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The Role of Sukuk in Islamic Capital MarketsPresented by Dr Marjan Muhammad (ISRA) and Ruslena Ramli (RAM Ratings)
The Role of Sukuk in Islamic Capital Markets (ICM)
10th MeetingCOMCEC Financial Cooperation Working Group
29 March 2018
Dr. Marjan Muhammad and Ruslena Ramli
2
1 INTRODUCTION: SCOPE & METHODOLOGY
2 ROLE OF SUKUK IN ISLAMIC CAPITAL MARKETS
3 KEY SUCCESS FACTORS IN DEVELOPING A SUKUK MARKET
4 GLOBAL DEVELOPMENT OF SUKUK STRUCTURES, ISSUANCES & INVESTMENT
PART 1: OVERVIEW OF SUKUK AND ICM
5 KEY ISSUES & CHALLENGES IN DEVELOPING SUSTAINABLE SUKUK MARKETS
Scope of the study
3
Objective: To analyse the role of sukuk as an instrument for capital market development and resource mobilisation, and as an alternative financing tool for the economic development of the public and private sectors
Theoretical and legal natures of sukuk Parties involved in developing & issuing
sukuk Requisites of a successful sukuk market
Sukuk growth, analysis of issuances, structures and investments
Factors & challenges affecting sukuk and policy recommendations
SUKUK STRUCTURES, ISSUANCES &
INVESTMENTS
Legal, regulatory, Shariah governance, and tax frameworks
Innovations Developmental challenges
CASE STUDIES & POLICY RECOMMENDATIONS
Scope:
KEY BUILDINGBLOCKS
Methodology of the study
4
Methodology:
Desktop Research
Survey & Interview
Literature review
Data analysis of data from various industry & economic reports and macroeconomic data
Primary data from Bloomberg and Eikon-Thomson Reuters
Online survey of more than 50 market respondents
Phone calls and face-to-face meetings
Field visits to Indonesia, Turkey & Nigeria
Evolution of the sukuk industry
5
Initial attempts to develop sukuk- Muqaradah
bonds- Participation
terms cert- GII
Early sukuk issuance
- Shell MDS sukuk
- Period of theory and model building
Emergence of sukuk markets
- Bahrain government ijarah sukuk
- Malaysian global sukuk
Expansion of sukuk markets
- Green sukuk- More
jurisdictions issuing sukuk
Historical Pre-1990 1990 -2000 2001 -2016 2017 - Future
Classical use of sukuk
- Commodity/ grain coupon
- Esham
Global outlook of Islamic finance industry as at December 2017
6
Source: ICD-Thomson Reuters Report 2017
“The CAGR of Islamic finance assets from 2012 to 2017 stood at 7.4% with total assets of USD2.4 trillion as at end-2017 (projected)”
A snapshot of global sukuk as at end-2017
7
Global Sukuk Issuance By Country
As at end-2017, global sukuk issuance increased 45.4% to USD105.6 billion from USD72.6 billion end-2016
In 2017, GCC sukuk issuance improved significantly by 144.5% to USD46.9 billion from USD19.2 billion in 2016. Performance was driven by higher issuances from the public sector jumping to USD31.9 billion from USD3.7 billion, of which Saudi Arabia’s market share stood at 77% (or USD24.6 billion)
USD36.5b
USD14.9b
USD46.9b
USD7.3b
0,00
10,00
20,00
30,00
40,00
50,00
Malaysia Indonesia GCC Other countries
2015 2016 2017
Source: Eikon-Thomson Reuters, Bloomberg, Bank of Indonesia, Capital Markets Board of Turkey
A snapshot of global sukuk as at end-2017 (con’t)
8
From total global sukuk issuance, public sector issuance made up 58.5% (or USD61.8 billion) and private sector comprised 41.5% (or USD43.8 billion)
On the private sector, Malaysia and GCC hold the highest market share. End-2017, Malaysian corporates represented a dominant 60.0% (or USD26.3 billion) followed by Saudi Arabia at 16.2% (or USD7.1 billion) and UAE at 9.0% (or USD3.9 billion) of total private sector issuanceSource: Eikon-Thomson Reuters, Bloomberg, Bank of Indonesia, Capital Markets Board of Turkey
By Type of Issuer – Public Sector
USD10.2b
USD14.2b
USD24.6b
USD1.1b
USD4.2b
USD2.0b
Malaysia
Indonesia
Saudi Arabia
UAE
Bahrain
Qatar
Oman
Kuwait
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2015 2016 2017
By Type of Issuer – Private Sector
USD26.3b
USD668.1m
USD7.1b
USD3.6b
USD1.3b
USD1.3b
USD616,0m
USD750,0m
Malaysia
Indonesia
Saudi Arabia
UAE
Bahrain
Qatar
Oman
Kuwait
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2015 2016 2017
Key domestic stakeholders in developing a sukuk market
9
Stimulate activity and product development in both the sell and
buy sides
SERVICE PROVIDERS
SIX KEY DOMESTIC MARKET STAKEHOLDERS
Attract foreign investors and strengthen the liquidity structure
REGULATORS
Generate investor confidence
EXCHANGES
Facilitate issuance of infrastructure-based sukuk
with long tenures
NBFIs
Promote the efficient use of domestic wealth through financial intermediaries
GOVERNMENT
Promote value creation through capital-market activities
FINANCIAL INSTITUTIONS
A SUSTAINABLE
SUKUK MARKET
Key international institutions in developing sukuk markets
10
Key role:
To issue short-term Shariah-compliant financial instruments (i.e. short-term sukuk) to facilitate more efficient liquidity management for IFIs and to support cross-border transactions between these institutions.
Key role:
To develop and issue innovative Shariah-compliant sukuk structures to fund its member countries.
Key role:
To issue sukuk that promote shared prosperity and socially responsible investment (SRI).
Capital Markets
Government bonds Corporate and financial
institution bonds
Equity Securitised products
1 Foundational policies
Benchmarkassets
Supply of capital
Demand for capital
Intermediation Free markets Price discovery
2
Regulatory framework
3
Cornerstoneinstitutions
4
Regulations and standards
5
Taxation
6
Market infrastructure and technology
Regulatory bodies and their architecture
Governance and ownership
Institutional setup
Transparent regulations
Predictable enforcement
Tax policies
Tax incentives
Market infrastructure
Technology
Po
licym
akin
gM
arke
t ar
chit
ect
ure
an
d d
esi
gn
Basic Pillars of a Domestic Capital Market
11
McKinsey’s building blocks…
Source: McKinsey & Company (2017)
Critical success factors for establishing a sustainable sukuk market
12
4. Sustainable supply of private sector:
The best yardstick in tracking the pulse of a local sukuk market is the performance of the private sector (i.e.quasi-government and corporate issuance)
1. Cohesive collaboration with key market stakeholders:
A specific roadmap for the inclusion of ICM, interlinking sukuk as a core component is key to guide andmeasure the effectiveness of participation level
2. Vibrant ecosystem:
Amalgamation of a strong legal and regulatory regime, coupled with a conducive tax environment androbust market infrastructure and technology
3. Intermediation of domestic financial resources:
Effective mobilisation of domestic financial resources through cornerstone institutional investors such aspension funds, insurance/takaful companies, etc.
5. Shariah governance framework:
Harmonistion of Shariah principles and interpretations adds clarity to product development, builds marketconfidence and creates awareness of the benefits of Islamic finance
Global development of sukuk structures
13
Shariah contracts under AAOIFI Shariah
Standards No. 17 on Investment
Sukuk
Despite the existence of international Shariah guidelines, AAOIFI Shariah standards are not binding
Each jurisdiction has evolved differently to accommodate the Shariah-related needs and requirements of its domicile country
Global development of sukuk structures (con’t)
14
0%
20%
40%
60%
80%
100%
United Arab Emirates Saudi Arabia Qatar Oman Bahrain *Jordan
Types of Shariah contracts for sovereign issuances by selected Arab countries (2011 - June 2017)
Wakalah bil istithmarIjarahMurabahahSalamHybridOthers
“Ijarah-based sukuk constitute a large portion of sovereign issuances in most jurisdictions”
Global development of sukuk structures (con’t)
15
Types of Shariah contracts for sovereign issuances by selected Asian countries (2011 - June 2017)
0%
20%
40%
60%
80%
100%
Bangladesh Brunei Indonesia Malaysia Pakistan Turkey Hong Kong
Ijarah
Wakalah bil isitithmar
Mudarabah
Murabahah
Others
Global development of sukuk structures (con’t)
16
Types of Shariah contracts for sovereign issuances by selected African countries (2011 - June 2017)
0%
20%
40%
60%
80%
100%
Gambia Nigeria Senegal Ivory Coast South Africa
Salam
Others
Ijarah
Global development of sukuk structures (con’t)
17
Types of Shariah contracts for quasi-government and corporate issuances by selected Arab countries (2011 - June 2017)
0%
20%
40%
60%
80%
100%
United Arab Emirates Saudi Arabia Kuwait Qatar Oman Bahrain *Jordan
Wakalah bil istithmar
IjarahMudarabahMurabahahMusharakahHybridOthers
“Requirement of having to secure available unencumbered assets has pushed the commercial decision by governments and corporates to adopt wakalah contracts”
Global development of sukuk structures (con’t)
18
Types of Shariah contracts for quasi-government and corporate issuances by selected Asian countries (2011 - June 2017)
0%
20%
40%
60%
80%
100%
*Indonesia Malaysia Pakistan Turkey
Wakalah bil istithmar
Ijarah
Mudarabah
Murabahah
Musharakah
Hybrid
Others
Global development of sukuk issuances – Arab region
19
GCC’s and Jordan’s sovereign and corporate (including quasi-government) sukuk issuance (2013–June 2017)
0%
20%
40%
60%
80%
100%
2013 2014 2015 2016 June 2017
Sovereign Corporate (including quasi-government)
16%
84% 65%
35%
54%
46% 39%
61%
71%
29%
“Arab countries have been actively issuing both LCY and FCY sovereign sukuk to finance their budget deficits”
Global development of sukuk issuances – Arab region (con’t)
20
Water and Sanitation
Transport
Information and Communications
Technology
5%
Electricity
9%
43%
43%
Annual funding gap of USD60.0 billion
Investment Requirements
Current Spending
USD40.0 billion
USD100.0 billion
Infrastructure financing gaps Priority sectors for the next 5 years
Arab countries’ infrastructure spending
“In developing Arab countries’ sukuk markets, consideration should be given to the large infrastructure funding gap that has historically been funded by governments and commercial banks”
Global development of sukuk issuances – Asian region
21
Financial institutions have been the core sector raising sukuk to meet capital adequacy requirements. Sectoral diversification can be observed in quasi-government and corporate sukuk issuances originated in Indonesia and Malaysia.
The GoM’s concerted efforts to include Islamic banking and Islamic finance as policy tools in its economic agenda have been the driving force behind the country’s rise in the mainstream financial markets.
0%
20%
40%
60%
80%
100%
Indonesia Malaysia Pakistan Turkey
LeasingService - Other
Telecommunications
Utility - Other
Financial - Other
Selected Asian countries’ quasi-government and corporate sukuk issuance (2013–June 2017)
Global development of sukuk investment – Arab region
22
A snapshot of selected GCC’s credit investors profile
“Investors in GCC’s recent bond issuances (including sukuk) shows a high reliance on foreign investors”
Masjid Al Futtaim Perp
Qatar Reinsurance Perp
Dubai Islamic Bank Sukuk 5Y
Gulf International Bank 5Y
Ahli Bank Qatar 5Y
NBAD Green bond 5Y
Inv. Corp of Dubai Sukuk 10Y
Oman 30Y
Oman 10Y
Oman 5Y
Kuwait 10Y
Kuwait 5Y
KIPCO 10Y
Equate Petro Sukuk 7Y
Country NBFIs assets as %
to GDP
Pension fund assets
as % to GDP
Bahrain 31.5% (2014) 20.5% (2006)
Kuwait 2.44% (2014) n/a
Oman n/a n/a
Qatar n/a n/a
Saudi Arabia 14.4% (2014) 26.0% (2016)
UAE n/a 2.7% (2007)
Financial Intermediation by NBFIs as a Percentage of GDP (Arab)
Global development of sukuk investment – Asian region
23
McKinsey Asian Capital Markets Development Index
“Hong Kong and Malaysia have undergone healthy developments in terms of the composition of their financial markets. Indonesia is still attempting to establish a higher ratio of its outstanding bond market against its GDP. ”
Financial Intermediation by NBFIs as a Percentage of GDP (Asian)
CountryFunding at scale1
Investment opportunities2
Pricing efficiencies3 Total score (out of 5)
1 Weight allocated: 50% while arriving at total score
2 Weight allocated: 40% while arriving at total score
3 Weight allocated: 10% while arriving at total score
Very deep
Deep Moderate Shallow Very Shallow
Country NBFIs assets as %
to GDP
Pension fund assets
as % to GDP
Hong Kong n/a 37.4% (2014)
Indonesia 3.3% (2014) 1.69% (2011)
Malaysia n/a 57.9% (2014)
Pakistan n/a 0.02% (2012)
Global development of sukuk investment – African region
24
Based on the composite mix of investors, Africa’s debt securities are mainly held by foreign holders.
Although African governments have implemented measures to heighten the development of NBFIs, challenges such as financial inclusion and a low savings rate have been hampering progress.
Country NBFIs assets as % to GDP Pension fund assets as % to GDP
The Gambia n/a n/a
Nigeria n/a 4.4% (2012)
Senegal n/a n/a
Ivory Coast n/a n/a
South Africa 120.3% (2014) 40.8% (2014)
Sudan n/a n/a
Financial Intermediation by NBFIs as a Percentage of GDP (African)
Key issues and challenges
25
Common law vs civil law Recognition of trust1 Legislative framework
Tax neutrality Tax incentives2 Tax law & framework
Standardisation/ harmonisation Centralised Shariah board 3 Shariah governance framework
Sovereign benchmark yield curve for corporate issuers4 Corporate sukuk issuance
Intermediation of NBFIs Local & foreign investors from
various institutions5 Diversified investor base
Thank you
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