Category Archives: Sukuk

Islamic Bonds

Airport, Utility Sukuk Favored by Funds Over Real Estate

Airport, Utility Sukuk Favored by Funds Over Real Estate


Islamic bonds that pay returns based on cash flows from airports and utilities rather than income from property may stay in favor in the coming year after a drop in Persian Gulf real-estate prices shook investor confidence.

Saudi Electricity Co.’s 7 billion-riyal ($1.9 billion) sukuk sold in May was underwritten by income from fees such as connection charges, according to its prospectus. Nomura Holdings Inc., Japan’s largest brokerage, sold Islamic debt in Malaysia in July using aircraft as the underlying asset. Pakistan raised 51.8 billion rupees ($605 million) in a Nov. 8 Islamic bond sale linked to the Jinnah Terminal at Karachi’s Quaid-e-Azam International Airport.

The 50 percent decline in real-estate prices in Dubai from their peak in mid-2008 contributed to a 31 percent retreat this year in global sales of Islamic debt that pay asset returns to comply with the religion’s ban on interest. Offerings are picking up following an agreement by Dubai World, one of the emirate’s three main state-owned holding companies, in September to reschedule debt payments.

“With new bonds coming after debt restructuring in the Gulf, investors will be keen to know the quality of businesses and what kind of cash flows they generate,” Esther Teo, who helps manage the equivalent of $2.9 billion of Islamic and non- Islamic funds at Kuala Lumpur-based HwangDBS Investment Management Bhd., said in an interview yesterday. “The asset linked to a sukuk is important given the way it is structured and after the default concerns in the Middle East.”

Upcoming Issues

Saudi Arabian Oil Co. and Total SA, Europe’s third-biggest oil company, plan to sell $1 billion of sukuk this year in a joint issue, Simon Eedle, global head of Islamic banking at Credit Agricole SA, the lead arranger, said in Abu Dhabi in October. Nakheel PJSC, the developer of palm-shaped islands off Dubai’s coast, may issue sukuk to its trade creditors in the first quarter, Faisal Mikou, executive vice president at the Investment Corp. of Dubai, said in the emirate on Nov. 28.

The Palestine Monetary Authority will offer Islamic debt for the first time in 2011. The central bank may sell as much as $50 million of notes to jump-start the territory’s Shariah- compliant finance industry and raise funds to construct its headquarters, Governor Jihad al-Wazir said in an interview in Ramallah on Nov. 25.

Sukuk sales dropped to $13.7 billion this year, according to data compiled by Bloomberg. Offerings from the Gulf Cooperation Council, which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, declined 40 percent to $4 billion in 2010 from the same period last year.

‘Out of Favor’

“Real estate continues to be out of favor, particularly in the Gulf Cooperation Council countries,”Rafael Martinez Dalmau, the Singapore-based head of Shariah-compliant portfolio management at BNP Paribas SA, said in an interview in Kuala Lumpur yesterday.

KPJ Healthcare Bhd., a Malaysian healthcare provider, plans to sell as much as 500 million ringgit ($159 million) of sukuk to refinance debt and fund its capital spending needs, according to a company statement on Nov. 12. The debt is linked to funds from its Real Estate Industrial Trust, Alvin Lee Swee Hee, the chief financial officer, wrote in an e-mail today.

Malaysia Airports Capital Bhd. plans to sell as much as 1 billion ringgit of 12-year Islamic notes to yield around 4.6 percent to 4.8 percent as soon as tomorrow, according to a person familiar with the matter. The offering may grow in size to be more than 1 billion ringgit, another person requesting not to be identified said Nov. 23.

“We want issuers to meet their liabilities from cash flows they generate from their businesses rather than by selling that asset,” Sajjad Anwar, who helps manage the equivalent of $160 million of Islamic and non-Islamic funds at NBP Fullerton Asset Management Ltd., said in a Nov. 30 phone interview from Karachi. “Collateral based on real estate or a piece of land was popular, but it was not likely to be a long-term solution.”

Valuation Concerns

Shariah-compliant bonds returned 11.1 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in emerging markets gained 13.1 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed 11 basis points yesterday to 350 points, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

The yield on Malaysia’s 3.928 percent Islamic note due June 2015 was little changed today after rising 11 basis points yesterday, according to prices from Royal Bank of Scotland Group. It has climbed from a record low of 2.33 percent on Nov. 4. The yield on Dubai’s 6.396 percent sukuk due November 2014 rose four basis points this week to 6.78 percent, data compiled by Bloomberg show.

‘Adversely Affected’

The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s was little changed today at 384, according to data compiled by Bloomberg.

“In asset-backed sukuk, or sukuk that is secured with assets either through a true sale or as collateral, if that asset has reduced in value by so much percent, irrespective of what nature of instrument you have, that instrument will be adversely affected,” Yavar Moini, senior adviser for global capital markets at Morgan Stanley in Dubai, said in an interview in Kuala Lumpur yesterday.


To contact the reporters on this story: Khalid Qayum in Singapore;Soraya Permatasari in Kuala Lumpur at

To contact the editor responsible for this story: Sandy Hendry at

Islamic finance liquidity body to issue Sukuk in 2011

Islamic finance liquidity body to issue Sukuk in 2011


A new global Islamic liquidity management corporation backed by central banks will start issuing Islamic bonds next year to help Islamic banks manage their liquidity, a board member said on Tuesday.

Liquidity management is seen as the weak point of the emerging Islamic finance industry as it currently relies on the use of commodity murabaha, a money market instrument only grudgingly accepted by Islamic scholars for lack of alternatives.

The Islamic capital market is in its infancy and there is a dearth of highly rated Islamic bond issues, or sukuk, which Islamic banks can use to place their surplus liquidity.

The Islamic Financial Services Board (IFSB), an association of regulators in Muslim countries, said in October it would set up the International Islamic Liquidity Management Corporation to issue sharia compliant instruments.

Khaled Al Aboodi, chief executive of the private sector unit of the Islamic Development Bank (IDB) and a board member of the new company, said it would start operations at the beginning of next year and could issue the first Islamic bonds, or sukuk, by the middle of 2011.

He said that while the sukuk will be issued by the company itself, individual central banks will act as custodian for the assets that underpin the sukuk.

"You move the asset to the central bank because that will raise confidence of the buyers of the sukuk," he said, adding that this would help the issues to obtain top credit ratings that qualify them to be used in banks’ liquidity management.

Islamic bonds need to be underpinned by physical assets from which returns to bondholders are derived.

The liquidity management company will be backed by 11 central banks, including Malaysia, Iran and Turkey and some Gulf states and is expected to have up to $1 billion in authorised capital.


Middle East Sukuk bond returns increase by six times over last quarter

Middle East Sukuk bond returns increase by six times over last quarter


Islamic bonds in the Persian Gulf are returning six times more this quarter than in the previous three months as Dubai-based companies restructure debt and economic growth in the region accelerates.

Sukuk sold by the six-country Gulf Cooperation Council have returned 2.9 percent since June 30, compared with a 0.5 percent gain in the second quarter, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The average yield on the debt narrowed 83 basis points, or 0.83 percentage point, in the past six weeks to 6.65 percent and reached an eight-month low of 6.49 percent on Aug. 3, according to the HSBC/NASDAQ GCC Index.

Bonds in the region that comply with Shariah law may extend gains after the International Monetary Fund said in a report on July 7 that gross domestic product growth in the Middle East will quicken to 4.5 percent this year from 2.4 percent in 2009. State-owned Dubai World said on July 22 it will complete a restructuring of its $23.5 billion of liabilities in “coming months,” while real-estate unit Nakheel PJSC said a group of creditors supported a proposal to alter the terms on $10.5 billion of loans and unpaid bills.

“The Middle East may be coming out of its economic woes, so there is a better chance that its debt will be attractive for the region’s investors,” Muhammad Asad, who oversees the equivalent of $210 million as chief investment officer at Al Meezan Investment Management Ltd., the largest Shariah-compliant fund in Pakistan, said in an interview yesterday in Karachi. “The restructuring and economic recovery are positive signs.”

DP World Sukuk

A rally in the 6.25 percent dollar-denominated sukuk due 2017 issued by DP World Ltd., the world’s fourth-biggest container port operator, pushed the yield down 131 basis points since June 30 to 7.33 percent, according to data compiled by Bloomberg. The yield on the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 declined 56 basis points to 7.13 percent in the same period, prices from Royal Bank of Scotland Group Plc show.

Transactions in the Islamic financial services industry are based on the exchange of asset flows rather than interest to comply with the religion’s principles. The majority of sukuk are of the Ijarah type, which are based on a sale and lease agreement as in real estate.

Property prices in Dubai, the Persian Gulf’s financial hub, retreated more than 50 percent from their peak in 2008 as the global credit crisis led to a cut in mortgage lending and pushed companies to slow expansion, according to estimates from Colliers International. The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Rally ‘Impressive’

“The rally in GCC sukuks has been impressive so far but stabilization of the real-estate sector, which is usually a big component of sukuk structures, is needed,” Ahmed Talhaoui, the head of portfolio management at Bahrain-based Royal Capital PJSC, which is 44 percent owned by United Gulf Bank BSC, an investment bank in Bahrain, wrote in an e-mail yesterday.

Global sales of sukuk dropped 28 percent to $7.85 billion so far in 2010, according to data compiled by Bloomberg. Persian Gulf issuers sold $2.5 billion, compared with $3.2 billion a year earlier.

Islamic bonds sold by Middle Eastern borrowers have returned 9.4 percent this year, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. Shariah-compliant notes that include issues from the Persian Gulf to Southeast Asia and the U.S. gained 9.1 percent in the period, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in developing markets increased 12 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

Attract Investors

The difference between the average yield for emerging- market sukuk and the London interbank offered rate widened five basis points yesterday to 401, the highest level in more than two weeks, according to HSBC/NASDAQ index. The spread has narrowed 66 basis points this year.

Higher sukuk yields in the Persian Gulf relative to Asia make the bonds more attractive, according to Abu Dhabi Islamic Bank PJSC, the United Arab Emirates’ second-biggest Shariah- compliant lender.

The yield on Malaysia’s $1.25 billion of 3.928 percent Islamic notes due 2015 sold in May dropped two basis points today to 2.84 percent and reached a record-low 2.82 percent on Aug. 11, RBS prices show. The rate has dropped 100 basis points since the notes were issued.

“The return is likely to be higher in the GCC not because of their performance, but because it’s the only way to attract investors to this market,” Naeem Ishaque, senior manager of the international division at Abu Dhabi Islamic Bank, said in an interview yesterday. New issuers will have to offer higher returns, said Ishaque, whose bank had 68.3 billion dirhams ($18.6 billion) of assets in the second quarter.

Scholars and bankers invited at George Washington University to discuss nuances of Islamic finance

Scholars and bankers invited at George Washington University to discuss nuances of Islamic finance

The event featured five distinguished scholars and experts in the field of Islamic finance. They included Prof. Frank Vogel, senior fellow and head of Muslim World Law and Islamic Finance, Institution Quraysh for Law and Policy and Umar Moghul, Partner at Murtha Cullina LLP and co-chair of the firm’s Islamic Finance and Investments Group.

Yusuf Talal deLorenzo, chief Shariah officer at Shariah Capital, Aamir Rehman, managing director at Fajr Capital Limited and Ibrahim Warde, adjunct professor of International Business at the Fletcher School of Law and Diplomacy, Tufts University, were the others.

The panelists addressed a several hundred attendees on the various aspects of contemporary Islamic finance such as its historical legacy, the compatibility of Shariah-compliant institutions with US law, derivative instruments and the development of sukuk in the Gulf, Shariah financial regulation and practice in the GCC (Gulf Cooperation Council) and Islamic finance in the light of the recent financial crisis.

It also addressed Shariah financial regulation, how the rise of Gulf capital is affecting financial markets and how it should be regulated, as well as the compatibility of Shariah institutions with US law and regulation and the objections of Shariah scholars challenging the permissibility of derivatives under Islamic Law.

The discussions were moderated by Jean-Francois Seznec, visiting associate professor at Georgetown University’s Center for Contemporary Arab Studies.

Regarding the question of sukuk in the Gulf, DeLorenzo said ownership is an important issue for Shariah scholars to understand.

“Ownership is always a sticky subject and it is not always a failure of the Shariah advisers when ownership and sukuk is questioned,” he said.

DeLorenzo, wrote the introduction to Islamic bonds, a book that introduced sukuk to the world’s Islamic capital markets as well as a three volume Compendium of Legal Opinions on the operations of Islamic banks, the first English/Arabic reference on fatwas issued by Shariah boards.

One clear lesson, he said, “is the need for more and more diligence on the business side.”

Questioned on whether sukuk is a sound investment, he said there are serious Shariah issues that need to be addressed. “There are tensions between GCC investors and Malaysian investors who have different philosophies in the jurisprudence.”

He said that sukuk need to have a viable trading market.

“We need to confront these issues. The tensions need to be resolved before real trading can take place.

“Sukuk are hybrids, some look like equity, others like debt. They need to be traded and exchanged, and unless everyone understands the rules there will be a lot of confusion in the marketplace and people will leave. There is a need to deal with this sooner than later.”

DeLorenzo’s 30-year career as a scholar of Islamic Transactional Law was a front-page story in the Wall Street Journal in 2007.

“It’s a rules-based business; people need to understand that, whether they’re in Hong Kong or Chicago, and the way to do this is through an exchange of information,” he said.

“Many of the high profile sukuk defaults have taken place as the result of poor business decisions, not Shariah.”

He said the problem was that the “press picks up on a sukuk default and then blames it on Shariah. We need to explain it better.”

The expert said a new generation of sukuk coming to the market also needs to be closely examined.

“My feeling is that the issuers need to be more transparent to investors, and feel the same way about Shariah boards. We need to be careful about managing perceptions.”

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The role of sukuk after recent defaults

The role of sukuk after recent defaults








Dubai World is presenting creditors with a restructuring plan for $26bn of debt. Questions remain about how Islamic financial structures will fare in financial distress. Usman Hayat discusses the role of sukuk after recent defaults.

Are sukuk holders treated differently from conventional bondholders in the event of default?
Defaults pertaining to sukuk are a recent phenomenon, and how the underlying legal structures would fare in a court of law vis-à-vis conventional bonds is uncertain. Although sukuk must comply with Islamic law, they are governed as well by the secular law under which they are issued, like bonds. In the case of Dubai World, a last-minute bail-out by Abu Dhabi has obviated the need to address this question directly.

What is the difference between asset-backed and asset-based sukuk?
The key difference is the concept of true sale. In asset-backed sukuk, there is a true sale between the originator and the special purpose vehicle (SPV) that issues the sukuk and sukuk holders do not have recourse to the originator. Assets are owned by the SPV, returns are derived from assets, and asset prices may vary over time. The majority of sukuk issues, however, are not asset backed.

What issues have arisen following recent defaults in sukuk?
One of the most critical issues is whether the SPV—and thus sukuk holders—completely owns the underlying assets. In addition, the role and efficacy of sharia governance arrangements and due diligence for sharia compliance have attracted attention. Given the relatively nascent stage of development of sukuk in particular and of Islamic finance in general, sukuk are likely to continue to evolve.

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