Opening Remarks by Mr Jaseem Ahmed, Secretary-General of the IFSB at the Seminar on Islamic Capital Market - “Supporting Development through Sukūk: Prospects and Initiatives”
Date posted: 10 April 2016
Date: 10 April 2016
Event / Venue: IFSB Annual General Meetings 2016 and Side Events | Cairo, Egypt
Speaker: Mr Jaseem Ahmed, Secretary General, IFSB
It is my pleasure to welcome all of you to the Islamic Capital Markets Seminar on “Supporting Development through Sukūk: Prospects and Initiatives”. On behalf of the Islamic Financial Services Board (IFSB), I would like to thank the Central Bank of Egypt, which is the Chairman of the IFSB for 2016, and H.E. Mr. Tarek Amer, the Governor of the Central Bank of Egypt, for hosting the IFSB annual meetings which are starting with this Seminar.
I would like to also express my appreciation to the distinguished speakers and panelists, many of whom have travelled long distances, and who join us here to share with us their experience and knowledge on this important subject.
Ladies and Gentlemen,
The IFSB is pleased to participate with the Central Bank of Egypt in Islamic finance activities. We held the 37th Meeting of the IFSB Technical Meeting in November 2015. We have also collaborated with the Banking Institute of the central bank in capacity building exercises, and hope to do so again. Earlier, I had the pleasure of speaking at a joint WB-IFSB Conference in Islamic Finance in 2012 which drew more than 200 participants.
Ladies and Gentlemen, Islamic Finance, Islamic Capital Markets, and Sukūk, have been evolving, and growing rapidly in recent years, and especially since the aftermath of the global financial crisis.
We are all aware of the rapid growth rates of Islamic finance, and its various sectoral components, since 2008/2009.
In relation to Sukūk the tremendous growth in Sukūk issuances appear to reflect a number of factors on both the demand and supply sides, many of which will feature in your discussions today.
I would like to touch on some of the recent developments.
First, Sukūk is being used to finance real sector investments, in particular for physical infrastructure in both Asia and the Middle East. But we have also seen Sukūk financing for social infrastructure, e.g. for education, in Africa. In addition, there are now new initiatives for Sukūk financing for such goals as Climate Change and the Green Economy, or to finance international immunizations programmes or, more broadly, to address the expanding SRI agenda.
Second, we continue to see use of short term Sukūk for liquidity management purposes in the banking sector, something that has been taking place in a wider set of jurisdictions. These issuances have been by the public sector and principally by central banks.
More recently, it is expected that the new capital adequacy and liquidity buffer standards under Basel III, and their requirements for high-quality liquid assets (HQLA), will lead to additional Sukūk issuances, this time by the Islamic banks as they seek to comply with Basel III and its corresponding IFSB standards under IFSB-15 for capital adequacy, and GN-6 for liquidity management.
And third, there is an expanding set of jurisdictions who are seeking to integrate Islamic finance into their public expenditure programmes. Sovereign Sukūk has been the key instrument for this. This issue remains challenging.
The challenges are more readily addressed in the context of the financing of government projects where a real physical project and rates of return can be identified. However, the definition of an appropriate rate of return on general government services still pose challenges in a number of jurisdictions from a Sharī’ah compliant perspective.
It will be important to overcome these challenges as sovereign use of Sukūk is also an area of expanding needs as well as opportunities. These opportunities are especially relevant for those jurisdictions which are seeing pressure on their revenues from falling commodity prices.
These jurisdictions may well find it attractive to diversify their funding base through Sukūk financing. They may find it easier to do so by leveraging off the precautionary balances that some have built up in the form of foreign exchange reserves. However, the challenge will be to strike quickly, before reserves are visibly diminished, and markets lose confidence. Market confidence can be built up in these jurisdictions by undertaking reforms, or rather strengthening their ongoing programmes of reforms, so as to address key legal, regulatory and financial infrastructure issues that can serve to facilitate Sukūk issuance. But the benefits, and opportunities for development of Sukūk programmes as an alternative financing source are available to all jurisdictions and institutions seeking to diversify their funding services.
Ladies and Gentlemen, The scope for the expansion of Islamic capital markets is enormous but will need concerted efforts by public and private sectors to create the pre-conditions, and the legal and financial infrastructure needed to sustain it.
There has been considerable progress made in terms of Sukūk market infrastructure and its ancillary services. Sukūk are now being rated by both international ratings agencies as well as domestic agencies in countries where available; this has enabled a better pricing mechanism for investors.
However, in terms of benchmark pricing itself, there is a disparity in progress; some countries have launched regular sovereign issuance programmes across wide maturities which helps to provide the benchmark for pricing of various Sukūk instruments.
In others, the absence of a yield curve remains a problem and combined with a thin and infrequent secondary market, Sukūk issuances in these countries are higher cost as compared to comparable bond issuances.
The same disparity across countries is also prevalent from a legal perspective in terms of institutional development. The legal framework is critical, however, in another fundamental sense. If we are to see a greater shift towards Sukūk that are based on the credit of securitised assets we will need to see corresponding progress to provide greater legal certainty in a number of areas where there are major gaps in Islamic finance. These areas include, but are not limited to, sale or true sale, collateral security, bankruptcy issues including bankruptcy remoteness, etc.
Finally, there is a need for international standards that will help to provide understanding on issues such as transparency and disclosure in Islamic capital market products. Other important issues include the broader Guiding Principles for the prudential regulation and supervision of ICM. In view of the importance of these issues from both a national and cross border perspective, the IFSB has in place an expanded programme of ongoing and planned standards for ICM that comprises: first, a standard on transparency and disclosure in an advanced stage of preparation; second, we propose to launch a standard in 2016 for the preparation of Core Principles for the Regulation of ICM; and third, in 2017, we will be launching a standard for Consumer Protection in ICM products.
Ladies and Gentlemen,
I would like to close with the following observations.
First, issuers from more than 30 jurisdictions have tapped the Sukūk market including many non-OIC sovereign issuers e.g. UK, Luxembourg, Hong Kong. In 2015 alone, sovereigns, GREs and international organizations domiciled in at least 13 jurisdictions have tapped the global sovereign Sukūk market. These issuances have been used to fund a variety of public sector projects including infrastructural development, budgetary support needs, and capital expenditure and working capital requirements.
Second, the Multilateral Development Banks (MDBs) have also been active in the international Sukūk market. For instance, the World Bank’s International Finance Corporation returned to the Sukūk market with a 5-year USD100 million Sukūk al-Wakulla issuance in September 2015. Similarly, the Islamic Development Bank (IDB) also continued its annual Sukūk issuance programmed and issued a total of 4 instruments worth a combined USD1.56 billion in 2015 (2014: USD4.1 billion).
Third, among the corporate issuers, the Sukūk sector is witnessing an expanding number of business groups utilising the Sharī’ah-compliant instrument to raise funds. Here, a noteworthy development is the issuance of the Emirates Airline Sukūk that was guaranteed by UK Export Finance, a government-backed export credit guarantee agency, marking a first for the UK Government.
And, fourth, financial services providers have increased their issuances of revised regulatory-compliant capital adequacy Sukūk to meet new international standards for banking sector capitalisation. In 2015, there have been three Additional Tier 1 (AT1) Sukūk issued by Islamic banks in Saudi Arabia, Qatar and UAE while Tier 2 instruments have been issued in Malaysia and Turkey. There have also been issuances of short-term liquidity management Sukūk to meet the high-quality liquid assets (HQLA) requirements of the BCBS and IFSB standards.
In particular, the International Islamic Liquidity Management Corporation (IILM) expanded its programme and issued USD6.4 billion worth of Sukūk in 2015 (2014: USD5.8 billion).
These developments suggest a thriving sector, and a widening global engagement in Islamic finance and in Islamic capital markets that sets the stage for the future.
The future is bound to be different from what has preceded it. It is also bound to be challenging.
But the knowledge that the industry has gained, and the sharing of that knowledge in settings such as this, will I believe add strength to a gathering momentum in Islamic finance. It is this gathering momentum, carrying with it a willingness to address difficult issues, that will shape our engagement with the future.
I am optimistic about that future. With that, may I now conclude by wishing you all a fruitful and very productive Seminar. Thank You.
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