IILM moves to build sales network after sukuk debut -dealers

Reuters

By Bernardo Vizcaino and Al-Zaquan Amer Hamzah

KUALA LUMPUR, Sept 6 (Reuters) - Primary dealers of theInternational Islamic Liquidity Management Corp (IILM) saidafter enjoying healthy demand for its debut Islamic bond lastweek, efforts were shifting to expand the distribution networkof buyers.

The $490 million, three-month sukuk was auctioned to sevenprimary dealer banks, as the IILM aims to address a shortage offinancial instruments for Islamic banks to manage theirshort-term funding needs.

With the structure and approvals now in place,Malaysia-based IILM can shift its focus to establishing regularissuance, decide on future tenors and possibly expand itsnetwork.

"Ideally one of the next steps would be to develop anissuance calendar. They will develop a plan in relation to theother tenors," said Leon Koay, head of global markets andco-head of wholesale banking at Standard Chartered Malaysia, oneof the seven primary dealers.

"They've been approved for $2 billion, they've got plenty ofrunway. With this landmark issuance out of the way, the rest ofit would be easier."

A key element of the IILM, backed by nine central banks andmonetary agencies as well as the Islamic Development Bank, is a network of dealer banks that ensure a secondarymarket for sukuk.

"As primary dealer, we are obliged to participate in allauctions conducted by IILM and at best, try to be the marketmaker for the sukuk," Aria Putera Ismail, head of Islamic globalmarkets for Maybank Islamic, told Reuters.

"The market in general is still short of Islamic assets.Hence, we expect that there will be continuous demand frominvestors for such instruments."

CLARITY

With the sukuk now trading in the open market, prospectivebuyers can observe the bid-ask spreads which reflect liquidityin the market for IILM paper.

On Thursday, the first IILM sukuk had a sample best bid of0.608 (for a block of $5 million) with a sample best offer of0.525 (also for $5 million).

"This shows a perfectly normal and healthy secondarymarket," said Jonathan Grosvenor, general manager of globalfinancial markets at KBL European Private Bankers,the Luxembourg-based primary dealer for IILM.

The remaining IILM primary dealers are Kuwait Finance House, AlBaraka Turk, National Bank of Abu Dhabi and Qatar National Bank.

The sukuk was sold to primary dealers at 30 basis pointsover the London interbank offered rate, seen as attractivepricing for primary dealers to create a secondary market.

That spread was set by the IILM for the launch but goingforward it would be determined according to the auction processby primary dealers, Grosvenor added.

As the market gains a better understanding of how the IILMworks, it could also attract a wider range of buyers.

KBL, for instance, has reached out to Islamic asset managersand other regular buyers of such instruments in Europe, saidGrosvenor.

"We haven't made any calls to the Middle East and in a waywe are very complementary to IILM, we are adding somethingdifferent."

Better understanding of the IILM's structure could help tomarket its offerings.

The IILM uses a wakala structure, according to a filing withMalaysia's central bank. Wakala is a sharia-compliant agencyagreement where one party acts as agent (wakil) for another.

In a wakala sukuk, certificates are issued by an originatorto buy specific assets, which in turn are given to a wakil formanagement, which charges a fee for its services. The originatorundertakes to buy the assets at maturity at an agreed price.

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