Islamic Bond @ Sukuk A Global Update

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

THE sovereign Islamic sukuk (bonds) market in the Gulf region grew to as large as $4 billion by the end of 2004, a top Bahrain Monetary Agency (BMA) official has said http://www.menafn.com/qn_news_story_s.asp?StoryId=92003   The BMA Governor, Rasheed Al Maraj, in his opening remarks at the first International Islamic Financial Markets Conference (IIFMC) and meeting of technical specialised panels being held at the Gulf International Convention Centre Gulf Hotel, said that BMA has taken major initiatives to promote and develop a strong sukuk market as part of the Agency's commitment to the creation of Islamic money market.

"BMA has a pioneering role in the development of sukuk as an asset class and has provided a template that is globally acceptable to the Islamic banking community. The market for sukuks is now maturing and showing signs of increasing momentum. According to one estimate, the sukuk investments tripled in 2004 to $6.7 billion. The $600 million government of Pakistan sukuk was a notable addition to the list of sovereigns tapping the international sukuk market. Non-Islamic borrower such as the German State of Saxony also issued sukuk last year. It is estimated that by 2006, close to $10 billion of sukuk would be outstanding. BMA's own sukuk Al Ijarah programme now runs in excess of $1.1 billion," Al Maraj said.

Organised by the Bahrain-based International Islamic Financial Market (IIFM) and supported by BMA and the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank, over 250 delegates attended the opening ceremony. The major Islamic financial institutions are also taking part in the exhibition.   The conference, being held under the theme 'Opportunities in the Islamic Capital & Money Markets' will cover various theoretical and practical aspects directly affecting the Islamic financial services industry, with particular focus on the sukuk and Islamic money markets issues.   "BMA's initiative in the creation of the Liquidity Management Centre (LMC) and International Islamic Financial Markets (IIFM) were in recognition of the constraints and challenges of creating a viable Islamic money market. Whilst the creation of such support institutions, has started delivering tangible results to an extent, the BMA's own short-term Sukuk Al Salam programme has addressed critical short-term liquidity issues. We shall soon be introducing Islamic Repos, which is a result of a joint endeavor with LMC. "We need to further innovate both on the products side and also on the infrastructure side such as creation of a full-fledged trading platform for Islamic debt, equity and money market instruments. I understand that IIFM would be working on such initiatives in collaboration with other institutions and industry players," the Governor said.  

"Despite all these developments there is now a need to grow beyond these numbers. There is a limited number of Islamic issuance in comparison to the conventional fixed income market that constrains secondary market activities. There is a need to create a sustainable and viable infrastructure for the secondary market of Islamic instruments. Islamic finance industry should also put substantial resources into creating risk management products for Islamic Investors and try to evolve Shari'a-compliant hedging mechanisms. Recent innovations on Shari'a-compliant Interest Rate Swap (IRS) and FX hedging are important achievements. However, there is a need for further refinement for structured solutions and standardisation in the upcoming Islamic Derivative market," he explained.  

"The timing of this conference could not be more important considering the rapid pace of growth in the global Islamic finance industry. The development and innovation in Islamic capital and money markets is critical for the sustained development of this industry. We have seen, recently, tremendous potential of sukuk as an asset class and hence the growth in the global Islamic capital market. We now need to witness similar pace of innovation and development in the area of Islamic money market. Liquidity management for Islamic Financial Institutions is a major challenge due to the dearth of an efficient inter-bank Islamic money market.   "There is a need to further create awareness on the role of sukuk in the development of the Islamic financial markets by organizing conferences such as the one being held today. This will result in fruitful deliberation and sharing of intellects by bringing local experiences of Islamic issuance into global perspective.   "There is a also need for product harmonisation and continuous re-engineering. The industry players and support institutions need to conduct high-level research and development in Islamic securitization and aim to simplify the issuance procedures. The role of sharia scholars would be crucial in this regard. We need to work towards common guidelines for sukuk issuance and trading," the governor added.   The Governor BMA also opened the IIFC exhibition and said that this would be an added benefit for the participants and the visitors.   Ijlal Alvi, Chief Executive Officer of the IIFM, Dr Ezzedine Khoja, Secretary General of CIBAFI were also present during the opening ceremony and addressed the opening ceremony.   Ijlal Alvi said that IIFMC is the best platform for experts, bankers and strategists to discuss the latest issues aimed at creating a sustainable market for sukuks and Islamically designed instruments world-wide. Dr Ezzedine Khoja, in his remarks said that the Conference would help in improving the understanding of Islamic banking and finance and would also address both practical and academic issues.  

Dr. Khoja highlighted the importance of the sukuks issued by the Islamic financial institutions (IFIs) and stressed the need of creating greater awareness about the sukuks, more spending on research and development, hums resources development and consultant services in this highly specialised area of the global economy.