Islamic bonds spur interest in South Korea

Now is the time for Korean companies to tap into the rapidly growing $800-billion Islamic capital market, and Malaysia may be one of the best destinations for such companies hoping to raise capital from Muslim investors, said two top financial regulators from Malaysia, reports JoongAng Daily (Nov 21, 2009).
Dato’ Dr. Nik Ramlah Nik Mahmood, managing director of Malaysia’s Securities Commission, and Dato’ Yusli Yusoff, chief executive of Bursa Malaysia Berhad, Malaysia’s stock market operator, said a growing number of Asian companies, including those in Japan and Korea, are expressing interest in issuing bonds based on Islamic principles, which the two said will open a vast new market for the firms.
The two visited Seoul this week to attend the Islamic Finance Conference, jointly organized by Korea Exchange and Bursa Malaysia to help coordinate more financial cooperation among investors and companies in Korea and in Muslim countries.
“By selling sukuk [Islamic bonds], you will be able to attract not just conventional investors but another group of investors who would not have invested in conventional bonds, because they are required to invest in securities structured in line with Islamic financial principles,” Dato’ Nik Ramlah said in an interview with JoongAng Daily. “You’re not excluding existing investors, but you’re opening up to new groups. That’s a major attraction of Islamic bond issuance.”
Sukuk is an Islamic financial certificate working in a similar way to a bond in Western finance but structured in line with Shariah, Islamic religious law.
Since Shariah prohibits the use of interest-bearing securities, a sukuk issuer sells the certificates to the investors, who then lend the certificates back to the issuer for a predetermined “rental fee.” The issuer then signs a contract to promise to buy back the bonds later at par value.

Oil money
With investors in Western countries still reeling from the recession, a growing number of investors are considering a plunge in the Islamic financial market, which has been hit less severely by the crisis and whose economies still boom with oil.
HSBC recently estimated rising liquidity in Arab regions due to the oil boom would prompt the volume of Islamic bonds issued across the world to jump from about $7 billion this year to $14 billion in 2010.
Dato’ Yusli said he has met with officials from several Korean companies planning to issue sukuk and local stock brokerages trying to take part in the process.
“The companies are quite ready. I’m still waiting for some laws to be changed in Korea, then we will be able to assist them,” he said. “The whole legal, accounting, regulatory and systematic frameworks to issue sukuk are very well established in Malaysia.”
Dato’ Yusli also stressed that the modus operandi of Islamic financial principles offers a fresh antidote to today’s global financial system.
“After the crisis, investors are looking for far safer types of investment, and more of them are allocating funds for companies qualified under the ESG [environmental, social and corporate governance],” he said, referring to the global investment criteria for investing in companies with socially responsible management. “We believe that Islamic financial principles are compatible to these types of criteria, for instance, under Islamic law, investing in gambling, weapons or alcohol is prohibited.”
During the Seoul conference this week, Citigroup said Korean industries like autos, construction, manufacturing, retail, energy, machinery, telecom and transportation will be encouraged to attract Muslim investors.
Around 50 top local companies like Samsung Electronics, GS Caltex, SK Telecom, Lotte Shopping, Posco and Korea Airlines and Hyundai Heavy Industries as such examples.
Dato’ Yusli said he has met with representatives from several companies on the list to discuss possible bond sale deals.
Dato’ Nik Ramlah also echoed the same sentiment, saying the Islamic financial principles, which put more priority in transparency and clarity in financial securities’ underlying assets, will offer more assurance to the global market that learned the lesson through the subprime mortgage crisis.
“In Islamic financial products, every conception or underlying contract should lead to the actual products, so you don’t have products that are derivatives on top of derivatives on top of other derivatives, where you don’t know what’s the real underlying asset,” she said.