Markets

Success In Sukuk and Islamic Capital Markets

NOTHING SUCCEEDS LIKE SUCCESS”. THIS FAMOUS PROVERB EXPRESSES THE IDEA THAT SUCCESS BREEDS FURTHER SUCCESS. IN THE CONTEXT OF ISLAMIC FINANCE, IT HOLDS GOOD TOO. THEREFORE, IT IS NO SURPRISE THAT ISLAMIC CAPITAL MARKETS ARE GROWING CONSISTENTLY OVER THE PAST FEW YEARS AND SUKUK IS AN INSTRUMENT OF CHOICE IN ALMOST EACH ONE OF THOSE. WHEN A BULGE BRACKET INVESTMENT BANK FROM WALL STREET DECIDED TO ENTER THE ISLAMIC CAPITAL MARKETS,
THE RESPONSE WAS A US$500 MILLION CORPORATE SUKUK. WHEN AN IMPORTANT ECONOMY AMONGST THE WESTERN FINANCIAL WORLD DECIDED TO ENTER THE ISLAMIC CAPITAL MARKETS, THE RESPONSE WAS A £200 MILLION SOVEREIGN SUKUK.

THE FACT THAT WE HAVE ALREADY Realized participation from the western world and the Wall Street based firms’, upholds testimony to the fact that Sukuk as an offering and Islamic Capital Markets as a destination could compete and earn success driven outof its meritocratic proposition.Sukuk is basically an investment certificate consisting of ownership claims in a pool of assets. It has emerged as one of the most widely accepted asset class in the Islamic capital markets. However, by virtue of this excellent acceptance it has to face the test of the times, qualitative comparison with conventional bonds being at the forefront.

FOR REASONS BASED ON CONVENIENCE, Sukuk is often considered a replica of a conventional fixed income bond. However, one of the best forms of rejection of this argument was observed when an industry leader candidly said – “If someone calls Sukuk as an Islamic Bond, then it is like discovering a Shari’a compliant liquor”. Rightly so, just like there is nothing like Shari’a compliant liquor, similarly, in strictest terms there is nothing called an Islamic bond. Islamic finance is driven by faith, which believes in the well-being of society and the world at large. Since, there is no similar faith that drives a conventional bond, hence the comparison is not worthy of making. One similarity, which we could think of between a bond and sukuk, is the conventional concept of securitisation, a process in which ownership of the underlying assets is transferred to a large number of investors through certificates representing the proportionate value of the relevant assets. However, the larger difference is that a conventional bond proceeds over interest bearing securities, a concept that any given Sukuk or Islamic finance is fundamentally opposed to.

Islamic capital market can play a significant role considering the participation business entities and individual investor take in opting for various financial instruments available in the market. To understand this, let’s take the example of India, which with its 15% population of Muslims, is the 2nd largest Muslim populated nation of the world. However, negligible amount this population currently invests in India’s equity markets. This gives rise to a larger question, whether 2% are investing out of ignorance leading to a religious breach or out of compulsion in the absence of adequate opportunities to invest or else whether 98% are ignorant about the existing opportunities to invest.

THE CAPITAL MARKET THINK-TANKS locally believe there are multiple instruments worth considering as they are in compliance with Shari’a law and there are many Muslims who are already investing in those products. However, this message doesn’t get the deserving attention, which leads to poor participation of Muslims in Indian capital markets. It’s a classic example of how important is financial literacy and the impact its absence may have. In general, an Islamic capital market consists of Islamic equity, Sukuk, Islamic funds and Islamic Real Estate Investment Trusts (REIT’s). Sukuk pipeline for 2015 looks to be very strong. As of 18th January 2015 the Thomson Reuters Global Sukuk Index is at 116.7 points, up from 115.7 at the end of last month. According to Reuters, Sovereign Sukuk issuance is expected from Indonesia, Ningxia, Bahrain, Kenya, Turkey, Oman, Kazakhstan, Luxembourg, Jordan, Tunisia and Corporate Sukuk may be issued from Pakistan – Bank Islami and Mobilink; Bangladesh Central Bank; Turkey – Turkiye Finans, Tirsan Treyler, Kuveyt Turk, Fleetcorp, Agaoglu Group, Aktif Bank, Dogus Group; Malaysia – UniTapah Sdn Bhd, Cagamas, Point Zone (M) Sdn Bhd, Malaysia Building Society Berhad, Temasek Ekslusif, Bank Islam, Axis REIT, Bintulu Port Holdings, Malaysia Marine and Heavy Engineering, Mahco Malaysia, Cendana Sejati, CIMB Islamic, Sunway, Société Générale; Bahrain – Gulf Finance House; Saudi Arabia – Islamic Corporation for the Development of the Private Sector (ICD); UAE – Etisalat; Oman – Bank Muscat; International Bank of Azerbaijan. Moreover, The World Bank has been involved in Islamic finance for years (funding an immunisation programme etc.) and its private lending arm, the International Finance Corp., is also considering a return to the sukuk market.

With such a diverse and strong list, Sukuk is set to grow further and become a more significant financial instrument in days ahead of us. Amongst the world’s multiple Islamic finance capitals, London is increasingly viewed as a probable leader in the years to come. OMAN IS PROPOSING TO DEBUT ITS sovereign sukuk early this year; Senegal & Republic of South Africa did it in 2014 and Kazakhstan is all set to make its debut soon. Though in an expansion mode, at the same time, Islamic capital markets is keeping pace with the contemporary financial industry standards. As of December 2014, nine Basel III compliant sukuks have been issued raising US$5.09 billion in proceeds for eight different issuing banks across three different countries – Malaysia, Saudi Arabia and the UAE. This is a significant move in assuring the quality and compliance, which is a default expectation from any given financial product these days. These expectations from Islamic finance market are ever-increasing. Its biggest strength is its risk management, diversity and inherent merit, which drive the underlying commerciality.

During 2008 financial meltdown, when a majority of financial institutions worldwide suffered huge losses, the impact on Islamic financial institutions was relatively low. Islamic finance was beating benchmarks, then, now and in all possibility in future. It is for this particular reason we could label its journey as successful, and of course “Nothing succeeds like success”, which is evident in a double-digit growth rate for a few years in a row, which were by far the toughest years for the global financial industry

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