Sovereign Sukuk as a Public Debt

Management Instrument

“Current Status, Developments and Key

Challenges”

The 8th Meeting of the COMCEC Financial Cooperation Working Group

Thursday, 30th March 2017, Crown Plaza Hotel, Ankara, Istanbul

Ijlal Ahmed Alvi

Chief Executive Officer

IIFM

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Contents

1. Sukuk Market Current Status

a) Total Global Sukuk Issuances (International & Domestic)

b) Total Global Sukuk Issuances Breakdown by Issuer Status

c) Total Global Sovereign Sukuk (International & Domestic)

d) Structural Breakdown of Sovereign Sukuk Issuances (Int’l & Domestic)

e) Country Wise Breakdown of Total Global Sovereign Sukuk Issuances

2. Sovereign Sukuk Market

a) Purpose of Key OIC Sovereign & Quasi Sovereign Sukuk Issuances

b) Landmark Sovereign Sukuk Issuances in 2016

c) New Entrants to Sovereign Sukuk Market (International & Domestic)

3. Key Challenges in Sukuk Issuances

4. Islamic Hedging & its Role in Sukuk Market Development

5. About IIFM

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Sukuk Market

Current Status

Total GLOBAL Sukuk Issuances (Jan 2001- Oct 2016)

– All Tenors, All Currencies, in USD Millions

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Total Domestic Sukuk issued – USD 669k Millions

Total International Sukuk issued – USD 176.8k Millions

5.988 3.723

11.852 13.859

2.210 7.166

4.098

9.084

20.269 23.305

27.390 20.880

27.024

13.227 10.286

21.755

36.182

22.127

30.904

49.027

84.490

117.331 112.565

80.570

39.813

50.759

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

90.000

100.000

110.000

120.000

130.000

140.000

150.000

Domestic

International

Total GLOBAL Sukuk Issuances (by Issuer Status)

(Jan 2001 - Oct 2016) – All Tenors, All Currencies, in USD Millions

19.264

115.772 104.244

735 8.855

27.432

1.900

16.019

73.755

11.324

152.108

314.475

0

50000

100000

150000

200000

250000

300000

350000

2001-2005 2006-2011 2012-2016 October

Corporate

IFI's

Quasi-Sovereign

Sovereign

5 years 6 years 5 years

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Total Global SOVEREIGN Sukuk Issuances (Jan 2001-Oct 2016)

– All Tenors, All Currencies, in USD Millions

4.750

480 309 350 3.050

19 3.750

7.847 9.000

7.508

3.803

7.450 6.574

6.528 7.450 10.287

21.818

34.052

64.015

79.245

81.767

64.170

23.174

30.511

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Domestic

International

Total Domestic Issued – USD429.6k Millions

Total International Issued – USD 48.3k Millions

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Structural Breakdown of Sovereign Sukuk Issuances

(Jan 2001- Oct 2016) All Tenors, in USD Millions

Sukuk Al Wakalah

2,463 (1%)

Bai' Bithaman

Ajil 22,122 (5%)

Hybrid Sukuk

1,738 (0%) Sukuk Al

Ijarah 74,402 (17%)

Sukuk Al Istisna'a

19 (0.004%)

Sukuk Al Mudharaba 4,519 (1%)

Sukuk Al Murabahah

298,066 (69%)

Sukuk Al Musharakah 19,582 (5%)

Sukuk Al Salam

6,678 (2%) Sukuk Al Wakalah ,

11,100 (23%)

Hybrid Sukuk ,

1,000 (2%)

Sukuk Al Ijarah, 34,161 (71%)

Sukuk Al Murabahah,

97 (0%)

Sukuk Al Salam ,

1,958 (4%)

Domestic Currency International Currency

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Total GLOBAL Sovereign Sukuk Issuances by Country

(Jan 2001- Oct 2016) – All Tenors, All Currencies, in USD Millions

ASIA & FAR EAST Number of Issues Amount USD Millions % of Total Value Bangladesh 4 37 0.01% Brunei Darussalam 124 7,950 1.66% Hong Kong 2 2,000 0.42% Indonesia 150 39,206 8.20% Iran 1 144 0.03% Malaysia 990 328,554 68.75% Pakistan 23 10,533 2.20% Singapore 3 164 0.03%

Total 1,297 388,588 81.31%

GCC & MIDDLE EAST Number of Issues Amount USD Millions % of Total Value Bahrain 348 21,425 4.48% Jordan 2 153 0.03% Oman 2 1,147 0.24% Qatar 15 18,117 3.79% Saudi Arabia 4 7,256 1.52% United Arab Emirates 16 10,722 2.24% Yemen 2 253 0.05%

Total 389 59,073 12.36%

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AFRICA Number of Issues Amount USD Millions % of Total Value Gambia 210 136 0.03% Ivory Coast 2 460 0.10% Nigeria 2 133 0.03% Senegal 2 445 0.09% South Africa 1 500 0.10% Sudan 27 19,248 4.03% Togo 1 245 0.05% Total 245 21,166 4.43%

EUROPE & OTHERS Number of Issues Amount USD Millions % of Total Value Germany 1 123 0.03% Luxembourg 1 220 0.05% Turkey 27 8,737 1.83% United Kingdom 1 340 0.07%

Total 30 9,420 1.97%

Grand Total 1,961 478,246 100%

Total GLOBAL Sovereign Sukuk Issuances by Country

(Jan 2001- Oct 2016) – All Tenors, All Currencies, in USD Millions

(cont…)

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Note: Figures for KSA and UAE sovereign Sukuk issuances also contain issuances by

quasi-sovereign/government related entities

Sovereign

Sukuk Market

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Purpose of Key OIC Sovereign

& Quasi Sovereign Sukuk Issuances

Malaysia (transport, power projects, monetary management, quasi

sovereign/government related entities funding needs)

Indonesia (emphasis on infrastructure projects )

Bahrain (generally monetary management)

Sudan (generally monetary management)

Qatar (generally monetary management)

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Purpose of Key OIC Sovereign

& Quasi Sovereign Sukuk Issuances (continued…)

United Arab Emirates (infrastructure and quasi sovereign/government

related entities funding requirements)

Pakistan (so far power projects and monetary management)

Turkey (generally monetary management)

Saudi Arabia (infrastructure and quasi sovereign/government related

entities funding requirements)

Brunei Darussalam (generally monetary management)

Landmark Sovereign Sukuk Issuances

in 2016

Government of Indonesia International Sovereign Sukuk (2 issues, USD 2.5

Billion)

Government of Bahrain International Sovereign Sukuk (USD 1 Billion)

Government of Malaysia International Sovereign Sukuk (2 issues, total USD

1.5 Billion)

Government of Turkey Domestic Sovereign Sukuk (2 Issues, total USD 1.3

Billion equivalent)

Government of Pakistan International Sovereign Sukuk (USD 1 Billion)

Government of Sharjah International Sovereign Sukuk (USD 500 Million)

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New Entrants to Sovereign Sukuk Market

(International Currency)

A total of 6 issues amounting to around USD 4 billion have come from new sovereign

countries, namely, UK, South Africa, Hong Kong and Luxembourg, in that chronological

order. Hong Kong has been the value leader among new sovereigns who issued an

inaugural Sukuk in 2014 and then tapped the Sukuk market again in May 2015.

SOVEREIGN ISSUER

ISSUE DATE

AMOUNT IN (USD MILLION)

TENOR CURRENCY OF ISSUE

STRUCTURE RATING BY S&P

Hong Kong 2014 2015

1,000 1,000

5 years 5 years

USD Wakalah Ijarah

AA+

Luxembourg 2014 220 5 years EUR Ijarah AAA

South Africa 2014 500 5.75 years USD Ijarah BBB

UK 2014 340 5 years GBP Ijarah AAA

Total 3060

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Africa has been a regular player in the Sukuk market since Sudan and Gambia started

meeting their domestic financing needs through Sukuk financing. Sudan is clearly the

value leader accounting for almost 95% of the dollar value of Sukuk issuance so far;

however, Gambia has been a regular issuer as well. Nigeria entered the market with two

domestic sovereign Sukuk in October 2013, one of them based on the Ijarah model and

the other on Murabahah, together amounting to USD133 million. In the most recent past,

the years 2014 - 2016, we have seen domestic debut sovereign issues from three African

countries, namely, Senegal, Ivory Coast and Togo. In case of Ivory Coast & Senegal the

jurisdictions have again tapped the Sukuk market in 2016 which is a welcome

development for geographical diversity of the Sukuk market.

SOVEREIGN ISSUER

ISSUE DATE AMOUNT IN (USD MILLION)

TENOR CURRENCY OF ISSUE

STRUCTURE

Ivory Coast 2015 2016

215 245

5 years 5 years

CFA-Francs CFA-Francs

Ijarah Ijarah

Togo 2016 245 10 years CFA-Francs Ijarah

Senegal 2014 2016

200 245

4 years 10 years

CFA-Francs CFA-Francs

Ijarah Ijarah

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New Entrants to Sovereign Sukuk Market

(Domestic Currency)

Key Challenges In Sukuk Issuances

1. Limited availability of tangible assets leads to over reliance on

certain Sukuk structures

2. Asset title transfer law in OIC countries particularly for

sovereign assets

3. Established conventional bond issuance process versus

Sukuk issuance process (Structuring, Documentation, Legal,

Pricing, Law Reforms etc)

4. Investor’s preference and risk appetite tilted towards balance-

sheet risk rather than direct risk on a tangible asset

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Key Challenges In Sukuk Issuances (continued…)

5. Tax Neutrality

6. Volume

7. SPV Role

8. Trust Law

9. Quasi Sovereign Sukuk Implicit and Explicit Government

Guarantee

10. Currency & Rate of Return risk mitigation

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Islamic Hedging and its Role in Sukuk Market Development

IIFM Hedging Standards

Tahawwut (Hedging) Master Agreement

Islamic Foreign Exchange Forward (IFX Forward)

Islamic Cross-Currency Swap (ICRCS)

Islamic Profit Rate Swap (IPRS)

Credit Support Deed for Cash Collateral Variation Margin

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About International Islamic Financial Market (IIFM)

IIFM is a standard-setting body of the Islamic Financial Services Industry (IFSI) focusing on standardization of Islamic financial contracts and product templates relating to the Capital & Money Market, Corporate Finance and Trade Finance segments of the IFSI.

IIFM plays its role in market unification by developing best practices at the global level and achieving Shari’ah harmonization through its efforts for creation of a robust, transparent and efficient Islamic finance industry. IIFM also contributes in creating industry awareness by organizing specialized seminars and technical workshops as well as publishing research reports.

IIFM was founded in 2002 by the collective efforts of the Islamic Development Bank, Autoriti Monetari Brunei Darussalam (formerly Ministry of Finance Brunei Darussalam), Bank Indonesia, Bank Negara Malaysia (delegated to Labuan Financial Services Authority), Central Bank of Bahrain (formerly Bahrain Monetary Agency) and the Central Bank of Sudan as a neutral and non-profit organization. Besides the founding members, IIFM is also supported by certain regulatory and government bodies such as Indonesia Financial Services Authority, Dubai International Financial Centre Authority, Nasdaq Dubai, State Bank of Pakistan, The National Bank of Kazakhstan, and by a number of international and regional financial institutions active in Islamic finance as well as other market participants.

IIFM was formed under Royal Decree No (23) Year 2002 of the Kingdom of Bahrain.

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Shukran

Wassalamu ‘Alaikum

International Islamic Financial Market (IIFM)

Office 72, 7th Floor, Zamil Tower

P.O. Box: 11454, Manama, Kingdom of Bahrain

Tel: +973 17500161 Fax: +973 17500171

Email: info@iifm.net Website: www.iifm.net

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