More banks opt for Sukuk as a means of raising capital - IFN

More banks opt for Sukuk as a means of raising capital

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GLOBAL: Over the last two weeks, a number of major banks have come to the market stating their intentions to issue Sukuk for capital raising purposes. The banks, spread over various markets including Turkey, Europe and the Middle East, are continuing a trend from last year which saw significant issuances from Abu Dhabi Islamic Bank, with its US$1 billion Tier-1 perpetual Sukuk, Qatar Islamic Bank which issued US$750 million in Sukuk and Saudi Hollandi Bank with its US$373 million domestically-placed Sukuk. The most recent announcement this week came from Abu Dhabi-based Al Hilal Bank which intends to sell US$500 million-worth of Sukuk as part of its US$2.5 billion bond program. Other banks which have made similar announcements include Albaraka Turk Katilim Bankasi which is looking to issue Sukuk worth at least US$200 million before the end of this year or early next year, and Bank Asya with a TRY125 million (US$61.78 million) issuance in the fourth quarter. Qatar Central Bank also closed two Sukuk issuances this week with maturities of five years, totaling to QAR1 billion (US$274.46 million); while the most interesting deal to be announced so far is perhaps the upcoming Sukuk by one of the Eurozone’s largest banking entities, Societe Generale, which will launch a RM1 billion (US$302.69 million) Sukuk by the end of this year — making it the first French bank to issue in Malaysia. It is evident, from the spate of banks coming to the Islamic capital market that capital raising exercises are ramping up as part of the agenda to fulfill Basel III requirements. However, it also begs the question of why would banks choose to issue Sukuk over other usual funding sources such as Commodity Murabahah or using the bank’s own assets or financing portfolio as a means of raising capital. Speaking to Islamic Finance news, a Malaysia-based lawyer familiar with structuring Sukuk for banks looking to increase their capital, said: “The main reason banks issue Sukuk for capital raising is to gain a certain profile; and they are usually looking to signal something to the market such as the ability to obtain liquidity from that specific market. Banks such as Societe Generale for example, has chosen Malaysia as the jurisdiction to issue because the Malaysian market is generally more active in terms of trading compared to the Middle East markets in which investors usually hold the paper to maturity.” “The assets have to satisfy certain capital requirements and are usually meant for Tier-2 capital. Based on the upcoming Basel III requirements, banks are only allowed to derive funds from certain sources, and have to fulfill requirements such as being low risk, guarantee a certain level of returns, and pay out certain forms of redemption over a certain period. This however depends on central banks across different jurisdictions. In Malaysia for instance, Basel III is already embedded in the capital requirements for banks in Malaysia,” he added. Other banks that have announced their intentions to issue Sukuk this year but have not revealed a definitive timeline or amount as yet include Barwa Bank in Qatar, Russia-based VTB Bank, Qatar Islamic Bank and Al Baraka Islamic Bank.