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Saturday, 20 October 2012

European sukuk sellers tapping Malaysia as crisis curbs lending

Malaysian tax breaks on sukuk are luring companies from Germany, France and Turkey to tap the world’s biggest Islamic bond market as Europe’s debt crisis curbs lending.

CIMB Group Holdings and AmInvestment Bank, among the top three sukuk arrangers in Malaysia this year, said they are seeing increased interest after the government extended tax exemptions for foreign issuers to 2014 in the September budget.

Ireland’s state-owned power producer is the only European entity that’s so far revealed plans to sell ringgit-denominated securities complying with religious tenets.

Global sales of Islamic notes climbed 84% in 2012 to an all-time high of $39.1bn, while syndicated loans in Europe, the Middle East and Africa fell 40% to $545.5bn, according to data compiled by Bloomberg.
Shariah banking assets in Malaysia rose 20.6% to a record 469.5bn ringgit ($154bn) as of July from a year earlier, the Finance Ministry said on September 28.

“We are getting enquiries from these countries because the European crisis is making it difficult to source financing in their home nations,” Mohd Effendi Abdullah, the Kuala Lumpur-based head of Islamic markets at AmInvestment Bank, the nation’s third-biggest Shariah-compliant debt underwriter, said.
“Many issuers are beginning to see Malaysia as a good source to tap Islamic funds.”

European roadshows held by the Malaysian International Islamic Financial Center, a government body set up in 2006 to promote the country as a Shariah-compliant hub, are starting to bear fruit, Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank in Kuala Lumpur, said.

Badlisyah and Effendi declined to name the companies considering selling notes in the Southeast Asian nation.
The Electricity Supply Board of Ireland is seeking approval from regulators for a sukuk, Dublin-based Dermot O’Reilly, business development executive at IDA Ireland, the international development agency, said in an e-mail on September 19.

Sales of Shariah-compliant debt by overseas companies increased 93% to 2.7bn ringgit this year, led by issuers from the Arabian Gulf, Singapore, and Kazakhstan.

Abu Dhabi National Energy Co and Singapore-listed First Resources sold 650mn ringgit and 600mn ringgit, respectively, this year. Gulf International Bank BSC and Saudi-Arabia-based Al Bayan Holding Co announced Islamic bond programs totaling 4.5bn ringgit.

“The trend of foreign investors selling ringgit sukuk is more visible as there’s greater awareness of what is available in Malaysia,” said Badlisyah, whose firm is a unit of CIMB Group, the second-biggest underwriter. “The debt crisis in Europe is also a factor that’s making companies look for alternative financing.”
Average yields on global Islamic bonds dropped four basis points, or 0.04 percentage point, to an all-time low of 2.87% in the first four days of the week, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.
The difference between the average and the London interbank offered rate, or Libor, narrowed 14 basis points to 181 basis points, the least since January 2008.

Islamic bonds sold to international investors returned 8.4% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets climbed 16.6%, JP Morgan Chase’s EMBI Global Composite Index shows.
The Southeast Asian nation pioneered the development of the global Shariah bond market with the sale of the first sovereign Islamic debt worth $600mn in 2002, according to the Malaysian International Islamic Financial Center.

Foreign issuers are interested in selling sukuk in Malaysia because it’s a cost effective destination with a diversified pool of investors, central bank Governor Zeti Akhtar Aziz told reporters in Kuala Lumpur last month.
Borrowing costs for top-rated companies in Malaysia dropped 35 basis points to 4.31% this year, the lowest level since 2003, according to a central bank index. Corporate sales of sukuk rose 34% to 52.3bn ringgit in 2012, data compiled by Bloomberg show.

Issuance reached an all-time high of 75.6bn ringgit last year following the single-biggest offering from highways operator PLUS Bhd. in December of 30.7bn ringgit.

(Gulf Times , 20 Oct 2012)

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Malaysia: Syariah-compliant small cap index launched

KUALA LUMPUR: FTSE Group and Bursa Malaysia have launched the FTSE Bursa Malaysia Small Cap Shariah Index to complement the existing FTSE Bursa Malaysia syariah indices.
In a joint statement, it said the new syariah index was designed to provide investors with a precise benchmark for syariah-compliant investment in Malaysian small cap companies.
The FTSE Bursa Malaysia Small Cap Shariah Index was developed in response to the needs of market practitioners who noted the lack of a benchmark to track the performance of syariah-compliant small cap companies. Constituents are selected from the universe of the FTSE Bursa Malaysia Small Cap Index according to the Malaysian Securities Commission's Shariah Advisory Council screening methodology.
The index is based on FTSE's award winning methodology which includes free float adjustment and liquidity screens and is managed in accordance with a clear and transparent set of index rules governed by an independent index committee.
The new FTSE Bursa Malaysia Small Cap Shariah Index forms part of the FTSE Bursa Malaysia Emas syariah universe and will be calculated on an end-of-day basis. Subscribers to the FTSE Bursa Malaysia Index Series will receive the new index as part of their existing data package at no extra cost.

(The Star Online / 17 Oct 2012)

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Crescent Wealth opens $150 billion market to Australian investors

Australian Islamic wealth manager, Crescent Wealth (established in 2010), announced in a press release last week that it has partnered with the Bank of London and The Middle East (BLME), a large European Islamic Bank, giving Australian retail investors exposure to the growing US$150 billion global Islamic bonds market for the first time.
Sharia’a-compliant bonds or ‘Sukuk’ generate ethical returns backed by real assets. The release said that the portfolio will be managed by BLME which is a global provider of Sharia’a-compliant, fixed income products. Crescent Wealth founder and Managing Director, Talal Yassine said that the partnership is significant because it is evidence that, “Australia is being taken seriously as a viable growth market for Islamic funds management.”
He added that the partnership “rounds out” Crescent Wealth’s product suite with a fixed income option added to their existing Australian and global equities, property and cash offerings; and that it also opens the Gulf Cooperation Council (GCC) market to Australian investors.
Nigel Denison, the Head of Wealth Management at BLME, said that BLME has seen increased demand from international investors for Sukuk bonds which have “good credit performance” and  have been “resilient to the global economic downturn.”
Islamic banking is one of the fastest growing financial sectors today with global Islamic banking assets exceeding US$1 trillion, and growth estimates upwards of US$2 trillion projected by 2017. Sukuk bonds have exceeded pre-financial crisis levels and are expected to grow exponentially over the coming years.
Yassine, said that his firm was “tapping the significant potential” for Islamic funds in Australia, which is expected to grow by as much as $22 billion(AUD) by 2020. He added that the number of Australians who “identify as Muslim” has grown “by 40% since 2006, up to 487,000 in 2011″, and explained that the Muslim population represents “a natural investor base” for Islamic financial products which along with the “genuine appetite in the broader community for a low risk, low-leverage investment profile” made Crescent Wealth a “compelling proposition”.
(Muslim Village.Com / 20 Oct 2012)

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Malaysia's Islamic banks ripe for consolidation-Bank Muamalat

KUALA LUMPUR (OCT 18, 2012) : Malaysia's Islamic banks are ready for consolidation as they seek ways to cope with rising operational costs, a top official with Bank Muamalat Malaysia Bhd said, signalling a greater acceptance in US$143.64 billion sector for M&As.
Islamic banks in the past have often been reluctant to merge, in part due to resistance from powerful shareholders who fear a loss of control while strains in global financial markets discourage risk-taking.
Islamic finance has grown in leaps and bounds to account for 23.7% of Malaysia's total banking assets although a major aspect is missing -- the development of megabanks that can issue ground-breaking products in the same way as conventional banks.
"I think consolidation is imminent and we will see a lot of Islamic banks getting together," Bank Muamalat CEO Redza Shah Abdul Wahid told Reuters.
"Costs have risen easily by 20% to 30% mainly due to the shortage of human capital and increased regulatory costs. Margins are falling and the only way to counteract this is to become bigger and more efficient," he added.
Bank Muamalat is now the target of a potential acquisition by financial group Affin Holdings Bhd, which may buy a stake from Khazanah Nasional Bhd and DRB-Hicom Bhd to create the country's fourth largest Islamic bank by assets.
DRB-Hicom holds 70% of Bank Muamalat, while the Khazanah holds the remainder. Affin, which received the greenlight from the Malaysia's central bank to begin negotiations, said the matter will conclude by end-2012.
The combined entity of Affin and Bank Muamalat would elevate both banks to a stronger market position. Affin would grow to the fourth largest Islamic bank by assets from ninth currently, the bank said last month.
"(With consolidation) we would be able to take in all these costs and do bigger deals, I think this is the way forward," Redza said.
DRB-Hicom, controlled by reclusive tycoon Syed Mokhtar Al-Bukhary, purchased a controlling stake in Bank Muamalat in 2008 with a mandate to reduce its holding to 40%.
The company last attempted to divest to Bank Islam Malaysia Bhd and Bahrain-based Al Baraka Islamic Bank.
Bank Muamalat is one of the country's remaining domestic standalone Islamic banks next to Bank Islam Malaysia Bhd, which has retained its leading position in the market.
(The Sun Daily / 19 Oct 2012)

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Gulf Islamic banks ready to step in as HSBC pulls back

SYDNEY, Oct 18 (Reuters) - Four days after HSBC Holdings said it would shrink its global Islamic banking operations, National Bank of Abu Dhabi revealed very different plans: it aims to triple the contribution of its sharia-compliant operations over the next eight years.
The contrast suggests that rather than being a sign of weakness in the Islamic finance sector, HSBC's decision reflected its own business priorities - and to the extent that the British bank pulls back from the industry, local banks will gain an opportunity to expand.
HSBC announced early this month that except for wholesale banking operations, it would no longer offer Islamic products in Britain, the United Arab Emirates, Bahrain, Bangladesh, Singapore and Mauritius.
It said it would focus its Islamic finance business on customers in Malaysia and Saudi Arabia, while keeping a limited presence in Indonesia.
Through its HSBC Amanah arm, headquartered in the UAE, HSBC was a pioneer in the industry and it operated the largest Islamic business of any Western bank, so the news sent ripples through the sector.
Some analysts speculated the decision reflected doubts about the long-term profitability of Islamic banking - perhaps dissatisfaction with costs that can be higher than conventional banking in some areas. Frequent asset transfers can attract repeated taxation, while buying the expertise to structure complex sharia-compliant transactions is expensive.
The details of HSBC's announcement, however, suggest the bank will not come close to pulling out of Islamic finance, and may even continue growing in some parts of the industry. The bank estimated it would keep about 83 percent of its Islamic business revenue after the move.
HSBC also stressed it would keep its wholesale Islamic banking operations, which are believed to be more profitable than retail and include its business of arranging issues in the Gulf's booming sukuk market, where it is a leader.
"The impact on the competitive landscape and the Islamic banking market as a whole will be minimal, as the closures affect only relatively small Islamic banking markets or countries where HSBC's retail banking presence is limited," said Alexander von Pock, principal at consultancy A.T. Kearney.
Faced with financial pressures in struggling European and U.S. markets, and increased regulatory demands as Basel III global banking standards start to take effect, HSBC and other Western banks are being forced to prune their operations in both Islamic and conventional finance.
An HSBC spokesman said the decision on HSBC Amanah followed a global strategic review, announced in May last year, which judged businesses on their compatibility with global strategy and the need to allocate capital efficiently.
"In conventional banks, an Islamic window is non-core business, and hence banks may be exiting to refocus on core business," said John Chang, head of retail banking at Dubai-based Noor Islamic Bank.
In fact, HSBC moved to scale back its Islamic business more slowly than it pruned its conventional operations; it has already divested assets in over 26 countries, including the United States, South Korea and Pakistan.
In the case of the Islamic operations, the decision was protracted, said a former HSBC Amanah director, who declined to be named because he was not authorised to speak to media.
Internally, the unit was able to argue that it was profitable but its weakness was that it lacked scale compared to HSBC's huge conventional operations, the director said. "The retail business is profitable, but it is a very tiny business."
HSBC's pull-out from Islamic retail banking operations in the UAE, the Arab world's second biggest economy, is expected to put the biggest dent in its growth. But bankers and analysts said it made sense given regulation and funding trends faced by Western banks.
"The retreat is more in retail banking, where especially in the UAE, international banks are only allowed to operate eight branches, which gives them no competitive edge with domestic banks who on average operate 40-50 plus branches," Moinuddin Malim, chief executive of Dubai institution Mashreq Al Islami , told Reuters.
Before the global financial crisis erupted in 2008, Western banks could expect to enjoy two advantages when competing with local banks in the Gulf: cheaper costs of funding, and better access to overseas financial markets.
Both these advantages have now faded, said Sohail Shafiq, vice president at Bank Sarasin-Alpen in Dubai. "The costs of the foreign banks have risen due to downgrades, and the returns on foreign assets have lost their glitter."
Days after HSBC's announcement, Michael Tomalin, chief executive of National Bank of Abu Dhabi, the second-largest bank in the UAE by assets, said his bank would boost its Islamic operations partly by introducing sharia-compliant services in Egypt, Oman and Malaysia.
NBAD aims to derive up to 10 percent of its operating income from Islamic banking by 2020, up from 3 percent currently, he said at the launch of the bank's Malaysian subsidiary.
Other Gulf institutions also plan to grow in the sector. Dubai-based investment bank Shuaa Capital is seeking to increase its share of sharia-compliant business through the Islamic window of its credit division, a company spokesman said.
Chang said it would be premature to expect any trend for Western banks to pull back in Islamic finance.
"It is too early to make any snap judgments. HSBC, RBS, BNP and Deutsche Bank have created separate desks to cater to Islamic structuring, and this speaks for itself," he said.
But to the extent that the Western institutions do scale back, Gulf banks will eager to take their place, said Shafiq.
"There is a very good chance that if they provide the sophistication and the suite of products currently put together by foreign banks, they could gain a major chunk of the business."
HSBC did not detail how it would handle clients in the six countries where it will cut Islamic business, or give a monetary value for the size of the business.
"We will ensure that we maintain account services for existing customers, with appropriate sharia oversight, as they transition to alternative arrangements," the bank said.
The experience of Qatar suggests some of HSBC Amanah's customers in affected countries may not leave HSBC but instead move to the conventional side of the bank, limiting the windfall for other banks.
After Qatar last year banned conventional banks from offering Islamic services, the flow of deposits to Islamic banks was smaller than expected; many depositors stayed loyal to their institutions. By some estimates, 60-70 percent of bank customers base their choice of bank primarily on pricing and service quality rather than religious permissibility.
(Reuters / 18 Oct 2012)

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Islamic finance body, IILM hires new CEO ahead of first sukuk issuance

Kuala Lumpur-headquartered IILM has delayed its first issuance of short-term sukuk, or Islamic bonds, twice since it began operations last year.
The company, which aims to help sharia-compliant banks manage liquidity and create a liquid cross-border market for Islamic instruments, said that Rifaat Ahmed Abdel Karim would take over as chief executive, replacing Mahmoud AbuShamma who was hired in February 2011 on a three-year tenure.
Rifaat was the first secretary general for the Islamic Financial Services Board and the Accounting and Auditing Organization for Islamic Financial Institutions, IILM said in a statement.
"Rifaat has an impressive career track record in Islamic finance and will certainly add value to the work of IILM," the chairman of IILM's governing board, Dr Mohamed Y. Al-Hashel, said in the statement.
IILM is set to launch its first sukuk of $300 million to $500 million within the next few months, AbuShamma told Reuters in an interview on Oct 2.
The company has faced a challenge to ensure it complies with laws in all of the 12 countries in which its members operate, AbuShamma said in the interview.
Eventually, IILM will issue sukuk totalling more than $2 billion a year, AbuShamma predicted.
IILM members include monetary authorities in Indonesia, Iran, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Saudi Arabia, Sudan, Turkey and the United Arab Emirates as well as the Islamic Development Bank and the Islamic Corporation for the Development of the Private Sector.

(Reuters / 19 Oct 2012)

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