Asian rivals are still determined to set up their own Islamic finance infrastructure, eyeing Malaysia’s successes. While plenty will try, the biggest threat to Malaysia’s dominance looks likely to come from an entirely different source.
Source: Reuters/Bazuki Muhammad
Heini Koivuniemi of Finland pulls a car weighing about 1500 kgs (3307 lbs) during the World’s Strongest Man and Woman 2002 competition in Putrajaya.
Asian governments have long been envious of the massive success of Malaysia’s deep and liquid sukuk market. Not only has that market churned out a large volume of deals, it has also shown the ease with which it can attract new and foreign issuers.
As the world’s largest sukuk centre, Malaysia’s status is one that other countries hope to emulate, if not challenge. In recent years, a number of Asian countries had announced related initiatives, but the biggest threat to the ringgit market may not come from Asia, but from the surge in international issuance centred in the Middle East.
Recent offshore sukuk sales in US dollars from that region include chunky deals, such as the US$4bn jumbo sukuk from Qatar in early July. The Qatari deal lifted the total international issuance of Islamic bonds to over US$12.5bn, according to Thomson Reuter’s data. The figure has surpassed last year’s record volume of US$10.6bn.
At the same time, total sukuk issuances – including domestic sales – saw some US$20bn sold just in January alone, nearly a quarter of the US$85bn sold in 2011.
However, despite the growth in local currency bonds as significant viable alternatives to the US-dollar issues, it is Malaysia’s ringgit scene that still holds sway. That market in Malaysia accounts for over two-thirds of global sukuk volumes.
Outstanding Islamic bonds stand at close to M$1trn (US$315bn) and, as of mid-June, some M$41bn in new Islamic bonds were issued (including the jumbo PLUS sale of M$30bn, which was priced in December and issued in January 2012).
Local Islamic investor funds are clamouring for more supplies of Islamic bonds and more diversification. Their demands may well be met this year as sukuk deals from infrastructure projects and foreign issuers are building a strong pipeline.
“In Malaysia, there is ample liquidity and continued strong appetite for sukuks from Islamic funds and conventional players. The expectations are for sukuk bonds to continue to perform in the ringgit market and attract foreign issuers from different regions of Asia and the Middle East,” said Rash Dan Abdul Aziz, senior vice president, fixed income syndicate at CIMB Investment Bank.
This opens a viable avenue for first-time foreign issuers, such as First Resources, to tap the market. First Resources, with assets mainly in Indonesia, became the first Singapore-listed company to raise Islamic funds in Malaysia in early July. Its M$600m five-year issue drew a book of M$2bn during an intra-day bookbuilding process.
The efforts of other Asian countries to grow their individual Islamic bond markets have been patchy at best. It was long thought that, if an Asian country were to challenge Malaysia’s sukuk dominance, it would be Indonesia, where its huge Muslim population was expected to provide the deep liquidity and appetite to grow the market.
However, the non-government sukuk market has made dismal progress due in part to the lack of liquidity in the government sukuk market and also because issuers refuse to pay a “sukuk illiquidity premium”.
In March this year, the Hong Kong Government revived its ambition to make the SAR a hub for Islamic finance hub, after shelving such plans following the global financial crisis. Given Hong Kong’s efficiency, it will not surprise if it pips Thailand in putting in place tax changes to level the playing field for sukuk issues versus conventional bonds.
The Thai Government has already installed a regulatory framework on how sukuk can be offered and who qualify as issuers and trustees. However, the rules will only become effective when tax laws are implemented.
The tax authorities in Thailand have drawn up tax laws on fees for the regular treatment of trusts, but regulations specific to sukuk issues are still in draft form.
“A draft tax regulation is before the revenue department for approval and the response should come soon, at least before the end of the year,” a government official told IFR. “There has been a delay because sukuk structures are new to the tax department and a proper study was needed to address the issues comprehensively.”
Biggest disappointment
The biggest disappointment has been in Singapore. Despite being well ahead of the other countries in implementing regulations to foster the Islamic finance industry, sukuk issues have been too few and far in between.
Also, conventional bonds have served issuers well, while the cumbersome process of setting up sukuk structures has been a major disincentive to local corporations.
The lack of progress in these countries has not dimmed the allure of sukuk markets, particularly in light of the success of the Middle Eastern deals.
The Ministry of Finance in India has asked the central bank to explore the introduction of Islamic finance, while Australian banks, always on the prowl to diversify their huge funding needs, are said to be mulling sukuk offers.
Nevertheless, their attempts to match Malaysia’s well established status as the sukuk centre are unlikely to lead to overnight successes. Malaysia took several years to build a foundation.
Now, with the complete and committed support of all regulators to push the boundaries, the ringgit-denominated market will stay many steps ahead of rivals as the global hub for sukuks.
