Dubai has made great strides towards being the center for sukuk listing globally. The total number of listed sukuk on NASDAQ Dubai and Dubai Financial Market accounts for $ 31.7 billion across 42 listed sukuk. Bursa Malaysia–which had previously been the most active—has the same number of listed sukuk but only two-thirds the total value of sukuk listed, the more important figure for secondary market trading.
Secondary market liquidity has been a hot topic in Islamic finance for years because, as a consequence of supply lagging demand, most buyers prefer to hold sukuk to maturity. Alternative methods of generating activity that also generate market depth to make pricing more robust have been slow to develop as no agreed upon Islamic repo alternative is used widely in the market.
Hamed Ali, CEO of NASDAQ Dubai, said one other area Dubai could work on is the repo market. A reference paper released by the International Islamic Financial Market in 2012 (I’aadat Al-Shira’a) described commodity murabaha transactions collateralized with sukuk as one possible structure for Islamic repo. Tri-party repo would also be a possibility because it would avoid concerns with bay’ al-ina’ that would be part of any repo product which mirrored the transaction legs of a conventional repo (sale and future repurchase).
However, there is a more limited share of sukuk listed on Dubai’s exchanges that would be well suited for repo based on size and ratings. A higher percentage of sukuk being of benchmark size is an advantage because these sized sukuk tend to be more actively traded (so market prices are closer to their true value than less actively traded sukuk). However, 40% of the sukuk listed on Dubai’s exchanges are not rated (and about 10% of those that are rated sukuk are not investment-grade) which may limit the appeal for using them as collateral, particularly for banks. Banks are big users of repo but may be limited in the amount of unrated collateral they accept.
Competition from Bursa Malaysia, the second largest market for sukuk listings, is limited by the market being more domestically focused with smaller issuers and more in Ringgit. However, more of the sukuk are rated. Malaysia’s central bank rules allow repo transactions involving sukuk but requires them be nonconvertible, investment-grade sukuk. Further in Dubai’s favor are its proximity to many large Islamic banks and having a sukuk market composed of 100% international (USD-denominated) sukuk. Competition in attracting cross-border repo transactions may be hindered by competition from London.
Although fewer sukuk are listed in London (the outstanding volume of sukuk limits the value of Islamic repo because of limits on rehypothecation), many of them are also listed in Dubai and London has a natural advantage of being a global financial system. Most commercial disputes are judged under English law and the London Metals Exchange is used widely for commodity murabaha transactions which may be part of the repo structure, so London may be able to capture more of the cross-border repo activity.
Any formalized system offering cross-border repo would be welcomed by Islamic banks given the huge shortage of opportunities to generate liquidity from sukuk holdings without selling them. Encouraging or mandating a ratings requirement for listed sukuk could help build the collateral necessary for Islamic repo.