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Thursday, 7 August 2014

Global sukuk market dips in July as corporate issuances stall

Global primary market sukuk issuances experienced a 31.4% month-on-month decline in July, as corporate issuances stalled on account of the Islamic month of Ramadan. July issuances amounted to $7.95bn according to Kuwait Finance House, down from $11.6bn in June.
Corporate issuers throughout the global markets remained absent from the primary market with the exception of few corporate sukuks issued in Malaysia and a sole corporate sukuk issued in Indonesia.

Collectively, these corporate sukuks produced a volume of $1.16bln or less than 15% of the new issuances market share in July as compared to the bumper $5.24bln volume or 45.3% market share in June.

On the other hand, the sovereign and quasi-sovereign issuers steered the market with a $6.79bln volume or 85.4% primary market share. Notably, the two global Islamic finance mandated multilateral entities, the Islamic Development Bank (IDB) and the International Islamic Liquidity Management Corporation (IILM) tapped the market in July, raising $1.86bn.

 The IDB issued a $1bn tranche on 17th July in a privately placed transaction as part of its upsized $10bn medium-term note programme which it had announced and received approvals for last year. The latest issue marks IDB’s third issuance this year following the $1.5bn publicly-listed tranche in March and a privately placed $100mn tranche in April.

Meanwhile, the IILM issued its third $860mn tranche, as a re-issuance for the second tranche of the same volume issued earlier in April this year and that matured on 23rd July. This latest issuance marks IILM’s seventh issuance to date since its inaugural issuance in August last year. The reissuance maintains IILM’s total short term sukuk outstanding portfolio at $1.35bn.

However, the most important limelight of the month lies in the debut of the Sub-Saharan African nation of Senegal in the global sukuk market. The Government of Senegal priced its maiden sovereign sukuk deal on 18th July, worth West Africa CFA Franc (XOF) 100bln which is equivalent to approximately $200.5mn.

Overall, the global primary market volume has reached $74.15bn in seven months ended July 2014, 6.8% higher than the $69.42bn volume in July 2013. Despite a decline in corporate issuances in July, sovereign and quasi-sovereign issuers have steered the market to ensure 2014’s annual issuances to date remain on track to overcome last year’s annual issuances volume of $119.7bn.

Analysing by the country of sukuk origination, the primary market activity was heavily concentrated in Malaysia which accounted for 80.6% or $6.41bn of the total new issuances in July.

The Malaysian market was spearheaded by Bank Negara Malaysia, which issued over USD3.4bln worth of short-term maturity sukuk. Approximately $931m was also raised by two Malaysian government-related entities, Dana Infra Nasional Berhad ($787.6mln) and Cagamas Behard ($144.5m). In the Malaysian corporate sukuk sector, five issuers tapped the market in July collectively raising $1.14bn in proceeds.

(Global Market / 06 August 2014)
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Islamic finance: SBP’s 5-year plan will drive asset growth, says Moody’s official

Moody’s Investors Service has said the five-year strategic plan issued by the State Bank of Pakistan (SBP) will drive strong asset growth in the Islamic finance sector because of high demand from the domestic population for Islamic banking.
“We believe that this strategic initiative will lead to strong growth and consolidation in the sector, given the relatively small size of market participants and capital bases needed to support growth,” a statement quoted Khalid Howladar, Moody’s global head of Islamic finance, as saying on Wednesday.
While expecting optimism about growth prospects of Islamic banking in Pakistan, Moody’s noted risks associated with high growth rates, which will pressure underwriting and the risk management infrastructure.
Deposits of the Islamic banking industry increased to Rs872 billion at the end of the first quarter of 2014, up 23.8% from March 2013. The market share of Islamic banking industry’s deposits in the overall banking industry stands at 10.7% in March, up 1% from the market share of 9.7% one year ago.
The SBP’s five-year strategic plan targets a 15% share of banking system assets for the sector by 2018, up from around 10% as of December 2013.
“Although the asset quality of Islamic banking is currently better than that of conventional banking – with a non-performing financing ratio of 5.7% as of end-2013 versus 13% for conventional banking – the high rate of financing growth may eventually lead to higher delinquency ratios in the absence of a prudent approach to expansion,” according to Melina Skouridou, Moody’s analyst for Pakistani banks.
Additionally, according to the regulator’s mandates, the banks need to establish separate departments to manage risk, auditing, treasury activities and other support functions for their Islamic operations, which pose additional risks and will pressure the banks’ infrastructure.
According to Moody’s global head of Islamic finance, Islamic banking in Pakistan is growing rapidly with annual growth rates of Islamic banking above 30% between 2009 and 2013. While most of this growth has been generated by the dedicated Islamic banks, most of the country’s largest conventional banks have announced expansion plans targeting the fast-growing Islamic sector.
For example, National Bank of Pakistan (NBP) will convert around 6% of conventional branches into Islamic banking branches over the next two years.
In April, MCB Bank aborted efforts to buy a majority stake in Burj Bank, which is a relatively small Islamic bank, and is instead setting up its own Islamic banking subsidiary.
Similarly, Allied Bank has also launched Islamic banking operations in 2014 through stand-alone shariah-compliant branches.
“We believe that the push for Islamic banking services will help to expand overall banking system penetration, which is currently low in Pakistan where consolidated banking system deposits accounted for only 36% of GDP as of end-2013,” Skouridou said.
The SBP’s five-year plan envisages doubling of the number of branches in 2014-18. It also envisages revamping of Shariah-compliant export financing schemes and making available Shariah-compliant long-term financing facility.

(The Express Tribune / 07 August 2014)
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