Indonesia Beats Malaysia in Global Sukuk Tempo

Indonesia is the most regular issuer of global sovereign sukuk even as its Islamic banking assets and local-currency sales lag behind Malaysia.

Finance Minister Bambang Brodjonegoro said on Jan. 9 that the government will offer international sukuk in the first half, the fifth straight year it’s issued such debt. The Southeast Asian nation sold $5 billion of global sukuk in the past four years, compared with $3.25 billion for Malaysia and $2 billion for Qatar, data compiled by Bloomberg show.

A shortage of investment products in the $1.7 trillion industry, which Ernst & Young LLP sees doubling by 2018, will ensure demand for Indonesia’s sukuk, according to Kuala Lumpur-based consultant Amanah Capital Group Ltd. While the nation is ahead of Malaysia in dollar-denominated bond sales, its Islamic banking assets are just 12 percent of its smaller neighbor.

“Indonesia has been consistently selling sukuk every year to develop better trading and improve market confidence,” Akbar Syarief, fund manager at PT MNC Asset Management in Jakarta who oversees about 2 trillion rupiah ($160 million), said by phone yesterday. “Indonesia can absorb funds seeking different strategies, whether it’s short term or long term, so that widens the investor base and improves trading volumes.”

The nation’s outstanding dollar Islamic bonds range in maturity from 2018 to 2024, compared with the longest tenor in Malaysia of 2021. Indonesia joined the Philippines with Asia’s first sales of global conventional notes of 2015, receiving bids for 4.8 times the $4 billion raised on Jan. 9. It sold 10- and 30-year securities at yields of 4.2 percent and 5.2 percent.

Rising Rates

Indonesia has about $9 billion of local-currency government sukuk outstanding, compared with Malaysia’s $52 billion, according to official and Bloomberg-compiled data.

Rising demand for the relative safety of government debt due to global market turmoil has helped push Indonesian yields to a one-month low. The yield on the 4 percent Shariah-compliant notes due in 2018 dropped 10 basis points so far this year to 3.02 percent, data compiled by Bloomberg show. The 2024 securities are paying 4.34 percent, while Malaysia’s 2021 sukuk offer 2.75 percent, down from 2.88 percent on Dec. 31.

South Africa, Hong Kong, Luxembourg and the U.K. sold sukuk for the first time last year, joining the predominant issuers in Asia and the Middle East. The only sovereign sales from the Persian Gulf in 2014 came from the emirates of Dubai and Sharjah.

Indonesia sold $1.5 billion of 10-year Islamic bonds in September last year at a coupon of 4.35 percent and saw bids of 6.82 times the amount sold. A new global sukuk would be the government’s sixth since a 2009 debut.

‘Good Idea’

PT MNC Asset’s Syarief said he expects the yield on Indonesia’s latest offering to be the same or higher than the coupon paid in September.

“Investors are starting to price in higher U.S. rates, so it’s a good idea for the government to sell sooner rather than later,” he said.

The Bloomberg Malaysian Sukuk Ex-MYR Index, which tracks global government and corporate issues including Indonesia’s, rose 5 percent in 2014, a fourth straight annual gain. The gauge has climbed 0.6 percent so far this year. International sales of the debt reached $46.3 billion last year, shy of the record $46.8 billion in 2012, data compiled by Bloomberg show.

Nations such as Indonesia may look to front-load issuance before U.S. interest rates start rising later this year, said Fakrizzaki Ghazali, Kuala Lumpur-based credit strategist at RHB Research Institute Sdn., a unit of RHB Capital Bhd. The Federal Reserve is preparing to increase its benchmark rate for the first time since 2006.

‘Overwhelming’ Demand

“Currently, it’s still accommodative for sovereigns and corporates to issue,” Fakrizzaki said by phone yesterday. “An issuer would want to capitalize on the current still-low yield environment.”

Indonesia is looking to tap the sukuk market amid optimism President Joko Widodo will enact reforms to attract investment and revitalize Southeast Asia’s largest economy. The government plans to spend about 5,519 trillion rupiah from 2015 to 2019 to build roads, railways and power plants.

The nation’s debt is rated the lowest investment grade of Baa3 by Moody’s Investors Service, three levels below Malaysia.

Demand for Indonesia’s sukuk “would be overwhelming as political stability and good governance are important aspects in determining the risks of sovereign sukuk,” Abas A. Jalil, chief executive officer at Amanah Capital, said in an e-mail yesterday. “Investors view the Indonesian sukuk market as going toward the same level as Malaysia, as proven by the previous successful issuances.

(Bloomberg / 13 January 2015)

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Tunisia to delay Sukuk issue until third quarter of 2015

TUNIS, Jan 12 ( Reuters ) - Tunisia will delay its planned issue of $500 million in Islamic bonds until the third quarter of the year to allow parliament time to amend a law concerning the sale, Finance Minister Hakim Ben Hamouda said on Monday.

Tunisia had initially said it would issue the Sukuk by the end of last year.

"Tunisia is putting back its issue of the sukuk to the third quarter from July. Parliament needs to rectify the sukuk law," the minister told a conference.

He did not give further details. Tunisia passed a law allowing Islamic bonds in 2013 and hoped to potentially attract large amounts of Islamic-oriented funds from the wealthy Gulf.

(Zawya / 12 January 2015)

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Rise of Islamic finance and banking ‘to reach new heights in 2015’

The CIBE said the industry realised $2.1tn of assets in 2014, owing to “gains in popularity in traditional markets” such as Malaysia and the Middle East, and boosted by moves into new markets in Europe, Australia and China.

CIBE chief executive officer Muhammad Zubair Mughal said Islamic banking is likely to represent a share of 86% of the industry’s $2.5tn market in 2015, followed by sukuk, the Islamic equivalent of a bond (6%), Islamic funds (4%), takaful (Islamic insurance – 2%) and Islamic micro-finance (1%). He said Dubai will continue in its role as “a global Islamic finance hub”.

Zubair Mughal said there are more than 1,500 organisations working for Islamic banking, finance, takaful, sukuk, Islamic funds and micro-finance in more than 90 countries, some 40% of which are non-Muslim nations. He said Muslim countries, which have a 76% share of the global Islamic banking market, include Qatar, Saudi Arabia, the United Arab Emirates, Malaysia, Pakistan and Indonesia.

Zubair Mughal said that the sukuk market recovered in 2014 after a fall in 2013 and promises “a great chance of rapid growth” in 2015. He also anticipated that the sukuk market will reach $150 billion, with Islamic funds having “great potential” of attaining a market share worth around $100bn.

On takaful, Zubair Mughal forecast a growth rate of 15% and said the global takaful contribution is expected to reach $20bn during 2015. “Tanzania, Namibia, Morocco, and India are the new destinations for Islamic insurance,” he said. The new year is also expected to see increased take-up of Islamic micro-finance, which is being promoted by “many multilateral agencies” and backed by governments in countries such as Pakistan and Malaysia, Zubair Mughal said.

In September 2014, South Africa entered the sukuk market with the launch of a $500 million Islamic bond. The National Treasury said it had concluded its debut 5.75-year Islamic bond issuance in the international capital markets priced at a coupon rate of 3.90%, “representing a spread of 180 basis points above the corresponding benchmark rate”.

In October, the governor of Malaysia's central bank, Bank Negara Malaysia, said the $270bn global market for sukuk could become an "important source of funding" for infrastructure and other long-term projects. Zeti Akhtar Aziz told the 10th World Islamic Economic Forum in Dubai that the sukuk market had "significant potential" to fund infrastructure projects in the Gulf Cooperation Council, Africa and Asia. She said that some developing economies in Africa were already looking to the sukuk market as a means of obtaining financing for infrastructure.

(Out_Law.Com / 12 January 2015)

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Third phase of financial innovation fund to focus on Islamic financing

ISLAMABAD: 

The federal government on Friday launched the third round of Financial Innovation Challenge Fund designed to promote Islamic financing, the share of which is rapidly growing in the overall banking industry in the country.

The fund was launched with the assistance of the United Kingdom under the UKAid-sponsored Pakistan Financial Inclusion Programme being executed by the State Bank of Pakistan.

The earlier two rounds focused on promoting innovative agricultural and rural financing in the country.

“The Financial Innovation Challenge Fund will go a long way in promoting an inclusive economic growth through demand-driven innovative financial services for the low-income and unbanked population,” commented Finance Minister Ishaq Dar while inaugurating the fund.

He said the Financial Innovation Challenge Round was designed to encourage competition and introduce a world-class dynamic structure capable of meeting human resource requirements of the industry and act as a research incubator providing innovative products.

Dar pointed out that the Islamic mode of financing was growing at a phenomenal pace across the world and current size of the Islamic finance industry, estimated to be over $1.8 trillion, was almost twice the level a decade earlier.

At present, the Islamic finance industry of Pakistan comprises 19 Islamic banks with a network of 1,200 branches spread across 80 districts, 27 modaraba companies, 15 mutual funds and five takaful companies.

The industry now constitutes over 10% of the country’s financial system and keeps a strong growth momentum.

Dar stressed that the Islamic finance industry was working well below its potential. Only one-fifth of farmers have access to the formal financial system while just 5-6% of small and medium-sized enterprises (SMEs) receive bank financing.

Islamic banks should approach these largely untapped markets through their asset-based and risk-sharing products and contribute to catalysing growth in the real economy, he said.

Similarly, linkages between Islamic banks and microfinance institutions could be instrumental in channelling surplus liquidity of Islamic financial institutions towards meeting financial services needs of the low-income population.

This will help Islamic banks to improve their perception among people and facilitate the government in achieving the Millennium Development Goals, which are largely in line with the basic philosophy of Islamic finance, ie, facilitating development of a fair and equitable economic system and ensuring broad-based welfare and well-being of the masses.

Dar said the government was putting special emphasis on the promotion of Islamic banking and took a number of steps in that regard.

Pakistan’s entry into the international Sukuk market after a gap of nine years through dollar-denominated Sukuk was received well by the investors and is a reflection of its seriousness in exploring Shariah-compliant avenues to finance the state’s needs.

Recommendations

A steering committee constituted to promote Islamic banking has prepared an interim report and its recommendations will help in setting a roadmap and deciding a future course of action for providing an enabling environment for the growth of Islamic finance.

Among the challenges highlighted in the report, the shortage of qualified Islamic finance professionals has emerged as a major issue.

The finance minister stressed that skills development played a crucial role in strategy formulation, product innovation and infusion of global best practices. The proposed Centre of Excellence will play an important role and help in overcoming capacity-building challenges by offering a comprehensive set of educational, training and research programmes.

He said the government would implement recommendations of the committee in order to put more emphasis on Islamic finance in courses starting from higher secondary level to undergraduate and post-graduate levels in business, law, finance and accounting.

(The Express Tribune / 10 January 2014)

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The growing importance of Islamic finance

The global popularity of Islamic finance has grown sharply over the past 10 years and here, Geoff Cook looks at how Britain and Jersey are tapping into this flourishing market.

In 2014, Britain’s export credit agency announced that it will guarantee a sukuk bond for the first time next year, in a move that will boost London’s position as a centre for Islamic finance. Britain became the first Western government to sell an Islamic bond four months ago, where it saw an unprecedented level of interest as it attracted bids worth more than 10 times the 200 million pounds on offer.

Islamic finance has been growing exponentially in recent years, where new issues have grown from $5bn (£3.3bn, €4.2bn) in 2003 to $134bn in 2012.

It is exciting to see Britain is expanding its position in Islamic finance, where they’re also creating an Islamic index on the London Stock Exchange.

Jersey is also seeing expanding activity in delivering shariah compliant products. We have seen several Islamic institutions in the UK benefit from the services offered by Jersey, such as Gatehouse Bank, one of the five Islamic banks registered in the UK, which has issued two sukuk bonds through Jersey.

Benefiting from the GFC

Sukuk bonds differ from conventional bonds, where they have been adapted to suit shariah law, which prohibits the charging, or paying of interest. Instead, investment in the bond gives the investor a share in a particular asset owned by the investment company, such as a share in a property, where the bond owner is then able to collect their profit as a rent.

This format makes sukuk bonds stand out from conventional bonds, and offers an alternative funding opportunity to those who live by Islamic law.

The sukuk market offers a strong opportunity to drive infrastructure development, according to the governor of the Central Bank of Malaysia,

She also stated that Asia requires $8.3trn through to the year 2020 to meet infrastructure needs, while the Middle East needs more than $2trn. Sukuk bonds therefore facilitate investment into growing economies, where they may not have otherwise been able to under shariah law.

In addition to facilitating investment in developing countries, the growth in Islamic finance is also motivated by the recent financial crisis, because of their less conventional format that emphasises risk sharing.

Sukuk bonds and other similar financial instruments appear to have avoided many of the most severe consequences of the crisis because they are underpinned by equity, rather than debt, which means that they are more closely connected to the real sector.

In fact, growth in Islamic finance has generally outperformed the growth of conventional financial instruments after the onset of the financial crisis in 2008.

This growth is funding the development of businesses and infrastructure in growing economies, and Jersey is playing its part in supporting this funding by providing knowledge, expertise and experience relating to the establishment of shariah compliant structures, which further enables investors to make an informed investment through Jersey Protected Cell Company structures.

(Interntional Adviser / 08 January 2014)

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Get Ready for Corporate Sukuk Boom After Sovereign Rush

The busiest year on record for sovereign Islamic bond sales is poised to be eclipsed as a revival in corporate issuance takes hold in 2015.

Companies in the U.K. and Hong Kong may be among those selling sukuk this year as they follow debut issues from their governments, according to National Bank of Abu Dhabi PJSC, the biggest Middle Eastern underwriter of Islamic bonds in 2014. Corporates in the Gulf Cooperation Council will be encouraged to tap the market as bank liquidity and credit conditions deteriorate amid declining oil prices, Moody’s Investors Service said last month.

Islamic bond investors have been starved of options as established corporate issuers, led by those in the six-nation GCC, which accounts for about a third of all global sales, opted for bank loans over public debt. That’s in contrast to sovereign borrowers, which raced to tap an industry whose assets may climb to $2.6 trillion by 2017, according to PricewaterhouseCoopers LLP. Government borrowers sold 215 Shariah bonds last year as the number of company sales dropped to the lowest since 2004.

“I expect 2015 to witness a further maturing of the market as sukuk becomes increasingly relevant to global issuers,” Andy Cairns, global head of debt origination and distribution at NBAD, the United Arab Emirates’ biggest bank, said by phone from Abu Dhabi on Dec. 29. Governments including in the U.K. and Hong Kong sold sukuk “to establish proof of concept for Islamic issuance, achieve investor diversification and encourage follow-on supply,” he said.

‘Forced Out’

In Asia, Malaysia Marine and Heavy Engineering has approval from the country’s securities commission for a 1 billion ringgit ($284 million) Islamic bond. In the Middle East and Africa, Al Baraka Banking Group plans to raise 300 million rand ($26 million) in South Africa, according to the chief executive officer, and Turkey’s Dogus Varlik Kiralama AS has approval from the Capital Markets Board to sell as much as $370 million in sukuk.

“The tightening of bank liquidity and credit conditions in the GCC may force more of the larger, quality corporates out to the public markets,” Khalid Howladar, the Dubai-based global head of Islamic finance at Moody’s, said in a Dec. 17 e-mail. This year there will also be a “growing number of new and emerging sukuk markets,” he said.

The U.K. became the first non-Muslim sovereign government to issue sukuk when it sold a 200 million-pound ($307 million) bond in June. In September, Luxembourg sold 200 million euros ($240 million) of five-year Islamic bonds, Hong Kong raised $1 billion and South Africa tapped the market for $500 million.

While the number of sovereign sukuk sales rose last year, the amount raised dropped 30 percent from a year earlier to $20.4 billion, the least since 2010. Corporate issuers raised $78.6 billion through 501 sales.

Oil Slump

Companies seeking to sell debut Islamic bonds instead of non Shariah-compliant debt have to meet additional criteria that may deter or delay them, according to Rizwan Kanji, a Dubai-based partner at King & Spalding LLP, a law firm that worked on Emaar Properties PJSC’s $2 billion sukuk program.

“The corporates need to have Shariah-compliant assets,” Kanji said by telephone on Dec. 30. “The use of proceeds from the issuance of sukuk need to be Shariah-compliant too.”

High-Yield Sukuk

Decreasing bank liquidity and demand for public debt will make sukuk issuance more attractive for GCC corporate borrowers this year, according to Mashreq Capital DIFC Ltd.’s Chief Executive Officer Abdul Kadir Hussain. Corporate, shorter-term sukuk may offer a better yield to investors, according to Bahrain-based Securities & Investment Co.

“By the first half of 2015, people will look for corporate, high-yield sukuk,” Najla Al Shirawi, CEO at SICO, said in an e-mail on Dec. 15. “And they will manage interest-rate risk by reducing duration.”

Slumping crude prices are poised to erode both government revenue and cash at banks. Brent crude has declined 52 percent since a June peak. More than half of the Organization of Petroleum Exporting Countries’ 12 members are located in the region.

“When liquidity is declining and market volatility is higher, the sukuk market tends to be a little more attractive,” Hussain, who oversees about $1.2 billion, said by phone on Dec. 30. “You will get potentially more corporate issuance.

(Bloomberg / 05 Jnuary 2015)

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Caring side of Islamic finance

In November last year, the International Finance Facility for Immunisation (IFFIm) issued a US$500 million sukuk with a difference – the funds would be used to buy life-saving vaccines.

From an attempt to wipe out polio in the Democratic Republic of Congo, to the deployment in Haiti of a five-in-one vaccine that tackles haemophilus influenza, tetanus, hepatitis B, diphtheria and whooping cough, the funds from the sukuk, structured by a consortium of banks including NBAD, will be used to support a project that is estimated to have already saved more than 6 million lives.

As an added bonus, the sukuk pays, in quarterly coupons, a Sharia-compliant profit rate equivalent to the US 3-month London Interbank Offered Rate plus 0.5 per cent. For Islamic investors interested in putting their money to its best use, products such as these are an obvious choice. “The principles underlying our work are very well aligned with the principles of Islamic finance,” says Rene Karsenti, the chairman of IFFIm. “The sukuk offers a profit, a good rate of return, and the social benefit – use of the proceeds for a very noble cause, which is to save lives.”

IFFIm’s sukuk indicates a growing similarity between two heretofore disparate areas of asset management: Islamic finance, and the largely western socially responsible investment (SRI) tradition,

The IFFIm, which is part of the World Bank, has secured $6.3 billion in funding from nine different countries, to be paid over a period of 20 years – so the organisation has decided to issue debt against these promises to fund current vaccination projects.

This serves two purposes. First, the more vaccines that are provided at once, the more effective a vaccination programme is. If you vaccinate half the population of a given area, disease can still spread rapidly; if 99.9 per cent of a population is vaccinated, there is a good chance that the disease may die out completely.

The second reason is more immediate: hundreds of thousands of people are dying from treatable diseases every day. So why wait?

Mr Karsenti says opting for an Islamic product allows IFFIm to attract Islamic investors. In this, IFFIm has been successful: 68 per cent of total orders originated in the Middle East and Africa.

Mr Karsenti describes the move as “natural” for IFFIm, whose vaccination project has invested more than half of its funds in 33 Organisation of Islamic Countries member states, including Mali, Mozambique, Bangladesh, Niger and Afghanistan.

Last year, SRI funds totalled about $6.57 trillion in assets under management in the US alone, the US Social Investment Forum says, while global Islamic finance assets are estimated to total $1.7tn in 2014, according to Ernst & Young. Both are recording double-digit growth rates.

SRI grew out ofChristian religious institutions that wanted to place their funds in companies that did not violate Biblical teachings.

“SRI means different things to different people, but ultimately, the bottom line, or profit, is not the only consideration. Most funds want to show that they are making an impact on society,” says Joshua Brockwell, the investment communications manager at Azzad Asset Management, an Islamic fund in the US.

SRI funds choose from two non-exclusive approaches. Negative screening means a fund cannot invest in some asset areas regarded as morally impermissible. Positive screening involves searching for investments that return a positive social benefit.

It is positive screening where the commonalities are most evident – an emphasis on delivering clear social benefits, where labour conditions, the environment, standards of governance and fair-dealing are taken into account. “There is a vast overlap between what can be considered socially responsible investing and Islamic finance,” says Farmida Bi, the head of Islamic finance at Norton Rose Fulbright. “The basis of Islamic finance is real economic activity, which must not be based on the oppression of other people. SRI principles are very similar to these ideas,” Ms Bi says.

(The National Business / 08 January 2014)

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