Tuesday, May 20, 2014

Basel III-compliant Sukuk, a catalyst for the global Sukuk market


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GLOBAL: Over the past 16 months, since the implementation of Basel III in January 2013, a total of eight Basel III-compliant Sukuk issuances have been made. Auctioned by seven different issuing banks across Malaysia, Saudi Arabia and the UAE, the deals raised approximately US$4.93 billion.

According to KFH Research, the gradual implementation of Basel III accords has led Islamic banks to turn towards Basel III-compliant Sukuk instruments to satisfy the revised capital standards. The research arm of Kuwait Finance House expects more Islamic banks to come to the market with Basel III-compliant issuances.

The first Sukuk instrument structured to comply with Basel III standards were issued by Abu Dhabi Islamic Bank (ADIB) in November 2012. The US$1 billion Sukuk was compliant to Basel III’s additional Tier 1 capital requirements and generated an overwhelming response from the investors. The deal was more than three times oversubscribed on the initial benchmark size at an orderbook of US$15.5 billion, with an expected profit rate of 6.37% – the lowest ever coupon for an instrument of this type.

ADIB’s Sukuk success spurred others to follow suit. Financial institutions which have issued Basel III-compliant Sukuk include: Dubai Islamic Bank, Saudi Hollandi Bank, Saudi British Bank, National Commercial Bank, AmIslamic Bank, Maybank Islamic and most recently, RHB Islamic. Additionally, Public Islamic Bank has also jumped onto the bandwagon announcing its upcoming Basel III-compliant Tier 2 Sukuk issuances this year.

Based on KFH Research’s findings, out of the US$4.93 billion outstanding Basel III Sukuk, 59% was issued in accordance to Basel III's Tier 2 capital requirements, while the other 41% was raised complying with the additional Tier 1 capital requirements. Various structures were utilized by issuers, the most preferred being the Mudarabah structure (67%), followed by hybrid structures (22%) and the Murabahah structure (11%).

Sukuk currently play an instrumental role in addressing the liquidity and capital adequacy needs of Islamic banks as stipulated by the Basel III accords. Basel III-compliant Sukuk issuances is believed to be a significant milestone in the development of Shariah compliant financial engineering which will fuel the momentum of the global Sukuk market.


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