The Islamic Financial Services Board (IFSB) and the Dubai Financial Services Authority (DFSA) have successfully organised a Joint Seminar on Liquidity Generating Innovations in Islamic Finance themed The Role of Sukūk and Securitisation to Support New Financial Regulations on 30 April 2017 in Dubai, UAE.
The joint seminar was designed to encourage broad interaction among the delegates in exploring sharīʻah-compliant Islamic capital market instruments, in particular sukūk and securitisation of assets, to generate liquidity in the Islamic finance industry. At a time of tightened financial regulations, the seminar also discussed the readiness of Islamic financial institutions to meet the new liquidity requirements, while also highlighting opportunities available to various bodies (e.g. regulatory authorities, capital market players, legal firms) to support the industry’s liquidity management needs.
Ian Johnston, Chief Executive of the DFSA, discussed the need for the industry to think laterally to address the shortage of liquidity management tools at Islamic institutions, including consideration for assets in adjacent markets.
“The forum aimed to address the very real challenges around the shortage of liquidity management tools that institutions continue to face, with some relying primarily on cash and central bank placements. It was encouraging to see such active engagement and innovative thinking by the practitioners over the course of the day’s programme.”
Zahid ur Rehman Khokher, Acting Secretary-General of the IFSB, noted that “liquidity management has been a long pressing concern in the Islamic financial services industry”, adding that “these difficulties also present opportunities for ‘exciting innovations’ in the industry amidst an evolving global regulatory framework”.
Zahid noted the slowdown in corporate sukūk issuances over the previous four years but also noted a tightening in spreads between sukūk and bond pricing, with some recent issuances even being priced at a discount to their conventional counterparts. He also reiterated the importance of promoting securitisation of assets by Islamic financial institutions to aid liquidity, a move which has been recommended in several IFSB standards and other publications.
The half-day Joint Seminar was chaired by Prof. Volker Nienhaus, University of Bochum, Germany.
The first panel discussion on the role of sharīʻah-compliant instruments in the Islamic capital market featured Dr Mohamed Damak, Senior Director, Global Head of Islamic Finance, S&P Global Ratings, Moosa Tariq Khoory, Head of Sharīʻah, Dubai Islamic Bank, Debashis Dey, Partner, White & Case, UAE and Mohamed Dagher, Manager and Head of Account Management (Middle East, Africa & CIS), Euroclear Bank SA/NV, UAE.
The panel offered insight into sukūk instruments and the Islamic capital market developments from the viewpoint of their respective fields. A panelist mentioned that there is expected to be about US$70 billion of new issuances during 2017; however this is not enough to keep up with the projected growth of the Islamic finance industry as demand is much higher. While there have been some new sovereign issuances recently, the added complexity of structuring sukūk is a disincentive for governments wishing to raise capital quickly. To resolve these challenges, the industry needs more standardisation in terms of both legal documentation and sharīʻah interpretations. In this respect, the IFSB’s new standard on Disclosure of Islamic Capital Market Products (IFSB-19) can help the industry to enhance harmonisation in the sukūk market.
In terms of developing the liquid markets for Islamic finance industry players and offering them high quality liquid assets, the role of sovereign and central bank sukūk issuances was highlighted, as it will simultaneously promote sharīʻah-compliant money markets and support the availability of sharīʻah-compliant lender of last resort facilities to Islamic banks, a facility which is not always available in most jurisdictions. Similarly, secondary market trading in the sukūk market needs to be promoted through various incentives and infrastructure development.
The panelists also observed that from a structuring perspective, there is a small volume of assets which are readily available for securitisation in a sharīʻah-compliant manner. The lack of suitable sharīʻah-compliant alternatives to a repo (repossesion) market is an issue for the Islamic finance industry on which some developments are taking place. For example, some securities settlement companies are taking initiatives to offer segregated pledge account services for bilateral fund raising and to reduce counter-party credit risk. The discussion also emphasised the need for centralised sharīʻah boards in the jurisdictions and the availability of more market makers for Islamic capital markets products.
A second panel discussion, Securitisation of Islamic Assets saw the participation of Khalid Howladar, Managing Director & Founder, Acreditus; Basheer Ahmad, Senior Manager, Dubai Financial Services Authority; Ismail Dadabhoy, Islamic International Financial Market (IIFM), Bahrain and Gregory Man, Norton Rose Fulbright Middle East, UAE.
The session focused on securitisation, product development and innovation in the Islamic capital market sector with a way to looking beyond the typical products for liquidity management. A panelist cited some innovative structures that had been developed by various market players, such as an issuance in the UAE which was structured on revenues generated from future ticket sales. A panelist emphasised the need for regulation of the Islamic finance industry to focus on substance rather than form as many sukūk are not particularly differentiated from conventional counterparts in risk and return characteristics.
Panelists also observed that the covered bond market stayed relatively robust during the global financial crisis, and that equivalent structures in the Islamic market using securitisations should be seriously considered by Islamic finance industry. Some of the main challenges in promoting this market concern the negative perception of securitisation post-crisis, as well as sharīʻah impediments to tranche structures and general investor appetite. Similarly, the “originate to distribute” securitisation model has not taken off in the Islamic finance industry, likely due to the challenge Islamic banks have in replacing assets on their balance sheets. The panel noted however, that for the GCC region, car financing is a substantial business for all banks, including Islamic entities. This could be the asset of choice to help grow securitisations.
More than 40 delegates market players, regulatory bodies, and international agencies attended the event.
www.ifsb.org.
The joint seminar was designed to encourage broad interaction among the delegates in exploring sharīʻah-compliant Islamic capital market instruments, in particular sukūk and securitisation of assets, to generate liquidity in the Islamic finance industry. At a time of tightened financial regulations, the seminar also discussed the readiness of Islamic financial institutions to meet the new liquidity requirements, while also highlighting opportunities available to various bodies (e.g. regulatory authorities, capital market players, legal firms) to support the industry’s liquidity management needs.
Ian Johnston, Chief Executive of the DFSA, discussed the need for the industry to think laterally to address the shortage of liquidity management tools at Islamic institutions, including consideration for assets in adjacent markets.
“The forum aimed to address the very real challenges around the shortage of liquidity management tools that institutions continue to face, with some relying primarily on cash and central bank placements. It was encouraging to see such active engagement and innovative thinking by the practitioners over the course of the day’s programme.”
Zahid ur Rehman Khokher, Acting Secretary-General of the IFSB, noted that “liquidity management has been a long pressing concern in the Islamic financial services industry”, adding that “these difficulties also present opportunities for ‘exciting innovations’ in the industry amidst an evolving global regulatory framework”.
Zahid noted the slowdown in corporate sukūk issuances over the previous four years but also noted a tightening in spreads between sukūk and bond pricing, with some recent issuances even being priced at a discount to their conventional counterparts. He also reiterated the importance of promoting securitisation of assets by Islamic financial institutions to aid liquidity, a move which has been recommended in several IFSB standards and other publications.
The half-day Joint Seminar was chaired by Prof. Volker Nienhaus, University of Bochum, Germany.
The first panel discussion on the role of sharīʻah-compliant instruments in the Islamic capital market featured Dr Mohamed Damak, Senior Director, Global Head of Islamic Finance, S&P Global Ratings, Moosa Tariq Khoory, Head of Sharīʻah, Dubai Islamic Bank, Debashis Dey, Partner, White & Case, UAE and Mohamed Dagher, Manager and Head of Account Management (Middle East, Africa & CIS), Euroclear Bank SA/NV, UAE.
The panel offered insight into sukūk instruments and the Islamic capital market developments from the viewpoint of their respective fields. A panelist mentioned that there is expected to be about US$70 billion of new issuances during 2017; however this is not enough to keep up with the projected growth of the Islamic finance industry as demand is much higher. While there have been some new sovereign issuances recently, the added complexity of structuring sukūk is a disincentive for governments wishing to raise capital quickly. To resolve these challenges, the industry needs more standardisation in terms of both legal documentation and sharīʻah interpretations. In this respect, the IFSB’s new standard on Disclosure of Islamic Capital Market Products (IFSB-19) can help the industry to enhance harmonisation in the sukūk market.
In terms of developing the liquid markets for Islamic finance industry players and offering them high quality liquid assets, the role of sovereign and central bank sukūk issuances was highlighted, as it will simultaneously promote sharīʻah-compliant money markets and support the availability of sharīʻah-compliant lender of last resort facilities to Islamic banks, a facility which is not always available in most jurisdictions. Similarly, secondary market trading in the sukūk market needs to be promoted through various incentives and infrastructure development.
The panelists also observed that from a structuring perspective, there is a small volume of assets which are readily available for securitisation in a sharīʻah-compliant manner. The lack of suitable sharīʻah-compliant alternatives to a repo (repossesion) market is an issue for the Islamic finance industry on which some developments are taking place. For example, some securities settlement companies are taking initiatives to offer segregated pledge account services for bilateral fund raising and to reduce counter-party credit risk. The discussion also emphasised the need for centralised sharīʻah boards in the jurisdictions and the availability of more market makers for Islamic capital markets products.
A second panel discussion, Securitisation of Islamic Assets saw the participation of Khalid Howladar, Managing Director & Founder, Acreditus; Basheer Ahmad, Senior Manager, Dubai Financial Services Authority; Ismail Dadabhoy, Islamic International Financial Market (IIFM), Bahrain and Gregory Man, Norton Rose Fulbright Middle East, UAE.
The session focused on securitisation, product development and innovation in the Islamic capital market sector with a way to looking beyond the typical products for liquidity management. A panelist cited some innovative structures that had been developed by various market players, such as an issuance in the UAE which was structured on revenues generated from future ticket sales. A panelist emphasised the need for regulation of the Islamic finance industry to focus on substance rather than form as many sukūk are not particularly differentiated from conventional counterparts in risk and return characteristics.
Panelists also observed that the covered bond market stayed relatively robust during the global financial crisis, and that equivalent structures in the Islamic market using securitisations should be seriously considered by Islamic finance industry. Some of the main challenges in promoting this market concern the negative perception of securitisation post-crisis, as well as sharīʻah impediments to tranche structures and general investor appetite. Similarly, the “originate to distribute” securitisation model has not taken off in the Islamic finance industry, likely due to the challenge Islamic banks have in replacing assets on their balance sheets. The panel noted however, that for the GCC region, car financing is a substantial business for all banks, including Islamic entities. This could be the asset of choice to help grow securitisations.
More than 40 delegates market players, regulatory bodies, and international agencies attended the event.
www.ifsb.org.
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