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Sukuk in Kazakhstan Yerlan A.Baidaulet, Senior Adviser, MoID RoK, Chairman, ADIF, IDB Board Member (2011-2014) KazanSukukConference 09.04.2015.

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Presentation on theme: "Sukuk in Kazakhstan Yerlan A.Baidaulet, Senior Adviser, MoID RoK, Chairman, ADIF, IDB Board Member (2011-2014) KazanSukukConference 09.04.2015."— Presentation transcript:

1 Sukuk in Kazakhstan Yerlan A.Baidaulet, Senior Adviser, MoID RoK, Chairman, ADIF, IDB Board Member (2011-2014) KazanSukukConference 09.04.2015

2 Sukuk in Kazakhstan: facts IF Legislation: securities market MoF: sovereign Sukuk (when?) Instructions of the Head of State (as of 20.10.11 DBK: test Sukuk – pros & consNB RoK: Sukuk market engineSukuk 2015: systemic approach Sukuk market: proposals to the government Almaty: IF Hub in CIS and EAEU Finance Center?Advices on Sukuk market development in RF KazanSukukConference

3 IF Legislation in Kazakhstan: securities market What adopted?  12.02.2009 – Law “About amendments & changes into some legislative acts RoK on issues of establishing and functioning Islamic banks and Islamic finance entities” (general points (incl. such securities as investment fund shares, lease and participation certificates)  22.07.2011 – Law “About amendments & … on issues of Islamic finance organization» (IF securities to be issued by the state and legal entities resided in RoK).  The new draft law is being introduced to the Parliament due to planned issue of sovereign Sukuk.  Basic features : (earlier only Islamic banks and state holdings as issuers) 1) originators – state bodies and all legal entities registered by NB RoK, 2) common wordings (without details), 3) taxation not well considered What to be done? Necessity for the standalone law (case- by-case approach): lack of unification, some IF instruments (initially only common things, then commodity murabaha (AL Hilal), later ijara (DBK), then most probably istisna), no binding core law, random taxation methods, rebranding) Training of Islamic fund market personnel Preparation and synchronization of technical infrastructure on KASE Technical consultations with IIFM, AAOIFI Close cooperation with CBB, DIFC, MIFC Priority of primary market (less secondary one due to no speculations) KazanSukukConference

4 MoF RoK: sovereign Sukuk (when?)  2008-2009 RFCA Agency: initial announcements  2010 MoF: designing the Sukuk Ijara scheme (upon Roads Committee MTC (car roads as underlining assets) and Al Hilal Bank (co-financing and Sharia-compliance) targeted to finance current budget deficit. In July 2011 the second law adopted (see above slide) (where the state body allowed to originate Islamic securities).  2011 (late autumn) – most suitable timing for the pioneering sovereign Sukuk of Kazakhstan.  Role of top-management attitude  Necessity in regional/country benchmarking.  Gradual decrease of state budget deficit and lack of motivation.  2012 - test issue of corporate Sukuk by DBK  2013 - official quote within external borrowings (1.5 bln.USD), leading view on prior issue of sovereign Eurobonds  2014 (September) – issuing of these Eurobonds in amount of 1 bln.USD  Nowadays there exists an adequate quote for placing Sukuk, but new legal issues were raised by MoF upon initiating the respective new draft law. Provided it is adopted at late 2015 the Spring 2016 would be a full readiness for Sovereign Sukuk of Kazakhstan, KazanSukukConference

5 Instructions of the Head of State as of 20.10.11 (9): implementation (3) 1. Draft the Road Map for IF development till 2020 (currently is being implemented): p.5.4. Issue of state Islamic securities p.6.1. Defining of respective industrial projects and thereupon placing corporate Sukuk 2. Conduct the cooperation with IIRA and consider the possibility of getting a sovereign rating. IIRA is ready to do this rating exercise free-of-charge. However, upon NB RoK requirements such rating cooperation was done only with Ram Malaysia. 3. Define respective industrial projects and issue Sukuk certificates for them. It was assumed that JSC SWF Samruk Kazyna and JSC DBK would jointly conduct this task and up to 2011 launch the corporate Sukuk market. However, only DBK tested a pioneering issue (outside the country) of Sukuk. Strong shortcomings of the legislation with regard to taxation don’t allow to develop further this market. KazanSukukConference

6 DBK Sukuk: facts Pros  14.03.2012 – BoD DBK decision on Sukuk Murabaha (1 phase volume about MYR 600 mln, ( 200 mln. USD ) for 5 years  03.08.2012 – first test of Sukuk on the amount 240 mln.MYR (approx. 76 mln.USD ) ( listed at KASE (Kazakhstan)  45 % by pension funds, 34% insurance companies, 21% banks (62% in Malaysia and 38% in RoK)  Strong political support (RoK government, BNM and IDB).  MTN program to be continued (possibly in 2016 in GCC market) Cons  Commodity Murabaha Tawaruq : easiest and most disputable scheme (granting the client with cash liquidity) (AAOIFI (2007), OIC Fiqh Academy (April 2009)  Sheilkh M. Taqi Usmani, 2009: 85% of all Sukuk are not Sharia-compliant.  Investment expectations upon available cash are not realized due to legal shortcomings (taxation)  Mistakes with selecting the location and timing of initial placement.  No experienced staff, no IF knowledge, lack of benchmark, unknown issuer for outside investors  Eurobonds replication KazanSukukConference

7 NB of RoK: Sukuk market engine  2013-2014 – NB RoK (via its affiliate JSC StateInvestCorporation SIK) participated in the public placements of IDB Sukuk AAA certificates (50 mln USD each year) (fiirst time in CIS)  In frames of Road Map on IF development the MoID (earlier MINT) proposes to strengthen collaboration between IDB Treasury and NB SIK on higher investment exposure for State National Fund resources ‘ placement and joint activities with MoF RoK and NB RoK in purpose of developing Sukuk market for financing the 2 nd stage of the State Industrialization Program.  Kazakh Stock Exchange (KASE) is considered as a sole trading platform for issuing of corporate Sukuk (in USD as well KZT) (cooperation with Istanbul Stock Exchange).  It is needed to conduct jointly with MNE RoK sovereign rating exercise by IIRA (financed by IDB). Also it is well to be supported an IIRA initiative on OIC inter-Sukuk market for 8 selected countries (KSA, Bahrain, Oman, Egypt, Turkey, Kazakhstan, Turkey, Malaysia, Pakistan). KazanSukukConference

8 Sukuk 2015: systemic view  Under the aegis of the regulator the interministerial working group was formed for the Sukuk market development. I. Sovereign (external) Sukuk : а) MoF initiates a new draft law for the Parliament adoption. b) It’s worth to reconsider the scheme (Sukuk resources usage, guaranteed quote within the state external borrowings program, rating level, experience of recent sovereign Sukuk issues) II. Sukuk of the National Bank (Islamic notes for the short-term liquidity market) : а) CBB case, b) access for all players III. Corporate Sukuk: а) independent analysis of the tested 2012 issues, b) quality changes to the legislation re. taxation and administration, c) scenarios of possible issues in foreign and local currencies upon assistance of international consultants, d) expected country Sukuk issues (via private placement) (KazAgro till the end of 2015) KazanSukukConference

9 Sukuk market: Proposals to the government 1. Within the interministerial working group on Sukuk by the NB RoK it’s necessary to systemize the advanced experience of Bahrain, Malaysia, Dubai and non-Islamic countries (so to replicate the regulatory measures), focus on both market sides («buy&sell»), allocate resources for drafting scenarios of all Sukuk types, 2. Work out the procedure of semi-annual (quaterly) certificates (notes) of Sukuk Ijara (Waqala) (as per CBB case) for short-term liquidity market needs (NB RoK). 3. Analyze (within the ongoing TA Grant assignment) all details of the test sample of corporate Sukuk DBK. In case of further preference for Commodity Murabaha it’s essential to transfer legally its trade platform from London to Almaty. 4. Facilitate the arrangement of technical conditions (incl. HR training) at the KASE and create the IT infrastructure for launching the emission mechanism of Sukuk in foreign and local currencies. KazanSukukConference

10 Sukuk market: Proposals to the government 5. Instruct the responsible state bodies (especially MoNE (tax policy) and MoF (taxation)) to process for including into the basic institutional life the methodology of non-interest financing «asset- based & backed» (IF tools (incl. Sukuk) by assistance of international consultants (as done by JSC FFSA in KazAgro Holding). 6. Educate institutional and private investors (e.g. upon the government enactment there are ways of placing equity capital funds not only on bank deposits, but into securities) to promote primary and secondary Sukuk markets. 7. Approve corporate Sukuk (upon available basic market conditions) into the State industrialization program (stage 2) as one of funding sources for industrial projects. 8. Jointly with IIRA enable the sovereign and corporate rating exercises and study its pioneering initiative on launching inter-Sukuk market within 8 selected IDB MCs (Regional Sukuk Hubs). KazanSukukConference

11 Almaty: synergy of merging ideas of RIFC in CIS and EAEC Hub?  2010 (January) - N.А.Nazarbayev (The Annual Message to People of Kazakhstan): Almaty as a regional center of Islamic banking in CIS and CA till 2020.  2014 -2015 – discussions by EAEC about the unified financial regulator to be located in Almaty.  IF as unique factor for development of common financial hub in Almaty: NB RoK (HQ), IDB (ROA), EADB (HQ), finance sector (HQs) (incl. Al Hilal Bank), IFSB Summit (21-23.05.2015)  Islamic securities : real economy investments, natural sustainability, lack of speculations, transparency, no moral hazard, ethics.  Respective market infrastructure: stock exchange, commodity exchange, Sharia Board, consultants, lawyers, arbitrage, training centers KazanSukukConference

12 Advises on Sukuk market development in RF  Study AAOIFI standards (audit/accounting), IIFM (procedures/contracts), cooperate with IIRA (sovereign/ corporate ratings).  CB RF can participate in public placements of IDB AAA Sukuk (within its MTN)  Second-tier banks can expose their treasury investments in primary and secondary markets of corporate Sukuk outside the country.  Participate actively in establishing the regional Sukuk market in RoK (e.g. via EADB and daughter banks).  It’s worth to wait with plans of Sukuk inside the Russia till lifting the western sanctions.  It’s of high importance to process the general legislative and technical basis for development of IF industry in Russia (minimum 2-3 years) KazanSukukConference


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