Sukuk for vaccine fund ushers Islamic finance into ethical sphere

Islamic finance is eying a new direction of socially responsible investment - which could even include the fight against Ebola

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The latest entrant into Islamic finance is leading the industry in the new direction of socially responsible investment - which could even include the fight against Ebola.

Last week an immunization program secured a $500 million issuance of Islamic bonds, or sukuk, in the largest debut issue ever by a global non-profit organization, under a broader trend to use bond markets to fund development and humanitarian projects.

The sukuk from the International Finance Facility for Immunization Co (IFFIm), for which the World Bank acts as treasury manager, is a break from the predominantly commercial nature of most Islamic finance transactions.

The deal is part of World Bank efforts to adapt sukuk for use in a variety of ethical pursuits, including advising the Dubai government on a funding strategy for the emirate's green investment program.

IFFIm, backed by nine sovereign donors including Britain and France, will use the proceeds of its sukuk to finance projects for the Global Alliance for Vaccines and Immunization (GAVI) and is open to using the format again.

“It’s a natural market for us. These kind of socially responsible investments are very much aligned with the core principles of Islamic finance,” IFFIm Board Chair Rene Karsenti told Reuters.

The sukuk helped IFFIm diversify its investor base and secure competitive pricing, but also helped raise the profile of GAVI activities among Muslim-majority countries.

The sukuk could encourage other non-profits to consider this funding tool, while Gulf countries could be inclined to become GAVI donors themselves, said Paris-based Karsenti, who is also president of the International Capital Market Association.

Founded in 2000, GAVI has financed immunization efforts in 73 countries, with half of its investment directed to 33 Muslim-majority countries, including Yemen, Mali and Indonesia.

“Sukuk is not new but what is new here is that it is associated with a socially responsible vehicle. We hope we can lead the way for other similar institutions to use the market.”

Islamic finance follows religious principles which forbid involvement in businesses connected with gambling, tobacco or alcohol, but has only recently begun to explore wider social responsibility.

Future sukuk from IFFIm could help reinforce that change by financing other high-profile immunization efforts, and GAVI is actively in discussions over taking a role in fighting Ebola when a vaccine becomes available, Karsenti said.

“IFFIm could also provide long-term funding in that effort.”

GlaxoSmithKline and NewLink Genetics are currently testing experimental Ebola vaccines, and a trial of an Ebola vaccine from Johnson & Johnson is scheduled to start in January.

Substance over form

IFFIm issues bonds designed to bring forward future donor pledges into cash-in-hand today to finance its immunization projects.

It has raised $5 billion since 2006 from bonds issued in markets such as Japan and Australia.

Islamic finance wants to be part of such efforts as it seeks to boost its ethical credentials: In August, Malaysia’s capital markets regulator introduced guidelines for the issuance of socially responsible sukuk.

IFFIm, rated AA by Standard & Poor’s, attracted $700 million in orders for its sukuk, with 85 percent of bids coming from new investors, mainly out of the Middle East and Asia.

Despite a limited secondary market, its high credit rating made the issue appealing to Islamic finance institutions, with banks taking 74 percent of the deal.

The IFFIm sukuk uses commodities to underpin the transaction and is not tradeable other than at par value.

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