The sukuk market, rules for
issuance and risks for investors
Professor Rodney Wilson
Islamic Capital Markets Seminar
Special Session on Islamic Banking
21 May 2009, Port Louis, Mauritius
Islamic Financial Services Board
Contents
Growth of sukuk issuance
Sukuk by country and currency
Leading arrangers
Rules for the issuance of sukuk
Ijara sukuk structure ∂
Sukuk choices
Concerns over sukuk returns
The role of assets in sukuk
Risks for sukuk investors
Number of sukuk issues
300
250
200
∂
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
Value of sukuk issues, $ million
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
∂
2000
2001
2002
2003
2004
2005
2006
2007
2008
Value of sukuk issues by country
April 2008 – April 2009, %
5%
1%
13%
3%
47%
∂
31%
Malayasia
UAE
Pakistan
Saudi
Indonesia
Cayman
Value of sukuk issues by currency
April 2008 – April 2009, %
5%
13%
48%
∂
34%
Ringgit
Dirham
Saudi Riyal
Rupiah
Sukuk managers league, year to April 2009
Rank Arranger
Amount, $US million
Issues
1
CIMB Islamic
2,889
34
2
HSBC
1,560
4
3
Maybank
928
13
4
AmInvestment
886
15
5
Dubai Islamic Bank
741
4
6
Caylon
666
1
7
Standard Chartered
622
9
8
Emirates NBD
514
2
9
Citigroup
406
2
10
RHB Capital
375
9
∂
Rules for the issuance of sukuk
Asset backed
– Nominal value of sukuk = asset value at start
Payments
– No reference to interest
Establishment of a special purpose vehicle
∂ then leased back
– Assets sold to SPV and
– Promise to buy back assets from SPV on maturity
– SPV issues certificates of participation issued in
bearer form as evidence of an undivided
ownership and interest in the asset
– SPV enters a trust agreement with the investors
(the beneficiaries)
Ijara sukuk structure
Buy back of asset at maturity
Rental payments
Sale of asset
Cash
Originator
(advised by arranger)
SPV issuer
(law firm
∂ admin)
Islamic investors
(takaful operators
Shari’a funds)
Certificate
of participation
Lease agreement
Rental payments
Reimbursement of issue
price on maturity
Guarantee of SPV obligations
Sukuk choices
Sukuk
Salam
Murabaha
Ijara
Musharaka
Mudaraba
Convertible sukuk
Conventional
Bills
Bonds
Notes
∂
No equivalent
No equivalent
Preference stock
Concerns over sukuk returns
Returns on ijara sukuk benchmarked to
interest
– LIBOR, KIBOR, SIBOR
Malaysia has Islamic inter-bank rates for
∂
overnight deposits
– Declined from 3.47% in May 2008 to
1.94% in May 2009
For sovereign sukuk GNP/GDP growth
could be used for benchmarking
– Negative in 2009!
The role of assets in sukuk
Are sukuk debt or equity based securities?
Alternative structures
– Asset based sukuk
– Asset backed sukuk
– Pass through sukuk ∂
Source:
– IFSB Capital Adequacy Requirements for
Sukuk, Securitisations and Real Estate
Investment, January 2009
Asset based sukuk
Re-purchase undertaking by the originator
Credit risk is that the originator fails to meet
their obligations
Pay through structure with income from the use
∂
of the assets paid to the investor
Applies to ijara sukuk
Suitable for investment of funds from takaful
pool, including for general takaful
Asset backed sukuk
Capital returned on sukuk maturity depends on
asset value
Investors are subject to market risk
Appropriate for mudaraba and musharaka
sukuk where re-payment
∂ of capital cannot be
guaranteed
Suitable for shari’a compliant investment funds
Significant exposure risk for takaful pools and
Islamic pension funds
Merits for family, but not general, takaful
Pass through sukuk
Asset based sukuk where issuing entity (SPV)
purchases assets from originator
Assets packaged into a pool
Originator required to provide recourse by the
∂
issuer
Credit enhancement as issuer guarantees
repayment in the event of default by the
issuer
Cannot be used for mudaraba or musharaka
sukuk
Risks for sukuk investors
Credit risk
– Delay or default on payments/repayments by
the originator
Market risk
– Asset value falls reducing
∂
repayment amount
on maturity
Liquidity risk
– No buyers in secondary market for sukuk
– Salam sukuk illiquid until maturity
Risks for sukuk investors
(continued)
Rate of return risk
– Ijara sukuk have variable returns
– Variable to fixed rate swaps possible and vice
∂
versa (ijara ↔ murabaha)
Shari’a risk
– Ijtihad and issuance of new fatwa results in
sukuk no longer being shari’a compliant
– Reputational risk with arranger/issuer
Any questions?
∂