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Sunday, 31 March 2013

Sukuk (Islamic bonds) find favour in Australia



SHAUN DRUMMOND: INSURANCE AUSTRALIA GROUP BECAME MALAYSIA’S BIGGEST GENERAL INSURER WHEN ITS JOINT VENTURE BUSINESS AMG INSURANCE BOUGHT KURNIA INSURANS IN SEPTEMBER 2012. CHIEF EXECUTIVE MIKE WILKINS IS KEEN TO TAP INTO THE RAPID RISE IN TAKAFUL, OR ISLAMIC INSURANCE, WHICH ADHERES TO PRINCIPLES OF CO-OPERATION AS PRESCRIBED BY ISLAMIC LAW.

Wilkins’s interest in takaful extends beyond viewing Asia as an important growth market for IAG: he assisted with the preparation of Australia as a Financial Centre, a report released in late 2009, which recommended Australia pull down tax barriers in order to encourage Islamic finance. The federal government is yet to respond to a subsequent Board of Taxation review.
Wilkins stresses it is early days for IAG’s plans in Malaysia given the government is not issuing new takaful licences. But the growth is hard to ignore. “The takaful sector is likely to grow by about 20 per cent a year there,” he says.
Indonesia is also a target market for IAG and, being the largest Muslim state in the world, is another obvious market for takaful. “Given our interest in south-east Asia, and specifically Malaysia and Indonesia, our shareholders would at least expect us to explore the possibilities,” Wilkins says.
Under Islamic law, in order to fund its takaful liabilities, IAG would need to invest the cash flows received from policyholders into sharia-compliant products such as sukuk, or Islamic bonds.

RISE OF MALAYSIAN MARKET

Outside the Middle East, Malaysia has become the chief market to raise and trade Islamic finance instruments, and the vast majority of sukuk issuance now occurs there. At present, there is a low supply of issuers, compared to demand from investors, which is contributing to low yields.
Sukuk issuance dropped off during the global financial crisis but the instrument’s prohibition against interest payments appears to have shielded investors from the full force of the fallout. This resilience, along with high demand from Middle Eastern states seeking to park their piles of cash into sharia-compliant investments, has led to a rapid revival in the asset class.
Investor demand estimates vary. Ernst & Young forecasts sukuk demand is expected to triple from the present level to around $US900 billion by 2017. Thomson-Reuters is more conservative but still says demand will almost double from $US240 billion in 2012 to $US421 billion by 2016. Both agree that demand will continue to outstrip supply.
Thomson-Reuters says sukuk issuance, which reached $US121 billion in 2012, will more than double to $US292 billion by 2016.
So it’s a good time to issue. At present, issuance is dominated by sovereign funds and Islamic banks. Despite numerous Western countries amending their regulations in recent years to remove tax barriers to Islamic finance, offers by Western companies have been sporadic and mostly to fund operations in Islamic countries.
German insurer FWU Group raised $US55 million – the largest amount so far by a European company – in its first sukuk in Dubai in December. Several years ago, UK supermarket giant Tesco issued an Islamic bond to fund its Malaysian operations.

GOOD FIT FOR DEVELOPMENT

Sukuk favours cash flows generated by physical assets and contain various structures designed to provide steady income. These include returns based on a share of profits the asset generates, and often a transfer of ownership to a special purpose vehicle between investors and issuer which then leases the asset to the issuer.
The use of physical assets means it is often viewed as a good fit for infrastructure or property funding, suiting developing countries. The Malaysian government, for instance, has so far raised 1.5 billion ringgit ($458 million) in 2012 and 2013 to fund its biggest construction project, the Sungai Buloh-Kajang mass rapid transit network, with more than 400 million ringgit raised for the first time via a sukuk to retail investors.
Some believe sukuk investors could provide another source of funds for Australia’s high capital intensive industries and fill part of its looming infrastructure funding shortfalls.
National Australia Bank has been preparing to issue sukuk for some time with Malaysian investment bank CIMB for funding diversification purposes. It is understood Australian tax barriers are standing in the way. Non-bank lender FirstMac wants to securitise via sukuk sharia compliant mortgages it has sold in Australia for the past decade.
But where big financial institutions are tentatively exploring its potential, one small Australian company has dived in. In July 2013, a joint venture between Brisbane-based solar producers The Solar Guys and Mitabu Australia plans to raise $100 million in the first Australian dollar-denominated sukuk to build the first of five 50 MW solar power plants in Indonesia. The first one will be based in a “special economic zone” in the province of East Kalimantan on the island of Borneo. SGI-Mitabu plans to raise $500 million in total to finance all of the plants.
Mitabu director Rusdyi Mitabu is leading the financing, but the idea to use a sukuk initially came from the Kuala Lumpur branch of investment bank Kuwait Finance House. AM Bank (IAG’s joint venture partner in AmG Insurance) will lead the second $100 million tranche to build the next 50MW plant in either Bali or West Kalimantan.

SOLAR GUYS WARM TO IDEA OF SUKUK

SGI-Mitabu is raising the funds via the Malaysian International Business and Finance Centre on the island of Labuan, off the northern coast of Borneo. This was set up to attract capital by minimising Malaysian taxes for offshore issuers raising money for non-Malaysian based ventures. Another attraction of Labuan for Mitabu is the ability to raise the funds in Australian dollars, avoiding swap costs.
While some of the costs of the project will need to be paid in Indonesian rupees and to offshore manufacturers, the strong Australian dollar makes it a good currency to buy assets made overseas, such as solar panels. The panels will be bought from Japanese firm Kyocera.
Sukuk investors are also keen on Aussie dollars. “There is very strong appetite from the market for Australian dollar investments,” Mitabu says. “They would like to diversify away from US dollars.”
Sukuk yields have also recently hit record lows due to investor demand. Mitabu says he is looking to price at an equivalent return to investors of around 8 per cent. That may sound pricey to big companies. But he says on conventional bond markets, given the joint venture’s lack of credit rating, the fact it is relatively unknown and the risk allocated to Indonesia, they were looking at around 12 per cent.
The Solar Guys founder and commercial director, Dane Muldoon, says another reason to finance with the sukuk was good PR given the Indonesian government is keen to promote Islamic finance. He says solar power also suits Islamic investment principles. “Solar power is a good fit [for sukuk] in terms of the environment, in terms of the community,” he says. It is also an infrastructure asset that will have a steady stream of income selling electricity.
“Sukuk investors want to own an income-producing asset that has a consistent income per annum.” Solar power plants also don’t need to be finished before they can start generating an income, so he says benefits should flow to investors within about three months.
SGI-Mitabu is being courted by several other investment banks to do the final three raisings, including Malaysian bank RHB and Goldman Sachs.

MANY STRUCTURES, HIGHER COSTS

As in the traditional bond universe, there are numerous structures. Most now are asset-based, according to the global head of Islamic finance at Allen & Overy, Anzal Mohammed. This means that even though returns from the physical asset are the basis for the sukuk, there is also a guaranteed payment with recourse to the issuer in the event of default, just as in a conventional bond.
Mitabu’s sukuk is of the more traditional asset-backed variety, which means the issuer and the investor, in effect, share a proportion of the profits generated by the asset according to their level of investment. The asset is transferred to a special-purpose vehicle, and the issuer leases it from the SPV, with payments made in the form of rent, thereby avoiding interest.
Because they are like conventional bonds, some asset-based structures defaulted during the GFC due to the debt-like guarantees on returns. In asset-backed structures, investors share more of the risk with the issuer with recourse only allowed to the asset. If it doesn’t earn profits, neither does the investor.
The legal and structuring costs for sukuk are around 20 per cent higher, according to Mohammed. Part of the reason for this is the need to pay an Islamic scholar to rule on whether the sukuk complies with Islamic finance rules. SGI-Mitabu used scholars from the International Research Centre For Islamic Finance at Lorong University in Kuala Lumpur. They have ruled investors cannot trade their certificates until the power plant is constructed as the sukuk will be too much like debt up until that point.
While the pricing SGI-Mitabu could get, and the project being based outside Australia in an Islamic country, meant a sukuk suited its purposes, other Australian companies seeking to tap the sukuk market still face barriers. For larger companies, the pricing differences between sukuk and conventional financing may not be great enough to take a risk in a new market. Then there are the tax barriers.

TAX BARRIERS CAN BE SURMOUNTED IF NOT REMOVED

At present, because sukuk is based on several transfers of assets into and out of an SPV, it falls foul of federal capital gains tax and state stamp duty, as well as income tax laws relating to infrastructure funding. This would generally increase the cost of issuance well above a conventional bond.
Countries such as the UK, Germany, Turkey and Japan have removed similar tax barriers to Islamic finance. Australia’s Board of Taxation recommended amendments to tax laws to remove the double taxation in July 2011, but the federal government has not responded.
Some advisers, however, say potential issuers don’t need to wait for tax reform. Almir Colan, head of the Australian Centre for Islamic Finance, says the tax issues are surmountable now, with separate rulings available from the Tax Office for structures. He also points out Victoria has amended its stamp duty rules to remove barriers to Islamic finance.
Corrs Chambers Westgarth special counsel Rhys Jewell says sukuk has a role to play in financing infrastructure in Australia. But he says sukuk for Australian projects is likely to mainly be a source of diversification and funding competition. “It may be one of the pieces to the puzzle when trying to finance a project especially if there are only a few players that might be able to finance them,” he says. “It may increase the competitive tension between the financiers to help reduce the cost of finance.”
Anzal Mohammad believes Western companies are waiting for a big issuer, a global bank for instance, to test the Islamic market for them.

(Financial Review / 27 March 2013)


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

Insights into Islamic Investment Management from a CFA Charterholder in Pakistan



To gather insights into Islamic investment management from experienced CFA charterholders from different countries, we will be conducting a series of interviews. In the first interview of this series, we discuss Islamic investment management with Mohammad Shoaib, CFA.
Shoaib is the chief executive officer of Al Meezan Investment Management Limited based in Karachi, Pakistan. He earned his CFA Charter in 1999. In addition, he holds an MBA from the Institute of Business Administration, Karachi, which is now a program partner of CFA Institute. He has 23 years of work experience, including 10 years in Islamic investment management.
CFA Institute: Tell us about your market and how it has evolved over the years.
Shoaib: The first conventional fund was launched in Pakistan in 1962, and the first Islamic fund was launched in 2002. The Islamic fund management industry is about 12% of the overall fund management industry. All types that are available in the conventional arena, are also available on the Islamic side also. For example, we have Islamic equity, money market, sovereign, corporate fixed income, index tracker, capital protected, and defined contribution pension funds. The market is concentrated; of the total size of USD520 million managed by Islamic funds, about USD400 is being managed by Al Meezan Investment Management Limited
How has the market for Islamic investment management grown relative to that of conventional investment management?
While the market for Islamic funds is relatively new, the annual growth rate of Islamic funds is about 24% as compared to 12–14% growth for conventional funds.
The appeal to the Muslim population and the competitive returns offered by Islamic funds are two predominant factors leading to high growth for Islamic funds. Conventional funds on the other hand have focused more on institutional money.
How do fees charged on Islamic funds compare with conventional counterparts?
The fees and charges applicable to mutual funds are regulated and capped by the SEC in Pakistan. Due to the very competitive market, the fees charged by Islamic funds are same as those by conventional funds. The extra cost related to the Shariah board are borne by an asset management company instead of being charged to the fund.
Describe the screening process employed in your market? What are the effects on the investable universe and portfolio turnover?
It is basically a negative screening process based on nature of business and financial ratios whereby those companies that do not meet screening criteria are excluded from the permissible investment universe.
Most Islamic funds follow the screening criteria developed by a prominent seminary located in Karachi. While the investment universe is somewhat reduced, it does not much affect diversification of portfolio across sectors as most companies with large market cap are Shariah compliant as per the screening criteria.
How have Islamic investments performed in your market?
The only Islamic index available is KSE Meezan Islamic Index (KMI-30), which was launched about four years ago. The leading conventional index is KSE 100 Index. It is interesting to note that KMI-30 has consistently outperformed KSE 100 every year since launch of KMI-30.
How does the CFA Charter help investment professionals in Islamic investment management? What are the preferred sources of continuing professional development (CPD)?
Yes, employers value the CFA charter. However the curriculum does not cover Islamic finance, so employers need to train or arrange for the training of Islamic finance in addition to CFA program. There are not many CPD opportunities available in Islamic investment management.
What are the major challenges and opportunities for Islamic investment management in your market? How do you see its future prospects?
Two major challenges are: (a) creating awareness and understanding of Islamic finance and its principles; and (b) limited number of investible products (assets) on the debt and money market side. Because about 95% of the total population of about 180 million in Pakistan is Muslim, there is lot of untapped potential for growth in Islamic financial markets, which is expected to grow at twice the pace of the growth in conventional financial markets.
(Enterprising Investor / 26 March 2013)

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

Malaysia: Petronas Gas ponders RM5bil Sukuk (Islamic bonds)


KUALA LUMPUR: Petronas Gas Bhd is considering setting up a RM5bil Islamic bond programme to part finance the construction of regasification plants, three people familiar with the deal said.
The gas distribution arm of Petroliam Nasional Bhd invited proposals from investment banks to arrange the debt sale, said the people, who asked not to be named as the details are private.
A sale would be the company’s second offering of sukuk. It sold RM860mil of syariah-compliant notes in August via unit Kimanis Power Sdn Bhd to part finance a power plant, with maturities ranging from 2016 to 2028.
The 5.05% notes due in 2023 yielded 4.23% on Wednesday, according to data compiled by Bloomberg.
Petronas Gas started building its first regasification plant in Malacca in 2010 to meet rising domestic demand. The terminal is expected to begin commercial operations in the second quarter of this year, the company said in November.
The group is also planning similar facilities in Johor and Sabah, according to its latest annual report.
Petronas Gas chief executive officer Samsudin Miskon could not be immediately reached for comments.
Global Islamic bond sales have dropped 18% this year to US$10.3bil (RM32bil), after reaching a record US$46.5bil (RM144bil) last year, according to data compiled by Bloomberg.
Average sukuk yields have climbed 10 basis points, or 0.1 percentage point, to 2.91% this year, 24 basis points off an all-time low reached in January, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. 

(The Star Online / 29 March 2013)


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

IFC Makes First Islamic Finance Investment in Sub-Saharan Africa



IFC, a member of the World Bank Group, today announced the investment of $5 million equity in Gulf African Bank to support corporate finance and lending to small and medium businesses in East Africa. The investment in Gulf African Bank marks IFC’s first engagement with an Islamic finance institution in Sub-Saharan Africa.
Gulf African Bank, one of Kenya’s only two Islamic banks, has fourteen branches in Kenya, offering a range of Sharia-compliant banking products and services. The bank will use IFC’s financing to increase finance for retail and corporate customers, develop programs for women entrepreneurs and extend more services to small and medium businesses.
Jamal Al Hazeem, Chairman of Gulf African Bank, said, “We are delighted by IFC’s decision to take up a 15% shareholding stake in Gulf African Bank.
This is a clear indication of their belief not only in our Bank’s future but the future of Islamic Banking in the region. In addition to the IFC partnership, the Bank is undertaking a rights issue simultaneously to increase its capital base by an additional Kshs 850M. We feel priviledged that this is the first investment by IFC in an Islamic financial Institution in Sub_saharan Africa. IFC’s involvement will open up more opportunties for Gulf African Bank’s growth and expansion and enhance our processes.”
Gulf African Bank, which was established in 2007, has in the past five years greatly raised awareness in Kenya about Islamic banking. The bank’s shareholders are institutional investors from the Middle East and North Africa.
Oumar Seydi, IFC Director for East and Southern Africa, said, “IFC is committed to helping expand access to financial services in Africa. In Kenya, new financial market segments like Islamic banks enhance competition and can help reach a greater number of small businesses and women entrepreneurs, who are often excluded from banking services. IFC looks forward to working with Gulf African Bank to extend services and offer clients a more diverse range of financial products.”
In addition to the equity investment, a further $3 million trade line will be made available to Gulf African Bank under IFC’s Global Trade Finance Program. The Program complements the capacity of banks to deliver trade financing by mitigating risk in new or challenging markets where trade lines may be constrained.
To date, IFC’s investment and advisory services have partnered with 11 banks and one microfinance institution in Kenya, to help them sustainably increase business with small and medium enterprises.

(African Brain / 29 March 2013)


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

Egypt’s al-Azhar asserts role on Islamic finance, clashes with Muslim Brotherhood



Egypt’s leading Islamic authority Al-Azhar said on Thursday its clerics must be consulted on a law allowing the state to issue Islamic bonds, setting it at odds with the Muslim Brotherhood which drove the legislation through parliament last week.
It marks the first time Al-Azhar, a thousand-year-old seat of Islamic learning, has said its Senior Scholars Authority should be consulted on issues pertaining to Islamic law as set out in Egypt’s new, Islamist-tinged constitution.
Al-Azhar’s intervention could set a precedent for clerical oversight of other affairs of state. The Salafi Nour Party has said Al-Azhar must also approve an agreement Egypt is seeking with the International Monetary Fund because it includes a loan upon which Egypt will pay interest.
The Islamic bond, or sukuk law, will allow Egypt to issue debt compliant with Islamic principles, allowing the state to tap a new area of finance as President Mohamed Mursi’s administration grapples with an unaffordable budget deficit.
The sukuk law has been a source of friction between the Brotherhood, whose Freedom and Justice Party leads the upper house of parliament, and more hardline Islamists who say it should first have been approved by Al-Azhar.

(Reuters / 29 March 2013)


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

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