What is International Islamic Financial
Market (IIFM) ?
IIFM is the international Islamic financial market’s organization focused on the Islamic
Capital & Money Market (ICMM) segment of the Islamic Financial Services Industry
(IFSI). Its primary focus lies in the standardization of Islamic financial products,
documentation and related processes at the global level.
IIFM was founded with the collective efforts of the Islamic Development Bank, Autoriti
Monetari Brunei Darussalam, Bank Indonesia, Central Bank of Bahrain, Central Bank of
Sudan and the Labuan Financial Services Authority (Malaysia) as a neutral and nonprofit organization.
Besides the founding members, IIFM is supported by its permanent member State
Bank of Pakistan as well as by a number of regional and international financial
institutions and other market participants as its members.
The main strength of IIFM is pooling of expertise from banks, legal, accounting
and other market participants who work together under the guidance of Shari’ah
scholars
1
What IIFM provides to the Industry?
Addressing the standardization needs of the industry & creating awareness
Universal platform to market participants through 'Global Working Groups' for the
development of Islamic Capital and Money Market
Shari’ah harmonization in documentation, products and processes
2
Documentation & Product Standardization
- Why Standardize?
 Reduces cost of evaluation and negotiation of documentation
 Provides balance and fairness
 Increases efficiency, liquidity and certainty
 Benchmark to provide a reference point
Example: Use of IIFM MATP documentation in SWIFT Message
Standardization
 Reduces the price divergence between Islamic transactions
and conventional transactions
3
Documentation & Product Standardization
– A Market Based Approach
 Standardization of existing practices





Review of market practices
Development with Industry consultation
Shari’ah guidance & approval
Legal environment & law reform
Enforceability
 Standardization through innovation





Market requirement & research
Consultation by industry experts & development
Shari’ah guidance
applicability/practicality
legal environment & law reform
4
Overview & Trends in the Global
Sukuk Market
Sukuk Emergence
2011 >
2010
2009
2002 >
2001
1990
1988
Sukuk Ruling
(The Fiqh
Academy of
the OIC )
Shell MDS
RM125
Million Sukuk
Issue (based
on BBA
structure)
Kumpulan
Guthrie $100
Million
Malaysian
International
Sukuk Issue
(Ijarah
structure)
Short-term
Ijarah Sukuk
by Central
Bank of
Bahrain
SOURCE: IIFM SUKUK ISSUANCE DATABASE
International
Sukuk
Issuances in
Bahrain,
Pakistan,
Indonesia,
UAE,
Germany,
Qatar, Saudi
Arabia
Sukuk
Issuance by
IDB
First
International
Sukuk issued
in Indonesia
KT Turkey
Sukuk Limited
$100 Million
Series of
Indonesian
Sovereign
Retail Sukuk
IFC Sukuk
$ 100 Million
GE Sukuk
$ 500 Million
PLUS Expressway
Berhad, Malaysia
$ 9.7 Billion
Sukuk
Saudi Arabian
Civil Aviation
Authority $ 7.2
Billion Sukuk
Khazanah
Nasional’s
offshore
denominated
Sukuk (Chinese
Yuan)
Qatar Central
Bank’s $ 9 Billion
Domestic Ijarah
Sukuk
Sukuk
issuance by
Japanese
corporate
Malaysia Global
Wakalah Sukuk
$2 Billion
International
Sukuk Issuances
Bahrain -$750 M
ADIB– $500 M
HSBC - $500 M
ADCB - $500 M
5
Overview & Trends in the Global Sukuk
Market
Total Global Sukuk Issuance
Sovereign, Quasi Sovereign & Corporate Issuances (All Currencies), Period 1 st Jan 2001 – 31st Dec 2011
10,244
2011
67,679
2,679
2010
43,392
7,000
2009
18,277
2,140
2008
16,457
13,859
2007
12,115
2006
3,413
2005
2,503
2004
1,680
2003
2002
1,130
241
2001
425
747
0
Domestic
International
Grand Total (US $ Millions)
35,028
17,919
International
8,767
Domestic
5,637
4,730
10,000
20,000
30,000
40,000
Amount in USD Millions
50,000
60,000
70,000
80,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Grand Total
747
241
4,730
5,637
8,767
17,919
35,028
16,457
18,277
43,392
67,679
218,875
425
1,130
1,680
2,503
3,413
12,115
13,859
2,140
7,000
2,679
10,244
57,189
1,172
1,371
6,410
8,140
12,180
30,034
48,887
18,597
25,277
46,071
77,923
276,064
SOURCE: IIFM SUKUK ISSUANCE DATABASE
6
Overview & Trends in the Global Sukuk
Market
Country-wise Breakdown of Total Global Sukuk Issuance by Volume
Sovereign, Quasi Sovereign & Corporate Issues – All Currencies (Jan 2001 – Dec 2011)
Country
Malaysia
UAE
Saudi Arabia
Sudan
Qatar
Bahrain
Indonesia
Pakistan
Cayman Islands
Kuwait
Jersey
Brunei Darussalam
USA
Turkey
UK
Singapore
Germany
Jordan
Japan
Gambia
Iran
Yemen
Grand Total
Number of Issues
2285
43
25
23
7
234
75
39
6
11
2
21
3
2
2
5
1
1
1
49
1
2
2838
SOURCE: IIFM SUKUK ISSUANCE DATABASE
Volume (US $ Million)
169,878
32,946
17,099
13,344
11,568
10,654
6,780
4,568
2,679
2,026
1,250
1,176
767
450
271
192
123
119
100
30
28
15
276,064
% of Total Value
61.54%
11.93%
6.19%
4.83%
4.19%
3.86%
2.46%
1.65%
0.97%
0.73%
0.45%
0.43%
0.28%
0.16%
0.10%
0.07%
0.04%
0.04%
0.04%
0.01%
0.01%
0.01%
100%
7
Overview & Trends in the Global Sukuk
Market
Breakdown of Total Global Sukuk Issuance by Issuer Status
Sovereign, Quasi Sovereign & Corporate Issues by Volume – All Currencies (Jan 2001 – Dec 2011)
Domestic Sukuk
Sovereign
USD 103,241
Million
47%
QuasiSovereign
USD 7,313
Million
3%
SOURCE: IIFM SUKUK ISSUANCE DATABASE
International Sukuk
Corporate
USD 37,125
Million
65%
Corporate
USD 108,322
Million
50%
Sovereign
USD 13,985
Million
24%
QuasiSovereign
USD 6,078
Million
11%
8
Overview & Trends in the Global Sukuk
Market
Structural Breakdown of Domestic Sukuk Issuance (% by Volume)
Sovereign, Quasi Sovereign & Corporate Issues – All Currencies (Jan 2001 – Dec 2011)
Mudaraba
USD 9,123
4%
Murabaha
USD 83,456
38%
Istisna‘a
USD 3,469
2%
Musharaka
USD 44,413
20%
Ijarah
USD 49,613
23%
Salam
USD 1,683
1%
Exchangeable
USD 408
0%
Investment / Al Istithmar
USD 8,978
4%
Bai' Al Tawarruq Principle
USD 49
0%
SOURCE: IIFM SUKUK ISSUANCE DATABASE
Wakalah
USD 2,125
1%
Hybrid
USD 2,283
1%
Bai' Al Inah Principle
USD 1,637
1%
Bai' Bithaman Ajil
USD 11,639
5%
9
Overview & Trends in the Global Sukuk
Market
Structural Breakdown of International Sukuk Issuance (% by Volume)
Sovereign, Quasi Sovereign & Corporate Issues – All Currencies (Jan 2001 – Dec 2011)
Ijarah
USD 25,168
44%
Mudaraba
USD 4,725
8%
Exchangeable
USD 6,190
11%
Murabaha
USD 1,243
2%
Hybrid
USD 2,854
5%
Musharaka
USD 9,364
16%
Al Wakalah Bel-Istithmar
USD 1,201
2%
SOURCE: IIFM SUKUK ISSUANCE DATABASE
Wakalah
USD 4,454
8%
Salam
USD 1,990
4%
10
Overview & Trends in the Global Sukuk
Market
Structural Developments
International Corporate Sukuk Issues
 2001 – 2005
 Ijarah (Dominant structure)
 2005 – 2008
 Musharaka, Mudaraba, Exchangeable, Convertible
 2008 – 2010
 Ijarah, Murabaha and Wakalah
 2010 – 2011
 Wakalah Bel Istithmar, Hybrid Structures
SOURCE: IIFM SUKUK ISSUANCE DATABASE
11
Overview & Trends in the Global Sukuk
Market
Sukuk Trends – Impact Due To Downturn
International Sukuk Issuance
 2007 - $ 13.8 billion
 2008 - $ 2.15 billion
 2009 - $ 7.5 billion
 2010 - $ 2.7 billion
 2011 - $ 10.3 billion
SOURCE: IIFM SUKUK ISSUANCE DATABASE
12
Overview & Trends in the Global Sukuk
Market
Developments in Sukuk Market (Post Crisis)
 Call back of a portion of Sukuk
 Dubai Islamic Bank $200million - Cash tender offer @ 88% of face value
 Sukuk Issuance based on Reverse Enquiry
 Monetary Authority of Singapore
 Domestic Retail Sukuk Issuance
 Indonesia
 Islamic Government Investment Securities Issuances
 State Bank of Pakistan
 Investment Sukuk Issuance
 Islamic Development Bank
 Fixed Rate of Profit Issuances
 Bahrain, Indonesia and IFC Sukuk
 Issuance in International Jurisdictions & Other Currencies
 National Bank of Abu Dhabi’s RM 500 million Sukuk & Khazanah Nasional’s SGD 1.5 billion Sukuk
13
Overview & Trends in the Global Sukuk
Market
Sukuk Defaults and Restructuring – Lessons from Corporate Issuance






Investment Dar (Kuwait)
East Cameron (US)
Golden Belt (Saudi Arabia)
Tabreed (UAE) $463 Million
IIG (Kuwait)
Tamweel (UAE)
14
Overview & Trends in the Global Sukuk
Market
Asset Based vs Asset Backed
 Are Sukuk holders investment pari pasu with other secured or unsecured
creditors?
 Do Sukuk holders have title transfer?
 In case of Real Estate, is property freehold?
15
Sukuk Standardization
 To encourage and increase market share of Asset Backed Sukuk
through standardization
 Development of the Concept Paper to establish market requirements
16
Hedging Requirements in Sukuk
 Islamic Banks retail portfolio mostly consist of fixed profit rate
assets on a Murabaha basis while liabilities to corporate
customers are on floating rate benchmarks
 Rate of Return mismatch in Assets & Liabilities require
protection against steep rise or fall in reference rates of
return
 Islamic Banks’ foreign currency exposures such as deposits,
import & export L/C’s, Sukuk etc.,
 The foreign currency exposures need to be managed to
avoid loss due to volatility in the international currency
markets
17
Sukuk - Rate of Return Hedging
Issue Date
10 Jan 2012
24 Nov 2011
22 Nov 2011
06 July 2011
06 July 2011
31 Oct 2010
25 Oct 2010
05 Oct 2010
01 Sep 2010
10 Feb 2010
07 Jan 2010
27 Nov 2009
24 Sep 2009
09 June 2009
14 May 2009
23 April 2009
16 March 2009
25 Feb 2009
13 Sep 2007
05 June 2007
12 March 2007
29 Sep 2006
02 June 2006
11 June 2005
Issuer
Saudi Arabian Civil Aviation Authority
Abu Dhabi Islamic Bank
Government of Bahrain
Government of Malaysia
Government of Malaysia
Abu Dhabi Islamic Bank, UAE
Islamic Development Bank
Qatar Islamic Bank
Celcom Transmission Berhad, Malaysia
Government of Indonesia
Dar Al Arkan, Saudi Arabia
General Electric US
Government of Bahrain
Government of Bahrain
Government of Malaysia
Government of Indonesia
Panerbangan Malaysia Berhad, Malaysia
Government of Indonesia
Government of Malaysia
Silterra Malaysia Sdn. Berhad, Malaysia
Rantau Abang Capital Berhad, Malaysia
Khazanah Nasional Berhad, Malaysia
Aaber Petroleum Investment Company, UAE
Islamic Development Bank
SOURCE: IIFM SUKUK ISSUANCE DATABASE
Issuing
Currency
SAR
USD
USD
USD
USD
USD
USD
USD
RM
IDR
USD
USD
BHD
USD
RM
USD
RM
IDR
RM
RM
RM
USD
USD
USD
Amount
(USD Millions)
7200.00
500.00
750.00
800.00
1200.00
750.00
500.00
750.00
572.00
862.00
450.00
500.00
437.80
750.00
1420.80
650.00
405.80
464.50
1060.61
529.00
606.06
750.00
460.00
500.00
Issue Type
Sovereign
Corporate
Sovereign
Sovereign
Sovereign
Corporate
Quasi-Sovereign
Corporate
Corporate
Sovereign
Corporate
Corporate
Sovereign
Sovereign
Sovereign
Sovereign
Quasi-Sovereign
Sovereign
Sovereign
Corporate
Corporate
Corporate
Corporate
Quasi-Sovereign
Rate of Return per
annum
2.50 %
3.78 %
6.27 %
4.65 %
2.99 %
3.75 %
3.55 %
3.86 %
5.50 %
8.70 %
10.75%
3.4%
3.75 %
6.25 %
5.00 %
8.8 %
3.85 %
12.00 %
3.58 %
3.90 %
4.10 %
5.07 %
6.89 %
3.74 %
18
Sukuk - Rate of Return Hedging
Dar Al-Arkan – Sukuk Issuance & Profit Swap Facts
 Dar Al Arkan US$ 450 million Sukuk
 Largest Saudi Real Estate Developer
 Fixed Profit Rate of 10.75% p.a.
 Tenor 5 years (Feb 2010 to Feb 2015)
 US$ 225 million Profit Swap (fixed to floating)
 Cost saving of 280 bp (3 month floating rate 7.95%)
Source: www.arabianbusiness.com/dar-al-arkan-issues-450m-sukuk-at-11-source-27731.htm
19
Collateralization & Sukuk
 IIFM Reference Paper on I’aadat Al Shira’a (Repo Alternative) and
Collateralization published on 28th July 2010
 Purpose
 The Reference Paper aims to provide general information on the
concept, operational mechanism and uses of conventional repurchase
agreements (known as Repo or Sale and Repurchase agreements) and
explore the possibilities for I’aadat Al Shira’a (repurchase) as an
alternative to Repo
 The aim is to provide for the Islamic financial institutions, another tool
to effectively manage its liquidity as well as to help it finance its
inventory of Asset, Sukuk and equities
20
Collateralization & Sukuk
Collateralization Prospects in Islamic Finance
Institutions may initiate this concept which will give similar results as those
achieved by a repo. Moreover, this concept will allow Islamic financial
institutions to raise cash to fund the inventory while providing the cash
investor a return which is further comforted in form of collateral
Further efforts are being initiated by IIFM and several bilateral trades
between banks are being done to test the product
21
Collateralization & Sukuk
Collateralized Product – Utilization of Sukuk
In order to make use of parties Sukuk portfolios and to initiate the process while further research
and deliberation on finding an ideal ‘IS’ structure may continue, the working team is of the view
that a collateralized structure is one of the options which perhaps can be initiated now given the
industry’s urgent requirement for a workable liquidity management tool.
The proposal is to make use of Sukuk, which are currently not utilized in a bank’s portfolio, through
either a Murabaha or Wakalah arrangement. Since Murabaha is more developed and widely used,
the working team is of the view that the following proposed structure may be initiated in various
jurisdictions so that not only do funds remain within the Islamic system but the required legal
procedures can be managed at the jurisdiction level (the suggestion is to seek required legal
changes in OIC countries to facilitate the process).
Sukuk collateralization through a Wakalah arrangement is another option which, if required, can
be further developed by the IIFM working team if requested by the industry.
22
Collateralization & Sukuk
Issues for Consideration
1. Taking Security: For this structure to be practical, it would need to be possible to
take security over the securities quickly, effectively and robustly. In addition it needs to
be possible for Party A to re-hypothecate the securities over which Party B has granted
security.
2. Securities used as security for the obligation to pay Deferred Purchase Price: It is
presumed that the securities used as security will be limited to Shari’ah compliant
securities.
3. Margin Maintenance: The margin maintenance methodology also needs to be
resolved and again needs to be quick, effective and robust. Easiest form would be
to add or return Sukuk depending on collateral level agreement
Continued…
23
Collateralization & Sukuk
Issues for Consideration (Continued…)
4. Broker Credit Risk: The parties will be taking a credit risk on the commodity broker
in respect of its obligations. However, this is similar to standard commodity
Murabaha documentation.
5. Re-hypothecation: In conventional repo, the buyer has an ability to make use of the
repo’d securities in its own business, which adds to the economic value of the repo
to the buyer. How to replicate this in Shari’ah complaint way needs to be
determined. Potentially Title Transfer Agreement may achieve the desired result.
6. Accounting Treatment: The applicable accounting treatment would need to be
clarified.
24
Collateralization & Sukuk
IIFM may put together standard product guidelines and required documentation for
Collateralized Murabaha where Islamic Custodian Bank or Clearing Company may
provide the required services for local market.
Based on findings and as recommended in the reference paper, institutions are using
this structure. Recently ADIB and NBAD made an announcement on entering into
Islamic repo using this structure.
The standard documentation for this product will be:
1) Guidelines on Product & Document
2) Collateralized Murabaha Agreement
3) Pledge Agreement
4) “IS” Global Master Agreement
5) Collateral Management Document & Client Service Documents
25
Collateralization & Sukuk
Next Steps
 Collateralized Product Consultative meeting Q1 2012
26
Thank You
www.iifm.net