Sukuk trading needs to modernise as sector expands
The rapid expansion of the Sukuk sector is a welcome development for all of us who recognize its value as an ethical and efficient means of raising capital. It is not only that the pace of growth is impressive, with global issuance expected to reach 70 billion dollars this year, according to Moody's, compared to 32 billion dollars in 2010. Even more exciting is the sector's successful break-out from niche appeal into the international mainstream, as demonstrated by Hong Kong's first ever Sukuk issuance, which took place this month, and plans announced by the South African government to issue a Sukuk soon. Neither are traditional powerhouses of Islamic finance, so it is clear that the Sukuk market is entering a dynamic new phase.
As with any financial market that grows quickly, progress is uneven. Though the base of issuers and investors has broadened impressively, there has been only limited development of the mechanisms by which Sukuk can be easily traded in the secondary market. Unless this problem is addressed, it could become a bottleneck in the growth of the sector as a whole, as restricted opportunities to trade could deter some investors from buying Sukuk in the first place.
I believe that the market would benefit greatly from expanded opportunities for on-exchange trading, to complement the over the counter (OTC) trading that currently dominates. The on-exchange option can offer significant advantages. Transparency is one; the availability of prices and volumes on a single screen, visible to everyone, can increase awareness of the market and confidence in its integrity, as well as aid price discovery. OTC trading by contrast is opaque and takes place in silos. A move towards trading on-exchange also has the potential to bring down the fees that investors must pay to buy and sell. The result is likely to be a steady strengthening of trading volumes, which is healthy for the Sukuk sector as a whole.
As a leader in Islamic finance, Dubai has been an early mover in promoting on-exchange Sukuk trading. In May last year NASDAQ Dubai set up a pilot trading platform for both Sukuk and conventional bonds and several brokers have signed up to take part. The project remains in its development phase for the moment; setting up a new market takes time. However we have prepared the ground carefully for future growth. Trades are routed for settlement at Euroclear, facilitating wide participation by international as well as regional investors. And the platform benefits from NASDAQ Dubai's growing role as a centre for listing Sukuk. The exchange now hosts Sukuk valued at a total of 19.2 billion dollars, the third largest amount in the world, and nearly all of these can be traded on the platform.
Since the global financial crisis struck five years ago, there has been a growing international consensus at the regulatory as well as commercial level that on-exchange trading is beneficial for a wide range of asset classes. It was off-exchange trading, after all, that lay at the heart of the crisis. As well as providing transparency and liquidity, on-exchange trading can mitigate risk through the operation of a central counterparty. This is especially appropriate for Sharia'a-compliant products such as Sukuk, given the emphasis placed by Islamic finance on promoting financial responsibility and providing a trustworthy framework for investing.
A successful on-exchange market will require critical mass. As well as a substantial number of attractive listed Sukuk, many brokers and investors must also be on board. The advantages that await them are so significant that I have no doubt they will wish to take part.
About the author
Chief Executive Officer, Nasdaq Dubai
Mr Ali was appointed Chief Executive Officer in July 2013, after serving as Acting Chief Executive Officer since August 2012. He previously served as Executive Director of Nasdaq Dubai from 2006 to 2008. His experience includes serving as Chief Operating Officer of DIFC Authority and most recently as Executive Director at the Dubai Knowledge & Human Development Authority.
Mr Ali played a key role in the development of the Dubai Strategic Plan 2015 and participated in number of strategy development exercises. These included Nasdaq Dubai’s strategy in 2006 where he had the role of overseeing the implementation of the Market of Markets strategy expanding the exchange’s activities beyond the equity and debt markets into derivatives and other sectors.
Mr Ali holds an Executive MBA from London Business School, a B.Sc. in Applied Computing from Leeds Metropolitan University, and a Master Certificate in Project Management.