“Liquidity Management in Islamic Banking”

IDB/IRTI

“Overview of Global Sukuk Market”October, 2015

Shahin Shayan AraniChairman of the Board

Hoda International Financial Engineering Company

“Liquidity Management in Islamic Banking”

IDB/IRTI

“Overview of Global Sukuk Market”October, 2015

Shahin Shayan AraniChairman of the Board

Hoda International Financial Engineering Company

Global Financial Markets

Shahin A. Shayan

Source: Bank of International Settlements (BIS) & Deutsche Bank as of the beginning of 2015

Global Islamic Finance Market

Source: Islamic Financial Services Industry Stability Report 2015

Total of $1868.1 Billion USDTotal of $1868.1 Billion USD

79%79% 16%16% 4%4% 1%1%

Shahin A. Shayan

Global Sukuk Market

Source: Islamic Financial Services Industry Stability Report 2015

Shahin A. Shayan

Global Sukuk Market

Source: Islamic Financial Services Industry Stability Report 2015

Shahin A. Shayan

Global Sukuk Issuance Market 2014

Source: Islamic Financial Services Industry Stability Report 2015

Shahin A. Shayan

Global Sukuk Market

Source: Islamic Financial Services Industry Stability Report 2015

Shahin A. Shayan

Global Sukuk Market

Source: Islamic Financial Services Industry Stability Report 2015

Shahin A. Shayan

Global Sukuk Market

Source: Islamic Financial Services Industry Stability Report 2015

Shahin A. Shayan

Global Sukuk Market

Source: Islamic Financial Services Industry Stability Report 2015

Shahin A. Shayan

Global Sukuk Market Maturity

Source: Islamic Financial Services Industry Stability Report 2015

Shahin A. Shayan

Global Sukuk Market Defaults

Source: Islamic Financial Services Industry Stability Report 2015

0.6%0.6% 0.2%0.2%3.8%3.8%

0.0%0.0% 0.4%0.4% 0.1%0.1%

Shahin A. Shayan

Global Sukuk Market Spreads

Source: Islamic Financial Services Industry Stability Report 2015

Shahin A. Shayan

Sukuk Performance Challenges• Some questions have appeared over the Sukuk market.

Perhaps not the first but certainly one of the most highprofile was the proclamation by Sheik Taqi Usmani ofPakistan that 85 per cent of non-Ijarah Sukuk issues werenot actually in compliance with the Shariah

• The Investment Dar of Kuwait failed to meet a profitdisbursement and in so doing defaulted on the terms of itsSukuk. At almost the same time East Cameron Partners inthe USA filed for Chapter 11 bankruptcy protection whichclearly had profound implications for investors in its Sukuk.This in turn was followed by much observation over the$3.52 billion Nakheel Sukuk and whether the government ofDubai would could honor its commitments.

• Some questions have appeared over the Sukuk market.Perhaps not the first but certainly one of the most highprofile was the proclamation by Sheik Taqi Usmani ofPakistan that 85 per cent of non-Ijarah Sukuk issues werenot actually in compliance with the Shariah

• The Investment Dar of Kuwait failed to meet a profitdisbursement and in so doing defaulted on the terms of itsSukuk. At almost the same time East Cameron Partners inthe USA filed for Chapter 11 bankruptcy protection whichclearly had profound implications for investors in its Sukuk.This in turn was followed by much observation over the$3.52 billion Nakheel Sukuk and whether the government ofDubai would could honor its commitments.

Shahin A. Shayan

Sukuk Performance Challenges• Another factor contributing to the uncertainty surrounding

post-default Sukuk is that many are subject to partially orwholly non-Shariah based legal regimes. For example, thelegal documents governing Sukuk or the Islamic structuresunderlying Sukuk are often subject to English law.Moreover, legal documents comprising separatecomponents of the same Sukuk issuance may be subject todifferent legal regimes. How Shariah based transactionstructures will be characterized and treated in variousapplicable jurisdictions cannot be known with any highdegree of certainty prior to the resolution of disputes andenforcement of rights in the relevant jurisdictions (the issueof non-recourse is under question)

• Another factor contributing to the uncertainty surroundingpost-default Sukuk is that many are subject to partially orwholly non-Shariah based legal regimes. For example, thelegal documents governing Sukuk or the Islamic structuresunderlying Sukuk are often subject to English law.Moreover, legal documents comprising separatecomponents of the same Sukuk issuance may be subject todifferent legal regimes. How Shariah based transactionstructures will be characterized and treated in variousapplicable jurisdictions cannot be known with any highdegree of certainty prior to the resolution of disputes andenforcement of rights in the relevant jurisdictions (the issueof non-recourse is under question)

Shahin A. Shayan

Sukuk Performance Challenges• Another significant area that needs to be addressed is that

of Shariah compliance and whether or not Shariahconvergence is some- thing to be aspired to. The reality isthat different scholars have different opinions aboutdifferent products. But perhaps of greatest concern is thetendency of some scholars to have different views on thesame subject at different times

• Another significant area that needs to be addressed is thatof Shariah compliance and whether or not Shariahconvergence is some- thing to be aspired to. The reality isthat different scholars have different opinions aboutdifferent products. But perhaps of greatest concern is thetendency of some scholars to have different views on thesame subject at different times

Shahin A. Shayan

Sukuk Market Going Forward• The Global Sukuk outstanding volume stands at $294

Billion USD and it has been growing at a staggeringrate of 21% Per annum for the past 6 years

• It is expected to grow at a rate of 15 to 20% perannum for the next 5 years

• In 2014 alone the big multi-jurisdiction globalissuances were:

The UK Government 200 million Pound Sukuk to test themarket and paved the way for the UK market developmentLuxemburg 200 million Euro SukukEmirate of Sharjah 750 million USD SukukHong Kong 1 billion USD SukukSouth Africa 500 million USD SukukGlobal Indonesian MOF Two Tranche 1.5+ billion USD Sukuk

• The Global Sukuk outstanding volume stands at $294Billion USD and it has been growing at a staggeringrate of 21% Per annum for the past 6 years

• It is expected to grow at a rate of 15 to 20% perannum for the next 5 years

• In 2014 alone the big multi-jurisdiction globalissuances were:

The UK Government 200 million Pound Sukuk to test themarket and paved the way for the UK market developmentLuxemburg 200 million Euro SukukEmirate of Sharjah 750 million USD SukukHong Kong 1 billion USD SukukSouth Africa 500 million USD SukukGlobal Indonesian MOF Two Tranche 1.5+ billion USD Sukuk

Shahin A. Shayan

• An active and Liquid Secondary market needs to bedeveloped locally and internationally through jointmulti-national efforts. Most efforts have not resulted ina cohesive and effective market (Labuan, Bahrain,DIFC & London)

• Through a multi-national joint effort, we must set upappropriate benchmarks to gauge yields for IPOs andSecondary market trades

Sukuk Market Going Forward• An active and Liquid Secondary market needs to be

developed locally and internationally through jointmulti-national efforts. Most efforts have not resulted ina cohesive and effective market (Labuan, Bahrain,DIFC & London)

• Through a multi-national joint effort, we must set upappropriate benchmarks to gauge yields for IPOs andSecondary market trades

Shahin A. Shayan

Sukuk Market Going Forward• There are as many as 30 domiciles that have tapped

into the Sukuk market• Sukuk maturities issued have moved towards shorter

term securities mostly under one year• This has been motivated by the lack of central banks

instrument availability for Islamic liquidity managementand working capital needs

• Going forward, Some interesting and un-tappedsectors hold promising prospects. They include:

• Islamic Social Responsibility Investments Sukuk• Orphan Funds Sukuk• Green & Ethical Investments Sukuk• Immunization Program Investments Sukuk (World Bank)

• There are as many as 30 domiciles that have tappedinto the Sukuk market

• Sukuk maturities issued have moved towards shorterterm securities mostly under one year

• This has been motivated by the lack of central banksinstrument availability for Islamic liquidity managementand working capital needs

• Going forward, Some interesting and un-tappedsectors hold promising prospects. They include:

• Islamic Social Responsibility Investments Sukuk• Orphan Funds Sukuk• Green & Ethical Investments Sukuk• Immunization Program Investments Sukuk (World Bank)

Shahin A. Shayan