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United Kingdom Sukuk: 10 times over-subscribed

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The U.K. raised 200 million pounds ($339 million) from the Sukuk sale, with investors bidding for more than 10 times the amount offered as the UK became the first non-Muslim sovereign issuer of Sukuk.

“We have seen very strong demand,” George Osborne, Chancellor of the Exchequer, said in a Treasury statement. “I hope that the success of this government issuance will encourage further private sector issuances of sukuk in the U.K.”

The Sukuk which is based on an Ijara sale and lease back contract was originally planned for issuance in 2008 but was shelved due to the financial crisis. Particular challenges faced in finding suitable government assets to back the sukuk in the Ijara sale, justified the relative small amount raised of £200 million according to Robert Stheeman, chief executive officer at the U.K. Debt Management Office, perhaps hinting at future challenges to raising larger sukuk for the UK Treasury.

Issuances from Pakistan, Bahrain and Banque Saudi Fransi wrap up busy Sukuk week

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Details of the Sovereign Sukuk from Pakistan, Bahrain and a corporate issuance from Banque Saudi Fransi are available from our Sukuk Profiles section.

We are expecting issuances this week from the UK Government with a Sterling denominated issuance out of London, and French Bank Societe Generale with a Malaysia Ringgit issuance out of Kuala Lumpur; both have been busy on road shows this week meeting prospective buyers of their Sukuk.

Central Bank of Bahrain: Monthly Sukuk Al-Ijara got BD 82m orderbook for BD 20m issuance

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Subscriptions worth BD 82 million were received for the BD 20 million issue, which carries a maturity of 182 days.

The expected return on the issue, which begins on 19 June 2014 and matures on 18 December 2014, is 0.85 % compared to 0.90% for the previous issue on 15 May 2014.

The Sukuk Al-Ijara are issued by the CBB on behalf of the Government of the Kingdom of Bahrain.

Islamic Finance in France

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In December 2007, Paris EUROPLACE, the organisation that promotes the city’s role as a financial centre, established the Islamic Finance Commission. Since then, the French financial markets regulator, the Autorité des marchés financiers (AMF), has issued two positions allowing Shari’ah compliant investment funds and sukuk listings. As such, the Bourse de Paris (Paris stock exchange) has created a sukuk segment and four tax regulations (relating to murabahah, sukuk, ijarah and istisna’) have been published that confirm a parity of tax treatment with conventional financial products.

In recent years, the French regulatory authorities have taken a number of steps to encourage Islamic finance in the country. The first initiative, which involved significant tax and regulatory changes aimed at boosting Islamic finance in France, was announced in July 2008. More specifically, these changes were related to the admission to listing of sukuk on a French regulated market, the tax treatment of Islamic financial transactions and, to a lesser extent, reforms of the fiducie (French trust). Under these changes, compensation paid by sukuk issuers is, for tax purposes, treated just like the interest on a traditional bond offering and is deductible from taxable income. In addition, the compensation paid to non-resident sukuk investors is exempt from withholding tax in France, regardless of whether an offering is governed by French law or the laws of another country.

In July 2010, the French government made certain amendments to its laws in order to facilitate sukuk issuances. The amendments removed double stamp duty, the payment of a capital gains tax on property and streamlined the regulations governing estate agents. In June 2011, France witnessed the introduction of the first Islamic deposit scheme operated via the Islamic window of an existing conventional bank.

Following this successful launch, an Islamic home finance product, a 10-year murabahah contract, was introduced. This was met with strong demand due to the fact that home financing has been a key expectation of French retail clients. Currently, there are plans to launch a similar Shari’ah-compliant deposit scheme aimed at small and medium-sized enterprises.

The French tax authorities are also planning to issue additional guidelines dealing with other Islamic finance concepts, including musharakah and mudarabah, in the near future.

There are presently six Shari’ah-compliant funds in France with total assets under management of USD 147.2 million, which are split relatively evenly between money market (47%) and equity (53%) assets.

Going forward, Islamic finance appears to have good potential to develop further in France. Over the years, the country has established favourable trade flows with a number of close neighbours with large Muslim populations, including Morocco, Algeria and Tunisia. A significant proportion of the French population originates from North Africa, and this has been driving domestic demand for Islamic finance.

UK debut Sukuk seeks diverse investor base, learning from Turkey’s Sukuk debut mistakes

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The exclusion of the UK’s domestic Islamic banks as arrangers for the UK debut Sukuk raised eyebrows in London last week. The UK Treasury had already appointed HSBC in January to arrange the deal and last week it added four more banks to the syndicate; Qatar’s Barwa Bank, Malaysia’s CIMB, National Bank of Abu Dhabi and Standard Chartered.

According to a person with knowledge of the deal, the UK is seeking a diverse investor base with the aim of heeding the lessons from Turkey’s debut Sovereign Sukuk issuance, which witnessed an over allocation to Middle East investors.

The subsequent selling, due to over allocation resulted in the Turkish sukuk somewhat tanking in the secondary market and trading below par at 98 cents on the dollar and thus removing some of the gloss from a nonetheless successful over-subscribed and up-sized debut Sukuk issuance. The Turkish sukuk was sold 58 percent to the Middle East, 13 percent to Europe, 12 percent to Asia, nine percent to Turkey and eight percent to U.S. investors.

UK Road Show begins as Sterling hits five-year highs

The UK Sukuk for £200 million with a maturity of five years will be denominated in Sterling, and given Sterling’s recent strength; it was assumed the UK Sukuk would have been aimed almost entirely at domestic UK consumption.

The road show will start on June 17 in Jeddah and Kuala Lumpur, then moving to Riyadh, Dubai, Doha, and Abu Dhabi, ending in London on June 20.

Malaysia’s Liberalisation of Finance sector to boost its Sukuk leadership

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The announcement was made by Prime Minister Najib Razak who said the decision would support the strengthening of Malaysia’s capital market and act as a catalyst sustainable long-term growth.

In the last two decades, the RM1 trillion Malaysian bond market – the largest in ASEAN – has been charting impressive growth in terms of market size, depth and breadth.

”Discerning investors will be the key driver of credit ratings in the future, and this will be important for the continuity of pricing transparency. In advanced bond markets, investors view ratings as being essential to their investment decisions,” remarks Foo Su Yin, CEO of RAM Ratings. ”RAM will continue pioneering credit-rating approaches to support the bond and sukuk markets,” adds Foo.

To subject credit ratings to open competition, Malaysia will remove mandatory requirement for bonds, and allow full foreign ownership by Jan. 1, 2017.
At present, two agencies in Malaysia oversee credit ratings in the domestic bond market, both conventional and Islamic. These agencies are co-owned by various local and foreign financial institutions, with foreign participation capped at below 10%.

The last major liberalization in the Malaysian financial sector was in 2009 when limits in foreign shareholdings in Islamic financial institutions were raised.

Mitsubishi UFJ to float yen-denominated Sukuk

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The Japanese bank will obtain necessary clearance to issue a total of up to $500 million in Sukuk.

BTMU is considering floating bonds denominated in dollars and yen this summer, targeting Middle Eastern pension funds and Islamic insurance companies, among others.

This will mark the first issuance of yen-denominated Sukuk. The bank expects demand from investors seeking to diversify. Growth in Sukuk could provide a channel for Japan to attract Islamic money.

The move is aimed at tapping into the rapidly growing Islamic financial market, which has been expanding at double-digit rates. Assets in the market have shot up 130% in five years.

In Malaysia, more than 20% of loans comply with Islamic rules, and lenders are encouraged to procure funds following the rules. Proceeds from BTMU’s bonds will go toward providing loans to infrastructure and energy-related development projects.

(Nikkei)

A look at Luxembourg’s Islamic Finance Credentials

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With over 2.6 trillion euros of assets under management this January, Luxembourg is the largest regulated funds domicile in Europe and the world’s cross-border distribution hub for investment funds with a market share of 75%.

But what about Islamic Finance? Is Luxembourg an emerging country in this field?

Geographically speaking, the market for sharia-compliant funds is concentrated within three main markets: Saudi Arabia, Malaysia and Luxembourg. According to Thomson Reuters’ Global Islamic Asset Management Report 2014, 2013 saw the highest number of funds launched and lowest number of closures. As a result, the number of mutual funds has doubled since 2007.

What makes Luxembourg so attractive?

Luxembourg’s well-known financial sector and its strength in conventional finance was a natural incentive for Islamic Finance to choose Luxembourg back in 1978. Unlike London, which is primarily known for its Islamic banks, Luxembourg does not focus on one single area but rather embraces all aspects of Islamic Finance: Banking, Asset Management as well as Insurance (Takaful). What’s more, Luxembourg has not chosen to limit itself by applying only one set of Sharia rules. Instead, it welcomes all of them, each with their own specificities.

As it stands today, Islamic finance is still a niche activity in Luxembourg. However, key figures in both the public and private sector see Sharia-compliant funds as a promising opportunity for growth: the infrastructure is in place and many new projects are in the pipeline. With its openness to innovation, the country has demonstrated an ever growing interest in Islamic Finance. Not only has a favourable environment been set up, but the government has also led by example in its initiative to issue a Sukuk. [1]

From niche to mainstream: how to reach the critical mass?

What are the key challenges?

There are a number of barriers to the growth of Islamic Finance in the EU:

  • Perception and image: There is a common belief that Islamic Finance is only made for Muslims. In reality, this couldn’t be less true. The main principle is that – instead of making money with money – cash is considered as an exchange tool and not a commodity. In this way, Islamic finance products invest in real assets, using partnership agreements to support the risks and rewards. In contrast to conventional bonds, where returns are based on a fixed or variable rate, Sukuk returns are based on the performance of an underlying asset.
  • Limited offering: there is currently only a small range of products on offer, in part due to difficulties finding the right projects to finance.
  • Cost: unclear tax treatment and cost issues are hampering progress;
  • Unclear legal and regulatory requirements: in principle, Islamic Finance products are subject to the existing laws and regulations we apply to conventional finance. However, the complexity of certain structures and products mean further analysis is required as existing regulation may be subject to interpretation.

The way forward

The Luxembourg State experienced some difficulties in launching Luxembourg’s first Sukuk. This makes for a good case study, highlighting a number of areas where further clarification will be required if EU countries are to boost the use or issue of Islamic finance products.

  • Tax treatments: further clarifications are required for each and every Islamic Finance product. Although tax treatment for Sukuk [2] may now be crystal clear, there’s not yet such clarity for the underlying agreements within the structure. One solution might be found in the way that Luxembourg approached Sukuk. Here, the government looked for an existing product with similar principles and then applied the same tax treatment to the new product, Sukuk. This methodology could be applied more consistently, with each country performing an upfront review of existing products with a view to matching them up with their Islamic counterparts.
  • Legal requirements: what does “Sharia compliant” mean in Luxembourg or in the EU?
    Contrary to Malaysia, Saudi Arabia and other leading countries in the field of Islamic Finance, there is no such thing as a defined set of Sharia rules applicable in Luxembourg nor in the EU. It is to be noted that even in those countries who have reached greater maturity in the field of Islamic Finance, there are some differences in interpretation.
    Should Luxembourg be the first mover in the adoption of certain Sharia rules in its own legislation or adopt its own set of standardized Sharia rules for plain vanilla products?
    If so, the treatment of such rules would not be different from any other compliance matters and may eradicate the need to appoint Sharia boards. It is to be noted that a majority of Muslims currently invest in conventional finance as there are limited alternatives open to them.
  • Investors: who can or should invest in Islamic Finance products? Islamic finance products are, when all’s said and done, still finance products and there is no reason to restrict them to Muslims only. Existing rules around conventional finance could still apply. One element to consider, however, is how to limit any expectation gap, by indicating the specific rules that the product is following in the offering document as long as no clear set of Sharia rules are embedded in national legislation.
  • Costs: by clarifying both the legal environment and tax treatment of Islamic Finance products, part of the additional costs involved might be reduced.

Once these aspects are clarified, large conventional players may be encouraged to offer Sharia compliant versions of their current products, as they have the credibility and confidence to give the get-up-and-go as well as the client base. Positioning Islamic funds as socially responsible or ethical investments could be a key strategy for fund managers. SRI is a fast-growing subsector of the conventional funds industry, naturally aligned with Islamic funds.

[1] The sovereign sukuk to be issued by Luxembourg will involve the sale and leaseback of assets (sukuk-al-ijara). Three buildings including the two towers situated at the Place de l’Europe in Kirchberg and the Gutenberg building in Strassen will be transferred to an SPV (a Luxembourg S.A. owned by the state of Luxembourg) that will issue EUR 200m of sukuk (corresponding to the value of the three properties).
[2] The tax treatment of Sukuk issued by a Luxembourg company has been clarified in a tax circular released on 12 January 2010 (Circular L.G.-A No. 55 of 12 January 2010). The circular confirms the classification of Sukuk as debt for Luxembourg tax purposes

Lutfije Aktan, KPMG Luxembourg
+352 22 51 51 6609

Luxembourg likely to beat UK to issue first Western European Sovereign Sukuk

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Announced in late 2013, both the UK, and Luxembourg sovereign Sukuk are moving closer to issuance, with Luxembourg likely to pip the UK and become the first Western European (as well as the first non-Islamic) country to issue a Sovereign Sukuk.

The Luxembourg issuance seems at a far more advanced stage having already identified the assets to be used in an Ijara structure. In contrast the UK Treasury released the below Memorandum to Parliament providing a background on the Sukuk and its legal framework as a Sovereign issuance. The UK Treasury concluded in the memo “The Treasury continues to work on practicalities of raising money through alternative finance arrangements,” indicating issuance is far from imminent.

UK Treasury memo to Parliament

Luxembourg buildings of value EUR 200m to be used in Ijara structure

The sovereign Luxembourg sukuk will use three buildings, which will be transferred to a Luxembourg S.A. Special Purpose Vehicle (SPV) owned by the state of Luxembourg. The buildings include two towers situated at the Place de l’Europe in Kirchberg, and the Gutenberg building in Strassen and in total value correspond to the size of the sukuk to be issued of €200m.

Lux-Sukuk

More information regarding the Luxembourg sukuk can be found in the below article from KPMG Luxembourg.

Luxembourg Sovereign Sukuk by KPMG

Sukuk Weekly Summary and Secondary Market update – 29 May 2014

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Domestic Sukuk market is gathering pace in Saudi Arabia with recent announcements from Saudi Telecom and Saudi based Al Hokair to issue sukuk.

Elsewhere the Sovereign space in South East Asia showed some new developments, with Indonesia mandating HSBC, Standard Chartered and CIMB Group Holdings Bhd to arrange a sovereign sukuk issue of up to US1.5billion, as well as a comment from the Philippines Finance minister indicated it to was looking at the sukuk market for funding.

The Bloomberg-Malaysia Sukuk Ex-MYR Index, which tracks 43 global corporate and sovereign notes from Asia and the Middle East, climbed 0.8 percent in May to an unprecedented 116.19, taking the advance this year to 3.1 percent and exceeding 2013’s 0.8 percent increase.

sukuk indexes

Secondary market prices were slightly up on the week:

sukuk prices