This has been a banner year for the Islamic finance
industry, thanks to a slew of new high-profile Islamic
bonds from an unusual source: non-Muslim governments in
Europe, Asia and Africa.
The UK won the race to be the first government from the
western world to tap the fast-growing market for so-called
sukuk, by structuring and selling a £200m Islamic bond in
June. It was followed by Hong Kong, South Africa and
Luxembourg.
These non-Muslim countries have not chosen the arduous,
complex task of issuing debt-like securities that adhere
to sharia law due to their religious beliefs.
In terms of overall volumes, there has been about $32bn of
sukuk sales this year, according to Dealogic –
respectable, but unlikely to break the $44.8bn record set
in 2012. But the quality and prestige of the sovereign
sukuk sales clearly makes this a vintage year for the
market, and constitutes a fillip to the wider industry.
“Four non-Muslim countries coming in a year suggests
there’s a lot of momentum,” says Neil Miller, a veteran
Islamic finance lawyer at Linklaters, who worked on the UK
sukuk.
This has implications also for the Gulf’s increasingly
vibrant Islamic finance industry. Malaysia remains home to
the largest and most developed market, but the biggest
potential is in the oil-rich Gulf, where Islamic banks are
now in many markets competing head to head against
conventional lenders – and gaining ground.
But one longstanding problem has been a lack of
sharia-compliant, liquid assets in which to invest excess
deposits. Samad Sirohey, head of Islamic banking at Citi,
points out that these have been building rapidly in recent
years due to low credit growth in their domestic
markets.
The spate of new sukuk debutantes have therefore given the
cash-rich Islamic banks in the Gulf a sorely needed
outlet.
Demand seems to be ravenous. The UK attracted more than
£2bn of demand for its £200m sukuk without breaking a
sweat. Appetite is particularly strong from the Gulf. For
example, more than 60 per cent of Luxembourg’s €200m debut
went to Middle East investors.
Even lower-rated countries face little difficulty in
borrowing from Islamic investors desperate for more
supply. Indonesia returned to the Islamic bond market in
early September with a $1.5bn issue that saw more than
$10bn of orders. South Africa’s maiden $500m sukuk
garnered a $2.2bn order book.
“The supply-demand dynamic is still tilted towards
demand,” Mr Sirohey says.
The crucial question many the industry are asking is
whether the clutch of western sovereign issues encourage
more companies – whether western or in the Gulf – to
follow suit, and transform a healthily growing but still
relatively narrow, thinly traded market into a vibrant
financing tool on par with other bond markets.
Typically, governments are the first to tap bond markets,
setting a benchmark that banks and companies use to price
their own issues.
Sovereign sukuk sales are arguably even more important in
laying a path for companies, especially western ones, as
it can help make the often-complex legal structures more
understandable.
“Companies don’t necessarily want to be the first issuers in a new market, so we need governments to pave the way,” says Mr Miller.
There are some encouraging signs. Goldman Sachs shrugged off a controversial attempt to issue a sukuk three years ago that ended in failure and returned to the market this year, becoming only the third global bank to structure and sell a sukuk, after HSBC and a small issue from Nomura.
Bankers and lawyers are now hounding companies in the UK, Africa and Asia to follow in the footsteps of London, Johannesburg and Hong Kong by tapping this eager investor base.
“What we’re excited about are the corporates coming,” says Tamim al-Kawari, chief executive of QInvest, a Qatari Islamic investment bank, and one of the banks that worked on Goldman’s sukuk.
“Sovereigns coming is good, but I really hope that corporates come in on the back of them.”
It remains questionable how many western companies will do so, given the additional legal and financial legwork required to structure sukuk.
It is notable that western companies that have issued
Islamic bonds – including HSBC, General Electric, Nomura
and Tesco’s Malaysian arm – have not returned to the
market. That is understandable. Why go through the long,
expensive process of dealing with Muslim scholars, lawyers
and bankers to issue a sukuk, when it has never been
easier and cheaper to sell conventional bonds?
But Mr Kawari argues that companies that ignore the
potential of the sukuk market are missing a trick, by
cutting off an alternative funding tool that is becoming
increasingly viable. The Qatari investment banker points
out that the time it takes to issue an Islamic bond has
been shortened considerably in recent years, as structures
and the legal documentation has become more standardised.