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Saturday, 30 May 2015

As sovereign issues grow, pricing and design stymie corporate sukuk

Sukuk issuance by governments around the world is expanding, helping to bring Islamic finance into the mainstream. But in one respect, the sovereign issues are proving a disappointment: they are not encouraging sukuk sales by companies.
Legal and product design issues as well as pricing - it can be considerably more expensive for companies to issue sukuk than conventional bonds - are deterring corporate activity.
Last year saw debut sukuk issues by the governments of Britain, Hong Kong, Luxembourg, Senegal and South Africa. Hong Kong tapped the market for a second time this week with a $1 billion deal.
Demand among international investors has been strong. Large pools of Islamic funds in the Gulf and southeast Asia are hungry for sharia-compliant instruments.
But expectations that the sovereigns would pave the way for companies to issue sukuk, by demonstrating the viability of Islamic bonds and by building a benchmark yield curve, have so far been dashed. Since the five debut sovereign sales, no company has issued sukuk in those five economies.
As a result, sovereign and quasi-sovereign issuers accounted for 85 percent of the $113.9 billion of sukuk deals done globally in 2014, and that proportion shows no sign of changing. Outside Malaysia, Saudi Arabia and the United Arab Emirates, corporate sukuk remain rare.
"In 2015 we will continue to see sukuk issuance, but in the context of the global capital markets I expect that it will remain a niche product for some time," said Richard O'Callaghan, Islamic Finance partner at law firm Linklaters, which advised Britain and Luxembourg on their maiden sukuk deals.
O'Callaghan said he hoped to see a number of corporate sectors, including telecommunications and utilities, explore the possibility of issuing sukuk.
South African National Roads Agency Ltd (Sanral) and power utility Eskom have been considering issues since the South African government conducted a $500 million sale last August.
But companies face a new set of legal and tax issues when they use sukuk. For example, the asset-backed nature of Islamic bonds means multiple asset transfers may be required for an issue, creating a heavy tax burden for the issuer unless special legislation is in place.
Sanral has studied sukuk for years but has faced some challenges relating to the transfer of assets and its tax status, Vusi Mona, Sanral's general manager of communication, told Reuters.
In Malaysia and the Gulf, investors are familiar enough with sukuk to demand little if any premium to buy them; in the Gulf, it has sometimes been cheaper for companies to issue sukuk than to sell conventional bonds. Elsewhere, the investor environment is different.
Both Sanral and Eskom said they would only sell sukuk if that was cost-effective versus other funding sources.
"The sukuk market remains an option for Eskom. The SA government sukuk benchmark and its post-issuance performance remains a guide for us," the company said in response to Reuters questions.
The specific structure of sukuk is another important consideration for companies and investors, and may partly explain why companies have not so far followed the sovereigns.
Britain, Hong Kong, Luxembourg and South Africa all used a lease-based format known as ijara for their debut deals, apparently because they wanted to ensure wide investor uptake. Ijara requires underlying tangible assets to back the entire transaction amount, however, and while that requirement may be easy for governments to satisfy, it can be difficult for companies.
For its second sovereign issue this week, Hong Kong used a hybrid format with an agency-based wakala contract, where only a third of the deal needed to be underpinned by tangible assets.
This could provide a more practicable model for potential corporate issuers in the territory, as Hong Kong authorities suggested.

"The use of the 'asset light' structure can set a benchmark for potential issuers in the private sector," Financial Secretary John Tsang said in a statement on Thursday. 
(Reuters / 29 May 2015)
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Turkey launches Ziraat Bank’s Islamic branch

Turkey’s largest state-owned bank, Ziraat Bank, has launched its first branch for Islamic finance in Istanbul.

“This is a historic step. Other state-owned banks should follow Ziraat’s move,” President Recep Tayyip Erdoğan said on May 29  during the opening ceremony in the Eminönü neighborhood, referring to Vakifbank and Halk Bank. 

The Banking Regulation and Supervision Agency (BDDK) allowed on Oct. 15, 2014 Ziraat and its sister companies - Ziraat Insurance, Ziraat Savings, Ziraat Investment and Ziraat Technology - to establish the new Islamic bank as main shareholders with a capital of $300 million.

Erdoğan underlined that Ziraat Bank should increase the share of Islamic banking in the country instead of taking a part of the current market.

Islamic banking comprises 5 percent of the total banking system, Erdoğan highlighted. The market share should increase to 20 percent by 2023, he said.

There are currently four islamic banks operating in Turkey: Albaraka Turk, Bank Asya, Kuveyt Turk and Turkiye Finans. Ziraat is the fifth bank entering into that sector.

Erdoğan and the government are at odds with Bank Asya, which is linked to U.S.-based Islamic scholar Fethullah Gülen, who they blame with attempting to topple the gıovernment. 

The Turkish government aims to see the establishment of three Islamic banks in total as subsidiaries of the current state-run conventional banks by the end of 2015.

Saying that London is an important center for Islamic banking, Erdoğan stressed that Istanbul should take “its deserved place” in Islamic finance. The Turkish government aims to establish Istanbul as a regional financial center and then as a global financial hub by 2023.

Ali Babacan, Deputy Prime Minister, said this is an important start for Turkey, adding that the new bank aims to open 20 branches with a total of 400 employees at the end of this year.

“In 2018, the bank aims to have 170 branches with 2,200 personnel,” he said. President Erdogan said the bank should have 500 branches in 2023.

Babacan stressed that Islamic finance is rapidly growing around the globe. “In 2003, the market was at $200 billion, but it will reach $2 trillion by 2014,” Babacan said.

Islamic banking is based on the principle that money should not simply be lent at interest, but rather invested in a productive process which produces returns.

(Daily News / 30 May 2015)
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Thursday, 28 May 2015

Indonesia: Government Plan Aims To Spur Consolidation Of Islamic Banks

JAKARTA, Indonesia – Indonesia’s efforts to develop its Islamic financial market will encourage smaller Islamic banks in the country to consolidate and create a larger domestic sukuk market, said Moody’s Investors Service.
The government is preparing a five-year plan to develop Islamic finance by encouraging the three large state-owned Islamic banks ‎ to merge. It says doing so will create more efficiency and is expected to spur smaller players to link up in order to compete with the new entity.
The government is also preparing regulations that are more conducive to Islamic or Shariah banking. The details are expected to be finalized later this year.
Among Sharia business tenets is a rule that prohibits banks from earning interest. Indonesia, which has the world’s largest Muslim population, currently has 12 banks that comply with Sharia principles.
But while growth in Islamic banking has been in excess of 30% a year since 2005, when it accounted for 1.4% of the banking system, the Islamic banking sector still only captures a 5% share, said Khalid Howladar, Moody’s Global Head of Islamic Finance.
By contrast, in Malaysia, where only 61% of the population is Muslim, Islamic banks garner a 20% market share.
“The Indonesian government’s Islamic roadmap should drive growth in the sector,” Mr. Howladar said in a press release.
Financial analysts say Islamic banking in Indonesia has found it hard to grow due to a lack of support from the government, an uncertain legal environment, and a lack of skilled manpower needed to develop innovative Islamic financial products.
The government is now encouraging the fully-fledged Shariah subsidiaries of the state-owned Bank Rakyat Indonesia, Bank Negara Indonesia and Bank Mandiri to merge, creating a new unit with total assets of $8 billion. The government says it expects that the new institution will be able to quadruple Islamic banks’ market share to 20% by 2018.
The central bank and the agency that regulates and supervises the financial sector, known as OJK, are also encouraging conventional banks to spin off their 23 Shariah-compl‎iant units into fully-fledged Islamic banks.
(Indonesia Real Times / 27 May 2015)
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Islamic financial products risk losing their uniqueness

Islamic finance continues to expand globally but the industry risks losing its differentation from conventional financial products and lacks official data to ensure better supervision, an oversight body said.
Islamic finance weathered the global financial crisis better than conventional banking and is recovering in areas such as profitability and asset quality, the Islamic Financial Services Board (IFSB) said in its third financial stability report.
Islamic finance, which has its core markets in the Middle East and Southeast Asia, follows religious principles that ban interest and shun outright speculation, and as such is seen as an alternative to interest-based banking.
But the industry’s fastest-growing Islamic bonds segment (sukuk) is moving away from profit-sharing structures, which risk weakening the industry’s value proposition.
Less than 7 percent of all new sukuk issued in the first three quarters of 2014 were based on risk-sharing contracts and instead favoured sales-based contracts, the report found.
This could lead sukuk to be valued using similar pricing and risk management approaches used for bonds.
“As a result, any adversity in the global financial system, even if it originates in the conventional sector, has an impact on the financial stability of the sukuk market.”
This was observed in the volatility stemming from the U.S. Federal Reserve’s monetary policy meetings, which had identical effects on both the sukuk and bond markets, the report said.
Another concern is the lack of official data to help monitor and supervise the industry. Some public and private sector entities collect such information but in most cases it is not standardised or comprehensive, the IFSB said.
Last month, the IFSB launched a databank of industry indicators covering 15 countries aiming to help fill this gap.
Islamic finance now holds systemic importance in countries such as Kuwait and Qatar, and has made wider gains buoyed by support from governments such as Pakistan and Turkey.
But with growth come more regulatory requirements, such as consumer protection tools in the form of sharia-compliant lender of last resort facilities, which remain rare.
The IFSB found that out of 24 countries surveyed, only Bahrain, Malaysia, Nigeria and Sudan have implemented such facilities. Fifteen respondents said they would consider lender of last resort provisions, but timeframes ranged from one to five years.
Jordan expects to have a lender of last resort facility fully operational within one to two years, the report said.
(Reuters / 27 May 2015)
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Wednesday, 27 May 2015

Maldives: More than 50,800 eligible for Zakat

More than 50,800 people across the country are eligible for Zakat (alms for the poor) this year, the Islamic ministry has revealed.
Zakat is an obligatory alms tax collected from the accumulated wealth of all able Muslims.
Deputy minister for Islamic affairs Dr Aishath Muneeza told the press on Monday that more than 13,000 people in Malé and 37,800 people in other islands are registered as poor.
Muneeza said the ministry plans to distribute MVR20 million (US$1.2 million) before Ramadan at a rate of MVR400 (US$26) per person, noting that the sum was the highest so far.
The ministry collected a record MVR52 million (US$3.3 million) as property Zakat last year. The registered number of poor in 2014 was more than 53,000.
Muneeza noted that Zakat payments can also be made through Dhiraagu and Ooreedoo.
Newly appointed Islamic minister Dr Ahmed Ziyad said at the press conference that renovation work on several mosques across the country will begin next week with a target of completion before Ramadan.
(Minivan News / 26 May 2015)
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Ivory Coast to Sell $1.1 Billion of Domestic Bonds, Sukuk

Ivory Coast plans to sell $1.1 billion of debt in regional markets before the end of the year, including Islamic bonds denominated in the local currency.
The government will seek to sell Sukuk bonds that have maturities of more than five years, Budget Minister Abdourahmane Cisse said in an interview in Abidjan, Ivory Coast’s commercial capital, on Monday. Ivory Coast and seven other countries in West Africa use the CFA franc, which is tied to the euro.
“We want to diversify the types of investments” the nation offers, he said. “We basically want to give Ivory Coast exposure to a lot of different investors.”
The world’s largest cocoa producer is targeting growth of 10 percent this year and wants to lure more investors after a political crisis in 2010 led to months of violence and a default on dollar bonds. Ivory Coast is seeking to capitalize on demand for its debt after a sale of Eurobonds this year was four times oversubscribed. Yields on the $1 billion of securities due March 2028 fell 1 basis point to 6.39 percent as of 11:47 a.m. in London on Tuesday.
Former President Laurent Gbagbo is awaiting trial at the International Criminal Court in The Hague on charges of crimes against humanity relating to the death of about 3,000 people after he refused to concede an election loss in 2010 to Alassane Ouattara, who is now president.
Revenue collection rose 14 percent in the first four months of the year from the same period a year earlier, improving chances the government will meet its growth target, Cisse said. The government is on track to sell about 41.2 billion francs ($69 million) of stakes in companies it owns, he said.
(Bloomberg Business / 26 May 2015)
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Aceh to provide roadmap for Indonesia's Islamic banking ambition

JAKARTA: Indonesia’s bid to rival Malaysia as a Shariah finance hub just took on greater impetus with a plan by Aceh province to convert its development bank to one that complies with Islamic law.

PT Bank Aceh will become the nation’s first to transform from a non-Shariah-compliant entity, setting a precedent for the national government that is also deliberating such a move for a state lender.

Shareholders will vote this week on converting the bank’s 16.4 trillion rupiah ($1.2 billion) of assets, Zulfan Nukman, head of the province’s central bank office, said in a May 21 phone interview from the city of Banda Aceh.

Indonesia’s Financial Services Authority plans to announce this month a roadmap to develop the Shariah-compliant finance industry, as total assets of 272 trillion rupiah pales against Malaysia’s 626 billion ringgit ($173 billion).

The country is seeking toboostits regional profile with a bid to host the infrastructure arm of the Islamic development Bank, whose largest shareholders are Saudi Arabia, Libya, Iran and Nigeria.

“Industry players will be watching closely to see if the process goes smoothly and if the bank becomesmorecommercially viable,” said Achmad Kusna Permana, the Jakarta-based secretary-general at the Indonesia Islamic Banking Association.

“It would support the option to convert a state lender, which would add an instant few billions to Islamic banking assets and create an institution that can compete toe-to-toe with conventional banks.”

Aceh Trailblazing

Bank Aceh is majority-owned by the provincial government and its plan to convert to an Islamic lender has been approved by Governor Zaini Abdullah, Zulfan said.

Aceh, located at the northern tip of Sumatra, was granted more autonomy in 1999 to help stem an insurgency arising from unequal distribution of wealth from its natural resources.

The 30-year conflict ended in 2005 as separatist group the Free Aceh Movement disarmed following a peace pact.

The province has the highest proportion of Muslims at 98 percent and is the only one of 34 administrative regions that has implemented Shariah law, or Qanun, which permits floggings and fines for offenses ranging from stealing, to adultery and alcohol consumption.

Aceh has seen growth in Islamic banking assets outpace those of the conventional market, with a 17.6 percent increase to 5.5 trillion rupiah in 2014, compared with a 9.8 percent rise to 36.7 trillion rupiah, central bank data show.

That’s in contrast to the nationwide trend last year in a country with theworld’s biggest Muslim population.

“A Shariah bank is fitting for Aceh as that’s where the demand is,” said Bank Indonesia’s Zulfan.

“This will add to Islamic banking assets and Bank Aceh will be the trailblazer for other lenders considering to convert to Shariah.”

Size Differential

In an effort to boost the ability of lenders operating under religious principles to win morebusiness, the government began discussing a plan to form an Islamic megabank in 2013.

Options include creating such an institution from scratch, combining the Shariah units of government-held banks or fully converting a non-Islamic state lender.

Similar industry-wide initiatives have so far failed to produce results in a market that Ernst & Young LLP predicts will reach $3.4 trillion in assets by 2018 from $1.7 trillion in 2013.

Malaysia’s CIMB Group Holdings Bhd., RHB Capital Bhd. and Malaysia Building Society put such a plan on hold this year.

The relatively small size of Indonesia’s Shariah-compliant lenders makes it a challenge to compete with bigger conventional rivals, said Permana at the banking association, who is also the Islamic director at PT Bank Permata.

Increasing Confidence

PT Bank Syariah Mandiri, the nation’s largest Islamic bank, had 67 trillion rupiah of assets at the end of last year, compared with second-placed PT Bank Muamalat Indonesia’s 62 trillion rupiah, according to their websites.

That’s a fraction of the 868 trillion rupiah of PT Bank Mandiri and 806 trillion rupiah of PT Bank Rakyat Indonesia.

The Bank Aceh plan is “a good indication of the increasing confidence and commitment of the authorities on the viability and sustainability of Islamic finance,” said Alhami Abdan, head of international finance and capital markets at OCBC Al-Amin Bank Bhd. in Kuala Lumpur.

A Shariah megabank would enhance “the Indonesian Islamic banking industry’s capacity and capability in deepening its coverage of the wholesale banking sector,” he said.

(Astro Awani  / 26 May 2015)

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Malaysia, Japan to enhance cooperation in Islamic finance

TOKYO: Malaysia and Japan will enhance their cooperation in areas such as Islamicfinance. Malaysian Prime Minister Najib Razak, who wrapped up his three-day visit to Japan on Tuesday (May 26), is supporting Japan’s foray into the Islamic market.
Many Japanese businesses are eager to learn and see how they can gain a piece of the pie in the growing market.
Mr Najib on Tuesday gave a keynote speech at the round table meeting of the World Islamic Economic Forum (WIEF) Foundation and Alliance Forum Foundation (AFF) in Tokyo - a forum to help link Japan and the Muslim world.
During his visit to Japan, he reached an agreement with his counterpart Shinzo Abe to enhance cooperation in areas such as the halal food industry and Islamic finance.
“We discussed the support from the Japanese government, and its authorities to encourage Japanese enterprises, financial institutions, and investors to engage in Islamic finance-related activities with Malaysia. We in turn will offer technical assistance to Japan in this field,” Mr Najib said.
Japan is still new to businesses catering to Muslims. Restaurants could well be the most advanced in this area, as more outlets in Japan try to offer halal cuisine to the growing number of Muslim tourists, particularly from Malaysia and Indonesia.
Several Japanese banks have also introduced Islamic finance, but the understanding of business opportunities catering to Muslims is still limited.
Katsuya Hisamichi, corporate officer at Rohto Pharmaceutical's R&D Department, said: “Actually, the Muslim world is quite a new field for us. We haven't had any experience with Muslim countries."
Some companies in the financial sector have had more experience.
Nobuaki Kurumatani, deputy president and board member at Sumitomo Mitsui Banking Corporation, said: “Our Islamic finance activities started in 2008 from SMBC Europe that covered Middle-East countries. We are now focusing on Asia. I think the two big markets still are growing, and the most promising next step is focusing on the African market.”
The Islamic economy is expected to grow at double digits for the next few years. Global Islamic finance is estimated at US$2 trillion, while the halal market is worth around US$2.3 trillion.
The medical industry is hoping to tap on the Muslim market too. “Shortage of donor in any country has caused problems in heart transplantation. Also it's very expensive. Almost all countries desire to start stem cell therapy,” said Yoshiki Sawa, Dean at the Osaka University Graduate School of Medicine.
With better cooperation, Malaysia hopes to help Japanese companies, academics, and physicians gain the skills for them to participate actively in the Islamic market. 
(Channel News Asia / 26 May 2015)
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Friday, 22 May 2015

Malaysia remains largest sukuk market

SINGAPORE: Despite the rapid growth of other sukuk markets, Malaysia remains the largest and most liquid, with a deep institutional investor base.

This is according to Moody’s Investors Service in its just-released Moody’s analysis report titled “Islamic Finance: 2015 Malaysian Sukuk Volumes Will Be Stable, Driven by Refinancing.”

Moody’s Global Head of Islamic Finance, Khalid Howladar said: “We expect total sukuk bond issuance in Malaysia to be at or slightly lower in 2015, when compared with the US$20bil (RM72bil) seen in 2014.

“This is, given Malaysia’s adherence to its policy of fiscal deficit reduction, against the backdrop of weak commodity prices and foreign exchange volatility.

“Malaysia’s declining share of global issuance reflects the increasing  internationalisation and diversity of Islamic capital markets.”

Simon Chen, a Moody’s vice president and senior analyst for the financial institutions group, said for Islamic banks in Malaysia, overall loans growth, including for Islamic financing, will slow slightly to between 8% and 9% in 2015 from 10% in 2014.

“This will reduce the banks’ need for new funding, because asset growth will moderate, due to the country’s slower economic growth,” he added.

Chen pointed out that at the same time, Islamic banks will continue to  apply sukuk in addressing the significant maturity mismatches between their assets and liabilities, and to improve liquidity management in the  context of Basel III.

Moody’s analysis is co-authored by Howladar, Chen, vice president and senior analyst for the sovereign risk group Christian de Guzman, assistant vice president and analyst Nidhi Dhruv, as well as associate analysts Vincent Tordo and Maisam Hasnain. Dhruv, Tordo and Hasnain are Islamic finance specialists in the corporate finance group.

The report said that in 2015, corporate sukuk issuance would remain dominated by Malaysian government-related issuers, as such issuers continued to tap and further deepen the Malaysian sukuk market.
It also said US$44bil (RM158.6bil) of Malaysian sukuk would mature in 2015-2017, with corporate and sovereign issuers needing to refinance almost 90% of the total amount. Financial institutions account for the remaining US$4.6bil (TM16.6bil).

Of the US$44bil, only about 6% is denominated in US dollars, with the rest in ringgit, highlighting the depth of the domestic market.

As for the Malaysian sukuk market in relation to the overall global sukuk market, the former’s share of volumes is declining.  At March 31, 2015, some 58% of the about US$308bil (RM1.11bil) of total sukuk outstanding were issued in Malaysia versus a 40% issuance share in 2014.

The remaining issuance is increasingly fragmented, reflecting increased  volumes from other Islamic markets, particularly the Arabian Gulf countries.

Moody’s expects this trend of increased volumes from other Islamic markets to continue.
Moody’s report pointed out while other sovereigns have been keen to support the growth of Islamic finance in their jurisdictions, it is unlikely over at least the next five years that any other market except perhaps Saudi Arabia will match the depth and breadth of Malaysia’s domestic sukuk market.

This is considering the lead gathered from over a decade of sustained issuance, and the extensive and coordinated policy support from Malaysia’s central bank and all other stakeholders in the country.

The report further highlighted that future growth in issuance in Malaysia would be driven by strong demand from local investors, coordinated and supportive policies from the Government for Islamic finance.

Other factors include the large and growing base of syariah-compliant corporates in Malaysia and global investors’ increasing familiarity and comfort with sukuk instruments and increasing appetite for Malaysian credit.

(The Star Online / 21 May 2015)
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Islamic Finance -- a Potent Tool to Address Most Pressing of Development Challenges

Even though it still remains a small share of the global financial system, Islamic finance industry has expanded rapidly, with annual growth rates of 10 to 15 percent over the past decade. And today, Shariah-compliant financial assets are estimated to be close to U.S. $2 trillion, compared to roughly U.S. $200 billion in the late 1990s. Many countries already have sizeable Islamic finance industries, including Bahrain, Brunei, Indonesia, Islamic Republic of Iran, Malaysia, Pakistan, Sudan, and the UAE. There is also a growing interest in Islamic finance from non-Muslim countries (for example, the United Kingdom, Hong Kong SAR, China, Luxembourg and South Africa), providing further evidence that this hitherto niche market has entered into the mainstream of global finance.
So, what is behind this success? Islamic finance principles adhere to best practices coming from common sense and that's what adds a special appeal to it. These distinct features characterize Islamic finance:
  • avoidance of debt and prohibition of "interest"
  • promotion of risk sharing, so that the relationship between the borrower and thelender is based on shared business risks and returns,
  • prohibition of contracts with high uncertainty and a requirement for full disclosure before, during and after the contract
  • a requirement that financial transactions be linked to real assets
  • promotion of socially responsible and ethical finance
Not only is Islamic finance gaining broader recognition in financial markets, it's also becoming a viable "alternative" source of funding to address pressing developmental challenges, eliminate extreme poverty and boost shared prosperity in developing and emerging economies. Why do I think Islamic finance has this potential?
First, Islamic finance can make significant contributions to economic development, given its direct link to physical assets and the real economy. The use of profit- and loss-sharing arrangements encourages the provision of financial support to productive enterprises that can increase output and generate jobs.

Second, by expanding the range and reach of financial products, Islamic finance could help improve financial access and foster the inclusion of those who are now deprived of financial services. Notably, Islamic finance emphasizes partnership-style financing, which could be useful in improving the access to finance for the poor and for small businesses.
Third, Islamic finance helps strengthen financial stability: there is some empirical evidence that Islamic financial institutions may be more resilient to unforeseen shocks, thereby contributing to overall financial stability.
In the World Bank, we recognize the cross-cutting relevance and importance of Islamic finance across a range of development solutions. The Finance and Markets Global Practice is expanding the use of Sharia-compliant modes of financing in World Bank Group operations, thereby delivering important benefits to our client countries. For example, recent operations in Egypt and Turkey have leveraged Sharia-compliant solutions to expand financing for small and medium scale enterprises through long-term Ijarah contracts (operating leases) to finance the acquisition of fixed assets as well as asset-backed Murabahah contracts (mark-up financing) for their working capital needs.
Despite its recent years of rapid growth and the obvious potential for development financing, we should recognize that Islamic finance is still in early stages of development. The industry will also need to address several challenges, such as establishing robust legal, accounting, regulatory and supervisory frameworks, improving risk management techniques, increasing the number of skilled Islamic finance professionals, and standardizing contract documentation and structures. As the World Bank Group continues to advance this agenda, we look forward to helping the industry at large and our client countries in particular to address these challenges. We are also expanding our efforts in promoting the systematic and sustained use of relevant knowledge of Islamic finance to raise awareness, build consensus and promote the worldwide use of Sharia-compliant financing instruments.

(Huff Post Impact / 21 May 2015)
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Thursday, 21 May 2015

Khazanah to roll out first tranche of RM1b SRI sukuk

Khazanah Nasional Bhd will be rolling out the first tranche of RM100mil of its RM1bil sustainable and responsible investment sukuk (SRI sukuk) this year.
“We are looking at RM100mil to start with, but with an upside of RM150mil,” said Khazanah board of director and Yayasan AMIR chairman Raja Tan Sri Arshad Raja Tun Uda after the launch of the SRI sukuk yesterday.
The sukuk programme is the first of its kind and has been issued a preliminary AAArating by RAM Ratings Sdn Bhd.
The proceeds of the issuance will be channeled to Yayasan AMIR, a non-profit organisation initiated by Khazanah in 2010, to manage its cashflow for the deployment of the Trust Schools Programme for schools identified in 2015.
The first issuance will be used to roll out 20 schools under the Trust Schools Programme, in Kuala Lumpur, Johor and Sarawak.
Khazanah executive director and chief financial officer Mohd Izani Ghani targets to price the sukuk by mid-next week.
“Indicatively now, we are thinking of MGS (Malaysian Government Securities) seven-year plus 50 basis points, so indicatively 4.3%.
“Because of the uniqueness of the structure we are allowing some time for investors out there to go and seek approval,” said Izani.
Khazanah has already met a group of investors, including some financial institutions and foundations, as well as asset management companies.
“Generally they are all interested in giving back to society. It is a matter of time when they have to present to the committee for the investment,” he said.
He added that the SRI sukuk was dedicated for education only.
“At the beginning of every year, there’ll be an issuance for the schools roll out in that particular year.
“The structure is unique that can be applicable for any other initiatives, like affordable housing, healthcare, environment. It’s out there for people to adopt and use the structure that we have created,” he said.
The SRI sukuk has several key performance indicators, which will affect the returns from the sukuk investment.
“If the KPIs (key performance indicators) are not met, investors will get normal returns as per the launch date.
“If the KPIs are met, there is a mandatory step down in the yield, ie when the KPIs are met you are happy with gifting away the returns,” he said.
The “step-down” could range from 80 to 100 basis points, he added.
“We will sum up the final yield when we price the sukuk hopefully by mid next week,” said Izani.
Another feature of the SRI sukuk is that investors can decide to waive their principal anytime from the first day of the investment up to the seven years of the sukuk.
“If you feel that the KPIs are met and you feel like you want to give, just give notice to Khazanah, and we will manage the redemption at nominal value of RM1 and that’s effectively giving to the trust schools,” he said.
The investor will be granted a tax exemption by the Finance Ministry if the principal is waived.
Some of the KPIs include expansion of the trust schools, upskilling and training teachers as well as senior leaders of the schools, among others.
(The Star Online / 19 May 2015)
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