International Islamic Liquidity Management Corp (IILM) faces a delicate task as it designs its maiden sukuk: it must make the issue attractive enough for investors to buy, but not so attractive that most of them buy to hold.
Whether it gets the balance right will affect the development of Islamic money market trading in the Gulf and South-East Asia over the coming year.
Malaysia-based IILM, backed by nine central banks and monetary agencies as well as the Jeddah-based Islamic Development Bank, has said it planned to issue up to US$500mil of dollar-denominated sukuk in the second quarter of this year, and eventually expand the programme to as much as US$3bil.
Its issues will be based on a very different premise than other sukuk. Other issuers design their sukuk merely to attract investors and raise money cheaply; IILM's mission is to create a highly liquid tool which Islamic banks will trade to manage their short-term funds.
To ensure trading of the sukuk around the world, IILM had signed agreements with eight primary dealer banks, said Ayhan Keser, executive vice president at Turkey's Albaraka Turk , one of the market-making banks.
“These primary dealers are given the right to purchase the issued sukuk in the primary market, have the responsibility to set the secondary market and actually buy and sell the bonds to form a market price,” Keser said.
Standard Chartered is another primary dealer, according to Standard and Poor's. The bank declined to comment on its role.
The participation of other banks in the primary dealer network appears less certain, however. Qatar Islamic Bank, the Gulf state's largest syariah-compliant lender by assets, is still considering whether to take part, according to its chief executive.
“We will probably be. It's still under discussion,” group chief executive Baseel Gamal said in Doha earlier this month.
Bank Islam Malaysia Bhd is awaiting internal approval from its syariah board, according to a source at the bank who declined to be named as he is not authorised to speak to the media.
A second Malaysian lender was also considering its participation, with the country's central bank pushing for decisions to be made soon, the source said.
Luxembourg, where the sukuk will be domiciled, has one confirmed primary dealer while another is still working on the paperwork, according to a banking source familiar with the discussions, who declined to be named because of the sensitive nature of the issue.
No specific date has been given for the first or subsequent sukuk issues, and the IILM did not respond to Reuters questions.
Another key issue for the IILM sukuk, which are expected to have maturities of up to one year, will be their bid-ask spreads in the secondary market.
If the issues are too small relative to demand, many investors may end up buying and holding them rather than trading them, making price discovery difficult and resulting in wide bid-ask spreads that hurt their function as a store of value.
Other international sukuk often trade with bid-ask spreads ranging from 80-100 basis points (bps), so the IILM paper will need to demonstrate it is much tighter than that.
Spreads above 50 bps could affect the IILM's effectiveness and credibility, said the head of treasury at a Bahrain-based Islamic lender. “Below 50 is good a quarter (0.25 percentage point) would be great.”