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Wednesday, 9 March 2016

Malaysia: Better prospects for Petronas as sukuk costs decline, petrol price up

KUALA LUMPUR: Petroliam Nasional Bhd (Petronas) is enjoying a twin boost as commodity prices rally and Islamic bond costs fall just as it considers borrowing.
The difference in yield between 10-year government sukuk and two-year securities shrank to a five-month low of 91 basis points last week from as high as 128 in early January, making longer-term financing attractive for issuers such as Petronas. That’s been helped by record foreign purchases of ringgit government bonds last month, a rally in the currency and a recovery in Brent crude.
Petronas last month posted its third loss in five quarters, announced plans to cut 1,000 jobs and said it might need to raise funds and tap cash reserves to cover capital expenditure and dividends. The decline in bond costs is also a bright spot for Prime Minister Datuk Seri Najib Tun Razak, who’s seeking to finance a US$444bil development plan while contending with slowing growth.
“The flattening yield curve reflects the general perception that the pace of domestic economic growth won’t be strong,” said James Lau, an investment director at Pheim Asset Management Asia Bhd overseeing US$300mil. “The sweet spot remains for companies, especially those involved in development projects, to tap the loan and debt markets.”
Corporate sales of bonds that prohibit the payment of interest more than doubled in Malaysia to RM9.6bil in 2016 from a year earlier, according to data compiled byBloomberg. The ringgit rallied 4.7%, the best performance among 24 emerging-market currencies after Indonesia’s rupiah and the Brazilian real.
Overseas investors increased holdings of Malaysian sovereign ringgit bonds to an unprecedented RM176.7bil in February from the previous month as a global sell-off in equities at the start of the year boosted demand for fixed-income securities. When accounting for company notes, total ownership fell 0.6% to RM215bil.
“Demand-supply dynamics for Islamic bonds will stay favourable from the shift in asset allocation given the weakness seen in equities and other asset classes,” said Fakrizzaki Ghazali, a strategist at RHB Research Institute Sdn Bhd. “Nonetheless, this may not be a one-way affair as markets could be highly volatile again.”
The 10-year syariah-compliant yield fell 41 basis points in 2016 to a seven-month low of 4.11%, almost six times as fast as the decline on the equivalent two-year debt, according to Bank Negara indexes.
The possibility the central bank may ease monetary policy this year may also further support demand for bonds. Bank Negara unexpectedly cut the statutory reserve requirement for lenders at its last meeting in January and kept the benchmark interest rate at 3.25%. It’s also forecast by all 19 economists in a Bloomberg survey to hold the rate today.

Bank Negara expects inflation to tick higher to 2.5% to 3.5% this year from 2.1% in 2015 even as economists bet growth will weaken to 4.4%.

(The Star Online / 09 March 2016)
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Why Islamic finance is ‘booming’ around the world

There is no doubt that Islamic finance is growing around the world – actually sector expert Camille Paldi says it is “booming”, but it needs proper regulatory, reporting and resolution framework and tailored standards to continue its rapid expansion.
There are current around 500 Islamic banks operating in 75 countries around the world and Islamic finance is growing at 10-15% per year with GCC Islamic banks constituting 70% of the global total.
Camille Paldi explains, “Islamic finance is booming around the world and is an alternative source of financing. With proper regulation, financial reporting, and dispute resolution, Islamic finance has a healthy and vibrant home alongside and in cooperation with the conventional banking system.”
A two-day Islamic Finance and Banking Workshop, organised by the Franco-American Alliance for Islamic Finance (FAAIF), of which Camille Paldi is Chief Executive Officer, has just taken place in Philadelphia and Chicago, USA. Other workshops are being held in Seoul, Korea, Kanawaza and Tokyo, Japan and Beijing, China, later in the year.
Ms Paldi says, “It has been suggested that Islamic finance is as common now in the UK as conventional finance and soon it may be as American as apple pie.”
Non-Muslim countries are also tapping into the sukuk market, she says, For example, Germany issued US$123million sukuk ijarah in 2004 and in 2006, in the USA, East Cameron Gas, a Louisiana-based oil and gas company, issued $167million sukuk musharakah. General Electric (GE) issued $500million sukuk ijarah in November 2009 and Goldman-Sachs in New York issued the same in September, 2014.
“In 2014, Luxembourg was the first AAA-rated government to issue a euro-denominated sukuk in a €200million five-year Islamic Bond. Also in 2014, the UK was the first Western nation to issue a £200million sovereign sukuk, maturing on 19 July 2019. In 2015, Australia’s SGI-Mitabu issued the first Islamic finance offering by an Australian Corporate, an AU$150million sukuk in Labuan to fund its Indonesian 250 megawatt solar project.”
The sector is also expanding in:
The first French sukuk of €5million was launched in 2011 in the French fast food sector. In 2012, two more sukuk were issued in France for both individual and institutional investors.

The Seychelles and Ghana became the first countries in Africa to issue Islamic bonds in 2006 and 2007. In 2013, Nigeria issued a $62million sukuk. Senegal raised $200million through a sukuk issuance in 2014. South Africa issued a $500million sukuk in September, 2014, which was more than four times subscribed, with an order book of $2.2billion. Even Gambia and Sudan have issued sukuk, however, for small amounts and on a short-term basis.

The first sukuk was issued in Japan by Aeon Credit Services in Malaysia in 2007. Next, in 2010, Nomura Investment Company issued sukuk in US do. In 2012, Toyota Motor Corp. sold $88million of sukuk in two offers via its unit Toyota Capital Malaysia Sdn. due for maturity in May 2015. In 2014, Bank of Tokyo-Mitsubishi UFJ (Malaysia) Bhd set up a $500million multi-currency sukuk program and is also considering the world’s first yen denominated sukuk.

South Korea
South Korea has taken steps towards entering the global Islamic finance market including tabling legislation, joining various Islamic financial regulatory bodies, preparing for sukuk issuance, and tapping into the London Murabahah Exchange. Several Korean companies including GS Caltex, Korean Air, Hyundai, Samsung and others are exploring the possibility of raising funds from the sukuk market. South Korean Chaebols including Lucky Goldstar, Samsung, Korea Shipping and several others have accessed Islamic commodity Murabahah facilities structured through London.

The People’s Republic of China has been taking the steps necessary to facilitate Islamic finance transactions in China and Hong Kong to prepare China for competition in the sukuk, Islamic funds, and Islamic finance industries. As of January 2015, the government has approved plans to accelerate 300 infrastructure projects valued at 7trillion Yuan. Since 2006, seven sukuk with a value of $5.8billion have been listed on the Hong Kong Stock and two renminbi-denominated sukuk by Khazanah National and Axiata. Riding on the sukuk momentum, after Hong Kong’s debut $1billion sukuk, the government of Hong Kong announced another $1billion sukuk offering. In addition, Ninxia Province plans a $1.5billion Debut Sukuk sale in 2015/2016.

However, the Islamic finance boom simply cannot sustain itself without a proper regulatory, accounting, financial reporting, and dispute resolution framework including an Islamic finance dispute resolution centre and Islamic finance bankruptcy court, says Camille Paldi.
“Banks across the industry use different accounting methods and reporting techniques and this leads to confusion, inconsistency, non-transparency, and possibly a misleading representation of the true financial health of the IFI. The special nature of Islamic banking requires tailored standards in order to promote full disclosure and transparency of the IFI.
“It is recommended that the industry adopt the KFH (Bahrain) B.S.C.(c) Public Disclosure Report as a template for financial reporting to be used industry wide and that regulations including those for capital adequacy and accounting are tailored to and harmonized across the industry.”
Camille Paldi is a United States citizen and has qualified as a lawyer in four countries including the UK in addition to earning seven university degrees including an MA in Islamic finance from Durham University in the UK in 2014. She is the only US citizen to graduate from the Durham University Islamic Finance Program as well as receive training in Islamic finance and Shari’ah in the UAE, Bahrain, Qatar, Pakistan, and Malaysia.
FAAIF Limited is a legal and management consultancy firm servicing clients in the legal, Islamic banking, finance, takaful, and the halal industry. FAAIF Events is an events production and management company.

(Opp.Today / 09 March 2016)
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