Debut Sovereign Sukuk in 2014

The following is an excerpt from a pre-copyedited, author-produced version of an article by Scott Morrison published in the Journal of International Banking Law and Regulation following peer review. The definitive published version ‘Debut Sovereign Sukuk in 2014,’ Journal of International Banking Law and Regulation (Sweet and Maxwell), Vol 30 Issue 3 (March 2014), 122-127 is available online on Westlaw UK or from Thomson Reuters DocDel service.

Abstract

Ten countries issued sukuk between 2000 and 2013. Last year four more countries originated debut international sukuk: the United Kingdom, Hong Kong, South Africa, and Indonesia. After a succinct summary of sukuk structure, this article analyses these issuances ascertaining present and possible future trends involving this shar‘iah-compliant financial instrument and the legal and regulatory reforms requisite to it. Keywords: sukuk, Islamic finance, shari‘ah-compliant finance, sovereign issuances, UK, Luxembourg, South Africa, Hong Kong, Senegal, South Africa, Indonesia

Introduction

A significant characteristic of global finance in 2014 was the variety and number of debut issues of sovereign sukuk. After averaging less than one annually for over a decade, last year there were four new entrants to the sovereign sukuk arena. Sukuk — sometimes termed ‘Islamic bonds’ — are investment certificates representing proportional ownership of an asset, which may include a business ventures or usufruct.[1] This article summarises first time international sovereign issuances as these are particularly consequential instances and evidence of the global growth and evolution of sukuk (and Islamic finance generally). Chronologically the sovereign sukuk surveyed here are the following: the United Kingdom, Hong Kong, South Africa, and Indonesia.

In order to analyse the significance of this large number of sovereigns, this article reviews the main features of the issuances at closing including investor breakdowns. It then concludes with some tentative thoughts about what the year portends for future sovereign, quasi-sovereign and corporate issuances and for Islamic banking and finance more broadly– the economic sector in which sukuk represents the most high profile element. Legal and regulatory significance In each country issuing debut sukuk the extent and character of legislative, regulatory and policy change required depended upon the flexibility and development of existing and applicable statutory and regulatory frameworks including tax. Before its issuance Luxembourg was already home to a large Islamic funds industry; it completed the reforms requisite to a competitive sukuk offer[2] over three or four years, without the same level of public discussion or consultation (or aborted attempts)[3] seen in the United Kingdom where the debut issue was the culmination of at least seven years of deliberation and targeted reform[4] – although the UK sukuk still preceded that of Luxembourg by two months.

One point that the comparison of Luxembourg and the United Kingdom demonstrates is that a government’s ease in arranging the financial and legal landscape in a manner conducive to a sukuk issue does not necessarily reduce to already available knowledge about Islamic commercial jurisprudence or the ethics underlying shari’ah compliance; this was for all intents and purposes equally lacking in each of these two countries. In other words the ease and the time required to originate a sovereign sukuk successfully depends on factors shared equally with those required by any novel financial products: the ability of existing securities legislation and regulatory frameworks to flexibly adapt to new or innovative structures whilst preserving uniform application and consistent treatment of transactions and contracts whether or not they purport shari’ah compliance.

Competition to be an Islamic finance centre

A spur to the sukuk sales reviewed in this article was the policy goal of becoming either a global or a regional centre for Islamic finance and banking. Particularly the United Kingdom was in competition with its Eurozone rival, Luxembourg; seeking to capitalise on increasing trade between China and the Middle East,[5] Hong Kong competed with regional rivals Singapore and to a more limited extent followed in the footsteps of the longest established and still globally dominant Kuala Lumpur.[6] The implicit assumption is that sukuk represent a gateway into other, less established and potentially in the future more variegated and larger quantities of shari’ah-compliant securities as well as retail financial and banking services where demand may be sufficient. The sovereign issuances represented a means of broadening the sukuk market,[7] diversifying markets,[8] and acting as a signalling device intended to stimulate larger corporate issuances. Sovereigns pave the way for private sukuk sales not only by effecting and demonstrating their competitiveness but also by setting a benchmark.[9] In summary the question of which if any countries manage to supplant the historic centres of Islamic finance or to otherwise attain in their own right the status of capitals of Islamic financial services capital may ultimately matter less than the by-product of that competition; a greater understanding, awareness and familiarity of sukuk as one among a number of serviceable components of a diverse investor portfolio and market.

Background to the 2014 issuances  

The historic home jurisdictions of Islamic banking and finance have been in Malaysia[10] and in the Middle East[11] — more precisely in five of the six Gulf Cooperation Council (GCC) states: Bahrain, Qatar, Kuwait, Saudi Arabia, and the United Arab Emirates (with the sixth member, Oman, only beginning to license Islamic financial institutions in 2012).[12] The larger share of sukuk are still intended for local investors. However international sukuk are growing, from 10% in 2010 to 20% last year.[13] The UK, Luxembourg, Hong Kong and South Africa make no claims to an Islamic legal, constitutional or other identity. Indonesia hosts the largest population of Muslims worldwide[14] and Senegal (a repeat issuer) a large majority.[15] Notwithstanding occasionally aired concerns of social inclusion and state acknowledgement of religious sensibilities, domestic demand does not number among the primary causal factors producing the sovereign debuts; at all events the encouragement or licensing of retail Islamic banks or windows would be a more effective means of catering to a broader national population seeking shari’ah-compliant financial services. The expansion into these new jurisdictions suggests rather a transformation from an instrument that is driven by specifically religious values or identity,[16] or by moral sensibilities (whether religious or secular) into a mainstream tool for financing governments and infrastructure projects, or for the financing requirements of private entities. The United Kingdom sukuk taken up in the next section followed a relative dearth of sovereign issues; from December 2013 to June 2014, only four triple-AAA rated sukuk had been issued.[17] Predictions in 2013 that volume would remain concentrated in the Gulf and Malaysia in 2014 were substantially born out notwithstanding the origin countries of the five sovereigns surveyed below.[18]

The 2014 Debut Sovereign Sukuk Issues

The inaugural debut sovereign sukuk issuance of the year took place in June. The United Kingdom’s sukuk was over-subscribed; orders emanated from investors in the UK, the Middle East and Asia on the order of £2.3 billion for a £200 m ($322m) sale, denominated in pounds sterling.[19] The underlying assets of this ijarah sukuk were three government-owned properties.[20] Although widely touted as the first sovereign sukuk issue in the western world or in Europe, in actual fact the German Land of Saxony Anhalt holds that title having issued sukuk a decade earlier.[21] Although not a debut, Senegal’s issue closing the following month amounted to 100 billion CFA francs (US$ 208 m).[22] The tenor was four years, with an annual 6.25 pc profit margin; it targeted primarily institutional investors and banks in the West African Economic and Monetary Union (WAEMU).[23] Sukuk issuances mainly for domestic investors in local currencies in other African countries that preceded South Africa’s include Gambia, Nigeria, and Sudan.[24] The South African sovereign sale itself had a 5.75 year tenor, with an order book of $2.2 b for a sale of $500 m.[25] Like the United Kingdom, this was an ijarah sukuk with assets comprised of items of (publicly undisclosed) infrastructure.[26] Fifty-nine pc of investors participating in the deal were Middle Eastern.[27] In contrast to Nigeria, Senegal and North African countries, South Africa’s population features a very small Muslim minority (less than 2 percent).[28]

In September Hong Kong completed a US$1 billion ijarah sukuk.[29] It attracted orders of 4.7 times the amount on offer,[30] with nearly half of the buyers being based in Asia, and a third to Middle Eastern funds.[31] This issuance is the initial test of new tax laws passed by the Hong Kong Legislative Council.[32] Also in September Luxembourg closed a €200 m sukuk, which was twice oversubscribed,[33] with over 60 pc being sold to Middle East investors;[34] half of the sukuk were placed with central banks and other official institutions.[35] The Luxembourg authorities like those in London have also sought to attract listings of sukuk, on the Luxembourg Stock Exchange (LuxSE).[36] Lastly Indonesia originated a US$1.5 b issue, which received over $10 b of orders, closing in September.[37] The sukuk’s tenor was ten years.[38] The Finance Ministry reported that the buyers were based in the Middle East (35 pc), Asia (30 pc), the US (20 pc), and Europe (15 pc).[39]

Conclusions 

Each of the debut sovereign issues described above is the outcome of legal and regulatory reforms. Each debut issuance comprises a novel jurisdiction where sukuk have demonstrably become competitive for the first time with conventional financing. The uptake and geographic heterogeneity of investors as well as the quantum of excess demand suggest that the legal reforms undertaken — whilst motivated more by policy concerns than by immediate financing imperatives – may encounter some success in stimulating larger volume corporate issues or iterated sovereign or quasi-sovereign issuances. The initial costs of issuing sovereign sukuk in a country with some form of Islamic identity or a Muslim majority population (such as Indonesia) are not necessarily lower than in a country without these features.[40]

Furthermore, the demonstration and ‘mainstreaming’ effect of those sovereigns perceived as secular or non-Islamic is likely greater both because of their positions and profiles in conventional global banking and finance and because the adoption of sukuk in these jurisdictions (by government imprimatur no less) makes it plain that not only Muslims can be interested in a form of shari’ah-compliant finance, and be rewarded for their interest in it. The mainstreaming effect on sukuk then is all the greater given the absence of a large domestic retail market for Islamic financial services in countries such as South Africa or Luxembourg or the United Kingdom. Concerns about political externalities attendant to sukuk have evidently diminished.[41]

The socio-political resistance that foreign ownership of assets can and has at times elicited has also receded as an obstacle to the trade of shari’ah compliant securities; sukuk investors are more visible and more readily identifiable than those in conventional bond markets and yet there has been little discernable resistance as there may have been in the past in response to a perception of wealthy Middle Eastern investors acquiring assets in, for instance, European countries. One further reason for the uncontroversial reception of these sovereign issues may be not so much a reduction in suspicion or doubt but the undeniably increased diversification of investors; [42] the generalization or stereotype of Muslim investors being the chief target or buyer of these structured investments is more tenuous than it ever has been given the investment of heterogeneous parties from Asia, Europe and the United States as noted above. 2014 offers a current perspective on the interplay of sukuk and geo-political risk, although arguably one without any definitive conclusion. Some observers found significance in sukuk fluctuations due to military hostilities by and against ‘the Islamic state of Syria and the Levant (ISIL)’ while others discounted such correlations as specious or at best short-term perturbations.[43]

In summary, such variable interpretations based on inconclusive and rapidly changing data is not unlike the lack of firm conclusions that can be drawn concerning the impact of events of the day on conventional bond markets; if anything the effort to speculate on geo-political risk and the value of sukuk is evidence of the mainstreaming of sukuk and a result of its increased profile in global finance. 2014 also marks an increasing proportion of international sukuk[44] — more sukuk are now designed for and successfully marketed to cross-border investors. More are denominated in foreign currencies (relative to their countries of origin) — especially to the world’s reserve currency, US dollars.[45] In 2014 gradual progress has been made in the jurisdictions described above in overcoming the additional costs and obstacles standing between sovereigns and any novel financial structure, and in particular those peculiar to shari’ah compliance and governance.[46]

There remain areas of legal uncertainty, particularly with regard to the enforcement of investors’ interests.[47] An important area of future research concerns sukuk defaults and distress resolution, and how these might be similar or different to those appropriate to conventional debt instruments.[48] Cost reductions via standardization are not yet being fully exploited.[49] As noted in the introduction to this article, Muslim populations and the demands of domestic population have not furnished decisive pressures leading to sovereign issuances. However the geographic distribution, scale and needs for financial services of Muslim populations are relevant to predictions of Islamic banking more broadly, and also potentially relevant to both corporate and sovereign sukuk. There is therefore substantial reason to pay attention to the growth and development of Islamic finance and banking in Sub-Saharan Africa, as population projections suggest there will be a 60 pc increase in the Muslim population in this region.[50]

The year 2014 furnishes continuing evidence of an emerging or a consolidating reliance on ijarah rather than upon other types of sukuk, due to the dependability of the return at redemption and the AAOIFI ratified and now widely accepted practice of incorporating a purchase undertaking. Basel III rules will continue as a boon to sukuk, since sukuk can be counted towards capital on balance sheets, contributing to the capital and liquidity requirements as increased by Basel III.[51] An as yet insufficiently explored area of interest is the impact of sukuk on shareholder value.[52] The debut sovereign as well as several corporate debuts have helped build a reservoir of confidence in sukuk[53] which may translate into additional issuances and increasing volumes this year. Predictions for 2015 run a range from US$100 –US$174 b. Contrary to the position in 2014 where demand outstripped supply, surveys suggest supply will begin to exceed demand this year.[54] The geographic and jurisdictional expansion of sukuk will continue; there is interest from a number of novel jursidictions in issuing sovereign sukuk, particularly for infrastructural projects; for example, Egypt, Jordan, Morocco, Oman, and Tunisia[55] as well as Kazakhstan, Bangladesh, and the Philippines.[56]

Finally apart from promotion and the understandable ambient eagerness concerning the international expansion and increasing asset base of sukuk worldwide, this article has endeavoured to point out the specific significance of recent sovereign issues and of those leading sovereign issues that came to fruition (in some cases after years of analysis and effort) in 2014, as well as of areas of legal or practical uncertainty that would benefit from further reform, research and analysis. Certainly the sovereign issuances of the United Kingdom, Hong Kong, South Africa, and Indonesia have advanced the recognition and familiarity as well as the market credibility of shari’ah investment certificates, and those of emerging economies and participants in Islamic finance across large and disparate territories of the globe promise to continue that trend this year. In terms of the size and scale of this financial sector, however, the corporate response and the outcomes of the competition between a variety of jurisdictions hoping to assume a leadership role in Islamic financial services, remains far from decided.

[1] The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Manama, Bahrain Shari’ah Standards (Standard 17) defines sukuk as ‘‘certificates of equal value representing, after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity.” In the words of the Financial Times, citing Philip Molyneux: “Sukuk represents undivided shares in the ownership of tangible assets relating to particular projects or special investment activity. A sukuk investor has a common share in the ownership of the assets linked to the investment although this does not represent a debt owed to the issuer of the bond…under a sukuk structure the sukuk holders each hold an undivided beneficial ownership in the underlying assets.” http://lexicon.ft.com/Term?term=sukuk-(Islamic-bonds). An early and still informative paper on the adoption of securitization by Islamic finance is Andreas A. Jobst IMF Working Paper WP/07/117 “The Economics of Islamic Finance and Securitization” (2007), https://www.imf.org/external/pubs/ft/wp/2007/wp07117.pdf.

[2] The Securitisation Law (22 March 2004) was not tailored for sukuk, however it facilitated their issuance a decade later. Florence Stainier and Bishr Shiblaq, Arendt & Medernach, “Luxembourg,” http://www.arendt.com/publications/documents/lawyerspublications/islamic%20finance%20in%20luxembourg%20-%20f.stainier%20and%20b.shiblaq.pdf, pages 1-4 at 3. Luxembourg Inland Revenue’s Circular LG-A No. 55 (2 January 2010) placed the direct tax treatment of sukuk on par with that of conventional debt instruments. The Luxembourg Land Registration and Estates Department issued Circular No. 749 (17 June 2010) which clarified the application of VAT to sukuk, reducing the rate of land transfer tax (Stainier and Shiblaq at 3).

[3] Dana El-Baltaji and Camilla Hall, “UK Cancels Sukuk, Focus on Economic Growth: Islamic Finance,” Bloomberg, 17 January 2011. Mushtak Parker, “UK Treasury to rule out sukuk on ‘not-value-for-money basis,” Arab News, 23 January 2012.

[4] A seminal document at the beginning of the process of governmental consultations on sukuk, dated November 2007: HM Treasury and the UK Debt Management Office, “Government sterling sukuk issuance: a consultation.” Concerning tax implications particularly pertinent to the type of sukuk that was ultimately offered (ijarah): HM Revenue and Customs, “Stamp duty land tax: Commercial sukuk (Consultation Document 26 June 2008).

[5] “Hong Kong, Pakistan, Indonesia set for Islamic bond issues,” India Times, 8 August, 2014, http://economictimes.indiatimes.com/articleshow/39866814.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst. Another contender is Dubai; its leader Sheikh Mohammed Bin Rashid Al-Maktoum launched for the first time the Global Islamic Economy Summit in November 2014 and declared the ambition for Dubai to become a centre of Islamic finance and economics quite rapidly, by 2016. Mushtak Parker, “The industry hoping to go into top gear,” Zawya, January 31 2014, https://www.zawya.com/story/The_industry_hoping_to_go_into_top_gear-ZAWYA20140813103313/#utm_source=zawya&utm_medium=web&utm_content=related-news&utm_campaign=story.

[6] “Sukuk: An asset class goes mainstream.” Gulf News, October 18 2014, http://gulfnews.com/business/banking/sukuk-an-asset-class-goes-mainstream-1.1400326

[7] As Bernardo Vizcaino states, the sovereign issues “will broaden the market in Islamic bonds, helping in a small way to ease a shortage of top-rated paper that hurts the ability of banks to manage their funds.” “Birth of new sovereign sukuk sources to broaden market,” Reuters, January 22 2014 http://www.reuters.com/article/2014/01/22/islamic-finance-sukuk-idUSL5N0KR03620140122

[8] “Sukuk Commentary by BLME” Zawya, 5 November 2014, https://www.zawya.com/story/Sukuk_Commentary_by_BLME-ZAWYA20141105132505/

[9] A. Roger Wedderburn-Day, “Sovereign Sukuk: Adaption and Innovation,” Law and Contemporary Problems, Vol. 73:25, 325-333 at 326: “Typically, governments are the first to tap bond markets, setting a benchmark that banks and companies use to price their own issues.” Also Robin Wigglesworth, “Non-Muslims tap sukuk market,” Financial Times, October 8 2014.

[10] Shell MDS Sdn Bhd initiated the first modern sukuk in 1990 — Noripah Kamso with Tsu Mae Ng, Investing in Islamic Funds (Wiley and Sons: Singapore 2013), 159. In 2000 the Malaysian government completed a sukuk issue, the first rated by international credit rating agencies. A. Roger Wedderburn-Day, “Sovereign Sukuk” at 325-326.

[11] Bahrain’s sovereign issue followed on the heels of Malaysia’s, in 2001. “Big interest, no interest: The market for Islamic financial products is growing fast” Economist, 13 September 2014. Wedderburn-Day examines other early sukuk including those of Pakistan, Ras al-Khaimah (one of the seven emirates comprising the United Arab Emirates, UAE) and Saudi Arabia — at 325-326 et al. In total sixteen governments have issued sukuk; Mohieddine Kronfol, “Sukuk: An asset class goes mainstream” Gulf News, October 18 2014. Pakistan and Iran adopted Islamic banking even before the GCC states, however the fashioning of an Islamic banking system and banking law have been sui generis in both cases, and their participation (along with that of Sudan, also an early adopter) in global finance has been limited, with Pakistan and Sudan recently becoming exceptions to this last statement.

[12] Scott Morrison, “Oman’s Islamic Banking Regulatory Framework: the Corporate Governance of Shari‘a Compliance in a New Jurisdiction,” Arab Law Quarterly (Brill: Leiden, Netherlands) (accepted 20 May 2014, forthcoming).

[13] IFIS and Moody’s data referenced in “Big interest, no interest” specifies the volume of sovereign issuances: in 2014 US$20 b, in 2012 US$33 b.

[14] Drew Desilver, “World’s Muslim population more widespread than you might think,” Pew Research, Fact Tank, 7 June 2013, http://www.pewresearch.org/fact-tank/2013/06/07/worlds-muslim-population-more-widespread-than-you-might-think/. Indonesia (and Senegal) is the only member of the Organisation of Islamic Cooperation (OIC), which may serve as one metric of an Islamic identity of affiliation. OIC, “Member States,” http://www.oic-oci.org/oicv2/states/

[15] Senegal’s population exceeds 90% Muslim — Boubacar Samba Dankoko, “The Evolution of Population in Senegal” (September 2011) http://populationcommunication.com/Medias/Evolution_of_the_population_in_Senegal.pdf

[16] In 2008 Rahail Ali considered the ethical investment movement and its focus on conventional regulation. He wrote “Sukuk are, above all, ethically driven. So perhaps the biggest driver for sukuk in years to come will be ethically driven constituencies, of which the Islamic finance industry is very much a member.” Rahail Ali, ed., Islamic Finance – A Practical Guide (2008 – London: Globe Business Publishing Ltd) “An overview of the sukuk market,” pages 7-18 at 14. It is unclear that the expected reliance on ethical drivers or on Islamic identity and religious motivations can now be sustained, even as these motivations no doubt subsist among a significant portion of investors.

[17] “three of which were issued by the Islamic development bank in Saudi Arabia, and one of which was issued for public sector finance in Malaysia,” according to data from Dealogic, quoted by Elaine Moore and Thomas Hale, “UK sukuk bond sale attracts £2bn in orders,” Financial Times June 25 2014.

[18] Quoting Khalid Howladar; Babu Das Augustine, “Global sukuk issuance poised for a big leap,” Gulf News, December 1 2013; http://gulfnews.com/business/banking/global-sukuk-issuance-poised-for-a-big-leap-1.1261790. In terms of exchange listings of sukuk, Dubai takes third place following the Dubai government’s $750 million sukuk, which was then followed by Hong Kong’s $1 billion sukuk on Nasdaq Dubai (discussed below); Dahlia Rahaimy, “Sukuk industry likely to sustain double-digit growth,” Zawya (from Arab News) 29 October 2014, https://www.zawya.com/story/Sukuk_industry_likely_to_sustain_doubledigit_growth-ZAWYA20141029030153/. In the GCC states quasi-sovereign sukuk are common. For a discussion of volumes of assets: “Big interest, no interest,” and Yudith Ho and Liau Y-Sing, “Bombing of Militants Roils Sukuk” Bloomberg News, 30 September 2014, and Karin Strohecker, “After Western sukuk debuts, Islamic finance looks to emerging sovereigns” Reuters, 2 December 2014, http://www.reuters.com/article/2014/12/02/us-sukuk-emergingmarkets-sovereign-idUSKCN0JG1K620141202. According to Thomson Reuters data cited in that article, “Sovereigns and government-related entities accounted for $76.7 billion, compared to $84.7 billion for the whole of 2013.” This figure does not take account of sukuk sales in the last quarter (none of which were debut sales, and therefore are not discussed in this article) by TurkeyPakistan, Bahraini sovereign fund Mumtalakat, and the International Finance Facility for Immunisation.

[19] The tenor was five years and the profit rate 2.036 pc; it was set at the same rate as the yield on the UK’s equivalent five-year government bond — Elaine Moore and Thomas Hale, “UK sukuk bond sale attracts £2bn in orders,”Financial Times, June 25 2014. Also “Baroness Warsi Confirms Imminent Closure of UK Debut Sovereign Sukuk at 2014 London Sukuk Summit,” Zawya, 24 June 2014, https://www.zawya.com/story/Baroness_Warsi_Confirms_Imminent_Closure_of_UK_Debut_Sovereign_Sukuk_at_2014_London_Sukuk_Summit ZAWYA20140626064759/#utm_source=zawya&utm_medium=web&utm_content=related-news&utm_campaign=story. Abdullah Saeed and Omar Salah, “The Development of Sukuk: pragmatic and idealist approaches to sukuk structures,” (2014) 1 Journal of International Banking Law and Regulation, 141–152. Scott Morrison, “The Upcoming UK Sovereign Sukuk Issue,” Journal of International Banking Law and Regulation (Sweet and Maxwell), Vol 29 Issue 7 (July 2014), 362-366.

[20] A concise description of the ijarah sukuk structure is as follows: “The originator seeking financing sells the asset to an SPV for a value equal to the financing provided, and then leases it back. The lease payments provide the fixed income stream. The sukuk al-ijara are title deeds of equal shares in the leasing project, giving their holders the right to own shares, receive rental fees and dispose of their properties without affecting the lessee’s rights.” Florence Stainier and Bishr Shiblaq, Arendt & Medernach, “Luxembourg.” Ijarah are preferred by investors, according to an IMF study: “Investors treat a company’s shares differently depending on the specific types of Islamic bond it issues and the reputation of the Islamic scholars who oversee the instruments.” “Not all sukuk are created equal, IMF study finds,” Gulf News, August 13 2014; http://gulfnews.com/business/markets/not-all-sukuk-are-created-equal-imf-study-finds-1.1371754. The findings of the study were based on stock price movements corresponding to sukuk issued 2006-2013.

[21] Naveed Mohammed, “Islamic Finance in Germany,” Sukuk.com, 11 July 2014, http://www.sukuk.com/index.php/article/islamic-finance-germany-2074/. ON the benefits for the Land’s government and similar cases, Andreas Jobst, Peter Kunzel, Paul Mills, and Amadou Sy, IMF Policy Discussion paper, “Islamic Bond Issuance – What Sovereign Debt Managers Need to Know,” July 2008. The United Kingdom does possess a longer history of cross-border sukuk listed on the London Stock Exchange (LSE): US$34 billion through 2013 — Siddesh Suresh Mayankar, “UK building infrastructure to develop it as western Islamic finance hub, official says,” Gulf News, October 28 2014, http://gulfnews.com/business/economy/uk-building-infrastructure-to-develop-it-as-western-islamic-finance-hub-official-says-1.1405250. https://www.imf.org/external/pubs/ft/pdp/2008/pdp03.pdf, at 13

[22] Sadibou Marone and Jaco Visser, “Senegal Sukuk Shows Way for South Africa, Nigeria to Debut,” Bloomberg News, 27 June 2014, http://www.bloomberg.com/news/2014-06-27/senegal-sukuk-shows-way-for-south-africa-nigeria-to-debut-1-.html. Also Thomas Hale and Javier Blas, “Senegal bond sale raises $500m,” Financial Times, July 23 2014. The same month as reported in the same article the Ivory Coast attracted US$5bn of orders on a 10-year $750m bond.

[23] The government hopes the issuance will stimulate others that will finance energy and infrastructure projects. Muslims make up more than 90 pc of the population; Tosin Sulaiman, “Senegal leads way for sub-Saharan African sukuk,” Blogs.FT.com, 14 July 2014, http://blogs.ft.com/beyond-brics/2014/07/14/senegal-leads-way-for-sub-saharan-african-sukuk/.

[24] Elaine Moore, Andrew England, and Robin Wigglesworth, “South Africa joins sukuk bond rush,” Financial Times, 17 September 2014. Some of the motivations in Sub-Saharan African countries for sukuk issuances continue to include infrastructure, funded and diversified by Middle East liquidity –“Sukuk May be Solution to Africa’s Infrastructure Woes,” International Finance Magazine, October 18 2013, http://www.internationalfinancemagazine.com/article/Sukuk-May-be-Solution-to-Africas-Infrastructure-Woes.html#sthash.nujmtfBh.dpuf.

[25] According to South African Treasury figures cited by Elaine Moore, Andrew England and Robin Wigglesworth, “South Africa joins sukuk bond rush,” Financial Times, 17 September 2014.

[26] 3.9 pc coupon rate. Elaine Moore, Andrew England and Robin Wigglesworth “South Africa joins.” “There was very big appetite and this was very aggressive pricing, given that most issuers come at a 20 and 40 basis point premium over their conventional eurobond and this probably around 15 basis points, so it’s one of the lowest new issue premiums ever paid for a debut sukuk,” “Fitch Rates South Africa’s USD Sukuk ‘BBB,’” Zawya, 15 October 2014, https://www.zawya.com/story/Fitch_Rates_South_Africas_USD_Sukuk_BBB-ZAWYA20141015101224/ And Robert Brand and Lyubov Pronina, “South Africa Readies Continent’s First Dollar-Denominated Sukuk,” Bloomberg News, 16 September 2014, http://www.bloomberg.com/news/2014-09-16/south-africa-readies-continent-s-first-dollar-denominated-sukuk.html.

[27] Robert Brand and Lyubov Pronina, Bloomberg News “South Africa Sells Islamic Bonds at Record-Low Borrowing Cost,” 18 September, 2014, http://www.bloomberg.com/news/2014-09-17/south-africa-sells-islamic-bonds-at-record-low-borrowing-cost.html

[28] Eleanor Whitehead and Chiara Francavilla, “Africa: Looking to Sukuk,” This is Africa: a global perspective, 26 June 2013, http://allafrica.com/stories/201306271132.html. As compared to the UK, with a Muslim minority — 5% or 2.7 million in England and Wales; Office for National Statistics 2011 census, published 2012, KS209EW, “Religion, local authorities in England and Wales,” http://www.nomisweb.co.uk/census/2011/ks209ew.

[29] Daria Solovieva, Dana El Baltaji, and Samuel Potter, “Luxembourg Bond Plan to Test Islamic Shariah Cash Depth,” Bloomberg News, 28 October 2014, http://www.bloomberg.com/news/2014-10-27/luxembourg-bond-plan-to-test-shariah-cash-depth-islamic-finance.html. As an ijarah: Chien Mi Wong, “Hong Kong debuts landmark $1b sukuk,” Finance Asia, 11 September 2014, http://www.financeasia.com/News/390224,hong-kong-debuts-landmark-1b-sukuk.aspx.

[30] Liau Y-Sing, Yudith Ho, and Lilian Karunungan, “Singapore Sukuk Hub Goal Leaves a Lonely Sabana: Islamic Finance,” 2 October 2014, http://www.bloomberg.com/news/2014-10-02/singapore-sukuk-hub-goal-leaves-a-lonely-sabana-islamic-finance.html.

[31] Josh Noble, “Hong Kong raises $1bn in debut Islamic bond,” Financial Times, September 11 2014.

[32] Ashley Lee, “HK sukuk first explained,” IFLR, 26 September 2014, http://www.iflr.com/Article/3384440/Islamic-Finance/HK-sukuk-first-explained.html.

[33] “Luxembourg’s €200m sukuk oversubscribed two times,” Gulf News, October 2 2014, http://gulfnews.com/business/markets/luxembourg-s-200m-sukuk-oversubscribed-two-times-1.1393542.

[34] Wigglesworth, “Non-Muslims tap.” The issue was of five-year tenor — Solovieva, El Baltaji and Potter, “Luxembourg Bond Plan to Test.” And Siddesh Suresh Mayenkar, “Luxembourg’s appetite for Islamic bond issuances grows after successful debut,” Gulf News, 27 October 2014, http://gulfnews.com/business/markets/luxembourg-s-appetite-for-islamic-bond-issuances-grows-after-successful-debut-1.1404627. “Luxembourg’s sukuk yielded 0.47 pc yesterday compared with 1.5 percent for the U.K. notes, 1.8 percent for Hong Kong’s and 3.8 percent for South Africa’s.” Solovieva, El Baltaji and Potter, “Luxembourg Bond Plan to Test”.

[35] Siddesh Suresh Mayenkar, “Luxembourg’s Appetite.”

[36] “Luxembourg Stock Exchange lists Pakistani sovereign sukuk,” Zawya, 4 December 2014.

[37] Wigglesworth, “Non-Muslims tap.” Demand was ascribed to optimism on the impending assumption of presidential office by Joko Widodo. Yield started at 4.65 before reduction to 4.35 pc — Mian Ridge, “Indonesia’s sukuk attracts record order book,” Financial Times, 3 September 2014.

[38] Yudith Ho and Tanya Angerer “Indonesia Markets 10-Year Dollar Sukuk at Two-Year Low Yield,” Bloomberg News, 2 September 2014, http://www.bloomberg.com/news/2014-09-02/indonesia-markets-10-year-dollar-sukuk-at-lowest-rate-since-2012.html.

[39] Mian Ridge, “Indonesia’s sukuk attracts.”

[40] One reason for this is that such jurisdictions are less likely to be faced with dilemmas as a result of sectarian or doctrinal/juristic differences among Muslim populations.

[41] In 2008 it was observed that the role of shari’ah scholars might “breach the religious neutrality of government and require more nuanced regulatory oversight in some countries.” Jobst, Kunzel, Mills, and Sy, at 15. Whether or not there is room for further improvement in shari’ah governance (in countries with or without Muslim majorities) is a distinct and separate matter.

[42] Even the Muslim Brotherhood in Egypt was the target of such criticism when mooting the possibility of a sovereign sukuk – accusations that they were going to sell Egyptian property to foreigners. Orland Crowcroft “SUKUK ISSUERS: Meeting the shortfall,” Zawya, 10 March 2014; https://www.zawya.com/story/SUKUK_ISSUERS_Meeting_the_shortfall-ZAWYA20140423105920/#utm_source=zawya&utm_medium=web&utm_content=related-news&utm_campaign=story. The conclusion to be drawn may be that resistance insofar as it is continuing or will resurface again is that it is more likely to do so along national and nationalistic, rather than religious or sectarian, lines.

[43] The market indicators paired with events on the ground, including the seizure of territory along the Turkish border, were based on a Bloomberg index tracking US dollar-denominated sukuk only (43 sovereign and corporate issuers), which in September fell 0.3 pc. Other observers quoted in the same article viewed such fallout as minimal and rates in the US as more consequential, Yudith Ho and Liau Y-Sing, “Bombing of Militants.”

[44] For an inventory of sukuk, with special attention to the volumes generated in September: “Global Sukuk Monthly: Milestone issuances, including four sovereign debuts, propel the global primary sukuk market in September,” 8 October 2014, http://www.kfhresearch.com/product/global-sukuk-monthly-milestone-issuances-including-four-sovereign-debuts-propel-global.

[45] “Global Sukuk Market: 2015 Outlook”

[46] Jobst, Kunzel, Mills, and Sy, at 13. This source suggests that “Non-Islamic sovereigns, in particular, would need to consider the necessary organizational changes needed to administer the shari’ah-compliant structure,” suggesting that there would be an unfamiliarity with, and no routines or procedures in place in non-Islamic sovereigns, to make the necessary determinations to issue a sukuk. However there is no assurance of their being any such expertise in countries that could be categorized as Islamic. It is a technical jurisprudential exercise to which governments are typically not actually accustomed, unless they have already completed the exercise. For an example see the legislative and policy efforts that have been required to initiate Islamic banking in Oman or the Maldives; each by Scott Morrison, “Oman’s Islamic Banking Regulatory Framework: the Corporate Governance of Shari‘a Compliance in a New Jurisdiction,” Arab Law Quarterly (Brill: Leiden, Netherlands) (accepted 20 May 2014, forthcoming), and “Islamic Banking in the Maldives: banking law, prudential regulation and corporate governance of a new sector,” Harvard Asia Quarterly, Vol 15 Issue 3/4 (2014), 47-55.

[47] Jobst, Kunzel, Mills, and Sy, at 15.

[48] One study finds that with reference to a small number of defaults (four) since 2007: “the problems can be traced back to clauses and structures that made the sukuk more like conventional bonds.” “Furthermore, once default happened, most of the sukuk discussed did not transfer the underlying assets to the sukuk holders.” “So, in the event of default, due to limited recourse provisions, sukuk holders often had nothing to resort to, as effectively there were no underlying assets in their ownership.” Sajjad Zaheer, Sweder J.G. van Wijnbergen, “Sukuk Defaults: on Distress Resolution in Islamic Finance” (First draft), July 2013, http://papers.tinbergen.nl/13087.pdf. On the subject of default also see Dennis Ryan and Fawaz Elmalki, “The Untested Waters of Default in Islamic Finance,” The Cayman Islands Journal, 6 January 2010, online: http://www.compasscayman.com/journal/2010/01/06/The-untested-waters-of-default-in-Islamic-finance/.

[49] The absence of a standardized sukuk trading platform also hampers growth. “Global demand for Sukuk to reach US$900bn by 2017,” 9 September 2012, http://www.ey.com/GL/en/Newsroom/News-releases/News_Global-demand-for-Sukuk-to-reach-US-Dollar-900bn-by-2017. Further: “Deficiencies still persist in areas such as transparency, standardisation, and liquidity in the secondary market, mainly due to limited trading mechanisms and the different treatment of certain structures in different jurisdictions.” “Thomson Reuters Announces 2015 Findings of Annual Sukuk Perceptions and Forecast Report at WIBC 2014,” Zawya, 3 December 2014, https://www.zawya.com/story/Thomson_Reuters_Announces_2015_Findings_of_Annual_Sukuk_Perceptions_and_Forecast_Report_at_WIBC_2014-ZAWYA20141204081246/.

[50] from 2010 to 2030, when it is expected to reach 385.9m in 2030 — according to Pew Research Centre; referenced in Tosin Sulaiman, “Senegal leads way.” He writes: “By 2030, the region is expected to be home to 17.6 per cent of the world’s Muslims, up from 15 per cent in 2010. Countries with the largest projected increase in their Muslim populations within the 20-year period include Nigeria, Niger, Ethiopia and Burkina Faso.” Simply charting the numbers, however, does presuppose without empirical or any other adequate justification that Islamic banking and finance will evolve in a way such that it will appeal to and attract the capital and assets of a sizable proportion of Muslims – the cause and effect in such a transaction is of course by no means pre-determined or automatic.

[51] Bedi Gunter Lackmann, “Basel III Creates New Opportunities for Sukuk (Islamic Bond) Issuance,” Nomura Journal of Capital Markets, Summer 2014 Vol 6 No 1, http://www.nicmr.com/nicmr/english/report/repo/2014/2014sum02.pdf, pages 1-18 at 1.

[52] Empirical findings with respect to Malaysia (only) that the issuance of sukuk “contributes to an increase in the firm’s stock returns” and that therefore opting for sukuk as a financing tool enhances shareholder value. Mamoru Nagano, “Who Issues Sukuk and Why? An Analysis of Islamic Bond Issuing Determinants,” http://www.qass.org.uk/MINE/2013_pdf_files/9th/Nagano_2013.pdf.

[53] quoting Sayd Farook; the survey was taken in August and September. “Thomson Reuters Announces 2015 Findings.” For an inventory of sukuk, with special attention to the volumes generated in September: “Global Sukuk Monthly: Milestone issuances, including four sovereign debuts, propel the global primary sukuk market in September,” KFH Research, 8 October 2014, http://www.kfhresearch.com/product/global-sukuk-monthly-milestone-issuances-including-four-sovereign-debuts-propel-global. The last two months of 2014 already furnish some evidence with corporate issues in the offing by Malaysia Development Berhad, DIFC Investments, and Fly Dubai, “Global Sukuk Monthly: Global primary market issuances surpass the USD100bln mark; October records a modest monthly performance,” KFH Research, 10 November 2014, http://www.kfhresearch.com/product/global-sukuk-monthly-global-primary-market-issuances-surpass-usd100bln-mark-october-records. Additional corporate and sovereign sukuk are in the planning stages, “SUKUK PIPELINE – Issue plans around the world,” Zawya, 9 June 2014, https://www.zawya.com/story/SUKUK_PIPELINE__Issue_plans_around_the_world-ZAWYA20140610085021/#utm_source=zawya&utm_medium=web&utm_content=related-news&utm_campaign=story

[54] Predictions by lead arrangers (44) and investors (106) suggest sukuk issuance volumes will increase to a level ranging between $150 b to over $174 b in 2015; Mohieddine Kronfol, “Sukuk: An Asset Class Goes Mainstream,” September 22 2014,
 http://global.beyondbullsandbears.com/2014/09/22/sukuk-asset-class-goes-mainstream/. The lower figure is drawn from “Global Sukuk Market: 2015 Outlook” which notes the 2011-2013 average was US$112 b.

[55] Regarding Oman, as an exemplar of an oil state seeking to diversify its economy; “Oman for Islamic banking to cut dependence on oil,” Zawya, 29 October 2014, https://www.zawya.com/story/_Oman_for_Islamic_banking_to_cut_dependence_on_oil-GN_29102014_301037/

[56] Strohecker. There is also reason to believe volumes will continue to be weighted towards the traditional centres in 2015, such as the quasi-sovereign sukuk characteristic of Saudi Arabia, Malaysia and the UAE; for example, airports and airlines, energy (oil and gas), infrastructure and utilities — including “General Authority of Civil Aviation (GACA) in Saudi Arabia, Saudi Electricity Company, SABIC (the Saudi petrochemical giant), Saudi ARAMCO, the world’s largest oil company; Malaysia Airports Holdings Berhad (MAHB), Prasarana and Dana Infra (the two Malaysian infrastructure companies); PLUS Berhad (the Malaysian highways agency); Emirates Airlines.” Mushtak Parker, “The industry hoping to.”