LONDON – After much speculation and expectation about a debut sukuk launch last April 6, the announcement in Doha by the Governing Council of the International Islamic Liquidity Management Corporation (IILM) that it was merely launching a sukuk program has turned out to be somewhat of an anti-climax. The expectation is now that the IILM will eventually issue its debut sukuk in the third quarter of 2013 – a $500 million issuance.
Bankers have long past expressed their disappointment in the seeming inability of the IILM to get its act going since its establishment in October 2010 – that of issuing AAA-rated papers in a cross-border market to generate short-term liquidity management for the global Islamic finance industry. It was only the replacement of the inaugural CEO of IILM Mahmoud Abu Shamma by Dr Rifaat Abdel Karim, former Secretary General of the Islamic Financial Services Board (IFSB) a year ago, that the IILM has progressed to its current position.
But little did the powers that be on the IILM Governing Council, which is currently chaired by Abdulla Saoud Al-Thani, who is also the Governor of the Central Bank of Qatar (CBQ), anticipate the abrupt divestment from the IILM’s equity subscription by the Saudi Arabian Monetary Agency (SAMA) last Friday. SAMA together with Bank Negara Malaysia are the two largest founder equity subscribers of IILM at $10 million each.
In terms of the politics of global Islamic finance, this is an earthquake measuring some 6 to 7 points on the Richter scale.
But what impact the Kingdom’s departure will have on the future of the IILM remains a moot point. According to bankers, who wish to remain anonymous, there will be some damaging fallout, albeit that the biggest effect could be psychological.
The message the events of the last few days emits to the world is that the world of Islamic finance is disunited at the highest levels and that even petty disagreements could not be resolved on the basis of primus inter pares.
Whatever the reasons behind the Kingdom’s decision to leave the IILM, market sentiments remain strong that the Governing Council must re-engage with SAMA Governor Fahad Al Mubarak with the aim of getting Riyadh to rejoin the corporation. The reasons are manifold. The Kingdom is the single largest market for Islamic finance in terms of assets and liquidity. It is a member of the OIC, the Arab League and the G20, one of only three Muslim countries, the other two being Turkey and Indonesia.
Saudi Arabia’s departure brings the shareholding membership of the IILM to 10 countries and 2 multilaterals, with the total paid-up capital of $80 million and authorized capital of $1 billion however remaining unchanged. The Central Bank of Qatar (CBQ) and Bank Negara Malaysia (BNM) have each purchased additional shares in the IILM thus absorbing the SAMA shareholding. This means that the BNM’s equity share in IILM increase to $15 million and CBQ’s to $10 million.
IILM members include monetary authorities in Indonesia, Iran, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Sudan, Turkey and the United Arab Emirates as well as the Islamic Development Bank and the Islamic Corporation for the Development of the Private Sector.
“The launch of the highly-rated IILM Sukuk Program is a milestone for the IILM. It will be the first step toward creating a cross-border liquidity instrument for the International Islamic Financial Services (IIFS) industry. The IILM Sukuk will help to address the challenges that IIFS have been facing globally with regard to their need for highly rated financial instruments to manage their liquidity compared to their conventional counterparts”, said Chairman Abdulla Saoud Al-Thani.
The launch of the program is pursuant to the granting of an A-1 public rating by Standard & Poor’s Rating Services. But the Governing Council could not even bring themselves to give any indication as to the size of the program. A $500 million sukuk in September later this year is not going to even begin to address the cross-border liquidity management challenges that the Islamic finance industry is faced with.
In a statement, the IILM stressed that its short-term Sukuk Program with an A-1 short-term rating will be a significant milestone as it will be the first Shariah-compliant US dollar denominated short-term highly rated financial instrument in the market to be issued at maturities of up to one year; it will be a money-market instrument backed by sovereign assets in the form of sukuk; and it will have a multi-jurisdictional primary-dealer network which will facilitate distribution to investors worldwide.
“The Governing Council anticipates that there will be a strong response to the IILM Sukuk Program. The launching of this historic program and the obtaining of a public rating from an international rating agency marks the first step in the IILM’s achievement of its mandate,” the corporation added in the statement.
While this may be true, the real challenge is for the Corporation to get member countries to contribute qualifying highly-rated assets as the underlying for the sukuk issuances.
Several central bank participants at the launch of the IILM did express a ‘wait- and-see’ attitude as to the operational efficacy of the proposed IILM mechanism. Some were particularly concerned about the availability of a critical mass of AAA-rated papers, especially given that sovereigns through central banks would not donate assets directly but would only nominate entities to donate such assets.
As such, it will be interesting to see the asset compilation of the proposed debut IILM Sukuk in Third Quarter 2013.
Perhaps equally important is the fact that the IILM also signed signed a Memorandum of Understanding (MoU) with the Asian Development Bank (ADB) in Doha on Saturday to strengthen cooperation between the two organizations.
“The MoU will facilitate mutual cooperation and collaboration between the IILM and the ADB besides fostering the development of global cross-border Shariah-compliant liquidity management for institutions offering Islamic financial services (IIFS),” said the Chairman of the IILM Governing Council, Abdulla Saoud Al-Thani.
The collaboration with the ADB could see the issuance of a spate of short-term sukuk by the Asian multilateral under the IILM umbrella aimed at liquidity management enhancement of banks in member countries common to both organizations.
The ADB already has a collaboration with the Islamic Development Bank, a founder shareholder of the IILM, in a joint infrastructure and development fund which co-finances projects in member countries common to both.