Islamic finance body plans bond after Saudi pullout

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(Photo for illustrative purposes only)

(Photo for illustrative purposes only)

The International Islamic Liquidity Management Corp (IILM), a body backed by central banks from the Middle East and Asia, announced plans to issue its first Islamic bonds after an unexpected pull-out by Saudi Arabia from the body.

The IILM aims to issue up to $500m of sukuk in the second quarter of this year, helping to create a liquid cross-border market for Islamic debt - a major step in developing the rapidly growing Islamic finance industry.

"The governing board anticipates that there will be a strong response to the sukuk programme," IILM chief executive Rifaat Ahmed Abdel Karim told reporters on Saturday at a conference in Qatar.

However, prospects for full acceptance of the sukuk by banks internationally have been called into question by the unexplained exit of Saudi Arabia from the IILM just a few days ago.

On Wednesday, the Kuala Lumpur-based IILM announced that Saudi Arabia's central bank had sold its shareholding in the body to Qatar and Malaysia, and Saudi Arabia is no longer listed as a member of the IILM's governing board.

IILM officials declined to give the reasons for the Saudi decision, while officials from the central banks involved declined to comment or could not be contacted for comment. So it is unclear whether the Saudi pull-out was prompted by management frictions at the IILM or by deeper disagreements over policy.

The IILM was founded in 2010 to address a key weakness in Islamic finance: a shortage of highly rated financial instruments that banks and other firms can trade and hold to manage their short-term funds.

But the IILM has grappled since its inception with issues such as finding suitable assets to back its sukuk; Islamic bonds do not pay interest but returns from physical assets. The body delayed its first issue several times and replaced its chief executive in October last year.

The body plans initially to issue as much as $500 million of sukuk with maturities of up to one year, but intends eventually to increase the programme to as much as $3 billion.

"We haven't yet decided how big it will be," IILM chairman and Qatar central bank governor Sheikh Abdullah bin Saud al-Thani told Reuters.

Saudi Arabia, the largest Arab economy, is home to some of the world's biggest Islamic banks, and it is possible that the Saudi central bank's pull-out from the project could limit trade in the sukuk by other Saudi institutions.

One source familiar with the matter, who declined to be named because of its political sensitivity, said he believed Saudi Arabia's conservative central bank did not want to be involved in issuance or trading of the sukuk.

"The Saudi central bank is being very conservative and does not want to be seen as a player in the market," said the source.

The Luxembourg-domiciled sukuk programme was given a credit rating of A-1 by Standard and Poor's. It is linked to a pool of sovereign and quasi-sovereign assets from member countries; Standard Chartered will serve as primary dealer for the securities to facilitate their distribution around the world.

The credit rating is higher than Malaysia's A-2 short-term foreign currency rating but lower than Saudi Arabia's A-1+, the highest rating which S&P gives to short-term paper.

In the wake of Saudi Arabia's departure, IILM shareholders are the central banks of Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Turkey and the UAE, as well as the Islamic Development Bank Group, a Jeddah-based body. Iran is a founding member but not a shareholder of the IILM.

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