By A. Stephanie
Malaysia will soon have Dubai snapping at its heels, having overtaken London in sukuk listings by end-2014. Islamic bonds, or sukuks, accounted for only 17% of the world’s Islamic finance assets in 2013. Yet the spotlight remains on these oft-listed market instruments. Kinibiz examines what Dubai has going for and against it.
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Last year, Thomson Reuters and advisory firm DinarStandard estimated Islamic finance assets at US$1.66 trillion (RM6.03 trillion) in 2013, of which sukuks or Islamic bonds contributed 16.8% or US$280 billion.
Still total Islamic finance assets at end-2013 accounted for slightly more than 1% of global commercial banking assets of US$127 trillion.
Nevertheless, Bank Negara Malaysia’s Malaysia International Islamic Finance Centre (MIFC) report noted that global Islamic finance assets will surpass US$2 trillion end 2014, at a compound annual growth rate (CAGR) of 17.3% from 2010 to 2014.
In the State of the Global Islamic Economy Report 2014-2015, Thomson Reuters said Islamic funds and sukuks led the sector’s annual growth, swelling 14% and 11% respectively, whereas banking assets dropped 5%. It estimated the potential universe of Islamic finance assets in its core market to hit US$4.2 trillion in 2014.
It is the sukuks’ growth factor that keeps the industry spotlight on it, as Thomson Reuters expects it to sustain double-digit growth in the next three years with assets in Islamic finance expected to reach US$2.8 trillion by 2015.
Malaysia continues to lead sukuk leaderboards in both issuances (RM80.1 billion) and listings (RM125.81 billion) last year, according to the Securities Commission and Bursa Malaysia respectively.
On Apr 3, the Finance Ministry said it is studying a potential US dollar-denominated sukuk to repay an earlier issuance due this June. This earlier sukuk is most likely the US$1.25 billion sukuk issued by 1Malaysia Sukuk Global Bhd, which listed on Bursa in June 2010.
Last month, national oil company Petronas began roadshows to raise up to US$17 billion from a US$15 billion multi-currency conventional bond and a US$2 billion one-off dollar-denominated sukuk, for working capital.
Dubai sukuk listings swelling
But Malaysia’s sukuk allure may be soon be upstaged by that of Dubai’s. The emirate has made leaps and bounds in sukuk listings from US$9 billion in 2013 to US$24.05 billion by end 2014, 2.7 times the previous figure.
This meant Dubai exchanges overtook the London Stock Exchange which had US$21.06 billion by end 2014, but remain behind Bursa at US$34.66 billion.
The emirate’s exponential growth in sukuk listings comes on the back of an initiative called the Dubai Global Sukuk Centre, which was launched less than 18 months ago by both Dubai exchanges in Dubai – Dubai Financial Market and Nasdaq Dubai.
The initiative is one of many that were kickstarted that same year following Dubai ruler and United Arab Emirates (UAE) Prime Minister Sheikh Mohammed Rashid Al Maktoum’s announced goal to make Dubai the capital of the world’s Islamic economy.
Abdulla Mohammed Al Awar, CEO of Dubai Economy Development Centre (DIEDC) which oversees the overarching strategy towards achieving this goal, said issuers are mixed between private and government bodies, including foreign governments.
Last year there was a wave of sovereign sukuk issuance from countries outside the Islamic world. The United Kingdom, Luxembourg and Hong Kong all issued sukuk, with Hong Kong’s US$1 billion sukuk listing on the Nasdaq Dubai last September.
The Dubai Global Sukuk Initiative’s goal is to make the emirate the leading jurisdiction for sukuk listings. Abdulla said in an interview with Kinibiz, “There is no timeline on this, but in a span of a year and a half, we overtook London so who can say what will happen in the next year or so?
“It’s not about overtaking Malaysia, but being the leading jurisdiction for sukuk listings. It’s not a matter of competition but what each jurisdiction uniquely offers,” he added.
And Dubai does have a lot to offer, from its access to the lucrative Middle East and North Africa (MENA) region to the investor-friendly status Nasdaq Dubai has.
Internationally attractive exchanges
Abdulla said, “Issuers can access a different type of investor base from our region of around 42 countries spanning the Middle East, Africa and South Asia, all easily accessible from Dubai.
“Besides wider access to the region, Nasdaq Dubai, whilst it provides a sukuk investment opportunity, exists in a common legal framework mostly adopted in Western civilizations. So we are able to attract international investors into that market quite easily,” he remarked.
But Dubai investors have been equally robust.
In January, state-owned low cost carrier flydubai listed its inaugural US$500 million on Nasdaq Dubai, making it the 18th Sukuk to be listed on the exchange since the start of 2014.
Another local issuer was Dubai Investments Park, which listed its US$300 million sukuk last March on Nasdaq Dubai. The Islamic bond was more than 12 times oversubscribed, with investors placing US$4 billion in orders.
One of the deal’s lead arrangers was Emirates NBD, Middle East’s largest banking group in terms of assets, which totalled AED363 billion (RM359 billion) at end 2014. The bulk of these, 85% or RM305 billion are in Dubai.
The group is not new to Islamic finance and sukuk, as its conventional bank offers Islamic products in addition to its wholly-owned subsidiary Emirates Islamic Bank.
Emirates NBD closed 2014 having arranged 33 dollar sukuk issuances, totalling around US$14 billion, Kamran Wajid, CEO of its investment banking arm Emirates NBD Capital told Kinibiz.
He noted, “As of June 30th last year, we were the global leader in terms of dollar sukuk issuances, and we closed the year third from the top amongst sukuk arrangers behind Standard Chartered and HSBC.
“We are the only bank that has arranged sukuk issuances for all four Islamic banks in Turkey, and we also helped with the US$1.5 billion Indonesian sovereign sukuk last year,” he said.
Syariah board differences
Much like Malaysia when its Islamic finance market took off in 2004, Dubai is now facing challenges in terms of harmonising policies, as well as instituting Islamic finance education.
On the first count, Kamran flagged differences in interpretation when Emirates NBD managed the AED2.5 billion initial public offering (IPO) for Dubai Parks & Resorts, which plans to build three theme parks and a hotel.
He recounted, “When we approached the market, we realised that for some syariah scholars and boards the hotel industry as a whole was not syariah-compliant. For others, the hotel industry is compliant, but only if the non-syariah-compliant revenues are less than 5% or carved out. And these were syariah boards of Islamic banks.
“On one particular transaction, you see different views. This not only confuses investors, but impacts the growth of Islamic finance. But at the same time, you cannot push regulators to have one global syariah principle. It has to be in a friendlier manner, revolving around intra-institutional discussions.
“There should always be a difference in opinion, but if we get closer to a common ground, it will definitely help in giving confidence to both issuers and investors,” Kamran remarked.
Steps are being made to address these differences with the March 23 announcement by DIEDC chairman Khalid Abdul Aziz Al Janahi that the UAE plans to set up a federal syariah board by the end of the third quarter of this year.
The board – mirroring Bank Negara Malaysia’s Syariah Advisory Council which was set up in 1997 – will comprise scholars that pass religious decrees on whether a financial product conforms with Islamic tenets will help meet the need to unify standards and contracts in the industry, he said.
Financial education ecosystem
On the education side, DIEDC in 2013 launched a dedicated centre for Islamic banking and finance at the Hamdan bin Mohammed Smart University, offering postgraduate degrees in Islamic finance and developing related research.
This is comparable to Kuala Lumpur’s Global University of Islamic Finance (Inceif), whose scholars in turn sit on syariah boards of local Islamic banks.
Besides educators, regulators too have come in quickly to fill in the gaps in syariah compliance.
From April 1, UAE’s central bank announced that Islamic banks, which account for 25% of the nation’s banking assets, will be allowed to use syariah-compliant securities other than central bank issued Islamic certificates of deposit to borrow overnight from the central bank’s Collateralised Murabaha Facility.
Kamran said this was welcomed by the industry as having picked up over the last 20 years, the Islamic finance sector needs a developed liquidity management process.
He commented, “Previously, there was no set liquidity management provided, so even the Islamic banks who were receiving deposits under syariah-compliant products, were keeping these deposits in an interbank market with conventional banks.
“With this step, Islamic banks can tap liquidity under the central bank’s syariah-compliant excess funds,” Kamran noted.
Moving forward, both Abdulla and Kamran envision more Islamic finance and sukuk being taken up to finance infrastructure projects.
Abdulla said, “Within our region there are quite a number of infrastructure projects in the pipeline. Needless to say, Expo 2020 which Dubai will host, will require a lot of infrastructure to be developed and that is a golden opportunity for Islamic finance to shine.”
Dubai’s Expo 2020, together with Qatar’s hosting of the 2022 Fifa World Cup, will spur almost US$210 billion investments in construction projects in the coming years, according to Qatar Energy and Industry Minister Mohamed Saleh al-Sada.
And it is not just countries within the MENA region who are expecting increased infrastructure investments.
Analysts at ratings agency Fitch have noted that sukuk could stand to get a boost from the G20 central bank governors’ look towards infrastructure sukuk to finance the construction of major public investment works following its meeting in Istanbul last month.
The G20 represents the European Union and 19 countries, namely Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States.
This sukuk pie will continue swelling, yes, but will Malaysia continue to get the largest slice?
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