Customers are now going back into expansionary phase

Standard Chartered is currently having "good and healthy" conversations with a handful of sovereign and quasi-sovereign entities for new sukuk issuances this year. Majority of them are dollar issuances but some are also pondering dirham-denominated issues, a top official from the bank's international Islamic window told Emirates Business.

"Sukuk is not a leading indicator of recovery but the fact that conversations are going on with customers suggest that they are going back to expansionary mode again," Afaq Khan, CEO of Standard Chartered Saadiq, said in an exclusive interview. He said the sukuk industry would continue to grow despite the many controversial issues that it is currently facing. How the courts will deal with the bankruptcy of East Cameron Partners in the US – the US' first and only sukuk – will be crucial on the future of sukuk. The default by Investment Dar of Kuwait on a sukuk payment that matured in 2009 also shows that sukuks are no longer a safe haven that offers predictable returns with minimal risk.

"Default is not done by syndication, securitisation, sukuk or bond. One is not more prone to default than the other. It has to do with the inability to pay. What has that got to do on whether it is conventional or Islamic?" Khan asked.

The Islamic finance industry was also put under the spotlight when it was incorrectly reported that Sheikh Taqi Usmani of AAOIFI said 80 per cent of sukuk was not Shariah compliant. His comments, however, were directed towards certain malpractices in structuring sukuks based on partnerships.

"AAOIFI gave some guidance on mudaraba and musharaka structure. They do not constitute 80 per cent of sukuk outstanding in the world today, so obviously 80 per cent of sukuks can't be wrong," he said.


Your retail operations are all based in Asia and the Middle East. Are there plans to expand into Europe such as the UK, which has been actively promoting Islamic finance in the last few years?

Not really as we don't have very big retail operations in London. Standard Chartered Bank is in Asia, the Middle East and Africa.

Can we expect you to open up presence at least in other developed financial economies in Asia such as Singapore and Hong Kong?

We have been doing Islamic banking since 1992 in Malaysia. In 2003, the bank decided to have a global team. We are now in six countries – the UAE, Pakistan, Bangladesh, Bahrain, Malaysia and Indonesia. These are brick and mortar businesses where we have a physical presence and we offer consumer banking. We will grow organically, although we are always looking at opportunities. We want to have critical mass in each country that we operate in rather than open in a new market every year. Our progress is determined by customer needs. Right now, on the retail banking side I don't see a lot of value that we can add. Remember, the mandate for wholesale bank is global; it is only in the retail banking that you need a brick and mortar approach.

Can you expound on the 'critical mass' point – how many people in terms of employees or Islamic population is needed to reach this level?

For the consumer banking business, you need to have a critical mass so that you can cut the cost of the delivery down to the customer. It's difficult to say how many people but you need to have, for retail banking, a size of population. Otherwise, the distribution cost is [will be] too high and it will reflect on the solution that we offer to the customer.

Turning now to global banking, which seems to be a bigger portfolio of the bank, are you arranging any sukuks at present?

We arranged all the big sukuks last year. This year, we are in several conversations but sukuks, until they are launched, they are in a black-out period. What I can share with you is that we have good and healthy conversation with customers.

Which sectors are these upcoming sukuks from?

Right now they are mostly sovereigns and quasi-sovereigns.

Will there be a health pipeline of sukuk issuance this year?

Yes, there will be.

Which currencies are likely to be used?

Majority of them are in dollars.

Economists have long been lobbying for a dirham or any local currency denominated sukuk or bond market to deepen the debt capital markets. Is that something we can see in the near future?

There were several issues in dirhams.

But still they are few…

The issue is that the issuer or the customer wants maximum capital. When you want to attract the maximum liquidity and you say you want to go for dollar issue only, you may lose some potential investor who want to invest in other currencies. That's why you don't see a lot of euro or sterling sukuks. This part of the world has fixed exchange so the Middle Eastern investor does not ask for a premium to invest in a dollar issue and a dollar investor does not ask vice versa.

Are you talking to any corporates or governments who are looking at issuing sukuks in dirham currency?

Yes, we have ongoing conversations.

Can we equate the growth in sukuk issuance to the rate of recovery?

Sukuk is not a leading indicator, but the fact that conversations are going on with customers suggest that they are going back to expansionary mode again.

In Malaysia, it is mandated that sukuks should be rated. Is it really necessary that sukuks be rated?

Not necessarily. Invariably it helps because it attracts a wide source of investor. Say you are a bank or an asset manager and your policy says that you should only go for a rated sukuk or a pension fund and you are only allowed to invest in an A-rated investment paper. If you are not rated, then you will lose that investor because of his internal ratings.

It has been reported or misreported that about 80 per cent of sukuks are not strictly Shariah compliant. That raises an issue on compliance. What are the main criteria to make a bond genuinely Islamic?

There is a lot of misinformation. The quote that 80 per cent of sukuks are not strictly Shariah compliant is fundamentally wrong. Everybody looked at the wrong article and republished it. What AAOIFI did was give some guidance in mudaraba and musharaka structure. They do not constitute 80 per cent of sukuk outstanding in the world today so obviously 80 per cent of sukuks can't be wrong. Sukuks are Islamically structured capital markets solution. The issuer should be in a business that is Shariah-compliant – manufacturing and trading. Industries that are not Shariah-compliant are gambling, alcohol and conventional banking because they primarily deal with interest but all other businesses are allowed. The underlying should also be Shariah compliant.

Are pricing for sukuks better than the traditional bonds?

No. If a customer has an established curve – where he has issued a conventional paper – then sukuks will invariably come flat to the curve. If you go to a new market and try to attract a new investors class, there will always be a new issuer premium. But that is also true for conventional issuance.

Why would an issuer go for a sukuk rather than a conventional bond?

For the issuer, the advantage of going to a sukuk is that in the same transaction he can attract the conventional investor and the Islamic investor. As a result the depth of investor base increases.

But doesn't the cost of documentation pose a hurdle to issuing sukuks? It seems that due to the lack standardisation in the documentation of sukuks, the cost tends to be higher.

There was a time – seven to eight years ago – when there were some material differences in cost. Now that the size of transaction has increased and the lawyers and issuers have become familiar with the documentation, banks and rating agencies have expertise – the time taken to launch a sukuk has now come very close to the conventional one. The cost in material terms is now almost the same. If you make a $1 billion (Dh3.67bn) bond, the legal cost of doing it as Islamic or conventional is hardly different.

People used to believe that sukuks are a far safer haven because it is asset-backed. But with cases of Saad, Investment Dar and East Cameron, do you think sukuks are still less likely to default compared to its traditional peers?

Default is not done by syndication, securitisation, sukuk or bond. Default is done by a customer. When the customer defaults, he defaults on LCs (letter of credits), syndications, sukuks and securitisation. One is not more prone to default than the other. It has to do with the inability to pay, which relates to cashflow. What has that got to do on whether it is conventional or it is Islamic?

The recent English High Court decision in The Investment Dar Company versus Blom Developments Bank appears to throw some doubt on the Shariah-compliance of wakala contracts. What's your take on that?

There is again a lot of miscommunication in the Press. The court first said return the principal then I will hear the dispute. The court said when the money is secured, then we will talk about the profit. Nobody knows until the court hears it why they say it is non-Shariah compliant. Is it a poorly drafted or executed document – that is what the court will hear. What happened is that we don't know but the fact is that the court said first return the money.

Will it not set a precedent for parties to question if an agreement or a business is Shariah or non-Shariah compliant?

We don't know why lawyers are claiming it is non-Shariah compliant. It could be for several reasons – documents were deficient, the Shariah fatwa was not given or everything was there but it was not executed properly. But an English court cannot say that wakala is non-Shariah compliant because an English court has no knowledge to decide on Shariah compliance or the lack thereof of an Islamic concept. I don't think the English court can set a judge[ment] whether the wakala is Shariah or not – it is not its set of expertise.

Islamic finance has long been criticised for the lack of standardisation, which regulators see as an outstanding challenge. How can they regulate this sector if there are no written standards?

There is a lot of miscommunication on standardisation. There are two types of standardisation – one is for cross-border transactions such as sukuks, syndication and project finance. Any place where you are getting more than one investor from another country. The only way that a customer can participate in the transaction is if it also meets his requirements.

When you do a sukuk, it is itself a proof that standardisation is taking place if you have investors in 10 countries. The second type is in retail banking.

When we do retail banking in any country in any currency we have standard documents – anybody who takes a mortgage

has exactly the same document from the same bank. Are the forms different per bank? Yes but that is true in conventional also. But in the bank there is a lot of standardisation happening already. But is there room for further growth? Yes. Should this journey continue? Yes.

PROFILE: Afaq Khan Chief Executive Officer, Standard Chartered Saadiq

Afaq joined Standard Chartered Bank in 2003 with the mandate to launch the Islamic business division for the bank. Since then, he has been responsible for the strategic build-up of the international Islamic banking business covering retail, corporate and investment banking, culminating in the launch of the 'Saadiq' brand for Islamic banking at Standard Chartered Bank in 2007.

Standard Chartered Saadiq has a wide suite of product capabilities, having rolled out more than 100 products and solutions across geographies and in both consumer and wholesale banking divisions. Standard Chartered Saadiq has received numerous awards, including being voted the Best International Islamic Bank in 2009 by Euromoney and the Best Islamic Investment Bank by the Asset Triple A Awards for Islamic Finance in 2009.

Afaq has more than 20 years banking experience and is actively involved in helping governments develop Islamic banking regulations. His in-depth banking experience has led him to a number of industry "firsts" including the inaugural USD denominated sukuk issued by the Republic of Indonesia; the first sovereign sukuk issued in AED denomination by Ras Al Khaimah; as well as the first local currency sukuk programme issued by the Government of Pakistan and the Monetary Authority of Singapore.

Afaq is a member of a various high-profile advisory boards.


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