Ireland may be first EU state to sell Islamic bond

By Elffie Chew

IRELAND plans to become the first European nation to sell sovereign sukuk — Islam-approved financial certificates — as its equal tax treatment for Islamic-finance products attracts investors.

The Government has agreements with more than 60 countries to avoid double taxation on Islamic transactions, Micheál Smith, the south-east Asia director of IDA Ireland, said.

Islamic finance assets around the world may rise about 16% to €1,240 billion this year, Raj Mohamad, managing director at Five Pillars, a consulting firm based in Singapore, told Bloomberg Television yesterday.

While plans to sell sukuk by Britain, France and Luxembourg have stalled, Mr Smith said Ireland will push ahead with a sale.

“Ireland will be going back to the bond market and a sukuk is an option when conditions are right. We also hope to form more working groups with Muslim countries such as Malaysia to build up a critical mass of expertise as the objective is for Dublin to become a centre of excellence for Islamic finance.”

Ireland introduced tax legislation for products that comply with Islam’s ban on interest in 2010, Mr Smith, who is based in Singapore, said.

The Central Bank has a Shariah team overseeing its Islamic funds, which total about €390m under management.

The Irish Stock Exchange listed its first sukuk in 2005 and Ireland is a popular choice for sales because the nation offers a “relatively inexpensive” and timely listing process, he said.

The Government last sold bonds in September 2010, the year it had a deficit that was the highest as a percentage of gross domestic product in the developed world. The Department of Finance estimates the ratio dropped to 10.1% of GDP in 2011 from 31% the previous year.

CIMB Group Holdings, the world’s biggest sukuk arranger, said this week that it got approval to set up the first Shariah-compliant equity funds from Malaysia in Ireland.

Ireland’s bid to become an Islamic finance hub received a boost in October when Goldman Sachs Group got approval from the nation’s central bank to list its $2bn (€1.55bn) sukuk programme. The planned sale has attracted criticism among Islamic scholars, with some saying the proceeds may not be used according to Shariah law.

CIMB-Principal Islamic Asset Management, based in Kuala Lumpur, chose Ireland for its Islamic equity funds because there’s no double taxation and no withholding tax on interest payments, Jim McCaughan, chief executive of US-based venture partner Principal Global Investors, said on Monday.

An initial investment of $20m (€15.5m) will be put into three funds that will open for subscription next month, he said.

“We expect interest from Europe, Malaysia and more importantly the Persian Gulf and other Muslim countries,” Mr McCaughan said. “People are getting wealthier and want to diversify their funds.”

Global sales of sukuk, which pay asset returns instead of interest, total €4.7bn this year, compared with €500m in the same period in 2011, according to data compiled by Bloomberg. Offerings reached a record $36.3bn last year, surpassing the $31bn raised in 2007.

The difference between the average yield for sukuk and the London interbank offered rate, or Libor, narrowed two basis points to 299 basis points yesterday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.

The average yield has climbed nine basis points, or 0.09% point, this year to 4.08%.

Shariah-compliant bonds have dropped 0.1% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets declined 0.2%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign currency Islamic debt sold by companies in Malaysia rose 0.5% this year to 104.919 yesterday. The gauge increased 5.9% in 2011.

Britain cancelled what would have been the first sukuk sale by a Western government last February, saying the debt didn’t offer value for money. Luxembourg ruled out a plan to sell Islamic bonds in 2011 because the government saw no need to raise additional funding. France has legislation in place to facilitate a sale and has yet to proceed with an issue.

Ireland has a Muslim population of 30,000, according to a Department of Finance document covering the nation’s Islamic industry issued in March 2010. Roman Catholics make up 87% of Ireland’s population.

The Islamic Cultural Centre for Ireland and the Immigrant Council of Ireland have all called for more Shariah-compliant initiatives, the report said.

“There’s been no objection to Islamic products being sold in Ireland,” said Mr Smith, who is also a director in charge of the 10-member Association of Southeast Asian Nations at the IDA.

The European debt crisis provides an opportunity for Islamic finance to grow given it is rooted in ethics and religion, according to Nik Norzrul Thani, the chairman of Malaysian law firm Zaid Ibrahim & Co.

“What Ireland is doing is a step in the right direction,” Nik Norzrul said in an interview in Kuala Lumpur.

“Ireland’s ambition to be a Shariah-compliant hub is a recognition that Islamic finance isn’t only for Muslims.”

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source : Irish Examinar

Islamic bond scholars toughen rules on Sukuk sales

images37Religious scholars are imposing tougher rules on the sale of Islamic bonds to investors after stating that most of the securities may not fully conform to the teachings of the Muslim faith.

Investors bought $30 billion of so-called sukuk in the past year that avoid breaching Shariah law prohibitions on the payment or receipt of interest by using property or other assets to provide an income, according to data compiled by Bloomberg. New guidelines demand that investors become the legal owners of those assets rather than nominal holders, the Bahrain-based Accounting & Auditing Organization for Islamic Financial Institutions said on its Web site.

The rules from AAOIFI’s board of 18 religious advisers led by Chairman Sheikh Muhammad Taqi Usmani will make it harder for companies to issue Islamic debt at a time when borrowing is already shrinking because of the global credit crisis. Sales of sukuk dropped to $856 million so far this year from $4.7 billion in the first quarter of 2007, Bloomberg data show.

”This is a paradigm shift and will make life difficult for chief financial officers used to the existing structures,” Moody’s Investors Service analyst Khalid Howladar said in a phone interview from Dubai today.

Shariah restricts investors to transactions based on the exchange of assets rather than money alone, so interest payments are banned. Working with Islamic advisers, banks including Citigroup Inc. and HSBC Holdings Plc have built the market for sukuk to $60 billion from almost nothing in a decade, based on Bloomberg and Standard & Poor’s data.


Borrowers and their bankers until now created a fixed income for investors by promising to buy back the assets underlying sukuk at their face value on maturity, irrespective of whether the assets made or lost money, Moody’s Howladar said. These types of agreements are banned under the tougher rules because Shariah demands buyers and sellers share profits or losses from their transactions.

”Blemishes” have crept in that the industry must now ”rid” itself of, AAOIFI’s board of scholars said last month. As much as 85 percent of sukuk sold to date may not comply with all the precepts of Shariah, the board said.

The new rules force issuers of sukuk to legally transfer the ownership of assets to bondholders. The assets must be tangible rather than a cash flow.

”What the scholars are trying to do is make sukuk asset- backed rather than just asset-based,” said Arul Kandasamy, the Dubai-based head of Islamic finance for Barclays Capital.

Sukuk Sales

Borrowers won’t have to restructure bonds already sold to comply with the new guidelines, AAOIFI financial consultant Majd Bakir said in a phone interview from Bahrain.

Jebel Ali Free Zone FZE, Dubai’s state-run operator of a business park adjoining the Jebel Ali port, raised $2 billion in the biggest sale of sukuk from the Gulf in the past six months. Buyers of the bonds have no legal claim on the underlying assets and have an ”implicit guarantee” the issuer would cover any payment shortfalls, S&P said in a report in January.

Banks and borrowers rely on approval from recognized Shariah scholars to be able to sell their sukuk to devout Muslims. Sheikh Usmani advises the Islamic finance unit of HSBC, the No. 2 underwriter of sukuk last year, according to Bloomberg data. Usmani didn’t respond to two e-mails seeking comment on the rules.

Fellow AAOIFI board member Sheikh Mohammed Elgari advises Citigroup and Merrill Lynch & Co., and Sheikh Nizam Yaquby advises banks including BNP Paribas SA, Lloyds TSB Group Plc and Standard Chartered Plc, according to HSBC.

Higher Costs

AAOIFI accounting standards are binding in six Arab countries and the Dubai International Financial Centre, a base for banks including Goldman Sachs Group Inc. and UBS AG. Regulators in countries including Malaysia, Saudi Arabia, Australia and South Africa base their rules for sukuk on AAOIFI’s guidelines.

While the rules will mean ”slightly” higher costs on sukuk until the new structures become commonplace in about a year, clarity on the guidelines is positive for the market, said Haris Irfan, a Deutsche Bank AG director responsible for Islamic finance in Dubai.

It will ”give comfort to some investors who had shown concern” about the scholars’ comments on Shariah compliance, said Irfan. ”We’re already moving away from guaranteed returns to more risk-sharing structures” for planned sales, he said.

Companies planning sukuk sales include Bahrain Islamic Bank, which on March 11 said it plans to raise as much as $664 million from the securities to finance expansion. The U.K., Japan and Thailand are among governments that may sell sukuk, helping the market grow to $200 billion by 2010, Moody’s said in a report last month.

”The likely impact of this is that either the sukuk market becomes more based on Islamic securitizations or it bifurcates, with some sales becoming truly asset-backed and other issuers choosing to continue with existing structures,” Moody’s Howladar said.

 Source: Bloomberg