Abdulkader Thomas began the third session by asking Allan Redimerio about liquidity, pricing and capacity issues. Redimerio answered that the market sees a higher price in securities, about two or three times higher and that this has affected the Islamic financial market.

A lower value of Sukuk issuance to US$10 billion was recorded for the first half of 2008 compared to US$35 billion in the previous corresponding period. The value of Sukuk issuance for the whole of 2007 was US$50 billion.

He attributed this to concerns over the credit crunch and the global health of the economy. Due to these factors, issuers are facing higher or wider credit spread.

However, Redimerio was optimistic on the Sukuk and expects the second half of 2008 to pick up much faster than the first half of the year as the economy of the GCC is still strong and there’s lots of petrodollars flowing into the market and plenty of deals in the pipeline.

Mohamad Safri Shahul Hamid said there are two issues affecting the issuance of Sukuk: pricing and structuring. He explained the pricing of Sukuk is based on the fair valuation method.

On structuring, he said the difference in structuring Sukuk between the Middle East and Malaysia, coupled with the global uncertainties and the resolution by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in February this year, have made the exercise more challenging and interesting. The resolution caught the market by surprise and it took a few months for the market to digest.

Mahmoud Abushamma said although the prices of Sukuk have increased in the global market, it is a thriving business in the local market and there is a preference for local Sukuk compared to the global issuance. It is becoming a shallow market, not only for the global Sukuk, but for the whole capital market across the world.

Asim noted a lower value of Sukuk compared to last year due to the global credit crunch which is affecting yield and AAOIFI’s accounting mode, basically Musharakah, Mudarabah and Ijarah Sukuk. He said Al Rajhi Bank has a strict interpretation of Sukuk Ijarah compared to Mudarabah and Musharakah. The bank looks at Musharakah as a pure structure, and not a hybrid and due to this, the marketability of issuance decreases because of high capital risk charge.

He said the change in methodology will pave the way for Al Rajhi to look into a pure equity structure, creating a much more meaningful impact on the global Sukuk market.

Steven Choy said there is opportunity even in difficult times and that for Cagamas, it is quite well placed whether in the conventional or Sukuk market. He said 25% of the outstanding bonds of Cagamas are made up of Sukuk and as for new issuance, 35% or more use the Islamic structure.

Cagamas recently issued RM2.02 billion (US$573.22 million) Sukuk Commodity Murabahah and the bonds were fully subscribed. With the authority pushing for the Malaysian International Islamic Financial Centre (MIFC), it is an area where issuers can tap into and Malaysia has much to offer.

Abdulkader then asked the panel whether the time is right to issue directly in Malaysia in ringgit or through MIFC in international currencies. To that, Asim said in either case, the cost of issuance of Sukuk at present is expensive. The pricing is higher than typical syndicated financing as the cost of ratings and registration will be time consuming. Hence, it would be better to raise funds through syndicated financing as opposed to Sukuk.

Mahmoud thought entering into syndicated financing may block an issuer’s credit limit for long-term tenor. He cited the case of Indonesia, where its corporate players were going into capital expenditure investment, adding that not all of the corporate players were keen to block their credit limit and hence, Sukuk seemed to be a viable alternative.

To a question from Nik Norishky Thani, executive director of Islamic finance at the Dubai International Financial Centre, on the areas that MIFC should be looking into in the next few years, Redimerio suggested Ijarah and real estate using Ijarah financing while Asim offered new structures need to be created and that MIFC should look into structure based on real estate investment trusts, pure asset securitization or cash bonds which are in demand in the GCC. He also suggested Malaysia needs to widen its investor base.