Gulf sukuk funds grow

SYDNEY, June 21 (Reuters) - Gulf investment funds dedicated to sukuk are increasing in size and number, but the growth spurt may not be enough to solve the concentration and liquidity issues facing the Islamic bonds market.

Assets of sukuk funds based in the Gulf now exceed $500 million, a 31 percent increase since last year, according to Reuters calculations based on data from fund companies. This remains small compared to the total Islamic bonds market; global sukuk issuance was $86 billion in 2011, and $43 billion in the first quarter of this year, according to Thomson Reuters data.

The growth of sukuk funds is partly because investors are becoming more sophisticated in their asset allocation decisions, and searching aggressively for yield, said Mark Watts, head of fixed income at National Bank of Abu Dhabi.

"As the market institutionalises, there is recognition that investments are not all about equities," Watts said. Classic asset allocation models suggest investors should put 60 percent of their money into fixed income, while currently that proportion is in equities or cash for Gulf investors, he added.

A reallocation towards sukuk is now underway but it faces a shortage of sukuk funds. This prompted NBAD to launch its own sukuk fund in May, alongside those announced this year by HSBC and Gulf institutions Al Hilal Bank and Rasmala Investment Bank.

FRAGMENTATION

The new launches join a small club of Gulf-based sukuk funds. There are a total of 17 such funds, with half of them accounting for some 91 percent of assets, according to the Reuters calculations.

The sukuk fund of QIB UK, a Qatar Islamic Bank subsidiary , by itself accounts for a huge proportion of the assets; launched in 2009, it now has $213 million in assets, of which $100 million was raised last year, Anouar Adham, head of asset management at QIB UK, told Reuters.

"A key differentiator for us is that we are a pure sukuk player...Some of the competition puts a lot of different instruments, not only sukuk, in their funds," Adham said.

Some funds allocate a large portion of their portfolios - 25 percent or more - to short-term instruments in order to manage their liquidity needs, because most sukuk holdings are not traded often.

Many funds are unable to accomodate retail investors, which are left out because of minimum investment restrictions. The investor base of QIB UK's sukuk fund is approximately 80 percent institutional, according to Adham, and comprises mostly takaful and re-takaful institutions (Islamic insurance and re-insurance). He said that three years ago, the fund attracted individual investments of $3 million in size, but some were now as large as $20 million.

The takaful sector's growth rates and profitability are under pressure, increasing the need for products with yields higher than cash.

This has encouraged customised investment mandates, some of which range from $60 million to $200 million, according to Adham.

"Discretionary mandates dwarf mutual funds," Watts said, citing one $350 million investment portfolio which allocates over half of that amount to sukuk. Precise figures remain elusive, but conservative estimates for the discretionary business range from one to three times the size of the sukuk fund industry.

NORMALISATION

Investors in sukuk include Islamic banks investing on their own accounts, which adds to the institutional and stable nature of the sukuk market, said David Marshall, head of product and distribution at Emirates NBD Asset Management.

"There is a normalisation of sukuk as an asset class," Marshall said, noting net inflows of $30 million last year into the sukuk fund of Emirates NBD, which was launched in 2010 and now has $44 million in assets.

But not all sukuk funds have enjoyed such interest, and distribution channels for funds have a strong influence on the make-up of investors in them, Marshall said.

"Not that many have a sustainable size, and in time, some will fall by the wayside," said Eric Swats, head of asset management at Rasmala Investment Bank. "Expect the industry to contract, with more money to be held by institutional players."

Rasmala, which manages $650 million in assets, announced its own sukuk fund in April with seed capital of $25 million. Swats says he expects it to grow to between $60 million and $75 million by year-end.

CONCENTRATION

While many analysts expect the sukuk fund industry to continue growing in the long term, poor liquidity in the secondary sukuk market and a relatively narrow range of sukuk issuers threatens to slow the expansion.

Because of their small aggregate size, sukuk funds have not contributed much trading liquidity to the secondary market. Furthermore, sukuk issuance is dominated by sovereign and state-linked entities, which are estimated to account for as much as 78 percent of global issuance; funds and other investors tend to hold these high-grade instruments to maturity, without trading them.

This explains the low turnover ratios in sukuk funds. The funds trade as little as 40 percent of their assets in a single year, according to Marshall. "We are not day traders," Swats said.

In 2011 the global sukuk market saw just 15 U.S. dollar-denominated issuers, according to The Bank of London and Middle East, which launched its first sukuk fund in 2009 and another in May of last year.

There is one element missing in the market altogether: a firm that both originates and underwrites sukuk, and which could encourage more corporate issuance.

"What you need is to increase issuance in the primary market. Supply will drive sukukholders to start trading," said Abdul Rahman Mohammed Al Baker, executive director of financial institutions supervision at Bahrain's central bank.

Bid-offer spreads reflect the lack of a liquid market, he added. "You constantly hear sukuk oversubscribed five times," Al Baker said. "But what happens next? Nothing.

(Reuters / 21 June 2012)

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Alfalah Consulting - Kuala Lumpur:

www.alfalahconsulting.com

Consultant/Trainer/CEO:

www.ahmad-sanusi-husain.com

Islamic Investment Malaysia:

www.islamic-invest-malaysia.com

Fitch affirms Islamic Development Bank

June 21 - Fitch Ratings has affirmed the Islamic Development Bank's (IsDB)

Long-term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook and
Short-term IDR at 'F1+'.

IsDB's ratings are underpinned by strong intrinsic features, primarily by 
excellent capitalisation. IsDB is one of the most highly capitalised 
multilateral development banks (MDBs) covered by Fitch. The ratio of equity to 
assets has remained above 60% since inception (64.1% at end-1432H, equivalent to
25 November 2011 in the Gregorian calendar), mainly thanks to regular capital 
inflows from shareholders and steady yet moderate profits. The ratio of debt to 
equity is low, at 49.2% at end-1432H. The bank also maintains a comfortable 
level of liquid assets, which more than fully covered its short-term liabilities
at end-1432H.

Credit risk is moderate. The IsDB mainly extends project financing guaranteed by
member states or state-owned banks to finance infrastructure or social services.
Due to compliance with Islamic finance principles, most financing is 
asset-backed. As with other MDBs, activity is mostly focused on speculative 
grade borrowers (63.7% at end-1432H) but the bank benefits from 
preferred-creditor status on sovereign-guaranteed operations, therefore keeping 
impaired operations at a minimum. It limits concentration risk as it operates in
a diversified number of countries and abides by strict country and single 
obligor limits. The five largest borrowers accounted for 32.8% of equity at 
end-1432H, a lower level than most peers.

Fitch deems other risks under control. Credit risk on treasury assets is 
mitigated by the recourse to short-term investments in a diversified range of 
instruments and banks. Interest rate risk and foreign exchange risk are strictly
hedged. The bank's risk on equity investments is higher (equity stakes and fund 
participations accounted for 16.2% of total operations at end-1432H and have 
suffered significant unrealised losses recently) but remains manageable given 
the bank's long-term investment horizon and comfortable cushion of equity. 

Shareholders' support is also supportive of the rating. IsDB's capital is owned 
by 56 countries, all members of the Organisation of Islamic Cooperation, which 
have committed to provide callable capital in case the bank should require it to
honour its liabilities. Although the proportion of highly rated callable capital
is lower than for peers (with 43.4% of callable capital being rated 'AA-' or 
above at end-1432H), willingness to support is strong as illustrated by 
continuous capital inflows to the bank.

The bank undertook countercyclical action in 2009-2011, significantly increasing
its loan portfolio. It has temporarily slowed its growth rate in 1433H but 
intends to significantly reinforce the use of its capital resources in the 
coming years. This should affect capitalisation and leverage but Fitch expects 
the IsDB to preserve its cautious prudential framework.

Downward pressure on IsDB's ratings would occur if Fitch observed a pronounced 
deterioration of asset quality or a sudden and unexpected deterioration in 
capitalisation and leverage.

The IsDB is based in Jeddah, Saudi Arabia. It was established in 1975 with the 
aim of fostering economic development and social progress, and provides project 
and trade finance as well as technical assistance to its member countries. It 
employed 739 staff at end-1432H and operated through four regional offices in 
Morocco, Malaysia, Kazakhstan and Senegal. 

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Alfalah Consulting - Kuala Lumpur:

www.alfalahconsulting.com

Consultant/Trainer/CEO:

www.ahmad-sanusi-husain.com

Islamic Investment Malaysia:

www.islamic-invest-malaysia.com

Saudi Arabia Islamic Finance Assets represent 8.2% out of total Global Islamic Finance assets

The report also focuses on the governance and structural aspects of an effective risk management framework in Islamic Finance. It presents new findings in the practice of Islamic Finance risk management that offer guidance to boards in managing risk in troubled times. It is based on a survey and group of case studies developed during the second half of 2011, on 20 leading Islamic Financial institutions from the Middle East and South East Asia, with aggregate assets of more than $50bn. It also includes several interviews conducted with industry leaders and risk management executives.

"Greater pressure has been placed on financial institutions offering Islamic Financial services to galvanize risk exposure and governance capabilities," commented Dr. Hatim El Tahir, director of the Deloitte Middle East Islamic Finance Knowledge Center (IFKC).

"Global and regional jurisdictional regulatory reforms are continuing. How this regulation will affect the Islamic Finance sector and the role of IIFS in the economy is yet to be seen," he added.

The Deloitte report finds that Saudi Arabia saw the launch of one the first and most important institutions in the Islamic Finance (IF) Industry. The Islamic Development Bank (IDB) is a multilateral development financing institution established in Jeddah in 1975. Up until today, the (IDB) has contributed over $200m of technical support to nearly 70 Islamic Financial Institutions (IFI) around the world.

Furthermore, Saudi Arabia saw the establishment of other prominent institutions that played a role in the advancement of IF. This includes the founding of the International Association of Islamic Banks in 1977, with a goal of promoting and facilitating cooperation between Shari'a-compliant financial institutions, as well contributing to harmonization of the industry on an international level.

Today, there are four Islamic Commercial Banks operating in KSA. They include: Al Rajhi Bank, $58.8bn total assets; Bank Al Jazira, $10.3bn total assets; Alinma Bank, $9.8bn total assets and Bank Albilad, $7.4bn total assets.

Aside from Islamic Commercial Banking, Cooperative Insurance industry evolved considerably in the KSA during the past 9 years. There are currently more than 30 Cooperative insurance companies, total assets of over $7bn with the largest company being The Company for Cooperative Insurance (Tawniya) with total assets of $1.9bn. The concept of Cooperative Insurance was introduced in KSA in 2003 after all conventional insurance companies were exempted from Saudi Arabia and the Cooperative Insurance regulations were passed, setting the basis of providing insurance on a cooperative basis in accordance with Islamic Shari'a. However there was no detailed guidance as to what constitutes cooperative insurance but it is accepted that there are differences to the Takaful model. 

The Sukuk market in Saudi Arabia (the Islamic equivalent of debt) is considered the third largest in the world after Malaysia and UAE, according to the IIFM Sukuk report. Total issue number of 25 with issue size of $17.1bn up until December 2011. The single largest Sukuk issue ever was issued from General Authority of Civil Aviation in Saudi Arabia in January 2012 with an issue size of $4bn on a Murabaha. Many Islamic finance forecasts and analysis predicts that Saudi Arabia and South East Asia will dominate the Sukuk market in 2012 with high quality quasi-sovereign issues.

However, in light of the global regulations in the financial services industry, Islamic Financial institutions are being heavily impacted.

Islamic Financial institutions and their systems of governance will continue to evolve as new regulations are issued. Executives of Islamic Financial Institutions, along with executive risk offers, will equally play an important role in coordinating risk management implementation and activities between boards and Sharia'a Supervisory Boards and other business supporting units in the institution.

(Ame.Info.Com / 17 June 2012)

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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Consultant/Trainer/CEO:
www.ahmad-sanusi-husain.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com