Australia is set to become the newest entrant to the Islamic debt market this year as a solar-power joint venture seeks to sell a debut sukuk in Malaysia’s offshore tax haven of Labuan.
SGI-Mitabu, run by The Solar Guys International and Mitabu Australia Pty, has revived a plan to offer A$150 million ($117 million) of the securities in the third quarter to finance the building of a plant in Indonesia, M. Rusydi, Mitabu’s director, said by phone from Brisbane on Feb. 10. The company is coming to Malaysia because Australia still hasn’t approved laws allowing for the sale of sukuk since first proposing a plan in 2010.
The offering may serve as a model for Australian companies to tap the $1.7 trillion Islamic banking industry, according to Kuala Lumpur-based consultancy Amanah Capital Group Ltd. Malaysia, the world’s biggest Shariah-compliant debt market, has attracted sukuk issuers from Japan, which also lacks legislation that avoids double taxation on capital gains and income streams. Labuan, an island off the coast of Borneo, was established as a financial hub in 1990.
“Such financial transactions benefit the Australian economy by opening up more sources of funding,” Suhaimi Zainul-Abidin, treasurer of the Gulf Asia Shari’ah Compliant Investments Association, said in a Feb. 10 e-mail from Singapore. “But, it may be premature to expect a sudden spurt in the number of Australian companies issuing sukuk.”
SGI-Mitabu’s debt sale was first announced in December 2012 with a target issuance date of June 2013. The offering was delayed while the Indonesian government approved the location of the new plant as an economic zone, said Rusydi.
Labuan, which is also an offshore oil and gas hub off the coast of eastern Sabah state, doesn’t charge stamp duties on revenue streams from sukuk’s underlying assets or on capital gains. The island offers an income tax rate of 3 percent and has attracted 10,352 companies since its inception, according to the Labuan International Business and Financial Centre’s website.
About 2.2 percent of Australia’s 23 million population are Muslim, according to U.S. government data. A bill to give equal tax treatment to Islamic bonds was presented to parliament in 2010 and the National Taxation Board submitted a study in July 2011. There’s been no major development since.
Shariah-compliant finance presents an avenue for Australia to open its capital market, boost competition and encourage social inclusion, Bernie Ripoll, a former parliamentary secretary to the Treasurer, said in an April 2013 speech.
The lack of progress could be partly due to the changes in the Australian government, said Reynah Tang, a tax partner with law firm Johnson Winter & Slattery in Melbourne.
“Back at the time the original proposals were happening, the thinking was that Islamic finance would become a more regular feature of our capital markets,” Tang said by phone on Feb. 11. “It hasn’t been very prominent in more recent years.”
While Australia is stalling, other nations are seeing opportunities in Islamic finance. The U.K. became the first non-Muslim country to sell sukuk in 2014, followed by debuts by Luxembourg, Hong Kong and South Africa. Investors bid for 10 times the 200 million pounds ($305 million) offered by the U.K.
Global sales of Shariah-compliant notes, which pay returns on assets to comply with Islam’s ban on interest, climbed 7 percent to $46.3 billion in 2014 from a year earlier and reached a record $46.8 billion in 2012, data compiled by Bloomberg show. Issuance totals $1.7 billion so far this year.
Malaysia has attracted sukuk sales from Japanese companies such as Bank of Tokyo-Mitsubishi UFJ (Malaysia) Bhd. and Nomura Holdings Inc., while Toyota Motor Corp. issued Islamic debt via its local unit. Export-Import Bank of Korea set up a combined Islamic and conventional bond program in the Southeast Asian nation in 2008 but never sold a sukuk portion.
National Australia Bank Ltd., the nation’s fourth-biggest lender, has been exploring the possibility of selling Shariah-compliant notes since at least 2011. Citilink Finance Australia Ltd. was also planning a sale that year, although neither has ever materialized.
Some institutions are already offering Islamic services in Australia. MCCA Ltd. and Islamic Co-operative Finance Australia Ltd. both provide Shariah-compliant property and car financing. Kuwait Finance House KSC offers Islamic treasury products and investment services, and Sydney-based Crescent Funds Management (Aust) Pty Ltd. supplies property and stock funds.
“SGI-Mitabu’s sukuk issuance is a very good catalyst for Australia’s Islamic financial market,” Abas A. Jalil, Kuala Lumpur-based chief executive officer at Amanah Capital, said in an e-mail interview Wednesday. “Once the Australian market becomes more familiar with Islamic finance, the process of amending the laws relating to sukuk taxation will be expedited.
Russian banks are developing their expertise in Islamic finance to help broaden funding sources for local firms, though Western sanctions over the Ukraine crisis and the absence of a regulatory framework could hinder those efforts.
Russia's Islamic banking sector is still in its infancy. But an estimated 20 million Muslims living in the country are a potential source of money, as are cash-rich Islamic funds abroad.
Islamic finance has become a mainstream funding source for some other governments and companies over the past several years, with even non-Muslim nations such as Britain and South Africa issuing debut Islamic bonds (known in Arabic as sukuk) last year.
However, the European Union and the United States are seeking to cut overseas funding to Russian firms over Moscow's support for rebels in eastern Ukraine. Banks in the Middle East and southeast Asia, the major markets for sharia-compliant debt, are wary of becoming tangled in the sanctions.
So some Russian lenders are trying to build their own in-house knowledge of Islamic finance.
State development bank Vnesheconombank (VEB), which has been targeted by the sanctions, is seeking help from Middle East firms to develop its Islamic finance expertise, a spokesperson said, without naming those institutions.
"VEB sets as it goal diversification of project financing instruments, and among those considers Islamic finance tools."
VTB Bank, Russia's second-largest lender and another sanctions target, is exploring sukuk deals for several of its clients, although some questions remain over the accounting treatment of such transactions, the bank said in response to questions.
"Nonetheless, this remains a current issue, especially given growing interest in Asian markets."
In December, officials from institutions including Moscow Industrial Bank, VEB, SME Bank and the Russian Direct Investment Fund took part in a trade mission to the Gulf region, with Islamic finance featuring in the discussions.
In the same month, Russia's National Rating Agency signed an agreement with the Bahrain-based Islamic International Rating Agency to jointly assign ratings for Islamic financial products.
This will allow sharia-compliance quality ratings to be assigned for sovereign debt and Islamic financial institutions, the Russian agency said in a statement. Firms ranging from an Islamic leasing firm in the Russian republic of Dagestan to a fish skin leather manufacturer in Ingushetia, another Russian republic, have received such ratings in the past.
The lack of a Russian regulatory framework for Islamic finance is an obstacle; both issuers and investors rely on clear regulations to reduce risk and costs.
In October, the Association of Russian Banks asked the Central Bank to help develop Islamic finance, suggesting it adopt a special federal law.
The regulator continues to study the question of introducing Islamic finance regulation but work is at an early stage, a Central Bank spokesperson said last week. It is not yet clear when any new rules would be drafted, he added.
The Central Bank could draw on the experiences of former Soviet republics Azerbaijan, Kyrgyzstan and Kazakhstan, all of which are drafting new laws to regulate Islamic banking.
Even without a regulatory framework, Russia's banking sector has seen some small-scale Islamic finance deals. Kazan-based AK BARS Bank, Russia's 18th largest bank by assets, has raised a combined $160 million via two Islamic syndicated loans since 2011 and is open to tapping the market for a third time.
"We will continue working in this direction, further diversifying our funding," said Elina Khayrullina, an official at AK BARS.
A sukuk issue by a local or regional government would be needed to encourage issuance by Russian companies, she said. "In general, sukuk might be an option for Russian companies given there is a benchmark at state or regional level."
Azerbaijan's largest bank plans to set up a stand-alone Islamic unit which would seek business across the region, including through its Russian subsidiary.
There have been false starts, however. The Russian republic of Tatarstan has planned for a sukuk issue as far back as 2011, but no deal has materialized.
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