Is Dominance of Sukuk Issuance Shifting to Saudi Arabia?

WHAT is the total volume of foreign currency sukuk issued in Saudi Arabia and Malaysia in Q1 2017? The figure for Saudi Arabia, my research shows, is US$13.75 billion (RM59.69 billion) comprising US$10.75 billion from three US dollar issuances by the Saudi Government, Islamic Development Bank and DAAR, the realty developer, and one issue in Saudi riyals (equivalent to US$3 billion) by Saudi Aramco, the world’s largest oil company.

In contrast, according to Securities Commission of Malaysia (SC) data, there were no foreign currency sovereign and corporate sukuk issued in Malaysia in 2017 to date.

The Finance Ministry of Malaysia, reportedly, is planning to issue an international sukuk this year. SC data shows there were six corporate ringgit sukuk issued in Malaysia in the first two months of 2017.

Is the dominance of sukuk issuance shifting from Kuala Lumpur to Saudi Arabia?

The defining development in April 2017 is the entry of Saudi Arabia as a sovereign issuer with a record debut US$9 billion sukuk, on the back of the US$3 billion maiden sukuk by Saudi Aramco. This, and other developments such as an escalated role by the International Monetary Fund (IMF) in the Islamic finance space and the Bank of England’s endorsement of a Wakalah-based central bank depository fund to help syariah-compliant banks in the UK, could be game changers for the development of the Islamic capital market (ICM).

The Saudi sovereign sukuk is the single largest US dollar sukuk to date and was oversubscribed to the tune of US$33 billion, indicating huge appetite for such certificates, which are as attractive to Western pension funds as they are to investors in the Muslim world.

Sukuk dominance for the short-to- medium term will continue to be out of Malaysia, whose Islamic financial architecture including capital market regulation and facilitation, and liquidity releasing secondary trading, is light years ahead of Saudi Arabia and other countries, and whose Malaysia International Islamic Finance (MIFC) platform until recently attracted a spate of foreign issuers from the GCC, Turkey and Japan to issue sukuk in the ringgit market.

It is the economic impact of the recent fall in crude oil prices and the volatility in the value of the ringgit against the US dollar that has temporarily dampened this development.

The size of the Malaysian ICM, according to SC, totalled RM1.692 trillion in 2016 accounting for 60 per cent of the total Malaysian capital market of RM2.84 trillion.

Total sukuk outstanding in 2016 was RM661.08 billion, which is 56.36 per cent of total bonds and sukuk outstanding.

Similarly, total sukuk (government and corporate) issuance amounted to RM129.45 billion in 2016, giving it a 53.81 per cent market share of total bond and sukuk market in Malaysia, which also accounts for 60 per cent of the total global sukuk market.

Malaysia should welcome the developments in Saudi Arabia. The business case is clear. Not only is there huge potential for cooperation, but Kuala Lumpur could also promote its sukuk architecture model as the universally preferred and proven choice. The world lacks high quality sukuk such as the sovereign Saudi one, which also qualify for inclusion in the High Quality Liquid Assets (HQLA) universe of the Basle III Liquidity Coverage Ratio standard. Investors are screaming for such papers to invest in.

Malaysia’s Employees Provident Fund (EPF), the public pension fund with assets in excess of RM700 billion, in January launched a dedicated Islamic pension fund, Simpanan Syariah, with a fund size of RM100 billion to be increased to RM150 billion in 2018.

EPF needs syariah-compliant assets to invest in under the above scheme and for asset allocation diversification purposes. The Saudi sukuk is music to the ears of EPF chief executive officer Datuk Shahril Ridza Ridzuan. It would also help if the Saudis open up direct investment by foreign accounts in their domestic sukuk.

The Saudi sukuk is also the only sukuk which includes a disclosure in the prospectus on credit risk retention requirements, to comply with the US Dodd-Frank Act, following its introduction by the US Congress after the 2008 financial crisis to reduce risk-taking.

This could be important for the further globalisation of sukuk in the US and Western markets.

Sukuk, as a fundraising instrument, is unique to Islamic finance, but its application as an alternative ethical financing tool is universal, irrespective of ethnicity or creed. Its importance as a potential infrastructure development and urban regeneration mode of financing has, in recent years, been recognised by the G20, IMF, World Bank, the International Finance Corporation (IFC) and the Basel Committee Banking Supervision.

Its proliferation is confined to issuers in traditional markets in Asia and the Middle East and North Africa region, with the odd sovereign issuances by the UK, Luxembourg and South Africa, and corporate ones by Goldman Sachs, HSBC, Nomura, General Electric and Tesco (in Malaysia). The World Bank and IFCG have also issued sukuk to fund projects in member countries.

It is one of the vagaries and mysteries of the contemporary Islamic finance industry that it has failed to unleash the power of sukuk as an exemplary financing instrument in the aftermath of the 2008 financial crisis.

The reasons are manifold, among others, lack of confidence of Muslim countries, poor economic governance and management, the dearth of public policy commitment to Islamic finance and sukuk, regulatory and legal framework gaps and deficits, and misguided asset allocation strategies.

Also, the fact that Islamic finance is still a nascent industry in its fifth decade, compared with the 200-year history of conventional finance.

Originally published on www.nst.com.my