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My presentation on Sukuk for the MENA SUKUK Congress in Dubai
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UNTAPPED POTENTIAL
Sukuk value and volume have consistently grown in the last five years… but plunged in 2013
2 1 04
47 4056 49
115
183
150
183
231
257
429
531
713
552
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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD Q3
2013
# Issues$ billionGlobal AGGREGATE SUKUK HISTORICAL TREND (1996 - Q3 2013)
Amount Issued Number of Issues
This collapse was mostly driven by U.S. Fed idea of tapering its stimulus package in May 2013 sending bond yields up around the world, and making it less attractive to issue debt..
0
1
2
3
4
5
6
1-Jan 16-Jan 31-Jan 15-Feb 2-Mar 17-Mar 1-Apr 16-Apr 1-May 16-May31-May 15-Jun 30-Jun 15-Jul 30-Jul 14-Aug 29-Aug 13-Sep 28-Sep 13-Oct
YTD (OCT 2013) JPMORGAN GLOBAL AGGREGATE BOND INDEX VS HSBC/NASDAQ DUBAI US DOLLAR SUKUK INDEX
JPM GABI SKBI
16-May: First Hint of tapering by the FED
September US Jobs data below forecasts
MENA issuance stood at 51% of global in 2006 & was at 23% in 2013…
22,561
37,039
20,316
33,790
50,368
79,180
133,231
114,280
11,42119,061
8,298 8,162 7,776
19,73425,106 26,442
51% 51%
15%
19%
23%
0%
10%
20%
30%
40%
50%
60%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2006 2007 2008 2009 2010 2011 2012 2013
Global (Mn$) MENA (Mn$) MENA%
Sukuk issuance grew from $22bn in 2006 to $133bn in 2012, MENA’s share
of total issuance declined over the years..
Outstanding Sukuk globally currently stands at $270bn of which $80 are in MENA!
80.8230%
189.9370%
Outstanding Sukuk Market (Bn$)
MENA Other
37,648
24,196
13,565
4,074
869 130 130 1200
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Saudi Arabia
UAE Qatar Bahrain Kuwait Sudan Oman Jordan
Distribution of Outstanding Sukuk in MENA (Mn$)
Mn$
Saudi Arabia managed to become the
world’s second largest issuer of Sukuk
MENA/GCC accounts for 30% of
outstanding global Sukuk market
In 2013, only MENA’s GCC states sold sukuk, Saudi Arabia led, Oman joined…
15,215
7,116
2,3491,589
130 44
20
13
9
24
12
0
5
10
15
20
25
30
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Saudi Arabia UAE Qatar Bahrain Oman Kuwait
Mn$ No of Issues
Absence of non-GCC issuers in 2013..
Yet, historically, UAE is still the largest issuer in MENA, followed by Saudi Arabia
49,463
46,525
23,792
14,413
2,984251 221 130 120
7670
24
279
22
2 2 1 1 0
50
100
150
200
250
300
0
10,000
20,000
30,000
40,000
50,000
60,000
UAE Saudi Arabia
Qatar Bahrain Kuwait Yemen Sudan Oman Jordan
All-time MENA Sukuk Issuance (Mn$)
Mn$ No
Financial services and real estate top charts after governments.. Oil and gas lag behind
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000
Governmental Institutions
Financial Services
Real Estate
Transport
Power and Utilities
Oil and Gas
Construction
Food and Beverages
Telecommunications
Leisure and Tourism
Conglomerates
Education
Mining and Metals
MENA Sukuk Issuance by Sector – All to date
Mn$
Oil and gas sukuk issuance is not proportional to the size of the sector
in the region…
At 48%, MENA international sukuk is well above the world’s average of 15% out of total (2013 figures)
114,280
26,442
17,58812,750
15%
48%
0%
10%
20%
30%
40%
50%
60%
0
20,000
40,000
60,000
80,000
100,000
120,000
Global (Mn$) MENA (Mn$)
Total (Mn$) International (Mn$) % of Int'l
GCC issuers more often look into international markets while Asian
sell more domestically >> domestic sukuk market
underdeveloped/underserved in the MENA..
In 2013, MENA Stock Exchanges grabbed 12 listings out of 53 listings globally.. mostly by Nasdaq Dubai.. Irish SE grabbed most globally
15
98
5
0
2
4
6
8
10
12
14
16
0
2,000
4,000
6,000
8,000
10,000
12,000
Mn$ No
Most of the Sukuk listed on Nasdaq Dubai are by UAE issuers, will
the trend change with IDB, and other issuers listing on Nasdaq
Dubai
Most of the listed MNEA issuers list on international stock exchanges such as ISE & LSE, but Nasdaq Dubai managed to attract some… (2013 figures)
12
9
3
1
2
11 1
0
2
4
6
8
10
12
14
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Irish SE Nasdaq Dubai
London SE Saudi SE Bursa Malaysia
Dubai FM Bahrain SE Muscat SM
Mn$ No
The Saudi Model
From a dormant issuer to a key player in the
market – GACA set the pace
Second largest issuer of sukuk in 2013 worldwide n
after Malaysia!
Diversity in issuers profiles: banks, oil & gas, real
estate and construction, agriculture and food..
Mostly domestic and in SAR, yet some
international sukuk
Way to go in terms of liquidity and trading
The UAE Model
• UAE maintained a spot among world’s top issuers
despite the credit crunch and global financial crisis
• Mostly skewed towards financial services (banks) –
followed by real estate, power and oil & gas
• Quasi-sovereign but not federal or sovereign or
government sukuk! >> area to develop
• Private-sector credit growth in the UAE is expected
to accelerate between 2014 and 2020
DUBAI – THE HUB
• HH Sheikh Mohammed’s initiatives to give big push
to the Sukuk market: more issuance, better
regulatory framework, more facilities, encourage
listing and boost trading!
• Dubai Expo 2020 is expected to leave a positive
impact
• Innovative structures
• DFM and Nasdaq Dubai initiatives supportive
The Omani/Kuwaiti Models
KUWAIT – Defaults Hurt
Kuwaiti companies started well, witnessed few
defaults and now rarely sell sukuk
We have not seen any new initiatives from the
regulators
OMAN – Cautious Approach
Started by regulating the industry -
First corporate sukuk in 2013
Oman sovereign sukuk anticipated
The Qatari Model
In March 2013, central bank began quarterly issues
of riyal-denominated government bonds and sukuk,
with maturities of three and five years
In June 2013, Qatar started trading government
bonds & sukuk – a step expected to deepen debt
market
Maintaining a spot with huge issuances from either
the government or the private sector once a year
QSE announced few initiatives, any follow up?
Will World Cup 2022 drive growth?
The Bahrain Model
One of the oldest issuers in the region and the world
Constantly selling the Short-term Ijara Sukuk and Al Salam
sukuk (24+ issues a year)
Occasionally selling 6-months or 12-months paper
Corporate issuance declined
In December, the central bank formally combined existing
rules for issuing and listing financial securities, including
sukuk, in an effort to make the process more efficient The
incorporation of an issuing agent or special purpose vehicle
for sukuk will not take more than 48 hours from the time
offering documents are approved, whether for local or for
international sukuk issuance
Other MENA countries’ baby steps…
Morocco: The government adopted in January
2014 a bill regulating Islamic banks and sukuk, law
yet to be approved
Egypt: Egypt's financial regulator is expected to
submit new rules to the government in 2014 to
facilitate issuance of sukuk as part of a capital
market law – political hurdles preventing
development
Tunisia: huge potential – untapped potential
If current trends continue, demand-supply gap for sukuk will taper of by 2018 to reach $187 billion
0
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1000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
$ bln SUKUK DEMAND & SUPPLY LEVELS (2013 - 2016)
Total Global Sukuk Matured Total Global Sukuk Issued Total Outstanding Global Sukuk Total Sukuk Demand
Supply & Demand Gap: Despite the huge
sukuk issuance growth in 2012, the market was
still undersupplied. However, despite the plunge
in 2013, sukuk market growth rates are
expected to return to a steady growth
Many emerging and frontier markets are paving the way for sukuk market development by first establishing suitable regulations…
2.89
3.00
3.31
3.00
2.88
3.42
4.46
2.22
2.76
2.84
2.91
3.17
3.19
4.07
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00
Nigeria
Egypt
Tunisia
Libya
Azerbaijan
Morocco
Oman
BUY SIDE - Preference SELL SIDE - Expectation
Which of the following emerging markets is the most attractive for sukuk
investment/issuance?
Lead arrangers and issuers believe the main reason for issuing sukuk is to diversify their sources of funding as investors mostly invest in sukuk due to Shariah requirements
54.0%
11.1%
20.6%
14.3%
0.0%10.0%20.0%30.0%40.0%50.0%60.0%
Religious mandate to only invest in Islamic instruments
Opportunistic
Diversification
Yield
BUY SIDE: what is your primary reason for investing in sukuk?
3.7%
14.8%
14.8%
22.2%
44.4%
0% 10% 20% 30% 40% 50%
Restructuring
Refinancing
Cheaper funding and better pricing
Business Expansion
Diversify source of funding
SELL SIDE: What is your most common reason for sukuk issuance?
Lead arrangers and investors agree that global market interest rates are the most important factor affecting sukuk pricing
2.7
3.1
2.7
2.7
2.3
2.4
3.1
3.7
4.1
2.6
2.6
2.8
2.8
2.8
2.9
3.0
3.2
4.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
Size of sukuk
Type of market (international or domestic)
Purpose of sukuk issuance
Type of sukuk - asset-based or asset-backed
Investor business structure/diversity
Type of currency
Type of issuer
Sukuk rating
Global market interest rates
The most important factors based on their significance to sukuk pricing
BUY SIDE SELL SIDE
While liquidity and tradability are still considered the main issues causing the price gap between sukuk and bonds
8.7%
8.7%
13.0%
69.6%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
Sukuk paper scarcity
Sukuk structure
Sharia non compliance risk
Liquidity & Tradability
SELL SIDE: What drives the price gap between sukuk and bond?
Things to watch
• Are we going to see more synergy between SEA
and GCC standards?
• More cross-border sukuk? Will non-MENA issuers
tap MENA markets?
• Malaysian or Turkish issuers list on Nasdaq Dubai?
• Oman to emerge as new hub?
• Will Egypt, Libya, Morocco, Tunisia and other
states join the club anytime soon?
• Will Dubai initiatives work out?
Things to watch
• How will Expo 2020 and FIFA 2022 affect the
market?
• How will QE2 affect sukuk issuance in the region?
• Are we going to see retail Sukuk anytime soon in
the MENA?