Sukuk Enhancement Fund for a Sustainable Islamic Finance Ecosystem

15 May, 2023

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Considering the structure of the Sukuk Enhancement Fund (SEF) as a product to support the Islamic finance ecosystems in IsDB member countries, a panel discussion was dedicated to the SEF during the 17th IsDB Global Forum on Islamic Finance held on 12 May 2023, during the IsDB Group Annual Meetings in Jeddah, Kingdom of Saudi Arabia.

Three leading experts in the Islamic financial industry joined the panel where they provided insightful details on the new mechanism and how it could be developed and deployed.

The panelists were Dr. Suminto Sastrosuwito, Director General of Budget Financing and Risk Management, Ministry of Finance, Indonesia; Mr. Ijlal Ahmed Alvi, CEO of International Islamic Financial Market (IIFM); and Ms. Sabeen Saleem, CEO of Islamic International Rating Agency (IIRA).

Dr. Hylmun Izhar, Senior Economist at IsDBI, moderated the session. He first delivered a presentation on SEF’s structure, concept, and objectives. He explained that the SEF provided a protection mechanism for Sukuk without additional cost to the insurers. He explained the crucial role of the fund to reduce informational asymmetries between issuers and investors, and that it offers an excellent arrangement for sharing the risks and enhancing the diversity and creditworthiness of Sukuk market.

In his contribution, Dr. Suminto Sastrosuwito first referred to the experience of issuance of sovereign Sukuk in Indonesia and mentioned that it is very much developed, with outstanding volumes of US$ 85 billion issued both in the global and domestic markets. However, the corporate Sukuk is very difficult to develop in ways where the outstanding amount is around US$ 5 billion, and infrastructure development is needed to develop further corporate Sukuk and credit enhancements.

He further explained the philosophical and conceptual side of the SEF concept. He explained that SEF could be established in a way that can contribute to market enhancements. He mentioned that it is not about the concept alone, but rather the applicability, where credit guarantee, insurance, and enhanced market infrastructure are needed.

Mr. Ijlal Ahmed Alvi described the ways SEF could help in making the market more diversified. He reiterated that SEF is more likely to be an independent fund. However, it is still a proposal and can be refined further. Regarding this, he described the causal factor for the issuer where with no enhancement, the issuer falls under the lower category in terms of the rating; in turn, the cost of issuing gets higher, and they tend to pay more premium. But if the enhancement is taken into consideration, it reduces the cost of issuing. Mr. Alvi highlighted the issues to take into consideration for refining the proposal.

He mentioned that Saudi Arabia has a considerable market demand where the concept of SEF can be brought in and developed orderly, deepening the capital market.

On her part, Ms. Sabeen Saleem mentioned that SEF would cover the function of credit risk as a part of other issues. Considering the current uncertainty, credit risks are very high. She elaborated on the SEF concept paper that some new risks will be introduced when the fund is put into effect.

She added that there are some mitigations, which are embedded and integrated into the SEF concept, that make it very palatable for the issuer. The main fundamental assumption of the concept in terms of market risk premium is the amount of protection offered is proportional to each other or is symmetrical.

In her opinion, a screening process will cover the real dimension of the product and will give a perspective to the fund. Depending on who and what gets covered, the risk profile could change accordingly, lending a certain amount of uncertainty to the evaluation. It cannot be considered a One-Shot guarantee because the fund’s strength develops over time.

In conclusion, the panel members positively noted the timeliness and relevance of the Sukuk Enhancement Fund (SEF) to help diversify the Sukuk market.

More details on the 17th IsDB Global Forum on Islamic Finance available here.

You can watch a video recording of the forum on YouTube here.

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