Focus: Sukuk

My Word Is My Bond

Jun. 13, 2017

In February of 2017, Kuwaiti petrochemical company EQUATE issued a USD750 million seven-year sukuk as part of a larger USD2 billion program. This deal marked the first sukuk issuance in Kuwait in more than two decades. In 2015, the Capital Market Authority (CMA) provided a regulatory framework that governs bonds and sukuk, which is now set to cater to more bonds in tune with sharia principles.

To date, Malaysia is still the pioneer in the Islamic finance industry, being the first to issue sovereign sukuk in 2002 and still accounting for around two-thirds of global sukuk issuances. As Kuala Lumpur advanced as a center for Islamic finance, sukuk issuances by the government and multinational firms were increasingly denominated in foreign currency, contributing to the internationalization of Islamic finance and creating liquidity in the global Islamic finance market. Kuwait is seeing a similar practice, whereby sukuk in USD has now been issued.

One of Kuwait's primary drivers of Islamic finance, the Kuwait Finance House (KFH), has, unsurprisingly, a reputable presence in Malaysia. The volume of sukuk traded via the bank nearly doubled in 2016, exceeding USD11.4 billion. According to group CEO Mazin Saad Al-Nahedh, the change in oil prices have played a major role in the sudden interest in sukuk. “Most GCC governments are hydrocarbon based and have been affected by oil prices and have had to fill gaps in their fiscal budgets. They have tapped international bond markets for a long time, but they have not been able to attract Islamic funds due to the form of the financing. We are now seeing more diversity in the financing pools and more appetite for Islamic financing. In essence, it is a complementary liquidity product that suits Islamic banks because it has liquidity features and tradability, and because it also suits the investor in the sense that it comes at the right price in relative terms, and accesses a larger audience of participants rather than limiting to purely commercial banks.” He furthermore commented that relative to conventional issuances, the amount of sukuk is still small, and he is currently researching how KFH can diversify the funding sources between Islamic and conventional.

Another global leader in Islamic finance is the Saudi-based Al-Rajhi Bank, the world's largest Islamic bank with assets exceeding USD90 billion. In February of 2017, the Central Bank of Kuwait granted permission for the bank to open a second branch in the country, the second foreign bank to open in the country, and the first sharia-compliant bank to do so. Its Country Manager, Walid Abdelkarim, sees both consumers and investors moving toward a principled model of financing and becoming increasingly attracted to sharia financing services. “It is a sector with assets expected to grow to USD1.8 trillion globally by 2020, partly attributed to the fact that both consumer and investor risk profiles are changing in response to market situations.”

Islamic finance involves ethical banking solutions that interest and attract many customers from around the world today, both Muslim or non-Muslim. Most customers seem attracted to sharia-compliant banking because it is line with their beliefs, but many others value its ethical dimension and the safety that these products guarantee. There is no interest rate, just a profit rate, and at maturity the amount remains the same without accruing any additional charges. It is also asset-based, easing the process of recovery when needed, and there is a limit on over-leveraging of the same asset. Once it is moneyed, there is no way it can be leveraged again.
With the large-scale infrastructural and mega projects on the ambitious development agenda of the government, further sukuk issuances are likely to happen.

In 2016, KNPC's deal for the Clean Fuels Project included an Islamic tranche for the first time, opening the door for potential future deals in Islamic finance, be it in local or foreign currency. The fact that EQUATE's sukuk was oversubscribed by more than seven times shows that there is investor appetite, and it was priced lower than conventional bonds. The fact that sukuk can compete both in terms of form and price has created a valid value proposition for both Muslim and non-Muslim investors, in some instances significantly outweighing conventional bank issuances.