The sukuk spark

If 2014 was the year of the non-Muslim sukuk, what can be expected in 2015, especially if oil prices find newly sustained lows?

In 2014, we saw sukuk – the endearing poster child for Islamic finance – issuance from London (US$315 million); Luxembourg (US$250 million); Hong Kong (US$1 billion); South Africa (US$500 million); Goldman Sachs, Bank of Tokyo-Mitsubishi UFJ, World Bank at U$500 million (for International Financial Facility for Immunisation), etc.

These were one-off issuances, and issuers have not made firm declarations of establishing an ongoing programme, which would assist with creating yield-curves.

[It is interesting to observe that France and Germany, with Muslim populations of about 5 million each, from north Africa and Turkey, respectively, have not taken a more active role on sovereign sukuk issuance. It was expected from the “anti-hijab” France after Christine Lagarde joined the IMF as managing director.]

In Dubai, with the emirate winning rights to host the 2020 World Expo, the sukuk is viewed as an infrastructure-building enabler.  It is well anticipated. Dubai will issue a variety of sukuk with various tenors and tranches, and add to supply. Whether that sparks secondary market trading (locally) is another issue, but it will go a long way in cementing Dubai as capital of Islamic economy.

Are these jurisdictions and blue-chip non-sovereigns sending a signal (mixed one?) that they are open for shariah-compliant businesses and investment? Is the sukuk the new “black”?

Or are they observing the sentiment of the public, i.e., voters, reaction to their “Islamic” participation? They are well aware of the small but vocal “halal hysteria” and anti-shariah movement in places like Australia and US. 

Or are they using sukuk issuance as a means to attract Muslim tourists? If so, they would need to look into bringing the halal food-beverage industry in places like Hong Kong into equation.

2015

The invisible hand of capitalism with a human face, i.e., Islamic or ethical finance, will see increased discussion and ensuing activities in (Islamic) venture capital in 2015. Why?

First, it’s the bulge bracket, Muslim youth, estimated to be about 500 million under age of 30, and they are educated and social media connected globally compared to their predecessor. Today, access to technology offsets, although not completely, access to capital issues, which has been a traditional entry barrier hindering entrepreneurship in the Muslim world.

[Conversations about angel-investing and (Islamic) venture capital have been within the domain of academic presentations at conferences in selected Muslim countries, like Malaysia, and such countries will lead. For example, Khazanah, the sovereign wealth fund of Malaysia, established an office in Silicon valley in 2013.]

Furthermore, combined with internet penetration and rise of mobiles phones amongst Muslims, estimated to be at 1.3B or 21% world (Thomson Reuters, 2012), hence, both –  youth and technology – will be the needed spark for innovation and invention.

For example, in Middle Eastern cities like Amman, Dubai, Jeddah, Cairo, Doha, Gaza, Beirut, etc., the word “start-up” is becoming as popular as “shourma” and “sheesha”. Thus, start-ups are taking advantage of incubators and accelerators to address current problems concerning digital content, e-commerce, payment gateway, etc., and this is only the beginning.

Thus, the decline of oil prices combined with rise of entrepreneurship may just give way to diversification of economies, address unemployment and underemployment amongst the youth, slow down the brain drain, reverse some capital flight, attract emigrant diasporas, etc., but, as important, the government must also do its part on business regulations and provide grant/seed money.

A silicon valley type of cluster must create the enabling environment the facilities and attracts start-ups, and not be a disguised real estate project with the primary objective of tenant occupancy.

Second, many Muslim countries, like Malaysia, are embarking on an ambitious journey to become high income/knowledge based economies by 2020. A sukuk may finance the address of the school building, incubators/accelerators, etc., of a silicon valley or silicon “oasis”, but it will not provide the risk capital to back ideas and prototypes.

For example, the GCC has a wealth of private equity firms, led by likes of Dubai-based Abraaj, but very few venture capitalists. Furthermore, there is very little Islamic finance or Muslim country money in Silicon Valley, which is about risk sharing. The present situation presents an incredible opportunity for Islamic finance, through Islamic investment firms, to lead local conventional finance in aligning itself to government’s mandate of knowledge based economies.

The Muslim world, comprising of 57 countries, US$9 trillion GDP, 2 billion people, one third of population under 30 years old, etc., needs to flatter less (by imitating) and innovative more so that others may flatter the Muslim world.

We have a history of the Golden Ages, and history does repeat itself, just needs a little sukuk equity spark. – January 7, 2015. 

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.