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Thursday, 14 August 2014

IMF study finds not all sukuk are created equal

NEW YORK, Aug 13 — Investors treat a company’s shares differently depending on the specific types of Islamic bond it issues and the reputation of the Islamic scholars who oversee the instruments, a study by the International Monetary Fund found.

The study, published this week, is one of the first systematic efforts to establish a numerical link between investors’ behaviour and sukuk structures, and as such it may influence companies to choose certain structures over others.
The IMF based its findings on the stock price movements of companies, which issued sukuk between 2006 and 2013, using a sample of 131 sukuk deals across eight countries including Qatar, Saudi Arabia, the United Arab Emirates and Malaysia.
Global sukuk issuance could reach US$130 billion (RM416.97 billion) in 2014, according to a Thomson Reuters study. About a dozen types of sukuk are in use worldwide.
All of them claim to follow religious principles such as bans on interest payments and pure monetary speculation, but some resemble conventional bonds in important ways while others have equity-like characteristics.
The study found the ijara structure tended to draw a positive reaction from the stock market, with the shares of companies using that structure performing relatively well.
Ijara is a lease-based transaction where the originator sells assets to a special-purpose vehicle, which issues sukuk certificates to obtain money to pay for the assets; actual ownership of the assets does not necessarily change hands.
By contrast, equity-based structures such as musharaka — an investment partnership where profits and losses are shared under agreed ratios — met a relatively negative reaction.
This was apparently because equity-like structures were often perceived as signals of financial weakness at the issuing companies, the IMF said. Investors felt an issuer expecting to realise a low profit would have more of an incentive to share the profit; an issuer expecting high profits would choose a debt-like instrument to maximise its bottom line.
The study could increase the use of ijara as the structure of choice for new issuers around the world. Britain used ijara in its first sovereign sukuk issue this year, and Luxembourg plans to use the structure in its maiden deal later this year.
The IMF also looked at other characteristics of sukuk such as their tenors and pricing, but did not find these factors to be statistically significant for the responses of equity market investors.
Boards of sharia scholars at financial institutions issuing sukuk rule on whether the Islamic bonds follow religious principles. A small number of prominent scholars around the world sit on multiple boards, commanding big fees for doing so.
The IMF study suggested institutions were rational in paying such fees; the market preferred the shares of companies which had the most respected scholars endorsing its sukuk.
Geographical proximity was also important, as the market favoured companies with scholars who were most familiar with local rules and practices, rather than scholars from remote jurisdictions.
But the study found that the size of an institution’s sharia board, and the length of the relationship between individual scholars and the institution, did not have an impact.
“Our findings support the view that the market premium paid for sharia scholar reputation and proximity with issuer may be justified,” the study said.
“However, the certification requirement should not overprice having a large number of scholars involved or their tenure, as these factors are not associated with a significant premium in terms of market valuation.
(Malay Mail Online / 13 August 2014)
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