IFSB Seminar on Islamic Capital Markets: Supporting Development through Sukuk: Prospects and Initiatives

22 April 2016 Kuala Lumpur - The Islamic Financial Services Board (IFSB) has successfully organised an IFSB Seminar on Islamic Capital Market themed, Supporting Development through Sukuk: Prospects and Initiatives on 10 April 2016 in Cairo, Egypt. This Seminar was held as part of the IFSB Annual Meetings and Side Events 2016, hosted by the Central Bank of Egypt. The Seminar was also held in collab

22 April 2016
Kuala Lumpur - The Islamic Financial Services Board (IFSB) has successfully organised an IFSB Seminar on Islamic Capital Market themed, Supporting Development through Sukuk: Prospects and Initiatives on 10 April 2016 in Cairo, Egypt. This Seminar was held as part of the IFSB Annual Meetings and Side Events 2016, hosted by the Central Bank of Egypt. The Seminar was also held in collaboration with the Islamic Development Bank.

The one-day seminar provided an interactive environment enabling speakers and participants to explore the prospective role of Sukukin social and economic development.

In his Keynote Address, Mr Sherif S. Samy, Chairman, Egyptian Financial Supervisory Authority, highlighted the importance of appropriate legal framework to support the issuance of Sukuk.  He observed that the availability of suitable guarantees play as an important role in the issuance of Sukuk and noted that the new Egyptian law on Sukuk provides the flexibility to use movable goods as a guarantee for the issuance of Shariah-compliant securities. Mr Samy also emphasised the need for utilising Sukuk as a source of funding for social and infrastructure financing. For example, he noted that Sukuk can provide an alternative source of funding for the microfinance companies, which are considered as an important vehicle to reduce poverty and spur employment. Similarly, Sukuk has a great potential for boosting the infrastructure in Egypt in order to finance its ports, highways and other major projects.

Mr Gamal Mohamed Negm, Deputy Governor of the Central Bank of Egypt, in his Welcoming Remarks, stated that "many new business opportunities could be found in Sukuk market as an instrument of financing government budget deficits and infrastructure projects". He outlined a number of challenges that impede the growth of this sector, which include, i) unavailability of appropriate regulations and laws, ii) conflicting Shariah opinions on Sukuk tradability and iii) use of credit enhancements as well as demand for premium pricing on new Sukuk issuances. He underlined that clarity of legal framework and regulations regarding Sukuk resolution in default cases could facilitate more international Sukuk issuances. Mr Negm also stressed the need for "sustainable re-issuances ofSukuk upon maturity by governments", which he noted would enable Islamic financial institutions to manage their liquidity more effectively. He further observed that increased budget deficits and regulatory reforms such as Basel III provide an opportunity for increased Sukuk issuances in 2016.

In his Opening Remarks, Mr. Jaseem Ahmed, Secretary-General of the IFSB, stated that i) financing social infrastructure projects, such as education, investments on climate change, the Green Economy, and international immunisations programmes, ii) issuance of short-term Sukuk for liquidity management and iii) expanding set of jurisdictions seeking to integrate Sukuk into their public financing programmes are positive recent developments in the Sukuk market. He pointed out that jurisdictions impacted by low commodity prices may diversify their funding base by issuing Sukuk. Mr. Ahmed also emphasised that the absence of a yield curve remains a problem, combined with a thin and infrequent secondary market, and the cost of Sukuk issuances in some countries are higher as compared to bond issuances. He also underlined that there is a need for international standards on issues such as transparency and disclosure.  

The first session of the Seminar, titled Development of the Sukuk Sector: Legal and Regulatory Considerations was chaired by Mr. Ali Hamdan Al Raisi, Executive Vice President of the Central Bank of Oman. The speakers for this session were Mr. Ahmadou Al Aminou Lo, Director General, Central Bank of West African States, Dr. Dadang Muljawan, Deputy Director, Islamic Banking Directorate, Bank Indonesia and Dr. Shahinaz Rashad Abdellatif, Executive Director, Egyptian Financial Supervisory Authority (EFSA).

The speakers shared the development of the legal and regulatory framework for Sukuk sector in their jurisdictions and new initiatives being taken to further develop this market. Mr Al Raisi commented that Sukuk served as an important instrument for Islamic banks to raise capital in recent years. He also noted that the use of Sukuk, supported by suitable incentives and appropriate legal and regulatory environment, has a wide potential to meet the financing needs of corporations and SMEs. The first speaker, Dr. Dadang shared the sovereign and infrastructure Sukuk issuance experience of Indonesia since 2008. He noted that certainty in the legal environment, diversified portfolio of Sukuk, strict compliance with Shariah principles, and a variety of instruments for a wide investor base are the factors that have supported the development of the Sukuk sector in Indonesia. Meanwhile, integrating the Sukuk issuance programme with the government's fiscal requirements was the most challenging step. Mr. Ahmadou underlined that securitisation, taxation and insolvency are the three main considerations in issuing Sukuk in the West African Monetary Union (WAMU) legal framework. He proposed that resolution of legal constraints with respect to issuance of Sukuk required a pragmatic approach by making provisions in the existing securities law rather than issuing a separate law in the WAMU. Dr Shahinaz shared the main highlights from the EFSA's New SukukLaw Amendment. She also outlined that Islamic capital market activities can be adequately regulated within the framework of the conventional market by securing a level playing field between these two markets.

The second session, themed,Sukuk for Budgetary and Financial Sector Support: Structures and Countrywas chaired by Mr. Ahmed Al Gebali, Director, Islamic Financial Services Department, Islamic Development Bank Group. The panelists for this session were Mr. Neil Miller, Partner and Global Head of Islamic Finance, Linklaters LLP, United Arab Emirates and Ms. Nevine Loutfy, Managing Director & Chief Executive Officer, Abu Dhabi Islamic Bank, Egypt.

Mr. Ahmed Al Gebali delineated a number of challenges in the issuance of sovereign Sukuk, which included: developing appropriate legal, regulatory, supervisory and Shariah governance framework; avoiding the replication of conventional products; and aligning theSukuk with the social objectives of governments. He then proposed the Sovereign Finance Corporation (SFC) model as a solution to these challenges. The model provides a flexible option to sovereigns to meet their financing needs for a variety of investors and multiple Shariah-compliant mechanisms. He also emphasised that the industry needs to move to sustainable, efficient and credible long-term solutions in Sukuk instead of limiting itself to short-term solutions. The first panelist, Ms. Nevine Loutfy, commented that the real problem with the Sukuk issuance is the perception regarding to generic Sukuk as it was stigmatised in the past. She also added that the clarity on Shariah compliance is of utter importance for issuing Sukuk. Mr. Neil Miller highlighted that the currentSukuk structures are criticised for replicating the conventional bonds and the new Sukuk structures should satisfy needs of the customers by offering flexible instruments. He also shared with the audience salient features of proposed SFC structure, presented by Mr. Al Gebali earlier in the session.

Sukuk for Infrastructure Financing: Prospects and Case Studies was the third session of the Seminar. The chairperson for this session was Mr. Zainal Izlan Zainal Abidin, Executive Director, Islamic Capital Market, Securities Commission Malaysia with distinguished speakers including Dr. Mohamed Damak, Director, Global Head of Islamic Finance, Standard & Poor's Ratings Services. UAE and Mr. Ashraf Mohamed, Assistant General Counsel, Asian Development Bank.

Mr Zainal Izlan started the session by highlighting that both Islamic finance and infrastructure financing are two new areas for the developing countries. Dr Damak shared the prospects for the Sukuk market in 2016 and highlighted that while some revision in Federal Reserve's policy stance, drop in oil prices and complexity related to Sukuk issuance could lead to a subdued Sukuk market activity, drop in commodity prices, demand by multilateral issuers and approaching deadline for implementing Basel III standards stand as prospective upside factors. He underlined that standardisation in documentation, direct issuance by the governments and resorting to traditional structures would make Sukuk a more effective way for infrastructure financing. Mr Ashraf Mohamed focused on infrastructure financing in Asia in his presentation. He underlined that growing population and accelerating urbanisation in Asia has given rise to a big infrastructure deficit mainly in energy, transportation, telecommunications and sanitation. He also added that the after-effects of the Global Financial Crisis, limited institutional capacity, legal environment and weak enforceability are responsible for the ongoing deficit. He then highlighted that Sukuk can be a good alternative financing tool in closing the infrastructure deficit in the region. Having said that, he stressed that Shar?`ah compliance risk, liquidity management needs and lack of human capital impede the potential ofSukuk for infrastructure financing.

The final session of the Seminar, a panel discussion on Building Synergies for Sukuk Issuances, was chaired by Mr. Daud Vicary Abdullah, President and Chief Executive Officer, INCEIF and the speakers were Mr. Andy Cairns, Managing Director, National Bank of Abu Dhabi, UAE, Mr. Kemal Rizadi Arbi, Expert, Capital Market Authority, Oman and Professor Dr. Ashraf Md. Hashim, Chief Executive Officer, ISRA Consultancy Sdn. Bhd., International Shariah Research Academy for Islamic Finance, Malaysia.

Mr. Daud Vicary Abdullah shared his thoughts on building synergies in Sukuk issuances as a priority considering the current picture of the global economy, low oil prices and unresolved Shariah issues. He mentioned differences in Shariah opinions as an important source of uncertainty in the market. He proposed that greater sharing of information, such as via a globalFatwa database with open access, could help to reduce the uncertainties in the markets, harmonise perceived differences as well as support informed decision-making by investors. Mr. Andy Cairns stated that international clients desire optimisation in their portfolio of Sukuk and bonds but complexity of asset-based financing, documentation and legal costs impede having more access to Sukuk. He also added that Islamic banks are much price tolerant in Sukuk issuances due to the fact that they are not able to hold bonds as a substitute. This tolerance and flexibility can offset the complexity issues and higher cost. Prof. Ashraf Md. Hashim raised some important points in building synergy from Shariah point of view while highlighting that some pre-requirements for issuing Sukuk already secure an extra guarantee for the viability of Sukuk transactions. He highlighted that investor base for Sukuk, especially the base of institutional investors, should be widened. This can be done by converting some of the giant funds, such as Malaysia's Employment Provident Fund (EPF), into Shariah compliant business. Moreover, practicality of the Shariah decisions are important for the perception of Sukuk. Mr. Kemal Rizadi Arbi shared his experience from Oman's debut Sukuk issuance in 2015. He underlined that trust is the key factor to build the synergy in issuing Sukuk and regulators should play active role in easing collaboration between public and private players for securing trust in the market.

Delegates from among the IFSB member and non-member organisations - representatives from market players, regulatory bodies, international agencies - Shariah scholars as well as academia and other interested parties from the public attended this Seminar.

The IFSB's Annual Meetings and Side Events were held from 10-12 April 2016. Other than the Seminar on Islamic Capital Markets, a Public Lecture on Financial Policy and Stability, as well as the 13th Islamic Financial Stability Forum were also held on 11 and 12 April respectively.


About the Islamic Financial Services Board (IFSB)
The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets, and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research/educational institutions, and market players. The members of the IFSB comprise regulatory and supervisory authorities, international inter-governmental organisations, market players, professional firms and industry associations. For more information about the IFSB, please visit www.ifsb.org.

© Press Release 2016

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