Kuala Lumpur, 22 April 2016 – The Islamic Financial Services Board (IFSB) has successfully organised an IFSB Seminar on Islamic Capital Market themed, Supporting Development through Sukūk: Prospects and Initiatives on 10 April 2016 in Cairo, Egypt. This Seminar was held as part of the IFSB Annual Meetings and Side Events 2016, hosted by the Central Bank of Egypt. The Seminar was also held in collaboration with the Islamic Development Bank.
The one-day seminar provided an interactive environment enabling speakers and participants to explore the prospective role of Sukūk in social and economic development.
In his Keynote Address, Mr Sherif S. Samy, Chairman, Egyptian Financial Supervisory Authority, highlighted the importance of appropriate legal framework to support the issuance of Sukūk. He observed that the availability of suitable guarantees play as an important role in the issuance of Sukūk and noted that the new Egyptian law on Sukūk provides the flexibility to use movable goods as a guarantee for the issuance of Sharī`ah-compliant securities. Mr Samy also emphasised the need for utilising Sukūk as a source of funding for social and infrastructure financing. For example, he noted that Sukūk can provide an alternative source of funding for the microfinance companies, which are considered as an important vehicle to reduce poverty and spur employment. Similarly, Sukūk has a great potential for boosting the infrastructure in Egypt in order to finance its ports, highways and other major projects.
Mr Gamal Mohamed Negm, Deputy Governor of the Central Bank of Egypt, in his Welcoming Remarks, stated that “many new business opportunities could be found in Sukūk market as an instrument of financing government budget deficits and infrastructure projects”. He outlined a number of challenges that impede the growth of this sector, which include, i) unavailability of appropriate regulations and laws, ii) conflicting Sharī`ah opinions on Sukūk tradability and iii) use of credit enhancements as well as demand for premium pricing on new Sukūk issuances. He underlined that clarity of legal framework and regulations regarding Sukūk resolution in default cases could facilitate more international Sukūk issuances. Mr Negm also stressed the need for “sustainable re-issuances of Sukūk upon maturity by governments”, which he noted would enable Islamic financial institutions to manage their liquidity more effectively. He further observed that increased budget deficits and regulatory reforms such as Basel III provide an opportunity for increased Sukūk issuances in 2016.
In his Opening Remarks, Mr. Jaseem Ahmed, Secretary-General of the IFSB, stated that i) financing social infrastructure projects, such as education, investments on climate change, the Green Economy, and international immunisations programmes, ii) issuance of short-term Sukūk for liquidity management and iii) expanding set of jurisdictions seeking to integrate Sukūk into their public financing programmes are positive recent developments in the Sukūk market. He pointed out that jurisdictions impacted by low commodity prices may diversify their funding base by issuing Sukūk. Mr. Ahmed also emphasised that the absence of a yield curve remains a problem, combined with a thin and infrequent secondary market, and the cost of Sukūk issuances in some countries are higher as compared to bond issuances. He also underlined that there is a need for international standards on issues such as transparency and disclosure.
The first session of the Seminar, titled Development of the Sukūk Sector: Legal and Regulatory Considerations was chaired by Mr. Ali Hamdan Al Raisi, Executive Vice President of the Central Bank of Oman. The speakers for this session were Mr. Ahmadou Al Aminou Lo, Director General, Central Bank of West African States, Dr. Dadang Muljawan, Deputy Director, Islamic Banking Directorate, Bank Indonesia and Dr. Shahinaz Rashad Abdellatif, Executive Director, Egyptian Financial Supervisory Authority (EFSA).
The speakers shared the development of the legal and regulatory framework for Sukūk sector in their jurisdictions and new initiatives being taken to further develop this market. Mr Al Raisi commented that Sukūk served as an important instrument for Islamic banks to raise capital in recent years. He also noted that the use of Sukūk, supported by suitable incentives and appropriate legal and regulatory environment, has a wide potential to meet the financing needs of corporations and SMEs. The first speaker, Dr. Dadang shared the sovereign and infrastructure Sukūk issuance experience of Indonesia since 2008. He noted that certainty in the legal environment, diversified portfolio of Sukūk, strict compliance with Sharī`ah principles, and a variety of instruments for a wide investor base are the factors that have supported the development of the Sukūk sector in Indonesia. Meanwhile, integrating the Sukūk issuance programme with the government’s fiscal requirements was the most challenging step. Mr. Ahmadou underlined that securitisation, taxation and insolvency are the three main considerations in issuing Sukūk in the West African Monetary Union (WAMU) legal framework. He proposed that resolution of legal constraints with respect to issuance of Sukūk required a pragmatic approach by making provisions in the existing securities law rather than issuing a separate law in the WAMU. Dr Shahinaz shared the main highlights from the EFSA’s New Sukūk Law Amendment. She also outlined that Islamic capital market activities can be adequately regulated within the framework of the conventional market by securing a level playing field between these two markets.
The second session, themed “Sukūk for Budgetary and Financial Sector Support: Structures and Country” was chaired by Mr. Ahmed Al Gebali, Director, Islamic Financial Services Department, Islamic Development Bank Group. The panelists for this session were Mr. Neil Miller, Partner and Global Head of Islamic Finance, Linklaters LLP, United Arab Emirates and Ms. Nevine Loutfy, Managing Director & Chief Executive Officer, Abu Dhabi Islamic Bank, Egypt.
Mr. Ahmed Al Gebali delineated a number of challenges in the issuance of sovereign Sukūk, which included: developing appropriate legal, regulatory, supervisory and Sharī`ah governance framework; avoiding the replication of conventional products; and aligning the Sukūk with the social objectives of governments. He then proposed the Sovereign Finance Corporation (SFC) model as a solution to these challenges. The model provides a flexible option to sovereigns to meet their financing needs for a variety of investors and multiple Sharī`ah-compliant mechanisms. He also emphasised that the industry needs to move to sustainable, efficient and credible long-term solutions in Sukūk instead of limiting itself to short-term solutions. The first panelist, Ms. Nevine Loutfy, commented that the real problem with the Sukūk issuance is the perception regarding to generic Sukūk as it was stigmatised in the past. She also added that the clarity on Sharī`ah compliance is of utter importance for issuing Sukūk. Mr. Neil Miller highlighted that the current Sukūk structures are criticised for replicating the conventional bonds and the new Sukūk structures should satisfy needs of the customers by offering flexible instruments. He also shared with the audience salient features of proposed SFC structure, presented by Mr.Al Gebali earlier in the session.
Sukūk for Infrastructure Financing: Prospects and Case Studies was the third session of the Seminar. The chairperson for this session was Mr. Zainal Izlan Zainal Abidin, Executive Director, Islamic Capital Market, Securities Commission Malaysia with distinguished speakers including Dr. Mohamed Damak, Director, Global Head of Islamic Finance, Standard & Poor’s Ratings Services. UAE and Mr. Ashraf Mohamed, Assistant General Counsel, Asian Development Bank.
Mr Zainal Izlan started the session by highlighting that both Islamic finance and infrastructure financing are two new areas for the developing countries. Dr Damak shared the prospects for the Sukūk market in 2016 and highlighted that while some revision in Federal Reserve’s policy stance, drop in oil prices and complexity related to Sukūk issuance could lead to a subdued Sukūk market activity, drop in commodity prices, demand by multilateral issuers and approaching deadline for implementing Basel III standards stand as prospective upside factors. He underlined that standardisation in documentation, direct issuance by the governments and resorting to traditional structures would make Sukūk a more effective way for infrastructure financing. Mr Ashraf Mohamed focused on infrastructure financing in Asia in his presentation. He underlined that growing population and accelerating urbanisation in Asia has given rise to a big infrastructure deficit mainly in energy, transportation, telecommunications and sanitation. He also added that the after-effects of the Global Financial Crisis, limited institutional capacity, legal environment and weak enforceability are responsible for the ongoing deficit. He then highlighted that Sukūk can be a good alternative financing tool in closing the infrastructure deficit in the region. Having said that, he stressed that Sharī`ah compliance risk, liquidity management needs and lack of human capital impede the potential of Sukūk for infrastructure financing.
The final session of the Seminar, a panel discussion on Building Synergies for Sukūk Issuances, was chaired by Mr. Daud Vicary Abdullah, President and Chief Executive Officer, INCEIF and the speakers were Mr. Andy Cairns, Managing Director, National Bank of Abu Dhabi, UAE, Mr. Kemal Rizadi Arbi, Expert, Capital Market Authority, Oman and Professor Dr. Ashraf Md. Hashim, Chief Executive Officer, ISRA Consultancy Sdn. Bhd., International Sharī`ah Research Academy for Islamic Finance, Malaysia.
Mr. Daud Vicary Abdullah shared his thoughts on building synergies in Sukūk issuances as a priority considering the current picture of the global economy, low oil prices and unresolved Sharī`ah issues. He mentioned differences in Sharī`ah opinions as an important source of uncertainty in the market. He proposed that greater sharing of information, such as via a global Fatwa database with open access, could help to reduce the uncertainties in the markets, harmonise perceived differences as well as support informed decision-making by investors. Mr. Andy Cairns stated that international clients desire optimisation in their portfolio of Sukūk and bonds but complexity of asset-based financing, documentation and legal costs impede having more access to Sukūk. He also added that Islamic banks are much price tolerant in Sukūk issuances due to the fact that they are not able to hold bonds as a substitute. This tolerance and flexibility can offset the complexity issues and higher cost. Prof. Ashraf Md. Hashim raised some important points in building synergy from Sharī`ah point of view while highlighting that some pre-requirements for issuing Sukūk already secure an extra guarantee for the viability of Sukūk transactions. He highlighted that investor base for Sukūk, especially the base of institutional investors, should be widened. This can be done by converting some of the giant funds, such as Malaysia’s Employment Provident Fund (EPF), into Sharī`ah compliant business. Moreover, practicality of the Sharī`ah decisions are important for the perception of Sukūk. Mr. Kemal Rizadi Arbi shared his experience from Oman’s debut Sukūk issuance in 2015. He underlined that trust is the key factor to build the synergy in issuing Sukūk and regulators should play active role in easing collaboration between public and private players for securing trust in the market.
Delegates from among the IFSB member and non-member organisations – representatives from market players, regulatory bodies, international agencies – Sharī`ah scholars as well as academia and other interested parties from the public attended this Seminar.
The IFSB’s Annual Meetings and Side Events were held from 10-12 April 2016. Other than the Seminar on Islamic Capital Markets, a Public Lecture on Financial Policy and Stability, as well as the 13th Islamic Financial Stability Forum were also held on 11 and 12 April respectively.
