Entries in English and Malay (Bahasa Melayu)

Tuesday, 7 October 2014

Portfolios:Azzad Asset Management Likes Non-Conventional Sukuk

Sukuk, Islamic equivalent bonds, are in and of themselves beyond the boundaries of many portfolio managers of advanced economies even in the most flexible mandates, but in the Islamic finance world, it's the non-Islamic sukuk issuers that are non-conventional, and this is where Azzad Asset Management sees value.
"Currently we see value in some of the non-conventional issuers," said Ihab Salib, the lead portfolio manager for the firm's sukuk fund, the Azzad Wise Capital Fund (WISEX).
"As maiden issuers in the market, they need to price the sukuk generously so as to tempt investors," he commented.
South Africa's September issuance was a case in point.
The 2020 South African government sukuk offers a 20 basis point pick up in return relative to the conventional debt of the same maturity, he argued.
South Africa was the latest non-Muslim country to grace the ranks of sukuk issuers with a $500 million June 2020 sukuk issuance in September.
Particularly noticeable was the UK government debut in June with a GBP200 million July 2019 sukuk issuance, which, like South Africa, was largely oversubscribed, with orders totaling about GBP2.3 billion, according to the UK Treasury. The profit rate of 2.036% was "in line with the yield on gilts of similar maturity," the UK government said.
Just as importantly, "allocations have been made to a wide range of investors including sovereign wealth funds, central banks and domestic and international financial institutions," it added.
Illustrating the growing worldwide interest in tapping the pools of Muslim wealth, investors were not only from the Middle East, but also from other centers for Islamic finance, notably Asia and Britain.
Likewise, the investor base for the South African issuance went beyond the Middle East and Asia, which still took the lion's share with 59%. The transaction was indeed allocated to European investors (25%), U.S. investors (8%), the remaining balance being distributed to "the rest of the world."
In September, Hong Kong also issued its inaugural sukuk, with 11% distributed to fund managers, 56% to banks and private banks, 30% to sovereign wealth funds, central banks and supranationals, and 3% to insurance companies.
On the corporate side, Goldman Sachs also tapped the sukuk market in September.
Going forward, "although 2014 has been a slow year for sukuk issuance, we are quite positive on future issuance from both sovereign and corporate issuers," Azzad Asset Management's Salib said.
"Over the next year we expect to see more non-conventional issuers tap the sukuk market for funds, as the market offers issuers a large and stable capital pool," he continued, a development he would welcome as an investor.
Sukuk are financial certificates representing ownership in real assets as well as the right to the cash flows they generate and to the proceeds from the sale of the assets. As such, they comply with Islam's prohibition on charging or paying interest. Traditional bondholders, on the other hand, own debt.
In addition to non-conventional issuers, Salib sees "some value in the Dubai complex" despite the spread tightening since the beginning of the year, especially the hospitality and retail sectors.
More generally, from a fundamental standpoint, the Gulf Cooperation Council, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, "offers the market the greatest support," Salib commented.
"Being a low population, hydrocarbon rich region whose governments run fiscal and current account surpluses, the economic backdrop is extremely conducive," Salib said, who also pointed out the solid balance sheets of individual issuers, many of them government owned.
Yet, sukuk are not entirely insulated from interest rate risk.
And as the Federal Reserve is preparing to hike rates, most likely next year, with potential implications worldwide, Azzad Asset Management is trying to limit its interest rate risk "by staying in fairly short-dated securities."
"Of course the sukuk market does not live in isolation to the rest of the fixed income markets, and the next cycle of increasing rates will prove a challenging headwind to demand," Salib said. "However the unique nature of the market along with its stability should see positive demand mechanics continue."
Yet, the market is quite illiquid relative to the traditional bond market despite a growing demand and supply and a broadening of the investor base in the sukuk market.
"Typically sukuk are bought and held right through to maturity by the investor base, and although a good thing in terms of price action, this can make it quite challenging when attempting to trade securities," he said.
(Deutsche Borse Group / 06 October 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Pakistan: State Bank of Pakistan Launches KAP Study Report On Islamic Banking

Karachi—State Bank of Pakistan (SBP) launched the survey-based report titled “ Knowledge, Attitude and Practices of Islamic Banking in Pakistan.” SBP Governor Ashraf Mahmood Wathra formally launched the report here at SBP’s main building at a ceremony which was also attended by bank presidents and senior industry representatives, Shariah scholars, reputed members of academia, officials of United Kingdom’s Department for International Development (DFID), World Bank and other reputed national and international organizations. 

The SBP Governor encouraged the industry to focus on research and development to develop innovative financial solutions that could meet needs of growing clientele of Islamic banking industry. He emphasized that while Islamic banking industry had established its foot prints in international and local market, the industry should not be complacent and stride towards bringing it closer to the key objectives of Islamic economic system: transparency, social justice and equitable distribution of wealth. He formally launched the KAP report and appreciated the efforts of SBP’s Islamic Banking Department and EdBiz Consulting Limited for successful completion of the project and thanked DFID for financing the study. A detailed presentation on the survey findings was delivered.

The first known initiative of its kind, the study has quantified the demand for Islamic banking in the country both for retail and corporate customers and has also identified demand supply gaps. The survey has a nation-wide representation of 9,000 households (banked and non-banked) and 1,000 corporates. According to the survey, there is an overwhelming demand for Islamic banking in the country that is evenly distributed amongst rural and urban areas, varied income strata and education levels. The analysis pent-up demand for Islamic banking is higher amongst retail (95 %) than businesses (73%). The study indicates that individuals in rural areas or in low-income brackets have relatively limited access to financial services. 

This highlights a huge opportunity for Islamic microfinance in rural areas. The study recommends that the role of Shariah scholars needs to be further enhanced and made more public in promoting Islamic banking and finance. Lack of general awareness about Islamic banking has emerged as one of the key challenges confronted by the industry. The study indicates that rural markets, SME, agriculture and microfinance sectors have got huge financing needs and are potential markets for Islamic banking. It can also be inferred from findings of the study that Islamic banks are desired to significantly improve their investments in expanding their outreach to 2nd and 3rd tier cities both to improve their visibility across the country and also to increase their interaction with local businesses and trading communities.

According to survey findings, given the supply-demand gaps, there is huge potential for further development of Islamic banking in Pakistan. SBP Deputy Governor Saeed Ahmad in his closing remarks informed the participants of measures taken by the central bank to address the keys challenges facing the Islamic banking industry. Mentioning the resolve and commitment of the Government of Pakistan for promoting Islamic banking in the country on sound foundations the Deputy Governor shared with the audience progress of the National Steering Committee on Islamic Finance.

(Pakistan Observer / 05 October 2014)
Alfalah Consulting - Kuala Lumpur:
Islamic Investment Malaysia:

Latest Posts

Upcoming Events on Islamic Finance, Wealth Management, Business, Management, Motivational

Alfalah Consulting's facebook


Alfalah Consulting is NOT providing any kind of loan to finance project etc and asking for a fee. If you've received any email claiming to be from Alfalah Consulting, offering loan to you, please ignore it or inform us for further actions. Our official email is If you've received an email from, that's NOT from us. Be cautious!