Malaysia-based IILM treads fine line in designing maiden sukuk

SYDNEY: International Islamic Liquidity Management Corp (IILM) faces a delicate task as it designs its maiden sukuk: it must make the issue attractive enough for investors to buy, but not so attractive that most of them buy to hold.

Whether it gets the balance right will affect the development of Islamic money market trading in the Gulf and South-East Asia over the coming year.

Malaysia-based IILM, backed by nine central banks and monetary agencies as well as the Jeddah-based Islamic Development Bank, has said it planned to issue up to US$500mil of dollar-denominated sukuk in the second quarter of this year, and eventually expand the programme to as much as US$3bil.

Its issues will be based on a very different premise than other sukuk. Other issuers design their sukuk merely to attract investors and raise money cheaply; IILM's mission is to create a highly liquid tool which Islamic banks will trade to manage their short-term funds.

To ensure trading of the sukuk around the world, IILM had signed agreements with eight primary dealer banks, said Ayhan Keser, executive vice president at Turkey's Albaraka Turk , one of the market-making banks.

“These primary dealers are given the right to purchase the issued sukuk in the primary market, have the responsibility to set the secondary market and actually buy and sell the bonds to form a market price,” Keser said.

Standard Chartered is another primary dealer, according to Standard and Poor's. The bank declined to comment on its role.

The participation of other banks in the primary dealer network appears less certain, however. Qatar Islamic Bank, the Gulf state's largest syariah-compliant lender by assets, is still considering whether to take part, according to its chief executive.

“We will probably be. It's still under discussion,” group chief executive Baseel Gamal said in Doha earlier this month.

Bank Islam Malaysia Bhd is awaiting internal approval from its syariah board, according to a source at the bank who declined to be named as he is not authorised to speak to the media.

A second Malaysian lender was also considering its participation, with the country's central bank pushing for decisions to be made soon, the source said.

Luxembourg, where the sukuk will be domiciled, has one confirmed primary dealer while another is still working on the paperwork, according to a banking source familiar with the discussions, who declined to be named because of the sensitive nature of the issue.

No specific date has been given for the first or subsequent sukuk issues, and the IILM did not respond to Reuters questions.

Another key issue for the IILM sukuk, which are expected to have maturities of up to one year, will be their bid-ask spreads in the secondary market.

If the issues are too small relative to demand, many investors may end up buying and holding them rather than trading them, making price discovery difficult and resulting in wide bid-ask spreads that hurt their function as a store of value.

Other international sukuk often trade with bid-ask spreads ranging from 80-100 basis points (bps), so the IILM paper will need to demonstrate it is much tighter than that.

Spreads above 50 bps could affect the IILM's effectiveness and credibility, said the head of treasury at a Bahrain-based Islamic lender. “Below 50 is good a quarter (0.25 percentage point) would be great.

(The Star Online / 13 May 2013)

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

Turkey can profit from Islamic banking push

Turkey can profit from Islamic banking. As part of an initiative backed by the Islamist government, Ziraat Bank, the country’s largest state-run lender, is working to set up a Shariah-compliant entity. It comes less than a year after Ankara’s debut sovereign sukuk.

Turkey already has four Islamic banks, known locally as participation banks, of which three are foreign-owned. The first was established almost three decades ago. But Shariah-compliant assets account for just 5% of total banking assets, far below the average of 25% in the Gulf region, according to Ernst & Young.

Size is mostly the problem. Conventional deposit banks have 15 times more branches than Islamic institutions. Islamic banks in Turkey are also lagging in innovation compared to peers elsewhere in the Muslim world, bankers say.

The current push is motivated as much by pragmatic reasoning as by any spiritual desires. Stronger and larger Islamic banks could strengthen Turkey’s financial position.

Domestically, they could lure funds out from under the mattress in the country’s conservative and pious heartlands. That cash could help fund Turkey’s GDP growth. The Islamic money would be less likely to disappear than inherently fickle foreign funding, which has driven the banks’ average ratio of loans to deposits above 100%.

Internationally, stronger Islamic banks would enable Turkey to attract more cash from the Gulf and Asia, where the appetite for Shariah-compliant products far outstrips the existing supply.

For Turkey, which needs to fund a current account deficit of more than 6% of GDP, diversifying its sources of finance to include this pool of captive capital makes sense.

The aim of the Participation Banks Association of Turkey is to triple the share of Islamic banking assets in the country by 2023. If more large players enter the Shariah-compliant market, that target could start to look modest.

CONTEXT NEWS:

n Ziraat bank, Turkey’s largest state-run lender, is planning to set up a separate Islamic Bank, general manager Huseyin Aydin said on April 13.

nThe announcement follows a report a month earlier in the Hurriyet Daily News which said that Deputy Prime Minister Ali Babacan had hinted that two state banks may offer interest-free services without giving any names.

n Turkish lender Halkbank will be the second bank to start offering Shariah-compliant services under a new entity, according to two bankers familiar with the situation.

(Gulf Times / 13 May 2013)

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

IFSB plays key role in market education of Islamic finance

LONDON — The Islamic Financial Services Board (IFSB), the multilateral organization established on Nov. 3, 2002 in Kuala Lumpur, with the mandate of promoting the soundness and stability of the Islamic financial services industry through the introduction of standards and guidance notes on capital adequacy, risk management and insolvency provisions for the banking, capital market and insurance sectors, celebrates its 10th anniversary next week which also coincides with its 10th annual summit. 

The Board actually started operations on March 10, 2003 under its inaugural Secretary-General Professor Rifaat Abdel Karim, and within a space of a decade it has probably done more than any other single institution to put Islamic finance firmly on the map of the multilateral institutions policing the global financial system. 

The theme for the summit, which will be held on May 16-17 in Kuala Lumpur, and hosted by Bank Negara Malaysia, the central bank, reflects the mood in general in global banking today but which is equally relevant to the Islamic finance industry: “The Future of the Islamic Financial Services Industry: Resilience, Stability and Inclusive Growth.” In many ways it also reflects the agenda for the Board over the next few years. 

Whether the IFSB would have achieved what it has in its first ten years without Rifaat being at the helm, must be doubtful. He almost single-handedly pushed the IFSB agenda through his energetic approach, and his ability to negotiate with his immediate bosses, the IFSB Governing Council. But above all, Rifaat put Islamic finance firmly on the map and in the minds of the multilateral financial institutions that mattered in global finance – the World Bank, the International Monetary Fund (IMF), the International Finance Corporation, the Basel Committee for Banking Supervision, the Bank for International Settlements (BIS), the Asian Development Bank and the International Accounting Standards.

He also managed to attract the World Bank, IMF, BIS and even the People’s Bank of China to become Associate Members of the Board. Similarly, he got the Banque centrale du Luxembourg, to sign up as Europe’s first and only regulatory authority to join the IFSB. 

Given the continuing global economic crisis symbolized by deficit reduction and austerity programs in the industrialized economies and the ongoing Eurozone debt crisis as in the Cyprus bailout, coupled with a range of new regulatory and compliance initiatives led by the Basel III Process including its new Liquidity Coverage Ratio (LCR) Standard, it is inevitable that the global financial services debate should concentrate on the resilience of financial institutions in pre-empting and managing future crisis and stress, contributing to market and systemic stability and helping to forge GDP growth which encompasses all stakeholders in society.

The contagion effect and economic impact has been pervasive — and no economy has been spared. The global Islamic finance industry, because of the nature of its faith-based ethos which proscribes interest-based financing, speculation in derivatives, and requires transactions to be backed by underlying real assets thus contributing to productive activities in the real economy, has coped with the crisis better than its conventional counterparts.

But they are faced with many of the same challenges which the global financial services industry is faced with whether in meeting tougher capital adequacy and liquidity requirements; risk management and stress testing measures; compliance measures especially in combatting money laundering and tax evasion; and rediscovering the inclusiveness of banking and financial services to serve society and the economy and not just the corporates and the rich. 

These and the core issues are firmly reflected in the key topics to be discussed at the IFSB Summit sessions. These include: 

• Global financial regulatory reforms 

• Challenges relating to a cross-cultural approach to the regulation of Islamic finance and market development 

• The prospects in new markets 

• Forging the new frontiers of Islamic finance

• Innovating for inclusive economic and market growth 

Dr. Ahmad Mohamed, President of the Jeddah-based Islamic Development Bank (IDB) Group, will give the keynote address at the opening session of the Summit on May 16. There will also be other prominent central bankers and international officials speaking at the Summit including Dr. Zeti Akhtar Aziz, Governor of Bank Negara Malaysia; Sheikh Abdullah Saud Al-Thani, the current Chairman of the IFSB Governing Council and Governor of the Central Bank of Qatar; Dr. Abdulrahman Alkalaf, Deputy Governor of SAMA; Karl Cordewener, Deputy Secretary-General of the Basel Committee on Banking Supervision at the Bank for International Settlements (BIS); and Abayomi A Alawode, Manager of the Financial Systems Global Practice at the World Bank. 

So what of the achievements of the IFSB over the last decade? 

A key achievement is its reach. The IFSB at 7 April 2013 had an impressive 187 members comprising 57 regulatory and supervisory authorities, eight international inter-governmental organizations and 122 market players, professional firms and industry associations operating in 43 jurisdictions. 

Some credit here must also go to Rifaat’s successor, Secretary General Jaseem Ahmed, who continues to promote the organization with the same urgency and vigor as before.

The IFSB has also excelled in issuing a series of Standards or Guiding Principles (13 to be precise), five Guidance Notes and one Technical Note. Through these, the Board has highlighted potentially serious and in some cases entrenched issues pertaining to regulating the Islamic financial services industry, and offered ways of managing, mitigating or pre-empting them and taking into account the very specificities of Islamic financial intermediation. 

The Guiding Principles issued include ones on Risk Management, Corporate Governance, Capital Adequacy, Islamic Collective Investment Schemes, Capital Adequacy for Sukuk Securitizations, Governance of Takaful, Shariah Governance, Solvency Requirements for Takaful, and Liquidity Risk Management. The fact that more jurisdictions are starting to adopt and implement the IFSB Guidance Principles is an encouraging sign, and attests to the demonstration effect of the IFSB and its standards. 

The IFSB has also played and continues to play an important role in market education regarding Islamic finance.  

The founders of the IFSB, which include the central banks of Saudi Arabia (SAMA) and Malaysia, in a unique display of unity rose to the occasion in the early 2000s when both Asia and Turkey were experiencing the impact of their own financial crises, to set the course for the orderly development of the Islamic financial services industry underpinned by the development of a sound set of prudential and supervisory standards to cope with the new risk, regulatory and market challenges that were emerging in an ever-changing international financial landscape. 

Indeed, apart from the technical, resource and operational challenges, a major ask for the IFSB founders and members will be a redoubled unity to take the Islamic financial system to the next level of its development over the next decade.

(Saudi Gazette / 13 May 2013)

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