Forum explores role of Sukuk in finance of large projects

Leading a Power Table discussion at the World Islamic Infrastructure Finance Conference (WIIFC) in Qatar, Abdi pointed out that infrastructure finance in the GCC is still driven by government expenditure. 'While the spending on infrastructure is growing quickly year-on-year, Islamic finance's share continues to decrease. Sukuks may offer the answer for several reasons. There is a growing awareness, interest and appetite for Sukuks among non-Muslims, governments are supportive, and Sukuks offer structural flexibility; they offer better asset/liability management as well as refinancing options.'

According to Abdi, although primary Sukuk issuance has shown growth, the use of Sukuks in project finance has been limited, as has the use of debt in capital markets in the Middle East and North Africa. Primary Sukuk issuance is still dominated by corporate and government borrowing.

Abdi raised issues that may limit the continued growth of Sukuk: 'Borrowers still have easier access to commercial bank debt. There are legal issues in the larger GCC markets and primary market pricing may not be reflective of project risk. The tendency of investors is to buy and hold which means that secondary market activity is limited and lacks depth. Although a lot is said about the level of innovation in the wider Islamic financial industry, I sometimes question whether this innovation is altering simply the format of a product, how much real, substantial innovation is there?'

The optimal solution according to Mr. Abdi is to encourage more direct access to capital markets. This could be done by encouraging more primary issues which will lead to increasing depth. More 'true sale' securitizations will reflect the true default risk longer tenures will build an effective Sukuk yield curve which will enhance transparency and increase the appetite for Sukuk. There is a need to address risk weightings which will result from improved regulatory stimuli. Finally a standardization of documentation which is already happening will reduce the time taken to market.'

Among the other panelists on the WIIFC Power Table were Douglas Clark Johnson, CEO Calyx Financial LLC; Terry Newendorp, Chairman and CEO, Taylor-Delongh; Tadashi Maeda, Director General: Energy and Natural Resources Finance, Japan Bank for Internal Cooperation; and Khalid Bucheeri, COO, Liquidity Management Centre.