Islamic Bills Fall Short of $400 Billion Consultants Say Needed

  • IILM sold $14 billion in liquidity bills since 2013 debut
  • Supply not enough after global sukuk sales sank 29 percent

Islamic investments are failing to keep pace with growth in the $2 trillion Shariah-compliant finance industry.

International Islamic Liquidity Management Corp. has sold $14 billion of dollar-denominated bills since it was set up in 2010 to support financial activity. While sales of the short-term paper have increased each year since the debut offering in 2013, it’s a far cry from the $400 billion Ernst & Young LLP estimates is needed. Sukuk sales slumped 29 percent in 2015, the most since the global credit crunch.

IILM, which counts nine central banks as its owners, may not want to increase sales when U.S. interest rates are rising because of the added risks to its stakeholders, according to the Chartered Institute of Islamic Finance Professionals. Demand for the relative safety of debt is climbing in the global risk-off environment, just as a sukuk shortage is reducing investment options.

“IILM has made a crucial start in tackling the liquidity-management problem,” said Khalid Howladar, the global head of Islamic finance at Moody’s Investors Service in Dubai. “Nonetheless, $14 billion represents the cumulative issuance but given the short maturities, only around $1-2 billion is outstanding at any point in time. It’s far below the amount needed by the industry.”

Worldwide Islamic bond sales fell to $35.4 billion in 2015, the lowest in five years, data compiled by Bloomberg show. Sales edged up 1.8 percent in 2014 and declined 5.6 percent the previous year, off the peak of almost $52 billion in 2012.

Limited Tenors

The liquidity management company has limited the tenors of the bills to three and six months and Badlisyah Abdul Ghani, president of the Chartered Institute of Islamic Finance Professionals, said it should lengthen the maturities to help banks better match their liquidity. Increasing the supply would also improve secondary-market trading, he said.

IILM’s securities carry a short-term issuer rating of A-1 from Standard & Poor’s, the second-highest investment grade. The company declined to reply to questions sent by Bloomberg via e-mail seeking comment on its plans and issuance.

“By issuing more short-term bills, the hold-to-maturity mentality can be resolved,” said Badlisyah. “For IILM to play a bigger role, best practices where Islamic banks can invest only in instruments that strictly comply with religious principles should also be implemented.”

The institution sold $980 million of the three-month securities in 2013 and started offering six-month bills in 2014, when total issuance rose to $5.8 billion, according to data compiled Bloomberg. Sales were $6.4 billion in 2015.

‘Very Small’

The organization was formed by central banks including those from the Middle East, Southeast Asia, Africa and Luxembourg, as well as the Islamic Development Bank based in Saudi Arabia. It has its headquarters in the Malaysian capital of Kuala Lumpur.

“IILM needs to sell more as $14 billion worth of short-term bills over a period of more than two years is very small,” said Mohd. Effendi Abdullah, the Kuala Lumpur-based head of Islamic markets at AmInvestment Bank Bhd., Malaysia’s fourth-biggest sukuk arranger. “The more the better.”

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