Issuers Day
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, 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 was 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, CEO of Maldives Islamic Bank; Krishan Thilakaratne, 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, 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.
INVESTORs Day
On advancing the sustainable development of the Islamic capital markets in Asia, Dr Khaled Al Fakih, secretary-general and CEO of AAOIFI, highlighted the importance of having deep and liquid capital markets, regional financial harmonization and integration and deployment of Asian liquidity into the Asian economies. He said that these may be achieved through promoting the issuance of local currency on the supply side and facilitating demands for local currency bonds on the demand side. Improving regulatory framework and enhancing related infrastructure for the capital instrument markets also remains a priority.
Commenting on the Islamic investment environment and market trends, opportunities and strategies, Noripah Kamso, the advisor to CIMB Islamic, highlighted the role of ASEAN countries in developing the global Islamic finance market. Noripah also pointed out that there is a flight to the emerging markets and that the global financial industry cannot afford to ignore the ASEAN region as it has witnessed strong economic growth in recent years. Greater economic stability, a high youth population and other required factors act as growth drivers, she said, and that there has been tremendous growth especially in Malaysia, Indonesia, Thailand, Singapore, the Philippines and Vietnam.
Stella Cox, the managing director of DDCAP Group, also a panelist during the first session, opined that the property investment market is developing in African countries and that the continent is definitely on the growth radar of jurisdictions heavily involved in Islamic finance as Africa is developing its links with the major markets of the world. Countries such as Nigeria, Kenya, South Africa, and Morocco are addressing issues and trying to create a working capital markets environment including the Islamic capital markets.
She also pointed out that Islamic banking is persistently developing in CIS (Commonwealth of Independent States) countries such as Kazakhstan and Azerbaijan, and Kazakhstan has already developed its market through enabling a framework for Islamic banking through its legislations and regulations.
Norashikin Mohd Kassim, the treasury director at Bank Islam Malaysia, shed light on the industry’s development when she said: “We are facing innovation in Islamic space on a daily basis.” She further pointed out that the trend is moving towards issuing longer-term Sukuk, which is vital to the industry citing the government of Malaysia’s 20-year issuance. With the expanding base of Sukuk investors, there has also been development of the retail Sukuk market. Sukuk product innovation is said to have seen phenomenal development in recent years, with the offering of overnight Sukuk and perpetual Sukuk for Tier-1 capital.
According to Jonathan Grosvenor, the general manager of global financial markets at Luxembourg’s KBL European Private Bankers, emerging markets have outperformed the developed markets in recent years but liquidity still remains a concern. “There is a strong indication that over the next 12 months or so, there might be chances that money will start to flow back into the US markets,” he said.
During his presentation on standardization in the Islamic capital and money market, Ijlal Alvi, the CEO of the International Islamic Financial Market (IIFM), underlined the need for increased cooperation among the players and the crucial role of liquidity management. In order to achieve this, he highlighted, there should be two main approaches taken to develop the Islamic financial market: the first is through standardizing existing practices and creating standards through innovation. Increased market consultations, enforceability of standards, a suitable legal environment and law reforms should also be areas of priority, he said. Additionally, there is a need for research on the applicability and practice of these standards, Ijlal pointed out.
During the session on the role of Islamic finance in the growth and development of the wealth management sector in Asia, prominent asset managers with Shariah compliant portfolios including: Angelia Chin-Sharpe, CEO of BNP Paribas Investment Partners Malaysia; Gerald Ambrose, CEO of Aberdeen Islamic Asset Management; Nor Rejina Rahim, the managing director of Nomura Asset Management; and Sandeep Singh, the country head (Malaysia) and CEO of Franklin Templeton Asset Management discussed the current challenges facing the growth of this industry.
The crux of the discussion revolved around the lack of a track record in Islamic wealth management and the current inability to attract investors. “There is always a lot of talk about how much Shariah money there is but if we take a look at the statistics in terms of how much investors have invested in, it is not as big as we’d like to see,” elucidated Chin-Sharpe. “Though we are seeing more and more Islamic financial institutions being set up, especially in the Middle East and in this region, the take-on of Islamic products has nonetheless been slow,” she added.
Aside from that, the panellists identified the issue of product portability across borders as another challenge for the expansion of this sector, which is said to be very localized or regionalized, along with the issue of differing regulations in different jurisdictions with regards to fund distribution channels. They remained cautiously optimistic, calling for more concerted efforts not only from Islamic financial institutions but also from regulators, to recognize Islamic finance as a separate asset class.
“The average of high net worth individuals in Asia has about US$180 million in assets and in the Middle East it is about US$890 million as compared to the global average which is about US$150 million. So there is plenty of room and opportunities,” said Nor Rejina.
And as Singh concluded: “Rome was not built in a day.” So with more time, effort and perseverance from players and regulators alike, the industry is believed to continue its growth to the level we’d like to see it at.
In the session on Islamic real estate, Richard Thomas, the chief representative of Gatehouse Bank in Malaysia, suggested that there needs to be more investor confidence in the laws regulating investments in the industry to ensure the industry’s success; citing the progressive activity in the UK real estate market and investor confidence in its legal system as examples. He also suggested that the real estate sector should be industrialized, as this will also assist in making investors more comfortable and that they can ensure their protection under the law. An area that should be focused on is residential property and the ability to develop and securitize the sector.
Stephen Pyne, the managing director of Guidance Investments, stressed on the importance of recruitment of quality human capital and extensive research in order to understand investor demands as well as the industry itself. He said that a “top-down, bottom-up” investigation should be carried out in delivering good investments. Pyne also urged for an increase in participation in Shariah compliant real estate.
In the Takaful and re-Takaful sector, the panel speakers debated on the need for “out of the box” initiatives in terms of marketing Takaful products as well as product innovation. Speaking on the development of the Takaful industry, Hassan Scott Odierno, a partner at Actuarial Partners Consulting, said: “Insurance in Asia is pushed and not pulled,” explaining that Takaful operators must find different ways to market their products tailored to specific target markets. He added that micro-Takaful should only be available to the poor and the lower class and not to the middle or upper class. “It cannot seem as if it is a cheaper means of obtaining insurance. Agents should understand the products that they are selling to properly expound the value proposition it admittedly possess,” he said. Product innovation should also be monitored in terms of creating new schemes rather than replicating those that are already available in conventional insurance.