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Islamic banks turning toward Basel III sukuk

Saudi ahead with issuances at $4.93 billion

JEDDAH – The gradual implementation of Basel III accords since Jan. 1, 2013 has led to Islamic banks turning toward issuing Basel III compliant sukuk instruments in order to satisfy the revised capital standards, “Global Sukuk Weekly Report” released by Kuwait Finance House Research Limited said.

Since the issuance of the world’s first Basel III compliant sukuk in November 2012, Islamic banks in countries including the United Arab Emirates (UAE), Saudi Arabia and Malaysia have issued such innovative sukuk instruments.

To date, a total of eight Basel III compliant sukuks have been issued raising $4.93 billion in proceeds for seven different issuing banks. By domicile, Saudi Arabia accounts for 48 percent of the total Basel III sukuk outstanding; UAE 41 percent and most recently, Malaysian Islamic banks have begun to issue Basel III compliant sukuks and account for 11 percent outstanding.

The world’s first Basel III compliant sukuk was issued in November 2012 by Abu Dhabi Islamic Bank (ADIB) in UAE. The issuance was worth $1 billion and was compliant with Basel III’s additional Tier-1 (AT1) capital requirements. This issuance generated an overwhelming response from the investors — an order book of $15.5 billion (more than 30 times over-subscribed on the initial benchmark size) and with expected profit rate of 6.375 percent, the lowest ever coupon for an instrument of this type.

Encouraged by ADIB’s performance, Dubai Islamic Bank (DIB) followed suit with a similar Basel III AT1-compliant $1 billion sukuk on March 20 which was also oversubscribed by more than 14 times. DIB’s sukuk was priced at an even tighter return of 6.25 percent.

Islamic banks in Saudi Arabia followed next with three issuances, each by Saudi Hollandi Bank (SR2.5 billion on Dec. 15, 2013); Saudi British Bank (SR1.5 billion on Dec. 17,  2013); and most recently National Commercial Bank (SR5 billion on Feb. 20,  2014). In contrast to Basel III sukuk issued in UAE, Saudi banks targeted to shore up their Tier 2 capitalization ratios and all three sukuks issued were compliant with Basel III’s Tier 2 capital requirements. Furthermore, while UAE’s sukuks were issued in $, all three Saudi Basel III sukuks have been issued in Saudi Arabian riyals.

Malaysian banks have only recently begun to tap the Basel III sukuk market and AmIslamic was the first Malaysian Islamic bank to issue a Basel III compliant sukuk meeting Tier 2 requirements.

In addition, AmIslamic was the world’s first to utilise the Shari’a compliant contract of Murabahah for structuring this sukuk. AmIslamic issued its first Tier 2 tranche on February 28 this year worth MYR200 million followed by a second tranche worth MYR150 million on March 25.

The sukuks were priced at profit rates of 5.07 percent and 5.05 percent respectively. Maybank Islamic followed suit and issued MYR1.5 billion Basel III Tier 2 sukuk on April 7, priced at a lower return of 4.75 percent. Maybank Islamic’s sukuk is rated better as AA1 by Ratings Agency Malaysia (RAM) as compared to AmIslamic which is rated AA3. Public Islamic and RHB Islamic have also announced their Basel III compliant Tier-2 sukuk and these are in the pipeline for issuance this year.

Overall, sukuks are now playing an instrumental role in addressing the liquidity and capital adequacy needs of Islamic banks as stipulated by the Basel III accords. Basel III sukuk represent a milestone development in Shariah compliant financial engineering which enables Islamic financial institutions to progress alongside their conventional counterparts.

To date, 59 percent of the volume raised has supported Basel III Tier 2 capital requirements while 41 percent has supported the AT1 capital. Issuers have utilized various Shariah-compliant structures including Mudarabah (67 percent), Hybrid/Combination (22 percent) and Murabahah (11 percent). Moving forward, more Islamic banks globally are expected to issue Basel III compliant sukuks which will further fuel the momentum in the global sukuk market.

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