The global Islamic financial community has recognized the innovative and development impact made by the Hashemite Kingdom of Jordan’s inaugural local currency Sukuk. At a lavish ceremony on February 28 2017 in Dubai, Jordan emerged as the winner of IFN “Sovereign Deal of the Year 2016” award. In addition to this global award, Jordan was a global runner-up for two award categories: “Ijarah & Sukuk Deal of the Year”. Since inception the Islamic Finance News (“IFN”) Awards have grown immensely and are recognized as the most prestigious, sought after awards by the Islamic finance industry.
The award came in recognition of the JOD34 million (US$47.9 million) 3.01% 5-year Sukuk that was closed in October 2016. The innovative deal was more than thrice oversubscribed. The pricing was also well inside Jordan’s bond curve, effectively lowering the cost of borrowing.
In its review of the transaction, IFN hailed the developmental impact of the deal and its expected ripple effect on the industry, as it "bears a number of unique features that may influence the evolution of the Islamic capital markets”. “Key innovations in the structure may lead to new developments in the global Sukuk market”, IFN added. IFN went on to say that the issuance has “brought about a potential seismic change in the Jordanian capital-raising landscape”. It has lowered the cost of borrowing by opening new niche market, developed the local currency debt market, initiated the government to use Sukuk to finance their future projects, and is encouraging utility companies to seek alternative funding from the newly created market instead of relying on the government.
The Islamic Corporation for the Development of the Private Sector (“ICD”), the private sector arm of the Jeddah-based Islamic Development Bank (“IDB”), acted as Transaction Technical Support and Advisor. The sovereign issuance is part of comprehensive joint-Technical Assistance Package provided by Japan International Cooperation Agency (JICA) and ICD. This partnership not only marked the Japanese entity’s entry into Islamic Finance, but also resulted in a successful debut Sukuk offering.
Developing the structure itself was a challenge. ICD had to develop a structure that revolves on the use of a partially completed building. The Shariah reservation, by the Jordanian scholars, was about questioning the economic benefit of leasing an asset that has not been fully completed. Having sought guidance from the IDB Group’s Shariah Committee, ICD advised that it is permissible to use such asset as the outcome will lead to finance the completion of the construction and hence achieving economic benefit to the public.
The challenge did not end there. The next hurdle came in the form of the country’s Leasing Law. The law indicates that the sale and leaseback structure, which is a commonly used Ijarah, is not allowed. To address this, the ICD led a working team to create the unique amortized Sukuk Ijarah, a first time in Jordan. With a purpose to aid development, the structure includes 10 instalment payments to investors in the form of principal repayments and profit amount. The note also has a weighted average life of 2.75 years lease.
The Sukuk was commended for bringing new concepts into an established market with the first ever use of a new method of subscription to adhere to the local Shariah requirements. The investors would subscribe to the deal based on an expected yield, not the final profit rate. After the closing of the transaction, investors will negotiate with government of Jordan on the final yield.
Another factor is that the rental stream is not based on a central bank benchmark, but the fair value of the rental payment. This led to the formation of an Expert Advisory Committee to conduct a study of the underlying asset and advise on the rental payment. The committee recommended the rate at 2.927% per year. To cover the operational expenses incurred by the Special Purpose Vehicle (SPV), a deduction from the periodic payments will take place. The deduction is subject to a ceiling.
The landmark transaction supported the financial inclusion of Jordan’s Islamic banks. After decades of being unable to invest excess liquidity, the Islamic banks were able for the first time to find a Shariah compliant instrument that meets their regulatory requirements. A Palestinian Islamic Bank subscribed to the Sukuk, hence accessing a liquidity management tool that is not available in the country’s domestic market. As for the investors, Jordan Dubai Islamic Bank, Jordan Islamic Bank and Islamic International Arab Bank secured 30% each; and Cairo Amman Bank on behalf of Al Safa Bank which is based in Palestine took up 9%.
Commenting on the achievement, Khaled Al Aboodi, CEO of the ICD said, “We are delighted with this coveted award, which show that the Islamic Finance industry continues to recognise our pioneering development work across our member countries’ Islamic debt capital markets”.
Watch the video on ICD_PS Channel YouTube to know more about the IFN Sukuk Award:
© Press Release 2017