the IILM once it ramps up to full volume is how small the amount seems now compared to when the IILM was first announced. And the market has changed since 2010 when it was announced.  Issuance that year worldwide was just above $50 billion while it is on pace for well over $120 billion in 2012 once the year comes to an end.

Sure, it will make a difference to have $2 billion in relatively safe sukuk issued by a multilateral institution.  But with the demand for the latest sukuk from ADIB (a $500 million sukuk that was increased to $1 billion after receiving $15 billion in orders), there is clearly a lot of excess demand for sukuk and maybe the IILM should upsize its issuance to $1 billion per issuance, several times a year (maybe doubling or more its annual issuance).

However, this is likely to be difficult because they have been working on the assumption that issuance would be around $2 billion per year and have to find assets from IILM member countries to back the sukuk issuance.  With the delay already having taken place, it is probably not palatable to anyone involved to go back to the drawing board on any issuance.  And it would probably be a mistake to delay further the issuance by IILM.

However, the changed market circumstances, where issuance is expected to reach $292 billion in 2016, makes the IILM's first order of business once it gets issuance underway to find additional assets to increase the capability for new issuance now, starting with a goal of $4 billion per year and probably looking to increase its capacity as much as it can in case the projections are accurate for the sukuk industry's growth trajectory over the next 4 years.  If the overall sukuk markets jumps by another 1.5 times in that period, the IILM sukuk issuance should at least keep pace, and that puts a target for them of having capacity to issue $10 billion a year by 2016. 

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