Primary dealers of the International Islamic Liquidity Management Corp (IILM) said after enjoying healthy demand for its debut Islamic bond last week, efforts were shifting to expand the distribution network of buyers.

The $490 million, three-month sukuk was auctioned to seven primary dealer banks, as the IILM aims to address a shortage of financial instruments for Islamic banks to manage their short-term funding needs.

With the structure and approvals now in place, Malaysia-based IILM can shift its focus to establishing regular issuance, decide on future tenors and possibly expand its network.

"Ideally one of the next steps would be to develop an issuance calendar. They will develop a plan in relation to the other tenors," said Leon Koay, head of global markets and co-head of wholesale banking at Standard Chartered Malaysia, one of the seven primary dealers.

"They've been approved for $2 billion, they've got plenty of runway. With this landmark issuance out of the way, the rest of it would be easier."

A key element of the IILM, backed by nine central banks and monetary agencies as well as the Islamic Development Bank , is a network of dealer banks that ensure a secondary market for sukuk.

"As primary dealer, we are obliged to participate in all auctions conducted by IILM and at best, try to be the market maker for the sukuk," Aria Putera Ismail, head of Islamic global markets for Maybank Islamic, told Reuters.

"The market in general is still short of Islamic assets. Hence, we expect that there will be continuous demand from investors for such instruments."

CLARITY

With the sukuk now trading in the open market, prospective buyers can observe the bid-ask spreads which reflect liquidity in the market for IILM paper.

On Thursday, the first IILM sukuk had a sample best bid of 0.608 (for a block of $5 million) with a sample best offer of 0.525 (also for $5 million).

"This shows a perfectly normal and healthy secondary market," said Jonathan Grosvenor, general manager of global financial markets at KBL European Private Bankers, the Luxembourg-based primary dealer for IILM.

The remaining IILM primary dealers are Kuwait Finance House , AlBaraka Turk, National Bank of Abu Dhabi and Qatar National Bank.

The sukuk was sold to primary dealers at 30 basis points over the London interbank offered rate, seen as attractive pricing for primary dealers to create a secondary market.

That spread was set by the IILM for the launch but going forward it would be determined according to the auction process by primary dealers, Grosvenor added.

As the market gains a better understanding of how the IILM works, it could also attract a wider range of buyers.

KBL, for instance, has reached out to Islamic asset managers and other regular buyers of such instruments in Europe, said Grosvenor.

"We haven't made any calls to the Middle East and in a way we are very complementary to IILM, we are adding something different."

Better understanding of the IILM's structure could help to market its offerings.

The IILM uses a wakala structure, according to a filing with Malaysia's central bank. Wakala is a sharia-compliant agency agreement where one party acts as agent (wakil) for another.

In a wakala sukuk, certificates are issued by an originator to buy specific assets, which in turn are given to a wakil for management, which charges a fee for its services. The originator undertakes to buy the assets at maturity at an agreed price. – Reuters