IILM faces Saudi withdrawal

Euromoney, December 2013

In February 2012, Euromoney ran a feature looking at the International Islamic Liquidity Management Corporation, an institution that had been launched in 2010 to create and issue short-term Shariah-compliant financial instruments to improve cross-border liquidity management in Islamic finance. It had 14 founder members from Malaysia to Saudi Arabia, the greatest cooperation ever seen in the sector. It was a great idea, Euromoney argued; so why wasn’t it actually doing anything?

At the end of August this year, the IILM finally made its inaugural sukuk auction almost three years after the institution’s foundation: a US$490 million issue of three-month sukuk, priced at 30 basis points over Libor. This was a landmark, an important step, and something for the Islamic finance community to be proud of. But there’s just one thing: Saudi Arabia had gone missing along the way.

When the IILM was established in October 2010, it reflected a widespread recognition that Islamic banking could have run into serious trouble in the global financial crisis if there had been a loss of confidence in inter-bank liquidity in the Islamic world, as there was in conventional. Islamic banks then did not have any instruments available in the capital markets to bolster liquidity, particularly cross-border.

The driving force of the initiative was Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, but what was truly impressive about the IILM’s foundation was the breadth of its engagement: alongside Malaysia and Indonesia in Asia were everyone who mattered in the Middle East – Saudi Arabia, Kuwait, Qatar, the United Arab Emirates and Iran – plus representation from Africa (Nigeria, Sudan and Mauritius), Europe (Turkey and Luxembourg), and the Islamic Development Bank.

Mahmoud AbuShamma, the former head of HSBC Amanah coverage in Dubai, became CEO in February 2011, while Zeti became chair of the IILM’s governing board, and then the world waited for issues. The challenge, from the outset, was finding a common denominator among the founding jurisdictions, but AbuShamma said to expect an issue by the end of that year. There were other challenges – in particular, getting a rating, and securing high quality underlying assets to underpin a sukuk – but it is understood this issue of common ground among countries with differing strands of Islam, and different interpretations of Shariah law, was the headache.

AbuShamma would not be around to see the first issue, instead being replaced by Rifaat Ahmed Abdel Karim, the founding Secretary General of the Islamic Financial Services Board, in October 2012. Most of the Shariah board would change too before a maiden issue got any closer to launch.

By April 2013, as conjecture grew about what was happening, the IILM felt compelled to issue a press release saying – and this is not an exaggeration – that it had nothing to say.  The first press release in six months, it was a fabulously anodyne release, except that when one looks at it afresh, in the below-the-line ‘about the IILM’ section, it lists the current members of the IILM governing board – and Saudi Arabia is missing. A day later, the IILM announced “a restructuring of its shareholding,” and said that the central banks of Malaysia and Qatar had purchased the shares of the Saudi Arabia Monetary Agency in the IILM. It did not say why.

Whatever the reason, it clearly smoothed things considerably, because just three days later the IILM announced the official launch of its sukuk programme, by which time it had secured an A-1 public rating from Standard & Poor’s. And that led to the August launch.

So what happened? IILM has not added to its original comment about the change of shareholding, so Euromoney asked Governor Zeti. “Different jurisdictions were at different stages of the whole approval process,” she said. “It’s not for me to explain their position, but since we were able to get the other members to participate in the first issuance, we therefore proceeded.”

Zeti and other board members stressed that just because Saudi is not a shareholder in IILM itself anymore, it does not undermine Saudi Arabian participation in the instruments IILM issues. “They gave their full support to the issuance,” Zeti said. “One of their banks is a primary dealer and I believe their banks are permitted to hold these instruments. It’s just they are not a shareholder.”

Euromoney asked Sultan Bin Nasser Al Suwaidi, Governor of the Central Bank of the UAE, if Saudi Arabia’s absence was damaging to the IILM. “I don’t think so,” he said. “It is an institution that is going to issue short term liquidity instruments that I imagine even banks from Saudi Arabia will buy.”

That sounds promising, but again things are a little unclear. IILM’s own release on the sukuk programme names seven primary dealers, and none of them are Saudi Arabian. Malaysia is represented, through Maybank Islamic; Kuwait Finance House is there, AlBaraka Turk, National Bank of Abu Dhabi, Qatar National Bank, Luxembourg’s KBL, and Standard Chartered as the only global name. Al Rajhi had been expected to be a primary dealer, but was not on the list.

IILM perhaps demonstrates two somewhat contrasting things at once. One, that it is possible to achieve a degree of harmonization across the Islamic world to the benefit of the industry; but two, there are limits to the extent of that harmonization, and those limits seem to stand at the Saudi Arabian border. An inter-bank liquidity instrument can still thrive without Saudi’s involvement, and the appearance of the maiden sukuk is still good news. But with a far stricter interpretation of Shariah law than any other major Islamic finance nation, it may be asking too much to bring Saudi into the same securities as its peers.