Transcript Document

Islamic Conferences Group
2007 London Sukuk Summit
20 – 21 June 2007
The Royal Horseguards Hotel, Whitehall
Increasing the Secondary Market for Sukuk
Speaker: Stella Cox, Managing Director
DDCAP Limited
Increasing the Secondary Market for Sukuk
Introduction
During this presentation we will:
• Evaluate current status of the Islamic Capital Market
• Consider the development of the secondary market
• Where are the priorities?
• Where do opportunities lie?
• Summary
Increasing the Secondary Market for Sukuk
Islamic Financial Marketplace – Sources of Funds
Islamic banks have EU
footprint through UK
More than two thirds of Islamic
funds are from the Middle East
SE Asian Islamic Marketplace
experienced rapid expansion 2006
• 1.3 billion Muslims (20% of population)
• Fastest growing and one of the most active religions
• Islamic financial assets estimated at USD 700bn*
(* source – Standard Chartered Bank 2006)
Increasing the Secondary Market for Sukuk
Islamic Capital Markets – 2006/2007
Equity
• GCC equity markets were amongst the fastest growing in the world by both
value and volume in 2005, but sharp decline in Q1 2006
• Equity held in Islamic portfolios at end of 2005 est. US$ 20 billion *1
• Approx. 100 GCC companies planned IPO’s in 2006 but only a fraction floated
• 60-70% of GCC market stock comply with generally accepted screening criteria
+ 30% of international stocks, total accessible market value c. US$ 9 trillion
Bonds
• Rapidly expanding GCC conventional and Islamic bond (sukuk) market
• Sukuk were first recognised as a Sharia’a compliant instrument in Malaysia c.
2000
• Total issues to December 2006 c. US$ 54 billion*2 of which
• US$ 33bn Malaysian domestic
• US$ 14bn international corporate
• US$ 7bn sovereign
• Sovereign issues have not shown significant growth, but corporate issues
grew 150% in 2005 and over 400% in 2006
(source: *1: IFC Bahrain / *2: Islamic Banker / IFIS)
Increasing the Secondary Market for Sukuk
Sukuk Issuance 2000 - 2007
ii) International issues completed /
announced January - June 2007
i) as at December 2006
USD
Billion
Malaysia
Domestic
40,000
35,000
30,000
25,000
Corporate
(ex.Malaysia)
20,000
15,000
Sovereign
USD
Billion
6,000,000
5,000,000
4,000,000
3,000,000
10,000
5,000
2,000,000
0
0
1,000,000
(sources – i) Bloomberg – 2007 issues / ii) IFIS – International issues / iii) Securities Commission – Malaysia Domestic)
2007
• US$ 5.33bn international, corporate Sukuk announced or issued Jan – June
2007
•
Sovereign issues awaited;
•
•
May - UK government announces preliminary intention
June - DIFC (US$ 1.25bn – international), Malaysia (MYR 3bn - domestic)
Increasing the Secondary Market for Sukuk
Sukuk Issuance 2000 - 2007
•
•
DIFC Sukuk Centre US$1.25bn – largest
single sovereign issue to date
•
•
•
•
(sources – i) Bloomberg – 2007 issues / ii) IFIS – International
issues / iii) Securities Commission – Malaysia Domestic)
Q
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Issues by Islamic Development Bank and
Saxony Anhalt classified as ‘sovereign’
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ki
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18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
M
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ay
si
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International Corporate Sukuk (ex. Malaysia Domestic)
Volume by country - to June 2007
USD Bn
2,800
2,400
2,000
1,600
1,200
800
400
0
In
t'l
USD Bn
Total Sovereign Issues (+IDB) by country
- to June 2007
UAE leads corporate issues by volume
with US$ 14bn
Of this, Dubai Ports issued US$ 3.5bn and
Nakheel US$ 3.52bn (in 2006)
Aldar issued US$2.53bn, Dubai Islamic
Bank US$1bn, Emirates Islamic Bank
US$350mn (in 2007)
Saudi Corporate issues include Saad
US$650mn and Daar US$600mn (in 2007)
Increasing the Secondary Market for Sukuk
Why Sukuk?
• Up to 80% of the assets of Islamic banks have historically been
allocated to non-tradable short-term investments, such as
Morabaha
• Created inappropriate concentrations, adversely impacted yields
and portfolio/balance sheet diversification
• Also, inefficient for supporting reciprocal liquidity requirements
• Islamic banks remain hungry for risk (asset diversification and
instruments better suited to liquidity management purposes)
Increasing the Secondary Market for Sukuk
Islamic Asset
Allocation Matrix
EQUITIES
IJARA
Working Capital
Finance
SALAM / ISTISNA
Shorter term
Property Finance
IJARA / MORABAHA
Structured Trade
MORABAHA
Longer term
Medium Term Ijara
Note Issue
SUKUK
Short Term
SUKUK
INTERBANK
LIQUIDITY
MANAGEMENT
PRIVATE
EQUITY
High return
Secured
Commodity
MORABAHA
65%+ OF
GLOBAL
MARKET
Low return
Increasing the Secondary Market for Sukuk
Development of Secondary Trading
• Development of Sukuk secondary trading is viewed as essential to
inject liquidity
• To date this has been slow to happen
• Most Sukuk have been purchased to hold
• Investors have no incentive to trade because:• There is sufficient depth of quality new issues
• Historically Islamic sovereign issues have offered enhanced yields
• Simply a lack of more attractive assets to replace existing holdings
• Information flows are limited
Increasing the Secondary Market for Sukuk
Capital Market Infrastructure Requirements:
• Standard or consistent market practice:
• product origination – market standards
• trade contracts – standard documents
• pricing – benchmarks, ratings
• settlement – crossborder, secure payment mechanisms
• Authoritative regulation, market best practice
• Established, tested legal infrastructure
• Confidence – issuers, investors, participants, intermediaries
• Efficient processes and systems
• Liquidity through volume and market utilisation
Increasing the Secondary Market for Sukuk
The Secondary Bond Market – a conventional comparison
• Global bond market is very diverse
• Primary issues are by auction, tender and direct placement
• Secondary market turnover is significant (UK secondary bond
market turnover c. £9bn per day)
• Investors/holders are constantly adjusting holding to reflect
• their liquidity management requirement
• credit rating
• future interest rate expectation
• envisaged economic changes
• Most trading occurs OTC through electronic trading and many
bond markets are decentralised
• Banks act as market makers, there are primary dealers who act
as principal and inter-dealer brokers acting as institutional
participants
Increasing the Secondary Market for Sukuk
The Islamic secondary market requirement
• A well functioning primary market for government securities
underpins government liquidity needs
• Most Islamic sovereign issues have been “landmark” – need more
frequent tranches i.e. Bahrain, Malaysia domestic
• Primary volume building and structures conducive to trading
• Creating the secondary market foundation is key
• Market standard documentation
• International clearing through conventional systems?
• Focus on use of a Central Counterparty to ensure good order
• Professional market bodies to ensure order and market best practice
Increasing the Secondary Market for Sukuk
Development of Clearing and Settlement for Secondary Trading
• Sukuk are traded over a number of different manual and automated
systems
• Malaysia managed over 0.5 million secondary bond trades OTC in
2006 without the benefit of an electronic system but technology can
support efficiency and cost reduction
• Settlement varies although the international, listed Sukuk are
settled through Euroclear and Clearstream, which develops market
confidence
• Otherwise, average time to process a Sukuk trade from deal to
settlement is more than a day
Increasing the Secondary Market for Sukuk
Motivating Secondary Trading
• High global demand from all sector investors for Islamic capital
market products, underpinning market liquidity
• Structures need to be appropriate (i.e. Ijara – Musharaka – Next?)
• Issuance and trading costs need to be comparable to conventional
(associated structuring costs, processing and settlement)
• Market intermediaries are required to assist distribution – dealers,
brokers, interdealer brokers
• Information flows must continue to improve – rating, pricing,
benchmark
• Education is needed – of issuers, investors and intermediaries
• How do they participate?
• Role for a professional market body – IIFM (ISDA, ICMA)
Increasing the Secondary Market for Sukuk
Summary
•
Markets and investors are becoming more sophisticated using cash as
strategic liquidity management tool
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Islamic banks liquidity management needs should remain the driving force
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However, conventional bank liquidity needs will feature
•
Market needs continual issuance, supported by Sovereigns, rather than
‘landmarks’
•
Greater volume of fixed rate issues will introduce new, longer-term
investors such as pension funds, with criteria on changes to market
forecast, credit and yield
•
Exchangeable/convertible structures in GCC securities are presently in
demand as investors perceive only upside potential following equity market
downturn
•
Recent listing on London Stock Exchange has introduced another new
investor category - Hedge Funds i.e. traders with a different investment
perspective
•
•
Basle I caused Sukuk to be a capital intensive asset for banks
Basle II provisions in 2007 are expected to improve this
Contact Details
Stella Cox – Managing Director
Email: [email protected]
Lawrence Oliver – Director
Email: [email protected]
15 Grosvenor Gardens
London
SW1W 0BD
Telephone: +44 207 663 5460 / 1
Fax: +44 207 663 5462
ICAP/DDCAP Sukuk info: (Bloomberg: ICSU <GO>)