Malaysia-based IILM treads fine line in designing maiden sukuk

SYDNEY: International Islamic Liquidity Management Corp (IILM) faces a delicate task as it designs its maiden sukuk: it must make the issue attractive enough for investors to buy, but not so attractive that most of them buy to hold.

Whether it gets the balance right will affect the development of Islamic money market trading in the Gulf and South-East Asia over the coming year.

Malaysia-based IILM, backed by nine central banks and monetary agencies as well as the Jeddah-based Islamic Development Bank, has said it planned to issue up to US$500mil of dollar-denominated sukuk in the second quarter of this year, and eventually expand the programme to as much as US$3bil.

Its issues will be based on a very different premise than other sukuk. Other issuers design their sukuk merely to attract investors and raise money cheaply; IILM's mission is to create a highly liquid tool which Islamic banks will trade to manage their short-term funds.

To ensure trading of the sukuk around the world, IILM had signed agreements with eight primary dealer banks, said Ayhan Keser, executive vice president at Turkey's Albaraka Turk , one of the market-making banks.

“These primary dealers are given the right to purchase the issued sukuk in the primary market, have the responsibility to set the secondary market and actually buy and sell the bonds to form a market price,” Keser said.

Standard Chartered is another primary dealer, according to Standard and Poor's. The bank declined to comment on its role.

The participation of other banks in the primary dealer network appears less certain, however. Qatar Islamic Bank, the Gulf state's largest syariah-compliant lender by assets, is still considering whether to take part, according to its chief executive.

“We will probably be. It's still under discussion,” group chief executive Baseel Gamal said in Doha earlier this month.

Bank Islam Malaysia Bhd is awaiting internal approval from its syariah board, according to a source at the bank who declined to be named as he is not authorised to speak to the media.

A second Malaysian lender was also considering its participation, with the country's central bank pushing for decisions to be made soon, the source said.

Luxembourg, where the sukuk will be domiciled, has one confirmed primary dealer while another is still working on the paperwork, according to a banking source familiar with the discussions, who declined to be named because of the sensitive nature of the issue.

No specific date has been given for the first or subsequent sukuk issues, and the IILM did not respond to Reuters questions.

Another key issue for the IILM sukuk, which are expected to have maturities of up to one year, will be their bid-ask spreads in the secondary market.

If the issues are too small relative to demand, many investors may end up buying and holding them rather than trading them, making price discovery difficult and resulting in wide bid-ask spreads that hurt their function as a store of value.

Other international sukuk often trade with bid-ask spreads ranging from 80-100 basis points (bps), so the IILM paper will need to demonstrate it is much tighter than that.

Spreads above 50 bps could affect the IILM's effectiveness and credibility, said the head of treasury at a Bahrain-based Islamic lender. “Below 50 is good a quarter (0.25 percentage point) would be great.

(The Star Online / 13 May 2013)

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Turkey can profit from Islamic banking push

Turkey can profit from Islamic banking. As part of an initiative backed by the Islamist government, Ziraat Bank, the country’s largest state-run lender, is working to set up a Shariah-compliant entity. It comes less than a year after Ankara’s debut sovereign sukuk.

Turkey already has four Islamic banks, known locally as participation banks, of which three are foreign-owned. The first was established almost three decades ago. But Shariah-compliant assets account for just 5% of total banking assets, far below the average of 25% in the Gulf region, according to Ernst & Young.

Size is mostly the problem. Conventional deposit banks have 15 times more branches than Islamic institutions. Islamic banks in Turkey are also lagging in innovation compared to peers elsewhere in the Muslim world, bankers say.

The current push is motivated as much by pragmatic reasoning as by any spiritual desires. Stronger and larger Islamic banks could strengthen Turkey’s financial position.

Domestically, they could lure funds out from under the mattress in the country’s conservative and pious heartlands. That cash could help fund Turkey’s GDP growth. The Islamic money would be less likely to disappear than inherently fickle foreign funding, which has driven the banks’ average ratio of loans to deposits above 100%.

Internationally, stronger Islamic banks would enable Turkey to attract more cash from the Gulf and Asia, where the appetite for Shariah-compliant products far outstrips the existing supply.

For Turkey, which needs to fund a current account deficit of more than 6% of GDP, diversifying its sources of finance to include this pool of captive capital makes sense.

The aim of the Participation Banks Association of Turkey is to triple the share of Islamic banking assets in the country by 2023. If more large players enter the Shariah-compliant market, that target could start to look modest.

CONTEXT NEWS:

n Ziraat bank, Turkey’s largest state-run lender, is planning to set up a separate Islamic Bank, general manager Huseyin Aydin said on April 13.

nThe announcement follows a report a month earlier in the Hurriyet Daily News which said that Deputy Prime Minister Ali Babacan had hinted that two state banks may offer interest-free services without giving any names.

n Turkish lender Halkbank will be the second bank to start offering Shariah-compliant services under a new entity, according to two bankers familiar with the situation.

(Gulf Times / 13 May 2013)

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IFSB plays key role in market education of Islamic finance

LONDON — The Islamic Financial Services Board (IFSB), the multilateral organization established on Nov. 3, 2002 in Kuala Lumpur, with the mandate of promoting the soundness and stability of the Islamic financial services industry through the introduction of standards and guidance notes on capital adequacy, risk management and insolvency provisions for the banking, capital market and insurance sectors, celebrates its 10th anniversary next week which also coincides with its 10th annual summit. 

The Board actually started operations on March 10, 2003 under its inaugural Secretary-General Professor Rifaat Abdel Karim, and within a space of a decade it has probably done more than any other single institution to put Islamic finance firmly on the map of the multilateral institutions policing the global financial system. 

The theme for the summit, which will be held on May 16-17 in Kuala Lumpur, and hosted by Bank Negara Malaysia, the central bank, reflects the mood in general in global banking today but which is equally relevant to the Islamic finance industry: “The Future of the Islamic Financial Services Industry: Resilience, Stability and Inclusive Growth.” In many ways it also reflects the agenda for the Board over the next few years. 

Whether the IFSB would have achieved what it has in its first ten years without Rifaat being at the helm, must be doubtful. He almost single-handedly pushed the IFSB agenda through his energetic approach, and his ability to negotiate with his immediate bosses, the IFSB Governing Council. But above all, Rifaat put Islamic finance firmly on the map and in the minds of the multilateral financial institutions that mattered in global finance – the World Bank, the International Monetary Fund (IMF), the International Finance Corporation, the Basel Committee for Banking Supervision, the Bank for International Settlements (BIS), the Asian Development Bank and the International Accounting Standards.

He also managed to attract the World Bank, IMF, BIS and even the People’s Bank of China to become Associate Members of the Board. Similarly, he got the Banque centrale du Luxembourg, to sign up as Europe’s first and only regulatory authority to join the IFSB. 

Given the continuing global economic crisis symbolized by deficit reduction and austerity programs in the industrialized economies and the ongoing Eurozone debt crisis as in the Cyprus bailout, coupled with a range of new regulatory and compliance initiatives led by the Basel III Process including its new Liquidity Coverage Ratio (LCR) Standard, it is inevitable that the global financial services debate should concentrate on the resilience of financial institutions in pre-empting and managing future crisis and stress, contributing to market and systemic stability and helping to forge GDP growth which encompasses all stakeholders in society.

The contagion effect and economic impact has been pervasive — and no economy has been spared. The global Islamic finance industry, because of the nature of its faith-based ethos which proscribes interest-based financing, speculation in derivatives, and requires transactions to be backed by underlying real assets thus contributing to productive activities in the real economy, has coped with the crisis better than its conventional counterparts.

But they are faced with many of the same challenges which the global financial services industry is faced with whether in meeting tougher capital adequacy and liquidity requirements; risk management and stress testing measures; compliance measures especially in combatting money laundering and tax evasion; and rediscovering the inclusiveness of banking and financial services to serve society and the economy and not just the corporates and the rich. 

These and the core issues are firmly reflected in the key topics to be discussed at the IFSB Summit sessions. These include: 

• Global financial regulatory reforms 

• Challenges relating to a cross-cultural approach to the regulation of Islamic finance and market development 

• The prospects in new markets 

• Forging the new frontiers of Islamic finance

• Innovating for inclusive economic and market growth 

Dr. Ahmad Mohamed, President of the Jeddah-based Islamic Development Bank (IDB) Group, will give the keynote address at the opening session of the Summit on May 16. There will also be other prominent central bankers and international officials speaking at the Summit including Dr. Zeti Akhtar Aziz, Governor of Bank Negara Malaysia; Sheikh Abdullah Saud Al-Thani, the current Chairman of the IFSB Governing Council and Governor of the Central Bank of Qatar; Dr. Abdulrahman Alkalaf, Deputy Governor of SAMA; Karl Cordewener, Deputy Secretary-General of the Basel Committee on Banking Supervision at the Bank for International Settlements (BIS); and Abayomi A Alawode, Manager of the Financial Systems Global Practice at the World Bank. 

So what of the achievements of the IFSB over the last decade? 

A key achievement is its reach. The IFSB at 7 April 2013 had an impressive 187 members comprising 57 regulatory and supervisory authorities, eight international inter-governmental organizations and 122 market players, professional firms and industry associations operating in 43 jurisdictions. 

Some credit here must also go to Rifaat’s successor, Secretary General Jaseem Ahmed, who continues to promote the organization with the same urgency and vigor as before.

The IFSB has also excelled in issuing a series of Standards or Guiding Principles (13 to be precise), five Guidance Notes and one Technical Note. Through these, the Board has highlighted potentially serious and in some cases entrenched issues pertaining to regulating the Islamic financial services industry, and offered ways of managing, mitigating or pre-empting them and taking into account the very specificities of Islamic financial intermediation. 

The Guiding Principles issued include ones on Risk Management, Corporate Governance, Capital Adequacy, Islamic Collective Investment Schemes, Capital Adequacy for Sukuk Securitizations, Governance of Takaful, Shariah Governance, Solvency Requirements for Takaful, and Liquidity Risk Management. The fact that more jurisdictions are starting to adopt and implement the IFSB Guidance Principles is an encouraging sign, and attests to the demonstration effect of the IFSB and its standards. 

The IFSB has also played and continues to play an important role in market education regarding Islamic finance.  

The founders of the IFSB, which include the central banks of Saudi Arabia (SAMA) and Malaysia, in a unique display of unity rose to the occasion in the early 2000s when both Asia and Turkey were experiencing the impact of their own financial crises, to set the course for the orderly development of the Islamic financial services industry underpinned by the development of a sound set of prudential and supervisory standards to cope with the new risk, regulatory and market challenges that were emerging in an ever-changing international financial landscape. 

Indeed, apart from the technical, resource and operational challenges, a major ask for the IFSB founders and members will be a redoubled unity to take the Islamic financial system to the next level of its development over the next decade.

(Saudi Gazette / 13 May 2013)

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First Saudi Sukuk issuance in Malaysia by Al Bayan Group

The landmark Sukuk was issued via Al Bayan’s special-purpose vehicle incorporated in Malaysia, ABHC Sukuk Berhad.  Proceeds from the issuance, with tenure of three years, will be used by the Group primarily for repayment of existing debt obligations and expanding the Group’s core businesses as well as working capital requirements.

Commenting on the successful issuance of the Sukuk offering, Dr. Abdulrahman Al Hammad, CEO of Al Bayan, said, "Al Bayan's inaugural sukuk issuance in Malaysia is a significant landmark in the Group's evolution and growth story. We are proud of this achievement and look forward to further capitalising on the opportunities for raising Islamic capital available globally. We thank the Joint Lead Managers and all other involved parties for their support in making this transaction a resounding success.”

The Sukuk programme is structured under the Shari’ah principle of Wakalah and Ijarah. Hong Leong Islamic Bank Berhad (HLISB) and HSBC Amanah Malaysia Berhad (HBMS) are the Joint Principal Advisers and Joint Lead Arrangers of the Sukuk Programme. They are also the Joint Lead Managers, together with Kenanga Investment Bank Berhad (KIBB) and Al Hilal Bank as the Manager in the UAE. Guidance Financial Group acted as the Financial Adviser to Al Bayan.

"The Sukuk issuance of Al Bayan here in Malaysia will be another milestone for the country as a premier Islamic finance hub and to further position our Islamic capital market's standing on the global map. The joint efforts between Hong Leong Islamic Bank and the other Joint Lead Managers have made this issuance a success,” said Raja Teh Maimunah, Chief Executive Officer/Managing Director of HLISB. “We are pleased to lead another landmark Sukuk issuance with this debut issuance from the Kingdom of Saudi Arabia tapping the MYR debt markets, following the successful issuance from the Republic of Kazakhstan last year. This issuance marks another key milestone in further enhancing Malaysia’s position as a global Islamic finance hub”, said Rafe Haneef, Chief Executive Officer of HBMS.

Chay Wai Leong, Managing Director of KIBB, said, “Al Bayan’s issuance of Sukuk in the local bond market further testifies to the growing interest from foreign issuers towards Malaysia’s mature Sukuk framework and financial environment. We can expect to see more contributions from foreign issuers to the growth and diversity of our Islamic capital markets. We will continue to work with our associate, AlWasatah Capital based in Saudi Arabia, in bringing Saudi-based issuers to Malaysia.”

The Sukuk Programme has been assigned a long-term rating of AA3(s) by RAM Rating Services Bhd. Under a kafalah agreement in favour of ABHC Sukuk Berhad, Al Bayan shall provide an irrevocable and unconditional guarantee to the holders of the Sukuk. As such, the rating is based on the credit profile of the Group.

Saudi Gazette report Abdullah Al Rasheed, Chief Executive Officer of Wasatah Capital, as saying, “We believe that the success of the Al Bayan’s Sukuk should encourage more Saudi companies to seriously consider this funding source. We also believe that the presence of Kenanga Investment Bank in Malaysia and Wasatah Capital in Saudi Arabia brings a unique value proposition to Saudi companies interested in attracting Malaysian investors.

(C.P.I Financial / 08 May 2013)

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India: MPs send proposal to RBI for Islamic banking

The RBI is studying and examining the proposal for Islamic banking in the country which has been sent to them by some MPs, said RBI Governor D Subbarao on Thursday.

“What needs to be seen is how Islamic banking would be allowed as it does not allow taking and charging interest on which our banking system operates,” Subbarao said while addressing a press conference here.

“We have got to see that Islamic banking is not consistent with our current banking laws,” he said.

The Reserve Bank of India governor said charging interest is necessary to conduct banking operation in the country. “We only allow banks to take a credit risk under the law,” he said.

“If an institution or bank is under Islamic banking, it will have to come under the purview of Shariah regulation. It is not clear whether there can be two regulatory agencies — RBI as the banking regulator and Shariah court as a regulator for the Islamic banking,” he added.

Subbarao said the government has to determine whether they want to permit Islamic banking and “if so they have to enact a law that is consistent with Islamic banking.”

He said the RBI has asked the banks in Jammu and Kashmir to increase the credit-deposit ratio to 40 per cent from the present 36.5 per cent by the end of the current financial year to make sufficient credit available to the people.

“Enough credit avenues are not available to the people in the state,” he said.

The RBI governor said the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) is not applicable to the state due to Article 370.

 “But chief minister has said it will be enacted shortly in the state either in the Assembly or through an ordinance,” he added.

The SARFAESI Act empowers banks to dispose of assets of defaulting borrowers to recover loans from them without having to go through the time-consuming process of invoking such securities through a court of law.

Subbarao said RBI has completed investigations against the banks after a web portal Cobrapost exposed violation of prudential banking norms. Action will taken against them if they are found guilty, he said.

“We have done investigations and prepared an internal report. To take the investigations to its logical conclusion, firstly action will be taken against individual institutions which are involved in practices that are inconsistent with the banking regulation and prudential banking,” he said.

 Cobrapost in its expose alleged that money laundering and other wrong doings were being carried out by several public sector financial institutions, including the country’s largest bank State Bank of India and Life Insurance Corporation.

(Deccan Herald / 12 May 2013)

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Islamic banking effective for non-Muslim economies

KARACHI: Islamic banking is not merely for Muslims in terms of an interest-free transaction but it is also profitable even for the non-Muslims in economic terms, Daily Times learnt on Saturday.

Meezan Bank Executive Vice President and Head of Consumer Banking and Marketing Muhammad Raza said Islamic banking was launched primarily for Muslims but generally it is also beneficial even for non-Muslims as the representatives from some non-Muslim countries approached him to elaborate the Islamic banking financial model at the end of an International Conference on Housing Finance held in India last month.

He said he was called on the International Conference on Housing Finance on Housing - an engine for inclusive growth organised by National Housing Bank of India in New Delhi last month in which representatives from 12 countries had participated. There he presented Islamic house financing model developed by Meezan Bank. After the conference ended, participants from Nigeria, Japan and Afghanistan approached him, expressed their interest in Islamic banking model and asked to elaborate it to them. He said Meezan Bank has recently provided its advisory services to Sri Lanka.

“This is what we have developed and now is the time to share it with other people, in fact to export it,” he added. Afghanistan has also approached Meezan Bank to share the Islamic banking model, which has been presented to them and is now under consideration.

He cited an example, “United Kingdom has 32 percent Muslim population and is promoting London as an Islamic finance hub.” He said the only reason behind it is that they are aware of its benefits for the economy. “However, being a non-Muslim country they cannot implement it with the name Islamic banking so they would rename it and promote it as ethical banking.”

It points they have began to understand Islamic banking and are working on this, he added.

According to a recent estimate by Standard & Poor’s, the global market potential for Islamic banks is estimated at $4 trillion. The countries like Oman, Nigeria, Tanzania, Uganda and Maldives have opened their doors for Islamic finance and are encouraging new and existing financial institutions to offer Islamic financial services to their customers.

In Pakistan, Raza has estimated the Islamic banking share at 15 percent of overall banking industry by 2015, which now stands at approximately 10 percent. He said the annual growth rate has been 25 to 30 percent. To grow the share at a faster pace, Meezan Bank is also developing some new products for consumer financing like generator financing, motorcycle financing, teen and kid account, old age people account, etc to offer the benefits of Islamic banking to the masses. Branchless banking is also under consideration.

He said some Islamic scholars are the hurdles to some extent on the way to the survival of Islamic banking in Pakistan. “These are the people who are aware of the product but do not want to understand it deeply. By this, they misguide the people and even do not know they are turning people to approach conventional banks as people would have no option for banking after Islamic banking.

(Daily Times / 12 May 2013)

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Going high-tech to keep the world's Muslims halal

Hamzah Mohd Salleh's lab is trying to ensure the world's 1.6 billion Muslims can stick to their religion's strict halal rules

Can you explain the concept of halal?

In Islamic law, there are things that are allowed, known as halal, and things that are forbidden. In terms of Islamic dietary laws, things that are forbidden include pork, products derived from pork, and alcohol. But many products are in a grey area. Muslims are advised to only consume things which are clearly halal.

What type of research do you do?

My colleagues and I aim to find ways to detect non-halal materials in products that are to be certified halal. Our chemists check for porcine DNA or an unacceptable level of alcohol, for example. We also try to find alternatives to forbidden ingredients, such as gelatin made from fish skin instead of from pigs. Our research assists the halal industry – estimated to be worth trillions of US dollars per year globally – and the religious organisations that certify products as halal.

Does halal go beyond food?

Yes, it extends to cosmetics, personal care products and pharmaceuticals, to name but a few. Most capsules for medicines contain gelatin, for example. More and more pharmaceutical companies, at least those in the Muslim world, are trying to source gelatin from halal sources. And Muslims want to know whether the lipstick they wear or the lotion they put on their skin is acceptable. We are also looking at the food animals eat, so whether it is OK to use a pig's body parts as animal feed, and whether pig hair is permissible for use in, for example, a pastry brush.

Are there other areas of active research?

We are working on making sure the processes used to make drugs are halal. To make vaccines and other proteins, you need to culture cells in a bioreactor. To increase the density of the cells you can use microcarriers – insoluble particles that the cells congregate around – usually made of porcine gelatin. I'm developing a microcarrier that works in the same way but is made of halal materials. The next step will be ensuring that nutrients given to the cells to make them grow are also permissible.

Halal slaughter involves cutting the animal's throat with a sharp knife, before draining the blood. Does your work inform this area?

The Malaysian halal regulatory body doesn't encourage stunning before slaughter, but since the country imports meat from countries such as Australia and New Zealand, where stunning is required, guidelines have been drawn up. These detail the current to be used and how long it should be applied, based on an animal's weight. We want to detect if guidelines are violated. So we are trying to find biomarkers – increased levels of hormones or enzymes – that are produced if an animal is overstunned, to make sure that the electricity is only used to stun rather than kill.

Do you think the growth of halal science is because halal certification is big business?

That's one reason. There are great opportunities for companies to address the needs of Muslims around the world. If you fulfil the requirements and accommodate those needs, that is OK, even if the driving force behind this is profit.

(News Scientist / 07 May 2013)

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Azerbaijan: Legislative amendments on Islamic banking not on CBA agenda

The Central Bank of Azerbaijan (CBA) does not currently consider amending the domestic legislation to ensure the implementation of Islamic banking in Azerbaijan, CBA Chairman Elman Rustamov told Trend news agency.

Prohibition on charging interest for loans is the major distinction between Islamic and Western-style banking. Instead of interest, Islamic banks take a stake in businesses to which they loan money and share both the profit and loss with the client.

There is a special order of taxation of Islamic financial instruments, forms and methods of regulation and supervision of Islamic banks, along with the procedure for the issuance and circulation of Islamic securities and the requirements of Islamic investment funds in the world.

Banned activity includes speculation in financial markets, financing the economy through methods of interest calculation and financing production, trade or services prohibited by Islam, such as producing alcohol, food containing pork, gambling, etc.

"It is necessary to first create a legislative basis, then a regulatory one based on it, then licensing and the issuance of permits can begin. If there is no such basis, these actions remain exploratory by nature," Rustamov said.

The only 'Islamic window' in Azerbaijan, created by the International Bank of Azerbaijan, has already begun serving customers. The amount of assets attracted from Islamic financing sources has hit $60-70 million. At the same time, Islamic leasing products are actively offered via the Joint Leasing Company, one of the co-founders of IBA.

The range of services offered by the bank includes such products of Islamic banking as Ijara, an analogue of traditional leasing, Vakala deposit, an equivalent of a conventional deposit, Islamic bank cards, and opening of Gard Hassan accounts.

IBA Islamic Banking Department head Behnam Gurbanzade earlier said that the above-said products of the IBA have undergone relevant certification in independent Sharia financial and legal advisory company Dar al Sharia, founded by Dubai Islamic Bank in accordance with international practices.

Thus, all procedures and documentation on these types of services provided by the IBA Islamic Banking Department meet the standards assigned by leading Islamic financial regulator AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions).

To create a legislative basis for Islamic banking, the IBA jointly with international financial institutions is preparing proposals for amendments to the banking legislation.

Experts believe that the application of Islamic window in Azerbaijan would influence positively the development of Islamic banking in the country. They suggest that as long as loan interest rates stay above the 20-percent mark, Islamic banking could potentially gain market share.

The IBA is not alone in studying the field of Islamic finance. Earlier, the Russian-owned Nikoil Bank started offering clients the opportunity to make interest-free deposits, which would then be invested into Sharia law-compliant business ventures.

Also, Amrahbank, partly owned by the Bahrain-based International Investment Bank, has plans to offer "Sharia-complaint financial products" to cash in on "the untapped Islamic banking market both in Azerbaijan and neighboring regions."

Earlier, Kovsarbank attempted to offer a full range of Islamic banking services in Azerbijan. However, the CBA withdrew its license, saying it was violating the law and citing a small portfolio. The bank subsequently closed down.

(Azernews / 07 May 2013)

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Record Sukuk Seen on Indonesia $92 Billion Plan: Islamic Finance

Indonesian corporate sukuk sales are off to their best ever start and the top underwriter predicts a full-year record as $92 billion of state-backed development projects buoy issuance.

Bank Muamalat Indonesia and Adira Dinamika Multi Finance were among issuers of Rp 1.5 trillion ($154 million) of securities, Financial Services Authority data show. That compares with Rp 1.9 trillion for the whole of 2012 and a record Rp 2.3 trillion in 2008. The market is still just a fraction of Malaysia’s, where companies sold 95.8 billion ringgit ($32 billion) of sukuk last year.

President Susilo Bambang Yudhoyono is seeking to reduce fuel subsidies to set aside more funds for roads, railways and power stations to spur growth from the slowest pace since 2010 last quarter. Finance companies have accounted for 72 percent of sales this year, while state-owned construction company Hutama Karya and electricity producer Perusahaan Listrik Negara may sell Islamic bonds in 2013, according to Danareksa Sekuritas, the top underwriter last year.

“The other sectors with the biggest potential to actively tap into the sukuk market will be those involved in infrastructure-related projects and utilities,” Alhami Mohd Abdan, head of international finance and capital markets at OCBC Al-Amin Bank Bhd. in Kuala Lumpur, said in a May 3 interview. Sales will reach Rp 2.5 trillion to Rp 3 trillion this year, he forecast.

State-owned companies

State-owned enterprises have committed about Rp 900 trillion through the end of 2014 for infrastructure and real- sector projects, Coordinating Minister for the Economy Hatta Rajasa said on Dec. 18. Listrik Negara last sold Rp 500 billion of Islamic securities in 2010, while Hutama Karya would be issuing Shariah-compliant notes for the first time, data compiled by Bloomberg show.

Construction company Adhi Karya sold Rp 125 billion of sukuk in March, after Pefindo Credit Rating Indonesia raised it to five steps above investment grade from four last June, citing strong cash flow. Property companies Bumi Serpong Damai and Lippo Karawaci have also been upgraded by Pefindo in the past year. Indonesia’s non-Islamic corporate debt market will triple in five years, Mandiri Sekuritas forecast last month.

‘Great demand’

“Property and construction companies will boost debt sales as their ratings rise, reducing borrowing costs and brightening the option to sell debt,” Yudistira Slamet, head of debt research at Danareksa, said in a May 3 interview from Jakarta. “We recommend our clients tap the sukuk market because of the great demand, which will further suppress coupons,” he said, adding that he was forecasting Rp 2.5 trillion to Rp 3 trillion of company issuance this year.

The average yield on global Shariah-compliant debt fell one basis point, or 0.01 percentage point, to 3.12 percent on May 2, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows, after reaching an all-time low of 2.67 percent on Jan. 10. The premium over the London interbank offered rate, or Libor, declined one basis point to 188 basis points.

Indonesia’s finance ministry plans to sell Rp 53 trillion of Islamic bonds this year, compared with Rp 57.1 trillion in 2012, as it seeks to boost trading volumes by selling less to the national Hajj fund, which holds the notes until maturity, Dahlan Siamat, director of Islamic financing at the debt management office, said Jan.

Tax Rules

Indonesia’s 8.8 percent dollar sukuk due April 2014 yielded  six basis points less than Malaysia’s 3.928 percent Islamic notes due June 2015, even though the former country is rated four levels lower by Standard & Poor’s. The yield on the Indonesian securities was 96 basis points higher on Jan. 11, the biggest gap in seven months, data compiled by Bloomberg show.

There is no specific rule on how sukuk should be taxed in Indonesia, although the Financial Services Authority has made sure that no corporate Islamic bonds have been double-taxed, Etty Retno Wulandari, a director at the regulator, said in July 2012. Bank Indonesia asked the taxation department in 2009 to issue a circular to clarify equal treatment for Shariah- compliant debt, Executive Director Edy Setiadi said last September, but this still hasn’t happened.

“The country is well-positioned to become a global center of Islamic finance and one of the key ingredients in achieving this is having clear tax laws,” Mohamad Safri Shahul Hamid, the Kuala Lumpur-based deputy chief executive officer of CIMB Islamic Bank Bhd., a unit of CIMB Group Holdings Bhd., said in a May 3 e-mail. “The first step is to formalize a tax neutrality provision for Islamic finance transactions, including sukuk.”

Bigger Market  

Islamic bonds have returned 1.5 percent this year, according to the HSBC/Nasdaq index, while debt from emerging markets gained 0.9 percent, JPMorgan Chase & Co.’s EMBI Global Index shows.

Worldwide sales of Shariah-compliant notes, which pay returns on assets to comply with the religion’s ban on interest, increased 3.8 percent to $14.8 billion in 2013 from the same period last year, data compiled by Bloomberg show. Issuance amounted to an all-time high of $46.5 billion in 2012.

There will be $950 billion of worldwide demand for Islamic bonds by 2017, according to a December report by Ernst & Young LLP. That compares with $267.6 billion of outstanding sukuk at the end of June 2012, according to Malaysia’s Securities Commission. Indonesia sold $3 billion of non-Islamic global bonds on April 8 at the country’s lowest-ever yield for dollar notes, with investors bidding for more than four times the amount offered.

“Supply is beginning to increase and catch up to ever- growing demand,” Akbar Syarief, a fund manager overseeing about Rp 3.3 trillion at MNC Asset Management in Jakarta, said in a May 3 interview.

“We hope a bigger corporate sukuk market will mean better liquidity and more efficient pricing, and therefore greater demand for the instruments.

(Jakarta Globe / 07 May 2013)

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

Malaysia: MBSB earnings up on Islamic banking ops, lower impairment losses

PETALING JAYA: Financial institution Malaysia Building Society Bhd (MBSB)made a net profit of RM166.14mil or 13.08 sen per share in the first quarter ended March 31 compared with RM79.41mil or 6.53 sen per share a year ago, underpinned by its Islamic banking operations and lower impairment losses.

The increase was partially set off by higher operating expenses resulting from improved business volume.

MBSB's pre-tax profit surged 114.6% to RM237.11mil from RM110.47mil while revenue rose 48.4% to RM562.47mil from RM378.88mil.

In a statement, president and chief executive officer Datuk Ahmad Zaini Othman said despite the challenging environment in the retail market, the firm maintained its capability to sustain business growth that had resulted in enhanced revenue and profit levels.

The efforts undertaken to ensure improved asset quality have also borne fruit, with the group's net non-performing loan standing at 3.4% as at March.

(The Star Online / 04 May 2013)

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