While the Central Bank of Malaysia’s decision to move away from sukuk financing means the global outlook for sukuk issuance isn't 'rosy', could the lifting of sanctions on Iran help drive issuance?
The Central Bank of Malaysia’s 2015 decision to move away from sukuk financing to shorter-dated Islamic instruments means the global outlook for sukuk issuance is “not rosy”, said Dr Mohamed Damak, global head of Islamic Finance at Standard & Poor’s Ratings Services. But Damak, speaking at the 2016 London Sukuk Summit, believes Iran will help drive issuance because its “investment needs are just huge”.
An agreement on the phased lifting of UN-mandated and EU nuclear-related sanctions against Iran in 2015 was a historic step that, in principle, opens Iran up to greater inward investment. As Iran is the 18th largest economy globally, with a median age of 28.3, and has performed well despite sanctions, it is likely to make full use of its new-found freedoms, according to Torsten Boehler, managing director of Abacus Emerging Markets Ltd. Boehler points out that Iran is the only country in the world with a fully Shariah-compliant banking sector, so investment will have to be Shariah-compliant – hence the expectation that Sukuk issuance could be boosted by Iran.
“Some of Iran’s investment needs will find a way to the Sukuk market…if Iran upgrades its regulation,” Damak said. Boehler argueed that Iran needs to move away from its current reliance on its local bank market to more capital markets issuance and that the essential question for the country in encouraging investment is how best to establish international links. Some present at the Sukuk conference pointed out that Iran has its own, slightly-different, interpretation of Shariah governance, which could be a stumbling block to international ties. However, the country has shown itself to be flexible in certain aspects of financial regulation, said Dr Mohd Daud Bakar, the chairman of Amanie Group, which advises on Shariah finance.
Will international investors be interested in sukuks? They offer better returns than conventional instruments (particularly in a low interest rate environment), bring portfolio diversity, have lower correlation to other asset classes and, as Mohieddine Kronfol, chief investment officer of Franklin Templeton Investments, believes, “it is a myth that they are not liquid”.
However, investing in Iranian assets may not be entirely plain-sailing, particularly for those institutions with strong links to the US. Rae Lindsay noted in her piece for “Financial World” in December 2015 that “the bottom line is that the primary US sanctions against Iran will continue generally to prohibit Iranian trade and commerce involving US persons, US origin goods or the US financial system”.
Ouida Taaffe is the editor of Financial World magazine.