Sukuk: SEC’s master stroke for deepening the capital market
Sukuk issuance is growing at a very fast rate across the world. In Africa, Senegal, Ivory Coast and South Africa have issued the Islamic financial instrument. The recent announcement that Nigeria will issue her first Sukuk in 2016 is seen as a way to deepen the capital market, writes TELIAT SULE.
The global financial industry has witnessed a number of financial reengineering in the last three decades. The development in this strategic sector has brought about the introduction of different assets such as sophisticated hedge funds and derivatives. Another area the global financial industry has made remarkable progress is in the development and introduction of financial instruments within the ever growing Islamic finance segment of the global financial industry.
According to the Said Business School of the University of Oxford, Islamic finance has shown a 10 to 15 percent year on year growth in the last two decades. Corroborating this phenomenal growth, Tahmoures Afshar, of the Woodbury University School of Business, USA, finds out that over 300 Islamic banks and financial organisations are successfully running their businesses from Dubai, Los Angeles, Karachi, Jakarta, Cairo and Riyadh and there is no sign this trend is going to slow down in the near future. Consequently, it is the fastest growing segment in global finance. The size of the Islamic finance market is put at between $1.6 trillion to $2.1 trillion and is expected to reach $3.4 trillion by 2018.
Therefore, the pertinent question is: What instrument was responsible for the spread and acceptance of Islamic financial services globally? This is no other than Sukuk otherwise known as an Islamic bond or Islamic Investment certificate. According to the Islamic Development Bank (IDB), a Sukuk grants the investor a share of an asset, along with the commensurate cashflows and risk. As against the conventional bond, which confers the ownership of a debt, the risk and return associated with the underlying assets and cashflows are transferred to the Sukuk holders.
There are basically two types of Sukuk and these are the asset based and asset backed Sukuk. The holders of the former have beneficial ownership in the asset and can make recourse to the originator of the security in the event that there is a shortfall in payments. A good example is stocks held on behalf of an investor in the name of a stock broking firm. Then concerning the latter, that is, the asset backed Sukuk, the holders own the assets and as a result do not have recourse to the assets but to the originator if there is a shortfall in payment.
Global issuance of Sukuk
The first issuance of Sukuk dated back to around 700 to 1300AD, in the classical Islamic period during which papers representing financial obligations originating from trade and other commercial activities were issued in obedience to the Holy Qur’an Chapter 2 verse 282 which says “O you who have believed, when you contract a debt for a specified term, write it down. And let a scribe write [it] between you in justice. Let no scribe refuse to write as Allah has taught him. So let him write and let the one who has the obligation dictate. And let him fear Allah, his Lord, and not leave anything out of it. But if the one who has the obligation is of limited understanding or weak or unable to dictate himself, then let his guardian dictate in justice. And bring to witness two witnesses from among your men. And if there are not two men [available], then a man and two women from those whom you accept as witnesses – so that if one of the women errs, then the other can remind her. And let not the witnesses refuse when they are called upon.” After this issuance, there was a hiatus.
The first modern Sukuk was issued in Malaysia in 1990 when Shell MDS rolled out Sdn Bhd 125 million Malysian Ringgit, which today amounts to about $30 million. Also in the same country, Kumpulan Guthrie, a Plantation Company issued the first dollar denominated Sukuk worth $150 million in 2001. Furthermore, between 2004 and 2007, a number of corporate entities also issued Sukuk. The Standard Chartered Bank Malaysia in 2004 issued $100 million Sukuk; Durat Al Bahrain Sukuk issued $152 million; Commercial Real Estate Kuwait issued $100 million; Rantau Abang Caiptal Sukuk, $2.029 billion; The Nakheel Group UAE and Dubai Ports Authority issued $3.52 billion and $3.5 billion Sukuk respectively. Also, Daar International Sukuk Saudi Arabia issued $1 billion and Alder Properties UAE has $2.53 billion worth of Sukuk to its credit.
The Central Bank of Bahrain issued $250 million worth of Sukuk in 2003. Other sovereign issuers are the Islamic Development Bank, $400 million; Government of Qatar, $700 million; Dubai Global Sukuk, $1 billion; Saxony-Anhalt State Properties, $100 million and Pakistan International Sukuk Co., $600 million, all issued between 2002 and 2005.
Europe competes with Asia and Middle East
Following Thomson Reuters’ study which predicts that the Sukuk market will rise to $237 billion by 2018, a number of countries in Europe have passed legislation to allow the issuance, listing and trading of Sharia compliant debt instruments on their bourses. On July 9 2014, the Luxembourg Parliament passed a law aimed at granting the issuance of the country’s Sukuk in response to surge in investor demand for it. In effect, the country wants to compete with London in order to attain that status as the financial centre in Europe.
Based on the findings of Deloitte, the most prominent Sukuk issuance in Europe took place in Britain where £200 million was raised. The global accounting body reported that that issuance was 10 times oversubscribed attracting investors from the United Kingdom, Middle East and Asia.
The German Government organised conferences on Islamic Finance in 2009. The country now has clear guidelines for financial institutions under the German Banking Act. The first Sukuk was issued in 2004 by the State of Saxony Anhalt and to date 13 foreign companies have listed Sukuk on the Frankfurt Stock Exchange. In France, 2 corporate Sukuk were issued in 2012. Also, the Irish Government has established a Sharia Funds Specialist Unit to ensure regulatory applications involving Sharia Funds. There is no doubt that London, Frankfurt, Paris and Luxembourg are the leading financial centres in the world, and this explains why Europe overtook the United States of America to become Nigeria’s highest capital importation source.
Sukuk in USA
In 2009, GE Capital issued $500 million 5-year Sukuk and this was followed by the $500 million issued by Goldman Sachs in September 2014. IFFIm in December 2014 issued a 3-year $500 million Sukuk and in September 2015, the International Finance Corporation and IFFIm issued $100 million and $200 million Sukuk respectively. Till date, $1.8 billion Sukuk has been issued in the United States of America and notable financial institutions such as Morgan Stanley, Standard Chartered, HSBC, Citi Group and Goldman Sachs acted as arrangers and advisors.
How Sukuk will benefit the Nigerian economy
Nigeria is set to issue its first sovereign Sukuk in 2016 as both the Securities and Exchange Commission (SEC) and the Debt Management Office (DMO) have finalised plans on the project. Among several benefits, Sukuk is well suited for infrastructure financing. Recently, the African Development Bank (AfDB) projected that Africa would have to invest about $100 billion annually to close the infrastructure financing gap. We are in a country that lacks good infrastructure, which is urgently needed for the enhancement of business activities. The quality of our roads, bridges, housing and sea ports is far below average. Little wonder why Nigeria was ranked 170th amongst the 189 countries that participated in the World Bank Ease of Doing Business in 2015.
Developing infrastructure is a prerequisite for development as numerous studies done in the field of economics have established a positive relationship between infrastructure financing and economic growth. According to Fidelis O. Nedozi et al, “ a one percent increase in infrastructure increases fixed capital stock by 1.37 percent, while a one per cent increase in fixed capital stock increases GDP by 0.06 percent” based on their findings in a study, which was published in 2014 and entitled “Infrastructure development and economic growth in Nigeria: Using Simultaneous Equation.” The International Finance Corporation (IFC) also finds that “a 1 percent increase in the stock of public capital would lead to a 0.08 percent increase in GDP.”
Beyond that, Sukuk will also enhance the deepening of the Nigerian capital market. It is a sure way to attract investors who are interested only in non-interest bearing financial instruments. In 2015, the Nigerian capital market lost about N1.6 trillion and has continued to swing in 2016. One of the reasons attributed to the continuous oscillation is the absence of many instruments that can offer varieties to investors. We cannot continue to do the same thing in order to get different results that is why the introduction of Sukuk at this time is seen as a master stroke.
TELIAT SULE