IDB Plans To Issue Another $1bn Sukuk In 2014

The Islamic Development Bank (IDB) will not go to the international markets to raise funds through a US dollar sukuk issuance again in 2013, although it may still issue sukuk through private placement, confirmed Dr Ahmad Muhamed Ali, President of the IDB, in an interview with the Saudi Gazette in London.

Dr Ali and a strong IDB Group delegation have attended the G8 Deauville Partnership with Arab Countries in Transition Investment Conference in London, which was organized by the UK Foreign & Commonwealth Office in partnership with the European Bank for Reconstruction and Development (EBRD) and the IDB Group.

The IDB issued its last sukuk offering in May this year – a 5-year $1 billion Sukuk Al Wakalah with a fixed profit rate of 1.535 percent per annum and a spread Mid-Swaps plus 30 basis points. The IDB Board of Governors earlier approved the increase insize of its Islamic Trust Certificates Issuance Program (sukuk program) from $6.5 billion to $10 billion.

The multilateral development bank of the Muslim world has come under pressure from its Board of Governors to raise funds more frequently from the international markets by leveraging its aaa/aaa/aaa ratings by the top three international credit rating agencies, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings respectively (all with a stable outlook), and its Zero Risk Weighting for multilaterals given by the Basel Committee for Banking Supervision and the European Commission. This as opposed to relying too much on the capital resources of its equity subscribers, of which Saudi Arabia is by far the single largest subscriber with 4,249.6 million Islamic dinars with 23.62 percent of the voting rights.

The IDB sukuk strategy going forward, explained Dr Ali, “is to go to market every year with one major international issuance. In the past we were not doing that and as a result the IDB was not much known as an issuer in the global market. Next year (2014) we will go to the international markets again, hopefully with the same size ($1 billion). It is difficult to assess now the size of the issuance next year because market conditions can change very quickly. In addition we will continue to issue sukuk through private placement to complement our resource mobilization activities.”

The IDB also has an additional mandate to issue local currency sukuk in selected countries. Thus far the IDB has issued sukuk in Malaysian ringgit and Singapore dollars. It is also exploring the possibility of issuing such sukuk in Hong Kong dollars, Turkish lira and British sterling.

“We have been considering issuing a sukuk in the sterling market for some time now. But the main problem has been how to utilize the proceeds from such a sukuk issuance. We are discussing this with British banks now,” he added.

But has the IDB discussed this issue in its many meetings with British government ministers? “We have discussed the issue with British ministers when they come with business delegations on official visits and when we go to London. I agree with you that it is important we try to resolve this issue and a sterling sukuk will give the market especially in the UK a major psychological boost.”

Dr Ali confirmed that he and the IDB Group will participate in the upcoming World Islamic Economic Forum (WIFE) 2013, which is scheduled to be held in London at the end of October – the first time it will be held in a non-Muslim country and in the European Union, and which could be important in fostering greater connectivity between the Islamic finance industry and the global halal business sector, which potentially is worth over $1 trillion. WIFE 2013 is also a good opportunity for the Muslim countries to reach out beyond their borders to foster bilateral business and investment with other regions including the UK and Europe.

On the recent issuance of its inaugural sukuk – a $490 million Sukuk Al Wakalah – by the International Islamic Liquidity Management Corporation (IILM), Dr Ali confirmed that the IDB did not participate in the offering neither as a primary dealer or as an investor.

“Despite the fact that we did not participate in the IILM sukuk, we are a founder investor of the corporation. I agree that cross-border liquidity management is a major challenge for the global Islamic finance industry,” he said.

But as a founding shareholder, what would the IDB like to see the IILM do to increase capacity in more cross-border issuances to facilitate demand for short-term liquidity management instruments? “We are not quite sure about the IILM’s business model and our people are still looking at this. We need to understand more how this model works,” he added.

During a visit to Tunisia earlier this year, Dr Ali announced that the IDB was willing to guarantee a sovereign sukuk issuance by Tunisia.

Unfortunately, despite this guarantee, the Tunisian government has yet to make a formal application to take up this offer and to issue a sovereign sukuk. The credit enhancement will come from the sukuk insurance policy, which has been developed and introduced by the IDB’s export credit agency, the International Corporation for the Insurance of Export Credits and Investment (ICIEC). Dr Ali recognizes that such a development is important especially to expand the universe of sovereign sukuk issuers, especially from non-traditional markets.

The IDB Group has a stated ambition of achieving a 20 percent target for intra-Islamic trade by 2015. Currently the percentage for intra-Islamic trade is about 17.5 percent. “I don’t think we may quite reach the 20 pe cent target for intra-Islamic trade, but I am confident it will be over 19 percent. We are now thinking beyond that and what we can achieve for the next 10 years till 2025. A target of 30 percent intra-Islamic trade is under consideration,” he added.

Source :  Saudi Gazette