At the end of August this year, the International Islamic Liquidity Management Corporation finally made its inaugural sukuk auction. It was almost three years after the institution’s foundation to create and issue short-term Shariah-compliant financial instruments and improve cross-border liquidity management in Islamic finance.
The $490 million issue of three-month sukuk priced at 30 basis points over Libor. It was an important event for the industry, and something for the Islamic finance community to be proud of. But there was just one thing awry: Saudi Arabia, previously one of the key constituents, had gone missing along the way. In February 2012, Euromoney ran a feature looking at the IILM, an institution that had been launched in 2010. It had 14 founder members from Malaysia to Saudi Arabia: the greatest cooperation ever seen in the sector. It was a good idea, Euromoney argued; so why wasn’t it actually doing anything?
When the IILM was established that October, it reflected a widespread recognition that Islamic banking might have run into serious trouble in the global financial crisis had there been a loss of confidence in inter-bank liquidity in the Islamic world, as there was in conventional finance. Islamic banks then did not have any instruments available in the capital markets to bolster liquidity, particularly cross-border.
Driving force
The driving force of the initiative was Zeti Akhtar Aziz, governor of Bank Negara, the Malaysian central bank. But what was truly impressive about the IILM’s foundation was the breadth of its engagement: alongside Malaysia and Indonesia in Asia were everyone that mattered in the Middle East: Saudi Arabia, Kuwait, Qatar, the United Arab Emirates and Iran – plus representation from Africa (Nigeria, Sudan and Mauritius), Europe (Turkey and Luxembourg), and the Islamic Development Bank.
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Mahmoud AbuShamma, the former global head of HSBC Amanah coverage in Dubai, became CEO in February 2011, while Zeti became chair of the IILM’s governing board. Then the world waited for issues. And the challenge, from the outset, was finding a common denominator among the founding jurisdictions. AbuShamma said an issue was to be expected by the end of that year. There was other work to be done – in particular, getting a rating and securing high-quality underlying assets to underpin a sukuk. But it is understood that the issue of common ground among countries with differing strands of Islam and different interpretations of Shariah law, was the principal hurdle – for example, Saudi Arabia’s far stricter interpretation of Shariah law than other important Islamic finance markets.
AbuShamma was not around to see the first issue, being replaced in October 2012 by Rifaat Ahmed Abdel Karim, the founding secretary general of the Kuala Lumpur-based Islamic Financial Services Board. Most of the Shariah board would change too before a maiden issue got any closer to launch.
Below the line
By April this year, as conjecture grew about what was happening, the IILM felt compelled to issue a press release. The first in six months, it reveals little, except in the below-the-line ‘about the IILM’ section. It lists the members of the IILM governing board – and Saudi Arabia is missing. A day later, the IILM announced “a restructuring of its shareholding” and said that the central banks of Malaysia and Qatar had purchased the shares of the Saudi Arabia Monetary Agency in the IILM. It did not say why.
Whatever the reason, it clearly smoothed things; just three days later the IILM announced the official launch of its sukuk programme, by which time it had secured an A-1 public rating from Standard & Poor’s. And that led to the August launch.
So what happened? IILM has not added to its original comment about the change of shareholding, so Euromoney asked Zeti at a conference on Islamic finance in London at the end of October. “Different jurisdictions were at different stages of the whole approval process,” she said. “It’s not for me to explain their position, but since we were able to get the other members to participate in the first issuance, we therefore proceeded.”
Primary dealer
Zeti and other board members stressed that just because Saudi Arabia is not a shareholder in IILM itself anymore, it does not undermine Saudi Arabian participation in the instruments IILM issues. “They [Saudi Arabia] gave their full support to the issuance,” Zeti said. “One of their banks is a primary dealer, and I believe their banks are permitted to hold these instruments. It’s just they are not a shareholder.”
At the same conference, Euromoney asked Sultan Bin Nasser Al Suwaidi, governor of the Central Bank of the UAE, if Saudi Arabia’s absence was damaging to the IILM. “I don’t think so,” he said. “It is an institution that is going to issue short-term liquidity instruments that I imagine even banks from Saudi Arabia will buy.”
That sounds promising, but again things are unclear. IILM’s own release on the sukuk programme names seven primary dealers, and none of them is Saudi Arabian. Malaysia is represented, through Maybank Islamic; Kuwait Finance House is there; AlBaraka Turk; National Bank of Abu Dhabi; Qatar National Bank; Luxembourg’s KBL; and Standard Chartered as the only global name. Al Rajhi, from Saudi Arabia, was expected to be a primary dealer, but was not on the list.
