Planned Sukuk issue to boost Islamic finance

THE GOVERNMENT’S planned maiden Sukuk bond offering this quarter is seen to encourage the market to explore private issuances of this type of security, aside from attracting more Islamic finance investors and players to the Philippines, the central bank said.

The upcoming debut of the Philippines in the global Sukuk market will be vital amid the country’s development of an Islamic capital market and finance ecosystem, the Bangko Sentral ng Pilipinas (BSP) said in a report released this month.

“This will send a strong signal that the Philippine economy is ready to accommodate Islamic finance investors and players. This will also generate the push for the domestic market to explore private Sukuk issuances to boost the country’s capital market,” the BSP said. 

The Philippines is eyeing to raise around $1 billion from the Islamic bond issue.

Finance Secretary Benjamin E. Diokno earlier said the government will proceed with the offering before the end of the year despite concerns of spillovers from the ongoing Israel-Hamas war.

At least six banks will be tapped as the underwriters for the issuance.

The details of the Sukuk structure may be a hybrid of contracts of wakala (agency), ijara (lease), or murabahah (cost-plus-markup sale), with a possible tenor ranging between five and 10 years, according to the BSP.

The details still need to be finalized through the engagement of the Bureau of the Treasury (BTr) with underwriters and Shari’ah consultants, it said.

“The availability of sovereign Sukuk will provide Islamic banking players with further means to manage their liquidity and investment requirements,” the BSP said.

Sukuk or Islamic bonds are defined under BSP regulations as certificates that represent a proportional undivided ownership right in tangible assets, or pool of tangible assets and other types of assets. These assets could be in a specific project or investment activity that is Shari’ah-compliant.

Citing a 2023 report from the Islamic Financial Services Board, the BSP said Sukuk dominated the Islamic capital market segment in 2022, accounting for 25.6% ($829.7 billion) of the $3.2-trillion global Islamic financial services industry last year.

“With the availability of a large variety of Sukuk structures in the global capital market, it is widely recognized that Sukuk complements the requirements and expansion of the Islamic banking industry,” the BSP said.

Sukuk also have notable features that distinguish them from the usual bonds. These issuances must adhere to Shari’ah principles and must be structured to prohibit elements like interest (riba), uncertainty (gharar), and investments in businesses that deal with prohibited goods or services (haram).

Three parties are involved in a Sukuk issuance: the originator, the special purpose vehicle, and the investors. Meanwhile, conventional debt instruments only involve an issuer and investors.

“In terms of ownership and risk sharing, holders of conventional bonds are merely holders of debt. Meanwhile, holders of Sukuk may have either legal or beneficial ownership and rights over the underlying asset, depending on whether a Sukuk is asset-based or asset-backed,” the BSP said.

“Holders of asset-backed Sukuk have legal ownership and recourse to the underlying assets or projects and share in the risks and rewards associated with these assets,” it said.

Meanwhile, only the beneficial ownership of the underlying asset will be transferred to holders of asset-based Sukuk, the central bank said.

“The originator keeps legal ownership of the underlying asset, and Sukuk holders only have recourse to the originator (obligor),” it added.

Conventional bonds may also be issued for multiple purposes, but Sukuk must be issued for financing a Shar’ah-compliant activity, the BSP said.

“On a positive note, Sukuk offers an alternative source of financing and investment diversification in the country. It caters to the needs of various groups of investors—individuals and institutions alike, whether Muslim or non-Muslim, and issuers,” it added.

The central bank expects Sukuk issuances to boost opportunities for Islamic banks in the country. Under the law, Islamic banks are allowed to issue Sukuk and other Shari’ah-compliant funding instruments for their operations with the approval from the Monetary Board.

“Other prudential policies covering Sukuk issuances are still in the pipeline. The BSP and the Securities and Exchange Commission continuously coordinate in providing a relevant and responsive regulatory framework on Sukuk,” it said.

The Shari’ah law refers to a system of values, norms, and rules regulating all aspects of life based on the principles of justice, fair dealings, and harmony through equitable distribution of wealth.

BSP officials earlier said the Monetary Board has approved the first Islamic banking unit license issued to a traditional bank. The BSP has yet to announce the bank that got the green light. — Keisha B. Ta-asan