Repositioning the sukuk

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The new source of power is not money in the hands of a few, but information in the hands of many, says John Naisbitt, best-selling author and futurist.

But, what do we know about sukuk? It's often described as a bond, but it's not a conventional bond. It is often described with pride and a sense of accomplishment for its issuance (in the case of Malaysia) and the London Stock Exchange for its listing.

The sukuk is the foundation of investment vehicles like today's sukuk funds, and, hopefully, tomorrow's sukuk exchange-traded funds. It has encountered defaults, bankruptcies, and restructurings. It has become the alter ego of debt capital market bias, Islamic finance.

Furthermore, the sukuk has also become a sort of a Friday sermon, where we practitioners are continually preaching the benefits to the converts, where resource-rich countries in, say, South America or the halal food companies need to learn about it.

Today, the sukuk is a Muslim-country and oil-related story, but, more importantly, it must now be viewed as a capital markets story about:

1. Delinking from sole reliance on bank financing in Muslim countries;

2. Establishing a foundation for building capital markets in Muslim countries; and

3. Providing investment opportunities with non-equity like risk profile for all investors.

The Islamic finance industry has been preaching and positioning itself for all of mankind and not just Muslims. The sukuk, or loosely defined as "participation certificate linked to assets from the real economy" may just be the capital market instrument that acts both as a locomotive that pushes Islamic finance to a US$2 trillion business and builds bridges to today's less trusted conventional finance recently built on speculation (excessive leverage) and uncertainty (derivatives).

Put differently, can Islamic finance generally, and sukuk specifically, be a contributor to the required deleveraging in, say, Europe? If so, then we have much work ahead of us, but, at least, there are pot-holed pathways and corresponding fading signposts that need a reset.

Islamic finance is generally understood for its lofty attributes of social justice, financial inclusion, and equitable treatment. Furthermore, it is often described in the positive; everything is permissible unless it violates one of these prohibitions: interest, uncertainty, speculation, and underlying asset inconsistent with syariah precepts.

However, we in the industry, seem to be mud-stuck in describing the process, structuring, modalities of contract and so on, instead of migrating the conversation to what, for example, the sukuk can finance. Emerging markets, which includes all 57 Muslim countries, are in need of billions of dollars of development finance, including roads, hospitals, bridges, airports, housing, and so on. These projects are right for asset-backed financing — sukuk.

Many of the developed countries, undergoing de-leveraging and restructuring, are also in need of a similar amount of funds and refinancing and restructuring conventional debt is the need of the hour. The "extend and pretend" refinancing only delays the inevitable, hence, a paradigm shift approach is necessary for the greater good: savings institutions, jobs, and family units.

The question now is what is holding back the deployment of sukuk, in (more) emerging (read Organisation of the Islamic Conference countries) and developed markets? It appears to be a combination of political and parliamentary interests, and, frankly, a failure on our part (industry stakeholders) for not recognising the importance of a well coordinated education and awareness campaign.

In focusing on areas where we have control over, we need to reposition today's locomotive of Islamic finance, sukuk, as a viable alternative to existing capital raising instruments. At the end of the day, the sukuk must sell itself on providing value merits while allowing capital raisers, as part of their fiduciary duty, to tap into another source of funding.

Thus, while league tables of banking and legal issuers and underwriters are important, they are not overriding at this nascent stage of sukuk market development.

Of paramount importance for sukuk to become a viable option for banks (Basel lll) corporates, international agencies, and sovereigns includes work flows (news, documentation and participants), content (modalities, standards, and so on), country regulation, tax efficiency and trading to be changed from over-the-counter to screen-based.

Furthermore, this information must be in real time, at the fingertips, and on a secure and interactive (global) community platform facilitating free flow of communication, collaboration, and contributions.

All of us have key performance indicators, be they secular or spiritual, so sukuk needs to have one. However, as it has no soul and body, it is dependent on us for its development.

For sukuk to become a universal capital raising instrument it needs to become shelf-registration efficient (to take advantage of compliant credit pricing of, say, Thomson Reuters (TR) Islamic Interbank Benchmark Rate (IIBR), and follow the developments of the eurobond market, established in the 1960s but took off in the 1980s.

Islamic finance is about financing, investing and insuring "ethical" products and businesses that have links to the real economy. The link to the religion is the form, but, more importantly, the substance is the transparent set of rules that address information asymmetry and elevates the interests of the weak.

The sukuk needs to move from the form, a Muslim-country and oil-related phenomenon, to the substance — participation certificate that finances assets contributing to the real economy, be it promoting development, financing diversification or contributing to stopping the financial decline.

So, how did the TR Global Sukuk Investment Grade Index perform on year-to-date basis?

Rushdi Siddiqui is global head, Islamic Finance and OIC Countries, Thomson Reuters

This story first appeared in The Edge weekly edition of Jan 21-27, 2013.

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