While the sukuk or the Islamic bond market has been growing rapidly with increasing number of large and liquid issues, the depth of the financial market, especially in the GCC, is not at the level of the developed countries or at a level some global fund managers would ideally like it to be. For that to happen, global asset manager Franklin Templeton Investments believes that the policy makers should concentrate their efforts at developing more non-banking financial services.
While acknowledging that liquidity has been on an improving trend, Mohieddine Kronfol, chief investment officer, Global Sukuk and Mena Fixed Income at Franklin Templeton Investments, said he would want policy makers in the Gulf and Malaysia to do more to promote money, debt and sukuk markets to have more liquidity going forward.
“Basically, we would like to see, the institutional side of things to develop further [and] that includes pension funds, insurance companies, asset management companies — all of them,” said Kronfol last week in Dubai at the launch of three Sharia complaint mutual funds which are on a daily subscription cycle. “You need to pass legislation and really support them.”
Annual global sukuk issuance at the end of 2012 stood at $200 billion, with 60 per cent coming out of Malaysia. In the UAE last week, there was the listing of the $1 billion Emirates Airline sukuk. Earlier in January, Emirates had issued a $750 million amortising bond but it had received a lukewarm response due to weak market sentiments at the time.
Kronfol bellieves that the sukuk market is certainly characterised by a lot of innovation and a lot of growth and that growth is coming from this part of the world but as well as from Asia and Europe. Different countries see the value and they are seriously thinking about Islamic finance playing a constructive role in their respective financial services or market infrastructure.
While it’s fair to say that there’s more demand than supply, the liquidity situation should better be characterised as “fluid”, according to Kronfol.
“If you have crisis tomorrow in Europe, that may not be the case. Confidence is something that can change,” he said.
Broadly speaking, the fixed income asset manager added, the underlying fundamentals of the Islamic market are supportive. “It’s growing, there’s money coming into it and that generates quite a bit of demand and I think a lot of issuers are trying to tap into that.”On the supply side, Kronfol would like to see a lot more issuance from the non-banking companies. “I am talking about regular issuance that will help build the yield curve and foster a culture of credit as well as bankruptcy regimes — all of those things should be high on the agenda.”
Islamic endowments could play a role
Islamic endowments such as Awqaf, in a certain sense, are trusts and could be considered as the Islamic equivalent of pension funds. The hope among asset managers is that, over time, with the right policy in place they would be ready to invest in global issues.
“Whether it is pension funds or Awqaf, you need to see more work on the policy framework that really gives these investors the right framework to invest,” said Mohieddine Kronfol, chief investment officer, Global Sukuk and Mena Fixed Income at Franklin Templeton Investments. “I think when they are ready—and we expect them over time to make investments—they should be seeking out the type of global products [Shariah compliant mutual funds] that we are bringing to the table.”
In countries where the government has taken control over Awqafs, reforms haven’t taken place for decades. “If those who are starting to reform the frameworks surrounding Awqafs and they started introducing modern management techniques and standards, you would think that they would start to reach out to outside managers,” Kronfol said. “But this is certainly something that is probably a few years down the line.”