Dubai: In recent years Multilateral Lending Institutions (MLIs) are showing interest in using Islamic Finance to fund some of their programmes.
Until a few years ago with the exception of the Islamic Development Bank Group (IDB), interest of MLIs in Islamic finance was limited. The International Finance Facility for Immunization (IFFIm), which focuses on raising funds for the immunisation and vaccine procurements programmes was the first among global MLIs to tap the sukuk market twice. In 2014, the IFFIm issued a $500 million (Dh1.8 billion) sukuk that was oversubscribed by 1.4 times. This was followed by another sukuk for $200 million that attracted similar interest from investors, with an oversubscription of 1.6 times.
In 2015, the International Finance Corporation (IFC) also tapped the market through a $100 million sukuk after a first issue in 2009, with underlying assets consisting of private-sector projects in the Middle East and North Africa.
“Although the oversubscription rates are somewhat lower for these MLIs’ sukuk than for some governments or private sector sukuk issued over the past few years, we consider that access to the sukuk market could offer MLIs the opportunity to diversify their funding bases and tap liquidity that is not allowed to go the conventional route,” said Mohammad Damak, Standard & Poor’s Global Head of Islamic Finance.
S&P estimates the overall size of the investor base looking to invest in Sharia compliant instruments such as sukuk at about $500 billion worldwide. With the IFFIm sukuk, for instance, around 65 per cent of the investors were based in the Middle East and financial institutions made up three-quarters of the total.
With Basel III deadlines approaching for some Islamic finance core markets and the chronic lack of high quality liquid assets (HQLA) in the industry, sukuk issues by MLIs might attract some interest. Most MLIs have high credit ratings (‘AA’ and above) and benefit from HQLA eligibility under the Basel III liquidity coverage ratio. “With the significant role global MLIs will have to play in achieving the SDGs and given the compatibility of some of their operations with the principles of Islamic finance, we expect to gradually see more sukuk issuance from global MLIs in the next few years,” said Damak.
Modest contribution
Islamic finance’s contribution to financing some SDGs will likely remain modest. This is mainly because of the industry’s small size compared with the overall financial system, even in the economies of OIC member countries. S&P estimates Islamic finance assets were worth about $2.1 trillion at year-end 2015, compared with more than $7 trillion of cumulative GDP of the economies of the OIC countries at the same date. Similarly, the agency projects that sukuk issue volumes will reach $50 billion-$55 billion in 2016, representing only a negligible fraction of conventional issues globally. Assuming the industry continues its efforts to improve standardisation and reduce the usual time frame for issuing sukuk, Islamic finance could attract new issuers such as MLIs or governments that might see the industry as a way to diversify their investors’ base and fund their SDG agendas.
