April 2010
In the Islamic capital and money market, Sukuk has emerged as a very important instrument over the past decade, not only in the Muslim world but also in the global markets. Isla MacFarlane looks at the key findings of a new report from the IIFM, which studies the mix between the Islamic principles on which the issued Sukuk were based.
The IIFM's study looks at the mix between issuers of international Sukuk, i.e. sovereign, quasi-sovereign and corporate. The share of corporate issuers was down from over 90 per cent in 2005 to over 70 per cent in 2007. The shift towards sovereign and quasi-sovereign Sukuk continued in mid-2008 to 2009. The IIFM said that it believes the trend will continue, as due to the global credit crunch funds will fly towards safe heavens.
According to the IIFM, the UAE has emerged as the leader in international Sukuk issuance by volume as of 30 June 2009, comprising of 55 per cent of the total issued value and also owing to its credit eight out of 10 of the largest Sukuk issues in the history of the market. As far as the domestic market is concerned, the report named Malaysia as the clear leader in terms of volume as well as value. It is also the world's largest Sukuk market. The Malaysian domestic market is $68 billion in size, a whopping 67 per cent of the total global domestic Sukuk market and in excess of 50 per cent of the entire global Sukuk market.
As against this, the GCC domestic Sukuk market is only $16 billion, miniscule compared to Malaysia and half of its own international counterpart, which is about $29 billion in size as of 30 June 2009. Bahrain has been the most active market within the GCC region, and was also the first Government in the GCC to use Sukuk as one of its primary tools for raising finance. Despite having 77 issuances to its credit between 2002 and 2009 was, the size of the current Bahraini market as of 30 June 2009 only $1.5 billion as the average size of most Sukuk has been small. A little over $1 billion out of this was raised in the form of nine three to five year Sukuk and one 10 year Sukuk, while the rest of the $1.2 billion was raised through short-term Ijarah and Salam Sukuk with an average size of $17 million and maturities ranging from three months to 15 months. All domestic Sukuk from Bahrain have been sovereign.
Outside of Bahrain, even though the rest of the countries in the GCC have been relatively less active in the local currency based domestic market, there have been some large sized issues from Saudi Arabia and UAE and the two of them claim over 85 per cent of the GCC domestic issuance, even though the number of their issues by volume fall way short of Bahrain and even most of their Asian counterparts. Saudi Arabia and the UAE have had a mix of sovereign, quasi-sovereign and corporate Sukuk while the only domestic Sukuk from Qatar has been issued by a corporate.
Asia, Indonesia, Singapore and Pakistan have been early entrants. Indonesia tapped the domestic Sukuk market in November 2002 and until August 2008 all the issues were corporate or quasi-sovereign, having a small average size. In August 2008, however, the Government of Indonesia entered the market with long-term Sukuk Al Ijarah issuances worth equivalent $295.4 million and $216.0 million respectively. Until June 2009, Indonesia had already issued domestic retail sovereign Sukuk worth $467 million, as well as an international sovereign Sukuk of $650 million, a signal that the Sukuk market is going to see another major player in the years to come, according to the IIFM.The report noted that, interestingly, some players in the domestic Sukuk market have never entered the international Sukuk market, namely, Brunei Darussalam, Gambia, the US, Germany and Singapore.
Among the more recent issues outside of Malaysia are the $1.3 billion quasi-sovereign Sukuk by Saudi Electricity issued in June 2009, the $200 million corporate Sukuk by Dar Al Arkan in Saudi Arabia issued in May 2009, the $192 million equivalent in March 2009 by the Government of Pakistan's three year Ijarah Sukuk (GIS Series), a number of short-term Sukuk Al Salam and Sukuk Al Ijarah issued by the Government of Bahrain and the Government of Brunei's short-term Sukuk Series.
Total global Sukuk issuance increased from a size of just over $1 billion towards the end of 2001 to $136 billion as of 30 June 2009, a compounded annual average growth rate (or CAGR) of 88 per cent. The GCC has been more inclined towards international issues while Malaysia has been more active in its domestic market.
According to the IIFM, domestic issuances form a much higher percentage of the total global Sukuk market (74 per cent) than international issues (26 per cent) as of 30 June 2009 with a broad regional break-up.
Growth
While the global Sukuk market grew at a CAGR of 88 per cent between 2001 and June 2009, the international Sukuk market has grown faster, at a CAGR of 106.8 per cent.
However, during the second half of 2009, the market again became inactive in terms of primary market issuances mainly due to credit issues and also due to the lingering issues with respect to troubled Sukuk such as the Golden Belt Sukuk, Investment Dar Sukuk, Maple Leaf Sukuk and East Cameron Sukuk. Moreover, the market had been nervous with respect to Nakheel Sukuk's repayment of $3.52 billion as initially announced on 25 November 2009. However, this was eventually paid on time, proving to be a positive event.
The troubled Investment Dar Sukuk is understood to be currently being restructured and, according to the IIFM, this could be the first instance of a restructuring of a Sukuk. Considering market requirements, recovering world economies and the appetite for quality credit, the IIFM said that the primary market is anticipated to pick-up but there could be a longer time lag now and it may happen after 2010.
The report said that Ijarah is clearly the structure of choice in the Islamic Sukuk market. The first few Sukuk issued in the international market had all been Ijarah-based and it was the dominant structure until 2005 when the first Musharaka-based Sukuk, the DMCC Gold Sukuk, was issued. After that, participatory structures such as Musharaka, Mudarabah and exchangeable trusts picked up pace quickly and even outstripped Ijarah for the years 2006 and 2007.
The report explained that Ijarah has come back into favour since the issuance of the Fatwa from the AAOIFI in February 2008, declaring unacceptable the purchase undertaking that was being employed in all participatory structures to sort of guarantee the principal value at redemption.
The report showed that, so far, the bulk of the issues in the international Sukuk market have been from corporate issuers. Fifty six per cent of the issues until June 30 2009 had been from corporate issuers. In 2008 and the half year 2009 however, the trend seems to have reversed itself although one cannot be too sure because a total of seven issues only came to the market during that period. Only two of the seven issues were from corporates, three from governments and two from quasi-sovereign entities. Due to the credit crunch, corporates entities were understandably wary of raising money through the Sukuk market and investors also had an appetite only for safer bets such as sovereign and high quality issues.
Among the sovereign issues during the life of the market, the highest number of issues - five - came from the UAE, three from Bahrain, and one each from Qatar, Malaysia, Pakistan and Indonesia.
The report explained that the Sukuk market is just a decade old at present and most of the innovations in terms of new structures or a combination of structures have taken place in the last eight years. 2009 saw a default likely-hood in at least three Sukuk, namely, the Saad Group Golden Belt Sukuk - the only Manfa'a-based Sukuk in the international market, the East Cameron Gas Company Sukuk, and the Kuwaiti Investment Dar Sukuk.
The three defaults have brought to light once again the problem pointed out first by the AAOIFI Board in February 2008, namely, the discrepancy between Shari'ah contracts and the governing law of the Sukuk in executing and interpreting the transfer of assets to the Sukuk holders. The IIFM explained that, at the time of default, the investors of the defaulted Sukuk found themselves without recourse to the so-called Trust assets under the governing law and therefore were being treated just like most sub-ordinated creditors, even though under Shari'ah guidelines, they must have had full recourse to the trust assets and should have had the right to liquidate the same in order to recover their investments.
The Saad Group, one of the defaulted Sukuk issuers, has asked its Sukuk holders to vote on dissolving the Sukuk, hence triggering a dissolution event, which could be the first step in Sukuk-holders claiming their money back from the group.The IIFM explained how the credit crunch and the tightening of the liquidity position of most issuers led to two other new developments. The report highlighted an instance when an issuer, Dubai Islamic Bank, exercised its call option and called back a portion of its Sukuk through a $200 million cash tender offer at 88 per cent of its face value. The offer was not well received though and only $83 million was actually bought back. Similarly, Dubai's Nakheel Properties initially indicated the revision of payment terms but eventually the Sukuk was redeemed on the due date, hence the market is yet to see how the revision of the Sukuk payments term will actually take place.
The report also talked about the implications of the AAOIFI Shari'ah board ruling: the AAOIFI Board met in early 2008 in order to deliberate upon certain aspects of the Sukuk structures which had gained popularity in the Sukuk market. The Board came up with a few milestone decisions which required major changes in the way standard forms of contracts were being drawn. AAOIFI observed certain flawed practices which rendered most partnerships or profit and loss sharing-based Sukuk as non-Shari'ah -compliant, although the Board decided to enforce its ruling for new Sukuk issues only.
The AAOIFI Board declared some aspects of the partnership-based structures that were being used in the market until early 2008 as unacceptable, especially as far as the pricing under the 'Purchase Undertaking' was concerned.
While the number of issues declined drastically thereafter, most likely due to the credit crunch, there was one Musharaka-based Sukuk that was issued by Gulf Holding Company based in Bahrain. The issue seems to comply with the new injunctions provided by the AAOIFI Board and is therefore totally new to the market.
The IIFM concluded through its research that Sukuk's unique characteristics have given it competitive advantages over other instruments in the Islamic capital market. The report concluded that the main function and objective of Sukuk issuance is to provide an alternative method of transactions in the capital and money market industry to Muslim investors as well as non-Muslims. To Muslim investor this will give them peace of mind, security confidence and concentration.
Finally, the report said that market conditions and the AAOIFI Shari'ah Board ruling had impacted the Musharaka and Mudarabah Sukuk issuance. Nevertheless, the IIFM are of the view that the acceptance and growth of Sukuk is expected to continue, which will necessitate continued improvement in many of its aspects.
© Islamic Business and Finance 2010
In the Islamic capital and money market, Sukuk has emerged as a very important instrument over the past decade, not only in the Muslim world but also in the global markets. Isla MacFarlane looks at the key findings of a new report from the IIFM, which studies the mix between the Islamic principles on which the issued Sukuk were based.
The IIFM's study looks at the mix between issuers of international Sukuk, i.e. sovereign, quasi-sovereign and corporate. The share of corporate issuers was down from over 90 per cent in 2005 to over 70 per cent in 2007. The shift towards sovereign and quasi-sovereign Sukuk continued in mid-2008 to 2009. The IIFM said that it believes the trend will continue, as due to the global credit crunch funds will fly towards safe heavens.
According to the IIFM, the UAE has emerged as the leader in international Sukuk issuance by volume as of 30 June 2009, comprising of 55 per cent of the total issued value and also owing to its credit eight out of 10 of the largest Sukuk issues in the history of the market. As far as the domestic market is concerned, the report named Malaysia as the clear leader in terms of volume as well as value. It is also the world's largest Sukuk market. The Malaysian domestic market is $68 billion in size, a whopping 67 per cent of the total global domestic Sukuk market and in excess of 50 per cent of the entire global Sukuk market.
As against this, the GCC domestic Sukuk market is only $16 billion, miniscule compared to Malaysia and half of its own international counterpart, which is about $29 billion in size as of 30 June 2009. Bahrain has been the most active market within the GCC region, and was also the first Government in the GCC to use Sukuk as one of its primary tools for raising finance. Despite having 77 issuances to its credit between 2002 and 2009 was, the size of the current Bahraini market as of 30 June 2009 only $1.5 billion as the average size of most Sukuk has been small. A little over $1 billion out of this was raised in the form of nine three to five year Sukuk and one 10 year Sukuk, while the rest of the $1.2 billion was raised through short-term Ijarah and Salam Sukuk with an average size of $17 million and maturities ranging from three months to 15 months. All domestic Sukuk from Bahrain have been sovereign.
Outside of Bahrain, even though the rest of the countries in the GCC have been relatively less active in the local currency based domestic market, there have been some large sized issues from Saudi Arabia and UAE and the two of them claim over 85 per cent of the GCC domestic issuance, even though the number of their issues by volume fall way short of Bahrain and even most of their Asian counterparts. Saudi Arabia and the UAE have had a mix of sovereign, quasi-sovereign and corporate Sukuk while the only domestic Sukuk from Qatar has been issued by a corporate.
Asia, Indonesia, Singapore and Pakistan have been early entrants. Indonesia tapped the domestic Sukuk market in November 2002 and until August 2008 all the issues were corporate or quasi-sovereign, having a small average size. In August 2008, however, the Government of Indonesia entered the market with long-term Sukuk Al Ijarah issuances worth equivalent $295.4 million and $216.0 million respectively. Until June 2009, Indonesia had already issued domestic retail sovereign Sukuk worth $467 million, as well as an international sovereign Sukuk of $650 million, a signal that the Sukuk market is going to see another major player in the years to come, according to the IIFM.The report noted that, interestingly, some players in the domestic Sukuk market have never entered the international Sukuk market, namely, Brunei Darussalam, Gambia, the US, Germany and Singapore.
Among the more recent issues outside of Malaysia are the $1.3 billion quasi-sovereign Sukuk by Saudi Electricity issued in June 2009, the $200 million corporate Sukuk by Dar Al Arkan in Saudi Arabia issued in May 2009, the $192 million equivalent in March 2009 by the Government of Pakistan's three year Ijarah Sukuk (GIS Series), a number of short-term Sukuk Al Salam and Sukuk Al Ijarah issued by the Government of Bahrain and the Government of Brunei's short-term Sukuk Series.
Total global Sukuk issuance increased from a size of just over $1 billion towards the end of 2001 to $136 billion as of 30 June 2009, a compounded annual average growth rate (or CAGR) of 88 per cent. The GCC has been more inclined towards international issues while Malaysia has been more active in its domestic market.
According to the IIFM, domestic issuances form a much higher percentage of the total global Sukuk market (74 per cent) than international issues (26 per cent) as of 30 June 2009 with a broad regional break-up.
Growth
While the global Sukuk market grew at a CAGR of 88 per cent between 2001 and June 2009, the international Sukuk market has grown faster, at a CAGR of 106.8 per cent.
However, during the second half of 2009, the market again became inactive in terms of primary market issuances mainly due to credit issues and also due to the lingering issues with respect to troubled Sukuk such as the Golden Belt Sukuk, Investment Dar Sukuk, Maple Leaf Sukuk and East Cameron Sukuk. Moreover, the market had been nervous with respect to Nakheel Sukuk's repayment of $3.52 billion as initially announced on 25 November 2009. However, this was eventually paid on time, proving to be a positive event.
The troubled Investment Dar Sukuk is understood to be currently being restructured and, according to the IIFM, this could be the first instance of a restructuring of a Sukuk. Considering market requirements, recovering world economies and the appetite for quality credit, the IIFM said that the primary market is anticipated to pick-up but there could be a longer time lag now and it may happen after 2010.
The report said that Ijarah is clearly the structure of choice in the Islamic Sukuk market. The first few Sukuk issued in the international market had all been Ijarah-based and it was the dominant structure until 2005 when the first Musharaka-based Sukuk, the DMCC Gold Sukuk, was issued. After that, participatory structures such as Musharaka, Mudarabah and exchangeable trusts picked up pace quickly and even outstripped Ijarah for the years 2006 and 2007.
The report explained that Ijarah has come back into favour since the issuance of the Fatwa from the AAOIFI in February 2008, declaring unacceptable the purchase undertaking that was being employed in all participatory structures to sort of guarantee the principal value at redemption.
The report showed that, so far, the bulk of the issues in the international Sukuk market have been from corporate issuers. Fifty six per cent of the issues until June 30 2009 had been from corporate issuers. In 2008 and the half year 2009 however, the trend seems to have reversed itself although one cannot be too sure because a total of seven issues only came to the market during that period. Only two of the seven issues were from corporates, three from governments and two from quasi-sovereign entities. Due to the credit crunch, corporates entities were understandably wary of raising money through the Sukuk market and investors also had an appetite only for safer bets such as sovereign and high quality issues.
Among the sovereign issues during the life of the market, the highest number of issues - five - came from the UAE, three from Bahrain, and one each from Qatar, Malaysia, Pakistan and Indonesia.
The report explained that the Sukuk market is just a decade old at present and most of the innovations in terms of new structures or a combination of structures have taken place in the last eight years. 2009 saw a default likely-hood in at least three Sukuk, namely, the Saad Group Golden Belt Sukuk - the only Manfa'a-based Sukuk in the international market, the East Cameron Gas Company Sukuk, and the Kuwaiti Investment Dar Sukuk.
The three defaults have brought to light once again the problem pointed out first by the AAOIFI Board in February 2008, namely, the discrepancy between Shari'ah contracts and the governing law of the Sukuk in executing and interpreting the transfer of assets to the Sukuk holders. The IIFM explained that, at the time of default, the investors of the defaulted Sukuk found themselves without recourse to the so-called Trust assets under the governing law and therefore were being treated just like most sub-ordinated creditors, even though under Shari'ah guidelines, they must have had full recourse to the trust assets and should have had the right to liquidate the same in order to recover their investments.
The Saad Group, one of the defaulted Sukuk issuers, has asked its Sukuk holders to vote on dissolving the Sukuk, hence triggering a dissolution event, which could be the first step in Sukuk-holders claiming their money back from the group.The IIFM explained how the credit crunch and the tightening of the liquidity position of most issuers led to two other new developments. The report highlighted an instance when an issuer, Dubai Islamic Bank, exercised its call option and called back a portion of its Sukuk through a $200 million cash tender offer at 88 per cent of its face value. The offer was not well received though and only $83 million was actually bought back. Similarly, Dubai's Nakheel Properties initially indicated the revision of payment terms but eventually the Sukuk was redeemed on the due date, hence the market is yet to see how the revision of the Sukuk payments term will actually take place.
The report also talked about the implications of the AAOIFI Shari'ah board ruling: the AAOIFI Board met in early 2008 in order to deliberate upon certain aspects of the Sukuk structures which had gained popularity in the Sukuk market. The Board came up with a few milestone decisions which required major changes in the way standard forms of contracts were being drawn. AAOIFI observed certain flawed practices which rendered most partnerships or profit and loss sharing-based Sukuk as non-Shari'ah -compliant, although the Board decided to enforce its ruling for new Sukuk issues only.
The AAOIFI Board declared some aspects of the partnership-based structures that were being used in the market until early 2008 as unacceptable, especially as far as the pricing under the 'Purchase Undertaking' was concerned.
While the number of issues declined drastically thereafter, most likely due to the credit crunch, there was one Musharaka-based Sukuk that was issued by Gulf Holding Company based in Bahrain. The issue seems to comply with the new injunctions provided by the AAOIFI Board and is therefore totally new to the market.
The IIFM concluded through its research that Sukuk's unique characteristics have given it competitive advantages over other instruments in the Islamic capital market. The report concluded that the main function and objective of Sukuk issuance is to provide an alternative method of transactions in the capital and money market industry to Muslim investors as well as non-Muslims. To Muslim investor this will give them peace of mind, security confidence and concentration.
Finally, the report said that market conditions and the AAOIFI Shari'ah Board ruling had impacted the Musharaka and Mudarabah Sukuk issuance. Nevertheless, the IIFM are of the view that the acceptance and growth of Sukuk is expected to continue, which will necessitate continued improvement in many of its aspects.
© Islamic Business and Finance 2010
