In January 2013 the Capital Market Authority (CMA), Oman’s capital markets and insurance sector regulatory agency, released draft regulations covering the issuance of sukuk – sharia-compliant debt instruments that function much like conventional bonds. Sukuk are the latest in a series of Islamic financial institutions and products to be introduced since 2011, when the Central Bank of Oman’s (CBO’s) “Islamic Banking Regulatory Framework” (IBRF) came into effect, authorising a wide variety of sharia-compliant financial sector activity for the first time.
Since then the Islamic segment has expanded quickly. As of late 2014 the sultanate was home to two full-fledged Islamic banks; six Islamic banking windows, which are operated by conventional lenders; two takaful (Islamic insurance) firms; and a handful of other sharia-compliant instruments or entities (see Insurance chapter).
The CMA’s draft sukuk legislation is widely regarded as a major step forward for Oman’s burgeoning Islamic financial sector. “There is a lot of liquidity in the Islamic sector right now,” said Lloyd Maddock, CEO of Ahli Bank, which operates the sharia-compliant window, Al Hilal Islamic Banking Services. “We have very few options in terms of investing this cash in Oman at the moment, due to a lack of sharia-compliant instruments. With this in mind, the industry is very excited about sukuk.”
Since the draft regulations were introduced several firms have moved forward with sukuk issuance. In November 2013 the Tilal Development Company (TDC), a real estate management firm, carried out a OR50m ($129.5m) sukuk sale. The listing, which offered a rate of 5% over a five-year period, was the first and only corporate sukuk to be issued in the sultanate and the first to be denominated in Omani rials.
The TDC sukuk was placed with private investors, primarily banks and pension funds. Several other corporates have since announced plans to issue sukuk of their own. In March 2014 Bank Muscat’s sharia-compliant window, Meethaq, announced that its shareholders had approved a OR500m ($1.3bn) sukuk issuance programme, which could be expected in the first quarter of 2015.
Oman’s government also made an announcement in early 2014 that it planned to issue OR200m ($517.9m) in sovereign sukuk in late 2014 – though this was later revised to early 2015. These upcoming sukuk issues bode well for the future prospects of Oman’s Islamic financial services industry.
Public Debt
The introduction of sukuk is widely considered to be part of the government’s overarching programme to develop Oman’s public debt market, underway since at least 2012. Bond listings in Oman are generally few and far between, though the CBO occasionally sells relatively small, short-term debt instruments – usually certificates of deposit (CDs) – primarily to banks, which use them to manage their short-term debt obligations.
These CDs are issued largely as a monetary policy tool, similar to the US’s issuance of Treasury bills and other kinds of short-term debt. The CBO has also successfully issued development bonds in recent years, generally earmarked for capital expenditure – particularly on initiatives related to infrastructure, schools and health care programmes. With five-to-seven-year maturities and values of OR100m-200m ($258.9m-517.9m), these issues are regularly oversubscribed. A new OR200m ($517.9m) float was announced by the CBO in late November 2014.
As of the end of August 2014 commercial banks held OR566.2m ($1.5bn) in government development bonds and OR1.8bn ($4.7bn) in CBO CDs. While these figures tend to fluctuate slightly according to Oman’s debt servicing, government development bond holdings by the commercial banking sector have more than tripled since 2009, pointing to both steady demand from the banking sector and a greater willingness to issue debt by the state. The CMA is currently in the midst of analysing the debt market with the goal of eventually revamping its regulatory framework. “The rules surrounding bond issuance in Oman are currently somewhat restrictive, including who can issue and in what size,” John Spencer, head of strategy and business development at the CMA, told OBG. “Given that the government is setting out on a period of large-scale infrastructure development, we plan to make the process of issuing debt easier and more lucrative. This should result in more government listings and, eventually, more corporate listings as well.” Given Oman’s strong economic fundamentals and the high level of liquidity in the banking sector, issuance of corporate debt is relatively rare in the sultanate. Indeed, most companies finance the majority of their activities through bank credits, which are cheap and generally much easier to obtain than arranging for a bond issue.
That said, a handful of firms have elected to issue corporate debt in recent years. As of December 2014 there were 10 corporate bonds listed on the Muscat Securities Market (MSM), including issues from Bank Muscat, Ahli Bank, Bank Sohar, Al Omaniya Financial Services and Renaissance Services, the oil and gas transport service provider.
Sharia Compliance
Taking into account the low level of activity in Oman’s conventional bond market in recent years, the introduction of sukuk has the potential to jumpstart debt financing in the sultanate. The CMA’s draft sukuk regulation builds on and clarifies the one laid out in the CBO’s IBRF, which included basic tenets of sharia-compliant debt issuance and allowed for future provisions to be made. The CMA’s legislation goes into considerable detail, broadly defining sukuk as “negotiable capital market instruments (such as notes or certificates) that represent or evidence a proportionate interest in underlying assets and revenues, and have been structured according to sharia precepts”.
Sukuk, as defined by the CMA, differ from conventional bonds in a variety of ways. Most importantly, a sukuk subscriber becomes a partial owner of an underlying asset and, as such, receives a portion of any of that asset’s profits or losses. Generally, a sukuk issuer sells shares in a given asset for a set period of time, at which point the issuer is responsible for buying the shares back from subscribers. Many variations on this basic structure are possible, depending on the terms of a specific instrument.
Under the CMA’s draft regulations, only two types of corporate entities are allowed to issue sukuk in Oman – specifically, either a domestically incorporated joint-stock company or a special-purpose vehicle, the latter of which is a company incorporated strictly for the purpose of issuing sukuk.
Early Bird
The TDC’s OR50m ($129.5m) sukuk, issued in November 2013, was the sultanate’s first Islamic debt issue. The company floated the instrument with the goal of financing a major expansion of Muscat Grand Mall, a large mixed-use shopping complex located in the Al Khuwair district of Muscat. The financing is being used to add 322,917 sq feet of space to the mall, or enough room for 100 new retail outlets, boosting the total number of shops to 250. Additionally, financing earned from TDC’s sukuk is to be used to double the size of the parking lot and add new entertainment facilities.
TDC’s issue was an ijara sukuk, a common and very popular structure whereby the instrument effectively functions as a leasing arrangement. Major subscribers to the issue included state pension funds from throughout the GCC region and a wide variety of sharia-compliant banks and windows, as well as several other major corporate entities.
In April 2014 TDC successfully made its first payment on the sukuk, issuing 5% of the value of the instrument to subscribers. Several other companies also played a role in the listing, including Bank Nizwa – one of two full-fledged Islamic banking institutions – and the sharia-compliant banking windows of Bank Dhofar, Bank Muscat and Qatar International Bank.
Upcoming Issuance
TDC’s successful listing has encouraged a wide variety of other players to look more closely at sukuk as a viable means of financing major projects. Indeed, several firms have announced upcoming listings. The OR500m ($1.3bn) sukuk recently approved by Meethaq – Bank Muscat’s Islamic arm – for example, is expected to be released in tranches and will likely carry tenors of three to five years, according to the bank.
“The sukuk issuance would be gradual and size would depend on the bank’s funding needs,” Sulaiman Al Harthy, group general manager of Meethaq, told press in May 2014. “The debut sukuk size could be around $300m.” Meethaq plans to use the sukuk financing for the expansion of existing business lines, such as home financing, and to fund the launch of new products and services. A handful of other companies have also disclosed plans to issue sukuk in the near future, including Bank Nizwa.
The government’s announcement in early 2014 of its plans to float OR200m ($517.9m) of sukuk in Oman in late 2014 has the potential to jumpstart issuance. Oman’s sovereign sukuk, which will likely be put forward by the CBO or the Ministry of Finance, will be used to help the government meet the 2014 budget deficit, which is projected to come in at a total of OR1.8bn ($4.7bn). The remainder of the deficit is expected to be financed through foreign borrowing and financial reserves.
The sukuk will have the secondary benefit of absorbing some of the abundant liquidity currently available in the country’s nascent Islamic banking segment. With more options to make investments at home, local sharia-compliant institutions will be able to withdraw from foreign markets, thereby putting their money to work in Oman.
In August 2014 the Ministry of Finance announced that the OR200m ($517.9m) sovereign sukuk issuance had been pushed back to early 2015, forming part of a larger sovereign debt issue of OR500m ($1.3bn) in total, including OR300m ($776.8m) of conventional debt. The state has yet to decide on an arranging bank for the sukuk issuance, though as of late 2014 the ministry had reportedly received a considerable number of applications from Omani financial institutions, demonstrating market interest.
Given Oman’s fiscal stability, demand for the country’s debt is widely expected to be quite high. Indeed, in June 2014 Standard & Poor’s affirmed the country’s A/A1 rating on long- and short-term foreign and local-currency sovereign debt, respectively, while Moody’s maintained its A1 sovereign credit rating.
Provided the state’s debt sale in early 2015 is successful, the government could move to issue additional sukuk in the coming months and years. The drop in oil prices in late 2014 – Brent crude was down to a five-year low of less than $68 per barrel in late November, before rallying slightly to around $70 in early December – means that Oman and other energy-rich countries in the Gulf will likely face increased budget deficits in the years ahead. As such, sukuk could provide an attractive financing alternative to bridge any funding gaps that arise.
Many local players echo expectations that the government will issue additional Islamic-compliant and conventional debt alike in the coming years, given that its credit ratings hold. While Oman’s 2014 budget assumed an oil price of $85 per barrel – considerably more conservative than the actual price of more than $100 when the budget was drawn up – the price has since dipped below that number and is projected to stabilise down at around $60 per barrel, according to reports from OPEC’s largest producer, Saudi Arabia, circulated in December 2014.
Darwish Al Balushi, Oman’s minister of finance, announced in late October 2014 that the government plans to introduce a series of subsidy cuts in early 2015 in an effort to make up for declining revenues. At the same time, the government has also disclosed that it is looking into the issuance of more debt – and particularly sukuk – in the coming years.
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