Sukuk Market Set for Lift-Off

With new regulations firmly in place, Sharia-compliant bonds finally appear to be gaining traction in Jordan.

The Islamic debt market in Jordan is set to capitalize on growing worldwide interest in sukuk, or sharia-compliant bonds. This comes after long-awaited regulations allowing banks to issue and buy the financial instrument have been put in place, paving the way for a sovereign issuance.

Jordan boasts a well-established Islamic banking sector, with the first such bank having opened in the Kingdom in 1978. But development of other Islamic financial products has been relatively slow, with the takaful (Islamic insurance) market only capturing about 8 percent of local insurance premiums, according to a PwC report, a modest level considering the success of such products across the GCC countries.

Only one corporate sharia-compliant bond has been issued so far in Jordan: a seven-year JD85 million security launched by Al Rahji Cement in 2011. The government has yet to tap the market with an Islamic sovereign bond.

The comparatively slow pace of the market’s development has been put down to the absence of specific legislation covering the segment, an issue the authorities addressed in 2012 when parliament passed the Islamic Finance Sukuk Law. This permitted both public and private entities to issue sharia-compliant bonds in dinars as well as in foreign currency, and for sukuks to be listed on the Amman Stock Exchange.

However, the sukuk market has remained in a moribund state due to the absence of regulations implementing the law and other regulatory obstacles.

These issues were addressed last year in two stages. In April, by-laws were passed specifying

the kind of sukuk structures that could be used in the Kingdom, and also enabling the transfer of assets necessary to issue sukuk. While in July, the Jordan Securities Commission (JSC) issued the remaining regulations necessary for the implementation of the law. Additionally, since mid-2013 the JSC has held a series of seminars on the sukuk market to educate potential participants.

These efforts appear to be paying off, with several local actors gearing up to issue sharia-compliant debt. In mid-February, the CEO of the Bahraini Islamic bank, Al Baraka, said its Jordanian unit, Jordan Islamic Bank, would issue its first Islamic bond later this year. The bank amended its articles of association in December 2014 to be able to issue the bond, which will be denominated in the local currency and will have a maturity of 10 years.

Three other Islamic banks are set to issue sharia-compliant debt in the wake of the new regulations. Furthermore, the Deputy Governor of Jordan’s Central Bank Adel al Sharkas, indicated in early January that the authorities were planning to enter the Islamic debt market with the issuance of between JD300 million and JD400 million worth of sukuk to tap the excess liquidity in the Islamic banking sector.

The Governor of the Central Bank of Jordan Ziad Fariz, told OBG that interest in Islamic bonds would help reverse a trend of typically low activity amongst private companies in the debt markets. “Unfortunately banks are hesitant to trade on bonds. However, a successful issuance of an Islamic bond may encourage private companies to take a closer look [at] raising capital through the debt market,” he said.

Local finance industry figures also view a potential issuance positively. “There has been a large amount of money sitting idle in Islamic banks and issuing a sovereign sukuk will increase debt market liquidity and act as a sound source of revenue for the government,” Wajdi Makhamreh, CEO of Noor Investments, told OBG.

International investors are becoming increasingly aware of such opportunities, and should Jordan go ahead with plans to issue a sovereign Islamic bond in 2015, it will join a growing number of countries, both Muslim and non-Muslim, which are entering the market.

The past year has seen maiden sukuk launches in a number of locations, including the UK, Hong Kong, and South Africa. In the Middle East, the Central Bank of Oman announced plans in early March this year for a $517.7 million sharia-compliant issue by the middle of 2015.

While al Sharkas had suggested that a sovereign sukuk could be launched in February, it is widely believed that an issuance will take place around mid-2015. Any potential delays may be related to concerns about the already high level of government debt as the authorities weigh the benefits of issuing more debt against the alternative of seeking soft loans from international donors at more favorable terms.

However the passage of the sukuk law and the government’s request in June last year for assistance from the Japan International Cooperation Agency to launch an Islamic bond suggest Jordan is intent on entering the market in the near future.


Oliver Cornock, Regional Editor THE INSIDE EDGE