The 240 million five-year Malaysian ringgit ($75.5 million) issue on July 18, which generates an annual payment of 5.5 per cent, has set the benchmark for Islamic bond issuers in the former Soviet republic, the Development Bank of Kazakhstan said.
The issue is part of the bank’s 1.5 billion ringgit Islamic note programme under the sharia principle of murabaha, approved this year by the Malaysian central bank and the Sharia Advisory Council of the Securities Commission of Malaysia.
“The next sukuk issue will depend on market conditions and the bank’s borrowing requirements,” the state-owned Development Bank’s press office said in a written response to questions.
“The number of issues will depend on the size (of each issue),” it said, adding that it could issue a further 1.26 billion ringgit under its existing programme.
Two decades after the collapse of the Soviet Union, majority Muslim Kazakhstan is making a bid to become a regional centre of Islamic finance, which is based on religious principles such as bans on interest and pure monetary speculation.
About 70 per cent of Kazakhstan’s 16.7 million population is Muslim. Since the global financial crisis, investors are more receptive to alternative forms of banking and keen to tap pools of Islamic investment money in the Gulf and southeast Asia.
Malaysian investors took up 62 per cent of the Development Bank’s debut issue. The bank said the highly developed Islamic finance market in Malaysia was the ideal model for Kazakh issuers.
In the first 11 months of 2011, Malaysia accounted for 71.2 per cent of total global sukuk issuance, it said.
“Not only is this sukuk issue the first in the history of Islamic finance in Kazakhstan. It is the first in the countries of the CIS (Commonwealth of Independent States),” the Kazakh bank said.
Halyk Finance (Kazakhstan), AmInvestmentBank and Kuwait Finance House acted as joint lead managers of the issue, with HSBC and RBS as coordinating joint lead managers.
Yerlan Baidaulet, adviser to Kazakhstan’s Ministry of Industry and New Technologies, said he was working on potential sukuk issues with other institutions in the country.
“We could have two or three deals. For sure, there will be one more sukuk from Kazakhstan (this year),” he said.
“The window has been opened. (The Development Bank) is playing the role of icebreaker.”
President Nursultan Nazarbayev, in power since Soviet times, has said he wants Kazakhstan’s commercial capital, Almaty, to be a hub for Islamic banking in the former Soviet Union, which includes other majority Muslim states and Russian republics.
A sovereign sukuk issue mooted in 2010 did not materialise. Finance Minister Bolat Zhamishev told Reuters in June that Kazakhstan had no pressing need to borrow abroad. Its National Fund to collect windfall oil revenues contains $51.4 billion.
Nevertheless, the Development Bank said its issue would serve as a model for other quasi-sovereign companies and banks to tap Islamic finance markets.
“We are convinced that this deal will open the way for other issuers in the region looking to diversify their funding on Islamic markets,” Zhaslan Madiyev, deputy chairman of the bank’s management board, said in a statement accompanying the issue.
Baidaulet, who is also executive director for the CIS and Eastern Europe at the Islamic Development Bank, a Saudi Arabia-based multilateral lender, said interest in sukuk reflected a desire among investors to work closely with the real economy.
“The way we are promoting Islamic finance in Kazakhstan is different,” he said.
“It’s not just a religious matter. It’s about the needs of the economy.”
The”sukuk premium” – the additional cost which borrowers must pay to issue an Islamic bond instead of a conventional bond – has effectively disappeared, and this will stimulate a boom in sukuk issuance while lengthening tenors, a senior executive at Deutsche Bank said.
“I don’t think there is an Islamic premium anymore,” Salah Jaidah, head of Islamic finance at the bank and chief country officer for Qatar, said in an interview this week.
Until late last year, sukuk issuers commonly paid a premium because they catered to a smaller investor base and because investors were not as familiar with sukukstructures as they were with conventional bonds.
This year’s heavy investor demand for sukuk, due to the appetite of cash-rich Islamic investment funds and the Gulf’s growing reputation as a relatively high-yielding safe haven, has transformed the market. Many high-grade credits – such as Qatar, in its record $4 billion deal this month – now pay less to sell sukuk than they would for conventional bonds.
Jaidah said the shift in the market’s perceptions was not temporary. “This trend will continue,” he said.
Sukuk issuance volumes regionally as well as globally have already surpassed lastyear’s total, including Qatar’s issue, which was the largest-ever dollar-denominated sukuk and on which Deutsche Bank was lead arranger and bookrunner.
Global dollar-denominated sukuk issuance so far this year stands at $12.8 billion,according to Thomson Reuters data, the vast majority from the Gulf Arab region; total dollar sukuk issuance last year was $11.2 billion.
Deutsche Bank placed fourth in the Thomson Reuters Islamic debt capital markets league table rankings for the first six months of this year, up five places year-on-year. It is ranked third in the Middle East DCM ranking.
Jaidah said that in addition to stimulating issuance, the new popularity of sukuk would permit issuers to lengthen tenors beyond the five years which was previously used for the vast majority of issues.
“Sukuk will be attractive for longer maturities, and used for infrastructure spending, for example. This is very encouraging. It will allow a lot of issuers on the conventional side to tap Islamic markets.”
Governments making plans for their debut issues of international sovereign sukuk include Turkey and South Africa, as well as other sub-Saharan African nations.
“Many nations are looking at issuing sovereign sukuk, even non-Middle Eastern nations. We think North Africa will also be very active when it comes to issuing sovereign sukuk,” said Jaidah, who was previously Qatar Islamic Bank’s chief executive.
“A lot of sovereign transactions will be more liquid. It’s an opportunity to create more liquid sukuk. This liquidity is an added attraction of the sukuk market.”
He declined to discuss specific mandates but noted that for first-time sukuk issuers, the process to enable them to print a deal can be a long one.
“We’re focusing on readying potential issuers for sukuk. We’re exploring, we’re convincing, the clients are learning.”
Muslim commitment and potential to support charitable causes in the UK should not be underestimated, says Fadi Itani.
As the Islamic holy month of Ramadan commences, in this year from 21 July, millions of Muslims in the UK will be fulfilling a fundamental part of their faith by donating a proportion of their wealth to charitable causes around the world. The general concept of Zakat is well known, yet even among many Muslims the detail and intricacies of this spiritual act of giving are not fully understood.
Zakat is the compulsory form of charity for all Muslims based on the amount of wealth they have held over an Islamic year (the Muslim calendar is based around the moon and lasts for either 354 or 355 days). For Muslims, Zakat is not simply a form of charitable giving but rather a means of achieving spiritual, moral and social objectives - a path to ‘purification’ of a donor’s wealth and a mechanism to redistribute income to the poorer elements of the Islamic economic system.
Each year, every Muslim is compelled to pay 2.5 percent of their wealth should they be in possession of the minimum amount of wealth on which Zakat is due (known in Islam as the nisab.)
Zakat is the third pillar of Islam and is closely aligned to the second pillar of Salat (prayer). It is a mandatory act of worship for Muslims and is considered both an obligation to God and an enshrined moral duty to the poor.
Zakat is commonly paid by Muslims during the holy month of Ramadan - the Islamic time of fasting and a period of intense spiritual reflection and worship. Zakat paid during Ramadan is believed to increase rewards given to the individual, as declared by the Prophet Muhammad (pbuh).
However, this standard practice by the majority of Muslims tends to counteract the true spirit of Zakat. When Zakat payment is due – i.e. if an individual has been in ownership of the minimum “Zakatable” wealth for one lunar year – then it must be paid on time and not delayed, even if rewards for charity are increased during Ramadan.
Traditionally, Zakat distribution would not be concentrated in one period but rather spread over a length of time so that recipients could be supported throughout the year. The early history of Islam also indicates that the collection and distribution of Zakat would normally be dispersed regionally to beneficiaries in the same surroundings. Today, Zakat donations are commonly distributed to international causes such as poverty alleviation or helping people meet their basic needs.
Zakat contribution to global development
While data on Zakat flows is limited, attempts to chart the potential of this form of giving are emerging. Islamic financial analysts recently estimated that each year, somewhere between £130bn and £645bn are given as mandatory and voluntary donations across the Muslim world. At the low end of this estimate, this is 15 times more than global humanitarian aid contributions in 2011.
Several governments in the Muslim world have made efforts to centralise the management and distribution of Zakat donations. In Malaysia, a massive £286m was collected in Zakat donations in 2010, while in Egypt the government estimated that £480m was given to charity by Egyptians in 2009, enough to pull nearly all of Egypt’s poor out of poverty in strictly financial terms.
At Zakat House, the UK’s first charity dedicated to the collection and distribution of Zakat funds, we are aiming to better inform Muslims on the objectives of Zakat and redress the flow of funds to under-resourced causes based in the UK. We believe that Zakat donations have huge, unfulfilled potential to make a greater difference to charities in the UK in line with the true teachings of the Prophet Muhammad (pbuh).
Our recently launched ‘Just Zakat’ campaign aims to alter donor perceptions of Zakat, and allows them to spread their Zakat over several worthy causes based in the UK and abroad in line with the categories of recipients entitled to receive it.
Currently, five charities make up our coalition of organisations eligible to receive funds under the Just Zakat banner, with two of these focused on providing services to beneficiaries in the UK.
Our website is growing and we are aiming for it to become an extensive resource base on the virtues and practical application of Zakat, as well as dispelling common myths and misconceptions associated with this religious concept of giving.
We are constantly on the look-out for other small and pioneering charities in the UK eligible to join and receive donations within our coalition group.
For more information about our campaign and to see how you can get involved, please visit the Just Zakat website.
Fadi Itani is the CEO of Zakat House a central collection organisation for Zakat in the UK.
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