The first day of the IFN Asia Forum saw industry players breaking from the norm and calling for a shift from the current suite of debt-based products into more equity-linked offerings. The first session, a panel discussion involving Malaysia’s most prominent dealmakers — Mohd Safri Shahul Hamid, the deputy CEO of CIMB Islamic; Rafe Haneef, the CEO of HSBC Amanah; Raja Teh Maimunah, the managing director and CEO of Hong Leong Islamic Bank; and Wasim Akhtar Saifi, the global head of Islamic banking, consumer banking and CEO of Standard Chartered Saadiq Malaysia, was brimming with new insight, as the bankers discussed new ways to capitalize on Asia’s position as an emerging market and the recent influx of local currency and foreign currency-denominated deals in Malaysia.
Among the suggestions during the session were the inclusion of China in the development of the global Islamic capital market space by illustrating the attractiveness of the premiums paid on Sukuk, as Chinese corporates are currently closing deals at an average of 300bps above the Sukuk market. The recent enactment of Hong Kong’s securitization law to include Sukuk is said to act as a conduit between the Chinese market and the Islamic capital market, while initiatives by the Malaysian International Islamic Financial Center (MIFC) were commended as a salient move to promote Islamic banking on a global scale. Sukuk structures were also said to be taking on new forms, as the market begins to venture more into the equity space, with Khazanah Nasional’s recent exchangeable Sukuk cited as an example.
Jawad Ali, the managing partner of the Middle East Offices at King & Spalding was candid in his presentation as he said that there are very few transactions at present which capture the essence of profit and risk sharing. He also said that the industry has to move beyond the current structures which mirror conventional offerings and at present are not in line with the Maqasid Al Shariah, or the ideals and objectives of Islamic law which rightfully should be the essence of every Islamic financial transaction.
During the second panel session entitled “Islamic capital markets and Sukuk: Innovation in regulations and structuring to support growth”, Ahsan Ali, the head of Islamic origination at Standard Chartered said that Sukuk has come a long way from being just a corporate funding instrument using fixed-income instruments such as Ijarah or Mudarabah to being a means to fulfil Basel III requirements for Tier-1 capital.
Ahsan also added that the market is moving towards more risk sharing and equity models and investors are increasingly encountering risk sharing equity models in the current environment, with more hybrid and equity Sukuk structures being introduced. Recent Sukuk issuances by Saudi Arabia’s Almarai and Abu Dhabi Islamic Bank were cited as prime examples of hybrid perpetual Sukuk. He said: “Corporate-based Sukuk has also moved on to become project-based Sukuk, which is more in line with equity and is also cheaper than quasi-Sukuk which are relatively expensive. This also translates to relatively higher returns. “
On the continued development of the Islamic capital markets in Asia and its sustainability, the panelists, comprising Ahsan Ali; Alhami Mohd Abdan, the head of international finance and capital markets at OCBC Al-Amin; Hitesh Asarpota, the director of capital markets and structured finance at Emirates NBD Capital; and Neil Miller, the global head of Islamic finance at Linklaters, agreed that markets with developed Islamic finance regulations are well-placed to meet the complex structuring requirements of Shariah compliant instruments. Reviewing the recent regulatory updates and central bank guidelines affecting Islamic finance transactions in Asia, the panelists pointed out that the recent Islamic Financial Services Act 2013 by the Malaysian regulators is a step forward in setting a precedent for other jurisdictions aiming to develop an Islamic finance market.
Asarpota said that the development of the Islamic capital market together with government support is crucial for the Sukuk market to develop, while Miller voiced his concern about the varying degrees of regulatory support throughout different markets around the globe, and how this might dampen the prospects for Sukuk. “For cross-border money to flow, it might be important to have consistent Islamic finance regulations across borders,” he said.
Other considerations that have to be taken into account in developing a sustainable Islamic finance market include human capital development driven by the industry, innovation and development in the debt capital markets, and the possibility of including SMEs into the greater scheme of things for the development of the Islamic capital markets. Responding to this however, Alhami said that there is somewhat of a mismatch between supporting SMEs via Sukuk as the Islamic capital markets is primarily driven by returns, and the SME market does not necessarily aim at getting good returns.
The Country Roundtable brought together a league of senior executive management professionals from key Asian emerging markets including: Harith Karun, the CEO of Maldives Islamic Bank; Krishan Thilakaratne, the CEO of Sri Lanka’s Al-Falaah, Lanka Orix Finance; Norfadelizan Abdul Rahman, the president director of Maybank Syariah Indonesia; Sabri Ulus, the head of treasury and markets of Bank Islamic Brunei Darussalam; Dr Serdar Sumer, the executive vice-president of the Capital Markets Group at Turkey’s Aktif Bank; and moderator Ahmed A Khalid, the regional head (Asia) of the Islamic Corporation for the Development of the Private Sector.
Despite belonging to different jurisdictions with unique financial environments, a common theme was raised by each panellist, which was: more work needs, and can, be done to further propel the industry forward, be it in relatively more “mature” markets with strong government support such as Brunei, or nascent markets such as Turkey and Sri Lanka or even smaller markets such as the Maldives where opportunities are limited but the panelists remain optimistic of its market outlook.
Another issue raised during the session was the dearth of corporate Sukuk issuances which, the panelists agreed, would help push and expand the Islamic financial base in their respective jurisdictions; calling for more active participation from the private sector.
“The problem is on the supply side, leading to unmet demands. Investment banks need to motivate more corporates to enter the Sukuk market,” said Dr Serdar. Thilakaratne concurred, adding that Sri Lanka needs large institutions to make the first move in the market especially since financial markets are complex and that they struggle to achieve large scale.
During the fifth session on real life issues and challenges facing Islamic issuers, key concerns such as standardization in terms of bureaucracy and regulations on a regional and global level remain the same and need to be addressed. As for education, Dr Mohammad Omar Farooq, the head of the Center for Islamic Finance, at the Bahrain Institute of Banking and Finance said that there should be a significant increase of education among Sukuk participants, and building trust and confidence in the industry are one of the few things that need to be improved on. Farmida Bi, a partner at Norton Rose Fullbright, pointed out that there are very few issuances originating from corporations and this is a phase that needs to be addressed to deepen the Islamic finance market.
In terms of human capital, David E Rich, vice president of depositary receipt services for Asia Pacific at Citi and Bishr Shiblaq, head of the Arendt & Medernach office in Dubai agreed with Farmida with regards to the need to balance fundamental knowledge in conventional finance with Islamic finance. She said that a “day-to-day” familiarity in Islamic finance products is needed for effective implementation. Dr Farooq also stressed on the importance of having “internationally portable” certifications, and that education systems and syllabuses between universities should not be conducted on a competitive basis.
During the Deal Roundtable, it was said that recent issuances have demonstrated the use of hybrid Sukuk which combines two or more structures. There is also a rising demand for funds to finance infrastructure projects to widen one’s investor base and to address company ratios. Chung Chee Leong, the president and CEO of Cagamas, said that Sukuk structures should continuously be made more compliant in meeting market requirements in order to remove concerns which arise from Sukukholders and potential investors. Mohd Izani Ghani, the CEO of Khazanah Nasional, called for more infra-financing among issuers for more funding and urged bankers to come up with more innovative structures for Sukuk issuances.