Jordan said last month it was going to issue its first ever sovereign sukuk, or sharia-compliant bonds, soon.
The long anticipated issuance is expected to rake in some JD400 million to finance real estate projects, a source familiar with the topic told The Jordan Times. The source also predicted the sovereign issuance to be a dinar-dominated offering.
Though Jordan passed the Islamic Finance Sukuk Law in 2012, allowing both public and private entities to issue sukuk, it was only in April that the government vetted the Islamic Corporation for the Development of the Private Sector, an arm of the Jeddah-based Islamic Development Bank, to support the country’s maiden security bonds issuance.
Only one corporate sukuk had been issued in the Kingdom before: a seven-year JD85 million security launched by Al Rahji Cement in 2011.
The Governor of the Central Bank of Jordan Ziad Fariz told the Oxford Business Group earlier this year that interest in Islamic bonds would help reverse a trend of typically low activity amongst private companies in the debt markets.
Jordan’s banks are generally hesitant to trade on bonds and economists hope that a successful issuance of an Islamic bond may encourage businesses to take a closer look at raising their capital through the debt market. “This could be especially appealing for those private companies which don’t want to borrow directly from banks and want to diversify the way they finance themselves,” said economist Jawad Anani.
But the sukuk issuance may also prove to be successful on the secondary market, where these bonds are traded. “Private and sovereign issuance have not succeeded on Jordan’s secondary market,” Anani said. “Most of them have been traded solely on the primary market without creating the secondary market the government hoped for, with people often purchasing and holding them until maturity.”
More Jordanians feel at ease with the Islamic security, the economist said, as they’re sharia-compliant. While their return is lower than on government bonds, their liquidity factor might make them more appealing on the secondary market.
Several countries have launched maiden sukuks in 2015, including the UK and South Africa. “Islamic financial instruments are growing in size in general,” Anani said. “By the year 2020, estimation sees that their market would exceed $2.5 trillion. Though this is not a huge number in terms of international market for financial instruments, many international banks have started to find them appealing in light of the safety they bear.”
And while some investors made losses using other financial instruments during the international financial crisis in 2008, the sukuk market was different, Anani said, as they are not affected by the ups and downs of interest rates.