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Thursday, 4 June 2015

Malaysia's ethical sukuk adds to market width but depth elusive

Malaysia's efforts to create a market for ethical Islamic bonds (sukuk) are the latest in a series of government-led initiatives to develop Islamic finance, but further expansion will require a greater buy-in from a sometimes reluctant private sector.
Malaysia has been at the forefront of innovation in Islamic finance, but a reliance on state-linked firms to launch new products could be a weak spot if the sector is to grow beyond such government patronage.
Last month, sovereign wealth fund Khazanah Nasional launched the country's first sustainable and responsible investment (SRI) sukuk, nearly two years after the format was first announced by the government.
"Until now, nobody has done it. If we don't take this challenge, then I don't think anyone would be doing it," Khazanah's Chief Financial Officer Mohd Izani Ghani said in a phoneinterview.
"We have done many firsts before and it is always challenging," said Izlan.
Last year, $74.9 billion worth of sukuk were issued out of Malaysia but only $13.5 billion came from corporate issuers, according to data from Zawya, a Thomson Reuters company.
There is little sign of this changing soon. Major issuers of sukuk this year include Petronas, Telekom Malaysia and Axiata, all of which are majority or fully owned by the government.
"Corporate sukuk issuance will remain dominated by government-related issuers," ratings agency Moody's said in a research note last month. "We expect this trend to continue for the remainder of 2015. as Malaysian government-related issuers continue to tap and further deepen the Malaysian sukuk market."
This presents a dilemma for the broader Islamic finance market: how to widen the appeal of the sector with new structures, while ensuring enough volume for existing ones.
The new structures aim to appeal to first-time issuers but they can add complexity and costs.
The SRI sukuk from Khazanah will fund 20 new government schools and has a novel "step-down" feature where coupon payments will be reduced up to 100 basis points from their fixed rate if the schools meet certain benchmarks.
Private-sector firms could shy away from issuing their own SRI sukuk due to the additional resources required to establish and track such a structure, said Azdini Nor Azman, head of fixed income at Asian Islamic Investment Management.
The step-down feature should be revised to boost its attractiveness, said Azdini.
Other sukuk formats have struggled to get wider traction. Khazanah has issued sukuk in an exchangeable structure but this has yet to be used by a non-government issuer.

Axiata issued a reminbi-denominated sukuk in 2012, a year after a similar deal from Khazanah. But since then, no other firms have issued sukuk using that currency. 
(Reuters / 03 Jun 2015)
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Singapore set to benefit from increased demand for Islamic financial services in Asia

SINGAPORE: Industrial real estate investment trust (REIT) Sabana is the largest Islamic REIT globally, in terms of assets - and it is based in Singapore. Overall, shariah-compliant assets under management here have risen by 22 per cent since 2010, while banking assets have grown by more than 73 per cent. This is expected to grow further, as more Islamic funds in the Gulf seek foreign investment opportunities, particularly in Asia.
Speaking at the 6th World Islamic Banking Conference Asia Summit on Wednesday (Jun 3), Ms Jacqueline Loh, Deputy Managing Director at the Monetary Authority of Singapore, said: "GCC (Gulf Cooperation Council) banks have already been expanding their operations in Singapore in recent years to support the deployment of Islamic funds to corporates in the region, through Islamic bank financing, and sukuk issuances.”
She added: “The asset-backed nature of Islamic finance makes sukuk ideal for financing of infrastructure projects and would complement ongoing work by Singapore to enhance the bankability of infrastructure projects in the region and involve more capital market participants."
Sukuks are securities that are similar to bonds but they comply with the Islamic law. In the past five years, there were 31 sukuk issuances in Singapore - more than in other conventional jurisdictions, with total outstanding issuance reaching a high of S$3.8 billion in 2014, compared to S$440 million in 2009.
Industry participants said growth in this segment can help support the financing needs in the region. In particular, an estimated US$60 billion will be needed annually until 2022 for basic infrastructure projects in Southeast Asia.
Growing infrastructure needs and cross border trade and investments are expected to drive demand for Islamic finance in ASEAN. Observers said markets in the region are well-positioned to meet the rising demand, and stock exchanges are working together to capture these opportunities.
Said Bursa Malaysia chief Tajuddin Atan: "Growth of the global Muslim population coupled with increase of global HNWI have been a factor to the rising demand for Islamic finance services and wealth management. Importantly, the ASEAN region will need to mobilise these funds.
“With this interesting fund size, the development of ASEAN economies, the infrastructure needs and the cross border activities in trade and finance, the outlook of future demand for Islamic finance industry, to me, remains bright," he added. "It is expected to almost double or grow by 98 per cent by 2018 to bridge the demand for Islamic finance and to support mobilisation of funds in Southeast Asia alone."
Mr Tajuddin said this will bring up the question of product innovation, to preserve and grow the wealth of the Asian and ASEAN population: “So what the exchanges of ASEAN have done so far ... Malaysia together with SGX, the Singapore stock exchange, and stock exchange of Thailand have collaborated in developing the ASEAN exchanges to facilitate more efficient cross border trading among ASEAN."
In 2012, the Malaysia, Singapore and Thailand stock exchanges established the ASEAN trading link, to allow investors easier access to each other's markets.
(Channel News Asia / 03 Jun 2015)
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