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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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