* Packages of long-term sukuk back short-term programmes
* Bahrain's LMC running a programme, IILM plans one
* Nigerian central bank guidelines cover them
* But multiple approvals by sharia boards raise costs, time
* IILM programme delayed by regulatory preparations
By Bernardo Vizcaino
DUBAI, June 27 Interbank lending programmes that
securitise sukuk are testing the Islamic finance industry's
ability to digest complex financial products.
Some firms are starting to combine sukuk, using portfolios
of long-term issues to back short-term certificates. This lets
them create liquidity programmes that address a major weakness
of the Islamic finance industry: a persistent shortage of money
market instruments needed by Islamic banks to manage their
Such is the approach used by Liquidity Management Centre
(LMC), a Bahrain-based wholesale Islamic bank.
"The programme is very simple: we have an SPV (special
purpose vehicle) where we book all the sukuk. The SPV is fully
backed by sukuk of different tenors and rates," said Ahmed
Abbas, LMC's chief executive.
The rising number of sukuk issuers globally is making it
easier to manage the programme, and LMC plans to double its size
in a year's time from about $120 million now, Abbas added.
"As we speak, we are reviewing our offering circular. We
will have more options in terms of tenors, rates and liquidity."
He added, "As we see more issuers come to the market, the
programme can grow. This helps in geographical distribution, the
number of issuers - it helps on many levels."
A similar format is to be used by the Malaysia-based
International Islamic Liquidity Management Corp (IILM), which
plans to launch a Luxembourg-domiciled programme of its own.
"All of the assets will be either sovereign,
sovereign-linked or supranational assets," said Eric Gretch,
senior director at Standard and Poor's, which rates the
"Basically you have long-term sukuk assets backing
short-term certificates, all of which will be sharia-compliant."
The IILM programme was originally to launch by the end of
this month; that timetable is now expected to slip because more
time is needed to resolve regulatory aspects, according to a
source familiar with the programme. But the IILM scheme could
encourage others to consider its approach.
"We expect other similar programmes to come to market in
attempts to replicate this unique structure," Gretch said.
If these programmes gain traction they could open the door
to additional layers of securitisation, not only in Islamic
finance's core markets in the Middle East and Southeast Asia,
but perhaps further afield.
For example, Nigeria is only just starting to develop
Islamic finance; its cocoa-producing Osun State plans to issue
the first sukuk in the country, a 10 billion naira ($62
million), seven-year issue, by the end of July.
But the Nigerian central bank issued guidelines in December
for asset-backed securities that would use IILM certificates as
collateral - essentially creating three layers of sukuk.
LMC plans to develop a product secured by its own short-term
sukuk programme through a murabaha structure, a common cost-plus
sale transaction, Abbas said.
But the nature of Islamic finance raises potential obstacles
to such complexity. Boards of scholars at the issuing
institution must certify the sharia-compatibility of not only
the programme itself, but of all the sukuk backing it.
Scholars at each investing institution are supposed to do
the same thing - increasing costs and time required with each
layer of the product. Since sharia standards are not uniform
across countries and investing institutions, the issuer may have
to take into account an increasingly complex set of demands as
its investor base expands.
The complexity of ensuring approvals for a range of
sovereign sukuk that will back the IILM's programme appears to
be one reason behind delays to its launch. The IILM was
established in 2010 and took over two years to even agree on a
plan for its programme.
Some issuers may seek to minimise the approval problem by
placing their products with a relatively small group of
like-minded institutions, often from the same geographical area.
The LMC programme, launched in 2004, was initially used
mainly by its own shareholders and related parties, although its
client base has expanded since then, Abbas said.
LMC's four shareholders, each with a 25 percent stake, are
Bahrain Islamic Bank, Dubai Islamic Bank,
the Jeddah-based Islamic Development Bank (IDB) and
Liquidity Management House, a unit of Kuwait Finance House
However, the types of sukuk in which the LMC programme can
invest has gradually expanded and now includes selected
Malaysian and Indonesian issuers, Abbas said.
The IILM has not revealed its choice of sukuk to back its
programme, but recent issuers of sukuk include IILM shareholders
such as the AAA-rated IDB and Qatar's central bank.
(Editing by Andrew Torchia)