Taiwan, or, as it calls itself officially, the Republic of China, in the past months became a new kid on the block for Islamic finance, and Qatar played a major role in it. Unnoticed by many in the wider global Islamic finance industry, the country became a new centre for offshore sukuk issuances through its Formosa bond market at the Taipei Stock Exchange after Islamic bonds were included and allowed for trading last November.
And so it happened that Qatar Islamic Bank, in a move seen by industry observers as being unprecedented and unexpected, issued a debut $650mn, five-year Formosa sukuk at the end of January which was met with such investor demand that it was quickly upsized to $800mn and eventually listed on the Taipei Stock Exchange on February 7, 2020.
According to a comment by Fitch Ratings, the Formosa sukuk market could play a strong role for offshore sukuk issuances especially for Islamic bond issuers in the Gulf Cooperation Council (GCC) as it both allows them to diversify their fundings, tap particularly East and Southeast Asian investors and at the same time eliminate currency risks.
The Formosa bond market was introduced at the Taipei Stock Exchange in 2006 to attract international bond issuers and investors. A Formosa bond is denominated in a currency other than the New Taiwan Dollar and must have a credit rating of BBB or higher. The majority of Formosa bonds is US dollar-denominated, which benefits GCC issuers given that all but one of the GCC currencies are pegged to the dollar. To widen the investor base, Formosa bonds can also be listed on overseas exchanges and may be traded over-the-counter between bond dealers. In the case of Qatar Islamic Bank’s Formosa sukuk, the dual listing is on the Irish Stock Exchange.
“The ability of GCC issuers to tap the Formosa market for sukuk could boost the overall global sukuk market, although it will take time for investor appetite to develop and to familiarise themselves with Formosa sukuk, and issuance is restricted to investment-grade issuers,” Fitch Ratings said.
However, the rating agency noted that the relatively large size of the Formosa bond market of $175bn in outstanding debt — compared to the GCC sukuk market in local currency of about $100bn — could stoke global investor interest in and popularity of Formosa sukuk, which, in turn, could benefit both pricing and liquidity of the bonds.
While the Formosa sukuk by Qatar Islamic Bank is the first Islamic bond issued in Taiwan, the financial market there is not unbeknownst to Qatari banks. Qatar National Bank (QNB) in 2016 issued a $1.1bn conventional Formosa bond as part of the bank’s strategy to expand into new markets and diversify its funding base internationally. This was followed by other issuances by QNB, a Formosa bond at a volume of $630mn in 2017 and of $600mn in January 2020. Other issuers, including the Qatari government, have also tapped the Formosa bond market in recent times. Currently, GCC issuers, led by Qatar, account for about 20% of total outstanding Formosa bonds.
Generally, the outlook for sukuk issued in Taiwan is expected to be bright as they offer long-term investors, namely sovereigns, banks, large industry holdings and insurance companies, securities that match their financial commitments. Taiwan’s Financial Supervisory Commission allowed local banks to allocate up to 10% of their net asset values to sukuk, while no cap has been set for insurance companies which are able to invest a maximum 65.25% of their investable assets in foreign bonds.
Analysts say that the choice of Islamic bonds in Taiwan will not be driven much by religion but rather by product suitability for long-term investment portfolios. Taiwan, where Buddhism and Taoism are the two main religions, has only a small Muslim minority of 60,000 people, or about 0.3% of the entire population, and essentially no other Islamic finance industry to speak of.