Despite a cautious outlook by Asian corporates and a drop in the region’s business sentiment index due to volatility across emerging economies, NAZNEEN HALIM believes that Asia remains as a beacon of hope for conventional and Islamic businesses alike.
Continued deleveraging in Europe and an almost palpable unwillingness amongst investors to park their money and investments in the continent has created a myriad of business opportunities in Asia and other markets outside of the Eurozone. However, recent announcements by the US Federal Reserve to taper down its investments in emerging markets has without a doubt had an impact on Asian currencies, bonds and equities over the last few months.
As illustrated in the Thomson Reuters/ INSEAD Asia Business Sentiment Index, readings in Q3 fell to 66 from 71 in the second quarter of the year. According to market commentators, this was mainly driven by declines in the shipping and corporate sectors, with Asian corporates are still assessing their global growth outlook. Rating agency Moody’s expects industrialized and developing countries to experience economic volatility in light of tightening monetary policies in the US, but the impact is likely to be limited and temporary at the sovereign level.
In terms of Islamic finance, however, Asia is still seen as the global destination of choice for endless opportunities. A rare and interesting mix, countries in Asia with Islamic finance capabilities already have sound regulations and structures in place, but are also open to new business and development opportunities. One of the more prominent markets in Asia and the world for Islamic finance, Malaysia has suffered quite a blow this year, following a sovereign ratings downgrade coupled with a negative outlook and a weakening currency, as fears of a possible recession have begun to seep into the market. Nonetheless, a senior banker in Malaysia told Islamic Finance news: “We are looking forward to some major deals which are expected to close before the end of this quarter, and although mostly domestic, things are looking up for the corporate Sukuk market and there are also some global deals in the pipeline.”
Ahsan Ali, managing director and head of Islamic origination at Standard Chartered in Dubai says that Asia is an interesting prospect for issuers in particular, due to its active trading market. Compared to other countries, he says, Malaysia is attractive to issuers who are looking to list due to an investor base who are familiar with investing in Islamic securities and are less likely to have a buy-to-hold mindset. Testament to this, Al Bayan Holding, a major Saudi Arabian conglomerate this year, chose to issue a ringgit-denominated Sukuk; and although the amount was not massive – issued at RM200 million (US$65 million) — market players believe that this bodes well for future international issuers to tap into the Malaysian market.
Recently, one of the largest banks in the Eurozone, Societe Generale (Soc Gen) came to market stating plans to launch a RM1 billion (US$302.69 million) Sukuk in Malaysia with the first tranche due before the end of this year. The planned issuance, which is still pending regulatory approval from the Securities Commission Malaysia is expected to open up the bank’s distribution base and create diversity of its funding sources.
Commenting on the issuance, an industry analyst said: “Being the largest Sukuk market in the world, Soc Gen’s decision to issue in Malaysia was driven by liquidity woes arising in Europe. It is also buoyed by the depth and pricing of the country’s Sukuk market.”
Out of the 20 most recently issued global Sukuk since April 2013, 16 issuances have originated from Asia, with Malaysia commanding the lion’s share at 12, totaling at US$2.92 billion, followed by Indonesia with two issuances worth US$1.69 billion and Singapore with two domestic public issuances worth US$275 million.
Beyond Sukuk
According to data from the Malaysia International Islamic Financial Centre (MIFC), the total market for Islamic funds globally reached US$65.1 billion in 2012, growing at an average of 11.2% a year. The report further elucidated that this growth has been driven by the steady economic performance and rising wealth of high net-worth individuals in Asia and the GCC, as more than 70% of Islamic funds are centered around these two regions.
In a recent interview, Noripah Kamso, industry maven and advisor at CIMB Islamic shared her experience through her dealings with sovereign wealth funds and what appeals to them when it comes to choosing an investment vehicle: “When I met with one of the top three sovereign wealth funds based in the Middle East, it was clear that their holy grail is performance — not faith or anything Islamic, although they do invest in ethical funds. It has to be mentioned that Islamic funds have been outperforming some conventional funds, and it is important to know the characteristics in these stocks that leads to this outperformance. Islamic funds typically cover technology, healthcare, oil and gas; whereas conventional funds cover financials, industrials and consumer goods.”
In Asia, Pakistan and Malaysia are perceived as the strongholds for Islamic funds. Two out of the top five best performing Shariah compliant funds in the world are domiciled in Pakistan and managed by Atlas Asset Management and Al Meezan Investment Management, while Malaysia’s Public Mutual ranks fourth, followed by Jadwa Investment’s Saudi Equity Fund in fifth place. According to data from Bloomberg, there are currently 46 Islamic funds domiciled in Pakistan; making up almost a quarter of the total funds listed in the country. Further data has suggested that the Islamic funds industry constitutes 12% of the entire asset management industry in Pakistan; with industry players constantly pushing for more uptake of Islamic products to create growth beyond the current levels.
Recently, the Securities and Exchange Commission of Pakistan established a Shariah advisory board to oversee transactions by Islamic financial institutions and those which fall under the Islamic capital markets. The move is also expected to boost awareness of Islamic financial products within the republic as the Shariah advisory board will also take on educational activities pertaining to the understanding of Shariah principles and the introduction and implementation of new Shariah compliant models and products. Commenting on the prospects for Islamic funds in Asia, the governor of the Central Bank of Kuwait, Dr Mohammad Y. Al-Hashel said: “Estimates suggest that as of 2010, around 12% of the US$25.2 trillion in total assets under management in the US is invested in socially responsible investing. Since developing countries in Asia have far more opportunities for high return investments than in advanced economies, it will be beneficial to achieve future growth by promoting investments that are community-oriented and socially beneficial.”
Real estate funds have been touted to be the next big thing within the Islamic funds industry in Asia. In May this year, HSBC predicted urban infrastructure requirements in Asia to reach levels of US$11 trillion, or 80% of the region’s entire GDP between 2010-2030. Malaysia and China are currently ranked highest amongst the ‘Take-off economies’, recording the largest growth in urbanization since 2000, and this sector is expected to be a key driver of infrastructure investment over the medium-term. Real estate funds are also moving towards Europe and Asia, as these markets become hotbeds for real estate investments and as a means for fund managers to diversify their investments beyond North America, following the credit crisis.
The Takaful industry, despite its growth challenges on a global scale, continues to thrive in Asia due to encouraging growth in Malaysia and Indonesia in particular. However, Takaful penetration in these countries are still low, with Family Takaful in Malaysia commanding an 11% market share and charting a compound annual growth rate of 27% between 2005 and 2010, and overall insurance penetration in Indonesia at levels below 2%. According to the Ernst & Young World Takaful Report 2012, Brunei, Indonesia and Malaysia are expected to be the main markets for Takaful growth in Asia moving forward, with gross Takaful contributions from these three countries reaching US$2 billion last year. Although Indonesia, with its high Muslim population, has been identified as a market with great potential in this sector, profitable growth for Takaful is still said to be a main concern in the republic.
Canadian Insurance company Sun Life Financial recently made its foray into the Asian Takaful market via its acquisition of CIMB Aviva Takaful. The new entity, Sun Life Malaysia Takaful will focus on both the Malaysian and Indonesian market despite being based in Malaysia. Kevin Strain, president of Sun Life Asia commented: “There’s a lot of sharing we can do between Indonesia and Malaysia based on the Takaful business. And as we expand across the region, I think there would be pockets where Takaful would also be important. So primarily, it’s Malaysia and Indonesia but I can see it being important for us in the broader sense of the word.”
Regulations for Takaful on a global scale are said to still be lacking in most countries, particularly in the GCC. In Asia, Malaysia has taken the lead in terms of regulatory advancements, with the upcoming risk-based capital framework in 2014 seen as a boost to the Malaysian Takaful industry. Commenting on this, Ahmad Rizlan Azman, CEO of Etiqa said: “This framework will strengthen and align individual operators’ solvency and capital position according to their respective risk profiles. The introduction of the RBC for Takaful will mitigate issues of capital insolvency to create a financial buffer for Takaful operators against any exposure to risks.”
Let the good times roll
Regional tie-ups through initiatives such as the ASEAN Free Trade Area (AFTA) agreement are also expected to further boost Islamic banking initiatives, especially in countries such as Indonesia. It has been reported that following the establishment of the AFTA Council, the minister of state-owned enterprises, Dahlan Iskan said that the government will look to establish a state-owned Shariah bank either through the merger of several Shariah compliant entities, or through the conversion of a government-owned bank.
With all eyes now on Asia especially in terms of infrastructure development, SME financing, microfinancing, Takaful and capital markets growth, Islamic banking and finance in the continent is on an upward growth trajectory. Strong government support and regulatory progress, as well as increased focus from international financial institutions, all bode well in guaranteeing that the Asian continent sees a continuous flow of liquidity, particularly from the Middle East and Europe.