Global Sukuk issuance in 2013 fell 8.9 per cent from the previous year, totalling $119.7 billion. With demand for Shari’ah-compliant instruments so high, it’s the lack of effective liquidity management that’s holding back the growth of the global Islamic market.
One of the key obstacles to investing in Islamic products is a lack of standardisation in terms of Shari’ah compliance. While there are some local auditors and regulators who control permissible transactions, these controls are not standardised, not only across country borders, but among different banks in the same country. In practice, this means that banks with excess liquidity often face difficulties investing in other banks that have different standards. Although Sukuk are the most common liquidity market instruments, they aren’t universally defined, and sometimes either the structure or the contract is not acceptable by the investor bank.
“A lack of standardisation also leads to higher operational costs, resulting in reduced profitability, as well as the absence of economies of scale and a learning curve.
“Another obstacle to liquidity management is that the Islamic secondary trading market is undeveloped. Sukuk are frequently traded over the counter and held until maturity, and what secondary market activity exists doesn’t operate through a trading platform on an overnight basis.
“A third obstacle is that since Islamic issuers frequently suffer from low risk ratings due to their small size, they’re either obliged to pay high rates to attract investment, or worse, are unable to attract investment at all. In addition, the high domestic demand for these products has kept yields low relative to their risk rating, contributing to their lack of cross-border attraction.
“A further issue lies with the structure of the products themselves. Traditionally, Islamic products have been designed by financiers from conventional backgrounds, who try to base them on conventional products. These products then become unnecessarily complicated when extra layers are added to achieve Shari’ah compliance. This lack of innovation in mimicking conventional products is paradoxically making Islamic liquidity products less appealing to non-Islamic investors.