Recent issue of Islamic bonds to give Jordan increased funding options

In 2016 the Central Bank of Jordan (CBJ) issued two rounds of sharia-compliant sovereign bonds for the first time in the country’s history. The first offering, released in May 2016, used a murabaha ( cost-plus financing) structure and was valued at JD75m ($105.5m). The sale successfully attracted JD205m ($288.3m) in bids from investors at a coverage ratio of 2.73. Meanwhile, the second sukuk, issued in mid-October, used an ijara (leasing) structure and was valued at JD34m ($47.8m). The latter sale was more than three times oversubscribed. The bonds have a five-year maturity, with expected profit rates of 3.5% and 3.01%, respectively.

While both issues have been termed sovereign, the May 2016 sukuk – which was designed to provide liquidity to finance the operations of two government-owned companies, the National Electric Power Company and the Water Authority of Jordan – is backed by the country’s utility companies rather than the government, whereas the October 2016 issue – which will be used by the Ministry of Finance – is guaranteed by the government.

The sales were accompanied by a move in September 2016, wherein the government signed an agreement with the International Islamic Trade Finance Corporation to finance basic imports with sharia-compliant funds. The Jordanian government expects net domestic borrowing will reach approximately JD896m ($1.3bn) in 2016, according to press reports.

Market Snapshot

The recent sukuk offerings are part of a broadening of Jordan’s Islamic financial services industry in the past couple of years.

At the end of July 2015 the Governorate Development Fund (GDF) – which was established in 2011 to finance small and medium-sized projects, as well as entrepreneurial initiatives – partnered with the Hajj Fund to offer sharia-compliant financing options.

The GDF plans to use a variety of Islamic financial structures, such as murabaha, ijara and istisna (a type of sales contract), to fund industrial and service projects that aim to increase employment in the country. 2015 also saw the Jordan Dubai Islamic Bank (JDIB) launch new sharia-compliant investment certificates of deposit, the first to be offered by an Islamic financial institution in Jordan.

Earlier in 2016 flagship carrier Royal Jordanian finalised a $275m, five-year loan facility, which will be partially funded through Islamic financing, to pay down its incurred debt and restructure the company.

Strong Foundations

Islamic finance is not new to Jordan, with local lenders Jordan Islamic Bank (JIB) and the Islamic International Arab Bank operating in the country since the 1970s and 1990s, respectively. Yet, while Jordan introduced a framework for the sector as early as 1978, with the implementation of the Jordan Islamic Bank for Finance and Investment Act No. 13, it was not until more recently that the government began to proactively encourage the burgeoning industry. In 2015 the CBJ took another regulatory step, issuing the Corporate Governance for Islamic Banks Instructions No. 61, which aim to increase accountability and transparency among Islamic financial institutions. The Islamic finance industry in Jordan, though small, has been steadily growing since 2010, when JDIB – established by the Dubai Islamic Bank and its partner Jordan Dubai Capital – began its operations. One year later local company Al Rajhi Cement offered Jordan’s first sukuk, a seven-year, JD85m ($119.5m) issue.

In 2012 Parliament passed the Islamic Finance Sukuk Law, enabling both private and public entities to issue sukuk in dinars and foreign currency. The long-awaited legislation had been in development since as early as 2010. Building on this, in April 2014 the government passed new by-laws specifying the structure and transfer framework for issuance of sukuk. This was followed in July of that year by the Jordan Securities Commission’s introduction of rules allowing the issuance of sharia-compliant debt.