Industry must stop considering a lack of liquidity as a sukuk-specific issue, says investor
The financial sector needs to stop considering a lack of liquidity as a sukuk-specific (Islamic bond-specific) issue, said Mohieddine Kronfol, chief investment officer, global sukuk and Mena fixed income, at the US Franklin Templeton Investments.
When it comes to liquidity, there tends to be a mischaracterisation of sukuk. The bid-offer [spread] on sukuk issued by regional companies is almost identical to that of many conventional bonds from this region, said Kronfol, speaking at the Sukuk Congress Mena held on 3-4 February in Dubai.
He added that performance of the secondary market is in line with the overall development of GCC financial markets and other developing or emerging markets. It also faces challenges having to cope with a global environment wherein international investors are less keen to trade.
Doug Bitcon, director of debt capital markets at investment bank Rasmala, told the conference that concerns about secondary market liquidity might be overblown to some extent.
Liquidity is reasonable, you just need to know where to look sometimes. Other times, it could be overblown because of market stress, which tends to cause liquidity to dry up, he said.
Lack of trading in the sukuk market is often the result of Islamic banks holding the notes until maturity, as there are few alternatives for investing in sharia-compliant, short-term products.
There is enough liquidity in the [Islamic finance] market, so there is no need for them to sell the securities back into the secondary market, said Samir Habib-Allah, executive director of Treasury at Bahrain-based First Energy Bank. People often still dont understand the difference between a bond and sukuk, which makes educating the market very important. That way it can open up for the private sector and retail investors. There has to be a lot more transparency.
More frequent issuance could help address the problem. Of the $140bn of sukuk globally issued in 2013, only around 10 per cent originated from the GCC, according to the Standard & Poors Islamic finance Outlook 2014.
But to spur more issuance the demand side needs to become more diversified as well, said Kronfol. Encouraging the development of a regional asset management industry, including long-term investors such as pension funds, would be the first step.
You need a holistic approach. [The demand side] is developing at almost too slow a pace you have to create an environment that attracts [investors] through laws and regulation. There are challenges and different policymakers should do something to change that, he added.
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