The MENA market for sukuk,or sharia-compliant bonds, has seen an impressive recovery since the onset of the global financial crisis led to a sharp dip in Islamic debt issuance. After peaking at $19bn in 2007, the value of the region’s annual sukuk offerings settled at about half that in the following three years, according to KIPCO Asset Management Company, but then recaptured its pre-crisis momentum with $19.9bn issued in 2011 and setting a new record of $26.4bn in 2013. The $23.3bn in sukuk issued in 2014 represents a consolidation of this growth, leading analysts to assert that the market has shrugged off its 2008 setback.
Qatar has played a key role in this return to form. In 2011, the first year of recovery, it was responsible for 11% of global sukuk issuance, according to Markaz Research. That year also saw Qatar produce the largest single issuance, a three-year batch valued at $9.06bn, around seven times its nearest rival, the first tranche of the Malaysian sovereign Wakala Global Sukuk. Since then, the nation has remained one of the region’s top issuers, with $2.35bn of sukuk offered in 2013 and $3.02bn in 2014, the third-highest in both years. With its distinguished track record in the sukuk market, Qatar has become a crucial player in the global sharia-compliant arena. Data from Kuwait-based investment bank Rasameel show that 6.2% of global sukuk issuance in the first half of 2014 used the Qatari riyal, behind only the Malaysian ringgit, US dollar and Saudi riyal.
SOVEREIGN SUKUK: Much of this growth can be traced to the actions of the Qatar Central Bank (QCB). Given the dominance of sovereign sukuk in the mix of sharia-compliant debt issuance, the QCB’s disposition towards sukuk is central to the development of the instrument. Usefully for proponents of Islamic debt, the QCB has quickly become a regular issuer. In the first half of 2014, the central banks of Kuwait, Bahrain, Qatar and Oman sold a total of $32.1bn in sovereign sukuk, according to Markaz Research, with the QCB replacing the Kuwait Central Bank as largest issuer. Of all sovereign and quasi-sovereign sukuk offered in that period, Qatar made up 35%, according to Rasameel, cementing its position as a major domicile of sukuk in the Gulf.
In March 2013 the QCB changed its approach to sukuk issuance, shifting from single issuances to a regular programme of quarterly QR1bn ($274.1m) offerings, split evenly between three- and five-year tenors.
This development brings numerous advantages. For the QCB, the regular issuances expand its range of monetary policy options; for the nation’s banks, they mean more tools to manage their liquidity. They also help establish a benchmark against which local-currency corporate sukuk offerings may be measured.
Sukuk is also moving west. When the UK issued its debut £200m sovereign sukuk in mid-2014, the first for a Western nation, it was Qatar’s Barwa Bank that was appointed joint lead manager for the transaction. This event hints at what could become a lucrative space for the Qatari banking sector as more non-traditional markets enter the IFS segment. “A clear trend over the last 12 months has been sukuk issuance from markets not traditionally associated with sharia-compliant activity,”
Khalid Yousef Al Subeai, acting group CEO of Barwa Bank, told OBG. “The debut sovereign sukuk from the UK, Luxembourg and Hong Kong are good examples of issuers, recognising the opportunity presented by pools of Islamic liquidity and acknowledging the need to issue in a format acceptable to Islamic investors. We see this trend continuing, and one of the effects of a sovereign sukuk is that it serves as a ‘pathfinder transaction’ for corporate issues in that country. This will be a growth sector for us in the coming years.”
ISLAMIC BANKS: Another driver of sukuk growth in Qatar has been the rapid expansion of the Islamic banking sector. Between 2006 and 2012, Qatar’s sharia-compliant banks saw compound annual growth rates of 46% for domestic financing and 40% for resident deposits, compared with 31% and 23% for the entire banking system, according to data from the QCB.
As sharia-compliant banks expand, one key challenge is that the tenors of major deals tend to be in the longer range, whereas the deposits they collect are generally short-term. This mismatch between deposits and financing has implications for risk management. To make their funding profiles more robust, Islamic banks frequently turn to debt capital markets, where sukuk offers an alternative to conventional bonds.
THE BASEL EFFECT: The necessity of establishing a quality funding base has been further driven in recent years by the implementation of Basel III rules, for which the QCB released its final circular in 2014. The Basel regime requires banks, including Islamic ones, to bolster their liquidity by holding higher-quality capital so that they are better prepared to absorb financial shocks. To answer the unique requirements of sharia-compliant finance, the Islamic Financial Services Board (IFSB), the Malaysia-based body that is taking a lead role in setting global standards for the industry, has recently drawn up capital adequacy standards for Islamic banks. The current iteration, IFSB-15, establishes requirements for regulatory capital – Tier 1 and 2 – in much the same way as Basel III does for conventional lenders, defining common equity as Tier 1 core capital and preferred stock as additional Tier 1 capital. The IFSB regulation also addresses capital adequacy requirements for sukuk, securitisations and real estate investments. Taken together, the Basel and IFSB initiatives highlight the potential for Islamic banks to use sukuk to comply with regulatory requirements, and it is widely expected that the full implementation of these international standards will lead Islamic banks to increase their issuance of sukuk in future.
LOOKING AHEAD: By early 2015 several Qatari banks revealed plans to issue sukuk in the near term. In January, Qatar Islamic Bank announced it would raise up to QR2bn ($548.2m) through sukuk to shore up its reserves after a period of strong lending growth. A month later, Qatar International Islamic Bank began the process of obtaining shareholders’ consent to issue Tier 1 sukuk worth QR3bn ($822.3m). Both banks have formulated their plans from a position of strength, having grown their total assets in 2014 by 24.3% and 12.8%, respectively. Issuing sukuk at this time, besides clearing the way for the implementation of Basel III regulations in 2019, will allow them to build on that growth and diversify their sources of capital.
In the medium term, there are further reasons for optimism about sukuk issuance in Qatar. The nation’s ambitious development plans, including the infrastructure required to host the 2022 FIFA World Cup, have produced a $278bn pipeline of projects, whose long lead times present a financing challenge that longer-duration bonds and sukuk are ideally suited to meet. The decline in oil prices that began in the second half of 2014 also increases the likelihood of an expansion of the use of sukuk in the short to medium term. As fiscal surpluses are squeezed, fixed-income issuances will be a useful alternative source of funding for development projects in Qatar and across the wider region.
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