Indonesia: Government upsizes sukuk sales as bids hit record high

The government has raised the highest ever amount from a single sukuk auction, with one of the sukuk series more than 11 times oversubscribed in the latest offering, underscoring the strong investor demand in the country’s largely untapped Islamic financial instrument.

The first sukuk auction this year, held on Tuesday, attracted incoming bids of Rp 13.7 trillion (US$1.1 billion), the most in history, representing a more than sixfold oversubscription, the government having set an issuance target of Rp 2 trillion.

In response to the high demand, the Finance Ministry then decided to upsize the issuance, selling Rp 6.8 trillion of sukuk bonds.

The robust demand in the latest sukuk auction was unexpected as sukuk debt papers, which comply with sharia-based investment principles, were known for their illiquid nature in the financial market, with a lack of daily trading volume.

In comparison, incoming bids in the previous sukuk auction on Oct. 21 barely reached Rp 3.5 trillion.

“There is ample liquidity in the market, which translates into strong incoming bids in the auction,” Suminto, the newly appointed director general of sharia financing in the Finance Ministry’s debt management office, said on Wednesday.

Nevertheless, Suminto said that the government would first assess upcoming auction results before deciding to raise more financing from sukuk this year.

“This might be just a ‘January effect’,” he said, referring to the seasonal phenomenon whereby the demand for portfolio investments rises after the market’s long closure for the year-end holiday.

The most in-demand debt paper during the latest auction was the short-tenor sukuk. Incoming bids for the six-month sukuk treasury bills (T-bills) and for the one-year sukuk exceeded Rp 5 trillion each.

The six-month sukuk T-bills were more than 11 times oversubscribed, as their bid-to-cover ratio 

stood at 11.2.

Meanwhile, the weighted average yield for the six-month and one-year notes stood at 6.32 percent and 7.46 percent, respectively. The government also sold 5-year and 15-year sukuk with yields of 7.89 and 8.62 percent, respectively.

The yield of the sukuk notes in the most recent auction offered attractive returns for both domestic and foreign investors, said Adra Wijasena, a fixed-income analyst with Mega Capital Indonesia.

He noted that the strong incoming bids were supported by new instruments, such as the 1-year sukuk. Investors sought such a type of bond because when a new financial instrument was issued, its price typically soared in following weeks, he explained.

“Diversifying the financial instruments is beneficial for local companies, which have the benchmark when they plan to raise capital through sukuk,” Adra said on Wednesday. “For companies relying on conventional bonds [for financing], issuing sukuk is one way to diversify their risks.”

As of Jan. 9, total outstanding sukuk in the secondary market stood at Rp 143 trillion, a miniscule amount compared with Rp 1.2 quadrillion in conventional bonds (SUN).

Meanwhile, foreign investors held 6.7 percent of rupiah sukuk in the secondary market, compared with 38.1 percent in conventional rupiah bonds.

Besides selling rupiah sukuk, the government also plans to issue dollar-denominated sukuk in the first half this year, having successfully raised $1.50 billion from global sukuk in 2014. 

(Jakarta Post / 15 January 2015)

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Malaysia: Zeti talks up Islamic finance having vital role to play in connecting world economies

KUALA LUMPUR, Jan 15 — The Islamic financial system is envisaged to play a more important role in connecting the world economies through the strengthening of financial linkages, said Bank Negara Malaysia (BNM) Governor Tan Sri Dr Zeti Akhtar Aziz.

She said Islamic finance brought immense benefits to the overall economy as it was a form of financial intermediation that was well-anchored to the real economy.

Its internationalisation, which started at the turn of the millennium, served to enhance and strengthen the interlinkages between economies, facilitating international trade and cross-border investment activities, said Zeti.

“This trend has marked the beginning of intensified collective efforts to enhance the Islamic financial infrastructure to create a robust and resilient global Islamic financial system,” she said.

Zeti said this in her acceptance speech for the Lifetime Achievement Award at Islamic Economy Award 2014 in Dubai yesterday.

She said internationalisation required collective efforts to establish the international Islamic financial architecture and the development of mechanisms for more effective cross-border liquidity management. “Our collective efforts in developing Islamic finance will provide an important platform to unlock the potential opportunities that lie therein to benefit every segment of the society and the business community that now extends beyond our domestic borders,” she said.

Central to achieving this next thrust of development was to develop a high-calibre and competent talent base to cultivate financial innovation and this required investments in human capital, she said.

(Malay Mail Online / 15 January 2015)

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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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