Youthful ambition

Asia’s sukuk market is having a good year, thanks to rising interest from Middle Eastern buyers and a benevolent regulatory climate, but it still has some way to go to fulfil its promise.

Asia’s sukuk market is on a tear, with the help of a rush of new prints, rising demand from Middle Eastern investors and a concerted push of regional sovereigns and city-states into the Islamic finance segment. The market is on track for a bumper year, with US$12.7bn worth of Asian sukuk printed in the first six months, against US$22.2bn for the whole of 2014.

In the first half, there were a raft of high-visibility sovereign prints, which investors eagerly gobbled up. On May 28, Hong Kong sold a US$1bn five-year sukuk, barely a week after the Republic of Indonesia did its own US$2bn print, the largest Islamic sovereign paper ever issued in the dollar market. In April, the government of Malaysia priced a US$1.5bn Islamic bond, split into a US$1bn 10-year tranche and a US$500m 30-year piece.

Corporations have also rushed to tap the growing market. Malaysian state-run infrastructure financing vehicle DanaInfra Nasional sold US$943m of Islamic bonds in March. In the last week of May, air carrier Garuda Indonesia priced an inaugural US$500m five-year sukuk, marking the first international Islamic bond from an unrated Indonesian corporate issuer.

Leading companies are also eyeing a new rush of issuance in the second half, from the Malaysian unit of Japanese automaker Toyota to Tenaga Nasional. Tenaga, Malaysia largest utility, plans to raise M$9bn (US$2.4bn) to fund the construction of new power plants. In fact, Islamic funding now underpins many of Malaysia’s largest infrastructure projects.

“The Asian sukuk market is thriving and will continue to grow in the near to medium term,” said Badlisyah Abdul Ghani, chief executive of CIMB Islamic, the global Islamic financing arm of Kuala Lumpur-based CIMB Group.

Rafe Haneef, CEO of HSBC Amanah Malaysia said this year’s uptick in prints was a “positive development”, which proved that sukuk was “firmly moving from an alternative class of investment” to a more mainstream Islamic financing product.

Key to this year’s surge in sales has been growing interest from Middle Eastern investors. Buyers from the region accounted for 56% of the Garuda print and 42% of the Hong Kong Government offering. Middle Eastern investors, with a little help from funds in Malaysia and North Africa, bought 41% of the securities on offer in Indonesia’s supersized sovereign print, which drew total orders of US$6.8bn.

HSBC Amanah’s Haneef draws a direct line between increased interest in Islamic bonds and rising trade between Asia and the Middle East. “Issuing sukuk is a great way for Asian issuers to attract investment from investors based in the Gulf Cooperation Council region, who have a natural affinity with such instruments,” Haneef said.

CIMB Islamic’s Abdul Ghani, who tips global sukuk volumes to hit US$200bn come 2018, says the demand for Asian sukuk is both “encouraging and not surprising”, given the number of Middle Eastern lenders, asset managers and insurers (takaful) desperate to channel cash into Islamic financial instruments.

Asian issuers are also waking up to the vast funding potential of a market which has long promised much, but has often grown in fits and starts. (Record Asian sukuk issuance of US$26.5bn in 2011 followed a slow year, and preceded two more years of ebbing interest in Islamic bonds). Malaysia is set to continue to dominate the market for the time being. In a typical year, the country accounts for 60% of total global sukuk issuance.

However, as HSBC Amanah’s Haneef notes, “other Asian countries have taken note of Malaysia’s success story and are looking at sukuk seriously”.

Indonesia, with the world’s largest Muslim population, has established itself as a major player in the market, becoming the most frequent sovereign sukuk issuer over the past five years. In early July, Indonesia’s financial regulator, with backing from President Joko Widodo, launched a five-year plan to triple the size of the domestic Islamic financial services market come 2023.

A raft of other cities and states are also eyeing the industry’s bountiful potential. Hong Kong and Singapore are taking a keen interest in sukuk, both by boosting cooperation with Malaysia, and by working independently to enhance their credentials as Islamic financing centres. In 2013, Hong Kong tweaked its tax laws to encourage sukuk issuance, while corporate Islamic bond sales are also rising in the likes of Pakistan and Brunei.

Then, there are the two big sovereign beasts in the region: China and India. Both, admits CIMB Islamic’s Abdul Ghani, have “yet to warm” fully to sukuk, though each, he adds, “has expressed its keenness to learn more. There has been news about a couple of Chinese names mulling sukuk offerings and we truly welcome these developments. Sometimes, it takes one to do it and the rest will follow suit. The international sukuk market will be boosted enormously if China enters the market.”

Asia’s Islamic bond market has enjoyed an increasingly benevolent regulatory climate and rising interest from Middle Eastern buyers. More remains to be done in order to create a deep market that grows strongly and steadily, rather than lurching wildly from one year to the next.

Implementing tax-neutral legislation across the region, thereby equalising the cost of issuing sukuk and conventional bonds, will be a good start. However, for now, the prospects for Asia’s sukuk market appear bright. Says CIMB Islamic’s Abdul Ghani: “The market has yet to reach its maturity stage, but it has certainly elevated itself to a ‘fresh graduate’ stage - young, bold, full of energy, and ambitious.”