Indonesia’s corporate sukuk market has a bright outlook

Indonesia’s three best-performing Islamic bond funds say a rebound in corporate sukuk sales is failing to keep up with demand from investors chasing higher returns as government yields decline.    

Insight Investments Management’s top-ranked I-Hajj Syariah Fund wants to boost company holdings from 80 percent if more securities become available, President Director Tony Henri said in an interview in Jakarta last week. Akbar Syarief, fund manager at MNC Asset Management, overseeing the second-best performer, said his confidence in finding buyers is not matched by certainty there will be sufficient supply.    

“Right now the concern is that when money comes in, there may not be securities to invest in,” Jakarta-based Syarief, whose MNC Dana Syariah vehicle returned 3.8 percent this year, said in a June 26 interview. “Corporate sukuk will always be in high demand.”    

The yield on Indonesia’s Shariah-compliant rupiah bond due August 2018 fell 1.12 percentage points in the past year to 6.20 percent, compared with the 8.1 percent average return for Indonesia’s six sukuk funds over the same period. Bank Muamalat Indonesia lifted its June sale to Rp 800 billion ($85 million) from Rp 500 billion after investors sought 2.2 times the amount first offered, Finance Director Hendiarto said.     

Corporate sales have reached Rp 1.5 trillion so far this year, compared with just Rp 200 billion for the whole of 2011. Etty Retno Wulandari, a Jakarta-based director at the Capital Market and Financial Institution Supervisory Agency, said last month she expected 2012 offers to get to Rp 3 trillion. However, official data shows the 20 percent average growth in outstanding corporate sukuk over the past five years still trails the 40 percent expansion in Islamic banking assets.                     

‘Don’t actively trade’     

“Our fund could be much bigger but Islamic bond issuance isn’t growing as fast as banking assets,” Insight’s Henri said. “We don’t actively trade the company sukuk because once we sell it, it is difficult to look for new products to invest in.”     

Worldwide sales of bonds that comply with Islam’s ban on interest climbed to $21 billion in 2012 from $14 billion in the same period of 2011, according to data compiled by Bloomberg. Offerings reached a record $36.7 billion last year.     

Malaysia, the world’s largest sukuk market, has exempted investors from paying taxes on capital gains made on Shariah-compliant debt denominated in currencies other than the ringgit through 2014. Indonesia offers no similar incentive because it is committed to keeping Islamic products on an equal footing with non-Islamic securities, the Capital Market Agency’s Wulandari said last month.            

              

Tax benefits     

“There needs to be tax benefits for the Shariah-compliant capital market to grow,” Insight’s Henri said. “Issuing Islamic bonds requires more processing and there needs to be a pay-off to make them more or equally lucrative as conventional bonds.”     

The I-Hajj Syariah fund returned 4 percent this year and 10.3 percent in 2011, the most among the six Indonesian sukuk vehicles tracked by Bloomberg, which advanced by an average of 3.1 percent in 2012 and 8.8 percent last year.     

Assets held by Islamic bond and stock funds in Indonesia increased by an annual average of 96 percent over the last five years and account for 3 percent of the nation’s total managed funds, Capital Market Agency data show.     

“We plan to launch more sukuk funds going forward, if there are products,” MNC Asset’s Syarief said, adding that he would like to increase his allocation for corporate notes to 70 percent from 50 percent. “Government Islamic bonds tend to be more volatile and yield lower, so we need to balance our fund with corporate notes.”                        

‘Bright outlook’     

Global Shariah-compliant bonds returned 5.1 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets gained 7.8 percent, JPMorgan Chase & Co.’s EMBI Global Index shows.     

The average yield on Islamic bonds fell one basis point, or 0.01 percentage point, to 3.44 percent on June 29, the lowest since August, according to the HSBC/NASDAQ Sukuk index. The difference between the average yield and the London interbank offered rate, or Libor, narrowed three basis points to 240 basis points.     

Corporate Islamic debt sales in Indonesia this year amount to just 2 percent of Malaysia’s 23.4 billion ringgit ($7.4 billion) of issuance in the same period, even though the former nation’s Muslim population is twelve times as big as its neighbors.     

“Indonesia’s corporate sukuk market has a bright outlook,” Ruben Sukatendel, a Jakarta-based portfolio manager at BNI Asset Management, said in a June 27 interview. 

“It is possible that Indonesia’s Islamic capital market may catch up to Malaysia’s if we see synergy between market players and regulators,” said Sukatendel, who oversees BNI Dana Syariah, the country’s debut sukuk fund and the third-best performing this year.

(Jakarta Globe / 03 July 2012)

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

Islamic Development Bank president meets ministers, discusses Islamic banking in India

MUMBAI: Islamic Development Bank Group's President Ahmad Mohamed Ali held discussions with several Ministers in the UPA on ways to popularise Islamic banking in the country. Mr Ali also met vice-president of India Mohammad Hamid Ansari, Pranab Mukherjee, minority affairs minister Salman Khurshid and minister of state for external affairs E. Ahmed during his visit to the country last week. 

During the meetings, Mr Ali highlighted Islamic Development Bank Group's (IDB) role in upgrading economic and social development of the Bank's member countries as well as Muslim communities in non-member countries. He touched upon ways for promoting social and economic cooperation between IDB Group and India's Muslim community on a number of grounds including development of Awqaf properties and their cost-effectiveness improvement, savings management for successful Hajj Pilgrimage experiences, education programs including connecting Quranic schools via distance learning technology and scholarships. 

IDB has so far supported 267 educational institutions in India with financial assistance amounting to $42.8 million as grants. It has also launched a scholarship program since 1983 to enable outstanding Indian students to pursue higher studies in universities in various science and engineering related disciplines. To date, the total number of beneficiaries in the scholarship Program in India stands at 3,819 - comprising 2,986 males and 833 females - out of whom 2,564 have graduated as medical doctors and engineers, a press note issued on behalf of IDB said. 

Also during his visit to India, the IDB Group President addressed the opening session of a conference on 'Hajj Pilgrimage Management' where he expressed IDB Group's readiness to cooperate with India so that the Indian Muslim community could benefit from the Malaysian experience in Hajj management by replicating Malaysia's "Tabung Haji" model.

(The Economic Times / 02 July 2012)

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

Middle East and Asia to stoke sukuk growth

KUALA LUMPUR: Global sukuk market growth will likely stem from the Middle East and Asia as these burgeoning markets attract liquidity and provide opportunities for funding.

HSBC Amanah (M) Bhd chief executive officer Rafe Haneef said the financial unease in Europe would continue to deflect funds in the direction of the Middle East and Asia, where there are opportunities for funding growth through sukuk.

“The global liquidity pool is moving away from more risky markets to safer, more growth-oriented markets. So you will find that the liquidity will now chase asset growth in the Middle East and Asia,” he said after launching the HSBC Amanah City Centre branch at Wisma UOA II, Kuala Lumpur.

HSBC Amanah is the global Islamic financial services division of the HSBC Group.

He added that the liquidity shift to the Middle East and Asia had created a price tension.

“Pricing has become more attractive and people are going out to issuesukuk,” Rafe said, adding that there was market talk of mega projects in the pipeline being sukuk-funded.

“What we hear in the market is that there are bigger deals than the RM6bil coal-fired power plant project in Tanjung Bin,” he said adding that about RM3.2bil of the power plant had been funded through sukuk.

He said the mega projects would be in Malaysia as well as the Middle East. “There are significant developments in the Middle East and it is believed that all of them will be funded through sukuk.”

The global sukuk market size hit US$20.5bil for the first half of this year, up 36.7% from US$15bil as at June 2011.

The sukuk market is then on target to reach US$44bil at year-end, encouraged by more sukuk issuance for growing markets. It closed last year at US$37bil.

Rafe added: “(The sukuk market is) already around the halfway-mark. By year-end, it should be comfortably close to US$44bil.”

Moving forward, he said that HSBC hoped to maintain its 35% market share of the global sukuk market, which now amounted to almost US$7.2bil.

HSBC Malaysia would also be launching its Islamic overdraft facility this year, while it continues to refine its full suite of financial products.

(The Star Online / 03 July 2012)

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

Takaful untapped potential ‘immense’

JEDDAH – The Takaful industry is currently concentrated in limited markets, segments and business lines. However, there is immense unrealized potential that can be achieved.Ernst & Young’s World Takaful Report 2011 forecast that the current takaful growth trends would suggest $12 billion in gross contributions by 2012.

Excluding Saudi cooperative contributions, total takaful contributions are expected to reach $7 billion by 2012 from $9.1 billion last year.

The results have been lower ($8.3 billion) due to industry slow down in core markets relative to the high growth rates seen in previous years, the report added.The anticipated compulsory medical insurance regulation in Dubai and other UAE emirates was not rolled out either. A sizable portion of Muslim populated countries are characterized by having low income/lower-middle income households (Indonesia, Pakistan, Bangladesh, Sudan). They are also characterized by having low insurance penetration rates. "This may be due, in part, to religious views towards conventional insurers but is also due to the unavailability of products suitable to the low income target market," it said.Micro takaful products can allow tapping into the large low income and lower middle income segments characterizing most Muslim populated countries. However, there is limited awareness of insurance products, savings and retirement plans in most Muslim majority countries, the report noted. The market is there for risk mitigation tools but traditional mechanisms are relied upon, it pointed out, and conventional distribution channels are being used to target the takaful market. Moreover, direct sales force, agencies, takaful partners have limited training on takaful and its unique selling proposition.Share of Islamic Finance in GCC and Malaysia is 25 percent and 22 percent whereas takaful market share is 15 percent and 10 percent respectively. 

Takaful as a predominantly retail driven in most markets, has at least 10 percent of the known Shariah-inclined market that they have not yet tapped. 

Corporate business is attracted through a value proposition based on the operators reputation, history, product suite, service standards, relationships and pricing. For takaful, the corporate customer segment has significant room for growth. The GCC takaful market predominantly comprises of general takaful business with family takaful accounting for as little as 5 percent in certain markets. With high disposable income average and low market penetration, the GCC presents potential for family takaful large Muslim markets such as Libya, Egypt, Bangladesh, Indonesia and Brunei are opening up to takaful. 

Besides, recent regime changes in MENA countries including Egypt, Libya and Tunisia have brought forward governments that are encouraging Islamic finance. Bangladesh, Brunei and Indonesia are emerging as important frontier markets for takaful, showing also healthy growth. India, China, Russia, Turkey and CIS countries have immense potential for takaful based on the size of their Muslim populations and the growth in their economies. Takaful has not been permitted and/or facilitated in these markets until now, the report added. Further, these markets hold considerable potential for takaful should there be encouragement from their governments. 

(Saudi Gazette / 03 July 2012)

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

3 Islamic investment banks in Bahrain plan merger

DUBAI, United Arab Emirates (AP) — Three Islamic investment banks in Bahrain said Sunday they have agreed to merge to better compete in a fragmented market.

The combination of Capivest, Elaf Bank and Capital Management House will create a bank with assets of $400 million, according to a statement from the lenders. The banks said the deal is the first-three way merger in the Gulf island kingdom's history.

Elaf's vice chairman, Isa Habib, said the combined bank should be able to win larger projects while benefiting from a more diverse balance sheet.

"The aim of this merger is to establish a strong banking institution that is able to compete solidly in a changing market," he said in a statement issued by Kuwait Finance House, which advised the lenders on the merger.

The official Bahrain News Agency also announced the deal, which must still be approved by Bahrain's central bank and the Ministry of Industry and Commerce.

Bahrain, one of the oil-rich Gulf's traditional banking centers, has positioned itself as a major hub in the Islamic finance industry. Its reputation as a business haven has been seriously damaged by more than 16 months of unrest in the strategic island nation, which is home to the U.S. Navy's 5th Fleet.

The Islamic banking industry focuses on investments and financial tools that comply with Islamic law, which generally prohibits the charging of interest.

The central bank last year pressed for consolidation in the country's Islamic banking industry to bolster the health of lenders' balance sheets.

A proposed merger of two other lenders in the kingdom, Bahrain Islamic Bank and Al Salam Bank, fell through in February after they were unable to agree on terms of the deal.

Some analysts have urged the Gulf's many relatively small local lenders to consider consolidation to better compete with international rivals.

In one of the region's rare banking acquisitions, Dubai's Emirates NBD in October agreed to take over Dubai Bank, a struggling lender with strong government ties. That deal was pushed through by the emirate's government, which came to Dubai Bank's rescue in the month before the acquisition.

(Canadian Business / 01 July 2012)

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

Sri Lanka: SriLankan Airlines gets $175m sukuk from Gulf banks

SriLankan Airlines signed a $175 million sharia-compliant loan, a statement from one of the arranging banks said on Sunday, the first time the carrier has borrowed from the international syndicated loan market.

The state-owned airline completed the four-year facility with Abu Dhabi Islamic Bank, Abu Dhabi's Al Hilal Bank, Mashreq Bank, Dubai's Noor Islamic Bank and United Bank Limited, a statement from Mashreq's Islamic arm said.

The loan was provided in dollars and UAE dirhams and will be repayable from ring-fenced cash flows, the statement added.

Mashreq Al Islami acted as the coordinating bank.

"The successful closure of this transaction is clear evidence of the growing acceptance of the Sri Lanka credit story in international markets," said John Iossifidis, head of international banking group at Mashreq.

He emphasized the growing importance of Sri Lanka in the region and how Mashreq, in conjunction with its other key partner banks, have been instrumental in closing the facility despite the difficult global liquidity conditions continuing.

He added, “Sri Lanka is a key strategic market for Mashreq and we are committed to working alongside our core relationship clients, to explore different forms of capital raising."

This transaction marks an important foray in the Islamic banking space by a major corporate based in Sri Lanka and should pave the way for many similar transaction in the future.

SriLankan Airlines, the national carrier of Sri Lanka, currently operates a fleet of 19 aircraft covering 60 destinations across the globe with an increasing presence in the Middle East and Asia.

The successful arrangement of this facility will financially strengthen SriLankan Airlines at a time when the Government of Sri Lanka expects the airline to be a catalyst for the further growth of Sri Lanka’s economy, especially tourism and export industries. - TradeArabia News Service &Reuters

(Trade Arabia / 02 July 2012)

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

First Islamic Mutual Fund Created in Tunisia

The first Tunisian mutual fund complying with Islamic sharia law was established yesterday. In a press conference, held at the headquarters of the Stock Market of Tunis, General Director of the Fund of Deposits and Consignment (CDC) Jamel Belhaj announced the creation of “Theemar” as the first Islamic product of its kind in the market of alternative finance in Tunisia.

Capitalized at around 50 million dinars ($30 million), Theemar’s mission is to finance small and medium-sized enterprises with a priority on those located in Tunisia’s interior. “During the first phase, we aim to create up to 30 enterprises providing at least 1,000 jobs,” Belhaj said.

Theemar’s shareholders are CDC, the Islamic Bank of Development, Kuwait Projects Company, and Al Baraka bank.

As impediments to create enterprises are not only financial, the fund plans to provide its clients with technical know-how and support for the first four or five years until they establish a foothold in the market.

Theemar will be made up of a number of committees, including a committee of renowned Islamic scholars and Islamic banking experts who will supervise investments.

Islamic finance currently has a small presence in Tunisia’s financial services sector, with only the establishment of Zitouna Islamic Bank in 2010. Al Baraka is an off-shore Islamic bank that does not provide Islamic financial products within Tunisia.

(Tunisialive / 2 July 2012)

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