Yemen issues sukuk

In mid-February the Central Bank of Yemen announced the issuance of its first ever sukuk, or Islamic bond, worth a relatively modest YR4bn (US$18.7m). The issuance has been expected for some months, but comes at a particularly propitious time in light of the government's new spending pledges. The initial offering is part of an ongoing programme to offer sukuk worth US$125m every three months, helping Yemen to raise some YR100bn by the end of 2011. According to the deputy finance minister, Jalal Yaqoub, domestic banks and individual investors are being targeted as potential buyers. (The largest single buyer of the first offering was the country's largest Islamic bank, Tadhamon International Islamic Bank.)

Yemen has been given technical advice on issuing commercial Islamic paper by the World Bank and IMF, under an agreement the World Bank has with the Jeddah-based Islamic Development Bank (IDB). The Islamic Corporation for the Development of the Private Sector (the private-sector funding branch of the IDB) is closely involved in the process, advising the Yemeni government on developing a market for Yemeni sharia-compliant bonds.

The development of a sukuk market will add flexibility to the local financial sector, not least by providing an alternative to government Treasury bills. By issuing sukuk, the government hopes to diversify its sources of budgetary financing, as well as to attract foreign investment to fund development projects. It may also be hoping to raise finance at less cost-at present it is paying out a very high 22.9% rate of interest on an 182-day T-bill. It will also offer a liquidity outlet for local Islamic and conventional banks and will provide local Islamic banks a repository for their capital and statutory reserves (a mechanism that is not currently available to them). More widely, it will help to build the capacity of the local Islamic banking sector, which is underdeveloped and uncompetitive.

That said, the sector has shown considerable growth. In the five years since end-2006 total investment advances made by the Yemeni Islamic banking sector have risen by 116%, and the three Islamic banks account for one-third of total bank assets, 43% of total loans, and 30% of total bank deposits.

There is also a willing regional market for Islamic financial products; Islamic banks were largely unaffected by the global credit crunch and have much greater surplus liquidity than conventional banks. Despite this, given that Yemen is far below investment grade, it is highly unlikely that investors from outside the Gulf will consider investing in Yemeni bonds, and even Gulf investors, cognisant of the fact that their investment will ultimately support Yemeni-and wider regional-stability, may wait a few months to see how the latest political crisis plays out, before putting their money down.

Yemen has three Islamic banks: Tadhamon International Islamic Bank, the biggest bank in the country in terms of assets; Saba Islamic Bank, the biggest lender; and Yemen Islamic Bank for Finance and Investment. The first sukuk offering is earmarked to finance three local road projects, but given the growing and more immediate need to finance current, rather than capital, expenditure, the government might divert future offerings to support the budget.