UAE’s Dh1.1 billion treasury sukuk to help build local currency bond market, boost Islamic economy

T-Sukuk will also contribute to the implementation of the new Dirham Monetary Framework

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Waheed Abbas

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Published: Wed 26 Apr 2023, 12:04 PM

Last updated: Wed 26 Apr 2023, 6:38 PM

The UAE government on Wednesday launched Dh1.1 billion dirham-denominated Islamic Treasury Sukuk (T-Sukuk) which will help build a local currency bond market and also boost the Islamic economy as one of the key pillars.

The T-Sukuk are financial certificates which will be traded to reflect the local return on investment, support economic diversification and financial inclusion.

It will be issued initially in 2/3/5-year tenures; followed by a 10-year sukuk at a later date and will be denominated in UAE dirham to develop the local bonds debt market and help develop the mid-term yield curve.

The T-Sukuk will also contribute to the implementation of the new Dirham Monetary Framework (DMF) and help establish the dirham risk-free pricing benchmark.

In February, Emirates Islamic bank, a subsidiary of Emirates NBD Group, launched the inaugural Dh1 billion dirham-denominated sukuk, becoming the first such dirham sukuk issuance by a UAE bank. The three-year issue witnessed robust demand and was oversubscribed 2.5 times. The order book exceeded Dh2.5 billion, allowing the bank to tighten the profit rate to 5.05 per cent, at a spread of 67 basis points over UAE government treasuries.

The UAE government’s sukuk was issued by the Ministry of Finance (MoF) as the issuer in collaboration with the Central Bank of the UAE (CBUAE) as the issuing and paying agent.

Mohamed Bin Hadi Al Hussaini, Minister of State for Financial Affairs, said the T-Sukuk will build a local currency bond market, diversifying financing resources, boosting the local financial and banking sector, as well as providing safe investment alternatives for local and foreign investors.

Khaled Mohamed Balama, governor of the Central Bank of the UAE, also issuing Islamic treasury sukuk will strengthen the infrastructure for the development of the Islamic financial sector.

“This issuance reaffirms the strength and stability of the financial system and the confidence of local and international investors in the UAE's ability to develop the financial sector in accordance with monetary policies and strategic plans,” said Balama.

The Ministry of Finance also published a primary dealers code and onboarded eight banks Abu Dhabi Islamic Bank, Dubai Islamic Bank, Abu Dhabi Commercial Bank, Emirates NBD, First Abu Dhabi Bank, HSBC, Mashreq and Standard Chartered as primary dealers to participate in the T-Sukuk primary market auction and to actively develop the secondary market.

According to Moody’s Investors Service, long-term gross sukuk issuance volumes fell 22 per cent to $80 billion in 2022 as significantly higher energy-related government revenue pushed fiscal deficits into surpluses for most Gulf Cooperation Council sovereigns.

It expects long-term sovereign sukuk issuance to stabilise in 2023 at around $80 billion, before rising to around $80-85 billion in 2024.

Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, said T-Sukuk will be a key enabler for the development of the nascent domestic debt capital market and also supports funding diversification initiatives and the Islamic finance ecosystem in the UAE.

“The T-Sukuk would give Islamic banks and conventional banks an option to invest their liquidity, and it could also help open the way for corporates and financial institutions to issue dirham-denominated bonds and sukuk. This will help build the domestic yield curve and provide a pricing reference for dirham-denominated bonds, sukuk and loan products,” he said.

Al Natoor added that the government sukuk could also allow investors to access smaller-sized or lower-rated domestic issuers unable to issue debt in the international market.

“Investors would also benefit from the UAE dirham’s peg to the US dollar, with no additional currency risk exposure. However, investing in the broader corporate debt market spectrum could entail additional credit risk," he added.

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