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11 August 2015 1
Sukuk Market and Its Recent Developments
Prof Azmi Omar
11 August 2015 2
◊ Evolution of Sukuk Market
◊ Some Key Observations from Sukuk Issuance
◊ Some recent developments in Sukuk Market
◊ Conclusion
Content
11 August 2015 3
◊ The debut of sukuk began in 1990 with the issuance of RM125 million
(USD 30 million) Al Bai’ Bithaman Ajil sukuk by Shell MDS Malaysia
◊ In September 2001, the State of Bahrain issued the world’s first sovereign
sukuk for USD 250 million. This Sukuk Al Ijarah carried a fixed lease
payment for 5 years
◊ In December 2001, Kumpulan Guthrie, a Malaysian government linked
company issued a USD 150 million Sukuk Al Ijarah with a floating rate of
return
Evolution of Sukuk Market
11 August 2015 4
◊ In 2002, the Federation of Malaysia issued a USD600 million Sukuk al
Ijarah that was listed in Luxembourg Stock Exchange and rated by
Standard & Poor’s and Moody’s
◊ This is a landmark sukuk as it is the first global sukuk that complied
with the US Regulation S and Rule 144A and meets conventional
bond practices such as listing, ratings, dematerialized scripts and
centralized clearance (Rafe Haneef, 2009)
11 August 2015 5
Source: Thomson Reuters, Sukuk Perceptions & Forecast Study 2015
11 August 2015 6
Corporate Sukuk Issuers
Source: Thomson Reuters, Sukuk Perceptions & Forecast Study 2015
11 August 2015 7
Source: IIFM, Sukuk Report 2014
11 August 2015 8
11 August 2015 9
Type of Sukuk 2001- 2008 2009 – 2012 Jan 2013 – July 2014
Sukuk Al Wakalah 1 27 34
Sukuk Al Salam 5 - -
Sukuk Al Musharakah 23 6 1
Sukuk Al Murabahah 1 5 13
Sukuk Al Mudharabah 13 0.002 4
Sukuk Al Ijarah 39 48 43
Islamic Exchangeable Sukuk 17 - -
Hybrid Sukuk 1 14 5
International Sukuk Issuances (%)
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Source: IIFM, Sukuk Report 2014
11 August 2015 11
11 August 2015 12
Type of Sukuk 2001- 2008 2009 – 2012 Jan 2013 – July 2014
Sukuk Al Wakalah - 1 1
Sukuk Al Salam 1 1 1
Sukuk Al Musharakah 30 11 8
Sukuk Al Murabahah 25 58 65
Sukuk Al Mudharabah 17 3 0.09
Sukuk Al Istisna’a 3 0.02 -
Sukuk Al Ijarah 20 17 14
Islamic Exchangeable Sukuk 0.39 - -
Hybrid Sukuk 7 2 9
Sukuk Al Bai’ Bithaman Ajil 11 7 2
Domestic Sukuk Issuances (%)
11 August 2015 13
◊ Early beginning: 100% asset-backed sukuk
At the initial development of sukuk, the thinking was to have a 100% physical
assets to cover for the sukuk issuance, in addition to the true sale
requirement of the underlying assets to sukuk holders
Given the constraints of finding suitable assets of sufficient value or
unencumbered assets, tax issues and legal restriction of sale of assets to
foreign investors, the 100% physical assets requirement and true sale of
underlying assets did not materialise
Some Key Observations from Sukuk Issuance (Source: Rafe Haneef, 2009 and Thomson Reuters, Sukuk Perceptions & Forecast Study 2014)
11 August 2015 14
In fact the number of asset-backed sukuk with true sale of underlying assets
remains insignificant until today
◊ The birth of asset-based sukuk
These constraints gave birth to asset-based sukuk, which does not require a true
sale but rather a sale of beneficial ownership of the underlying assets to sukuk
holders
The first example of asset-based sukuk was the 2002 USD600 million Federation of
Malaysia sukuk al Ijarah where the SPV holds the beneficial ownership of the
underlying assets on behalf of sukuk holders
11 August 2015 15
The assets used in the sukuk issuance were government building, hospitals
and civil service accommodation
In the event of default or dissolution, the sukuk trustee does not have the
power to retain or sell the assets to any 3rd party but rather to the
Federation of Malaysia
11 August 2015 16
◊ Next stage: Blended-assets sukuk
Given the constraints of having sufficient physical assets to cover the sukuk
isssuance, corporate as well as sovereign issuers came up with the
alternative of blended assets whereby the underlying sukuk assets comprise
of both physical assets and Shari’ah compatible receivables
Initially, the requirement was to have at least 51% or for some Shari’ah
scholars at least 66% of the portfolio must comprise of physical assets
11 August 2015 17
In 2005, however, the minimum physical assets requirement was set at 30% in a
mixed portfolio sukuk
◊ The emergence of asset-light sukuk
Given the attractiveness of sukuk, many corporates decided to tap the sukuk
market but were not able to meet the 30% physical asset requirement or have
sufficient Shari’ah compatible receivables
Two new sukuk structures were conceived at that time namely Sukuk al
Mudharabah and Sukuk Al Musharakah . They do not require any physical assets at
the time of sukuk issuance
11 August 2015 18
Many Shari’ah scholars criticised these two sukuk as they were structured to
effectively guarantee or protect the principal investment and the expected
return of the sukuk
In 2007 AAOIFI event and 2008 AAOIFI pronouncement effectively put an
end to the growth of asset-light sukuk issuances
11 August 2015 19
◊ Post 2008: Back to blended-assets sukuk
As shown in the above tables, Sukuk Al Ijarah and Sukuk Al Murabahah
remain the popular choice among issuers, although the issue of sufficient
physical assets in Ijarah and tradability in the secondary market for
Murabahah hinder their wider acceptance
Of late, Sukuk Al Wakalah has gained traction as a solution to the above
issues
11 August 2015 20
An e.g. of Sukuk al Wakalah was the 2011 USD2 billion dual tranche sukuk issued by
the Government of Malaysia
The underlying assets comprised leased assets and Shari’ah-compliant shares
(totalling 52%) and Murabaha receivables arising from Shari’ah-compliant
commodities (totaling 48%)
The obligor is appointed as agent (wakil) to invest and manage the sukuk proceeds
on behalf of the sukuk holders
The sukuk relies on a blended-assets structure which is based on the principle of
Khultah (mixture of assets). This structure had the added advantage of allowing
issuances above the value of available physical assets
21
Government of Malaysia’s USD 2 Billion Dual-tranche Wakalah Sukuk 2011
Source: HSBC Amanah
22
Wakala Sukuk: Government of Malaysia’s USD 2 Billion Dual-tranche Wakala Sukuk 2011
Source: HSBC Amanah
Some recent developments in Sukuk Market◊ Perpetual Sukuk, post 2012
11/8/2015 23
Source: RafeHaneef
Perpetual Sukuk – Structure Overview
11/8/2015 24
Source: RafeHaneef
11/8/2015 25
Perpetual Mudaraba Sukuk Cash Flow Illustration - USD100 million, 4% annual profit rate
Source: RafeHaneef
11/8/2015 26
◊ SRI (Sustainable Responsible Investment) Sukuk
International Finance Facility for Immunisation issues first Sukuk, raising US$ 500 million
Dubai, UAE, 27 November 2014 – The International Finance Facility for Immunisation Company
(IFFIm) today issued its inaugural Sukuk, raising US$ 500 million for children’s immunisation in
the world’s poorest countries through Gavi, the Vaccine Alliance. This landmark transaction is the
first socially responsible Sukuk with funds to be utilised for this purpose. This successful
transaction marks the largest Sukuk al-Murabaha issuance in the public markets and is also the
largest inaugural Sukuk offering from a Supranational.
The 3-year Sukuk – a financial certificate that complies with Islamic law – provides institutional
investors with a socially responsible investment that will help protect tens of millions of children
against preventable diseases.
Some recent developments in Sukuk Market…
11 August 2015 27
◊ Malaysia's Khazanah First Ethical Sukuk – Sukuk Ihsan
Published on 09 June 2015
RAM Ratings has assigned an AAA(s)/stable final rating to Ihsan Sukuk Berhad's (Ihsan) RM1 billion
Sukuk Ihsan Programme.
Ihsan is a trust-owned company established for the sole purpose of raising capital to support the corporate
and social responsibility efforts of Khazanah Nasional Berhad – the promoter of this exercise.
As the issuer, Ihsan will raise funds under the Islamic principle of Wakalah Bi Al-Istithmar and/or other
Islamic principles to be determined. The initial issue of Sukuk Ihsan will be based on the Islamic principle of
Wakalah where process raised will be used to purchase eligible sukuk investments. Khazanah will, in turn,
use the proceeds to fund Shariah-compliant eligible sustainable and responsible investment (SRI) projects, as
defined under the Securities Commission's sukuk guidelines revised and effective 28 August 2014.
Some recent developments in Sukuk Market…
11 August 2015 28
The sukuk will follow a unique "step-down" structure: coupon payments will
be reduced by 80 to 100 basis points from their fixed rate if the schools,
which are measured by their rate of expansion and the competency of their
teachers among other factors, meet the benchmarks set
Usage of the sukuk funding:
funding the purpose of education and a means for investors to fulfil their corporate
responsibility
raising money for affordable housing, the healthcare and environment sectors
11 August 2015 29
finance projects that conserve energy, use renewable energy such as wind and solar,
build public hospitals, schools or affordable housing, and develop awqaf properties.
(Awqaf operates social projects such as hospitals, mosques and schools with donations
received from Muslims in the form of land, cash or other valuables)
11 August 2015 30
Conclusion
Source: HSBC Amanah
Key considerations in structuring a sukuk
3111 August 2015
Contacts of the presenter Contacts of IRTI
Website: www.irti.org
Phone: +966 (0)
126466377
Fax: +966 (0) 126378927
P.O. BOX 9201 - Jeddah
21413
Kingdom of Saudi Arabia
3211 August 2015