One of the positive outcomes of the 36th annual board of governors meeting held in Jeddah last month was the approval by the Board of Directors of the Islamic Corporation for the Insurance of Export Credit and Investment (ICIEC), the standalone export credit and political risk insurance agency of the IDB Group, of the corporation's capital from the current $240 million to $640 million. (source)
The obvious benefit for ICIEC is that the capital increase would substantially increase its underwriting and reinsurance capacity. But there is potentially a much more important implication of the capital increase, officially from 250 million Islamic Dinars to 400 million Islamic Dinars. ICIEC, according to CEO Abdel Rahman Taha is working on launching two unique products - an LC Guarantee Fund and a Sukuk Guarantee Fund - which would fill a major gap in the market.
Taha confirms that ICIEC is still reviewing the feasibility of launching the LC Guarantee Fund, and are in discussions with some partner institutions on the structure and objectives of the fund. For the Sukuk Guarantee Fund, once the corporation's new capital increase takes effect, ICIEC may have enough insurance capacity to launching such a Fund, which would effectively act as a third party guarantee for sukuk, especially Musharaka and Mudaraba Sukuk.
The global sukuk market is currently estimated at about $150bn of papers outstanding. In the wake of the financial crisis a small number of sukuk have defaulted. Sukuk, by their very nature cannot be guaranteed by the issuers, but can be guaranteed by a third party. This puts ICIEC in an ideal position to be able to provide the insurance depending on the risk or the nature of the underlying transaction. "We have estimated that once the market returns to normality, new sukuk issuance would top $30 billion. If we assume that a third would actually go to the market we are talking about $10 billion of issuances," adds Taha.
Both the LC Guarantee Fund and the Sukuk Guarantee Fund, he says, should bring good returns to investors because the risk is not very high. It is not like trade credit where the risks are high. The track record of LC business is good because defaults are very rare. Central banks even in least developing countries make sure that the commercial banks do not default on LCs, because it is not good for the reputation of the country. In 16 years of insuring LCs, ICIEC has never had a single default. There were a few payment delays but these were sorted out with the respective central banks.
The Sukuk Guarantee Fund would also take the edge off the misunderstanding regarding the statement of the AAOIFI Shariah Committee in 2008 regarding guaranteeing of principal and purchase undertaking in Musharaka and Mudaraba Sukuk.
Third party guaranteeing of sukuk is fairly nascent in Islamic capital markets. The Malaysian government in the aftermath of the global financial crisis established in May 2009 Danajamin Nasional Berhad (Danajamin) as the country's first financial guarantee insurer. The objective was for Danajamin "to be a catalyst to stimulate and further develop the Malaysian bond/sukuk market" by providing financial guarantee insurance and a credit enhancement for bonds and sukuk issuances to help viable companies raise long-term fixed rate financing from the bond/sukuk market.
Danajamin, which is jointly owned by Minister of Finance Incorporated (50 percent) and Credit Guarantee Corporation Malaysia Berhad (50 percent) and is licensed under the Insurance Act 1996, is regulated and supervised by Bank Negara Malaysia, the central bank.
According to Danajamin, the bond/sukuk market is an important alternative source of financing, as it complements the banking sector. Its continuous development is critical in ensuring that Malaysian companies have several funding sources to finance their business expansion and investments.
Thus far in 2011, Danajamin has provided guarantees to six Malaysian sukuk issuances with a total size of RM2.25 billion. The latest one was the guaranteeing of the Antara Steel Mills' 7-year RM300 Million sukuk program at the end of June 2011. Danajamin CEO, Ahmad Zulqarnain Onn, is confident that this latest "collaboration is testament to Danajamin's commitment to work with the banking industry in providing Malaysian corporations access to capital, while fulfilling our objective to catalyze the development of the sukuk/bond market".
In June 2011, Danajamin also part guaranteed Ranhill Powertron II Sdn Bhd's RM710 million 18-year Islamic Medium Term Notes program. This is the first of its kind transaction for Danajamin whereby it is only part guaranteeing a bond/sukuk program, specifically the longer end of the issuance.
Of the RM710 million program, RM360 million (with maturities from 1 to 11 years) is issued on a standalone basis, while the remaining RM350 million (with maturities from 12 to 18 years) is guaranteed by Danajamin. At the same time it also co-guaranteed Ranhill Power Sdn Bhd's RM800 million Islamic Medium Term Notes ("IMTNs") program with Maybank Islamic Berhad. This was Danajamin's first collaboration with a financial institution to co-guarantee a transaction.
Under this arrangement, Danajamin and Maybank Islamic will jointly guarantee Ranhill Power's sukuk, with Danajamin concentrating on the longer end of the issuance.
The remaining two issuances which Danajamin guaranteed in 2011 included Gema Padu's RM170 million Islamic Securities Program; TSH's RM100 million Sukuk Musyarakah Sukuk Program. In addition Danajamin and Gema Padu also signed a RM170 million Al-Kafalah guarantee agreement.
