The IAIF, in line with its 10th annual conference, held the 6th pre-session on "Callable Sukuk Issuance in Islamic Capital Markets; Innovation in Sukuk Issuance", on January 20, at 2:00 PM Iran standard Time.

The speakers were as follows:

1- Mr. Tariq Naseem, Head of Islamic Finance, Securities and Exchange Commission of Pakistan (SECP)

2- Mr. Majid Pouyanmehr, Head of Islamic Finance Office, Securities and Exchange Organization of Iran (SEO)

3- Mr. Mohammad Hussain Sadraei, CEO, Central Asset Management Company, Iran

4- Mr. Mhd. Iqbal Balative, Head of Transaction Planning and Sukuk Instrument Development Section, Ministry of Finance of Indonesia

Majid PouyanMehr Head; Islamic Finance Office; Securities and Exchange Organization of Iran

Callable Sukuk issuance provides a Shariah compliant mechanism for profit risk management in the capital markets. If the profit rates changes in line with the monetary policies, previously issued sukuk might be redeemed. The callable feature enables issuers to redeem sukuk before maturity, facilitating strategic financial management and adaptability to changing market conditions.

This flexibility is appealing to both issuers and investors, as it provides opportunities for refinancing and capitalizing on favorable profit rates. For instance, if the government issues Murabaha sukuk with a 10% profit rate on May 1, 2024, and later the central bank announces reduced risk-free profit rates, the government can request investors to return their sukuk at the original 10% rate. This allows the government to buy back the sukuk and potentially issue new ones at a lower rate, such as 9%.

Advantages and Disadvantages:

Main Advantages: 1. Increasing issuer’s incentives 2. Flexible instrument for unstable situations 3. Providing more investment options 4. Improvement of transparency for the market

Main Disadvantages: 1. Increasing financing costs 2. Negotiations for sukuk selling 3. Fluctuating market profit rates

According to the SEO Shariah Committee resolution, the parties involved agree on the purchase price at the outset of the sale contract, specifying that the originator (the government) retains the option to buy back the securities from the creditors at a predetermined price or price formula, exercisable at specific intervals. The call option in the Murabaha Sukuk is based on Bay’dayn which is endorsed by the SEO Shariah Committee.

Will callable sukuk really work in Iran Capital Market?

It depends on several factors: 1. Mutual agreements between the issuer and investors for callable rates 2. Strong financial literacy 3. Good Shariah supervision 4. Transparent Secondary Market 5. Regtech and Fintech.

Mr. Tariq Naseem, Head of Islamic Finance, Securities and Exchange Commission of Pakistan (SECP)

Pakistan's Sukuk market is experiencing significant development, with progress in issuing sovereign and corporate Sukuks using various Shariah structures based on the issuer's needs, objectives, and business plans. The Islamic Republic of Pakistan's federal government has made rules for sovereign sukuk issuance, while the Securities and Exchange Commission of Pakistan (SECP) develops the regulatory framework for corporate sukuk. Issuers must obtain Shariah structure approval and, in cases of listed prospectus approval, from the SECP and the Pakistan stock exchange. As of December 2024, the sovereign sukuk market is around PKR 7.6 trillion, while the corporate sukuk market is around PKR 870 billion.

Existing sovereign sukuk in Pakistan are structured using the Ijarah concept, a sale and lease-back structure. Medium- to long-term sovereign sukuks with fixed or floating rates are issued. The Pakistan stock exchange now issues and lists these sukuks. Sovereign sukuk are now being issued and listed through the Pakistan stock exchange. Innovations include developing a Modaraba-based short-term Sukuk structure to invest in medium- to long-term sovereign Ijarah sukuks and considering retail digital sukuks in collaboration with telecom operators.

Corporate sukuks, particularly the Shirkat-ul-aqad structure, are commonly used to fund working capital needs of various issuers. These sukuks are privately placed with institutional investors, with repeat multiple issuance after redemption every six months. The Shirkat-ul-Aqd is a partnership contract where profits are shared as per a two-tier profit-sharing ratio, while losses are shared proportionally to the capital. These sukuks are popular among Islamic income funds and Islamic money market funds due to their tradability and transferability feature.

Jazz Pakistan issued an innovative airtime-based Sukuk of PRK 15 billion last year, becoming the first and largest short-term unsecured Sukuk by a telecom operator in Pakistan. The underlying assets were airtime, quantified through bundled voice calls, SMS, and data services, which were purchased by Sukuk investors at a discounted price and sold through the telecom operator to franchises over a six-month period. Profits were shared as per a two-tier profit-sharing ratio.

The focus of our further innovation in the Sukuk market aims to simplify processes and documentation through tech integration, facilitate regular corporate Sukuk issuances for working capital and expansion, and promote secondary trading through exchanges and alternate platforms.

Mr. Mohammad Hussain Sadraei, CEO, Central Asset Management Company, Iran

Callable bonds give the issuer the right, but not the obligation, to redeem the bonds before the maturity date, typically at a predetermined call price. Callable bonds allow issuers to take advantage of favorable market conditions, such as falling interest rates, by refinancing their debt at a lower cost.

For example Federal Home Loan Banks (FHLBanks) in the US frequently issue callable bonds and have a history of redeeming them when advantageous. Also in 2021, Tesco issued callable bonds in the UK with various maturities. Some of these bonds had the option for early redemption (call) after specific dates, allowing Tesco to refinance at more favorable terms if market conditions allowed.

Operational Aspects of Issuing Callable Bonds:

In terms of Issuance, they are issued by government, municipalities or corporations to raise funds. The bond agreement specifies the call date and call price.

Call option; after setting a period, the issuer can repurchase the bonds from investors at a predetermined price.

Investors’ compensation; due to the added risk of early redemption, callable bonds typically offer higher yields than non-callable bonds.

Pricing; includes the call premium to compensate investors for potential reinvestment risks.

Callable Sukuk in Iran Capital Market:

Options are generally considered permissible if structured in a way that avoids riba (usury), gharar (excessive uncertainty), and speculation. Call and put options are already approved by Sharia Committee of the Securities and Exchange Organization (SEO).

Callable Sukuk can play a vital role in strengthening Iran's capital market by providing cost-effective funding options for issuers, offering higher returns for investors, and diversifying the range of available financial instruments. They align well with the needs of a market characterized by economic fluctuations and can contribute to long-term economic development if implemented with the right regulatory and educational support.

Sadaei said cost savings for issuers, flexibility in debt management, increased issuance opportunities, improved market liquidity, risk management for issuers and support for economic development could be some advantages of callable Sukuk for Iranian capital market.

In conclusion, he said by considering the inflation and fluctuation rates in Iran’s economy, callable sukuk, could serve as a critical tool for enhancing the depth, liquidity, and attractiveness of Iran's capital market. However, their successful implementation requires addressing Sharia compliance, regulatory clarity, and investor education to fully realize their potential.

Mr. Mhd. Iqbal Balative, Head of Transaction Planning and Sukuk Instrument Development Section, Ministry of Finance of Indonesia

Indonesia has demonstrated remarkable growth and resilience in its Islamic financial sector, especially through the development of Sovereign Sukuk. These instruments have become a vital source of state financing, contributing significantly to economic stability and sustainable growth amidst global uncertainties.

Despite global economic challenges, such as sluggish growth projections and market volatility, Indonesia’s economy showed robust performance, with a 5.05% year-on-year expansion in Q2 2024. This growth is largely driven by strong household consumption and the manufacturing sector. Amidst these challenges, Indonesia’s Islamic finance sector, particularly Sukuk, has shown impressive resilience, with Islamic banking assets and sukuk performance demonstrating positive growth in 2023.

Indonesia’s journey with Sovereign Sukuk began in 2008 with the enactment of Law No. 19/2008, allowing for the issuance of Sukuk Negara. Over the years, the country has consistently innovated within this space, issuing diverse sukuk products such as retail sukuk, green sukuk, and cash waqf-linked sukuk (CWLS). By 2024, the outstanding Sukuk Negara had reached IDR 1.531 trillion, making Indonesia the world leader in sovereign sukuk issuance with USD 26.9 billion issued to date.

Key innovations include the introduction of the Primary Dealership system, which has enhanced auction demand, pricing competition, and secondary market activities. Additionally, technological advancements such as the e-SBN online platform have streamlined Sukuk management, while green sukuk and CWLS have mobilized funds for sustainable development and social finance initiatives.

Looking forward, Indonesia’s Sukuk market shows promising growth prospects, driven by increasing interest in Environmental, Social, and Governance (ESG) investments. The government is also focused on further integrating Islamic social finance with commercial finance through digital transformation. With a youthful and growing investor base, Indonesia is poised to expand its Sukuk market, making it a cornerstone of sustainable financial development.

In conclusion, Indonesia's Sovereign Sukuk represents a powerful tool for economic growth and sustainability, and continued innovation will ensure its pivotal role in the nation’s financial future.