Asia Finance Blog

Islamic bonds to be offered in Malaysian currency

The Islamic Development Bank is aiming at a USD 271 million offer of Islamic bonds for the first time in Malaysian currency, the Ringgit. The bank is a Saudi Arabian organization set up by 56 nations to lend to Muslim communities. The Islamic Development Bank says that the proceeds from this debt offering could be swapped later into another currency. As part of a plan to raise USD 1 billion over five years to expand lending, the bank last year sold USD 500 million through bonds.

According to the bank’s director of treasury, the bank is keenly exploring the possibility of financing local-currency long-term projects. But if it can’t find Ringgit projects to deploy all the money, then the rest of the money can be swapped into dollars or other currencies. He also said that Malaysia's domestic market is quite deep as it has a large number of institutional investors like pension funds and insurance companies who buy quality assets. There is growing popularity of Islamic debt among the world's 1.5 billion Muslim population, and bond issuers like Islamic Development Bank are taking advantage of this.

The Indonesian government may also issue Islamic bonds for the first time, around next February. However, the decision has to be made on the currency for Islamic bonds, commonly referred to as ‘Sukuk’. The reason why Indonesia is raising more money through bond sales this year is to cover a wider-than-expected deficit in its budget. The Sukuk that Malaysia has helped popularize, is in great demand globally as more and more issuers opt to issue the paper to fund their projects.

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Singapore allows banks to sell Murabaha

In a move that will boost Islamic finance in Singapore, the Monetary Authority of Singapore (MAS) has allowed Singapore banks to sell Murabaha investment products.

Heng Swee Keat, Managing Director, MAS made this announcement at an international Islamic financing conference. He also said that the central bank will review regulatory and tax issues so that banks can expand financial instruments in compliance with Islamic law. Singapore wants to evolve as a centre for Islamic finance in the Asian region and is competing with Malaysia and Indonesia for the same.

The decision was taken in response to the feedback from market participants and in order to enhance the asset management industry in Singapore. It is believed that such basic products will educate both customers and corporates and will pave the way for more sophisticated products. While banks are eager to sell the Murabaha products, they are looking forward to the introduction of Mudharabah instrument as it gives higher yields.

Investors from the Middle East are looking for attractive Shariah compliant investment opportunities. The Islamic funds market is growing at up to 15 per cent a year and thus has a tremendous potential to offer. Singapore’s own investor base is very small and by targeting Islamic finance, it can increase its product offering as well as attract more investors.

Next week, over 40 renowned Islamic finance experts will meet in Singapore for the 10th International Islamic Finance Forum (IIFF). The conference will launch the IIIF-Asia, an initiative aimed to boost Islamic finance in the Asia-Pacific area.

Developments in Islamic finance

Abraaj Capital, a leading private equity firm in Middle East, North Africa and South Asia region, has entered into a joint venture with Deutsche Bank and Ithmaar Bank, to raise USD 2 billion Sharia-compliant private equity fund. The alternative asset fund is called Infrastructure Growth Capital Fund (IGCF).

The fund will be managed by Abraaj Capital and co-sponsored by Ithmaar and Deutsche Bank. The fund will target an internal rate of return (IRR) of 15 per cent per annum and have a life of ten years. The fund will invest in infrastructure with a predominant focus on picking up a majority or minority stake in greenfield projects, participating in large-scale privatization and investing in buy-out and restructuring opportunities. Another area of interest will be providing mezzanine funding to companies in its targeted sectors. The fund will target oil and gas, petrochemicals, telecom, power, water, roads, healthcare and education sectors for investment. Through this fund, Abraaj Capital aims to capitalize on the rising demand for infrastructure finance and Islamic finance in the region.

In another development in the field of Islamic finance, Gulf Finance House (GFH) has signed a one-year renewable USD 90 million syndicated murabaha facility with a group of nine banks from Europe, Asia and the Middle East. A noteworthy point of the deal is that none of nine participating banks are Islamic institutions. The new murbaha facility will provide GFH with short-term funding to meet general contingency requirements.

HSBC launches Malaysia’s first Islamic Dual Currency Structured Investment

HSBC Bank Malaysia Bhd has launched Malaysia's first syariah-compliant structured investment product, the HSBC Amanah Islamic Dual Currency Structured Investment (Amanah).

The product is a two-component investment product, comprising the Commodity Murabaha-i and the Unilateral Promise to Exchange Currencies. Under the Commodity Murabaha-i, investors can invest funds via the purchase and sale of an underlying commodity on which the commodity and profit rate are pre-agreed. While the second component allows investors to provide HSBC a Unilateral Promise to Exchange Currencies in a future time period whereby the amount of currencies to be exchanged is also pre-determined. With Amanah, investors can buy rights to a ‘halal’ commodity, such as copper, for a certain period. At maturity, the bank would return investors' capital plus returns for a re-purchase of the commodity rights by the bank. The Unilateral Promise component would not involve ringgit but only foreign currencies. The product has a minimum investment period of one month and the minimum investment sum for institutions and individual investors RM 250,000. As compared to conventional products, the Amanah Islamic Dual Currency Structured Investment product offers potential yields of up to 9 per cent.

HSBC has zeroed on Malaysia to establish it as a dedicated regional resource to handle HSBC Amanah's Islamic finance business in the Asia-Pacific region. HSBC Amanah's global Islamic finance is at present managed solely out of Dubai. Malaysia’s strategic location and its potential to create linkages between the Gulf Cooperation Council (GCC) region and the Asia-Pacific makes it an ideal location to promote Islamic finance in the region.

Brunei unveils plans for Islamic debt

The Sultanate of Brunei plans to introduce its maiden sale of Islamic debt this month with a 91-day commercial paper worth USD 92 million. The sale will be first in a series of planned sales by the government.

Since the government of Brunei has no external debt, the fundamental reason for the sale is to develop Brunei as an Islamic market. As part of its issuance plans, the government launched an open-ended program, called the Short Term Government Sukuk Al-Ijarah program, that will allow for issuance of commercial paper with maturities of up to one year. The debt will use the ‘Ijarah’ - or sale and leaseback principal. Brunei has set up two special purpose vehicles, Sukuk Holding Properties Inc and Sukuk (Brunei) Inc for aiding the debt sale. The Land Department will first transfer the assets to Sukuk Holding Properties who will issue certificates to Sukuk (Brunei). The latter will, in turn, sell the certificates to five primary dealers; local banks Baiduri Bank Group and the Islamic Bank Brunei and foreign banks Citibank Inc, HSBC and Standard Chartered Bank. The government will lease back the assets and the rental payments will be used to pay the dividends to the debt investors. Though initially the sales will go through five primary dealers using a book building process, the government may adopt an auction process later.

The government Islamic debt issue is likely to be followed by local corporate issues, as they will now have a benchmark. The government also plans to work on other Islamic structures like ‘Mudharabah’ or ‘Musyrakah’ in future.

First Islamic bond index will be launched soon

Dow Jones and Citigroup will launch the world’s first Shariah compliant bond index in a bid to meet the rising demand for innovative Islamic investment instruments and to facilitate increasing cross-market trading.

The Dow Jones Citigroup Sukuk Index is scheduled for official launch on April 2, 2006. The index will include investment-grade, dollar-denominated Islamic bonds, issued in the global market. The index will initially consist seven bonds coming from Islamic Development Bank, Solidarity Trust Services Ltd, BMA International Sukuk, Qatar Global Sukuk, Malaysia Global Sukuk, Sarawak Sukuk and Dubai Global Sukuk. The bond needs to meet certain parameters to be included in the index. These include compliance with both the Shariah law and the Bahrain-based Auditing and Accounting Organization of Islamic Financial Institutions standards for tradable sukuk, maturity due within a year, a worth of at least USD 250 million, and being implicitly rated at least Baa3/BBB- by at least three rating agencies.

The new index will enable banks to structure new products around the index and attract Muslim high net-worth individuals and retail investors to the Islamic debt market. In the global bond market, Islamic financing is one of the fastest growing sectors. The Islamic debt market is currently worth about USD 300 billion. As interest payments are banned under the Shariah law, bonds are structured like an asset sale, rental agreement or profit sharing arrangement where the investor can partake in a borrower’s profits. The rise of Islamic bonds as an important asset class can be gauged from the response that Dubai Ports World received for its sukuk issue.

Al Masref all set to emerge as largest Islamic bank

Gulf Arab investors have announced plans to raise $10 billion to make Al Masref bank the world’s largest Islamic bank. The bank was licensed last month by the Bahrain Monetary Agency (BMA) to operate as a commercial and investment bank that complies with the Shariah principles.

The bank will begin operations with a capital of $5 billion and will further raise that to $10 billion in the next five years. The bank plans to raise a part of the initial USD 5 billion investment through a public offering this year and the rest through a private placement. The size of the IPO will depend on demand from private investors and will be open for subscription to foreign investors. Once the financing plan goes through, Al Masref will be the world’s biggest Islamic bank.

Gulf investors want to take advantage of the flourishing regional market for project finance. Soaring demand for oil and thereby increasing prices have made the region cash rich, with a substantial portion of the money going into infrastructure development. A lot of foreign banks are rushing into the region for project financing, but participation from local banks is very low as they lack the scale required to handle these projects. Al Masref plans to take advantage of this situation and emerge as a leading project financer in the region.

The Middle East has the second largest share of project finance in the world. The number of infrastructure projects in the GCC regions have grown significantly in recent times and are expected to go up by up to 50 per cent in 2006. This represents an enormous opportunity for local banks in project financing and capital market opportunities. It is the right time therefore for regional banks like Al Masref to scale up their operations and compete with the global majors.

Maybank launches Islamic products in Singapore

Maybank, Malaysia’s largest Islamic bank, has launched Islamic deposit products in Singapore. It is the first foreign bank in Singapore to introduce deposit accounts in compliance with the Shariah.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maybank has introduced two deposit products—an online savings account called iSAVvy Savings Account-i, with ATM access plus a special dividend-on-dividend feature, and a savings-cum-checking account known as PremierOne Account-i. These accounts will be based on the Islamic concept of ‘Al-Wadiah Yad Dhamanah’ or guaranteed safe custody, which means that the bank will guarantee the principal, but the returns will be based on its investments. The Islamic Banking accounts can be opened at any of the seven specified branches in Singapore, while the operations of the accounts can be carried out at any of Maybank’s 22 Singapore branches. The ‘Hibah’ or token on the accounts may be declared in the form of dividends. Maybank has assured that the dividends offered to depositors will be at competitive rates. The bulk of deposits received will be invested in Singapore itself, as investment overseas will involve exposure to foreign exchange risk, something which is not allowed under Islamic law.

The deposit accounts will serve as test products for Maybank in identifying the potential of the Singaporean market for Islamic finance and banking services. Depending on the success of these initial offerings, Maybank will consider the opportunities for expanding the product range of Islamic retail banking, Islamic term deposit and wealth management services and trade financing and project financing under the ‘Murabaha’ concept of profit sharing.

Singapore is an international financial center offering a wide range of financial products and services. It is Asia’s banking hub with expertise in Asian banking, wealth management and other financial domains. Thus, Singapore offers an ideal market for Maybank to spread out its Islamic banking operations.

 

Malaysia’s YTL Corp launches its first REIT IPO

YTL Corp has launched the IPO of its first property fund that is expected to raise around 523.4 million Malaysian ringgits (USD 90 million). The fund, called Starhill REIT, would be the second REIT to be listed in the country after Axis REIT Managers Bhd, which raised about RM 123 million in its IPO in August. Starhill will list on the Kuala Lumpur Stock Exchange on December 16.

Starhill REIT is offering 509.6 million new shares in its IPO, of which 30 million units will be sold to retail investors at RM 0.98 each and the rest to local and foreign institutional investors at an indicative price of RM 1.03 per unit. The REIT expects to distribute 100 per cent of its net income to shareholders for the first two years and 95 per cent in subsequent years. Starhill REIT’s assets comprise the Lot 10 and Starhill shopping malls and the JW Marriott Hotel—all located in Kuala Lumpur, with a combined market value of around RM 1.15 billion. Starhill will use 80 per cent of its proceeds to add more assets to its portfolio. The trust will target properties in Malaysia, Europe and US.

Starhill REIT is expected to draw a lot of interest from investors, as its properties are upscale, strategically located and have high occupancy rates and quality tenants. Government’s revision of REIT guidelines last year coupled with a positive outlook on the country’s property, retail and tourism sectors is drawing a lot of attention towards REITs in Malaysia. Incidentally, the government has recently unveiled guidelines for Islamic REITs as well.

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Singapore jockeys for position as center for Islamic banking and finance

At a time when Middle Eastern countries are diversifying their investments away from US and Europe, Singapore is positioning itself as a center for Islamic finance, wealth management, infrastructure finance and health care. Against this backdrop, Singapore’s Senior Minister Goh Chok Tong has asked Singaporean companies to target Middle Eastern nations including Qatar and Bahrain for future growth. Singapore’s investment in the Middle East has doubled to SGD 800 million from the year 2000 to 2004 while investment from the Middle East to Singapore has gone up from SGD 400 to SGD 700 million.

Surging oil prices are pumping a lot of money into the Middle Eastern economies. This money is in search of Islamic finance opportunities. Taking advantage of this, Singapore and Malaysia are transforming themselves into hubs for Islamic finance. Singapore plans to introduce an Islamic stock index and offer Islamic insurance services. Further, to counter competition from Malaysia, Singapore is also attempting closer ties with banks and regulators in the Middle East.

Apart from Islamic finance, Singapore is also promoting tourism to attract the Middle East. Singapore has substantial Muslim population and hence feels that travelers from the Middle East will have no problems regarding access to places of worship and cultural attitudes. The government’s tourism agency opened an office in Dubai two years ago.

Just like Singapore, many economies are realizing the importance of Islamic financing. For any market to position itself as a complete financial center it has become essential to incorporate Islamic finance. Like the US and Europe, Asian markets too need to work on this concept and attract investment from the Middle East.