After taking some big steps forward in 2011, Malaysia is looking to reinforce its already dominant position as the world’s biggest Islamic bond market.
Source: Reuters/Bazuki Muhammad
Young Malaysian muslims are silhouetted as they recite night prayer outside mosque in Kuala Lumpur.
In many ways, Malaysia’s sovereign sukuk last June exemplified the innovative measures the country is taking to cement its status as the world’s premier Islamic financial centre.
The US$2bn issue not only reopened the sovereign sukuk market after a prolonged lull, but also deepened the acceptability of Malaysian structures in the Gulf.
More significantly, the deal was a clear statement of the government’s ambition to develop Malaysia into a global hub for sukuk sales – in multiple currencies and from both domestic and international issuers.
Malaysian central bank governor Dr Zeti Akhtar Aziz underlined that point on January 26, noting that the country’s “Islamic capital markets have thrived, with a growing presence of international issuers and investors operating in both the ringgit and foreign currency sukuk markets in Malaysia”. To build on that strong base, Malaysia will be evolving to become a major multi-currency bond and sukuk market.
In turning to the offshore markets and re-establishing foreign currency Islamic bonds, as it did with its US$2bn sovereign issue, the government has taken its sukuk push to the next level.
The Wakala structure was aimed at gaining better acceptance in the Gulf market – and an enthusiastic response from Middle Eastern investors confirmed the success of that strategy.
Malaysia quickly followed up last October with another first – a Dim Sum sukuk from sovereign wealth fund Khazanah Nasional. The renminbi-denominated bond was a small Rmb500m (US$78m) three-year issue, but leads BOC International, CIMB and RBS stressed that the deal was not meant to raise funds, but to lift the profile of sukuk financing globally.
“Khazanah is not in need of funding and it can get loads of that in the Malaysian market, which is flush with liquidity,” said a banker at that time. ”Its major aim is to establish the Islamic finance initiative in the Dim Sum market and grow Islamic finance development in the capital markets in Asia.”
More innovative measures are expected to boost further Malaysia’s sukuk credentials, one of which is to develop the country as an international platform for the listing and trading of Sharia-compliant asset classes.
That role is vital to Malaysia. The government is wily enough to recognise that it is in no position to promote Malaysia as an international financial centre, but its deep domestic Islamic bond markets serve as the perfect launch pad to promote the country as a world-leading Islamic finance hub.
Foreign hurdles
Luring foreign borrowers to sell Islamic bonds is an important part of that strategy. With the freezing of the hard currency markets in 2008, Malaysia successfully drew a number of foreign issuers to the ringgit markets, with South Korean, Gulf and even a couple of Indian borrowers diversifying into the local markets to raise funds.
However, the steady stream of foreign borrowers stalled last year after an unofficial switch in the government’s stance. In its eagerness to promote its Islamic credentials, foreign borrowers were encouraged to sell Islamic bonds – instead of conventional debt – if they were to tap the ringgit market. That policy almost immediately threw up a number of obstacles. Many of the Korean issuers that had sold bonds in Malaysia were financial institutions, which do not conform to Sharia requirements. Other borrowers faced a lack of sukuk laws at home, adding to the tax and accounting hurdles in gaining access to the Malaysian market.
Malaysian bankers said the government needed to work out a delicate balance between promoting the ringgit market as a viable funding alternative for foreign issuers and promoting itself as a global sukuk hub.
Sukuk is playing an ever-increasing role in the domestic markets. Citing figures from Zawya Sukuk Monitor, Fitch reported that global sukuk issues in 2011 amounted to US$84.4bn, a surge of 62% year on year. Of that, Malaysian borrowers accounted for more than half.
Despite that impressive growth rate, the sukuk market remained a “fraction of the size of the global bond market”, said Fitch. It pointed to the absence of a standardised deal structure as the reason for the constrained growth, noting that the sukuk market “has not kept pace with demand from Islamic institutional investors and banks”.
Bank Negara Malaysia has said it will focus its efforts on intensifying the internationalisation of Islamic finance. Both the sovereign Wakala and Khazanah’s Dim Sum sukuk are representative of the country’s ability to drive the growth of the global sukuk market and, given Malaysia’s reputation for innovation in Islamic finance, 2012 promises more exciting developments.
