Zeti cautiously upbeat on prospects for Islamic finance industry in Malaysia

The issuing of three mega Islamic banking licenses in Malaysia; starting the implementation of the new Financial Sector Blueprint (FSBP) 2011-2020 including Islamic financial inclusion and microcredit and the internationalization of Malaysia's Islamic finance industry; and helping the International Islamic Liquidity Management Corporation (IILM) launch its first sukuk as part of an ambitious issuance program, are just some of the priorities for Bank Negara Malaysia, the central bank, and its experienced Gov. Zeti Akhtar Aziz in 2012.

Gov. Zeti is under no illusion about the challenges facing the Islamic finance industry going forward and the impact the global financial crisis and the euro zone sovereign debt crisis continues to have on the industry.

"The Islamic finance industry," explained Zeti at a recent briefing in Kuala Lumpur "was insulated from the first round of the crisis (the global financial crisis). Islamic financial institutions (IFIs) are more resilient because they are closely linked to the real economy, with in-built checks and balances such as profit-sharing and risk-sharing. As such, there are greater elements of responsible lending. As economies slow down and financial markets experience a correction, these will impact financial institutions including IFIs. That is why it is important to have capital buffers, risk management and governance practices that are sound. We are continuing to develop mechanisms, institutional arrangements and financial infrastructures such as greater liquidity management and more so that the Islamic finance industry would continue to be resilient."

On the other side of the stakeholder coin, Bank Negara considers financial inclusion, microcredit and the financing of small-and-medium-sized enterprises (SMEs) as an important agenda. "We are also focusing on financial services outreach including mobilization of deposits from the lower income groups. Microfinance and microtakaful are also part of this. Our new Financial Sector Blueprint has a whole section on new measures that we will put in place to enhance financial inclusion mostly through outreach programs but also through institutional arrangements such as agent banking. We have also gone in a very major way into financial education and literacy to raise the level starting from the schools to factory workers and housewives on how to manage your finances," she explained.

The Malaysian Islamic banking industry indeed has shown impressive and steady growth over the last decade - growing from 6 percent in 2001 to 22 percent of the banking sector at the end of 2011. The previous Financial Sector Master Plan 2000-2010) has targeted a 20 percent market share for the industry, but the new Financial Sector Blueprint is careful not to include any performance or market share targets. Instead the aim according to Zeti is consolidation of the achievements thus far and achieving the various recommendations outlined in the blueprint.

Bank Negara is also processing three applications by foreign promoters for so-called mega Islamic bank licenses which would have a minimum paid-in capital of $1 billion each.

"The applicants for the Islamic megabank licenses are still in the process of fulfilling all the necessary requirements for licensing under the Islamic Banking Act 1983. Assessments will thereafter take place which, upon satisfactory fulfillment, will be recommended for the granting of license by the minister of finance," confirmed Zeti.

Banking sources stress that there is a timeframe for these institutions to meet all the conditions and that the applications will be resolved during 2012. None of the three promoters are from the West which rules out any of the remaining major global banks which do not have an Islamic banking license in Malaysia. The investors according to the sources are from the GCC countries.

The sukuk and Islamic capital market is an important component of the Malaysian Islamic finance industry. As such, the Malaysian government keen to boost the country as a multi-currency origination center. Already Khazanah Nasional Berhad, the Malaysian sovereign wealth fund, has issued a US dollar sukuk, a Singapore dollar sukuk and a Chinese renminbi sukuk in 2010 and in 2011.

Zeti is a keen supporter of the IILM and expects the first sukuk issuance by the corporation within the next 6 months. "The IILM," she revealed, "is currently obtaining the required rating, as well as fulfillment of all other parameters for the issuance including high quality underlying assets. The first issuance, which is a pilot issuance, will be relatively small, designed to test the system and to ensure that it is functioning as intended. Subsequent issuances are expected to be larger, more regulated in the range of $2 billion to $3 billion per issue and will be in major currencies."

The corporation's sukuk program is designed to be high quality short-term liquidity instruments and therefore demand will probably be generated from other institutions and managed funds such as pension funds etc. as it is another asset class that would be attractive as a liquid instrument. "During this crisis we saw liquidity becoming an important issue. The internationalization of Islamic finance and greater cross-border transactions require effective short-term liquidity management not only in stressful conditions but also in normal times," she added.

The IILM issuances are expected to play a major role in liquidity management in the global Islamic finance industry. At least that is the ambition. In conventional finance, it is US Treasury bills that are highly traded for liquidity management. For Islamic finance, there are no sovereign short-term debt issuances or papers of that nature. But whether the IILM sukuk can effectively play the role of US Treasury Bills only time will tell.

Zeti, however, believes that the IILM, which is a collaboration between 10 central banks and two multilaterals, has come out with something concrete, which will be an important financial infrastructure for the development of Islamic finance. "Given collaboration between central banks that come from different parts of the world that also include Europe, Middle East and Asia, it has required a consensus building on all the issues. Compared to other collaborations, I believe this IILM is a great achievement," she added.

She welcomes any move by European sovereigns to enter the euro sukuk market. Several of the European countries including the UK, France and Luxembourg have introduced enabling legislation to facilitating sukuk such as tax structures. This has been a major step forward. "They are currently focused on conditions that are highly challenging, therefore it is very difficult. Of course if there were a sovereign issuance out of the euro market, we would certainly support it. I have always encouraged our sovereign issuances which has contributed depth to the market. This, despite the fact that we have many domestic sukuk issuances, and therefore liquidity in the market. We have decided that it is also important to have a number of international issuances. It certainly contributes to creating a benchmark yield curve," explained Zeti.

The euro zone sovereign debt crisis has impacted on economic growth including in Malaysia and in the rest of Asia. She predicts that "all of us will experience a moderation in growth across the board, but to a much lesser extent than ten years ago. We in Malaysia have domestic demand which is more significant in our economy. We have a stronger domestic economy. We have strength from our regional trade and investment activities. This has had a mutually reinforcing effect on our economies. We also have resilient financial sectors that are still providing credit. We also have low unemployment and have not over-leveraged."

Asked if Malaysia will take the great leap forward by adopting a Shariah-compliant monetary policy she stressed that the country has already implemented liquidity management operations whereby Shariah-compliant instruments are used to manage the liquidity in the Islamic financial system. Bank Negara issues short-term instruments to manage liquidity by absorbing or releasing the liquidity into the system.

(Arab.News, 15 Jan2012)

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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Consultant/Trainer/CEO:
www.ahmad-sanusi-husain.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

Turkey's government plans its first-ever issue of Islamic bonds this year

ISTANBUL, Feb 22 (Reuters) - Turkey's government plans its first-ever issue of Islamic bonds this year, overcoming sensitivities about Islamic finance in the secular republic as it seeks to tap a rich pool of investors flush with oil money.

A sovereign sukuk issue from an economy regarded as one of the most progressive and successful in the Muslim world would signal intent on Turkey's part to play a bigger role in Islamic finance. The size of the global sukuk market is estimated at more than $100 billion.

"It will be like ringing a bell and attracting all the attention," said Murat Cetinkaya, deputy chief executive for treasury at Kuveyt Turk, an Islamic bank that has been a trend-setter for corporate sukuk issues in Turkey.

"Other issuances will follow the sovereign and Turkey will be on the agenda in this market constantly...as a frequent issuer."

Despite espousing Islamic values, Prime Minister Tayyip Erdogan's government shied away from taking the plunge with a sukuk issue during its first decade in power, out of fear of giving ammunition to critics who accuse the ruling AK Party of seeking to roll back state secularism by stealth.

"For a few billion dollars of funding there could be negative results in domestic politics," said a deputy chief executive at a leading Turkish bank, who declined to be named because of the political sensitivity of the subject.

In 2008, the Supreme Court came close to shutting down Erdogan's AK Party after ruling it was a centre of Islamist activity. But since then, the government has won the upper hand over old foes in the military and judiciary.

Few Turks question the AK Party's economic management, and having overseen a near tripling in per capita income, the party was re-elected for a third term in office last June.

Moreover, even borrowers outside the Islamic world have entered the sukuk market in the last few years, giving less reason for Turkey to hold back.

"Now the sukuk has become an instrument that even Germany and France are using," the banker said. "And in domestic politics, Erdogan is much stronger."

So there was hardly a murmur of dissent when Deputy Prime Minister Ali Babacan, who oversees the economy, announced last month that the government planned to issue a sovereign sukuk this year, using legislation already in place.

"Turkey could very easily issue a couple of billion dollars worth of sukuk. It will probably issue $500 million or $1 billion at first and see how it goes," said Osman Akyuz, secretary general of the Participation Banks' Association of Turkey.

"An issuance by the Treasury would provide depth to the instrument and it will be sold with confidence."

Royal Bank of Scotland economist Timothy Ash, a Turkey watcher, was also upbeat. "The market is potentially big - guess the sovereign could easily raise several billion."

Islamic finance bans the use of interest, so theoretically, investors in a sukuk acquire partial ownership of an asset and share in its returns rather than receiving a stream of coupon payments.

BY ANY OTHER NAME

Although the sukuk market is tiny compared to the trillions of dollars of conventional international bond issuance, sukuk have been a relatively stable source of funding during the global financial crisis because of their conservative Islamic investor base.

Because of secular sensitivities, Islamic banks are called "participation banks" in Turkey and sukuk are referred to as "participation certificates".

The country has used Islamic finance methods since the late 1980s through private financial institutions that were recognised as participation banks in 2006. There are four participation banks now operating in Turkey: Albaraka Turk , Bank Asya, Kuveyt Turk and Turkiye Finans. Kuveyt Turk, a unit of Kuwait Finance House, issued the country's first sukuk in 2010.

Last October, following legislative changes to accommodate sharia-compliant transactions, Kuveyt Turk issued another sukuk for $350 million, and the strong demand demonstrated Turkey's potential to become a major fresh source of Islamic bonds for investors keen to diversify their portfolios.

Albaraka Turk, the Turkish unit of Bahrain's Albaraka Banking Group, and Bank Asya have formulated plans for sukuk issues of as much as $500 million, but have so far held back because of weak market sentiment globally due to the European debt crisis.

Despite that, the Turkish economy's buoyancy, which produced growth of over 8 percent last year, and high yields compared to other emerging markets have increased investor appetite for Turkish assets, including sovereign debt issues.

POSSIBLE PROP FOR BRIDGE PROJECT

Ratings agency Fitch said last month that plans by sovereign borrowers outside the Middle East and other largely Islamic regions to tap the sukuk market could meet pent-up demand from Islamic institutional investors and banks to diversify their bond holdings.

That is good news for Turkey as it needs backing for huge infrastructure projects, having run into difficulties due to an international financing crunch. The government was forced to cancel a tender in January for the North Marmara Motorway Project, which involves a highway looping north of Istanbul and includes construction of a third bridge across the Bosphorus strait dividing Turkey's European and Asian sides.

In April, the government will launch a fresh tender, and some bankers see the sukuk market providing a possible solution to the financing problem.

"Turkey needs investments and the sovereign sukuk could be used for financing of some projects, especially the third Bosphorus Bridge and highway projects," said Akyuz of the Participation Banks' Association.

Not only could a sukuk be specifically designed for the project, according to Is Investment Strategist Ugur Kucuk, it would also pull in investors who want to avoid international capital market volatility.

"A sovereign sukuk issue which is indexed to revenues to one of the Bosphorus bridges, or to some highway revenues, could be both attractive for investors and for the Turkish Treasury doing its first issue," said Kucuk. (Editing by Simon Cameron-Moore and Susan Fenton)

(Reuters, 22 Feb2012)

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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Consultant/Trainer/CEO:
www.ahmad-sanusi-husain.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com