Malaysia’s sukuk costs rise as dollar supply ebbs

KUALA LUMPUR: The cost for Malaysia to replenish US dollar holdings has risen to an 11-month high as foreign-exchange reserves slump to the lowest since 2011.

The difference in yield between the nation’s 2.991% sukuk due in 2016 and similar-maturity Treasuries was 84 basis points, the widest since February, data compiled by Bloomberg show. The securities are one of only three global notes the country has outstanding, which are all Islamic, and the others mature in June this year and in 2021.

Malaysia’s currency has declined to its lowest level in more than five years on concern the drop in crude prices will erode the oil-exporting nation’s current account surplus. Reserves in South-East Asia’s third-largest economy have dwindled to US$121bil, versus US$157bil in Thailand and US$111bil in Indonesia.

“Since the spread is expected to widen in the near future and the country’s financial health is weakening, it doesn’t pay for Malaysia to issue dollar sukuk now,” Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Group Ltd in Singapore, said by phone yesterday.

“Timing is important and there’s a window of opportunity in the second quarter before the US raises interest rates.”

The central bank told local lenders last month to guard against speculation in the ringgit, which led losses in Asia in 2014 behind the yen. All short-dated transactions requiring the exchange of ringgit for a foreign currency must be backed by documentation, Bank Negara said in a Dec 4 statement.

Diverging monetary policies in the US and Europe are also increasing demand for the dollar, forcing policy-makers in some Asian countries to intervene to curb losses. European Central Bank president Mario Draghi last week signalled the prospect of government bond purchases. The Federal Reserve halted its debt-buying programme last year and is likely to increase borrowing costs sometime after the first quarter.

The extra yield investors demand to hold Malaysia’s 2021 Islamic bonds climbed to a six-month high of 99 yesterday. The yield on the sukuk due in June this year has increased 35 basis points, or 0.35 percentage point, from 2014’s low to 1.09%. That compares with 0.06% for the similar-maturity Treasury notes.

Concern about the nation’s finances is already starting to show in the local-currency debt market, where global funds reduced holdings of Malaysian government bonds in November by 5.8%, the most since September 2011, to RM236.5bil, central bank data showed Dec 31.

The surplus in Malaysia’s current account, the broadest measure of trade, shrank to RM7.6bil in the third quarter, the least since the three months through June 2013.

The nation is the only net oil exporter among major Asian economies and tumbling crude prices will reduce state income as the government seeks to cut the fiscal deficit to 3 percent of gross domestic product this year from last year’s 3.5 percent target. Brent crude dropped below US$60 a barrel in December for the first time since 2009.

While Malaysia’s foreign-exchange reserves have dwindled, they are still higher than the US$91bil at the end of 2008, when the ringgit dropped 4.6% in the midst of the global credit crunch. In 1997-98, when the Asian financial crisis struck, they were as low as US$20bil.

Demand for global Islamic bonds, which pay returns based on assets to comply with a ban on interest, may still be supported this year amid a shortage of supply.

The Bloomberg Malaysian Sukuk Ex-MYR Index, which tracks foreign-currency syariah-compliant bonds, climbed 5% in 2014, a fourth straight annual gain. Worldwide issuance rose 7.4% to US$46.3bil, just shy of the unprecedented US$46.8bil in 2012, data compiled by Bloomberg show. Offerings in Malaysia increased 27% to RM62bil.

“The spread widened because of concern that falling oil prices will crimp the government’s revenue,” Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed-income analyst at CIMB Investment Bank Bhd, said by phone yesterday. “It’s still not expensive for the government to tap the dollar bond market as US yields are still not high.

(The Star Online / 07 January 2015)

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Issues facing product development in Islamic finance

One of the major challenges of Islamic Finance is to create new products and services for its clients. Product innovation and enhancement is an important aspect for the development and growth of Islamic Finance. 

It is estimated that 50% of the customers in GCC have a preference for Islamic banking products as long as they offered equal value and are competitively priced. Majority of GCC citizens are estimated to belong to the 50% segment.

To create products or services in Islamic finance, one should understand that there are two common ways — Shariah-based products, or Shariah-compliant products. 

Shariah-based products are those that have been produced by Shariah on the basis of concepts and rules based on the Holy Qur’an and Sunnah and other sources of Islamic commercial law such as Mudarabah, Musharaka, Salam, etc.

Shariah-compliant products are those that have been imported from conventional finance and converted into Islamic products such as credit card, forward currency, derivatives products, etc. 

In order to have a proper product development, following parameters should be observed,

- Identifying Islamic commercial contracts: To understand and comprehend the underlying contract that governs that product.

- Understanding the rules governing the contract: When all parties in the contract are defined and the nature of the contract recognized, that will help the Shariah scholars to have a proper understanding of the product and design the right structure for that product.

- Applying and maintaining Islamic rules for the new product, so that the product will take Islamic taste and flavour.

Many Islamic banks in GCC have used Shariah-compliant products. Many of them have failed to convince their clients to market the newly developed products, because they miss to satisfy all the Islamic rules. One of the problems that I observed in the new product development in Islamic banks are:

- The process flow of product is not defined and the parties involved in the product are not clearly identified.

- Many of the new products have no clarity on how profit is generated and calculated, and how the flow of funds is traced between the lender and the borrower.

- Some of the new products have not specified the nature of the transactions that will take place and whether they fall under investment, financing or deposit.

- Many of the new products’ development starts by searching for a niche product that exists in a niche market and adapting this product by eliminating prohibited elements in Shariah. However, by using this method, sometime the developers fail to recognise the risk exposure of the product. There is no valid reason to expend financial engineering effort on a product that has a high risk level, and do not attract the banks’ customers. 

- Some of the product developers have no knowledge on Islamic Fiqh and rules, and they don’t know the framework of the Islamic contracts. 

The product development process should be governed by very prominent parameters, standards and framework to ensure that a proper product is introduced in the market. In order to best meet the needs of this particular market segment, Islamic financial institutions need to fully understand the importance of product development.

Needless to say, Islamic banking products are constantly being compared to interest-based products in terms of cost and return without any regard for the unique product rules of Shariah. 

(Gulf Times / 06 January 2015)

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Africa: 'Africa Lagging Behind in Islamic Banking'

Experts in the field of Islamic banking are to converge on Ilorin, Kwara State from January 6th to 10th for a workshop to brainstorm on the development of Islamic Banking in Africa.

The workshop is being organized by the Islamic Research and Training Institute (IRTI), a research unit of the Islamic Development Bank Group in collaboration with University of Ilorin and Al-Hikmah University.

Addressing a press conference on the workshop, Chairman of the Local Organizing Committee (LOC), Dr. Abdulkadir Abikan explained that the workshop would bring together experts in the field from various countries in the world.

He decried the underdevelopment of the Islamic financial system in Africa despite its strategic importance to the growth of the continent.

"Africa is a continent that needs this financial system more because of the way some other continents have taken advantage of this to take care of their infrastructural deficits and a lot of other developments that could be achieved from this industry", Abikan said.

He emphasized that Africa has an alternative to take advantage of the system or remain backward as a continent, even as he lamented that in the whole of West Africa, there were only seven Islamic banking institutions.

Abikan, who is the acting Dean, Faculty of Law, Al-Hikmah University, attributed the underdevelopment of Islamic banking in Africa to the low level of development in the continent.

He noted that many people, especially in Nigeria, introduced religious sentiment into the banking model, noting that many countries with insignificant percentage of Muslims have embraced Islamic banking.

The scholar recalled that the Tax Law of United Kingdom was amended in 2004 by the former Prime Minister Gordon Brown in order to accommodate Islamic banking, saying, "The first Islamic Bank which is known as the Islamic Bank of Britain was launched in 2004 in UK.

"The best way for any reasonable government is to have Islamic banking. If we say because of religious volatility, we are not going to have Islamic banking, then we would be going backward".

In a related development, a statement from IDB explained that experts in Islamic banking, regulation, and financial economics are expected to be at the workshop "to take stock of current academic research, policies, practice and development of Islamic banking in Africa.

"The workshop is also to explore current issues in Islamic banking and financial products, with a focus on the experiences of particular African countries in terms of regulation, supervision, systemic risk measures, stress testing, counterparty risk, opportunities and challenges".

Also speaking, a member of the LOC, Dr. Lateef Oladimeji disclosed that 25 papers had been submitted so far with Malaysia dominating the list of entries.

(All Africa / 04 Janury 2015)

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Dubai closer to becoming Islamic finance hub

The global Islamic economy continued to grow in 2014, and Dubai made solid progress towards its ambitious target to be the hub of the estimated $6.7 trillion market by 2016.

But significant challenges remain if the emirate is to become the “capital of the Islamic economy” in the tight deadline set by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai.

Sheikh Mohammed set the goal in October last year for Dubai to reach top slot in Islamic finance, goods and services within three years, and charged a select number of the emirate’s top executives to achieve that goal.

It is a dazzling prize, but a daunting ambition. The global Islamic economy is potentially the fourth largest trading bloc in the world, after the United States, China and the European Union, with 1.4 billion Muslims across five continents and with a growing demographic profile that makes it a boom market.

For Dubai to become its leader would be a huge step forward for the emirate’s overall economic development.

Abdulla Al Awar is at the sharp end of the Islamic strategy. As chief executive of the Dubai Islamic Economy Development Centre, his job is to implement the policies set by a top-level executive appointed by the Ruler.

This month, Mr Al Awar gave a progress report which showed significant advances in sectors, such as halal foods, cosmetics and Islamic tourism, but with a gap to bridge in Islamic finance, the most important single contributor – at $4 billion – to the total global value of Sharia-compliant goods and services.

Dubai, despite major advances in Islamic finance, is still trailing Malaysia, the global leader in the financial market.

But Mr Al Awar can look back on a year of solid progress, and prepare for another year of high-growth in the Islamic economy.

Seven “pillars” need to be built to support Dubai as the capital of the global Islamic economy: Islamic finance; the halal industry; tourism; digital infrastructure; arts; knowledge; and standardisation.

A more granular approach breaks down those seven pillars into more than 40 initiatives which must be accomplished, but Mr Al Awar was aware of the dangers of micromanagement. “I don’t see this just as a box-ticking exercise. This is a long-term initiative and we do not stop when we have achieved one launch,” he said.

Discussions are continuing in these areas with governments, food firms and financial groups, but the highlight of the public face of Islamic economy came at the World Islamic Economic Forum in Dubai in October.

Winning the right to stage the forum was a coup for the emirate, moving it away from its home in Kuala Lumpur, Malaysia, for only the second time in its 10-year history. Over three days, 3,200 attendees were given an opportunity to see the attractions of the emirates as a place to do global Islamic business.

In finance in particular, the event was a watershed in how the Islamic world viewed the attractions of non-conventional banking and financial services.

Khalid Howladar, head of Islamic finance at ratings agency Moody’s Investor Services, said: “I could never have said this five years ago, but I think we are seeing a sea change in thinking about Islamic finance. This is where Islam meets capitalism, and where Islamic finance truly becomes a global concept.”

Alongside the financial sector, the forum took a major step forward on one of the crucial aspects of Islamic economy: the need for global standards in the halal food industry.

Mohammed Al Gargawi, UAE Minister of Cabinet Affairs, called for common halal food standards between Malaysia and the UAE, an area where discussions are continuing; while Hamad Buamim, chief executive of the Dubai Chamber of Commerce and Industry, urged financiers to set up a standardised Sharia-compliance system.

In the all-important financial sector, Nasdaq Dubai, the emirate’s international capital market, pulled off some big sukuk listings to make up ground on Kuala Lumpur and London as a hub for trade in these Sharia-compliant corporate bonds.

Two big issuances by Chinese institutions highlighted the growing appeal of Islamic finance, and underlined the success of Nasdaq Dubai’s strategy in seeking these listings, promoted by its chief executive Hamed Ali: in September, the government of Hong Kong brought a $1bn sovereign sukuk to Dubai. In the same month Agricultural Bank of China listed a Dh600m sharia-compliant corporate bond on the market.

Essa Kazim, the DIFC governor, said Dubai’s “sophisticated financial infrastructure” would help to promote an offshore yuan market, and hinted that Chinese and other Asian corporates might want to use Nasdaq Dubai as their primary capital market next year.

(The National Business / 30 December 2014)

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Islamic banks to dominate finance sector

Brunei's financial system is transitioning to one in which Islamic banking and takaful are the dominant forms of banking and insurance, said the Oxford Business Group (OBG), a global consultancy and research company.

According to the latest publication of OBG The Report: Brunei Darussalam 2014, the country's two Islamic banks, Perbadanan Tabung Amanah Islam Brunei (TAIB) and Bank Islam Brunei Darussalam (BIBD) had combined assets of $7.9 billion at the end of 2013, representing 41 per cent of total bank assets.

"That was up from 37 per cent in 2010 and demonstrate that Islamic banking is making a steady progress towards it's declared goal of a majority market share," OBG said.

OBG said consolidated Islamic banking assets, including that of BIBD's finance company subsidiary BIBD At-Tamvil, hit $8.3 billion. This is according to OBG calculations based on data from financial regulators and BIBD's annual report.

"That too is equal to 41 per cent of consolidated banking sector assets, including conventional finance companies," OBG said.

Takaful is already dominant in the general insurance sector, OBG said, noting that takaful had a 68 per cent share of the general insurance and takaful assets in March 2014. This is up from 62 per cent in March 2011.

The report said family takaful is small but catching up, with 18 per cent of total life insurance and family takaful assets in March 2014, up from 12 per cent in March 2011.

Total takaful assets came to some $444 million or 33 per cent of total insurance and takaful assets at the end of March 2014, said the report, citing figures from financial regulators.

Two takaful companies compete in the insurance market, Insurance Islam TAIB, a subsidiary of TAIB and Takaful Brunei.

Both have separate subsidiaries that compete in the general takaful market (Insurance Islam TAIB General and Takaful Brunei AM) and the takaful family market (Insurance Taib family takaful and Takaful Brunei Keluarga).

OBG said that Islamic banks are more aggressive than most of Brunei's conventional banks in putting their funds to work in the domestic economy.

While Islamic banks have not yet reached a majority of banking assets, they may already make up more than half of domestic loans said the report, though added that there was still limited data.

The strong focus on domestic lending is because the Islamic banks in Brunei are government linked institutions with mandate to support domestic business. The report said that most conventional banks in the Sultanate are foreign owned and take a more cautious approach to lending.

Another reason is that the largest Islamic bank, BIBD, handles most public employee payroll account and since 2010 banks have been forbidden from making consumer loans to people who do not receive their primary income into an account at the bank.

The OBG said Islamic banks also have a higher non-performing loan ratio, 9.7 per cent compared to the 4.1 per cent conventional banks, citing figures provided to the International Monetary Fund by financial regulators.

Despite this, OBG said that Islamic banks continue to be almost as profitable as conventional banks due to larger volume of high-earning loans. The report said that the average return on equity of Islamic banks was 9.2 per cent in the first nine months of 2013, compared to 10.9 per cent for conventional banks.

BIBD currently dominates the Islamic banking sector, accounting for about three-quarters of Islamic banking by assets said the report, citing OBG calculations from available data. OBG said TAIB is somewhat held back by its status as a trust fund, and because of this even government officials said that they would like to see at least one more Islamic bank enter the market. The OBG cited a consultant with AMBD's banks and specialised marked division saying that there is room for two or three more banks in the Islamic segment.

(Asia One Business / 02 January 2014)

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Malaysia: DRB-Hicom issues RM715m Sukuk

KUALA LUMPUR: DRB-Hicom Bhd has issued RM715mil in nominal value of Sukuk Musharakah, which is the first issuance under its RM2bil Sukuk programme.

DRB-Hicom said on Tuesday the programme was accorded a final rating of AIS by Malaysian Rating Corporation Bhd with a stable outlook.

It said the RM715mil Sukuk comprised of RM415mil under tranche one and RM300mil under tranche two. The tenure is perpetual.

The call date for tranche one is Dec 30, 2019 and each subsequent periodic distribution date thereafter.

As for tranche two, the call date is Dec 30, 2021 and each subsequent periodic distribution date thereafter.

DRB-Hicom said the net proceeds from the first issuance of the Sukuk Musharakah would be used for Shariah-compliant purposes.

They include for the company’s investments (purchase of shares, lands, buildings and property; and development and construction costs and working capital of existing and future projects.

The proceeds would also be used to provide advances to the subsidiaries; and working capital, as well as refinancing outstanding borrowings/financings that are utilised for Shariah-compliant purposes.

CIMB Investment Bank Bhd was the sole principal adviser, lead arranger and lead manager for the programme.

(The Star Online / 30 December 2014)

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Across the world: Islamic banking assets cross $2t

LAHORE: 

The year 2014 proved remarkable for Islamic banking and finance industry across the world.

It not only crossed $2 trillion in assets but also got access to new markets including various destinations in Europe, South Korea, Australia, Brazil, Malta, Argentina, China among others.

Islamic banking and finance gained popularity in its traditional markets – Malaysia, Pakistan and the Middle East – as well. There are many countries that recently stepped into Islamic banking and showed good progress, which include Morocco, Tunis, Azerbaijan, Kazakhstan, Libya, Oman, Nigeria, Tanzania and South Africa.

While giving prediction for Islamic banking and finance in 2015, Al-Huda Centre of Islamic Banking and Economics (CIBE) CEO Muhammad Zubair Mughal said it was likely to rise above the $2.5-trillion mark this year.

In this market, the share of Islamic banking will be 86%, Sukuk 6%, Islamic funds 4%, takaful 2% and Islamic microfinance 1%. 

(The Express Tribune / 02 January 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
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