Islamic bankers from all markets in the global Islamic finance industry have expressed their disappointment at the recent announcement by the Finance Minister Ibrahim Al-Assaf that the Kingdom had no plans to issue sovereign bonds — whether conventional or Islamic. “Government bonds are issued when there is a need for them. Thank God, lately there has been no need to issue bonds or sukuk,” he reportedly told Al Arabiya news channel.
A Saudi sukuk expert at a financial institutions in Jeddah said that the Kingdom had lost a great opportunity to show leadership in Islamic finance and to help stimulate the recovery of the sukuk market in the GCC countries.
The latest study published in September 2009 by Trowers & Hamlins, the London-based international law firm which has a well-established Islamic finance legal practice, says that the value of corporate conventional bonds issued in the Gulf Cooperation Council (GCC) countries has overtaken the issuance of corporate sukuk (Islamic bonds) for the first time. For the year ending June 31 2009, Gulf corporates issued $12.8 billion in conventional bonds compared to just $4.3 billion in sukuk. In fact, the value of conventional corporate bond issuance in the GCC increased year-on-year by 15 percent, whilst sukuk issuance fell 74 percent for the same period, said Trowers & Hamlins.
The depth of the impact of the global financial crisis and particular market idiosyncrasies of the Islamic capital and debt market is becoming clearer even as the crisis starts to recede and the sukuk market starts its recovery. Neale Downes, Regional Banking & Finance Partner in the Trowers & Hamlins Bahrain office, stressed that “the fact that conventional corporate bond issuances have overtaken corporate sukuk issuances by such a large margin is unprecedented in the relatively short history of the Gulf’s debt markets.” But he remains optimistic that the long-term future of sukuk as a corporate fund-raising instrument is established.
Similarly, the report published in August 2009 by Jadwa Investment, said that the Saudi sukuk market had grown considerably over the last few years and has the potential to become a major vehicle for raising finance for local corporates and utilities and an investment portfolio diversification for both local and foreign investors.
There are three countries in the world that should be the natural leaders of the global Islamic finance movement — each for its own reasons. These are Malaysia, because of the unparalleled proactiveness of successive governments in supporting and building the most advanced Islamic finance regulatory, legal and business frameworks; Saudi Arabia, with the largest pool of liquidity and the largest Islamic finance market in terms of assets and potential; and the UK because London is the world’s largest financial center and under the UK’s financial inclusion policy has instituted an enabling legislative framework which has facilitated the introduction of Islamic finance products such as mortgages, deposit and savings accounts, murabaha, ijara and sukuk. The UK indeed has a more entrenched Islamic finance regulatory framework than most Muslim countries.
Islamic bankers in Saudi Arabia agree that the Kingdom does not need to borrow as it has accumulated large reserves from crude exports underpinned by high oil prices. However, they stress the need for Saudi Arabia to establish a bond and sukuk yield curve in a bond market that is at best currently nascent. As such a debut sovereign sukuk issuance would have served to set a benchmark. Perhaps Riyadh should follow the lead of Kuala Lumpur and Singapore in its sukuk and bond issuance policy. The Malaysians issued their $600 million Malaysia Global Sukuk in 2002 not because the Malaysian Treasury needed the money for public borrowing purposes, but to set a benchmark for such sukuk issuances. Similarly, Singapore (a non-Muslim country) introduced its Reverse Enquiry sukuk earlier this year not because it needed the funds but to set a benchmark for Singapore sukuk issuances and to serve as an action of intent on behalf of the Singapore government’s policy of developing the island state into an international Islamic capital markets hub.
Another non-Muslim state Saxony Anhalt has also raised finance through a sovereign sukuk issuance, and Hong Kong, the UK, Korea, France and even Luxembourg are reportedly thinking of going down the same route. To date the only Muslim countries that have issued sovereign sukuk are Malaysia, Pakistan, Brunei, Indonesia, Bahrain and Qatar.
The biggest boost for the sukuk market would come from a Saudi sukuk issuance— to further give depth and legitimacy to the sovereign sukuk as a financing tool; and from a UK sukuk issuance — to pave the way for a Euro sukuk market akin to the role the Bank of England has played in developing the Eurobond market in the 1960s and 1970s. In June this year, the Saudi securities regulator, the Capital Markets Authority (CMA) launched an automated order-driven secondary exchange for the trading of conventional bonds and of Islamic securities (sukuk) on the Saudi Tadawul Stock Exchange. The CMA confirmed that it would allow the registration, issuance, trading and clearance of debt securities and sukuk on the Tadawul Stock Exchange. Till then, there was some unofficial trading of securities done on an over the counter (OTC) basis. While this is an important symbolic move, it won’t transform the Saudi sukuk market.
As the Jadwa Report stresses, this is just one step in a long process to enhance the debt capital market and its depth in the Kingdom. The Saudi regulatory authorities are keen for local banks and corporates to tap the Saudi capital market to raise funds for their expansion, working capital, balance sheet and refinancing purposes.
Saudi Arabia in its 2009 budget earmarked a project and infrastructure spend of over $400 billion. Not all this financing can possibly come from the budget or oil revenues. As such the current policy of not issuing a sukuk even for benchmark purposes is short-sighted in the least.
Similarly, secondary bond and sukuk trading has been very modest to date, according to the CMA. Islamic bankers stress that adding depth to the market through a critical mass of issuances is vital to elevate secondary trading to profitable and viable levels. Al-Assaf’s view is also contrary to that of Gov. Muhammed Al-Jasser of the Saudi Arabian Monetary Authority (SAMA), who is a very proactive supporter of Islamic finance.
Bankers believe that the following drivers would stimulate the sukuk market through supply from issuers and demand from investors, including institutional and quasi-sovereign ones such as GOSI, The Saudi Public Investment Fund and the Saudi Pension Fund. The role of the latter three which are liquidity rich, would increasingly be crucial to giving depth to the Saudi market.
The drivers include predicatability and portfolio diversification, with sukuk investments much more predictable than say equities; problems raising finance from traditional conventional banking sources either through loans or even IPOs; balance sheet mismatches between long-term lending and short-term cash flows which could lead to an asset-liability mismatch, where once again long-term sukuk would ease the problem; and a healthy deal pipeline for sukuk — both sovereign, quasi-sovereign and corporate issuances.
The Saudi sukuk market, compared to the Malaysian one, is also starting from a low base, with only five publicly-listed sukuk issued by two companies, SABIC and SEC. In addition there have been private issuances by Dar Al-Arkan Real Estate Development Company (DAAR) which closed its third sukuk in July 2009; Saudi Hollandi Bank and the Binladin group. “The lack of depth of the market, lack of transparency and the lack of historical trade information meant that sukuk were very thinly traded. For the whole of 2008, there were only 85 trades executed with a value of SR1.3 billion,” stressed the Jadwa report.
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