Foreign Appetite for Malaysia Sukuk Narrows Spread
Spreads on 10 year Malaysian sukuk over conventional bonds have more than halved since being added to the Barclays Global Aggregate Index. Malaysia’s Shariah-compliant government investment issues were included in the Barclays Global Aggregate Index on March 31, with a weighting of 0.18 percent.
It was estimated the move would attract at least $2.5 billion to $3 billion of flows into the Malaysian sukuk market. The average yield on 10-year Malaysian sovereign sukuk at the start of the year was 4.23%, compared with 3.93% for non-Islamic notes of the same maturity, according to Bank Negara data.
Sukuk Structure Conflict
At the time of the announcement is was estimated the move would help narrow the premium between the conventional and Islamic note. In an interview with Bloomberg Azidy Daud, head of treasury at Asian Finance Bank Bhd. in Kuala Lumpur, said the move would “Spur growth in the Islamic finance industry, as it will create demand from more conventional banks and investors.” though he added it was unlikely to attract more Islamic funds from the Gulf. Malaysia mainly uses the Bay’ al-inah and Murabaha structures. Bay’ al-inah which involves the sale and buyback of an asset by the seller, isn’t acceptable in the Gulf, whilst Murabaha, which uses cost plus mark-up transactions between parties, faces restrictions in the Gulf also, Azidy added.
Increased Sukuk Flows in Malaysia
Bloomberg’s Kuala Lumpur Bureau Chief Shamim Adam stated the tightening of spreads is an indication foreign investors have become more comfortable with Malaysian sukuk. Lower yields assist Malaysia in increasing depth of its capital markets which it turn will help it achieve its year 2020 target of having 40% of its banking assets being based on Islamic Finance principles against 26% currently.