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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Sukuk for vaccine fund ushers Islamic finance into ethical sphere

The latest entrant into Islamic finance is leading the industry in the new direction of socially responsible investment - which could even include the fight against Ebola.

Last week an immunisation programme secured a $500 million issuance of Islamic bonds, or sukuk, in the largest debut issue ever by a global non-profit organisation, under a broader trend to use bond markets to fund development and humanitarian projects.

The sukuk from the International Finance Facility for Immunisation Co (IFFIm), for which the World Bank acts as treasury manager, is a break from the predominantly commercial nature of most Islamic finance transactions.

The deal is part of World Bank efforts to adapt sukuk for use in a variety of ethical pursuits, including advising the Dubai government on a funding strategy for the emirate's green investment programme.

IFFIm, backed by nine sovereign donors including Britain and France, will use the proceeds of its sukuk to finance projects for the Global Alliance for Vaccines and Immunisation (GAVI) and is open to using the format again.

"It's a natural market for us. These kind of socially responsible investments are very much aligned with the core principles of Islamic finance," IFFIm Board Chair Rene Karsenti told Reuters.

The sukuk helped IFFIm diversify its investor base and secure competitive pricing, but also helped raise the profile of GAVI activities among Muslim-majority countries.

The sukuk could encourage other non-profits to consider this funding tool, while Gulf countries could be inclined to become GAVI donors themselves, said Paris-based Karsenti, who is also president of the International Capital Market Association.

Founded in 2000, GAVI has financed immunisation efforts in 73 countries, with half of its investment directed to 33 Muslim-majority countries, including Yemen, Mali and Indonesia.

"Sukuk is not new but what is new here is that it is associated with a socially responsible vehicle. We hope we can lead the way for other similar institutions to use the market."

Islamic finance follows religious principles which forbid involvement in businesses connected with gambling, tobacco or alcohol, but has only recently begun to explore wider social responsibility.

Future sukuk from IFFIm could help reinforce that change by financing other high-profile immunisation efforts, and GAVI is actively in discussions over taking a role in fighting Ebola when a vaccine becomes available, Karsenti said.

(Reuters / 05 December 2014)

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Islamic finance turns socially responsible

The latest entrant into Islamic finance is leading the industry in the new direction of socially responsible investment — which could even include the fight against Ebola.

Last week an immunisation programme secured a $500 million issuance of Islamic bonds, or sukuk, in the largest debut issue ever by a global non-profit organisation, under a broader trend to use bond markets to fund development and humanitarian projects. The sukuk from the International Finance Facility for Immunisation Co (IFFIm), for which the World Bank acts as treasury manager, is a break from the predominantly commercial nature of most Islamic finance transactions.

The deal is part of World Bank efforts to adapt sukuk for use in a variety of ethical pursuits, including advising the Dubai government on a funding strategy for the emirate’s green investment programme. IFFIm, backed by nine sovereign donors including Britain and France, will use the proceeds of its sukuk to finance projects for the Global Alliance for Vaccines and Immunisation (GAVI) and is open to using the format again.

“It’s a natural market for us. These kind of socially responsible investments are very much aligned with the core principles of Islamic finance,” said IFFIm Board Chair Rene Karsenti.

The sukuk helped IFFIm diversify its investor base and secure competitive pricing, but also helped raise the profile of GAVI activities among Muslim-majority countries.

The sukuk could encourage other non-profits to consider this funding tool, while Gulf countries could be inclined to become GAVI donors themselves, said the Paris-based Mr. Karsenti, who is also president of the International Capital Market Association. Founded in 2000, GAVI has financed immunisation efforts in 73 countries, with half of its investment directed to 33 Muslim-majority countries, including Yemen, Mali and Indonesia.

“Sukuk is not new but what is new here is that it is associated with a socially responsible vehicle. We hope we can lead the way for other similar institutions to use the market.”

Follows religious principles

Islamic finance follows religious principles which forbid involvement in businesses connected with gambling, tobacco or alcohol, but has only recently begun to explore wider social responsibility. Future sukuk from IFFIm could help reinforce that change by financing other high-profile immunisation efforts, and GAVI is actively in discussions over taking a role in fighting Ebola when a vaccine becomes available, Mr. Karsenti said.

“IFFIm could also provide long-term funding in that effort.”

GlaxoSmithKline and NewLink Genetics are currently testing experimental Ebola vaccines, and a trial of an Ebola vaccine from Johnson & Johnson is scheduled to start in January.

IFFIm issues bonds designed to bring forward future donor pledges into cash-in-hand today to finance its immunisation projects. It has raised $5 billion since 2006 from bonds issued in markets such as Japan and Australia. Islamic finance wants to be part of such efforts as it seeks to boost its ethical credentials: In August, Malaysia’s capital markets regulator introduced guidelines for the issuance of socially responsible sukuk.

IFFIm, rated AA by Standard & Poor’s, attracted $700 million in orders for its sukuk, with 85 per cent of bids coming from new investors, mainly out of the Middle East and Asia.

Despite a limited secondary market, its high credit rating made the issue appealing to Islamic finance institutions, with banks taking 74 percent of the deal.

The IFFIm sukuk uses commodities to underpin the transaction and is not tradeable other than at par value.

(The Hindu / 09 December 2014)

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Malaysia Airports prices RM1bil sukuk at 5.75%

KUALA LUMPUR: Malaysia Airports Holdings Bhd's 1 billion ringgit ($290 million) issuance of Islamic bonds has been priced at an annual rate of 5.75 percent, the airport operator said on Thursday.

Funds from the subordinated perpetual sukuk programme, established in September, will be used to fund working capital, the refinancing of debt and other general investments, MAHB said in a stock exchange filing.

MAHB earlier told Reuters that the company will raise 1 billion ringgit in sukuk, as costs for the Kuala Lumpur International Airport 2 terminal had risen to 4 billion ringgit from 3.1 billion ringgit after numerous delays.

CIMB Group Holdings Bhd, HSBC Amanah Malaysia, Citigroup and Maybank are the joint bookrunners and lead managers for the sukuk musharaka, which has been rated AA2 by Kuala Lumpur-based RAM Ratings.

(The Star Online / 05 December 2014)
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Low profit, weak standards hamper Islamic banks

The Islamic banking industry is being hampered by low profits and "mediocre" customer satisfaction despite impressive growth, officials and executives said at a financial conference in Bahrain.

The sector, which provides banking services compliant with Islamic sharia law, has doubled in size over the past four years and is now worth more than $2 trillion (1.6 trillion euros).

But a study by EY (formerly Ernst & Young) released at the World Islamic Banking Conference in Bahrain this week found that Islamic banks run at significantly lower profit margins than their conventional peers.

The study, conducted on Islamic banks in nine countries including Saudi Arabia, Malaysia and Kuwait, found that their return on equity was 19 percent lower than traditional banks in the same markets.

This could cost shareholders billions of dollars in forgone profit, it said.

It also analysed the views expressed on social media by 2.25 million Islamic bank customers and found many unsatisfied with the service they had received.

"Results show that for many banks... customer satisfaction is, at best, mediocre," EY said, attributing discontent to poor performance and a lack of use of technology.

Islamic finance is based on shared profit and loss, which minimises risk for banks. The system forbids charging interest -- banned as usury in Islam -- and avoids dealing in debt and derivatives.

To meet an ever-increasing demand, the sector has developed numerous products compliant with sharia law, from loans for cars and houses to funding major infrastructure projects.

Jaseem Ahmed, secretary general of the Malaysia-based Islamic Financial Services Board (IFSB), the leading regulatory body for Islamic banking, believes low profits in the sector are down to a lack of sharia-compliant investment opportunities.

"In Islamic banks, liquidity is primarily held in cash and reserves, which affects their profitability. Cash does not earn you returns. For Islamic banks, the options for investments are limited," Ahmed told AFP.

Bahrain's central bank governor Rasheed al-Maraj called on Islamic banks to take a "giant stride" as they become more exposed to global markets.

"It is time for us to reflect on where we are and where we intend to go," Maraj told the two-day conference.

Maraj said Islamic banks needed among other reforms to improve their regulation, risk management and standardisation.

Although Islamic regulatory bodies have established a number of standards, different interpretations of religious texts and weak implementation mean they remain far from industry-wide.

Hamed Merah, secretary general of the Accounting and Auditing Organisation for Islamic Financial Institutions -- a major sector regulator -- said standards should be mandatory.

"If regulators make these standards compulsory, it will help the industry immensely," Merah said.

But Sheikh Essam Ishaq, a religious scholar on Islamic finance, said sector-wide regulation was difficult "because the understanding of Islam and its interpretation is different".

Around 40 million of the world's 1.6 billion Muslims are now clients of the Islamic finance industry, which has surged in popularity since its days as a small niche market in the early 1970s. But it continues to represent less than two percent of the global banking assets of $140 trillion, according to EY.

(The Daily Star / 05 December 2014)

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Sukuk for vaccine fund ushers Islamic finance into ethical sphere

The latest entrant into Islamic finance is leading the industry in the new direction of socially responsible investment - which could even include the fight against Ebola.

Last week an immunisation programme secured a $500 million issuance of Islamic bonds, or sukuk, in the largest debut issue ever by a global non-profit organisation, under a broader trend to use bond markets to fund development and humanitarian projects.

The sukuk from the International Finance Facility for Immunisation Co (IFFIm), for which the World Bank acts as treasury manager, is a break from the predominantly commercial nature of most Islamic finance transactions.

The deal is part of World Bank efforts to adapt sukuk for use in a variety of ethical pursuits, including advising the Dubai government on a funding strategy for the emirate's green investment programme.

IFFIm, backed by nine sovereign donors including Britain and France, will use the proceeds of its sukuk to finance projects for the Global Alliance for Vaccines and Immunisation (GAVI) and is open to using the format again.

"It's a natural market for us. These kind of socially responsible investments are very much aligned with the core principles of Islamic finance," IFFIm Board Chair Rene Karsenti told Reuters.

The sukuk helped IFFIm diversify its investor base and secure competitive pricing, but also helped raise the profile of GAVI activities among Muslim-majority countries.

The sukuk could encourage other non-profits to consider this funding tool, while Gulf countries could be inclined to become GAVI donors themselves, said Paris-based Karsenti, who is also president of the International Capital Market Association.

Founded in 2000, GAVI has financed immunisation efforts in 73 countries, with half of its investment directed to 33 Muslim-majority countries, including Yemen, Mali and Indonesia.

"Sukuk is not new but what is new here is that it is associated with a socially responsible vehicle. We hope we can lead the way for other similar institutions to use the market."

Islamic finance follows religious principles which forbid involvement in businesses connected with gambling, tobacco or alcohol, but has only recently begun to explore wider social responsibility.

Future sukuk from IFFIm could help reinforce that change by financing other high-profile immunisation efforts, and GAVI is actively in discussions over taking a role in fighting Ebola when a vaccine becomes available, Karsenti said.

"IFFIm could also provide long-term funding in that effort."

GlaxoSmithKline and NewLink Genetics are currently testing experimental Ebola vaccines, and a trial of an Ebola vaccine from Johnson & Johnson is scheduled to start in January.

SUBSTANCE OVER FORM

IFFIm issues bonds designed to bring forward future donor pledges into cash-in-hand today to finance its immunisation projects. It has raised $5 billion since 2006 from bonds issued in markets such as Japan and Australia.

Islamic finance wants to be part of such efforts as it seeks to boost its ethical credentials: In August, Malaysia's capital markets regulator introduced guidelines for the issuance of socially responsible sukuk.

IFFIm, rated AA by Standard & Poor's, attracted $700 million in orders for its sukuk, with 85 percent of bids coming from new investors, mainly out of the Middle East and Asia.

Despite a limited secondary market, its high credit rating made the issue appealing to Islamic finance institutions, with banks taking 74 percent of the deal.

( Reuters / 05 December 2014 )

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Islamic finance body IIFM to develop trade, corporate finance contracts

The Bahrain-based International Islamic Financial Market (IIFM) will develop contract templates for sharia-compliant corporate finance and trade finance transactions, as the industry body expands its mandate, its chairman said on Monday.

IIFM, a non-profit which develops specifications for Islamic finance contracts, is aiming to double the number of its standards by as early as next year.

The new standards would help broaden the scope of IIFM, as the bodywork to harmonise industry practices, said Khalid Hamad, executive director of banking supervision at Bahrain’s central bank and IIFM chairman.

“Such an initiative is a strategic step by the IIFM board to meet the demands of the industry,” he told a seminar in Bahrain.

Trade finance has remained a marginal business for Islamic banks even as other areas have boomed in recent years, partly because of a lack of scale and expertise compared to larger and more established Western banks.

Last month, the IIFM launched its sixth standard covering collateralised “murabaha” agreements, which serve as an alternative to repurchase agreements, a key liquidity management tool largely absent in Islamic finance.

The IIFM is also studying the impact of a G20 initiative that calls for the introduction of central clearing for over-the-counter derivative trades.

This could prove problematic for Islamic banks, as some of their transactions might not be accepted by such clearing-houses, while margin requirements would entail the charging of interest, which is banned in Islamic finance.

“Specifically, it is worth exploring if a sharia compliant CCP [central clearing Counterparty] structure is possible,” said Hamad.

The IIFM has previously launched standard contract templates for Islamic profit rate swaps as well as hedging and treasury transactions. It is working on standards for cross-currency swaps, foreign exchange forwards and Islamic bonds.

The body, was started operations in 2002, was founded by the Islamic Development Bank and the central banks and monetary authorities of Bahrain, Brunei, Indonesia, Malaysia and Sudan. Additional members include the State Bank of Pakistan and the Dubai International Financial Centre.

(Gulfnews.Com / 02 December 2014)

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Moody's assigns A3 rating to Cagamas Global Sukuk's programme

Kenya will issue its debut sukuk in the next financial year, not this one as some had expected, after it opted to borrow an additional $750 million from its maiden $2 billion Eurobond issued in June, its finance minister said on Monday.

Parliament is set to consider a recommendation by its finance committee to double the government's external debt ceiling to $28 billion to fund the construction of a newrailway, port, roads and power plants.

There were expectations in the market the government would issue a bond compliant with Islamic law or shariah this financial year, partly to reduce domestic borrowing and lower interest rates.

Henry Rotich, the cabinet secretary for the Treasury, said the re-opening of the Eurobond, which is expected to be completed on Wednesday, had given the government time to prepare the documentation for the sukuk issue.

"We will prepare for sukuk but for the next financial year," he told Reuters on phone, without indicating the potential size of the bond. He said it would be issued in the finiancial year in the financial year ending June 2016.

Kenya's central bank chief, Njuguna Ndung'u, said last month the country's public debt was sustainable at 46 percent of gross domestic product (GDP) because much of it was supporting transport and other projects that will fuel growth.

A senior government source who did not wish to be identified told Reuters last week that the re-opened Eurobond was getting good demand from investors who were willing to pay a premium.

(Reuters Africa / 01 December 2014)

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Pakistan picks banks to hold dollar sukuk roadshows, will start Monday

 Pakistan has mandated four banks to arrange fixed income investor meetings starting Monday ahead of a potential issue of a U.S. dollar-denominated Islamic bond, a document from lead managers said on Sunday.

The sovereign, rated Caa1 by Moody's and B- by Standard & Poor's, has picked Citigroup, Deutsche Bank, Dubai Islamic Bank and Standard Chartered to arrange the roadshows and the possible deal, it showed.

Pakistan will hold roadshows in the United Arab Emirates on Monday, before heading to London and Singapore on Tuesday, with a 144A-compliant, benchmark-sized sukuk to follow, subject to market conditions, the document added.

Benchmark size is traditionally understood to mean upwards of $500 million. If a debt issue is 144A-compliant, investors in the United States can buy the offering.

The sukuk uses a sharia-compliant sale and lease-back structure to underpin the transaction. Proceeds will be used to purchase land comprising the M-2 Motorway, which connects Lahore to the capital Islamabad.

Political instability in Pakistan had temporarily caused some uncertainty around the sovereign sukuk issue as Prime Minister Nawaz Sharif came under pressure from weeks of demonstrations calling on him to resign.

Pakistan, a favourite with frontier market investors since peaceful elections were held there last year, sold $2 billion of dollar-denominated bonds in April after attracting $7 billion in investor orders.

In September 2013, the IMF saved Pakistan from possible default by agreeing to lend it $6.7 billion over three years.

The sukuk will be issued by Pakistan International Sukuk Company and is expected to be listed in the Luxembourg Stock Exchange.

Pakistan's external debt was about 19 percent of gross domestic product (GDP) on June 30 and it had a fiscal deficit of 5.5 percent of GDP in 2013-2014, it showed.

(Reuters / 23 November 2014)

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Pakistan's Asia Insurance to enter takaful market

Lahore-based Asia Insurance Company Ltd will seek shareholder approval next week to offer Islamic insurance (takaful) products, the latest insurer seeking to expand into the sector.

Asia Insurance joins a growing list of firms in offering sharia-compliant products including United Insurance Company and EFU insurance group , the largest private insurance group in the country.

In May, Pakistani regulators introduced new takaful rules that allowed conventional firms to enter the sector, aiming to increase insurance penetration which remains the third-lowest in Asia.

An alternative to conventional insurance, takaful follows religious guidelines including bans on interest and pure monetary speculation and a prohibition on investing in industries such as alcohol and gambling.

Asia Insurance will seek approval to allocate 50 million rupees ($492,853) in capital to its takaful operation, the minimum capitalisation requirement, the firm said in a bourse filing.

It will also seek to increase its authorised capital to 500 million rupees from 300 million currently.

(Reuters / 24 November 2014)

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