q8 Thomson Reuters Sukuk Perceptions and Forecast Study 2013

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ISLAMIC

FINANCE

GATEWAY

THOMSON REUTERS ZAWYA SUKUKPERcEPTiONS ANd FOREcAST STUDY 2013dEcEMbER 2012

Supporte y


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ReuteRs/Mura Sezer


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iSLAMic FiNANcE GATEWAY 3

beyon rose-tnte spetales, the sukuk market aes hallenges that may slow or even log growth hannels.deenes persst n the areas o transpareny, stanarzaton, an lquty n the seonary market ue to theshortage o trang mehansms an the erent treatment o ertan sukuk strutures. To ree the arteres o theislam aptal market an susequently enrh ts trutares an ownstreams, there s a nee or pratal stuesthat aress ts hallenges, an that wll prove a learer pture o ts urrent an oreaste status.

in August an Septemer 2012 Thomson Reuters onute a Sukuk Foreast an Pereptons Survey nvolvngnvestors an lea arrangers, hene overng oth the uy an sell ses. The survey gathers prmary empral atarom these two groups, susequently evelope to prove orwar-lookng analyts on the appettes an preereneso sukuk nvestors or 2013 an eyon.

The survey an ts nngs wll e o nterest to ssuers n assessng market appette or sukuk. For lea arrangers,orgnators an avsors, the survey wll norm ther prospetve sope o opportuntes. For nsttutonal an prvate

nvestors, the survey wll altate an unerstanng o what the market wll oer n the omng years. The survey sempral results wll also e o nterest to a we range o pul an prvate setor stakeholers who epen onsuh ata to make norme esons to shape strategy. These stakeholers nlue orporate ankers, relatonshpmanagers, islam nanal nsttutons, islam nane market prattoners, analysts, polymakers an regulators.

The gloal sukuk market has sustane growth that has ontrute

to the evelopment an strengthenng o the islam nane

nustry as a whole. Wth the nreasng use o sukuk islam aptal

markets have more eently an eetvely alloate uns, along

the way makng emans o the nter-onneteness o nanal

markets. Argualy, sukuk s now the ellwether o the islam

nane nustry, nreasngly arrestng the gaze o onventonal

aptal market players an altatng the expanson o the shara-

omplant partpaton ase. For the ormer the sukuk marketplae

prmarly oers eman versaton opportuntes. For oth the

ormer an the latter, the sukuk market now proves unrasngopportuntes or varous purposes o erent sales, as the

eonom an nanal emans o markets have pushe or the

evelopment o a now vare asket o sukuk strutures that meet

the nees o oth nvestors an ssuers.

FOREWORd


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cONTENTS

FOREWORd 3

EXEcUTiVE SUMMARY 7

MESSAGES FROM TOP MANAGEMENT 13

AcKNOWLEdGEMENTS 21

SURVEY FiNdiNGS 25

dEEP diVE iN SUKUK 55

OUTLOOK FOR 2013 ANd bEYONd 75

METHOdOLOGY 95

KEY LEGAL MATTERS TO bE cONSidEREd iN STRUcTURiNG SUKUK TRANSAcTiONS 103

APPENdicES 107


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EXEcUTiVE SUMMARY


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8 THOMSON REUTERS ZAWYA SUKUK PERcEPTiONS FOREcAST STUdY 2013

EXEcUTiVE SUMMARY

The evelopment o the islam aptal market s ntegralnot only to the overall evelopment o islam nane utalso to the roaenng an eepenng o aptal marketsn general. Whle there are erent prouts an servesthat make up the icM, nlung stoks, uns, an rskmanagement nstruments, sukuk takes pre o plae.

Ths stuy measures sukuks vtal statsts, an szesup the nstrument or uture growth. A key omponento ths stuy s a survey o sukuk lea arrangers annvestors. conute n August an Septemer 2012,the survey ouments the expetatons an preerenes

o market players on the uy an sell ses, provngvaluale nsghts an empral ata or the nustrymovng orwar.

The man phases o the sukuk market

PHASE CHARACTERISTICS NUMBER OF

ISSUANCES

VALUE OF ISSUANCES

($ BILLION)

i 1990 to 2001 Starte n 1990 wth Shell MdS orporatesukuk n Malaysa

Small loal ssuanes prmarly y theMalaysan government

95 5.89

ii 2002 to 2007 Starte wth the Malaysan governmentssung the rst rate nternatonal sukuk

Followe y many loal an ntl ssuanes

726 87.71

iii 2008 to 2010 Gloal nanal rss Asset ule urst n the Gcc Shara-omplane ssues as rase y AAOiFi

909 108.03

iV 2011 to present

ay

contnung eets o gloal nanal rss

Post Ara Sprng

1060 194.78

Vital statistics

Gloally, the value o sukuk ssue as at Novemer 5, 2012 s $121 llon. Malaysa ontnues to omnate, ollowey the Gcc. As has always een the ase sne 1990, omest ssuanes overwhelmngly outwegh nternatonalssuanes n 2011 the rato was 90:10 an or the rst nne months o 2012 t stans at 87:13.

The sukuk market has een at ts most atve these last ouple o years. More than 60 perent o the value o all sukukssue sne January 1996 an e attrute to ssuanes etween 2010 an 2012. issuanes urng ths pero a up to1,486 totalng $248.5 llon (the value o gloal aggregate sukuk rom January 1996 to Septemer 2012 s $396.8 llon).

despte ths reent growth spurt, supply s stll lmte. in the last year or so we have seen sukuk spreas ontnuallytghten as eman ar outpae supply. Ths gap has resulte n sukuk yels tghtenng relatve to onventonalons as nvestors hase qualty papers. it s urng an wthn ths envronment that our sur vey was onute,

oerng a very relevant market perspetve movng orwar nto the next ouple o years.


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iSLAMi c FiNANcE GATEWAY 9

EXEcUTiVE SUMMARY

Key suRVey indings:

inVestoRs Vs aRRangeRs

The survey overs pertnentonseratons relatng to oth seso the eal. These nlue retqualty, rsk lassaton, urrenytypes, oupon types, length otenors, sukuk struture, ssuaneosts, lstng, ratng, expete/preerre setors or ssuane/nvestment, lquty o seonarymarket, urrent an preerre OTctrang methos, sukuk traalty,an expete/preerre emergngmarkets. The ang tale presents

our Top 10 nngs rom the sur vey.(Note: Mh majorty or hghestranke on the uy se mathmajorty or hghest ranke on thesell se. gp majorty or hghestranke on the uy se o not mathmajorty or hghest ranke on thesell se.)

INVESTORS (BUY SIDE) ARRANGERS (SELL SIDE) COMMENTS

cr Most preer Sau Araa to nvest n,ollowe y UAE an Malaysa

Expet to see most sgnant numero nvestors rom UAE, Sau Araaan Malaysa

Mh

sr Preer soveregns, then quas soveregn,then state-lnke

Expet quas soveregn, then soveregn,then nanal serves setors to ssue

Mhinvestors leanng towars saer nvestmentsTop two hoes math or uy an sell ses

cr Q Majorty preer investment Grae (bbb-/baa3 an aove) papers

Very large majorty expet investment Grae(bbb-/baa3 an aove) papers to e ssue

Mh

tp i Large majorty lookng or nternatonalEuroon sukuk

internatonal Euroon most expetetype o ssue, although numer not as largeas nvestors

Mhbut eman s muh hgher than expetesupply (71.7% vs 53.6%)

crr Large majorty lookng or USd ssuanes(77.8%)

USd most expete, ollowe y Malaysanrnggt, USd only 48.1% expete

Mhbut eman or USd s muh hgher than

expete supplyemr Mrk Overwhelmng numer lookng orwar to

Oman sukuk, ollowe y EgyptEgypt an Oman as havng most sgnantpotental to ssue sukuk

Mh

Rk cf Large majorty lookng or asset-akesukuk (69.4%)

48.1% goes to asset-ase sukuk, ollowey 33.3% asset-ake

gpHgh eman or asset-ake sukuk vsexpete supply o 33.3%

cp tp Almost 50/50 splt etween xe rate anfoatng rate oupons

Fxe rate oupons most expete (70.4%) gpSell se leanng towars saer xe rateoupons or ssuers, whle nvestors equallykeen on xe an foatng rates

tr Majorty preer tenors o 3-5 years (52.5%) Most expete tenor s 5-10 years (66.7%),3-5 years tenor on 25.9%

gpSupply expetng longer tenors than eman

srr Majort y preer jara (63.3%) Splt 29.6%/29.6% et ween jaraan wakala

gpinvestors want jara sukukArrangers expet ths eman to eonly hal met


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EXEcUTiVE SUMMARY

Other mportant takeaways rom the survey nlue ratng onseratons oth lea arrangers an nvestors onser ratng to e most mportant or

Grae A an aove ssuanes, wth oth ses agreeng that sukuk ratngs mportant or ther ssung an nvestment esons. currently ratng smanatory n Malaysa ut not n the Gcc.

The gaps as seen n the tale le n the areas o rsk lassaton, oupontype, tenor an struture. Where nvestors largely preer asset-ake papersarrangers expet ths eman to e only hal met, wth the asset-asevarety most expete y arrangers. There s also a msmath n tenors, wtharrangers largely expetng ve to ten-year papers aganst the eman orthree to ve-year papers. On sukuk struture, nvestors are lookng or jara,wth arrangers expetng ths eman to e only hal met.

Gvng more nsght an analyss on ssues surrounng some o theseareas, partularly regarng rsk lassaton, struture rsk as well as uyer

rghts an nterests, are artles y dr Say Farook, dr Nkan Froozye, andr Tarqullah Khan. Notaly wthn ther artles the three pont out the neeor nustry stakeholers, espeally regulators an stanars setters, to takemore une an swt aton to push ross-orer assuranes.

outlooK oR 2013 and Beyond

Pertnently, our rsk assessment seton analyses outstanng sukuk ase on three key rsk ators prot rate,

lquty, an struture. Our analyss shows that xe sukuk wll elne n value one rates move upwar. Lqutyonerns, long a ane or the nustry, wll persst partularly or outstanng sukuk on longer tenors that are not asatvely trae. We then looke at the struture most use ths year the jara. Wth the nustry stll nervous aoutrepurhase agreements ollowng Mut Taq Usmans 2007 pronounements on the matter wth regar to muaraaan musharaka sukuk, only 29.6 perent o lea arrangers expet the jara struture n the omng two yearsompare wth 63.3 perent o surveye nvestors who preer t.

On the overall evelopment o the sukuk market, our stuy ponts to ts ontnue growth, wth the nustry lookngorwar to ssuanes rom a numer o emergng markets, partularly Oman an Egypt. but whle the market grew53 perent rom 2002 to 2012 (egge on y a umper rop rom the last two years), our short to meum term outlooks that eman wll ontnue to outstrp supply, espeally or nternatonal USd papers, an market growth wllontnue ut at a elnng rate. deman, however, s oreaste to grow threeol, reahng $421 llon n 2017.


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ReuteRs/beawharta beawharta


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ReuteRs/Maje Jaer


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MESSAGES FROMTOP MANAGEMENT


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MESSAGES FROM TOP MANAGEMENT

The new source o power is not money in the hands o a ew,

but inormation in the hands o many.

John Nastt, est sellng author an uturst.

What o we know aout a sukuk? its oten esre as a on, ut

ts not a on. its oten the raggng rghts o ountres on ssuane

(Malaysa) an stok exhanges on lstng (Lonon Stok Exhange).

its the ass o nvestment vehles lke the sukuk uns o toay

an hopeully, tomorrows sukuk ETFs. it has enountere eaults,

ankruptes an restruturngs. it has eome the alter ego o et

aptal market-ase islam nane.

REPOSiTiONiNG THE SUKUK

B Rh sq

Gloal Hea, islam nane & Oic ountres,Thomson Reuters

The sukuk has also eome a Fray khutah, or Fray sermon, that we, the prattoners, preah a nauseum tsvrtues to the onverte, when t s resoure-rh ountres lke those n South Amera, or the halal oo ompanes

that we nee to reah out to.Toay, the sukuk markets man narratve s authore y the Muslm worl an the wealth amasse rom ol. it s moremportant, however, or us to hghlght the hapters aout how aptal markets an elnk rom the sole relane onank nanng n Muslm ountres, how we an prove nvestment opportuntes wth non-equty lke rsk prole orall nvestors, an how we an ontnue ulng an strengthenng the ounaton o aptal markets.

PReacHing & Positioning

i we an make ths verson o the sukuk story aessle an relevant outse the Muslm worl, then we an moreonently lay lam to the message the islam nane nustry has een preahng Not just or Muslms ut orall mankn. The sukuk, loosely ene as partpaton ertates lnke to assets rom the real eonomy, mayjust e the aptal market nstrument that ats oth as a loomotve that pushes islam nane to 2.0 ($2 trllon)an uls rges to toays less truste onventonal nane reently ult on speulaton (exessve leverage) anunertanty (ervatves).

Put erently, an islam nane n general, an sukuk n partular, ontrute to the requre e-leveragng nEurope, or example? i yes, then we have muh work ahea o us or at the least, were starng own pot-holepathways an ang sgnposts that nee a reset.

eXPlaining suKuK

islam nane s generally unerstoo or ts loty attrutes o soal juste, nanal nluson, an equtaletreatment. it s also oten esre n the postve, where everythng s permssle unless t volates one o theour prohtons nterest, unertanty, speulaton, an unerlyng asset nonsstent wth shara preepts.

However, we n the nustry seem to e mu-stuk n esrng the proess, struturng, moaltes o ontrat,et., nstea o movng the onversaton to the very rason tre o sukuk; or example, what an sukuk nane?The emergng markets, whh nlues all 57 Muslm ountres, are n nee o llons o ollars o evelopmentnane, partularly to ul roas, hosptals, rges, arports, housng, an so on. These are rpe an rght orasset ake nanng, .e. sukuk.

Many o the evelope ountres unergong e-leveragng an restruturng are also n nee o a smlar amounto uns, an renanng an restruturng onventonal et s the nee o the hour. The exten an pretenrenanng only elays the nevtale. A paragm sht approah s neessary or the greater goo: savngsnsttutons, jos, an amly unts.


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suKuK KPi

All o us have KPis, e they seular or sprtual. The sukuk nees to have ts KPis too, ut evo o soul an oy, t sepenent on us or ts evelopment, rse an onus. For the sukuk to e a unversal aptal rasng nstrument t neesto eome shel regstraton eent (to take avantage o omplant ret prng, or example, o Thomson Reutersislam interank benhmark Rate [iibR]), an ollow the evelopments o the Euroon market, whh only took o twoeaes ater ts nepton n the 1960s.

conclusion

islam nane s aout nanng, nvestng an ensurng ethal prouts an usnesses that have lnks to the realeonomy. The lnk to the relgon s the orm, ut more mportantly, the sustane o t s the transparent set o rulesthat aress normaton asymmetry an elevates the nterests o the less ale, an the senranhse.

The sukuk nees to move rom orm to sustane, rom a Muslm ountry an ol relate phenomenon to a valeunversal opton. The sukuk nees to e seen an aopte as a partpaton ertate that nanes assetsontrutng to the real eonomy promotng evelopment, nanng versaton an servng as an antote tonanal elne.

WHats Holding BacK suKuK?

The queston eomes what s holng ak the eployment o anothermoe o nanng, .e. sukuk, n (more) emergng (rea Oic) an evelopemarkets? it appears to e a omnaton o polts an parlament, anrankly, a alure on our part (nustry stakeholers) to reognze themportane o a well oornate euaton an awareness ampagn.

in ousng on areas we have ontrol over, we nee to reposton toaysloomotve o islam nane, the sukuk, as a vale alternatve to exstngaptal rasng nstruments. At the en o the ay, the sukuk must sell tselon provng value merts whlst allowng aptal rasers, as part o theruary uty, to tap nto another soure o unng.

Thus, whle league tales o ankng an legal ssuers an unerwrtersare mportant, they are not overrng at ths nasent stage o the sukukmarket evelopment. O paramount mportane s or sukuk to eome

a vale opton or anks (basel lll), orporates, nternatonal agenes,an soveregns. Several areas nee to e evelope, nlung:

1. Work fows (news, oumentaton an partpants)

2. content (moaltes, stanars, et.)

3. country regulaton an tax eeny

4. Trang rom OTc to sreen ase

All ths normaton must e n real tme, always to han, an at ourngertps, on a seure an nteratve (gloal) ommunty platormaltatng ree fow o ommunaton, ollaoraton, an ontruton.

Have we hear an seen t eore?


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A t o hstoral perspetve wll shne a lght on where we urrently stan. Euroons only took o n the 1980swhen a numer o ators, oth maroeonom an nrastrutural, onverge to reate the Euroon market. The

urrent level o the sukuk market looks smlar to the Euroon market o the m 1970s, an t s at least 15 yearsaway rom reahng the tremenous volumes o Euroons. but wth the spee at whh t s growng, ath up slkely to ome sooner rather than later. Ths spee has een uelle y wealth that s ever nreasngly movng east toraply growng markets suh as the Mle East an Asa. Here, sukuk presents the optmal vehle to tap a quarter othe worls populaton. The eauty o sukuk, when ssue wthn the ramework o onventonal ons nrastruture,suh as nepenent learng an settlement an ratngs agenes, s that t eomes the ultmate vehle to tap othonventonal an islam nvestors.

To appeal to ths wer ase o nvestors, the sukuk has ha to eome more malleale. Struture nnovatons ase,sukuk an e ssue as a bullog, or n Renmn, not just as Regulaton S Euroons, whh s the platorm o hoeor nternatonal ssuers. The lattermost s not lkely to sappear an hene, or all ntents an purposes the appeal osukuk to reah the west ase o nvestors wll persst well nto the uture. However, eonoms avours the large anasset-rh ssuers, so the sukuk market may well stay the ottage nustry t s or a whle yet.

tHe PRoBleMs WitH issuesby ts very nature, sukuk are more umersome to ssue than onventonal ons. Seurng assets to ak the sukukssue value, whle eomng easer, s stll a sgnant hallenge. i you lghten the asset-akng requrement yemployng asset-ase strutures suh as a muraaha or a usurut-ase jara, you mght e ompromsng sharaauthentty an thereore e expose to the potental o shara non-omplane rsk. Struturng nnovaton hasnevertheless avane qute sustantally to the extent that ssuanes are ahevng a goo ompromse etweenshara authentty an ssuers nees.

Atonally, ssuane osts are stll hgh, therey prng out smaller ssues. Legal osts assoate wth struturng/oumentaton omne wth atonal regstraton or valuaton osts a anythng etween $50,000 to $199,000on top o the osts o ssung a onventonal on, aorng to our survey o lea arrangers. Hene ssuers woulhave to rase at least $100 mllon or the ssue to make nanal sense. in ths regar, Malaysa has one a antastjo nentvzng ssuane out o the ountry. beses the aptve nvestor ommunty enetng rom exemptonon wthholng taxes, the Malaysan government has mae t smple an straghtorwar to ssue rom Malaysa,

nlung a 14 workng ay turnaroun or approval y the Seurtes commsson o rnggt-enomnate sukuk ymultnatonal ompanes.

The sukuk market has seen a ramat rse, all an rse agan over

the past eae. From ts humle egnnngs n 1990 wth the rst

rnggt sukuk ssuane y Shell or $33 mllon (125 mllon rnggt),

t has grown to a market worth $110 llon n annual ssuanes.

Ths s margnal relatve to onventonal xe nome markets,whh saw approxmately $2.12 trllon worth o Euroons* alone

n 2011. Whle the sukuk market has ome some way, the roa to

even mathng the magntue o onventonal ssuanes s a long

one (see Seton Are Sukuk the next Euroon?).

SUKUK MARKET dEVELOPMENT:cAUTiOUS OPTiMiSM iS THE ORdER

OF THE dAYB dr. s rkGloal Hea o islam captal Markets,Thomson Reuters


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stRengtHening tHe cHaRge

Several ssues stll nee to e aresse the market s to enhane ts evelopment. We reognze that some o theseare not wthn the ontrol o islam nane nrastruture oes let alone regulators. in some nstanes, we woulnee trallazers to take up the mantle.

1. Enorement o rghts an olgatons uner sukuk transaton oumentsAlthough the rsk o major eaults has aate sne the atermath o the gloal nanal rss an most ssuersomng to market are sally soun, or the sukuk market to grow outse o the soveregn an quas-soveregn spae,regulators urgently nee to aress the rghts an olgatons veste n sukuk ertate holers y law n the event oa eault.

2. Struture approah to shara ratngsEveryone susses shara governane an non-omplane rsk ut the nustry only elt ts real mpat wth theGolman Sahs sukuk eale. More mportantly, no regulatory or stanar settng oy qute unerstans howto manage t. in the ontext o sukuk, these rsks an e aresse n a tatal manner, or va a holst approah.Tatally, a oy wth suent relty evelops a une perspetve on what s or s not onsere aeptale

or the vast majorty o nvestors. bol as t souns, the market has suently evelope a roa unerstanngo what s an s not onsere aeptale. it s now up to a proatve shara stanar setter or an nrastruturensttuton wth a suently rele shara oar to estalsh a struture approah to ratng sukuk ex-ante.

At a strateg level, t s rtal that nrastruture nsttutons suh as AAOiFi, iiFM, iiLM, iiRA an the iFSb worktogether to reate a une set o stanars an guane notes that over our aspets:

. Permssle master ontrats/strutures

. Assoate unerlyng ontrats an oumentaton requre to omplete eah master ontrat/struture

. Guane note on key prnples assoate wth sukuk n general an wth eah master ontrat/struture

v. Spe mpermssle provsons

3. Manatory ratngs regmeFor orporates to enter the nternatonal sukuk market n ore, regulators shoul requre ssuers sellng seurtes

nto ther market to proure a ret ratng. The Gcc ountres have yet to realze the mportane o external retassessment to the evelopment o the orporate on market. The suess o the Malaysan orporate sukuk markets a ase n pont.

We put orwar these an other ssues stemmng rom ths sukuk stuy to the islam nane nustry an all ourpartners, wth the hope that our many hans an heas wll make lght work o the hallenges on the roa ahea.

*A Eurobond is an international bond that is denominated in a currency not native to a country where it is issued.

These include Eurodollar (non-US entity issues in USD dollar), Bulldog (non British entity issues in Pound sterling),

Samurai (Non-Japanese entity issues in Japan) etc.

caVeat eMPtoR, BuyeRs (still) BeWaRe

On the uy se o the equaton, sukuk nvestors are expose to onseralesystem rsks. These nlue:

1. Lquty Rsk: investors are sproportonately onentrate n nanalnsttutons n the Mle East (partularly those wth a shara-senstvemanate), an they hol the nstruments to maturty.

2. Prot Rate Rsk: The majorty o nternatonal sukuk are ssue wth a xerate oupon, hene exposng nvestors to sgnant losses n the eventthat the urrent pero o monetary easng sspates an rates nreaseeyon toays negatve numers.

3. Struture Rsk: We saw n 2008 when Mut Taq Usmans statementprompte AAOiFi to tghten regulaton, leavng many nvestors to traewth ewer uyers an lower lquty. Ths oul potentally reur theislam Fqh Aaemy or some other regulatory oy ees, or example,that jara leaseak strutures n ts urrent orm are not permssleespte ther notonal usurut ase asset akng.

4. deault rsk: despte a sgnant elne n name-ase nanng aterthe gloal nanal rss, eault rsk stll lurks an oul potentally harmthe nustry n the event that a g name eaults wth lttle reourse tothe unerlyng assets akng the nstrument.

inRastRuctuRe: uRgent ReVieW needed

despte sol avanement, sukuk an only grauate to a vale ssuaneproposton a oornate approah, oth unlaterally wthn jurstonsan multlaterally aross jurstons, s mplemente. The momentumappeare to e pkng up wth the estalshment o the internatonalislam Fnanal Market an the internatonal islam Lquty Managementcorporaton. Sue to say, even wth the est ntentons, the est la plans

o me an men oten go awry.

despte sustantal progress on one o the ounatonal requrements orross-orer sukuk the prot rate swap, the iiFM has yet to make ts markon easng the osts an neenes o ssung the paper. Smlarly, the iiLMha, at est, a alse start an ater almost t wo years, stll struggles to ssue asukuk. The appontment o a new cEO may hange the pture.


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THE cHALLENGE OF iNNOVATiON

B J-Mr Pfq

che Operatng Oer, Zawya

a HwProut Manager, Zawya

The phenomenal an exponental growth o the sukuk market has een essental or the eonom

evelopment o key growth markets suh as the Gcc an Asa. Zawya estmates the urrent

outstanng sukuk market at $230 llon, wth 2012 eng yet another reor-reakng year.Whle hallenges arsng rom the lak o stanarzaton an a hanul o eault ases hol ak

the growth o ths nhe nustry, eman rom islam an onventonal nvestors remans aunant.

At the same tme emergng markets lke Egypt, Oman an Tunsa are eyeng ther euts n the sukuk

market, jonng seasone soveregn ssuers suh as Malaysa an bahran.

Whle all evene ponts to a uoyant outlook or the growng sukuk market, the hallenge o nnovaton perssts.

innovaton wthn the shara-omplant spae s meant to reate a wer varety o islam nane prouts anserves or as large a partpaton ase as possle. Ths ase nlues oth the supply an eman ses. For thenustry to grow, nnovaton must meet the nees an preerenes o oth ommuntes. innovaton s a tall orer n aast pae worl where normaton, tehnology, onventonal nane, an even relgon must aopt etter pratesan onstantly aapt to hange. For islam nane to thrve an reman reslent wthn ths ynam an sometmes

volatle envronment, partularly n the ae o onventonal nane, nnovaton s key.

Where there are nonsstenes an nompatltes wthn the sukuk market, nnovaton must smooth them out anoer etter ways an means to move the nustry orwar n partnershp. As or the eates an rtsms levelleat ertan sukuk strutures, nnovaton must e ale to separate the wheat rom the ha an put these energes toproutve use.

The more reent wakala struture, whh ontnues to gan popularty, s one suh example o nnovaton wthnthe sukuk market. Wakala enales the orgnator to utlze ertan assets that annot e trae on the seonarymarket suh as muraaha an stsna ontrats. When cagamas sol ts Sukuk al-Amanah l al-istthmar n 2010t was ale to ater to the market nees o a gger auene, eng a Malaysan ssue that satse the Gccsshara-omplane stanars.

We at Zawya are keen on empowerng oth nvestors an ssuers alke wth markets an usness ntellgene they

requre to make nvestment esons, enty opportuntes an stay well-norme aout all evelopments. Ourollaoraton wth Thomson Reuters to rng you ths Sukuk Pereptons an Foreast Survey 2013 s a urther step nthat reton an we hope our value reaers rom oth the islam an onventonal ses wll n muh value n t.


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ReuteRs/bazuk Muhamma


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ReuteRs/beawharta beawharta


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AcKNOWLEdGEMENTS


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ReuteRs/Ahme Jaallah


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ReuteRs/Zah Hussen


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SURVEY FiNdiNGSTHE cOMPLETE SURVEY QUESTiONNAiRE FOR LEAd ARRANGERS (SELL SidE) ANd

iNVESTORS (bUY SidE) cAN bE FOUNd iN THE APPENdiX. ALL SURVEY FiNdiNGS WERE

cOLLATEd ANd PROdUcEd bY THOMSON REUTERS iSLAMic FiNANcE GATEWAY.

SURVEY FiNdiNGS


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suKuK issuance

SELL SidE

RESPONDENTS SKIPPED

sell side 28 0

Most lea arrangers (42.9%) expet the ollar amount o sukuk n 2013to e rom $75 llon $99.9 llon, wth the $100 llon $124.9llon a lose seon hoe.

Lea arrangers o not expet the numer o Euroon (internatonalUSd) ssuanes to e more than 40 n 2013, wth majorty expetng25 to 30 whle 35.7% expet uner 25 ssues.

What s the expete ollar amount o sukuk ssuane n 2013?

What s the expete numer o Euroon (internatonal USd) sukuk ssuane n 2013?

SURVEY FINDINGS


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islaMic inance inVestMent Quantity

bUY SidE

RESPONDENTS SKIPPED

Buy side 68 73

investors expet to alloate etween $200 mllon an $1,200 mllono ther portolos to islam nane nvestments, wth averagealloaton o $200 mllon.

investors expet to alloate etween 20 perent an 100 perent other portolos to islam nane. On average they expet 50 perento ther portolos to e alloate to islam nane nvestments.

What s the expete ollar amount o sukuk ssuane n 2013?

SURVEY FINDINGS


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suKuK inVestMent Quantity

bUY SidE

RESPONDENTS SKIPPED

Buy side 68 73

investors expet to alloate etween $200 mllon to $800 mllono ther islam nane nvestments to sukuk. On average, theyexpet the amount o ther nvestments to e etween $1 mllonto $200 mllon.

investors expet to alloate etween 20 perent an 100 perento ther portolos to sukuk.

On average nvestors expet 35 perent to 40 perent o therportolos to e alloate to sukuk.

How muh o your islam nane nvestments o you expet to alloate to sukuk n the omng year?


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SURVEY FINDINGS


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suKuK issuance By sectoR

SELL SidE an bUY SidE

RESPONDENTS SKIPPED

sell side 27 1

Buy side 99 42

Lea arrangers most expet quas-soveregn ssuanes, ollowe ysoveregns an nanal serves.

investors most preer to nvest n soveregn ssuanes, thenquas-soveregns, ollowe y state-lnke ssuanes.

Notaly, real estate s the least preerre setor or nvestors, wtharrangers least expetng ssuanes rom the ol an gas setor.

Please rank the ollowng setors aorng to your expetaton/preerene o sukuk ssuane/investmentn the omng two years


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SURVEY FINDINGS


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liQuidity o suKuK secondaRy MaRKet

SELL SidE

RESPONDENTS SKIPPED

sell side 27 1

How woul you assess the lquty o the sukuk seonary market n the omng two years?

More lea arrangers expet the sukuk seonary market to e morelqu than less lqu. (The mean s 3.96, wth a stanar evaton o1.018, .e. the mean may not ully refet the realty o the response).


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SURVEY FINDINGS


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RisK classiication


RESPONDENTS SKIPPED

sell side 27 1

Buy side 99 43

What s your most expete/preerre rsk lassaton o sukuk ssuane/nvestment n the omng two years?

Most nvestors preer asset-ake sukuk, wth strong eman romAsa Pa, Gcc an the Levant.

Sgnantly 100 perent o Asa Pa lea arrangers expetasset-ake sukuk, wth the asset-ase varety preerre y therGcc ounterparts.

More lea arrangers expet asset-ase papers (48.1 perent) thanasset-ake ones (33.3 perent).

Projet-ake sukuk s mostly expete y lea arrangers anpreerre y nvestors outse o the Asa Pa, Gcc an the Levant.

Regon breakown

SURVEY FINDINGS


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couPon tyPe


RESPONDENTS SKIPPED

sell side 27 1

Buy side 99 42

What s your most expete/preerre oupon type o sukuk ssuane/nvestment n the omng two years?

Whle xe rate oupons are the hoe or oth sell an uy ses,t s the lea arrangers who more overwhelmngly expet t than thenvestors preer t, wth nvestors splt almost 50/50 etween thexe rate an foatng rate optons.

Sgnantly, Asa Pa lea arrangers are splt etween zerooupon an foatng rate whle ther nvestors preer the foatng

rate over the xe rate.

Regon breakown

SURVEY FINDINGS


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tenoR


RESPONDENTS SKIPPED

sell side 27 1

Buy side 99 42

What s your most expete/preerre tenor sukuk ssuane/nvestment nthe omng two years?

in an expetaton-preerene msmath, the majorty o lea arrangersexpet tenors to e etween 5 an 10 years whle the majorty onvestors preer ther tenors to e wthn the 3 to 5 year range.

Long term tenors o 10 years an aove are not at all expete on thesell se whle a neglgle 1 perent o nvestors preer t.

On the sell se, longer tenors are more expete y onventonalanks than islam anks.

Setor breakown

SURVEY FINDINGS


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suKuK stRuctuRe


RESPONDENTS SKIPPED

sell side 27 1

Buy side 98 43

What s your most expete/preerre struture o sukuk ssuane/nvestment n the omng two years?

The gap s we etween the sell an uy ses lea arrangers aresplt etween jara an wakala ut the majorty o nvestors n allregons preer jara.

Asa Pa nvestors also show a taste or hyr strutures, wthther sell se ounterparts over whelmngly expetng the hyrstruture as well.

The wakala struture s most expete y lea arrangers outse theGcc an Asa Pa.

Regon breakown

SURVEY FINDINGS


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actoRs tHat Will enHance suKuK liQuidity


RESPONDENTS SKIPPED

sell side 25 3

Buy side 98 43

Please rank the ollowng ators that you eleve wll enhane the lquty osukuk n the seonary market. (Sore out o 5)

The top three ators or oth ses are smlar, ut whle leaarrangers rank the islam mega ank as ther leang ator toenhane sukuk lquty n the seonary market, nvestors are keeneron eate sukuk traers.

Hghest Ranke Fators

SURVEY FINDINGS


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Holding PeRiod

bUY SidE

RESPONDENTS SKIPPED

Buy side 99 42

When nvestng n sukuk, how long woul you hol the sukuk or?

Most nvestors woul hol ther sukuk or 1 to 3 years.

A ar perentage 26.3 perent, woul hol ther papers to maturty.

Almost 20 perent have thers n han or less than a year.

The longest hol opton 3 to 5 years woul only e hel y 12.1%

o nvestors.

Setor breakown


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SURVEY FINDINGS


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listing and Rating o suKuK

bUY SidE

RESPONDENTS SKIPPED

Buy side 99 42

On average the numer o nvestors who agree that sukuk lstngshoul e ompulsory s slghtly hgher than those who o not agree.

Lke lea arrangers, most nvestors agree that sukuk ratng smportant or ther nvestment eson.

To what extent o you agree wth the ollowng statements?


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SURVEY FiNdiNGS


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Q: What wll e trens that wll mpat sukuk nvestors or 2013 an eyon?Hai: Let me omment on a tren that i oresee here n Qatar. Wth more an more nvestors showng nterest n saenanal nstruments that are omplant wth ther ele systems, there s a great lkelhoo that nterest n sukukwll ontnue to rse. Now, ths rngs wth t a hallenge. currently, those who an partpate n sukuk are g-tketholers an the struture an approah o sukuk s ver y attratve to them. However, there are a large numer osmall tket opportuntes n the market an that segment wll keep growng too. So i an see a hallenge emergngor promoters o sukuk to n a way to rge that gap an make t attratve not just to a lmte numer o largernvestors ut also to the greater numer o smaller ones.

Q: do you onser SiiL to e an nvestor or a potental ssuer? An why?Hai: i see us eng atve n oth apates. As or eng an ssuer, our experene wth sukuk n the past has eenpostve an hene we woul onser uture nvolvement. Among the value the sukuk opton reates s the at thatt s truste, lear-ut, an rngs wth t ts nherent proteton oth or uyers an sellers.

Q: Gong ak to SiiLs experene wth sukuk, what hanges, any, woul you lke to see n sukuk?Hai: Yes, there are some. i strongly eel that the entre sukuk proess s omplex, ostly an very tme onsumng.it nvolves huge legal osts, nteratons wth ankers, lawyers at multple levels. Now ths omes up as somewhato a roalok, to potental ssuers an nvestors. So i am a strong proponent o allng or smplyng the proeure.

i also thnk that there nees to e onserale eort n euatng themarket on sukuk. That wll e the key to attratng nterest an spreang t among a larger segment; that wll e thekey to makng sukuk a truly ompettve proposton. So long as the proess remans shroue n omplexty, i elevethat potental nvestors an ssues wll not sover the true value o t. For nstane sukuk has great potental orpromotng rsk sharng. Ths wll n turn nrease savngs molzaton an nvestment, whh woul promote growth.but unless there s a onerte eort to euate an smply, suh values wll saly reman hen.


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dEEP diVE iN SUKUK

chapter supporte y


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dEEP diVE iN SUKUK

B cr


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B cr

Malaysia leads, with North Arican countries entering the market

Sukuk atvty has een most onentrate n two regons SouthEast Asa (manly Malaysa) an the Mle East (manly Gcc).

Aorng to Thomson Reuters Zawya ata, Malaysa s the largestssuer wth 1,897 sukuk ssuanes amountng to $266.92 llon.

Sne the rst sukuk ssuane n 1990 (post Oic Fqh Aaemys1988 resoluton), Malaysas omest market has grown romstrength to strength altate y a well-estalshe regulatoryramework that has attrate oth omest an nternatonalssuers. Leang the way, the Malaysan government tsel haseen a prol ssuer, wth bank Negara Malaysa enjoyng 51perent market share o the amount o all sukuk ssue romJan 1996 to Sep 2012.

in the last ve years, other Asan ountres have starte ssungsukuk le y inonesa an Pakstan, ollowe y Sngapore,Japan an Kazakhstan.

in the Mle East, bahran was the rst to ssue sukuk n theGcc. The central bank o bahran regularly ssues short-termnanng nstruments n the orm o sukuk al salam an jara.These short term sukuk are usually oversusre thanks tothe large appettes o loal orporates an nvestors.

UAE leas the MENA ountres n sukuk volume, wth nreasngompetton rom Sau Araa rom 2010. in the rst nnemonths o 2012, Sau Araa outpae UAE wth ts $9 llonto the latters $5.3 llon.

On the other se o the equaton, the most sgnant numero nvestors n H2 2012 an 2013 are expete to e rom UAE,Sau Araa an Malaysa respetvely. These three ountresurrently enjoy the largest sukuk markets. (Reer to Survey

Fnngs, country, page 29).

Sukuk n the Mle East has een manly lmte to theGcc wth only a ew ssuanes orgnatng rom Yemen, iranan Joran olletvely. Post Ara Sprng, a numer o NorthAran ountres are expete to push islam nane orwarn the regon.


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dEEP diVE iN SUKUK

B crr


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Saudi Riyal exceeds expectations and GCC issuers tap the

Malaysian Ringgit market

As most sukuk are ssue n omest markets, they are moreoten than not enomnate n the ountrys loal urreny toattrat loal nvestors. Malaysan Rnggt enomnate sukukounts or approxmately 65 perent o gloal aggregate sukukue to large numers o omest ssuanes y the Malaysangovernment, government-lnke ompanes an loal orporates.

The US ollar trals the Rnggt, wth most nternatonalsukuk ssue n the greenak (as s the ase or onventonalEuroons). Most MENA urrenes are pegge to the greenakue to gloal ol sales transate n the ollar. in aton, mostnternatonal sukuk ssuers are nternatonal ompanes or anks

that report ther nanal statements n US ollars. US ollarpapers make t easer or these governments, orporates ananks to math ther nanng requrements, urther altatnglower urreny futuaton rsks.

in the last ouple o years, many Gcc orrowers have turne tothe Rnggt market as a strateg step to versy ther unngavenues away rom poltal unrest n the Mle East, anthe European et an euro zone rses. On the pull se areMalaysas lqu aptal market an lower osts o unrasng.The Malaysan nvestor ommunty lookng or nternatonalexposure n the loal urreny has very warmly welome thsGcc move to the Rnggt market. Ths evelopment has alsoserve to urther olster Malaysas gloal leaer poston n thesukuk market.

At the same tme Gcc urrenes are enjoyng a growngeman rom loal orporates, espeally Saus, Qatars anEmrats lookng to renvest wthn ther own ross orers.However, most o these loal urrenes enomnate sukuk

are relatvely llqu, suerng rom poor atvty rates n theseonary market.

despte the Malaysan rnggts uture potental to ompete wththe ollar as a sae haven, nvestors stll preer ssuanes n theUS ollar 77.8 perent o 99 survey responents preer USdssuanes aganst 6.1 perent preerrng Sau Ryal ssuanes(reer to Sukuk Fnngs, curreny, page 33).


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dEEP diVE iN SUKUK


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The Turksh government entere the islam aptal market n Septemer 2012 wth a $1.5 llon Euroon ssuane, onsere a key rver to estalsh aenhmark an to enourage the evelopment o the sukuk market n Turkey. in other new sukuk markets, Joran passe a law pavng the way or soveregnssues n m-Septemer 2012.

Soveregn ssuanes nrease rom $65.4 llon n 2011 to $69.2 llon as at Septemer 2012. The survey has oun that 59.6 perent o nvestors preer tonvest n soveregn sukuk. Seon an thr preerre setors are qua s soveregn an state-lnke, refetng nvestors preerene or lower rsk nvestments.On a sale o one eng the lowest an eght the hghest, soveregn ha the hghest sore o 6.15 ollowe y quas soveregn wth 5.80 an state-lnke wth5.02 (Reer to Survey Fnngs, Setor, page 30).

dEEP diVE iN SUKUK

B skk srr


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Ijara on the rise, musharaka loses popularity

Sne 2002, only 12 muraaha sukuk were ssue n the MleEast out o a total o 748 eals, wth the remanng 736 ssue nMalaysa. Gven that most Mle Eastern jurstons omplywth AAOiFi stanars, muraaha s not preerre onserngAAOiFis prohton on ts traalty. The survey oun that63.3 perent o nvestors preer to nvest n jara sukuk, wth amuh lower 10.2 perent hoosng muraaha (Reer to SukukFnngs, Sukuk Struture, page 39). The rst nne months o2012 yele $18.6 llon o jara sukuk ssuanes, representng17 perent o the total volume ssue urng the same pero.Notaly, the ggest ssue o all tme, Qatar central banks$9.063 llon n 2011 was struture as an jara sukuk.

The popularty o the musharaka struture has wane n reentyears ollowng AAOiFis 2008 announement that t s notpermssle or an orgnator to grant a purhase unertakng tothe trustee to purhase the musharaka assets or any amount

other than the trustees share o the market value o themusharaka assets at the tme o sale. it was prevously possleor the orgnator to grant a purhase unertakng to the trusteean or the exerse pre to e a xe amount etermne atthe tme o ssuane. The market share o musharaka rom Jan1996 to Sep 2012 s $57.8 llon, representng 14.57 perent ototal ssuanes. in the past ew years the wakala struture haseen more wely use n erent markets.

Statsts omple rom Thomson Reuters Zawya ata showan nrease n the use o the wakala struture. A total o $6.8llon n wakala sukuk were ssue n the rst nne monthso 2012, up rom $5.9 llon n the same pero last year.

interestngly, most o the enhmark, nternatonal an ross-orer sukuk that were ssue n 2011 an 2012 use the wakalastruture. The wakala struture s onsere shara-omplantn oth the Gcc an Malaysa, an ths ross-orer aeptaneoul e the man reason or ts nreasng use. The wakalastruture also enales the orgnator to utlze ertan assetsthat annot e trae on the seonary market strutureusng the muraaha an stsna ontrats.


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dEEP diVE iN SUKUK

Rk Prf shr Prp rqr b aaoii B R


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in 2007, Mut Taq Usman ommente that 85 perent o sukuk were not shara-omplant.Reerrng to musharaka an muaraa sukuk, hs rtsm was that they oere nvestors arepurhase unertakng where the ssuer promses to pay ak the ae value o the sukukwhen t matures, or n the event o a eault. Ths runs ounter to the prnples o rsk sharng,

an mrrors the struture o a onventonal on. Returns shoul e solely erve rom theperormane o the unerlyng physal assets, an nvestors shoul ae the atual onsequeneso ther nvestments.

in our researh we onentrate on the urrent outstanng Euroons, whh amount to aout60 sukuk. We have oun that 72 perent o sukuk omply wth AAOiFi stanars.

Sukuk ratings preerred by investors

Out o 83 urrently outstanng Euroons, nvestment graes an su nvestment graessukuk a up to 51, an ths s expete to nrease as per the survey nngs. The results llustratethat 92 perent o nvestors preer rate papers, out o whh 68 perent preer bbb- an aove,16 perent A an aove, an eght perent su-nvestment grae. More than two-thrs o nvestorseleve that ratngs shoul e ompulsory, as the opnon o an nepenent thr-party on theret qualty o sukuk wll prove nvestors wth an ae measure o omort. Sukuk ratngs manatory n Malaysa ut not n the Gcc. (Reer to Sukuk Fnngs, Sukuk cret Qualty,page 31).


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dEEP diVE iN SUKUK

B Mr Prf v. cp tp


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Investors could ace uture reinvestment and interest rate risk

Fxe nome nstruments are usually struture to serve long-term nvestors, yet most sukuk are stll trappe n the meumterm tenors o ve to ten years. Very ew nternatonal sukuk

serve the long-term. Tamweels non-onvertle sukuk maturngJuly 2037 s exeptonal. The preomnane o meum termpapers mght e attrute to ssuer unng requrements,shara-omplane ssues an trust assets overage. However,there are many longer-term sukuk n Malaysa where theomest market s more atve an mature.

Most outstanng nternatonal sukuk are expete to maturewthn the next three to ve years, eng reently ssue vean ten-year papers. The sukuk survey has oun that many

nvestors preer to nvest n meum term notes, most proalyue to nterest rate rsk. Lea arrangers, on the other han,expet longer tenor ssuanes o ve to ten years to meet ssuersunng requrements (Reer to Survey Fnngs, Tenor, page 38).

Nearly all o these reently ssue nternatonal papers arryxe oupons. Most o them were ssue n a low nterest rateenvronment urng the nanal rss. investors may haveeen lookng or hgh xe rates ut ssuers took avantage olow Lor rates to ssue ther xe oupon sukuk, n turn xngther ost o unng. On the other han, ssuers oun our tove perent average returns urng ths pero an emanemore xe oupon sukuk.

Most o these nvestors have enjoye reasonale xe returnsn the past ouple o years, plus hgh aptal gans ue to heavymarket eman. However, these nvestors are expete to aeuture nterest rate rsk one the gloal markets start to reover.

However, they have entere nto an asset swap prot agreementto hege ther nterest rate rsk, wth Lor elnng, ther hegngost wll e too expensve, partularly or islam ervatvenstruments (Reer to Survey Fnngs, coupon Type, page 37).

despte the slght reovery n the gloal markets, nvestors stllpreer xe rates, whh refets ther negatve outlook or nterestrates. Lea arrangers expet more than 70 perent o uturesukuk to e xe, natng ther expetaton or rates to reover.

dEEP diVE iN SUKUK

SUKUK MARKET PERFORMANcEskk Pr Mvm


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Sukuk demand hikes as prices rally and yields tighten

Lke any other xe nome nstrument, sukuk papers are prease on the ret rsk premum requre y nvestors aovethe rsk-ree rate. Untl reently onventonal rsk-ree rates suh

as US treasures, Lor an US swap rates were eng use topre sukuk. Thomson Reuters islam interank benhmarkRate (iibR), launhe n Novemer 2011, oul potentally ean alternatve to Lor or prng sukuk n the near uture.

in the last eae, sukuk pres were mostly rven y gloal anregonal events aetng the whole aptal market. The hart onths page shows the plunge n sukuk pres, n lne wth the ropn pres o all other assets aete y the gloal nanal rss.

investors eventually oun reputale names wth goo returns,untl the Nakheel eault pushe pres own agan. Presreovere wth the Au dha government alout that slowlyreturne nvestor onene to dua.

Sukuk pres have eome very attratve n the last ouple oyears, as osts roppe relatve to onventonal ons. Aorngto the survey results, 46.7 perent o arrangers expet the osto sukuk ssue to e aroun two perent o total ssue sze.

despte the rop n the ost o ssung sukuk, 28.6 perent o leaarrangers stll expet sukuk to ost ssuers $50,000 to $199,000more than onventonal ons. (Reer to Sukuk Fnngs, cost osukuk ssuane, page 47).

dEEP diVE iN SUKUK

skk ix Prrm


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Thomson Reuters Global Sukuk Index

Sukuk enjoye steay growth n 2012 ue to ts lower ostsrelatve to onventonal ons. but even wth hgher eman,on nes pres are stll outperormng sukuk nes.

Thomson Reuters launhe the Thomson Reuters Gloal Sukukinex n Septemer 2012, an nepenent an transparentenhmark or nvestors seekng exposure to sukuk xenome nvestments, to e use to montor the perormaneo the sukuk market. in aton to eng prmarly use as aenhmark or nvestors seekng exposure to shara-omplantxe-nome nvestments, the Thomson Reuters Gloal Sukukinex may serve to nrease seonary market trang n thsgrowng asset lass an altate ross-market relatve value

trang among erent asset lasses. The nex ntallynlues omposte an nvestment grae nes.

The dow Jones Sukuk inex s esgne to measure theperormane o gloal sukuk seurtes. The nex nlues

U.S. ollar-enomnate nvestment-grae sukuk, ssue n thegloal market, that have een sreene or shara-omplaneaorng to the nexs methoology.

The nex nlues zero oupon an xe oupon sukuk or othgovernment an orporate setors. inex onsttuents unergoalulaton an realanng on a aly ass whle nluson onew ons s one on a monthly ass. All return alulatonsare ase on Thomson Reuters En o day Prng.

To e nlue n the nex, a on must pass sreens orshara-omplane an meet the stanars ssue y AAOiFi.it also must have a mnmum maturty o one year, a mnmumsze outstanng o $200 mllon, an an explt or mplt

ratng o at least bbb-/baa3 y leang ratng agenes.Year to ate perormane or the Thomson Reuters GloalSukuk nex s 6.14 perent ompare to JP Morgan EM nexs9.71 perent an dJ Sukuk inexs 2.96 perent (all thesenes ear erent rtera an methoology).


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ReuteRs/Sgt Pamungkas


74/124

ReuteRs/Supr Supr


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OUTLOOK FOR 2013 ANd bEYONd

RiSK OUTLOOKPrf R Rk


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Fixed rate sukuk will decline in value once rates rises

As o Otoer 16 2012, we evaluate prot rate rsk on sukuk yvsualsng the yels o outstanng xe rate US ollar sukuk(mnmum $500 mllon ssue sze) aove an eyon m

swap rates. A large porton o sukuk ssue n the reent lowrate envronment wll neessarly elne n value shoul rates

nrease n the market, whh s not unlkely gven that ratesare at an all tme low now. The ost o swappng to varalerates utlsng prot rate swaps s stll a novel an relatvelyexpensve exerse or islam nanal nsttutons. As a result,

t s unlkely that most wll have hege ther exposure to a lowxe rate return y swappng to a varale rate.

As s event, almost hal o the 38 ssues are trang elow200 ps sprea aove m-swaps wth maturtes etween2013 an 2015 suh as Petronas, Malaysa an idb Trust 2014.Most o these are nvestment grae sukuk that trae very tght

sne ther nepton. These wll ertanly elne n value whenmarket rates move upwar.

legend

bule sze represents outstanng value n USd 2 llon 1.5 llon 1 llon 500 mllon


lq Rk


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Demand strong, but liquidity concerns persist particularly or

longer maturities

The supply o nternatonal sukuk s lmte ompare to thehgh nvestor eman seekng these papers rom ssuers wth

sol reputatons n the market. despte suh hgh eman,lquty remans a major hallenge or sukuk nvestors.

We evaluate the b-Ask pres sprea versus maturty or theoutstanng unverse o US ollar nternatonal sukuk szeaove $500 mllon (exept dana Gas). Soveregn nternatonalsukuk enjoy tghter spreas etween 0.25 to 0.60 ue to therlower ret rsk, suh as Malaysa, Qatar an central bank obahran. in aton, some orporates also enjoy low spreasmanly eause they are government-lnke enttes lke

Petronas or hghly rate ssuers suh as the idb. On the otherhan, sukuk that are plae at the ar en o the maturty urvehave hgher spreas (less trae), as these are presumaly hely penson an hege uns nvestors who preer longer termnvestments whh generate xe returns wth moerate rsk.

legend

bule sze represents outstanng value n USd 2 llon 1.5 llon 1 llon 500 mllon


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oPPoRtunities and cHallenges


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The sukuk market has experene a resurgene o eman that omes rom ts wenng aeptane

not only y islam un managers, treasurers, an takaul operators, ut nreasngly y ther

onventonal ounterparts. Now learly a manstay nstrument o the nvestment ommunty,

onventonal ret uns o not shy away rom nvestng n sukuk as a means o ganng exposure

to esrale rets. Perhaps eause o ts roa appeal to oth onventonal an shara-omplant

managers, at tmes sukuk trae rh to ther onventonal ounterparts.

The sukuk market s unergong hange alet at a shokngly slow rate. The market tsel ontnues to eovershaowe y unertanty, none o whh s new. it s perhaps a sgn o the onservatveness o oth market playersan regulators that whle rtsms an suggestons have oth valty an weght, the status quo mantans ts pull.

doctRinal unceRtainty

dotrnal unertanty or shara non-omplane rsk s o some onern or the ontnue aeptane o (spe typeso) sukuk. The soures o unertanty have ther orgn n the at that the majorty o jara-ase (seurtse lease)sukuk nvolve no true sale or ttle transer o the lease assets to ther Speal Purpose Vehles, wth the assetssovere to e merely a orm o wnow-ressng. Ths stnton etween the majorty asset-ase sukuk an theeal asset-ake sukuk shoul have earng over the ontnue aeptane o some jara-ase sukuk y shara-

omplant nvestors. Surprsngly, whle these rtsms surae eore the nanal rss, lttle anythng has eenone y ssuers or regulators to aress them, an the ssuane mx has vare lttle, at all.

legal unceRtainty

Whle the sutletes o otrnal matters may onern islam nvestors, onventonal un managers are smlarlyonerne over suh strutural ssues n terms o the reourse truly avalale to sukuk nvestors. The real queston,whh onventonal un managers wsh to etermne, s whether seurty s val an sukuk holers are eetvelysenor to any senor unseure retors. A lak o reourse to unerlyng ollateral s merely reason to re-pre thesukuk n lne wth other unseure et nstruments they exst.

Legal unertanty s a ar greater onern or onventonal un managers partularly n regar to nsolveny. The lako speey resoluton an preeent n most Gcc jurstons lea to strust o any proess an ar outomes. in thsregar islam nane oul e partly seen as an nhtor o swt resolutons, as any nsolveny requres the uy-ns o not just ounterpartes an ourts, ut also shara avsors srutnsng the valty o outomes. Resolutons

have een anythng ut swt, wth propose restruturngs takng years to gather aeptane, an loal nvestors orequty holers at tmes exertng unue nfuene on ourt proeengs. Ths orm o unertanty alone s enough toause nternatonal onventonal ret nvestors to pause when onserng oth sukuk an onventonal ons romthe regon, ausng prema that push up regonal unng osts. A swter an ertan resoluton wth strt prortyo seurtze retors over unseurtze retors, an n turn over equty holers, oul reue long-term unngosts an ontnue the allure o nvestment n regonal seurtes.

dr Nkan Froozye s Md, Strateg cret Group, Nomura. Prevously hewas hea o European Rates Strategy, ousng on the ongong aloutsn the euro zone. dr Froozye s o-author o an entry to the WolsonEonoms Prze whh was one o ve shortlste entres. He has workewth ctael investment Group, Golman Sahs an deutshe bank,havng starte hs areer at Lehman.

MANAGiNG UNcERTAiNTY: SUKUKFROM A SEcULAR iNVESTORSPERSPEcTiVE

B dr nk rzManagng dretor, Strateg cret Group,Nomura



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The status quo wth truly unertan outomes s ar less esrale than a resoluton that oul estalsh a strt prortyo sukuk holers over onventonal onholers. Rather than savantage onventonal un ma nagers, estalshngsukuk as senor woul gve onventonal managers the alty to hoose etween sukuk a n the rsker (an posslymore yely alternatve) senor unseure et.

conclusionSo, although sukuk have eome nreasngly attratve to the nternatonal nvestment ommunty, t s lkely that thelegal, otrnal an prorty ase unertantes wll e takle progressvely, prmarly eause the poston o sukukwll only e olstere through ther resoluton. i more sukuk are asset-ake rather than asset-ase, t wll e learthat they are nee seure nvestments rankng senor to the nterests o onventonal ons. i nsolveny regmesare olstere an ourts nstrute to keep to strt an stanarze prorty o retors n any restruturngs anwn-owns, an to ensure swt resoluton o nsolvenes, nvestors woul e more lkely to hol oth ons ansukuk throughout the ret yle, lowerng long-term unng osts. Further, rather than to nsst that sukuk anonventonal soures o nane e treate as par passu, ssuers an lawyers shoul onee ths stratagem an allowor the posslty o e ato senorty o sukuk holers lams over onventonal senor unseure onholers. Whleresoluton o eah o these orms o unertanty s not wthout pan, or equty holers an lower-ranke onventonalonholers n nsolvent rms, estalshng long-run preeents an only olster the plae o the sukuk as a trulyalternatve unng vehle whh an an shoul e stnt rom onventonal nstruments.

PRioRity-Based unceRtainties

Perhaps more sutle s the at that sukuk an onventonal nstrumentsare sujet to prorty-ase unertantes. Whle sukuk have oten eenstruture to e as smlar as possle to onventonal nstruments, thereare questons as to whether the two an e par passu n all generalty.Wth the true enton o par passu elung even the most seasone legalaaems (or example see Wemaer, Sott an Gulat, Orgn Myths,contrats an the Hunt or Par Passu [2011]), t s questonale anislam prout an e par passu wth onventonal prouts. Were sukukan onventonal ons to have the same payos uner all rumstanes,they woul e eonomally equvalent an there woul e no eonomratonale or pursung islam nane exept to employ extra osts, moreomplate strutures, an extra regulatory hurles. i woul lam thatmost nvestors woul nstea assume that although possly ranke parpassu to onventonal et, sukuk holers are more lkely to enjoy thesupport o shareholers an soveregns knowng that n islam voluntaryet wrteowns may e easle, ut nvoluntary haruts (.e. unlateralextngushng o ets) are generally unaeptale.



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derent soures onrm that 2012 saw a reor o at least $100 llon o sukuk ssuanes worlwe,

wth an unpreeente growth rate n the Gul regon. beause o the markets proylal nature,

we oten orget the unerlyng rsks when markets are uoyant ut are qukly remne when any

averse event auses markets to rash.

An mportant rsk emee wthn sukuk s struture rsk. One o the unamental erenes etween sukukan a onventonal on s that sukuk are ase on erent unerlyng islam nanal ontrats, whle ons areprmarly ase on nterest-ase loan ontrats. Sukuk holers own the unerlyng asset or the tenor o the paper,whle onholers own a pure nanal lam. The erene etween sukuk an onventonal ons thereore restson the struture o the sukuk ontrat (reer to Tale 1 or more ponts o omparson). There are two onseratons eause o maturty onseratons sukuk s lke a onventonal on an eause o ownershp onseratons sukuks lke an equty stake.

natuRe o stRuctuRe RisKs

in the asene o a enton or struture rsk, i woul suggest that struture rsk s the rsk o losng nvestment valueeause o amguty etween the exposure to pre rsk o the sukuk asset as an equty stake, an the ret rsk othe orgnator eause o the expetatons or perormane o the nvestment wthn the maturty tme o the sukuk asa onventonal on.

The equty stake lke eature (pre rsk rven eature as wth muaraa an musharaka ontrats) o sukuk spreerre rom the shara perspetve, ut the onventonal on lke eature (ret rsk rven eature) o sukuk spreerre y the ratng agenes, nvestment anks as arrangers, an legal avsers o the orgnators.

These nonsstent preerenes also lur the rate o return rsk o an nvestment as n many strutures t eomesunlear whether there s a rate o return rsk, an who s expete to e responsle or suh a rsk. For example, na muraaha ar nanng the uyer o the ar s solely responsle or the pre rsk o the ar vs--vs the market,although the pre rsk wll also aet the valuaton o the ollateral the ar tsel was a seurty. The ank sresponsle or the ret rsk vs--vs the lent. On the other han the ank an the lent are oth nepenentlyexpose to the rate o return rsk vs--vs the markets. i these three rsks ret, asset pre an rate o return arenot ente an properly assgne, the two partes wll onront the sukuk struture rsk (more omparatve rskeatures are summarze n Tale 2 an Fgure 1).

dr Tarqullah Khan s Proessor o islam Fnane at Hama bnKhala Unversty, Qatar Founaton, an Present o the internatonalAssoaton or islam Eonoms. Prevously he serve as SenorEonomst an dvson che islam bankng an Fnane at the islamResearh an Tranng insttute o the islam development bank, urngwhh tme he was tehnal Anhor or the jont idb-iFSb ntatve,

the Ten-Year Framework an Strateges or the development o islamFnanal Serves inustry.

THE cHALLENGE OF SUKUKSTRUcTURE RiSKS

B dr trqh KhProessor o islam Fnane at Hama bn

Khala Unversty, Qatar Founaton, anPresent o the internatonal Assoaton orislam Eonoms

dEEP diVE iN SUKUK


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stRuctuRe RisKs in HistoRical conteXt

The essene o rsk management rests n the partton an separaton o rsks nto smallest manageale possleomponents. Hstorally sukuk has een expete to meet the nees o the eonomy or xe return nanalnstruments y replang onventonal ons wth shara-omplant alternatves. Thereore, replatng on lkeeatures n a sukuk, wth respet to proteton o the prnpal nveste an an aeptale rate o return has remanethe major motvatng onseraton n esgnng sukuk, even when a sukuk s expete to e ase on the muaraaprnple. in ths regar a numer o approahes have een utlze, wth eah new approah ang new mensonsto the struture rsk, nstea o separatng the erent rsks as Fgure 1 shows.

1. desgn o ontrat an orgnators responsltesPakstan rst ntroue Partpaton Term certates (PTcs) n 1980. These were the rst orporate sukuk preOic Fqh Aaemy rulng n 1988. These PTcs were ase on the muaraa ontrat, ut the orporate orgnator

employe several supra-muaraa eatures to ensure the proteton o the prnpal nveste, as well as someguarantee returns, hene replatng eatures o the onventonal on.

The PTcs were sontnue ater three years as no ompromse oul e oun etween pre rsk rvers an ret rskrvers, wth the markets preerrng to ontnue wth onventonal orporate ons. Ths ulty was earler ponteout n one o the most nfuental Phd ssertatons on islam nane, wrtten y Waqar Masso Khan n 1981. Khananalyse struture rsk wthout reerrng to t as suh. Hs ontruton s no out one o the most roust n the theoryan prate o islam nane, ut n hs pessmst onluson aout the uture authentty o islam nane hsanalyss mple that there are no possle ompromses etween the pre rsk rvers an ret rsk rvers o the PTc .

Pi is

r f

is

cdi is Pi is cdi isIs

is

Fgure 1: Nature o struture rsk n a sukuk as ompare to equtes an ons2. Thr party guaranteeby 1984 an attempte ompromse was sought etween the pre rsk an theret rsk rvers o sukuk n the Joranan law on muqaraa ons wherethe role o a thr party was nvoke to protet the prnpal amount o themuaraa uns as well as a reasonale return mplt ret rsk mtgantsor the holers o the propose muqaraa ons. One o the longest anmost thorough resolutons o the Fqh Aaemy o the Organzaton oislam conerene (Oic) also sought to n the neee ompromse ynvokng thr party guarantees aganst eault o the orgnator. Thr partyguarantee not suee n reatng a sgnant market or muqaraaons, ut the ovous requrement or t has le to esgnng other sukukstrutures lke jara an stsna.

3. Gvng omnane to ertan ontrats n a pooldeson No.5 o the 4th Annual Plenary Sesson o the Oic Fqh Aaemy,hel n Jeah 18-23/06/1408H (6-11/2/1988G) oers a ar-reahng solutonn provng fexlty to esgn sukuk ase on omnant asset n a portolothat may omprse o real assets, goos, serves, usuruts, utltes, ets,

money et. Prmarly, ths fexlty has een utlze y islam nanalnsttutons to seurtze ther reevales y attahng these wth real assetsan usuruts generatng atonal struture rsks.

4. The plae o a ormal easlty stuySome sholars have alle or the orgnator to esgn protetve ovenantsoverng the prnpal uns an ertan aeptale return ase onthe mportant an sent ass o a ormal easlty stuy. Smlaronseratons le to the esgn o muaraa an musharaka sukuk thatatually alle or the rtal AAOiFi Sharah boar Resoluton o 2007.

5. ijara re-purhase unertakng at ntal preThs unertakng s atually the akone o all jara-relate sukuk struturesan perhaps also smples the jara sukuk or the erent stakeholers

to unerstan. However, the unertakng s generally seen y rts as alegal trk to open a ak oor to onventonal ons. Suh rtsms werealso strongly ehoe at the Oic Fqh Aaemy Sessons hel n Jeahn Septemer 2012. Perhaps a rtal resoluton may appear rom someshara oars allng or approprate transormaton o the unertakng. it spertnent to note that ths spe unertakng s one out o several that areutlze to mtgate struture rsks. Aressng one unertakng may atuallylea to the reaton o atonal rsks nstea o reung them.

dEEP diVE iN SUKUK

o


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tHe Way oRWaRd

Ater the 2007 AAOiFi Resolutonmost sukuk prospetuses eganto nsert a athall slamer ths struture o sukuk has een

approve y our shara oar anpotentally other shara oars anthe relevant law may not aeptthe struture as an approah tostruture rsk mtgaton, ompletelytranserrng the rsk to the nvestor.

investor rghts are not wellunerstoo an protete.Lookng orwar, the stakeholers,n ths ase orgnators, sharasholars, arrangers, legal rmsan ratng agenes nee to put

more transparent emphass onentaton an responslty ora) ret rsk, ) asset pre rsk an) rate o return rsk. The stanarssettng agenes AAOiFi, iFSb aniiFM nee to more ormally aressthese rsks, eah one separately nther sukuk relate guelnes, anpreeraly n a jont ntatve.

Tale 1: comparatve analyss o Sukuk, bons an Shares

# FEATURES SUKUK BONDS SHARES

1 owrhp depens on the type o the ontrat interest-ase et Ownershp lams on the whole ompany

2 Prmb All sukuk are requre to e shara-omplant All mpermssle Not all stoks are shara- omplant

3 Pr h Prp depens on the type o the unerlyngontrat

Guarantee cannot e ontratually protete

4 Pr h R Rr

depens on type o transaton anetermne y the nature o the

unerlyng ontrat

Guarantee determne y market ontons

5 Mr Sukuk have maturty bons also have maturty Permanent sne these represent

ownershp lams on the whole ompanywth no maturty ate

6 trb depens on the type o the ontrat, notall sukuk are traale

Traale n onve nt onal mar kets Tra a le

7 sr Sukuk are treate suornate to ons Senor to Sukuk Sne these represent ownershp, the

nvestors wll lose ther nvestment n aseo lquaton, these are mostly junor

8 tx Tax neutral wth ons Tax exempt derent taxes are applale

9 Rk The rsk ramework o sukuk epens onthe unerlyng ontrat; oul e ethermarket rsk, ret rsk, or hyr o market

rsk an ret rsk

cret rsk o the orgnator, whh savalale n the ret ratng o the issuer

it s expose agan to the pre rsk o theunerlyng assets

10 ivr Rh Sukuk nvestors rghts are not wellprotete, they share some rsk, an legalramework s not avalale

bo nholers ' r ghts are pro tete Not protete


T l 2 R k c k k t t


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Tale 2: Rsk-ase comparson o sukuk strutures

FEATURES

OF SUKUK

MARKET RISK-BASED SUKUK

STRUCTURES

CREDIT RISK-BASED SUKUK

STRUCTURES

CREDIT AND MARKET RISK-BASED (HYBRID)

SUKUK STRUCTURES

Mrb & mhrk i, mrbh & m Ptc, Mqr B(mrb & mhrk wh hr pr r) ijr kk

owrhp Ownershp o tangle assets,usuruts an serves or the assets

o partular projet .e. prot anloss sharng nanng sheme.

Ownershp o et ertates (purenanal lams), espeally sne t s

ase on et reatng ontrats.

However, aorng to AAOiFistanars on sukuk, the nvestorhols ownershp o uture assets not

nanal lams as suh.

Muaraah/musharaka type sukuk ut severalguarantees are nvoke to protet the prnpal amounto uns an rate o return. Has een severely rtze

y a numer o shara sholars as the guaranteesvolate the relevant rules an ause the exstene oresemlane o ra.

Mxture o the rst t wo types o sukuk, represent theownershp o tangle assets, usuruts, an serves,ut these are traale. The payment o the average

regular stream o nome as rent an repurhase o theassets at ntal pre make the sukuk epenent onretworthness o the orgnator.

Pr hPrp m

Not protete, sne t s ase on

muaraa an musharaka.

Repayment o the prnpal amount

o et s guarantee.

Thr party guarantees are nvoke, lke the Joranan

muqaraa ons. in other markets suh guaranteeshave eome a pont o serous rtsm y sharasholars.

Theoretally etermne y market ontons, sne

they represent ownershp lams on the assets o theprojets, ut n prate uner the jara ontrat, theorgnator promses to repurhase the sukuk assets at

the ntal pre.Pr hR Rr

Not guarantee aorng to therules o muaraa an musharaka.

Rate o return s part o the pre,hene t s protete, espeally sne

muraaha an stsna are the asso suh sukuk. The aove AAOiFistanars also relevant.

Protete wth ojetonale guarantees. Rent s a pr e an hene guarantee. However, re-purhase o the asset at the ntal pre removes the

pre rsk an leaves muh to e satse n terms oshara ompatlty.

trb Traale det ertates are not traaleoutse the Malaysan jurston.However, sujet to the aove AAOiFi

guelne these sukuk are traale.

Traale the shara ojetons are remove n asatsatory manner.

Traale eng ownershp share n real assets, usurutsan serves.

Rk determne y market ontons. Expose to ret rsk o the ssuer/

orgnator.

it s expose agan to oth the market rsk o the

unerlyng assets as well as ret rsk, heneojetonale guarantees are nlue.

Theoretally expose agan to oth market rsk o the

unerlyng assets as well as ret rsk o orgnator, utn prate expose only to the latter.


Huge eman or Adibs perpetual sukuk may start trenSUKUK bEcOME TOOL iN bASEL iii


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iSLAMi c FiNANcE GATEWAY 85

Huge eman or Adibs perpetual sukuk may start tren

Sukuk appear to t n well wth basel iii prnples

Qatar, Sau leners mght use them to support lenng growth

but anks wthout lear state support oul n ssues ult

Ter 2 sukuk may e prolemat or regulatory reasons

This article was frst published by Reuters on November 22, 2012

A $1 llon sukuk ssue y Au dha islam bank Adib.Ad ths month may start a tren that was proaly notontemplate y the ouners o moern islam nane: islam ons may eome a key tool or anks to meettghtenng aptal rules.

The tren oul a urther momentum to a gloal oom n sukuk ssuane. it oul also ease pressure on ankswhh n t har to rase aptal rom equty ssues as gloal nanal nstalty epresses stok markets.

Adib attrate a spetaular orer ook o over $15 llon or ths months $1 llon perpetual sukuk, whh has nomaturty ate; Adib an hoose to repay the on on ertan ates rom 2018 t wshes.

The hyr sukuk was the rst to e pully ssue y a ank to meet the Ter 1 aptal requrement n basel iii gloalankng stanars that wll e phase n aroun the worl over the next several years although Adib prvatelyplae a $2 llon Ter 1 note n 2009.

Features suh as the suornaton o sukuk holers an the ontonalty o payments Adib an halt perostrutons to nvestors t wshes mean sukuk ehave more lke equty than et, whh s avoure y the newbasel stanars, sa Alex Roussos, ounsel at Norton Rose n dua.

We are lkely to see more o t n ths market n the near uture, he sa.

Even eore Adibs ssue, sukuk ssuane was rsng sharply; gloally, $109 llon worth o sukuk were ssue n the rstnne months o 2012, up 69 perent rom a year ago, aorng to researh y Zawya, a Thomson Reuters ompany.

but supply stll appears to e ar rom satsyng eman among ash-rh islam nsttutons n the Gul an southeastAsa; outstanng gloal eman or sukuk totals aout $300 llon, aorng to an estmate y Ernst & Young.

Furthermore, Adibs hyr sukuk helpe to open up a new nvestor ase or islam ons; prvate anks aterng towealthy nvual lents were alloate 60 perent o Adibs ssue, n ontrast to most regonal on ssues whhare snappe up y other ank nvestors.

So Adibs suess may over the next one or two years prompt a wave o hyr sukuk ssues y anks rasng aptal.

The prospets are goo an Adibs suess s a postve preeent or other anks. The Adib ssue proves a gooenhmark or other Gcc (Gul cooperaton counl) ssuers who are thnkng o aessng ths market, sa AhsanAl, hea o islam orgnaton at Stanar chartere Saaq.

bernaro Vzano s the islam nane orresponent or the MENAregon at Thomson Reuters. He rngs wth hm several years o nustryexperene, havng worke wth ctgroup Sngapore an evelopeun platorms at Eurekahege overng islam, ethal an alternatveuns. He has wrtten extensvely on islam nvestment proutsontrutng to varous nustry pulatons, an he was the ouneran etor o Opalesque islam Fnane intellgene. bernarosaaem akgroun nlues a Masters n Apple Fnane romMaquare Unversty as well as leturng nane an statsts ourses.

SUKUK bEcOME TOOL iN bASEL iiicAPiTAL-RAiSiNG

B Brr Vz

islam Fnane corresponent,

MENA regon, Thomson Reuters


in questons o elglty t wll e up to natonal supervsors to etermne a spe ssuane quales We expet to see the ssuane o hyr nstruments over the next 12 to


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in questons o elglty, t wll e up to natonal supervsors to etermne a spe ssuane quales,sa a spokeswoman at the bank or internatonal Settlements, whh proves the basel commttee wth ts17-memer seretarat.

Ths month, the Kuala Lumpur-ase islam Fnanal Serves boar release rat guelnes on aptal aequay or

islam anks, sheng lght on the types o sukuk that oul e lasse as ank aptal. The iFSb ams to ntrouethe nal stanar n deemer next year. but ts guelnes are not nng on natonal regulators.

Whle Ter 1 nstruments essentally arry only market rsks, ssung sukuk to rase Ter 2 aptal uner basel iii oulprove more prolemat or sholars an ratng agenes eause t omnes market an ret rsks, sa TarqullahKhan, proessor o islam nane at the Qatar Founaton.

Ths ssue o market rsk an ret rsk s trky...oten leang to nrease struture rsk o a sukuk, he sa.

Uner basel iii, Ter 2 sukuk oul e ult to aept eause o onerns relatng to the suornaton o et,aorng to Smon Arher, vstng proessor at the Unversty o Reang an onsultant to the iFSbs aptalaequay workng group. There are some grey areas, he sa.

Gul leners suh as commeral bank o Qatar cOMb.QA, burgan bank bURG.KW, Sau Hollan bank 1040.SE anbank Al Jazra 1020.SE have all sol Ter 2 nstruments n reent years to omply wth the prevous basel ii ru les.

Sau Araas regulator has sa t wll allow Ter 1 an Ter 2 nstruments that no longer qualy uner basel iii to ephase out over a 10-year pero egnnng n 2013.

MudaRaBa

despte the ostales, the use o hyr sukuk to rase ank aptal seems to have strong eologal support n theislam nane nustry, so nsttutons wll n ways to ssue Ter 1 an Ter 2 hyrs, analysts sa.

Ther equty eatures make them appealng rom the pont o vew o islam nane, sa Mazlan Hussan, Malaysa-ase partner an hea o islam nanal serves at law rm Za irahm & co.

Shara sholars n partular have een allng or more equty-lke an equty-ase prouts n the oman o theislam nane market, an a eparture rom et-lke an et-ase prouts, he note.

Al at Stanar chartere Saaq sa the market mght avour Adibs muaraa ormat, whh s ase on annvestment management partnershp, eause t s relatvely smple an easy or nvestors to unerstan.

There are other possle strutures ut the muaraa onept s smple an straghtorwar, as t s more equty-lkean ts etter nto use as a hyr, he sa.

We expet to see the ssuane o hyr nstruments over the next 12 to18 months as mplementaton o new regulatory guelnes takes eet nvarous ountres.

Some ankers sa that n aton to meetng basel iii stanars, Gul anks

mght use hyr sukuk to rge the gap etween rap loan growth anslower epost growth.

Qatar an Sau leners are lkely anates. deposts n Qatar ommeralanks grew 16.1 perent year-on-year n Septemer whle total ret jumpe32.2 perent, aorng to entral ank ata; Sau ank eposts grew 11.8perent whle ank loans to the prvate setor lme 14.8 perent.

oBstacles

despte the euphora over Adibs sukuk, there are several ostales to tssuess eng repeate on a large sale.

beause perpetual sukuk are so smlar to equty, they are seen as relatvelyrsky; one anker sa he eleve that n the Gul, only anks rom Au dhaor Qatar oul easly get suh a eal one, eause governments there

have retly supporte loal anks. Perpetual sukuk wll e less welome nmarkets where state support s less rm, he sa.

Adib, rate A+ y Fth an A2 y Mooys, was ale to pre ts sukuk veryheaply ompare to onventonal hyr ons ssue y Western anksover the past year. its perpetual arre a 6.375 perent prot rate.

by ontrast, duth lener Raoank RAbO.UL, rate t wo nothes hghery Fth an three nothes hgher y Mooys, pre a Ter 1 onventonalperpetual at 8.4 perent n Novemer last year. Earler ths year, bano obrasl bbAS3.SA rase $1.75 llon o Ter 1 perpetual ons at a yel o9.25 perent.

Adibs sukuk AE085108166= has perorme strongly n the seonary market,

another sgn o eman or suh paper. it was at 103.6 ents on the ollaron Thursay, yelng 5.7 perent, aorng to Thomson Reuters ata.

it s not lear, however, whether anks outse the supportve envronmento Au dha oul pre ther hyr sukuk so heaply. An eause o thernewness, hyr sukuk oul ae regulatory rsk or ssuers the anger thatauthortes mght elne to aept them as hgh-grae aptal.


base on a numer o ata ponts, we projet the potental eman an the supply ppelne growth. Sukuk eman wll ontnue to outstrp supply, espte

SUKUK dEMANd ANd SUPPLY EQUiLibRiUMcpv m r h kk rwh w rr v h r r


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base on a numer o ata ponts, we projet the potental eman an the supply ppelne growth. Sukuk eman wll ontnue to outstrp supply, esptethe nrease growth n ssuanes.


We assume that the average portolo alloaton o sukuk requre y shara-senstve nvestors s 30 perent.deMand side


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g p q y pThs proporton s supporte y ata rom islam ommeral anks, whh suggests that they hol, on average,29 perent o lqu assets an seurtes, rom 2005 to 2008 (soure: banksope). We eleve our estmaton sonservatve gven that our Survey Fnngs n 2012 show that 68 o our 99 responents hol up to 50 perento ther nvestment portolo n sukuk.

Our estmaton s that nvestors wll prmarly nvest n nvestment grae papers ater the gloal nanal rss,.e. prmarly soveregn an quas soveregn papers.

deman or holng sukuk s also lkely to nrease n the omng years wth the mposton o basel iii. Our assumptonsexlue the szeale eman rom seular opportunst nvestors an hene an e onsere as the non-ylalaptve nvestor ase. All these onseratons orm the ass o our quanttatve projetons or the aptve eman orsukuk assets.

suPPly side

AssumptonsAorng to Thomson Reuters Zawya ata, gloal sukuk ssue n 2012 eat market expetatons, exeeng$121 llon as at Novemer 5, 2012. For our moellng purposes an wth a lttle more than a month to the loseo 2012, we take YTd amounts as ull year gures.

We have seen that sukuk has o late een ompetng wth onventonal ons as a soure o aptal unng, wthlower ssung osts makng the islam nstrument n hgh eman worlwe. The sukuk market has enjoye86 perent cAGR n terms o the amount o sukuk ssue or the pero 2009 to 2011 (soure: KFH Researh Gloalislam Fnane Forum 2012 Report). For the preeng pero o 2001 to June 2009, the internatonal islamFnanal Market Sukuk Report 2009 put sukuk market growth at 88 perent cAGR.

Aorng to Thomson Reuters Zawya ata, on average, the sukuk market grew 53 perent rom 2002 to 2012.However, growth starte elnng rom 2009, roppng rom 69 perent to 43 perent as at Novemer 5, 2012.

As the Sukuk market matures, the growth rate s lkely to stealy elne. Hene, w

Documents

q8 Thomson Reuters Sukuk Perceptions and Forecast Study 2013