1. The emergence of sukuk or
Shari'a-compliant bonds has
been one of the most significant
developments in Islamic capital
markets. The first ever Islamic
bond was issued in Malaysia in
1990, while the first sovereign
sukuk in the region was issued by
Bahrain in 2001. The majority of
sukuk offerings were seen in
Southeast Asian countries, but in
the last two years they have
gained popularity in the GCC
with a number of sovereign enti-
ties and corporate issuers tapping
into the ever increasing investor
interest in Islamic bonds.
However in the sultanate,
there hasn't been much move-
ment in that direction with only
one company coming out with a
sukuk issue so far. The reason is
primarily being attributed to the
late entrance of Islamic banking
and Shari'a-compliant products in
this market. But bankers and
lawyers unanimously agree that
the future looks bright.
34 Business Today DECEMBER 2014 www.businesstoday.co.om
FINANCE
The response to the much-awaited government sovereign issue and
Meethaq's sukuk programme will decide the future of Islamic bonds
in the sultanate
By Maheswaran P
OPENING A
NEW CHAPTER
“Islamic banking operations in
Oman started in 2012 following
the issuance of a Royal Decree.
The priority for the nascent Islam-
ic banking industry is to develop
the infrastructure, process and
procedures. The focus will be on
mainstream banking activities of
lending and project financing till
such time their asset books gain
considerable size to tap financial
instruments like sukuk. Going for-
ward sukuk will be an important
source of funding for Islamic
banks,” says Sulaiman al Harthy,
group general manager, Meethaq
Islamic Banking Group.
Sadaf Buchanan, partner at
law firm Dentons & Co adds that
there has been a lot of interest
and discussions on sukuk, particu-
larly in 2013 and she sees it as a
natural progression in any market
where Islamic banking is active.
“Oman is the last GCC country
to introduce Islamic banking. The
Central Bank of Oman has issued
both standalone licenses and also
licenses for dedicated Islamic
banking windows of conventional
banks. Therefore the market is still
in the development phase. Apart
from this, the fact that there has
generally been sufficient liquidity
available in the market means that
companies have been able to tap
into banks for funding. So the key
drivers to explore alternative
sources weren't there. Clearly
the conversation and interest is
ramping up and we have been
speaking to a number of parties
interested in issuing sukuk.”
Dr Jamil el Jaroudi, CEO of
Bank Nizwa says, “For investors in
Oman, not necessarily limited to
Shari’a-compliant investors, there
is an obvious gap in terms of
investment product offerings. We
GOING FORWARD SUKUK WILL BE AN IMPORTANT
SOURCE OF FUNDING FOR ISLAMIC BANKS,
SAYS SULAIMAN AL HARTHY
Sukuk story/E1:BusinessToday 11/25/14 12:26 PM Page 1

2. www.businesstoday.co.om DECEMBER 2014 Business Today 35
have bank deposits on one side
and shares on the other, with
nothing much in between. Sukuk
will therefore be in the middle.”
Salman Ahmed, partner at law
firm Trowers & Hamlins, which has
been the advisors for Oman's first
sukuk issue (the RO50mn issuance
by Tilal Development), also agrees
that sukuk is a good option.
He says, “Oman has excellent
potential for sukuk for a number
of reasons. First, the liquidity
available with Islamic banks and
Islamic windows can be used to
diversify funding and avail it at a
very competitive rate. Second,
there are numerous quality oblig-
ors capable of achieving good
rating, which makes them worthy
candidates for issuing sukuk. Last-
ly, Oman is going through various
infrastructure upgrades and the
number of development projects
currently in progress lends itself to
the utilisation of sukuk, which
can be used to either refinance a
completed project or fund the
complete or part of the project.”
Global scenario
According to a Global Sukuk Mar-
ket Quarterly Bulletin released by
Kuwait-based Rasameel Structured
Finance Company the global
sukuk market witnessed issuance
worth US$66.2bn in the first half
of 2014. This was 8.2 per cent
higher than US$61.2bn in the
same period last year, with a flurry
of issuances coming into the mar-
ket in the second quarter primarily
in the GCC and Malaysia. The
GCC accounted for 26.7 per cent
of the total global new sukuk
issues in the first half at US$17.7bn
compared to US$14.1bn in the
same period last year.
Among the GCC nations,
Saudi Arabia led the chart con-
tributing US$9.05bn or 51 per
cent of the region’s total new
sukuk issuances in the first half.
This was followed by Qatar, which
contributed US$4.12bn or 23 per
cent of the GCC market share,
and then UAE issuing sukuk
worth US$3.65bn (21 per cent
market share) in the first half.
Meanwhile, Bahrain produced a
volume of US$883.3mn, but
Kuwait and Oman remained
absent from the market.
Upcoming sukuk issues
One of the most awaited sukuk
issues is the government's
RO200mn sovereign offering,
which is expected to hit the mar-
kets in 2015. Analysts expect the
issue to be a roaring success as it
offers Shari'a-compliant invest-
ment opportunities to local
investors and at the same time
attracts foreign investors seeking
opportunities in Oman.
Jaroudi is of the opinion that
the primary driving factor is the
government’s need in regards to
its spending plan and he believes
issuing conventional bonds or
sukuk will be the most attractive
way to raise funds.
“Oman is enjoying its position
as a single-A-rated sovereign
country with no current interna-
tional issuance, whether it’s
conventional bonds or sukuk, and
thus has ready pent-up demand
from international investors want-
ing to enter Oman, even on the
basis of diversification alone.
Therefore, unconventional bonds
are in demand due to the lack of
sukuk supply in general and it
may even offer more attractive
pricing as compared to conven-
tional bonds.”
WE HAVE BEEN SPEAKING TO A
NUMBER OF PARTIES INTERESTED IN
ISSUING SUKUK, SAYS SADAF
BUCHANAN
UNCONVENTIONAL BONDS ARE IN
DEMAND DUE TO THE LACK OF SUKUK
SUPPLY IN GENERAL, SAYS DR JAMIL
EL JAROUDI
THE LIQUIDITY AVAILABLE WITH ISLAMIC
BANKS AND ISLAMIC WINDOWS CAN
BE USED TO DIVERSIFY FUNDING, SAYS
SALMAN AHMED
Sukuk story/E1:BusinessToday 11/25/14 12:26 PM Page 2

3. Michael P Grifferty, president
of the Dubai-based The Gulf
Bond and Sukuk Association
(GBSA) believes the best time to
go for an issue is when you are
not under pressure to raise funds.
“We have for years encour-
aged GCC governments to issue
both conventional bonds and
sukuk so as to build a yield curve
and create markets. The best time
to start that practice and create
the necessary market infrastruc-
ture is when you are not under
pressure to raise funds.”
He adds that sukuk specifically
should be interesting because they
would allow the government to
tap into both the conventional
and dedicated Shari'a-compliant
investor base. “But sukuk should
not be regarded as a panacea.
Demand for Oman sovereign
sukuk would be strong, but not
unlimited. Issuance should be part
of an overall funding strategy
rather than opportunistic.”
Another issue which investors
are keeping a close watch over
is the sukuk programme of
Bank Muscat. Harthy says,
“Meethaq as we speak today has
assets worth RO450mn. As we
grow our assets book we need to
find ways to fund these assets.
The way to fund assets is primari-
ly through deposits from clients,
but we also need to look at other
viable options.”
The bank has taken share-
holder approval for the sukuk
programme for five years and will
be able to raise up to RO500mn.
Harthy says, “We have in-prin-
ciple approval from CBO and there
is some groundwork to be done
and we hope to go to the market
early next year. The proposed first
issuance is in the range of
RO100mn and then we will issue
other tranches as we go along.”
Experts believe that sukuk are
an alternate option for corporates
to raise money and it is a com-
pelling way to diversify their
sources of financing. Grifferty says
that sukuk have demonstrated
their worth vis a vis conventional
bonds. He adds that corporates
will not only be able to achieve
cost-effective funding with sukuk,
they can also mitigate their
refunding risk as sukuk tenors are
steadily extending.
Draft sukuk law
While the general trend in most
countries is to develop the existing
capital market legislation to incor-
porate Islamic bonds, Oman has
taken a proactive step by develop-
ing draft sukuk regulations. Sadaf
believes that it is really important
to have a solid legal framework in
place before the big ticket
issuances take place.
“International investors would
want that certainty of issuances
undertaken within the regulatory
framework of the country. If there
is a gap, this could lead to delays
in developing the market if
investors lack the necessary
appetite,” she says.
However, Ahmed is of the
opinion that a legislation for
sukuk is useful but not essential.
“It is a good legislation which
clarifies a few issues (i.e. use of
trust) which may be of concern to
certain market players. However,
my personal view is that there is
too much emphasis on a separate
sukuk legislation,” he adds.
Even though Oman has seen
only one sukuk issue in the last two
years, the general consensus is that
the outlook is bright and the coun-
try will witness more offerings in
the coming years. Bankers and
lawyers believe that the success of
the government's sovereign bonds
and Meethaq's offering will send
an important signal to other
potential issuers.
“If both sukuk are perceived to
be successful issuances then the
sukuk market in Oman could
develop and mature very quickly,
given the framework that has
been put in place,” says
Mohammed Dawood, global head
of Sukuk Financing at HSBC.
Jaroudi adds, “We are confi-
dent that a successful govern-
ment sukuk issuance will open
the door for many more in the
future. At this time, without a
clear pricing benchmark, potential
issuers are naturally reluctant to
tap into the sukuk market with-
out a clear indication of the
potential outcome.” g
FINANCE
www.businesstoday.co.om36 Business Today DECEMBER 2014
WHATISASUKUK?
Sukuk commonly refers to the Islamic equivalent of bonds. However,
as opposed to conventional bonds, which merely confer ownership of
a debt, sukuk grants the investor a share of an asset, along with the
commensurate cash flows and risk.
THE BEST TIME TO
GO FOR AN ISSUE IS
WHEN YOU ARE
NOT UNDER
PRESSURE TO
RAISE FUNDS,
SAYS MICHAEL P
GRIFFERTY
IF BOTH ISSUES ARE
SUCCESSFUL, THEN
OMAN’S SUKUK
MARKET CAN
DEVELOP AND
MATURE QUICKLY,
SAYS MOHAMMED
DAWOOD
Sukuk story/E1:BusinessToday 11/25/14 12:26 PM Page 3