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Islamic banks turning towards Basel III sukuks; Saudi ahead Total issuances raise $4.93 bln

According to this week’s “Global Sukuk Weekly Report” released by Kuwait Finance House Research Limited (KFHR), the gradual implementation of Basel III accords since Jan 1, 2013 has led to Islamic banks turning towards issuing Basel III compliant sukuk instruments in order to satisfy the revised capital standards. 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 $4.93bln in proceeds for seven different issuing banks. By domicile, Saudi Arabia accounts for 48% of the total Basel III sukuk outstanding; UAE 41% and most recently, Malaysian Islamic banks have begun to issue Basel III compliant sukuks and account for 11% 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 $1bln 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 $15.5bln (more than 30 times over-subscribed on the initial benchmark size) and with expected profit rate of 6.375%, 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 $1bln sukuk on 20th March which was also oversubscribed by more than 14 times. DIB’s sukuk was priced at an even tighter return of 6.25%.
Islamic banks in Saudi Arabia followed next with three issuances, each by Saudi Hollandi Bank (SAR2.5bln on 15th December 2013); Saudi British Bank (SAR1.5bln on 17th December 2013); and most recently National Commercial Bank (SAR5bln on 20th February 2014). In contrast to Basel III sukuks issued in UAE, Saudi banks targeted to shore up their Tier 2 capitalisation 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 28th February this year worth MYR200mln followed by a second tranche worth MYR150mln on 25th March.
The sukuks were priced at profit rates of 5.07% and 5.05% respectively. Maybank Islamic followed suit and issued MYR1.5bln Basel III Tier 2 sukuk on 7th April, priced at a lower return of 4.75%. 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 Shari’a compliant financial engineering which enables Islamic financial institutions to progress alongside their conventional counterparts.
To date, 59% of the volume raised has supported Basel III Tier 2 capital requirements while 41% has supported the AT1 capital. Issuers have utilised various Shari’a compliant structures including Mudarabah (67%), Hybrid/Combination (22%) and Murabahah (11%). 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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