Thailand, a multi-religious country, witnessed the launch of the first Islamic Bank, known as the Government Savings Bank, in 1998. A year later, the Bank for Agriculture and Agricultural Cooperatives (BAAC) introduced Islamic windows in certain areas in Bangkok and southern Thailand. By 2001, Krungthai Bank opened its Islamic banking branch in southern Thailand which was subsequently bought over by the Islamic Bank of Thailand (IBT). Thailand has a clear intention of setting up an Islamic bank under the government’s jurisdiction with its own set of laws; hence the drafting of The Islamic Bank of Thailand Act by the ministry of finance (MoF) which was approved by parliament in October 2002.
In 2007, Thailand passed the Trust for Transactions in Capital Market Act B.E. 2550 which initiated the concept of trust for the benefit of capital market transactions. The establishment of the Trust Act by the Securities Exchange Commission (SEC) paved the way for the issuance of Sukuk, i.e. Sukuk Notification, which took effect in January 2011. This notification shall be used for Sukuk Issuance and Offering, defined as “the financial instrument from the Islamic principle (Shariah) with the characteristic of a Trust Certificate issued by the asset trustee”.
The SEC is also working with related agencies to amend the related notifications for different types of investors to invest in Sukuk, including mutual, provident and government pension funds as well as financial institutions and insurance companies.
Review of 2011: A focus on Islamic capital markets
On asset management, CIMB-Principal Asset Management Co. (Thai) (CPAM (T)) will be offering two Shariah compliant mutual funds. Based on a feeder fund concept, two new funds will be created in Thailand which will feed 100% into CPAM’s existing funds domiciled in Malaysia (i.e. CIMB Islamic Enhanced Sukuk Fund and CIMB Islamic Global Commodities Equity Fund). CPAM (T) will then offer the funds to financial institutions in Thailand where there are gaps in their offering to their retail investors. IBT for instance can add these funds to its wealth management product offering.
The prospectuses have been submitted to the SEC for approval and have been endorsed by CIMB Islamic Shariah Committee, even in the absence of guidelines on the formation of Shariah compliant funds (we understand these are currently in the works). Currently, there are three Islamic funds domiciled in Thailand: MFC Islamic Long Term Equity, KTAM-Krung Thai Shariah LTF and KTA-Krung Thai Shariah RMF.
Sukuk
The discussions on the release of the Sukuk Notification started since 2010; the SEC initiated a series of active discussions with the stakeholders of the capital market industry, including representatives from IBT, CIMB Group and Baker & McKenzie, forming part of the SEC Sub-Committee, which oversees the drafting and releasing of applicable regulations signifying Thailand’s commitment to developing the Islamic debt capital market.
The main highlights of the Sukuk Notification include:
• The definition of Sukuk as a financial instrument being a trust certificate issued by an asset trustee.
• Requirement of two advisers: (i) A legal advisor who gives an opinion as to whether or not the trust instrument is enforceable under the law; and (ii) A Shariah advisor who will issue an opinion on whether the characteristics of such Sukuk comply with Shariah principles.
• No mention on Shariah principles allowed. However, the principle/s must be determined for the purpose of utilizing the Sukuk issue proceeds to seek benefits in the forms that comply with the Shariah principles.
Despite the existence of the Sukuk Notification, no Sukuk has been issued to date, due to the outstanding tax issues. In May 2011, the cabinet of Thailand approved the proposal for tax relief for transactions in relation to Sukuk issuance, including value added tax and special business tax, aimed at achieving a level playing field for Sukuk. It is currently being assessed by the Council of State before being passed into law.
Offshore, Trans Thai-Malaysia (TTMT)’s debut serial Sukuk issuance (via a 100%-owned Malaysian Special Purpose Vehicle, TTM Sukuk) stands out as a landmark cross-border Sukuk deal. The US$190 million-equivalent Sukuk, under the principle of Murabahah, was utilized for the refinancing of Phase II of TTMT’s pipeline project. The sponsors are Thailand’s national oil company, PTT Public Company (Petroleum Authority of Thailand) and Malaysia’s national oil company, Petroliam Nasional (Petronas), each with a 50% stake. The transaction marks numerous ‘firsts’ and is a momentous achievement: including;
(i) The first Thai incorporated entity raising funds from the ringgit market via a ringgit-denominated Sukuk;
(ii) The first foreign entity to raise project financing via a Sukuk in Malaysia and;
(iii) The longest issue of Sukuk in Malaysia of up to 15 years by a foreign issuer. CIMB is the joint lead arranger, manager, bookrunner and Shariah adviser.
On the Equity front there is a Dow Jones Islamic Market (DJIM) Thailand Index and Thailand also makes up part of the DJIM Asean Index, indicating there is a respectable number of Shariah compliant companies listed on the Thai stock exchange. As at the end of November 2011 there were 37 components in the DJIM Thailand Index, or approximately 27% of its parent benchmark index in terms of market capitalization.
Preview 2012
The IBT is likely to be the first issuer of baht-denominated Sukuk in Thailand. It is currently awaiting clarification on the tax relief for Sukuk before proceeding with the landmark issuance, which will inevitably pave the way for other state-owned entities to issue Sukuk. The Thai bond market is only second to Malaysia within the Asean region and we should expect a flurry of activities in the Sukuk market amongst the Thai issuers once the relevant laws have been passed and the tax issue has been resolved.
Dr Subhak Siwaraksa is president & CEO of CIMB Thai Bank while Badlisyah Abdul Ghani is the executive director/CEO of CIMB Islamic Bank. They can be contacted at
[email protected]
and
[email protected]
respectively.