US$162.1 billion of sukuk were issued in 2019 compared to US$124.8 in 2018, representing market growth of 30% and consistent with growth over the past five years. Strong sovereign issuances by Indonesia, Malaysia and Saudi Arabia contributed to this growth whilst private sector issuances remained muted.

To cover fiscal needs due to slumped economic output resulting from the Covid-19 pandemic Indonesia and Malaysia continued to issue into 2020. Bahrain, Oman and Dubai also issued whilst Saudi Arabia issued sukuk worth US$18 billion if the first half of 2020.

It is expected market momentum will continue into 2021, as issuers lock in long-term funding at historically low rates. Sovereign Sukuk issuances continue to outstrip conventional bond issuance in Saudi Arabia and Malaysia.

Innovation in 2020

In August Malaysia innovated with a first digital retail sukuk which could be subscribed via digital channels. Innovations such as blockchain are expected to greatly automate the issuance of sukuk and lead to increased issuances with a retail as opposed to institutional focus.

In Taiwan, the Formosa sukuk market launched in 2019 after Taiwan permitted foreign borrowers to issue sukuk denominated in currencies other than the New Taiwan dollar saw Qatar Islamic Bank enter the market, issuing a US$800 million sukuk in January 2020 listed on the Taipei stock exchange.

Egyptian real estate developer entered the sukuk market with a US$127 million signalling the first corporate issuance in the country.

Airlines Restructure Sukuk due to Covid-19

The Indonesian national carrier Garuda Indonesia was forced to extend the maturity of its US$500 million sukuk by three years due to the drop in air travel due to the covid-19 pandemic. Malaysian Airlines similarly deferred by six months its US$362.5 million sukuk.

Saudi Arabia is the second largest Sukuk issuer globally

The popularity of Saudi Arabia sukuk is relatively new compared to Malaysia and UAE. Sukuk issuance in Saudi market started with infrequent issuances in the middle of the 2000s. A single sukuk issuance was performed in 2004 by HANCO Rent-A Car.

The next sukuk issuance took place in 2006 by Saudi Arabian Basic Industries Corporation (SABIC). The issuance of SABIC sukuk generated tremendous attention as it received SAR 4.3 billion in order, overshooting the SAR 3 billion (US$ 800m) cap set by the CMA. The second in the same year was by Saudi Electricity Company which made headlines by issuing sukuk worth SAR 5 billion (US$ 1.33 billion) in July 2006, the largest ever by a Saudi corporation.

In August 2006, with the first listing of SABIC sukuk, an over-the-counter market was launched. Under this system, trades are negotiated off the exchange and there is no system to match buy and sell orders; most trades were done through the treasury departments of local banks. Due to the lack of depth of the market, lack of transparency and the lack of historical trade information, the sukuk was, however, very thinly traded.

The sukuk market in KSA saw some turmoil in 2008 following the global financial crisis. Consequently, sukuk issuance in KSA declined 67.2% YoY to US$ 1.9 billion in 2008 before again increasing to US$ 3.1 billion in 2009.

It was worth noticing that the majority of the sukuk issuances in Saudi Arabia are denominated in Riyal. In contrast, less than half of the sukuk were denominated in local currency in other GCC countries during the same period. UAE, leading both sukuk and conventional bond issuance within GCC, represented about half of the total debt issuance in both 2007 and 2008. Saudi Arabia accounts for about 23% and 12% of the total GCC debt issuance in 2007 and 2008, respectively.

The First Sovereign Sukuk of Saudi Arabia

The General Authority for Civil Aviation (GCA) in January 2012 issued sukuk worth SAR 15 billion (US $4 billion), which was Saudi Arabia’s first and largest government-backed sukuk at that time. In the year of 2012 alone, total sukuk worth US$ 11.14 billion was issued in Saudi Arabia. Such a huge amount of sukuk issuance was not intended to merely raise money; rather it was meant to stimulate the market that would hopefully benefit banks endowed with a massive amount of unused liquidity. Indeed, it was also beneficial in restoring the market confidence among the market players. In tandem with sukuk market expansion globally, 2013 marks another flourishing year for sukuk issuance in Saudi Arabia with the total issuances of US$ 15.21 billion.

In 2014, Saudi Arabia became the second largest issuer of sukuk by issuing a total of 15 issuances with a total value of US$ 12.1 billion. In addition, the Saudi Capital Market Authority simplified regulatory approvals for sukuk products, which also garnered the sukuk market in Saudi Arabia.

Pushing the Market to a New Level

The year 2017 marks a significant milestone for Saudi Arabia. It embarked on issuing international sukuk worth US $9 billion on 12 April 2017, pushing the market to a new level. This issuance was not only the first dollar-denominated sukuk among the GCC member countries, but it was also the largest debt instrument issuance in emerging markets to date, surpassing Kuwait’s US $8 billion conventional bond issuance in March 2017.

Sukuk Structure in KSA

Different structures have been used over the years, with istithmār and murābaḥah being the most prominent, accounting for slightly over 30% of sukuk issued so far (Figure 3.12). Prior to 2011, istithmār sukuk was the most popular structure among the issuers. Although the number of corporate sukuk issued has exceeded that of sovereign sukuk in the recent years, the cumulative issuance amount of sovereign sukuk is greater than that of  corporate sukuk.

Saudi Arabia is the Second Largest Sukuk Issuer Globally

According to IFSB (2019), while Malaysia retained its position as the overall largest issuer of sukuk in terms of volume, Saudi Arabia is the second-largest overall issuer. UAE is the third-largest issuer due to its increase in corporate issuances, while Indonesia is on the fourth rank. Turkey is the fifth-largest issuer due to the increased activity in 2018. In terms of the type of sukuk, the sovereign issuances prevailed in Saudi Arabia in 2018 as it was in previous years.

Source: ISLAMIC FINANCE IN SAUDI ARABIA: Leading the Way to Vision 2030. Islamic Development Bank

It is official! The world has changed, and investors find themselves in a “new normal” also when it comes to money market investments. An advanced liquidity management is not just a necessity but an essential aspect for every investor. The concept of Islamic Liquidity Management (ILM) has not been at the forefront within the overall investment universe but quickly gathers of importance.

The ample liquidity coupled with broad and extensive support of the financial system pushed interest rates to extremely low or even negative levels. This environment causes many challenges when managing liquidity and the Islamic Liquidity Management theorem deals exactly with this subject. Every investor is confronted with the debate about credit vs. duration risk and how best to find the right balance.

The Islamic finance industry holds assets of around $2.5 trillions as of 2018 and grew by an average rate of over 6% over the last six years. Compared to total assets of global financial institutions it is a mere 0.66% but with raising importance. In this context, and with the growing threat of further negative interest rates, new liquidity options have to be taken in consideration.

We are at the cusps of defining the Islamic Liquidity Management for the future. With a growing gap between available liquidity and investable assets new and innovative products need to enter the market to satisfy the demand for Shari´a compliant investments. The current low / negative interest rate situation will not change in the foreseeable future and using the knowledge of when and how much liquidity is needed combined with of Al Waseelah Plc expertise, new innovative Shari´a compliant products will change the Islamic Liquidity Management landscape forever.

As interest rates (Riba) are prohibited any solution needs to take all aspects of Islamic finance into consideration. Murabaha compliant liquidity products based on self-liquidating, physical assets on an instant transaction allows for an advanced liquidity management in the money market space. The fixed rate, fixed date and stable return allow to manage forward liquidity more efficiently.

Al Waseelah Plc made it its mission to provide groundbreaking solutions in the Sukuk space and to offer investors new Liquidity Management tools. Embracing the “new normal” and using advanced liquidity tools will allow investors to make better decisions within their overall liquidity management.

Author: Chris Kruecken, Global Head of Business Development, Bedford Row Capital PLC

Lack of Credit Rating Impacts Dubai Sukuk

Dubai’s recently issued $1 billion sukuk priced at an attractive 2.763%, comparing well to market peers including Sharjah which issued a similar amount in June in a seven-year issuance at 2.942%, as well as Saudi Arabia’s most recent issuance in Oct 2019 for $2.5 billion at a profit rate of 2.969%.

Reuters reported Dubai’s lack of a credit rating may have contributed to Asian investors shying away as buyers mostly came from Middle East, Europe and the United Kingdom to reach an order book of $6.6 billion.

Bahrain and IILM

Bahrain announced on 9^th September it had issued a $1 billion in sukuk at 3.95%, whilst the Malaysian based International Islamic Liquidity Management Corporation issued short term sukuk for $900 million consisting of a $400 million 1 month tenor at 0.22% and a $500 million tenor at 0.43% respectively. The IILM short-term Sukuk programme is rated “A-1” by S&P. The total of IILM Sukuk outstanding is USD 3.0billion.

The IILM tender resulted in significant demand from Asian and Middle Eastern investors, with an order-book that closed in excess of USD1.59billion, representing an average over subscription rate of 1.77 times.

US$ 1 Trillion of Sukuk Issued

Since the issuance of the first modern sukuk in 1996 cumulative issuance of sukuk has crossed the US$ 1 trillion mark.

As of the end of 2018, outstanding sukuk were valued at US$ 469.7 billion across 2,887 sukuk. Sukuk issuances during the year reached US$ 124.8 billion, a similar level to the previous year.

Saudi Arabia and Malaysia Governments Lead the Way

The Saudi and Malaysian governments were the largest issuers in 2018, at US$ 17.1 billion and US$ 13.9 billion, as stated in the Islamic finance development indicator report for 2019 produced by the Islamic Corporation for the Development of the Private Sector, part of the Islamic Development Bank. Malaysia maintained its lead position in terms of issuances, boosted by the return of short-term murabaha sukuk from Bank Negara Malaysia. The central bank resumed sukuk issuances after a three-year hiatus. It issued US$16.1 billion in short-term sukuk during the second half of 2018.

A government sukuk program has spurred greater corporate issuance in Saudi Arabia.

Launched in 2017 with the aim to diversify funding, the Saudi finance ministry had planned to raise US$31.5 billion of Sukuk in 2019.

A new ‘primary dealer’ scheme for local-currency government sukuk was launched in 2018, under which five local banks buy the sukuk directly from the government and then make a market by quoting two-way prices to other investors. The scheme aimed at increasing demand and widening the investor base. With various tenors of up to 30 years, the Saudi government’s program has helped to establish a domestic benchmark sukuk yield curve. A growing number of corporates such as Saudi Telecom Company, Savola and Al Marai issued local currency sukuk in 2019.

Domestic Incentives

Additionally, Saudi regulators introduced a number of incentives in 2019 for corporate sukuk issuers and investors to encourage further issuances and increase trading activity in the secondary market, as stated in the Islamic finance development indicator report for 2019 produced by the Islamic Corporation for the Development of the Private Sector, part of the Islamic Development Bank.

Corporates now benefit from lower regulator fees for new and repeat issuers as well as smaller face values for sukuk from SAR 1 million to SAR 1,000 to offer easier access for retail investors. Lower trading commissions in addition to zero tax/zakat on investments in domestic sovereign sukuk also promise a more active and liquid secondary market.

Jeddah, Kingdom of Saudi Arabia 15 March 2018 – The Islamic Development Bank has successfully priced a US$1.25 billion, 5-year Fixed Rate Trust Certificates (Sukuk) under its US$25 billion Trust Certificate Issuance Programme. The Sukuk was priced at par at 3.10%, to be payable on semi-annual basis.

Benchmark Issuance

This issuance is the Bank’s first benchmark public issuance in 2018. CIMB, Citi, Emirates NBD Capital, Gulf International Bank, HSBC, Natixis, SMBC Nikko and Standard Chartered Bank acted as the joint lead managers (JLMs) and joint book runners. The mandate was announced on February 28, 2018.

Orderbook was opened with the release of the initial price thoughts on Wednesday, March 07, 2018. The Sukuk was priced on Thursday, March 08, 2018 at Mid Swap (MS) plus 33 basis points (bps), 4 bps lower than the IsDB’s September 2017 issuance which was priced at MS + 37bps.

The IsDB’s issuance of a sizeable benchmark at a lower spread to its last issue in September 2017 at a time when global interest rates are rising is a clear testament to IsDB’s strong credit and financial position, reaffirmed by its AAA ratings.
The Trust Certificates will be listed on the London Stock Exchange, NASDAQ Dubai and Bursa Malaysia (under the Exempt Regime). In terms of the final allocation, 61% of the issue size was allocated to investors in MENA, 18% to investors in Europe, and 21% to Asian investors.

Investors Breakdown

In terms of investor type, the deal saw strong participation from real money accounts and official institutions providing credence to IsDB’s credit strength. 74% of issue size was allocated to central banks and official agencies, while 26% was allocated to Banks and Fund managers. Dr. Zamir Iqbal, the Vice President, Finance, and CFO commented: “We are very pleased with the outcome of the deal which met our objectives for the transaction to continue building on the success of our prior deals, and we are also happy to see new investors subscribing in the Sukuk.

I would like to thank the IsDB’s member countries and other investors for their continuous support and commend the lead managers for delivering a deal that will make valuable contribution to meet our developmental objective.”

$1.25bn Green Sukuk

The world’s most populous Islamic nation, Indonesia, has sold a sovereign green sukuk. The $1.25bn five-year sukuk is the world’s first sovereign green sukuk and was priced at a yield of 3.75 per cent. Standard & Poor’s upgrading of Indonesia to investment grade in 2017 was one of the factors which drove strong demand for the issuance to $1.25 billion as well as driving down the coupon from a previously touted 4.05%.

Money raised through green finance is assigned to green projects, such as renewable energy. Non-Sovereign Malaysian organisations have previously issued green sukuk, most recently with two issuances in 2017. Indonesia confirmed none of financing raised would go to fossil-fuel based infrastructure, or projects involving the burning of peat.

The South East Asian nation also raised US$1.75 billion via a 10-year sukuk sold at the same time as the green issuance. The non-green sukuk was sold at a coupon rate of 4.4%.

Growing Green Financing Market

Globally, $155.5 billion of green bonds were sold last year, according to the London-based Climate Bonds Initiative.

CIMB, Citigroup, Dubai Islamic Bank, HSBC and Abu Dhabi Islamic Bank helped arrange the deal.

First UK Sukuk for British Bank

Al Rayan Bank PLC has become the first UK bank to issue a Sukuk. The £250 million sterling denominated issuance is backed by UK mortgages with a maturity of 2052. Al Rayan bundled 1,672 home purchase plans to act as security for its sukuk, which has been issued through a special-purpose vehicle called Tolkien Funding Sukuk, named after author JRR Tolkien, the famous Birmingham resident where Al Rayan Bank is headquartered. Al Rayan and Standard Chartered acted as the joint lead managers, with Legal advice provided by Norton Rose Fulbright.

The Sukuk was oversubscribed with final demand at 155% of book, reflecting the strong demand for Islamic financing instruments that exists in the market, and the fact that the UK is well positioned to become the destination of Sukuk issuance for Western Europe.

The last Sukuk originating out of the UK was the UK Sovereign Sukuk issued in 2014, though an issuance by Emirates Airlines in 2015 for $913 million was guaranteed by the UK Government.

Demand from investors has been significant, with European RMBS investors and conventional and Islamic banks and pension funds all represented in the final allocation. Commenting on the successful issuance Sultan Choudhury OBE, CEO, Al Rayan Bank, said: “The issuance of this ground breaking Sukuk is a major landmark in the history of Al Rayan Bank, but it is also a significant development for the global Islamic finance sector which reinforces the UK’s position as a global hub for Islamic banking. Tolkien Sukuk has been designed to ensure that it is recognisable as High Quality Liquid Assets (HQLA) and as a securitisation under CRD definitions; this has resulted in high levels of demand from conventional institutions as well as from Islamic investors.”

Proceeds raised from the Sukuk issuance will be used by Al Rayan Bank to fund further growth in its asset book, which has increased by more than 23% over the last 12 months.

Rated Sukuk

The transaction was priced at Sterling 3 months’ LIBOR plus 80bps. The securitisation of residential assets is provisionally rated AAA by Standard & Poor’s (S&P) and Aaa by Moody’s Investors Service (Moody’s).

Whilst assigning the Sukuk a provisional Aaa rating, Rodrigo Conde Puentes, Assistant Vice President and Analyst at Moody’s stated “The certificates to be issued by Tolkien Funding Sukuk No.1 Plc represent our first-rated Sukuk transaction in the UK,” and added “Islamic Finance is an increasingly important part of global capital markets — there is growing demand for investment and financing that conforms with the ethical and moral principles of the Islamic faith.”

The transaction is a static securitisation of “Diminishing Musharakah with Ijara finance” contracts extended to individuals in England and Wales. The portfolio consists of first lien Home Purchase Plans (HPPs) extended to [1,672] customers secured by residential properties, with a current pool balance of approximately GBP [301.4] million.

The HPPs are structured as “Diminishing Musharakah with Ijara” (reducing co-ownership with lease) arrangements; at the time of the origination, the client chooses a property, agrees the price with the vendor and then purchases the property with the bank. The bank then sells its share in the property to the client in installments over a fixed term (the acquisition payments). In addition to the monthly acquisition payments, the client pays rent to the bank for the portion of the property owned by the bank. The rent is assessed quarterly and benchmarked to the Bank of England base rate (BBR), although the rent can be fixed for a period of time.

S&P Global Ratings assigned preliminary ratings to the first UK transaction backed by Sharia-compliant form of residential housing finance. In this CreditMatters TV segment, S&P Global Ratings Director Irina Penkina comments on the specific features of transaction.