Sukuk Story

The emergence of sukuk or

Shari'a-compliant bonds has

been one of the most significant

developments in Islamic capital

markets. The first ever Islamic

bond was issued in Malaysia in

1990, while the first sovereign

sukuk in the region was issued by

Bahrain in 2001. The majority of

sukuk offerings were seen in

Southeast Asian countries, but in

the last two years they have

gained popularity in the GCC

with a number of sovereign enti-

ties and corporate issuers tapping

into the ever increasing investor

interest in Islamic bonds.

However in the sultanate,

there hasn't been much move-

ment in that direction with only

one company coming out with a

sukuk issue so far. The reason is

primarily being attributed to the

late entrance of Islamic banking

and Shari'a-compliant products in

this market. But bankers and

lawyers unanimously agree that

the future looks bright.

34 Business Today DECEMBER 2014 www.businesstoday.co.om

F I N A N C E

The response to the much-awaited government sovereign issue andMeethaq's sukuk programme will decide the future of Islamic bondsin the sultanate

By Maheswaran P

OPENING ANEW CHAPTER

“Islamic banking operations in

Oman started in 2012 following

the issuance of a Royal Decree.

The priority for the nascent Islam-

ic banking industry is to develop

the infrastructure, process and

procedures. The focus will be on

mainstream banking activities of

lending and project financing till

such time their asset books gain

considerable size to tap financial

instruments like sukuk. Going for-

ward sukuk will be an important

source of funding for Islamic

banks,” says Sulaiman al Harthy,

group general manager, Meethaq

Islamic Banking Group.

Sadaf Buchanan, partner at

law firm Dentons & Co adds that

there has been a lot of interest

and discussions on sukuk, particu-

larly in 2013 and she sees it as a

natural progression in any market

where Islamic banking is active.

“Oman is the last GCC country

to introduce Islamic banking. The

Central Bank of Oman has issued

both standalone licenses and also

licenses for dedicated Islamic

banking windows of conventional

banks. Therefore the market is still

in the development phase. Apart

from this, the fact that there has

generally been sufficient liquidity

available in the market means that

companies have been able to tap

into banks for funding. So the key

drivers to explore alternative

sources weren't there. Clearly

the conversation and interest is

ramping up and we have been

speaking to a number of parties

interested in issuing sukuk.”

Dr Jamil el Jaroudi, CEO of

Bank Nizwa says, “For investors in

Oman, not necessarily limited to

Shari’a-compliant investors, there

is an obvious gap in terms of

investment product offerings. We

GOING FORWARD SUKUK WILL BE AN IMPORTANTSOURCE OF FUNDING FOR ISLAMIC BANKS, SAYS SULAIMAN AL HARTHY

Sukuk story/E1:BusinessToday 11/25/14 12:26 PM Page 1

www.businesstoday.co.om DECEMBER 2014 Business Today 35

have bank deposits on one side

and shares on the other, with

nothing much in between. Sukuk

will therefore be in the middle.”

Salman Ahmed, partner at law

firm Trowers & Hamlins, which has

been the advisors for Oman's first

sukuk issue (the RO50mn issuance

by Tilal Development), also agrees

that sukuk is a good option.

He says, “Oman has excellent

potential for sukuk for a number

of reasons. First, the liquidity

available with Islamic banks and

Islamic windows can be used to

diversify funding and avail it at a

very competitive rate. Second,

there are numerous quality oblig-

ors capable of achieving good

rating, which makes them worthy

candidates for issuing sukuk. Last-

ly, Oman is going through various

infrastructure upgrades and the

number of development projects

currently in progress lends itself to

the utilisation of sukuk, which

can be used to either refinance a

completed project or fund the

complete or part of the project.”

Global scenarioAccording to a Global Sukuk Mar-

ket Quarterly Bulletin released by

Kuwait-based Rasameel Structured

Finance Company the global

sukuk market witnessed issuance

worth US$66.2bn in the first half

of 2014. This was 8.2 per cent

higher than US$61.2bn in the

same period last year, with a flurry

of issuances coming into the mar-

ket in the second quarter primarily

in the GCC and Malaysia. The

GCC accounted for 26.7 per cent

of the total global new sukuk

issues in the first half at US$17.7bn

compared to US$14.1bn in the

same period last year.

Among the GCC nations,

Saudi Arabia led the chart con-

tributing US$9.05bn or 51 per

cent of the region’s total new

sukuk issuances in the first half.

This was followed by Qatar, which

contributed US$4.12bn or 23 per

cent of the GCC market share,

and then UAE issuing sukuk

worth US$3.65bn (21 per cent

market share) in the first half.

Meanwhile, Bahrain produced a

volume of US$883.3mn, but

Kuwait and Oman remained

absent from the market.

Upcoming sukuk issuesOne of the most awaited sukuk

issues is the government's

RO200mn sovereign offering,

which is expected to hit the mar-

kets in 2015. Analysts expect the

issue to be a roaring success as it

offers Shari'a-compliant invest-

ment opportunities to local

investors and at the same time

attracts foreign investors seeking

opportunities in Oman.

Jaroudi is of the opinion that

the primary driving factor is the

government’s need in regards to

its spending plan and he believes

issuing conventional bonds or

sukuk will be the most attractive

way to raise funds.

“Oman is enjoying its position

as a single-A-rated sovereign

country with no current interna-

tional issuance, whether it’s

conventional bonds or sukuk, and

thus has ready pent-up demand

from international investors want-

ing to enter Oman, even on the

basis of diversification alone.

Therefore, unconventional bonds

are in demand due to the lack of

sukuk supply in general and it

may even offer more attractive

pricing as compared to conven-

tional bonds.”

WE HAVE BEEN SPEAKING TO ANUMBER OF PARTIES INTERESTED INISSUING SUKUK, SAYS SADAFBUCHANAN

UNCONVENTIONAL BONDS ARE INDEMAND DUE TO THE LACK OF SUKUKSUPPLY IN GENERAL, SAYS DR JAMILEL JAROUDI

THE LIQUIDITY AVAILABLE WITH ISLAMICBANKS AND ISLAMIC WINDOWS CANBE USED TO DIVERSIFY FUNDING, SAYSSALMAN AHMED


Michael P Grifferty, president

of the Dubai-based The Gulf

Bond and Sukuk Association

(GBSA) believes the best time to

go for an issue is when you are

not under pressure to raise funds.

“We have for years encour-

aged GCC governments to issue

both conventional bonds and

sukuk so as to build a yield curve

and create markets. The best time

to start that practice and create

the necessary market infrastruc-

ture is when you are not under

pressure to raise funds.”

He adds that sukuk specifically

should be interesting because they

would allow the government to

tap into both the conventional

and dedicated Shari'a-compliant

investor base. “But sukuk should

not be regarded as a panacea.

Demand for Oman sovereign

sukuk would be strong, but not

unlimited. Issuance should be part

of an overall funding strategy

rather than opportunistic.”

Another issue which investors

are keeping a close watch over

is the sukuk programme of

Bank Muscat. Harthy says,

“Meethaq as we speak today has

assets worth RO450mn. As we

grow our assets book we need to

find ways to fund these assets.

The way to fund assets is primari-

ly through deposits from clients,

but we also need to look at other

viable options.”

The bank has taken share-

holder approval for the sukuk

programme for five years and will

be able to raise up to RO500mn.

Harthy says, “We have in-prin-

ciple approval from CBO and there

is some groundwork to be done

and we hope to go to the market

early next year. The proposed first

issuance is in the range of

RO100mn and then we will issue

other tranches as we go along.”

Experts believe that sukuk are

an alternate option for corporates

to raise money and it is a com-

pelling way to diversify their

sources of financing. Grifferty says

that sukuk have demonstrated

their worth vis a vis conventional

bonds. He adds that corporates

will not only be able to achieve

cost-effective funding with sukuk,

they can also mitigate their

refunding risk as sukuk tenors are

steadily extending.

Draft sukuk lawWhile the general trend in most

countries is to develop the existing

capital market legislation to incor-

porate Islamic bonds, Oman has

taken a proactive step by develop-

ing draft sukuk regulations. Sadaf

believes that it is really important

to have a solid legal framework in

place before the big ticket

issuances take place.

“International investors would

want that certainty of issuances

undertaken within the regulatory

framework of the country. If there

is a gap, this could lead to delays

in developing the market if

investors lack the necessary

appetite,” she says.

However, Ahmed is of the

opinion that a legislation for

sukuk is useful but not essential.

“It is a good legislation which

clarifies a few issues (i.e. use of

trust) which may be of concern to

certain market players. However,

my personal view is that there is

too much emphasis on a separate

sukuk legislation,” he adds.

Even though Oman has seen

only one sukuk issue in the last two

years, the general consensus is that

the outlook is bright and the coun-

try will witness more offerings in

the coming years. Bankers and

lawyers believe that the success of

the government's sovereign bonds

and Meethaq's offering will send

an important signal to other

potential issuers.

“If both sukuk are perceived to

be successful issuances then the

sukuk market in Oman could

develop and mature very quickly,

given the framework that has

been put in place,” says

Mohammed Dawood, global head

of Sukuk Financing at HSBC.

Jaroudi adds, “We are confi-

dent that a successful govern-

ment sukuk issuance will open

the door for many more in the

future. At this time, without a

clear pricing benchmark, potential

issuers are naturally reluctant to

tap into the sukuk market with-

out a clear indication of the

potential outcome.” g

F I N A N C E

www.businesstoday.co.om36 Business Today DECEMBER 2014

WHAT IS A SUKUK?Sukuk commonly refers to the Islamic equivalent of bonds. However,

as opposed to conventional bonds, which merely confer ownership of

a debt, sukuk grants the investor a share of an asset, along with the

commensurate cash flows and risk.

THE BEST TIME TOGO FOR AN ISSUE ISWHEN YOU ARENOT UNDERPRESSURE TO RAISE FUNDS, SAYS MICHAEL PGRIFFERTY

IF BOTH ISSUES ARESUCCESSFUL, THENOMAN’S SUKUKMARKET CANDEVELOP ANDMATURE QUICKLY,SAYS MOHAMMEDDAWOOD


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Sukuk Story