A long-awaited law allowing Jordan to issue sukuk has been cleared by both houses of its parliament, paving the way for the government to tap strong global appetite for Islamic bonds as it tries to repair public finances.
The law, which had been in development since 2010, was passed by the lower house of parliament earlier this month and approved by the upper house at the end of last week. It may take effect in about 30 days, after the government promulgates it, Sufian Elhassan, director of the research and information department of the house of representatives, said by telephone.
A sovereign sukuk would broaden Jordan's sources of funding, giving it access to a huge pool of Islamic investment funds in the Gulf. Its need for external financing prompted it to agree with the International Monetary Fund in July on a $2 billion stand-by loan arrangement.
State finances are under pressure after Jordan hiked subsidies and wages to limit social discontent in the wake of the Arab Spring uprisings, and because it is having to absorb tens of thousands of refugees from Syria's civil war.
The government is struggling to keep its budget deficit to around 5 percent of gross domestic product this year. In July, Standard and Poor's said its BB credit rating for Jordan had a negative outlook because of the vulnerability of the economy to regional shocks and "limited fiscal flexibility".
It is not clear when Jordan might issue its first sovereign sukuk, and hurdles remain, including the choice of an asset pool for the sukuk and arranging for the central bank to manage payments on it, said a senior Islamic banker in Amman, who declined to be named because of his bank's briefing rules. Because of Islam's ban on interest, sukuk instead pay returns on funds invested in a pool of assets.
The government is keen in principle to tap the domestic and international sukuk markets, the banker said. "The assumption is that Islamic banks (within the country) would buy 400 million dinars ($565 million) of government issuance."
Last week, Jordan's finance minister said the country was discussing the issue of a seven- to 10-year sovereign, conventional Eurobond worth between $750 million and $1.5 billion to foreign banks.
Because global investor demand for sukuk exceeds supply, Jordan might be able to issue Islamic bonds more cheaply than it could sell conventional bonds.
Jordan has a small but growing Islamic finance industry. Last year local company Al-Rajhi Cement issued an 85 million dinar, seven-year sukuk, the first in the country. Jordan Dubai Islamic Bank began operating in January 2010.
In order to facilitate corporate issuance of sukuk in Jordan, the securities commission may seek amendments to the company law and set up a committee to study issues such as compliance with sharia law, a source at the commission said.
The committee would include experts on both sukuk and finance in general as well as representatives from the securities commission, the central bank, the ministry of finance and the ministry handling awqaf (Islamic endowments), the source told Reuters.