Sukūk Market Depth and Breadth Analysis: LAB (Liquid Assets Buffer) Portfolio Construction for a Non-Depository Megabank MDB

Abstract

The objective of this paper is to empirically examine the depth of the sukūk market by determining whether the sukūk market, in its current form, is sufficient to cover the liquid assets buffer (LAB) balance sheet requirement for a hypothetical multilateral Islamic “megabank.” The question is relevant as there has been much discussion in recent years amongst market practitioners on whether or not the sukūk market has sufficient breadth and depth to accommodate a “greenfield” Sharīʿah compliant megabank which would be structured as a Multilateral Development Bank (MDB) focusing on infrastructure finance. Given the strong need for infrastructure financing across much of the developing world, two new MDBs were launched just this year: the Asian Infrastructure Investment Bank and the Brics New Development Bank.

An MDB is an institution that is backed by governments and that typically operates under an exempt regulatory regime, while most other financial institutions are heavily regulated. An Islamic non-depository megabank MDB (“megabank MDB”) would be markedly different from an Islamic commercial bank: MDBs do not accept retail deposits from the public; MDBs have no regulators or even an industry oversight body. However, since MDBs issue bonds and sukūk as part of their business models, they need to acquire credit ratings; while the big three credit rating agencies have different rating methodologies, they collectively serve as the de facto regulators for non-depository MDBs. In light of these constraints, we will construct a LAB portfolio for a megabank MDB utilizing only sukūk.