The International Islamic Liquidity Management Corp (IILM), whose aim is to issue short term sukuk to be used as liquidity tools by Islamic financial institutions, has had a rough ride since it launched in late 2010. Market participants and the media have grown impatient for a debut — recent delays have only heightened the clamour.
It is easy to sympathise with the agitators. Success for Kuala Lumpur-headquartered IILM — which is backed by 11 central banks — could be a breakthrough for Islamic banking, which has been hampered by the lack of liquidity products of this kind.
But with the best will in the world, something involving so many moving parts and such a high level of negotiation was bound to take time. A big reason for IILM’s delays has been that its instruments must comply with the wide range of financial regimes and Shariah interpretations in its member countries.
The latest questions about IILM have stemmed from its no-show after it looked close to hitting the market with a $500m programme in late April — despite stakeholder Saudi Arabia dropping out of the plan. But a better question is: why would IILM have come to market?
In early May the global sukuk market was buoyant, but Saudi Arabia’s walk-out from IILM meant that changes were needed — the kingdom's shares were bought out by the central banks of Malaysia and Qatar. There was also the small matter of Malaysia’s close-run general election, on May 5.
Since the end of May, however, the whole emerging market bond sector has been hit by an unforeseensell-off — which has turned out to be the longest since the credit crisis. This has created big swings and inefficiencies in sukuk prices as well as in underlying currencies. Meanwhile, political goodwill between the UAE, Saudi, Kuwait and Qatar and Turkey has been strained over the deposal of president Mohamed Morsi in Egypt. The leadership in Qatar has also changed.
Rather than demanding black and white answers from IILM and holding its debut to a definitive timeline, those who care about the Islamic market would do better to give its pressured CEO, Rifaat Ahmed Abdel Karim, some breathing space and understanding. These are not the right conditions to launch any new product, let alone one so intently scrutinised and whose success or failure will project a lasting colour wash over Islamic finance as a whole.
In any case, IILM’s ultimate success will be judged not on one landmark issue but on whether it can sustain continued issuance over many years. Its failure, however, could well be proclaimed after one poorly timed or orchestrated attempt to come to market, so why risk more than two years of work in such conditions and with stakes so high?
One clue that IILM is ready to issue when market conditions allow is that Standard & Poor’s has taken its proposal seriously, giving its programme an A-1 short term rating. IILM has also secured the services of Standard Chartered as a primary dealer.
And the fact that IILM recently shuffled some of its Shariah board should not be taken as a sign of trouble but rather that it is ready for the next phase of development (the original board was only meant to sit until the end of 2013 in any case).
Those who know Karim’s record and determination say it is odds-on that he will soon make the naysayers eat their words.