Thursday 28 Mar 2024
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KUALA LUMPUR: Bank Negara Malaysia’s (BNM) pullback from offering short-term Islamic bonds (sukuk) this year has led to a significant drop in the global sukuk market.

Sukuk issuance fell by 42.5% in the first half of 2015 (1H15) compared with the same period last year, said Standard & Poor’s Rating Services (S&P). In 2014, BNM alone issued about US$45 billion of sukuk out of a total issuance of US$116.4 billion, it added. As a result, the international rating agency has halved its forecast for global sukuk issuance in 2015 to about US$50 billion (RM190.5 billion) to US$60 billion from US$100 billion to US$115 billion.

In a statement yesterday, S&P said it sees the global sukuk market heading towards a correction this year after Malaysia’s central bank stopped offering sukuk with tenors of three months earlier this year.

“We understand part of the reason behind BNM’s decision was that its sukuk was subscribed to by a broad array of investors, preventing them from reaching their intended end-users (primarily Malaysian Islamic banks for liquidity management purposes).

“As a result, BNM decided to switch to other instruments restricted to banks,” said S&P global head of Islamic finance Mohamed Damak in the statement.

It was previously reported that BNM believes that there has been sufficient liquidity in the country’s Islamic capital markets since the start of the year, and that short-term sukuk was being primarily used by foreign banks to address their liquidity needs — which does not help in improving domestic financial liquidity.

S&P noted that excluding the BNM effect, the worldwide volume of sukuk issuance performed in line with its expectations, total issuance dropping by only 10.7%, confirming that the impact of falling oil prices on recurring government spending and investment projects in core markets (namely Gulf Cooperation Council countries and Malaysia) was limited in the first half of 2015.

“While we expect this trend to continue in the second half of 2015, the effect of lower oil prices on sukuk issuance in 2016 remains uncertain,” said S&P.

It added that the sukuk market performance in the first half of this year was also aided by returning sovereign issuers (from core and non-core markets) and large, albeit sporadic issuances from banks and a few non-financial companies (corporates) in the Gulf states and Malaysia.

Amanie Advisors founder and group chairman Datuk Dr Mohd Daud Bakar said BNM’s decision not to issue short-term sukuk is worth a review.

“Banks have to comply with Basel III requirements on holding HQLAs (high quality liquid assets). The short-term sukuk is the perfect instrument for that purpose as it’s short-term in nature and easy to liquidate,” he told The Edge Financial Daily yesterday.

Daud said steps should instead be taken to address the problems that led the central bank to stop issuing short-term sukuk.

“The decision to stop issuing short-term sukuk will affect local Islamic banks’ ability to meet the liquidity requirement. It would be better that the system is revised to facilitate short-term sukuk issuance because the market badly needs it,” he said. Amanie Advisors is a global boutique syariah advisory firm.

According to Basel III international banking standards, lenders are required to hold liquid assets that are easily convertible into cash, sufficient to allow them to survive 30 consecutive days of net cash outflows.

As conventional money market operations are forbidden under syariah principles and must be backed by real assets, a lack of syariah-compliant liquid assets would cause Islamic banks difficulty in meeting liquidity requirements.

Ernst & Young Malaysia Islamic Financial Services partner Muhammad Syarizal Rahim is of the view that BNM’s move is not a cause for alarm, and that banks will not be adversely affected as the sukuk market is still awash in liquidity.

“The outlook for the sukuk market is not promising regardless of BNM’s announcement in 2015. It is unlikely for BNM to make this move if the market isn’t flush with supply, as managing the money supply is one of BNM’s primary roles,” he told The Edge Financial Daily.

Malaysia is the world’s largest sukuk market, accounting for 58% of the sovereign and corporate notes on issue worldwide, and has a solid institutional investor base, according to a May 21 report by Moody’s Investor Service.

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This article first appeared in The Edge Financial Daily, on July 8, 2015.

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