G20 governments look into infrastructure sukuk

Roads and bridges could be the next big leap for the sukuk market, says ratings agency Fitch.

OECD Secretary General Angel Gurria casts his shadow on the podium as he speaks during a news conference in the G20 finance ministers and central bank governors meeting in Istanbul on February 9, 2015. Reuters

Roads and bridges could be the next big leap for the sukuk market, a major ratings agency has said.

G20 governments aim to introduce infrastructure sukuk, Sharia-compliant products used to finance the construction of major public investment works, say analysts at Fitch, the ratings agency, in what could be a major boost for the asset class.

A G20 meeting in Istanbul last month added infrastructure sukuk to the body’s regular agenda, and instructed regulators to study ways to increase sukuk issuance.

The Asian Development Bank is also planning to provide partial credit guarantees and technical assistance to sukuk issuers, AFP reported, while the Islamic Development Bank has also promised technical assistance.

“If the initiatives from the G20, ADB and IDB really materialise in terms of the investment infrastructure – then the potential is really massive due to the expected capital expenditure spending in these high-growth countries,” said Bashar Al Natoor, the global head of Islamic finance at Fitch.

Sukuk are debt instruments, which must be backed by a particular asset – this means that they are ideally suited to serve large-scale project financing needs.

Western governments have been moving away from directly financing infrastructure construction over the past few decades, with many preferring to attract private capital, or to form public-private partnerships.

This would be good news for a burgeoning market where high-quality, low-risk, liquid securities of large value are uncommon.

Many Islamic banks do not have big enough balance sheets to issue large sukuk with distant maturity dates.

Standardisation has long plagued Islamic issuers, however, with a large variety of possible sukuk structures creating uncertainty for investors and issuers alike.

“Finding a legal structure that would be acceptable to governments, investors and the sukuk’s Sharia boards” would be a major challenge, according to Mr Al Natoor.

Sukuk often face legal issues that do not afflict their conventional counterparts.

Conflict between the legal environments of issuer jurisdictions, and the terms of a sukuk, can be especially problematic in the case of a default.

Many sukuk also involve multiple transfers of an asset, which can make underlying assets subject to repeated instances of taxation.

Governments can opt for new structures to solve many of these problems, but this will take time, Mr Al Natoor said.

Last year there was a wave of sovereign sukuk issuance from countries outside the Islamic world.

The UK, Luxembourg and Hong Kong all issued Sharia-compliant securities, with Hong Kong issuing $1 billion in Islamic bonds in a listing on the Nasdaq Dubai last September.

“Growing government support for Islamic finance, increasing acceptance of sukuk and large investment and financing requirement in the GCC, Turkey, Asia and other emerging markets projects” will all boost the prospects for infrastructure sukuk issuance, Fitch said.

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