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They won’t be reinvented under the programme |
The International Islamic Liquidity Management's (IILM) new short-term sukuk programme gives Shariah-compliant financial institutions a new way to manage their liquidity.
It is the first US dollar Shariah-compliant, highly-rated short-term investment product targeted at Shariah banks and financial institutions, to be used as a tool for liquidity management.
The programme is charged with purchasing sovereign, sovereign-linked or supranational sukuk assets with long-term A-1 ratings. It will issue Shariah certificates with a maturity profile of less than one year against these assets.
"Through their programme IILM are looking to set a benchmark which others could use to develop the market," said Freshfields Bruckhaus Deringer's Andrew Heathcote, who acted for IILM.
Heathcote explains that IILM is looking to develop a short-term Shariah-compliant instrument equivalent to commercial paper, because many Shariah-compliant institutions have significant cash reserves but few or no short-term investment options.
Accessible short-term instruments, such as the sukuk to be issued under IILM's programme would allow them to achieve yield while maintaining liquidity. "This can only help the long-term development of the Shariah-compliant finance market," Heathcote said.
The programme was established under the International Islamic Liquidity Management 2 SA vehicle and was rated A-1 by Standard & Poor's.
The IILM 2 SA vehicle is structured to be bankruptcy-remote, mitigating risk to investors if IILM becomes insolvent. Further, its structure includes a golden share held by a nominee trustee, restricting IILM's ability to change the vehicle's incorporation documentation.
Further, the short-term sukuk issued under the programme must comply with scholars' Shariah interpretations across a wide range of jurisdictions.
To encourage institutions to participate in this new market, the instruments must be structured to resemble instruments that they are familiar with, such as longer-dated sukuk and short-term commercial paper. "To the extent possible in structuring the programme, the intention was not to reinvent the wheel too much," said Heathcote.
This meant the challenge was to use and merge concepts and techniques familiar to both the existing sukuk and asset-backed commercial paper markets, said Heathcote, while always being mindful of the need for Shariah compliance.
Multi-jurisdictional compliance
One of the risks of cross-border Islamic finance instruments is that interpretations of Shariah differ across jurisdictions. For example, Malaysia has introduced products that would not be acceptable to Shariah scholars in the Middle East.
Therefore, ensuring that scholars across the stakeholders' jurisdictions would agree on the instrument's Shariah-compliance was especially difficult. Heathcote said that IILM has its own Shariah board comprised of scholars from diverse backgrounds. "It was key to develop a robust structure in terms of Shariah-compliance to maximise potential investor appeal, which was challenging," he added.
Saudi Arabia pull-out
IILM is backed by a wide range of stakeholders, and all twelve had to agree on the programme structure. Saudi Arabia pulled out of IILM in early April, selling its stakes to Qatar and Malaysia.
But Eric Gretch, analyst in charge of IILM at Standard & Poor's, said that the rating isn't predicated on the constituents of IILM. The IILM is a programme administrator and investment adviser of the IILM 2 SA. These roles, said Gretch, are no different from that of any large financial institution in a certificate programme. "Entities joining or pulling out of IILM do not factor into our analysis," he adds.
For now, there is only one primary dealer assigned to IILM 2 SA. But Gretch notes that the goal is to focus on Islamic financial institutions as end users. "As IILM signs additional agreements, the expectation is that the majority of these institutions will be Islamic finance institutions," he said.
Further, IILM's programme represents the first of its kind in the Islamic finance market. Gretch said that this is the only programme in the world that does this; there's nothing that compares.
But he warned that the new programme must be proved a success before seeing copycat deals. "It might get to $2 to $3 billion in the first two years, and at that point there will likely be copycats," Gretch added. "But IILM is unique because it has the backing of central banks."