Collaborative Sukuk Report by Zawya

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sukuk 1189 islamic 274 issues 223 investors 196 billion 191 issuance 176 <U+FB01>nancial 128 shariah 127 debt 118 malaysia 114 global 108 issued 101 asset 96 investment 95 markets 94 based 92 issuers 87 conventional 86 government 83 <U+FB01>nance 80

DOCUMENT KEY POINTS

• special thanks a special note of thanks goes to all our survey respondents and thought leadership contributors for their support of this initiative

• by gathering together the world s leading islamic i nance professionals the online group collaborates to i nd potential solutions to problems hindering the growth of the industry today
• we would like to thank our valued contributors for their continuous efforts patience and constant encouragement without which we would not have achieved the success we have today

• spread use of ratings both at a corporate and at sovereign level internationally recognised exchanges where these debt instruments can be listed and traded and a complex hierarchy of lead managers co lead managers joint lead managers arrangers distribution total sukuk debt still outstanding in the mena region amounts to billion out of a total of billion in i xed income debt for the agents and so on

• the resolution of these and similar events caused by the i nancial crisis will determine how robust the sukuk market will be in the years ahead and whether the i avour of the month will be sukuk or bond
• naturally there will be more reports in this series and in order to make them as relevant as possible it will be important for reader to share their thoughts opinions and insights with us

• given its historic ties to islam saudi arabia would have been the natural place for islamic i nance and sukuk to i ourish but the enigmatic kingdom turns out to be one of the last places in the gulf for islamic i nance to not surprisingly was a banner year for sukuk as issuance crossed billion of which nearly billion was raised by dubai take root
• with a population of million people the kingdom is leveraging its oil wealth to secure long term funding on favourable ter miss blue chips such as saudi basic industries corporation saudi electricity regional aspiration company saudi hollandi bank and dar al arkaan real estate development company among others have already issued sukuk and with dubai focused on managing its own debt pile other regional candidates looked to take on the mantle of sukuk epicentre

• the sukuk programme repthe development of the canadian sukuk market resented the largest islamic debt capital market deal in pakistan and its unique features included periodical offerings to local islamic banks in smaller tranches through auctions conducted by the sbp in exactly the same manner as that of treasury bills and pakistan prior to there have been some private corporate sukuk in canada but they often do not receive media attention
• bear mountain is a world class golf course and residential community with associated commercial and recreational properties and amenities all situated within a acre development property located on the outskirts of victoria british columbia at this stage it is very important to encourage industry players to develop the islamic debt capital markets by bringing more transaccanada

• the core strengths of the sukuk market in sum the story in canada is sukuk is getting some traction at both the sovereign and corporate levels but it is only just beginning and the expectation is that it will grow rapidly in the coming years
• certain large canadian investment banks have studied the structures and i nd them interesting and innovative but it will take investor participation and commitment from the mena region to co invest and work with canadian investment bankers and other professionals if sukuk are to become a new asset class in canada

• while we do not intend to imply that the maturation of a market for an economic instrument is analogous to the evolution of a regulatory system or that the solution to the recent downturn in the market should be the product legislation the concept of a system growing over time aptly describes the current state of the sukuk market
• this is not to imply that islamic products are by dei nition riskier than conventional ones but within the parameters ethical and i nancial of what shariah considers to be a compliant investment product islamic investors should be prepared to assume the risks inherent in making an investment in such product

• factor is compounded in the context of sukuk products as the assets on which such products are based or by which they are backed are scattered in multiple jurisdictions which apply different legal systems islamic common law civil law or hybrid legal systems deterrent to innovation and which may vary in terms of the maturity of their judicial systems and enforcement mechanis miss this gives rise to the need for a core risk of creating a broad based malpractice liability for shariah scholars is that would dampen the spirit of innovation currently a comparative study of how each default is being handled in the relevant jurisdictions

• a securitisation transaction essentially requires a true sale to be achieved in the transfer of assets from the originator to the spv and the secondary market for islamic instruments lacks certain key features required for efi cient functioning of the debt market is premised on the bankruptcy remoteness conceptthe ability legally to isolate the assets transferred by the originator to the spv such as from bankruptcy risks associated with the entities involved
• he should be free to it is very important for the development of capital markets to have a deep and liquid debt market as it provides greater access to global determine the requirements of shariah and the steps to be undertaken by the islamic i nancial services provider to comply with shasources of capital smooth funding of government liabilities expanded opportunities for domestic investors to fund local economic riah as interpreted

• sukuk issues have begun moving away from the a bricks and mortar debt based issues to asset based issues asset on a a true sale concept to the sukuk investors without having any purchase undertaking in the case the asset fails to generate such as sukuk ijarah to project based issues that pay specii c focus to the underlying assets that are being constructed to generate the expected income to the sukuk investors

• the issue has legal and documentation implications but must be studied by shariah scholars in order to safeguard the rights that holders have perceived at the time of issuance of the sukuk as well as issues such concerning fair risk and reward in the case of musharaka and mudaraba sukuk refer sheikh taqi usmani s ruling needs to be looked at from a convergence point of view
• we believe that collective efforts through cooperation and collaboration between major islamic i nancial standard setting and development bodies such as the international islamic financial market the accounting and auditing organization for islamic financial institutions islamic financial services board and central banks is important in strengthening the fabric of islamic i nance

• i believe that issuers will the clearest indication of this difference is in the rating of the two types although this comparison is further complicated by the fact also increasingly choose to list sukuk on exchanges because listing provides investors with many advantages of transparency visthat the asset backed sukuk has multiple classes a b c and d of investors with each class having a more senior legal claim to the ibility and certainty
• the need to have sukuk rated in order to attract investors might seem rather obvious to both issuers and investors in malaysia but another logical requirement for a successful issue might be the listing of sukuk on an internationally recognised exchange a but such there were many sukuk issued pre crisis that were vastly oversubscribed even though they did not have a rating

• this service will prove particularly appealing to investors as the absence of central counterparties in the trading of many asset types was a major cause of the global i nancial crisis

• sovereigns and corporates in the gcc may i nd that there is diminished appetite for their debt outside of the region a and possibly the bankruptcy i ling provided a chance for the courts to decide the fate of the sukuk holders and in particular whether the structure within the region itself that involved selling the orri to the onshore spv constituted a a true sale
• in order to hedge against severe price i uctuations in oil and gas markets there was a shariah compliant hedge that estabthe exercise until stability returned to the market which would suggest that the level of new issuance in the sukuk market in the middle lished a price collar between and per million btu mmbtu on half the expected products gas production and a put option at east may fall sharply in the near future

• it is possible that the negative headlines surrounding the nakheel sukuk will scare such investors off in the future a at least until there is more clarity from the courts over what happens in the event of an ijarah sukuk default of this size
• pricing of all new debt from the gcc may increase signii cantly in an effort to lure investors into an asset class that is now seen as signii cantly more risky the overall effects on the sukuk market are likely to be signii cant

• france and the uk want to follow germany with domestic currency sukuk but the typical middle eastern buyer is a skilled treasury person still thinking in a dollar pegged currency a fact limiting the success of sukuk in alternative international currencies
• from a shariah perspective currencies are frequently discussed among musli miss while shariah scholars accept modern artii cial currencies as acceptable and analogue to gold silver salt dates wheat and barley the six classical currencies many muslims remain future issues a thought leadership doubtful some arguing it is like a debt paper which cannot be traded under islamic law

• this bold and brave initiative represents the has an open ended equity like cash i ow promise does not mean that risk is shared or that it is more fairly distributed between investor depth of thinking that will be required to bring the industry from the slow burn phase that it is in to the fully i edged top speed that will and issuer

• entity will give more meaning and authenticity to the spvs and their role in sukuk structures figure and conclusion figure cit structure without downplaying the impact of the i nancial turmoil and resulting scarcity of liquidity the challenges we face in the sukuk cit market have far less to do with the crisis and far more to do with the internal structural and institutional features of the product and charitable trust industry
• the dei nition of a sukuk as a i xed return investment that engages productive resources is important and the creation of a cit that spv spv spv spv spv issuer issuer issuer issuer issuer acts as a genuine third party in sukuk transactions is a much needed institutional development

• in this analysis it is important to focus on issuer and investor considerations but also to remain cognisant of the important role of certain other stakeholders including regulators rating shariah scholars agencies shariah scholars lead managers and law i r miss it is often mentioned that standardisation is a key requirement for the islamic i nance market in general and the sukuk market in particular to take off in a major way and barring this the market will remain fragmented
• regulators some pertinent issues certain general considerations such as which format of sukuk to use which currency to issue in whether to issue under a programme regulatory and tax issues seem to be relatively straightforward when it comes to traditional sukuk jurisdictions covering most of gcc or issue a stand alone are common to all stakeholders

• ethical investing do conventional investors prefer sukuk over conventional bonds due to their a ethical nature although asset based sukuk might not what successful savings markets have in common is a regulatory framework for pensions and insurance would that includes prudenhave won the hearts of these investors when compared to conventional bonds purely on the basis of a form they might increasingly tial investment guidelines to ensure safety i rst of all and secondarily liquidity of investments

• regional bond funds the investor needs to be made aware of the benei ts of allocating assets to different asset classes and the specii c we believe that to improve not only trading in sukuk but also liquidity the industry needs to resolve the following points attributes of marketed products product providers should be able to access investors efi ciently and investors should have comfort in the laws protecting their rights
• insurance companies takaful companies commercial banks asset management i rms and other i nancial service providers will increasingly compete for retail funds and those i rms with the best products service and marketing will succeed in attracting retail the global sukuk and mena debt markets have been growing at compound annual growth rates in excess of per cent during investors and ultimately stimulate retail demand for sukuk

• it has been suggested that the islamic i nance market is not yet sufi ciently mature to consider a complete how i rm are the guarantees that is if a sukuk issue fails to deliver the returns expected by the investors and which the guarantees overhaul and that the current sukuk structures criticised by sheikh usmani should be permitted until such time as the market has sufare intended to support can the obligations be crystallised into claims against the obligor for whose benei t the sukuk was issued if i ciently matured

• the investment banking i rm behind the bear mountain sukuk and whose co founder ibrahim mardam bey was one area that may indicate greater interest by us based investors is the issuance of only the third and fourth sukuk to comply with the involved with the east cameron sukuk is also working on the shariah compliant securitisation of oil and gas properties in venezuela rule a which governs the issuance of securities to institutional investors located onshore in the united states
• these factors include fears that anything muslim could be viewed us based companies but there could be a greater number of issuers internationally that structure sukuk prospectuses to comply with skeptically following the attacks little familiarity of islamic i nancial products lack of government and industry support and posrule a so that they can be sold to us based institutional investors

• as the capital markets recover from the deep recession of to there will be a more conducive environment for sukuk issuers to target investors in the us and also the potential for more us based companies to look to sukuk as a way to raise capital outside of the conventional debt and equity markets
• there are a number of reasons for this but in general it comes down to a general lack of familiarity of us based investors in the potential for sukuk to serve as an alternative to conventional debt offerings

• jordan above bn under kuwait m the data gathered from the survey should prove to be of great value to anyone with a professional interest in the sukuk domain in the international bn to bn coming two years
• country entity type sector power and food and kuwait quasi utilties sovereign beverages indonesia transport bahrain uae real estate financial pakistan saudi corporate services arabia oil and gas malaysia rated unrated total issued so far announced for first m to bn plan to get time rated never issued more than

• a opinions and insight few months ago the sukuk was selling at a heavy discount however we chose not to jump in due to it not being clear if the sukuk will the zawya sukuk survey included a number of open ended questions that revealed some fascinating insights from the main be paid back on maturity or whether it will be restructured also a at the moment a given investment whether it be in the sukuk market market players or in other debt capital market products has come down to investor gut feel rather than a rigorous analytical approach
• players including the need for more players liquidity lack of detailed understanding of structures and pricing methodology and lack of lack of liquidity and lack of secondary trading as well as lack of depth of demand from insurance companies pension funds and so secondary market

• billion sukuk issued in uae by ports custom and free zone corporation first sukuk issued in qatar us million by the government of qatar first sukuk issued in the uk us million by pacific star international holding corporation first sukuk issued in pakistan us million on sukuk type size behalf of the government of pakistan country of issuer entity type first sukuk issued in sudan us million by berber note no sukuk issuance in and

• top ten sukuk lead arrangers rated and unrated sukuk dec a sep dec a sep type number top ten sukuk lead arrangers rated dec a sep unrated lead arranger number of country arrangements cimb investment bank berhad malaysia list of credit rating agencies that have rated sukuk dec a sep hsbc bank middle east uae credit rating number of sukuk headquarters maybank aseambankers malaysia agency rated am investment bank malaysia marc malaysia ammerchant ram malaysia ocbc bank malaysia s p usa standard chartered bank uae middle east and n

• currently indonesia stock exchange holds the highest number sukuk markets a malaysia issued the f irst sukuk and originated of all sukuk issued by number with a value of of sukuk listings but dubai is the leader in sukuk listings by value with us
• a conventional international banks or their islamic subsidiaries such as cimb nasdaq london se saudi se lfx luxembourg bahrain hong kong bursa irish indonesia dubai singapore vienna dubai labuan se se se malaysia se se fm se se lead arrangers investment bank berhad hsbc middle east and maybank aseambankers are on the top of the arranger list highlighting the absence of pure islamic banks in arranging sukuk

• a conventional international banks or their islamic subsidiaries such as cimb investment bank berhad hsbc lead arrangers middle east and maybank aseambankers are on the top of the arranger list highlighting the absence of pure central bank of bahrain nakheel development

• the real estate and construction sector was the largest in terms of value due to the real estate boom in this period included in the gulf and the ease of real estate in asset backing which is a requirement for all sukuk

• musharaka was the dominant structure by value and ijarah was the highest sukuk have predominantly been domestic financing instruments but a slight by number in this period compared to murabaha which dominated by value shift is being witnessed towards international issuance and number in the previous period compared to the previous phase in which of the issues were domestic of issues were domestic in this phase as issuers started accessing international investors along with tapping their domestic markets
• million dawama sukuk comprised of a combination of ijarah and murabaha structures and was the i rst time the increase in international issues coincided with increased investor understanding of islamic i nance and the desire to gain expoa combination of structures was used for a sukuk issue

• the absence of an islamic yield curve has hampered the pricing of sukuk and the recent issuances from sovereigns and multilateral global sukuk issuance ytd agencies are attempts to create a yield curve which may help in pricing of subsequent issues
• others were associated with global as well as regional benchmarks such as kibor sibor euritrend analysis phase bor and eibor

• the financial crisis made way for sovereign entities to become more active sukuk issued by governments were the highest in terms of both value and than corporate issuers in this phase ytd number in this period ytd the i nancial crisis produced difi cult market conditions for issuing debt by corporates
• us million average sukuk issues per sector corporate sovereign quasi sovereign lhs ytd lhs rhs ytd rhs source zawya sukuk monitor us billion source zawya sukuk monitor

• the ijarah structure s widespread acceptability led to its the majority of issuance remained domestic by number in this phase dominance in this period ytd while issuance by value maintained the same parity ytd sukuk issuance in took another hit when sheikh taqi usmani head of aaoifi s shari a committee announced that of the share of international sukuk issuance fell from to in this phase by number however their share in value sukuk were not shari a compliant
• in his opinion this was in contrast to the rules of shari a which state that principal guarantee is prohibited only risk sharing issuers are preferring to opt for local currency issues and are raising funds from home markets due to greater liquidity compared to is permissible to justify proi ts earned by investors

• the islamic development bank is also in the process of creating the future of the sukuk market a mega islamic bank which will aim to i nance large scale projects and assist in the creation of a global islamic inter bank market
• pricing still remains skewed towards fixed rates in the absence of an islamic benchmark ytd the absence of an islamic yield curve which has been mentioned earlier as a hindrance for pricing sukuk still presents an issue in the current period

• greater foreign and sovereign participation the sukuk market is expected to receive a boost with new sukuk announcements from canada china egypt south korea hong sukuk are expected to grow in importance on the radar of global investors as more government issuers jump on the kong india japan singapore jordan kazakhstan russia sri lanka and thailand

• hence the contents of this report in terms of the activities to be carried out might not necessarily be consistent with shari a in all cases and the opinion of at least one shari a scholar should be taken before any further steps are taken to implement any i ndings contained in the report

• in the islamic space zawya has a dedicated team of analysts that focus on highlighting opportunities in the global islamic i nance sector with particular emphasis on sukuk by bridging the buy side sell side and all relevant players in the industry

• hawkamah s mission is to promote corporate sector reform and good governance assist the countries of the region in developing and implementing sustainable corporate governance strategies adapted to national requirements and objectives
• regional cooperation will facilitate exchange and allow countries to learn from successful experiences combine efforts move towards harmonization of corporate governance frameworks and build on synergies resulting from national actions and initiatives

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DOCUMENT WORD ANALYSIS

Main Category

AlHuda Material\sukuk islamic

KeyWords

sukuk issu secur debt malaysia investor issuanc islam bond issuer corporate billion governance malaysian rate structur bankable institut developed convention

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DOCUMENT REFERENCES

Number of Pages

66

Published Date

2009-12-03 15:49:40

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