Sukuk Record Scuppered as 1MDB Delays 2014 Sale: Islamic Finance

Badlisyah Abdul Ghani, Chief Executive Officer of CIMB Islamic Banking Bhd., said it may take another six months for oil prices to stabilize and issuers in the Middle East may have to sell Islamic debt to raise funds.

Global Islamic bond sales look set to miss out on a record year after Malaysia’s sovereign wealth fund postponed what would have been 2014’s biggest offering. The top underwriter is also cautious over the coming year.

Issuance to date is $2.1 billion shy of the unprecedented $46.8 billion in 2012 and more than last year’s $43.1 billion total, data compiled by Bloomberg show. 1Malaysia Development Bhd., which has come under criticism from opposition lawmakers because of its rising debt, put off a plan yesterday to sell the equivalent of $2.4 billion of sukuk until the first half of 2015, said two people with knowledge of the deal.

CIMB Group Holdings Bhd. (CIMB), this year’s leading Islamic debt arranger, predicts that it will be a challenge for sales to test new highs next year as the slump in crude oil prices may deter issuance. Much will depend on first-time entrants coming to the market after debut offerings from the U.K., Luxembourg and Hong Kong in 2014, according to AmInvestment Bank Bhd.

“Sukuk sales this year are unlikely to surpass 2012’s levels,” Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd. in Kuala Lumpur, said by phone yesterday. “While we could still see strong interest from issuers to tap the sukuk market next year, sentiment has turned cautious because of the volatility in oil prices.”

Quarter Slump

Global issuance of sukuk is set for the worst quarter since the three months ended June 2013, with sales so far of $7.8 billion. In the six-member Gulf Cooperation Council, which relies on oil revenues, offerings climbed to $2.4 billion from last quarter’s $750 million, even as Brent crude tumbled 43 percent from its June high.

CIMB’s Badlisyah said it may take another six months for oil prices to stabilize and issuers in the Middle East may have to sell Islamic debt to raise funds. Malaysia, which is also a net exporter of the fuel, may see support for sukuk as the government undertakes projects linked to its $444 billion development program, he said.

1Malaysia Development is postponing the sukuk as it seeks a six-month extension from the nation’s energy commission to build a coal-fired plant south of the capital, said one of the people familiar with the matter. The state-owned firm, which has been criticized by three opposition lawmakers over its debt, had planned to sell notes due in five to 23 years in November. A company official declined to comment when contacted by phone yesterday.

Bond issuance will likely taper off now as bankers and investors go on their year-end holidays, said Badlisyah.

Rate Outlook

Borrowers will face the prospect of higher interest rates in 2015 as the Federal Reserve starts raising its benchmark rate for the first time since 2006. The median estimate in a Bloomberg survey is for Malaysia’s central bank to keep its rate at 3.25 percent at least until the final quarter next year.

Average yields on global sukuk have climbed 11 basis points, or 0.11 percentage point, to 2.87 percent from an 18-month low on Nov. 28, according to a Deutsche Bank AG index. That’s the highest level since Oct. 10 and reduces the decline this year to 55 basis points.

“While issuance is subject to prevailing market conditions, the sukuk market next year is expected to continue on a similar trajectory path as 2014,” Leon Koay, managing director and country head of financial markets at Standard Chartered Bank Malaysia Bhd., part of the fourth-largest Islamic debt arranger, said in a Dec. 5 e-mail. “There may be issuers who will opportunistically tap the sukuk and bond markets.”

Malaysia Dominates

HSBC Holdings Plc is the second-biggest arranger of Shariah-compliant notes this year behind CIMB. Malini Saudranrajan, media relations manager at HSBC Bank Malaysia Bhd., wasn't immediately able to give comment on the 2015 outlook in response to a Dec. 2 e-mail.

In Malaysia, the world’s biggest sukuk market, offerings may surpass this year’s level in 2015, supported by Prime Minister Najib Razak’s infrastructure spending, according to AmInvestment Bank.

Sales in the Southeast nation have climbed 48 percent in 2014 to 55.2 billion ringgit from a year earlier, data compiled by Bloomberg show. Islamic bond offerings from the GCC, which includes the United Arab Emirates, Saudi Arabia and Bahrain, fell 28 percent to $14.8 billion.

“The uncertainty over the oil price and interest rates are factors that could affect sukuk sales next year,” Mohd. Effendi Abdullah, head of Islamic markets at AmInvestment, said in a phone interview yesterday. “Most of the issuance will still come from Malaysia and some from the Middle East.

(Bloomberg / 06 December 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Global Islamic finance torn between competition and consolidation

Global Islamic finance torn between competition and consolidation --> A €˜compare and contrast' exercise was possible last week for those who had attended Dubai's Global Islamic Economy Summit and previously London's counterpart event a few weeks ago. An even greater number of delegates was apparently present, over three thousand, in the rather more salubrious setting of Madinat Jumeirah, which, it's probably fair to say, beats a reclaimed industrial dockland anytime, but especially in late autumn. Dubai was seeking to lend weight to its claim as the putative centre of the Islamic economy, extending its reach beyond the familiar field of Sharia-compliant finance, although this correspondent's focus remained on this key element, which attracts such attention, given the business potential still to be had. One statistic delivered in a side session illustrated that point even more starkly than before. It's often noted that Islamic financial assets make up only 1 per cent of the global total, just to keep a degree of perspective amid the hype. In respect of assets under management, though, that ratio, so we were told, is $60 billion versus some $60 trillion overall, making it a miniscule percentage and a sitting target for rapid evolution if this segment of activity can be cultivated. There were so many so-called takeaways from the event -- informational sustenance rather than alimentary -- that it would not do the subject justice to sweep through them. It's a topic to be tracked with due discretion and consideration, and to be filtered through the prism of time. That said, as an exception, the publication of the Thomson Reuters Islamic Financial Development report was of special note in analytical terms, as is the rubric of this space. It carries a multi-category analysis showing Malaysia leading the pack in the rounded advancement of the industry, followed interestingly by Bahrain , then UAE , but not featuring Saudi Arabia in the top ten, despite its size. That prompted thoughts here on the global process of the sector's development, and whether that predominantly will feature on the one hand competition between the various locations that want to secure market share, or collaboration on the other hand, by the various centres and regimes to get the job done. A harmonization of standards, documentation and regulation is believed by so many involved in the industry to be necessary. While we hear a lot about the Gulf and Malaysia in their dominance of Islamic finance, their motivating forces and realization seem distinct, and internationally the sector appears fragmented. Even basic research yields that, whereas Malaysia has embraced the sector in a focused way, as part of developing financial services within a national economic strategy, the Gulf's approach till now, for all its longevity and natural affiliation, has been sporadic. Malaysia has stolen a march, with a concerted agglomeration of support from the government, central bank, securities regulator and participating institutions. That well-coordinated process continues today. With a new financial district in view, Malaysia wants to compete with Singapore and Hong Kong , in keeping with its programmed vision to 2020. Most especially, as an underlying philosophy, Malaysia seems devoted to meeting the requirements of the market, rather than imposing a specifically ethical or religious predestination. In spite of its obvious alignment with Islamic finance historically, in the GCC the sector's growth has been organic rather than systematised, to date. Of course, the region has had enviable energy resources to rely on, often argued to have curtailed other avenues to growth. In a globally competitive sense Malaysia is ahead in the game, practically speaking, particularly in trained staff. Meanwhile, a unified, consolidated outlook is actually not on the agenda in the Gulf, although, clearly and by definition, not every centre in the region can be a hub. Indeed, the recent signing of a Memorandum of Understanding between the central banks of Malaysia and the UAE , aiming to foster closer economic ties, indicates that co-operating externally could actually be easier than bonding internally. In some sense, it is not surprising that the GCC states, as sovereign nations, should have ploughed their own furrows. The absence so far of Gulf monetary union is evidence of this disjuncture. Europe's dysfunctional condition as a template can only have warded off collectivist sentiments. At the same time, the Gulf's deeper association with Sharia-compliance is a profundity that even its rival Malaysia is known to respect. The different schools of thought might prove an enduring schism. That's not fatal for the industry, but might remain a disadvantage for those who want an Islamic market, but need it to be streamlined. Perhaps Dubai has a chance to find a way between the two pillars: of cultural authenticity alongside the pragmatism necessary for significant success in the real, competitive world. As far as comparing and contrasting is concerned, while the UK may have a €˜can-do' attitude, it's as if Dubai goes the critical step further, with a €˜will-do' resolution.

(Hispanic Business.Com / 30 Nov 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com