Japan bank’s debut sustains ringgit sukuk push

Japan Bank for International Cooperation’s proposal to sell ringgit sukuk is keeping alive Malaysia’s ambition for foreign bond sales in its currency, after a 47% slump in such offerings last year.

The Japanese government-owned lender is considering selling its first Islamic bonds this year to fund a project in the Southeast Asian nation, Tatsuhiko Takesada, executive officer for Asia Pacific, said in an April 2 interview in Jakarta. Local-currency issuance by foreign companies totaled 2.42bn ringgit ($741mn) in 2013, down from a record 4.6bn ringgit the year before.

“An issuance by JBIC can be a catalyst,” Mohd. Effendi Abdullah, head of Islamic markets at Kuala Lumpur-based AmInvestment Bank Bhd., Malaysia’s third-biggest sukuk arranger last year, said in an April 4 interview. “It will set a trend for issuers from Japan and countries that don’t have the Islamic infrastructure and regulatory framework to consider tapping the ringgit market.”

Bumitama Agri, a Singapore-listed palm oil producer, sold 500mn ringgit of sukuk in the only offer by a foreign company this year, as the Malaysian currency climbed 0.2% against the dollar following a 6.7% drop in 2013. JBIC may seek to tap an international pool of Shariah-compliant financial assets that has grown by 18% annually over the last four years, attracting governments in the UK and Hong Kong to consider Islamic bond

debuts.

While Japan has no Shariah banking rules of its own, the government amended legislation in 2008 to allow overseas subsidiaries of its lenders and insurers to provide financial services in accordance with Islam’s ban on interest.

Bank of Tokyo-Mitsubishi UFJ Malaysia Bhd. offers Shariah- compliant loans in Malaysia, Mizuho Financial Group Inc is active in Islamic trade financing and Sumitomo Mitsui Banking Corp is planning to enter the market after getting a permit earlier this year.

Toyota Motor Corp sold 280mn ringgit of sukuk in 2012 in two offers via its Toyota Capital Malaysia Sdn. unit. Nomura Holdings, Japan’s largest brokerage, is the only other Japanese company that has sold Islamic bonds. In 2010, it issued dollar notes in Malaysia that have since matured.

It makes sense for JBIC to tap the Malaysian market because of the large pool of Shariah-compliant investors, AmBank’s Mohd Effendi said. Islamic banking assets in the country climbed 13% last year to a record 556.5bn ringgit, or 25% of the total, according to central bank figures. There was $80.2bn of sukuk sold in Malaysia in 2013, making up 69% of all international sales.

“Since JBIC is owned by the Japanese government, its plan to issue a ringgit sukuk will add confidence to the Malaysian Islamic finance market,” Nik Norzrul Thani, the chairman of Kuala Lumpur-based law firm Zaid Ibrahim & Co, said in an interview on Sunday. “It will certainly help spur more potential issuers to tap the ringgit market.”

Singapore-listed plantation group Golden Agri-Resources, sovereign wealth fund Bahrain Mumtalakat Holdings, and multilateral lender Islamic Development Bank have all sold Malaysian-currency Islamic bonds in the last two years.

The Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index, which tracks the most-traded ringgit notes, fell 0.3% this year after gaining 2.8% in 2013.

The increase in international Shariah-compliant banking assets over the last four years probably resulted in holdings topping $1.7tn in 2013, according to Ernst & Young LLP’s World Islamic Banking Competitiveness Report 2013-2014.

Global sales of sukuk increased 3% to $13.8bn in 2014 from the year-earlier period. In Malaysia, issuance is up 83% to 19bn ringgit led by state-owned power producer Tenaga Nasional Bhd. and Perbadanan Tabung Pendidikan Tinggi Nasional Bhd., a government education fund.

JBIC first recognised the importance of Shariah-compliant financing after providing non-Islamic loans for projects in Bahrain and Saudi Arabia in 2006, Fumitaka Machida, the lender’s chief representative in Singapore, said in October.

In 2007, the Japanese bank signed a memorandum of understanding with Malaysia’s monetary authority to look into sukuk issuance, joined the Kuala Lumpur-based Islamic Financial Services Board and set up a Shariah advisory board internally.

“JBIC’s offering would be the first government sukuk from a developed nation if it materializes,” Badlisyah Abdul Ghani, chief executive officer at Kuala Lumpur-based CIMB Islamic Bank Bhd., said in an interview yesterday. “JBIC’s offering showcases another foreign entity tapping into the ringgit market, which reinforces confidence in Malaysian Islamic finance to give issuers what they need.

(Gulf Times / 07 April 2014)

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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

Morocco hopes regulation will aid second Islamic finance drive

Morocco is set to give Islamic finance a second try, counting on closer regulation and a clearer legislative framework to resolve problems which plagued its first attempt.

Banks in the country began introducing a range of Islamic finance products in 2007, calling them "alternative finance", but they drew little response from the majority Muslim population.

Both consumers and the banks themselves were unfamiliar with the products, while the lack of a detailed legal framework for Islamic finance also kept uncertainty and costs high.

This time, the environment is different. Morocco's parliament is considering a detailed bill that would regulate Islamic banks and issues of sukuk (Islamic bonds), and its passage - which could occur this year - is expected to prompt some Moroccan banks to establish dedicated sharia-compliant subsidiaries.

Meanwhile, Morocco's central bank plans to set up a central sharia board to oversee the sector. Sources aware of the plan told Reuters that seven scholars and financial experts had started training to become members of the board.

The political momentum behind Islamic finance has increased since a moderate Islamist-led government took power through elections in late 2011, and as the government struggles with a large budget deficit; sukuk issues could attract money from wealthy Islamic funds in the Gulf.

Said Amaghdir, chairman of the Moroccan Association for Participative Finance Professionals, an Islamic finance business association, said the tax treatment of sharia-compliant products would be crucial for the industry's development.

"We are fighting to get fair taxation for the participative products - that's how their prices would be closer to conventional ones," he said. "It is a matter of political will."

In its current form, the proposed legislation appears to address the tax issue well. It provides for the use of special purpose vehicles (SPVs), while transfers of real estate between sukuk originators and SPVs would not face double taxation, said Houda Chafil, managing director at Maghreb Securitization, a financial firm.

This is expected to favour the use of ijara sukuk based on sale and lease-back arrangements.

POTENTIAL

As several countries in the Middle East, including Oman and Libya, open up to Islamic finance, Morocco appears to be one of those with the most long-term potential; almost half of the population of about 33 million is believed to be outside the formal banking system.

A Thomson Reuters study of Morocco, released this month, estimated Islamic banks could account for between 3 and 5 percent of its total banking assets by 2018, or about $5.2-8.6 billion - still far below the proportion of roughly a quarter seen in the developed markets of the Gulf.

Moroccan banks have expressed cautious interest in the opportunities. AttijariWafa, Morocco's largest bank and the first to establish an Islamic unit, has said it will expand the unit after the bill passes.

Local lenders BCP, BMCE and BMCI , a subsidiary of BNP Paribas, may launch Islamic units of their own once the legislation is in place.

BCP, Morocco's second largest bank, aims to open an Islamic subsidiary alongside a partner with Islamic banking expertise, said Laidi El Wardi, BCP's general director for retail banking.

"First we want the new bank to create its own network, even though it will not be very large. I believe in the next four to five years, we will have at least 60 branches. For the second phase we will start using the conventional bank networks."

BMCE Bank, Morocco's third largest, is eyeing opportunities in sharia-compliant investment banking, takaful (Islamic insurance) and sukuk, BMCE officials said in the Reuters study.

Foreign banks look likely to play an important role in developing the market; Moroccan authorities may guide them towards partnering local banks rather than establishing fully owned Islamic subsidiaries, bankers believe.

Gulf banks from Kuwait, Bahrain and the United Arab Emirates have expressed interest in entering the market when the bill comes into force, said Lhassane Benhalima, the central bank's deputy head of banking supervision.

"We remain open-minded in our vision, and joint ventures between local banks and foreign investors are encouraged."

One banking industry source, speaking on condition of anonymity because of the sensitivity of the issue, said he expected the Moroccan central bank to approve the creation of only four to six Islamic banks, to avoid crowding in the sector.

"Most of the Moroccan banks interested in Islamic finance have already started talks with foreigners to make up joint ventures," the source said.

The ventures will face considerable obstacles, however, in particular a lack of consumer awareness of Islamic financial concepts, seen in consumer surveys conducted by BMCE.

"We think that it is normal to say that people want Islamic products, but we will need a lot of awareness because few of them know really what are the specificities and functioning of Islamic finance products," a BMCE source said.

INDEX

Moroccan officials are also looking to develop Islamic finance in areas outside banking. The Casablanca Stock Exchange is preparing to roll out a sharia-compliant index with around 35 companies, and will seek to list sukuk, said Karim Hajji, general director and chief executive of the exchange.

In the takaful sector, insurance companies are expected not to be allowed to open Islamic windows and instead will have to set up separate units, a move which could help differentiate the firms in an insurance market that is currently dominated by the largest four firms, the Thomson Reuters study said.

There is also a push to make the management of awqaf (Islamic endowments) more efficient, a process started in 2012 by the Ministry of Endowments and Islamic Affairs.

The country's awqaf own about 80,000 pieces of real estate across the country, but these tend to command low rental prices rather than competitive market rates, said Mohammed AlKawrari, awqaf president at the ministry.

"Moroccan awqaf are old awqaf; we have endowments that are twelve and a half centuries old. We have inherited the old awqaf in the historically rich old cities, such as Fez and Marrakesh," he said.

The ministry is studying the operations of real estate investment funds and the possibility of engaging private companies to help in the management of some of the properties.

However, AlKawrari conceded that the ministry faced a challenge: modernising awqaf and maximising their returns while avoiding a hike in rental prices, which could hurt low-income families occupying the properties. 

(Reuters / 08 April 2014)

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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