Dubai to Raise $1.93 Billion in Biggest Sukuk Sale

Bloomberg : Dubai will raise about $1.93 billion through the biggest Islamic bond sale from the Gulf region this year, according to two bankers familiar with the transaction.

The Persian Gulf emirate is seeking to borrow about $1.25 billion from its dollar-denominated, five-year fixed-rate Islamic bond, or sukuk, and 2.5 billion dirhams ($680 million) from a local currency floating-rate Islamic note, said bankers who didn’t want to be identified because the deal is not yet complete. Dubai, which today closed its book for the bond sale, attracted about $6.55 billion in orders, they said.

“This is a solid successful deal that sets the tone for anything Dubai Inc. wants to do in the future,” Norval Loftus, the head of convertible bonds and sukuk at Matrix Corporate Capital Ltd. in London, which oversees $2.5 billion in investments.[Read more]

Islamic investors snap up sukuk ijara as risks grow

Reuters:As the global downturn drags on, battering investor confidence and asset values, Islamic finance markets are expected to increasingly favour the certainty of lease-based bonds over profit-sharing structures to minimise risks.

With key sectors such as Dubai property and Malaysian manufacturing in a slump, Islamic banks have grown wary about financing through the once-popular musharaka structure that requires lenders to share a project's risks and rewards...Read More

NON-CONVENTIONAL FUNDING: ISLAMIC BONDS OR SUKUK – Part 1

RAM:Growth of Islamic Finance

Islamic finance has become increasingly significant since the mid-1970s and has made its presence felt, both in the eastern and western worlds. The growth in national and personal wealth in the Middle East over the past 25 years has coincided with a resurgence in the influence of Islamic beliefs in various parts of the world. This has created a strong demand for a financial system which enables Muslims to make use of their wealth in a manner consistent with their beliefs.

Market dynamism has been felt in both the traditional Islamic finance centres and a number of other markets...Read More

NON-CONVENTIONAL FUNDING: ISLAMIC BONDS OR SUKUK – Part 2

RAM:In the previous article, we introduced 2 types of Islamic contracts, namely Murabahah and Bai Bithaman Ajil. This week, we present 4 more structures that are common in Malaysia. As mentioned before, these structures are not meant to be prescriptive, and there can be variations over time...Read More

Indonesia raises more than forecast in retail sukuk

Reuters:Indonesia said it raised more than expected in its first retail sharia-compliant bond and will go ahead with plans to tap a wider range of investors to finance a ballooning budget deficit as it tries to shield the economy from the global crisis...Read More

Credit crunch blow for sukuk market

Gulf Daily News: The amount of sukuk issuance declined last year after years of massive growth.The amount raised from issuance decreased by 54.5 per cent last year to $15.1billion, as compared to $33.1bn in 2007, according to Global Investment House's Global Sukuk Report.Despite that, the number of global sukuk issues increased from 129 in 2007 to 165 last year...Continue Reading

UK working to offer sukuk in sterling

Sukuk.Net: A UK sukuk bond in sterling may well be offered "sooner rather than later", according to the Lord Mayor of the City of London. Ian Luder was at the Dubai International Financial Centre with his delegation, and later addressed students in the Executive MBA programme at Cass Business School...Continue Reading

Sukuks to face challenging year ahead, say analysts

Emirates Business 24/7:Sukuk market has witnessed a dramatic decline during 2008, especially during the fourth quarter and this year is not expected to be much better, says the Islamic Finance Information Service (Ifis).

According to figures provided by Ifis, Islamic bond issuance grew enormously between 2004 and 2007, with total issuance growing year-on-year by 49 per cent in 2005, 153 per cent in 2006 and 79 per cent in 2007. In 2007 sukuk issuance hit a record of $46.65 billion (Dh171bn)...Continue Reading

$30bn Islamic bonds set to be issued

Gulf Daily News: GCC financial institutions and industrial companies will soon issue Islamic bonds worth $30 billion, according to Moody's Investor Services.

Companies had delayed bond issues due to general economic conditions but should move forward by mid-June this year if there is prudent government involvement and an increase in oil prices, said Moody's business development manager and finance analyst Faisal Hijazi in an interview with CNBC Arabiya...Continue Reading

Islamic debt funds launched amid issuance doubts

Sukuk.Net:A number of Dubai-based banks and asset managers are launching funds to invest in Islamic debt, hoping to capitalise on de-pressed prices and attractive yields.

Emirates NBD, Mashreq Capital and Algebra Capital - among others - have already or are in the process of raising $50m-$100m (€39m-€78m, £34m-£69m) in capital from individual and institutional investors, as regional investors are expected to eye the returns and relative safety of Islamic fixed income, or sukuk...Continue Reading

Islamic bonds to help Indonesia fund crisis spending

AFP:Indonesia launched its first retail Islamic bond this month hoping to catch up with its neighbours in the Islamic finance business and help fund a six-billion-dollar economic stimulus package.

It may be the world's most populous Muslim country and Southeast Asia's largest economy but Indonesia has been slow to capitalise on strong demand for Islamic bonds, or sukuk, which follow principles of Islamic sharia law...Continue Reading

Sukuk market outlook upbeat

Gulf Daily News: Despite a dramatic decline in volumes last year, the long-term perspectives for global sukuk issuance are still good, a top ratings agency said.

More than 45 per cent of sukuk issued last year were lease financing (ijara), most probably as a direct consequence of the debate about Sharia compliance among some scholars, Standard & Poor's said in a report.

"The decline in sukuk issuance last year was as a result of global market turmoil, drying up of liquidity, widening of credit spreads, and investors' wait-and-see attitude," said Standard & Poor's credit analyst Mohamed Damak.

"Although difficult to measure, part of this decline could also have been due to comments about the Sharia compliance of some sukuk by the Accounting and Auditing Organisation for Islamic Financial Institutions."

The value of sukuk issued last year dropped by more than 56pc to $14.9 billion compared with 2007.

"We do not expect the market to start reviving before the second half of the current year or early next year," added Mr Damak.

However, long-term prospects for the sukuk market remain strong.

Although volumes dropped dramatically last year, the sukuk market attracted about the same number of issuers.

Conservative estimates of the pipeline of sukuk that have been talked about or announced are in excess of $45bn.

Several factors support sustainable growth of this market, including increasing popularity of Sharia-compliant products and government openness to Islamic finance, massive investment and financing needs in the Gulf, and issuers' desire to tap investors from the Middle East and Asia.

"Issuers from more than 20 countries have expressed interest in issuing, or announced their intention to issue, sukuk, and we anticipate that several new sovereigns will enter the market," added Mr Damak.

What is Sukuk?

muamalah.com:Sukuk is an Arabic term صكوك, plural of صك sakk, “legal instrument, deed, check” for a financial certificate or termed as an Islamic equivalent of bond.

In Islam, fixed income or termed as interest (riba’) bearing bonds are not permissible. Hence, Sukuk is considered as securities that comply with the Islamic law. Its investment principles prohibits the charging, or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets. It is estimated that over RM3,500 billion of assets are managed according to Islamic investment principles.

Such principles form part of ‘Syari’ah’ (Islamic Law), but it is actually broader than its concept that it also encompasses the general body of spiritual and moral obligations and duties in Islam. Shariah-compliant assets worldwide are worth an estimated more than RM1,750 billion and have grown at more between 8-12 per cent per year over the past decade, and in the Gulf and Asia, Standard & Poor’s estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.

In classical period Islam sakk (sukuk) – which is cognate with the European root ‘cheque’- meant any document representing a contract or conveyance of rights, obligations or monies done in conformity with the Shariah. Empirical evidence shows that sukuk were a product extensively used during medieval Islam for the transferring of financial obligations originating from trade and other commercial activities.

On the other hand, the essence of sukuk, in the modern Islamic perspective, lies in the concept of asset monetisation - the so called securitisation - that is achieved through the process of issuance of sukuk (taskeek). Its great potential is in transforming an asset’s future cash flow into present cash flow. Sukuk may be issued on existing as well as specific assets that may become available at a future date.

The sukuk market valued for more than RM175 billion (at the end of 2006) is due for an exponential rise in 2007 with every issue likely to be oversubscribed 5 to 6 times amid a fast growing interest in the western countries.

One point to note here that Shari’ah requires that financing should only be raised for trading in, or construction of, specific and identifiable assets. Trading in ‘indebtedness’ is prohibited and so the issuance of conventional bonds would not be compliant. Thus all Sukuk returns and cashflows will be linked to assets purchased or those generated from an asset once constructed and not simply be income that is interest based. For borrowers to raise compliant financing they will need to utilise assets in the structure (which could be equity in a ‘tangible’ company). It is worth noting that Equity financing is Shari’ah compliant and fits well with the risk/return precepts of Islam.

In the eyes of Islamic Jurisprudence or As Shari’ah, money is a measuring tool for value and not an ‘asset’ in itself, it requires that one should not take or receive income from money (or anything that has the genus of money) alone or in other words “if money generates money per say” it will tantamount to riba’. This generation of money from money (simplistically interest) is ‘Riba’, and is forbidden. The implications for Islamic financial institutions is that the trading/selling of debts, receivables (for anything other than par), conventional loan lending and credit cards are not permissible.

Now come the question of uncertainty or ‘Gharar’ principle. It is widely understood to mean the uncertainty in the existence of an underlying asset in a contract and/or uncertainty in the contractual terms and this is an issues for Islamic scholars to address when considering the application of derivatives. Syari’ah also incorporates the concept of ‘Maslahah’ (Public interest), denoting that, if something is overwhelmingly in the public good, it may yet be transacted – and so hedging or mitigation of avoidable business risks, may fall into this category but there is still much discussion yet to come.

Sukuk are widely regarded as controversial due to their perceived purpose of evading the restrictions on Riba. Conservative scholars do not believe that this is effective, citing the fact that a sukuk effectively requires payment for the time-value of money. This can be regarded as the fundamental test of interest. Sukuk offer investors fixed return on their investments which is also similar in appearance to interest in that the investor’s return is not necessarily dependent on the risks of that particular venture.

This seems to be similar but the fact is that it is not the same as the reality is that banks invest in assets and the return from these such as rent is evenly spread over the rental period and it is this stream of income which forms the basis of the “fixed” income stream and return to investors. Furthermore, given that there is an asset in the background, there is more security for the investor which makes sukuk increasingly appealing to global investors including both Muslims and non-Muslims.

Sukuk financing can be quite mystifying for the outsider. A good analogy is one of ethical or ‘Green’ investing. Here the universe of investable securities is limited by certain criteria based on moral and ethical considerations. Islamic Finance is also a subset of the global market and there is nothing that prevents the ‘conventional’ investor from participating in the Islamic market.

An overview of Sukuk

Dar Al Istithmar:Basics of Sukuk
Sukuk is popularly known as an Islamic or Sharia compliant ‘Bond’ whilst in actual fact, it is an asset-backed trust certificate.

In its simplest form Sukuk is a certificate evidencing ownership of an asset or its usufruct.

The Sukuk structures rely on the creation of a Special Purpose Vehicle (SPV).

SPV would issue Sukuk certificates which represent for example the ownership of an asset, entitlement to a debt or to rental incomes or even accumulation of returns from various Sukuk (a hybrid Sukuk).

The return provided to Sukuk holders therefore come in the form of profit from a sale, rental or a combination of both.

Sukuk could be based on Mudaraba, Musharaka, Murabaha, Salam, Istisna, Ijara or hybrid of these.

Difference between conventional bond and Sukuk:

In its simplest form, a bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on certain specified dates, interest and principal.

In comparison, under Sukuk structure the Sukuk holders each hold an undivided beneficial ownership in the underlying assets. Consequently, Sukuk holders are entitled to share in the revenues generated by the Sukuk assets as well as being entitled to share in the proceeds of the realization of the Sukuk assets.

Similarities between conventional bond and Sukuk:

Marketability: Sukuk are monetised real assets that are liquid, easily transferred and traded in the financial markets

Rateability: Sukuk can be easily rated

Enhanceability: Different Sukuk structures may allow for credit enhancements

Versatility: the variety of Sukuk structures (as many as over 27 possibilities)allow for: structuring across legal and fiscal domains, fixed and variable income options etc.

Issuing of Sukuk involves a number of steps like:

Preparing a detailed feasibility study (stating clear objectives to be achieved from the proposed Sharia-compliant business) and setting up of general framework and organisational structure to support the issuance process;

Working out an appropriate Sharia structure to achieve the set objectives in compliance with Sharia;

Arranging lead manager (s) to underwrite the Sukuk issue;

Arranging legal documentation around the agreed Sharia structure (both from the Issuer’s as well as arranger’s perspective);

Setting up the SPV to represent the investors (Sukuk holders); and
Putting the Sukuk into circulation.

Role of Sharia Advisors in Sukuk:

Sharia advisor (Sharia scholars or Sharia advisory firms with recourse to Sharia scholars) have a significant role to play. Amongst others, following may be listed as examples:

Advising on proposed Sukuk structure and suggest a Sharia structure which otherwise fulfils the set economic aims;

Working closely with legal counsel of the issuer to ensure that the legal documents are in line with

Sharia requirements;

Working closely with legal counsel of the arranger to ensure that the legal documents are in line with Sharia requirements;

Issuing Fatwa on the whole Sukuk deal before the same can be put into circulation.

Sukuk in the context of UK and Europe:

UK is all set to introduce new framework to support the issuance of Sukuk, through parliamentary legislation. Treasury minister, Ed Balls, has been quoted in media recently: “We are looking to place domestic Sukuk on the same footing as conventional products”

It is indeed an encouraging step by the UK. But it is important that such a framework is designed involving industry practitioners with experience in Sukuk issues.

In sum, future of Islamic finance (including Sukuk) is becoming more and more viable in the UK and wider europe.

SBP invites bids for Sukuk

Pakistan News: State Bank of Pakistan on Tuesday invited tenders for sale of 3-Year Government of Pakistan Ijara Sukuk (GIS).

The target for this auction is Rs 10 billion. The tenders have been invited in accordance with the provisions of SBP, FSCD circular No.13 dated Sept. 06, 2008, says SBP statement.

The bids will be opened on Dec 20, 2008 at 11:30 and the results will be announced on same day.

The settlement date will be December 29, 2008. The maximum remaining value of the assets under the present issuance program of Ijara Sukuk is Rs 29.02 billion. The bids can be rejected without assigning any reason.

Rupiah stronger this week, bonds gain on optimism as stocks rise

The Jakarta Post:The rupiah advanced this week against the U.S. dollar on positive sentiment that investors would buy the currency as stocks gained, and partly due to central bank restrictions on the purchase of the American greenback.

The rupiah strengthened by 5.3 percent this week to 11,115 per dollar at 4:28 p.m. Friday in Jakarta, Bloomberg reported. The local currency was the second best performer this week among the region's 10 most active currencies, excluding the Japanese yen.

Overseas investors bought more Indonesian stocks this week, while the Jakarta Composite Index had a 5 percent gain.

The central bank has introduced a regulation under which the purchase of foreign currencies equivalent to more than US$100,000 through spot, forward, or derivative transactions for Indonesian citizens and firms, must be supported by clear underlying transactions and justifying documents.

The rupiah also gained after the central bank cut its interest rate by 25 basis points to 9.25 percent early this month, Bank Mandiri chief economist Mirza Adityaswara said.

Bank Indonesia (BI) had aggressively increased the rate from 8 percent in May to 9.5 percent in October to curb inflation, and maintained it at 9.5 percent in November before slashing it by 25 basis points as inflation slowed.

BI governor Boediono said the central bank would seek to maintain the rupiah at a "good and stable" level, considering Indonesia's macreconomic conditions.

"Currencies rise and fall due to supply and demand. We will keep the rupiah at a good and stable level, based on what is needed by our macroeconomy," he said.

"We cannot dictate the market, but we can do something in the market. We have ammunition, which will increase in the coming months." He did not elaborate.

BI's foreign exchange reserves stood at $50.18 billion on Nov. 28, a slight drop from $50.58 billion on Oct. 31. BI expected another $2 billion addition for its reserves, coming from the World Bank as a program loan.

Meanwhile, 10-year government bonds rose for the third time this week. The yield on the 9 percent note maturing September 2018 fell 3.5 basis points to 13.06 percent, according to the Government Securities Inter Dealer Market Association, while the price rose 0.1617 to 77.93.

The government said it might issue dollar-denominated Islamic bonds (sukuk) in February nexy year, but subject to the market conditions.

"It is very much depending on the market conditions. We will not issue (global sukuk) if the market conditions are similar to what they are now," said Dahlan Siamat, the Finance Ministry's director of sharia financing policy.

GCC firms launch $100bn projects

Gulf Daily News: GCC property firms launched $100 billion of new projects yesterday, but the news failed to restore investor confidence as fears grew that the global credit crunch is biting and the local real estate market overheating.

From a 350bn UAE dirhams ($95bn) beachfront project to a kilometre-high tower, developers at Dubai's annual Cityscape exhibition launched the usual raft of mega-developments that have propelled the GCC commercial hub to international fame.

The Dubai government has launched the 350bn dirham project to develop a huge swath of land near the coast.

Meraas Development aims to build apartments, shopping malls and offices in some of Dubai's older districts over the next 12 years, chief executive officer Sina Al Kazim said.

Kazim said Dubai was not immune from the problems sweeping global financial markets but said he was confident that the development, called Jumeirah Gardens, would proceed.

Dubai mortgage lender Tamweel said it would launch up to 2bn dirhams of Islamic bonds next year despite the global liquidity squeeze and Abu Dhabi's Sorouh Real Estate said all its projects were on target. But investors in the UAE shrugged off the upbeat news to extend weeks of declines.

And Kuwait's Abyaar Real Estate postponed the sale of its $1bn Islamic bond due to the global credit crunch.

"The UAE is not an isolated link from the chain, from the global financial system," said Sorouh CEO Mounir Haidar.

"However the UAE does enjoy slightly different dynamics. The UAE is an emerging economy and demand is strong. Economic policy is encouraging for people to invest in the region."

Tamweel and fellow Dubai-based mortgage lender Amlak Finance said on Saturday they were in talks to agree a $2.4bn merger. A report by Zawya Dow Jones suggested that Union Properties and Deyaar, which said yesterday that the liquidity crunch could slow its international growth, were also considering a merger.

Meanwhile, Dar Al Arkan, the largest Saudi developer by market value, said it expected the kingdom to buck any Gulf downward trend as economic fundamentals remained strong and demand for property was still surging.

The property unit of Dubai-based family-owned business Al Futtaim Group said it was adopting a cautious approach in its expansion because the GCC region could be affected by a global downturn.

Emad Nimeh, a development director at Al Futtaim Group Real Estate said it was unclear how the local markets would be impacted, but would evaluate things on a project by project basis.

Betting on Islamic bonds against mortgage crisis

ANSAmed:Dubai Bank plans to sell this year some $500 million in Islamic bonds as part of a programme for emission of $5 billion to finance a growth which can help it become a global source of Islamic loans by 2013.

Dubai Bank plans to sell this year some $500 million in Islamic bonds as part of a programme for emission of $5 billion to finance a growth which can help it become a global source of Islamic loans by 2013.

In times of mortgage crises and global financial turmoils the investors are increasingly betting on Islamic finance.

Dubai Bank plans to sell this year some $500 million in Islamic bonds as part of a programme for emission of $5 billion to finance a growth which can help it become a global source of Islamic loans by 2013.

The unlisted bank, part of the Dubai Banking Group (DBG), could sell its first tranche in the next ''couple of months'', depending on the market conditions, chief executive Salaam al-Shaksy said in the past days, quoted by Arabian Business Online.

The Islamic bonds, or 'sukuk', are instruments of raising capital which have characteristics similar to those of a conventional bond, with the difference that, in order to comply with the Koran law, they are based only on real estate activities.

Actually the Sharia bans interest on loans (the 'riba') and speculation, as well as investments in non-socially responsible sectors. Moreover, Islamic finance is growing with skyrocketing rhythms (average 15% growth a year), with a development due to both the large availability of liquidity in the oil-producing countries and to the expansion of the economic base in the Muslim world.

Hence, the need of new ''ethical'' financial products, respecting the Koran, but looked upon with strong interest by the Western banks too.

That phenomenon has already spread in various Western countries where financial institutions inspired by the Koran and its precepts are created.

In its new emission the Islamic Dubai Bank chose Swiss UBS and Britain's Standard Chartered as pilot banks for the placement and has already received from the potential investors a good response for the sale of the 'sukuk', Al-Shaksy said.

The bonds will be listed on the London and Dubai Stock Exchanges. ''It is a historic milestone for Dubai Bank, therefore we are preparing to finance an aggressive growth plan, both towards the public and towards the companies, in the banking services compliant with the Sharia,'' Al-Shaksy said.

The chief executive also said that the first tranche would serve to finance part of the asset development of the bank. It is also considering the possibility of true Islamic loans in addition to the emission programme.

''The launch of the first tranche will depend on the market conditions, hopefully in the next two months, and it will probably be of some half a billion dollars,'' he added.

Conforming with the ban of Islam concerning the interest on loans, the 'sukuk' will remunerate the holders through the yields of parallel investments, such as renting real estate property.

Dubai Bank's decision to sell 'sukuk' comes in a moment in which the strong malaise which had hit the conventional markets can favour the further spreading of Islamic finance, which has so far been safe from the effects of the slowdown of the global economy.

Dubai Banking Group, part of Dubai Holding, owned by the sovereign of Dubai, holds a 40% stake in Bank Islam, the oldest and largest Islamic bank of Malaysia (it is Malaysia and the United Arab Emirates, respectively with 60% and 25% of the global emissions, that are the pivot countries of the Islamic bond market).

The group also holds 40% in ACR Retakaful Holdings, the world's largest reinsurance company.

Under the programme of banking acquisitions and partnerships in various countries (Indonesia, Senegal, Nigeria), according to Al-Shaksy it can become the world's largest Islamic financial services company by 2015.

Thailand plans first Islamic bonds to tap Arab wealth

Bloomberg : Thailand plans to raise $600 million from its first sale of Islamic bonds as it seeks to attract funds from the Middle East to pay for public works.
``We want to tap petrodollars as Middle East countries have lots of money,'' Dheerasak Suwannayos, president of the state- owned Islamic Bank of Thailand, told reporters in Bangkok today.

Islamic Bank plans to sell seven-year Islamic bonds in the third quarter of 2009, Suwannayos said. State companies will use money raised from the securities, known as sukuk, to help finance their projects.

Sukuk oversubscribed

Gulf Daily News: The Central Bank of Bahrain (CBB) has announced that the monthly issue of the short-term Islamic leasing bonds, Sukuk Al Ijara, has been oversubscribed by 120 per cent.

Subscriptions worth BD6 million were received for the BD5m issue, which carries a maturity of 182 days.

The expected return on the issue, which begins tomorrow and matures on March 26, is 2.35pc.

The Sukuk Al Ijara are issued by the CBB on behalf of the Government of the kingdom of Bahrain.

This is issue number 37 of the short-term Sukuk Al Ijara series.