Sukuk & Capital Market - Islamic Finance News

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Secondary Markets Stalemate?
Liquidity and the secondary market, or the lack thereof, in the Islamic
finance industry, has been hot on the lips of industry players since the
inception of the Islamic capital markets. A lackluster secondary market
has had an effect on the overall growth of the industry, particularly in
the long-term, NAZNEEN HALIM discovers.
The Islamic investor is known for his penchant to buy-to-hold
papers to maturity, which is perhaps one of the main reasons for
the current tepid movement in the secondary markets. Driven
by the mechanics of supply and demand, pricing in the Islamic
secondary market has also been relatively disappointing as the
buy-to-hold mentality and a limited diversity of Sukuk investors
have inhibited efficient price discovery.
Despite efforts from central banks such as the Central Bank of
Bahrain and Bank Negara Malaysia to drive secondary market
growth – through the issuance of short-term paper and the
establishment of the International Islamic Liquidity Management
center, which is meant to facilitate more efficient and effective
global liquidity management solutions for Islamic financial
institutions and to create greater cross-border investments; the
money market has yet to truly yield the results of these efforts.
In a paper by the IMF entitled: “Islamic bond issuance – what
sovereign debt managers need to know” it was suggested that
the development of a liquid secondary market will depend on
Shariah compliant short-term liquidity facilities and Sukuk as an
interbank money market instruments. It said: “Given the current
short-term nature of bank liabilities, the creation of money
market instruments, and asset securitization with shorter
maturities should help to encourage a secondary market for
Sukuk. Although Islamic banks are currently one of the largest
buyers of Shariah compliant products (with long maturities),
they would benefit most from issues at shorter tenors.
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