Islamic finance body says first sukuk to debut within months

KUALA LUMPUR Wed Oct 3, 2012 7:00am EDT

KUALA LUMPUR (Reuters) - International Islamic Liquidity Management Corp., backed by a group of central banks located mainly in Asia and the Middle East, will launch its first sukuk of $300 million to $500 million "in a matter of months", its chief executive said.

Kuala Lumpur-headquartered IILM, established last year, aims to issue short term sukuk, or Islamic bonds, to help sharia-compliant banks manage liquidity and create a liquid cross-border market for Islamic instruments.

Issuance of the first sukuk has been delayed. IILM has faced a big challenge to ensure it complies with laws in all of the 12 countries in which its members are, Chief Executive Officer Mahmoud AbuShamma told Reuters in an interview late Tuesday.

"It does not require an extreme amount of effort, but we're setting up a product that is ever-expanding and has many complexities," said AbuShamma, a former HSBC executive who launched Indonesia's first Islamic banking unit operated by a foreign bank.

He said that IILM is 85 percent prepared for the first issuance, and what remains to be worked out are "some highly technical issues."

"It's not our mandate to issue one sukuk and go off on a holiday, we should be manufacturing a continuous supply of it," he added.

Eventually, IILM will issue sukuk totaling more than $2 billion a year, AbuShamma predicted.

IILM members include monetary authorities in Indonesia, Iran, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Saudi Arabia, Sudan, Turkey and the United Arab Emirates as well as the Islamic Development Bank ISDBA.UL and the Islamic Corporation for the Development of the Private Sector.

TESTING THE MARKET

AbuShamma said IILM will initially focus on U.S. dollar-denominated sukuk, as central banks have already met the need for local-currency, short-term instruments.

"Because we are looking to issue at a regular pace, we first need to test the market. It's very critical to assess the engine itself, the capacity of the institution, the system and our processes to see if it is efficient and safe," he said.

The maiden sukuk will use an asset-backed leasing structure in line with an Islamic principle called al-Ijarah. It will aim to get high-quality ratings from international rating agencies, AbuShamma said.

"The pool of assets we're going to have will predominantly be sovereign assets from our member countries," said AbuShamma.

He added the sukuk will be distributed by a network of primary dealers, of which there will be up to two elected in each member's jurisdiction.

The first sukuk will be traded in a secondary market, which could pose fresh challenges as investors prefer to hold Islamic bonds until maturity instead of trading them.

"We have a lot of faith in the dealers, it will be their role to underwrite the issuance and create a secondary market," AbuShamma said.

(Editing by Niluksi Koswanage and Richard Borsuk)

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