Following the phenomenal success of the inaugural Malaysian Islamic Finance conference last year, Malaysia has once again successfully hosted the MIF Issuers and Investors Forum on the 13th and 14th August 2007 at the Mandarin Oriental, Kuala Lumpur.
MIF 2007 focused on Malaysia’s role as the dominant force in Islamic finance and how it could function to link the Middle East and Asian countries. Keynote addresses were delivered by Dr Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, and Dr Nik Ramlah, senior executive director of the Securities Commission. On the first day, the issuers day, there were about 450 attendees with approximately 19% international participants. While the second day – the investors day – witnessed the attendance of 420 participants including 24% international delegates. The delegates for both days came from over 35 countries across the globe.
Dr Zeti’s keynote address highlighted five major trends that have a significant bearing on the future development of the global Sukuk market:
1. The bond market is becoming a vital tool to meet the funding requirements for both the public and private sectors in emerging market economies. Thus, the development of the Sukuk market will provide opportunities for the corporate sector, government agencies, multinational corporations and multinational development institutions to raise funds through the issuance of Sukuk to meet their financing requirements. 2. The demand for Sukuk significantly exceeds supply. This significant demand has been spurred by high levels of surplus savings and reserves in Asia and in the Middle East. 3. There is a great number of global players such as investment banks, Islamic banks and securities firms that are involved in the issuance of Sukuk in the international financial markets. 4. The established international financial centers have shown their interest in playing an active role in promoting the development of the Sukuk market, including enacting the appropriate legislative provisions. 5. The evolution of the regulatory and supervisory paradigm has witnessed significant global shifts in the approach to regulation and supervision across many countries.
Dr Zeti also highlighted the potential of the Malaysian Sukuk market and its linkages with other international Islamic financial systems. “This would facilitate greater cross-border flows and not only contribute towards enhancing greater international economic and financial integration, and the global growth, but also towards financial stability in the international financial system,” she said.
The panelists on the issuers day discussed various topics that focused on the effect of the US sub-prime market on Sukuk issuance, the benefit of rating, the need to establish institutional investors (Takaful and pension funds) and also Japan’s interest in issuing its first Sukuk. The sub-prime market credit crisis in the US has indirectly caused issuers to pay attention to the timing of the issuance. “The sub-prime market does impact the bond market. In the Islamic space there were a few transactions cancelled because the issuer felt the time was not right to go into the market. In my opinion, the current credit crises will bring some bad and good news. The bad news is, the issuer will face more covenants and a thin pricing. Nonetheless, there is considerable amount of liquidity in the market and the Sukuk issuance will keep on continuing,” said Salman Younis, the managing director of Kuwait Finance House Malaysia.
Rating brings various benefits to the issuer – most important being the ability of the issuer to reach a wider investor base. According to Yakub Bobat, the managing director of HSBC Amanah (Malaysia), most of GCC Sukuk issuance came from well recognized GCC companies that did not require rating due the excess liquidity available. However, as the market is developing and with the current credit crunch, it is vital to have rating in order to reach investors other than just GCC investors. Yakub added that most companies avoid rating due to cost considerations. Rafe Haneef, the head of Islamic at Citigroup Asia, said that rating would be extremely helpful to determine the best price of issuance. “If an issue is not rated, the investors would have to do their own credit analysis and will come up with different pricing due to different method used. When rating is done, then its easier to make a peer comparison. For example if we are given a BBB rating, we can look at the trading price of other BBB securities to determine our price,” he exemplified.
In discussing the non-existence of a secondary trading market for Sukuk, the limited number of Sukuk issuances currently is said to play a role in non-trading, because if the Islamic banks sell the Sukuk that they invest in, then they do not have a replacement asset. Besides increasing the mass of issuance, Rafe Haneef highlighted that it is important to develop institutional investors (Takaful and pension funds) because these are the type of investors that will be interested in the fixed income, longer term Sukuk, because they need more conservative and stable investment avenues. “In the GCC region, most issuance are floating rate notes (FRN) that will attract financial institutions. If we look at Malaysia, more fixed income securities are issued in order to attract the institutional investors. Thus there is a global need to establish more Takaful and pension funds if we would like to see more longer term Sukuk issuance and trading in the secondary market,” he concludes.
Last but not least, the final session of the issuers day witnessed how Japan is seriously interested in the Islamic finance market. Tadashi Maeda, the director general of Japan’s planning and co-ordination division, said: “The size of the Muslim community in Japan is neglible, therefore the move of Japan to enter the Islamic finance industry is a strategic move rather than a commercial one. We are aiming to play a key role in Asian Islamic finance. Japan has been buying oil and gas from the Middle East, thus we would want to use Islamic finance instruments to fund these transactions,” he enlightened.
Dr Nik Ramlah Mahmood, the senior executive director of Malaysia’s Securities Commission, highlighted during her keynote address on the investor’s day that the single most important catalyst for the development of the Islamic capital market products and services in Malaysia was the establishment of the Shariah Advisory Council (SAC) at the Securities Commission. “Not only is the SAC able to respond to inquiries and proposals from the industry, often times, the SAC is also able to make pronouncements to encourage innovation from industry. The guidelines issued by the SC such as those on Islamic unit trusts, Islamic REITS and Islamic securities, always attract considerable interest from across the globe,” Dr Nik enlightened.
Dr Nik also added that in order to encourage the structuring of new and innovative products, the government have introduced tax incentives for the use of globally accepted Shariah structures. “In relation to this, the government has provided tax incentives on expenses incurred on Sukuk issuance under the Shariah principles of Musharakah, Mudarabah, Istisnah and Ijarah because the issuance of Islamic securities based on these Shariah principles is expected to draw greater interest from foreign investors, particularly from the Middle East since these principles are more well-known in the international market,” she elucidated.
Among other issues that were discussed on the investor’s day included the benefit of investing in Malaysia, the investment opportunities prevalent in the market and also the challenges that exist in the Islamic finance industry. Daud Vicary Abdullah, the chief operating officer of Asian Finance Bank, said that the biggest advantage that Malaysia has is a clear articulation of plans by the government. “The Malaysian government has in a place the Financial Sector Master Plan that has been carefully planned and executed. This creates and connects the environment in a financial system – namely the banking, Takaful and money market. Malaysia also has a strong legal, tax and regulatory environment.”
According to Daud, sectors that will bring about a lot of opportunities in the Islamic banking industry include traditional sectors like real property and infrastructure and more recent industries such as transportation (shipping and aircraft). Keith Driver, CEO of HSBC Amanah Takaful, highlighted that Malaysia and Indonesia have the most potential for growth. “If we analyze the population structure of these countries, the majority is made of a young population. However, these younger generation are not attracted to buy insurance. What do we need to sell to them? We need to come out with a product to cater for this segment. Nonetheless, this younger generation will eventually get older and there is our future prospective client for Takaful. That’s why there is high growth in these markets.”
It was also agreed that Indonesia’s market represents the awakened giant. However, efforts to improve on the regulatory framework are vital before development can take place in Indonesia. Besides Indonesia, India is also looking into developing its Islamic financial system. According to Taher Badshah, the investment advisor of Kota Mahindra Investment, India has promising opportunities because it has strong economic growth and quite a large Muslim population (10% of the population is Muslim). “There is no Islamic banking available to the Indian population, however we have a strong equity market. A large number of Shariah compliant corporations are based in India. That’s why we are currently looking at Shariah compliant investment fund activities. For the time being we are issuing funds for investors outside of India. Eventually we will develop investment products for the local Muslims investors,” he highlights.
The discussion on the second day revolved around challenges facing the Islamic finance industry. These include the need to modify the expectations of an investor. Currently, investors come into the market with the expectation of making high returns but only taking a low risk. This is where consumer education could play a role. An acute problem in Islamic finance at present is the issue of human capital. We lack qualified and experienced Islamic bankers, investment bankers, marketing teams, fund managers, lawyers, etc. This is where education and training plays a vital role to narrow the gaps in the workforce. Improvement of the regulatory framework is also fundamental to bring the industry forward because sometimes the law of the land acts as the impediment of the industry. Last but not least, there is a vital need to work towards Shariah harmonization.
Concluding the two-day event, Abdulkader Thomas, the event chairperson, wrapped up the forum with an interesting thought. “Islamic finance has concentrated a lot on real estate projects. There were concerns raised from the audience that Islamic banks are over-exposing themselves on real estate. Despite that fact, the investment in real estate keeps on growing. Why? It’s due to our demographic factor. I will describe in simple three words – youth, vigor and shortage. Most emerging economies have a young population who are dynamic and there is a shortage of supply of real estate. Thus, the real estate investment will continue for some time in the future.”