Sunday, February 23, 2014

HUMAYON: Malaysia's Islamic banking needs a big push

Based on the data available on the growth and development of Islamic banking in different parts of the world and with the help of an extensive research undertaking to construct Islamic Finance Country Index (IFCI), this year’s GIFR predicts that by 2020 there will be at least six countries in the world where Islamic banking and finance (IBF) will attain a market share of no less than 50% of the total financial sector in their respective countries.

These six countries, in addition to the Islamic Republic of Iran and Sudan, claims to have fully-fledged Islamic financial systems already in place. It is almost certain that Brunei Darussalam, the Kingdom of Saudi Arabia, Kuwait, Qatar, Malaysia and the United Arab Emirates (UAE) will have their financial sectors dominated by IBF by 2020.

Brunei Darussalam will be the first country to witness the share of IBF in the domestic financial sector exceeding 50% by 2020. Almost 45% of retail banking in the country already fulfills basic Shariah requirements. More impetus is needed for the capital markets, which requires a little guidance and support from the Ministry of Finance.

Given its small and overwhelmingly religious population, it will not be surprising to see Brunei Darussalam emerge as a nation where the IBF share is greater than conventional ones.

Similarly, the Kingdom of Saudi Arabia will have its financial sector predominantly Shariah compliant by 2020 since it currently has over 55% of its retail banking as Shari’a compliant. It will have to streamline Islamic banking and finance with official recognition, by the Saudi Arabian Monetary Agency and the Capital Market Authority. If Brunei Darussalam has not already achieved the milestone, Saudi Arabia could be the first country to boast of having Islamised the bulk of banking and finance practice in the country.

Since the establishment of Kuwait Finance House (KFH) in 1977, Kuwait has been at the forefront of IBF. It is expected that it will still be ahead of Qatar in achie-ving the threshold of 50% share.

With the current market share at 35%, Kuwait’s IBF industry will have to grow by 7.14% annually for the next six years to achieve the milestone of 50% market share. Furthermore, its existing Islamic financial institutions will have to take over 3.15% market share from the conventional financial institutions during the same time period.

Qatar is another country with huge potential for growth in IBF. Unfortunately, the likelihood of IBF reaching the 50% threshold was adversely affected by the government’s decision to disallow conventional banks offering Islamic banking through window operations.

Malaysia is another country that has made tremendous progress in IBF. With strong support from the government and the central bank, Malaysia has certainly taught other countries how government patronage actually brings wider economic benefits to the country.

The weakest link, however, in this list of six countries is the UAE. Despite the government of UAE’s strong support for IBF, the country will be able to just make the 50% mark by the end of 2020.

This brings us to the million-dollar question: How would Malaysia achieve the 50% mark, given that its financial sector currently has only one-fourth of it as Shariah compliant?

According to GIFR research, IBF in Malaysia will have to grow by 16.67% on an annual basis in the next six years (green field growth) in addition to cannibalising 5.56% of the conventional business annually (brown field growth) in order for it to have an equal share of IBF in its financial sector. Is it something achievable?

The table suggests that this is not only achievable but possible as well. Most of the conventional financial institutions involved in IBF have a lot of capacity to further grow their Islamic business. If the likes of Malayan Banking Bhd and CIMB Group Holding Bhd give a big (yet gradual) push to IBF as part of their expansion strategy, it will contribute significantly towards achieving the target of 50% market share for IBF in Malaysia.

Furthermore, this is perhaps the time for the government to consider converting Cagamas into a fully-fledged Islamic financial institution, as almost 50% of its business is already Shariahcompliant.

Agro Bank is already scheduled to convert fully to Islamic. It is worth considering to fully Islamise other banks like SME Bank, MIDF Amanah Investment Bank and similar government-linked financial businesses? Given the track record of the Malaysian government, it will not be surprising to see such a development in the next six years.

Prof Humayon Dar is chairman of Edbiz Corp London and a visiting professor of Islamic Finance at Academy for Contemporary Islamic Studies, UiTM

REUTERS: Gulf Islamic banks' extra product costs shrinking, study finds

The extra costs which Islamic banks in the Gulf charge consumers relative to conventional banks appear to be falling, according to a study by credit rating agency Standard & Poor's.

For years, bankers have assumed that Islamic institutions charge higher costs because of several factors, including the relative complexity of sharia-compliant products compared to conventional ones, and the fact that Islamic financial markets tend to be younger, smaller and less liquid.

Other factors that may push up costs are a lack of clear regulation, in an industry where scholars may issue contradictory rulings, and adverse tax treatment, since Islamic deals often involve multiple asset transfers.

Now the cost gap for Gulf banks rated by S&P seems to narrowing, to as little as 30 basis points in the first half of 2013 from a high of 110 bps in 2009.

The study used financial data from 2007 to 2013 to calculate the ratios of interest income to average assets for conventional banks and the equivalent ratios for Islamic institutions, said Paris-based Mohamed Damak, primary credit analyst at S&P.


First ever sukuk by anb exporrt-import bank

By Datuk Adisadikin Ali & Syed Alwi Mohamed Sultan


In December 2011, the central bank of Malaysia issued its Financial Sector Blueprint 2011-2020, in which it clearly identifies several recommendations for the “Internationalisation of Islamic Finance”. Among the recommendations is to encourage Malaysian issuers to offer foreign currency Islamic capital market investment products and to facilitate regular sukuk issuance by the government and government- linked companies. This is the inspiration behind the establishment of Export-Import Bank Malaysia Bhd’s (Exim Bank) US$1 billion (RM3.3 billion) Multicurrency Sukuk Issuance Programme under the special purpose vehicle, Export- Import Sukuk Malaysia Bhd.

On Feb 19, 2014, the first sukuk series from the programme was issued to the market marking the introduction of the world’s first ever sukuk to be issued by an export-import bank. It is also the first US dollar-denominated sukuk for 2014, hence making it the second consecutive year running where a Malaysian issuer has opened the accounts of international sukuk issuance.

Exim Bank Sukuk Structure

In designing the sukuk structure for Exim Bank, two key considerations were central to the thinking process — size and availability of tangible assets. This is to ensure that the structure of the sukuk complies with what is the “generally accepted principle” of Shariah-compliance and is a tradable sukuk in the secondary market. Eventually, a hybrid structure was decided upon on the basis of wakala principle to acquire a pool of assets comprising a combination of ijara contracts, qualifying sukuk and a commodity murabahah investment.

Three parties are involved in the entire structure — Exim Sukuk Malaysia Bhd (the “Issuer” and “Trustee”), Exim Bank (the “Wakeel”) and the sukukholders. On the issue date of the sukuk, the sukukholders subscribe to the sukuk and pay the issue price in respect of the sukuk (“issue price”) to the Trustee.

The Trustee in accordance to the provisions provided under the wakala agreement, are allowed to use the issue price for the following purposes:

• Use a portion, not less than 34% of the issue price for the purchase of a portfolio of tangible assets from Exim Bank; and

• Use the remaining amount of the issue price, being no more than 66% of the issue price to purchase a portfolio of non-tangible assets from Exim Bank; or to invest that amount, that is, no more than 66% of issue price, in the purchase of commodities from Bursa Suq Al-Sila’ and to sell such commodities to Exim Bank on a deferred payment basis (the commodity murabahah investment).

Pursuant to the above, the Wakeel will be required to ensure that tangible assets fulfill the tangible ratio requirement of not less than 33% at all times during the tenure of the sukuk.

The tangible ratio requirement refers to the ratio of tangible assets against the value of the wakala venture, which consists of the aggregate value of the tangible assets, non-tangible assets and / or the commodity murabahah investment. Notwithstanding the above requirements, for the first series of the sukuk issuance amounting to US$300 million, the ratio of the issue price used for the purchase of the tangible asset portfolio was 51% to give a healthy buffer against the requirement of 33%.

The Wakeel will manage the wakala portfolio of assets and ensure that the revenues from the portfolio of assets are used to fund the periodic distribution amounts payable by the Trustee to the sukukholders at each periodic distribution date.

Exim Bank Issuance Details

The landscape of global financial markets changed dramatically following the tapering of quantitative easing (QE) by the US Federal Reserve (Fed) since June 2013. With the expectation of an improvement to the US economy — official data show higher than expected growth of 3.2% in the fourth-quarter of 2013 — the Fed decided since June 2013 to gradually reduce its bondbuying programme with a target of ending it entirely by mid-2014.

The new Fed chairwoman, Janet Yellen, in her maiden speech to the US House of Representatives on Feb 11, 2014, reiterated the course of tapering the QE when she said “if incoming information broadly supports the committee’s expectation of ongoing improvement... the committee will likely reduce the pace of asset purchases in further measured steps at future meetings…”

Some emerging markets such as South Africa and Turkey, in early 2014, countered the outflow of liquidity by hiking interest rates to shore up their currencies. The outflow of liquidity and rise in interest rates were a fusion that resulted in increased yields in US Treasuries and bond markets globally. The benchmark five-year US Treasury yield started the year 2013 at 0.76% and ended the year close to 100 basis points (bps) higher, at 1.75%.

Issuers were like treading on eggshells when considering raising funding from the global capital markets.

With this backdrop, the successful pricing of the Exim Bank sukuk was a welcome relief and vindication of the confidence of global market investors to Malaysia’s economy. The Exim Bank sukuk received strong investor demand.

The sukuk was oversubscribed by approximately 10 times attracting approximately US$3.2 billion orders and was fully distributed to over 185 Islamic and conventional investors. The allocation was well-spread out globally with over 19% of the issue distributed to the Middle East investors, 65% to Asian investors and the remaining 16% to European investors.

The breakdown of investor type showed that approximately 42% was subscribed by asset managers, 30% by banks and private banks, 16% by central banks and sovereign wealth funds and about 10% by insurance and pension funds. The strong demand from the investors, allowed the sukuk to be priced at the tighter end of final price guidance at T+140 bps following an initial price guidance of T+165 bps area, which is equivalent to an all-in yield of 2.87% per annum.


In view of Exim Bank’s raison d’etre — to provide credit facilities to finance and support exports and imports and to facilitate the entry of Malaysian companies to new markets — the establishment of the sukuk programme is another building block towards achieving Exim Bank’s mandate. In a global financial world which is prone to frequent crisis and volatilities, access to liquidity at optimal cost and diversification of the sources of liquidity are key strategic objectives.

The sukuk market has proven to be a practical source of funding and the spectacular growth of the sukuk market is vindication of the viability of sukuk as an alternative source of liquidity. To that end, the establishment of the US$1 billion Multicurrency Sukuk Issuance Programme by Exim Bank and the first issuance off the programme is a key milestone for Exim Bank and Malaysia, towards achieving the objective of internationalisation of Islamic finance and becoming a global Islamic finance hub.

Datuk Adissadikin Ali is the president and CEO of Export-Import Bank of Malaysia Bhd.

Syed Alwi Mohamed Sultan is the MD and head of Islamic Banking, Asia Pacific for BNP Paribas Malaysia Bhd.

Ethica enters Saudi Arabian Islamic finance market

Ethica Institute of Islamic Finance, the Dubai-based Islamic finance training and certification institute, is partnering with the International Society for Trainers and Developers (ISTD) to deliver Islamic finance training in Saudi Arabia.

Through Ethica and ISTD, Saudi learners now get AAOIFI-compliant training in rapid 4-month programs, delivered online or face-to-face. AAOIFI is the Islamic finance industry’s leading standard-setting body. The partnership also sets the foundation for face to face training at financial institutions in Saudi Arabia where ISTD has built strong relationships, according to a statement from Ethica.


NIKKEI: Southeast Asia becoming global hub for halal foods

Big Japanese and U.S. food processors such as Ajinomoto and Kellogg are turning Southeast Asia into a global production center for halal foods, as they build facilities in the region to meet the dietary needs of the world's Muslims.

The number of Muslims is forecast to rise from 1.6 billion now to 2.2 billion by 2030, accounting for nearly 30% of the world's population and making them an attractive market for food companies, reports Nikkei Asian Review (22 Feb 2014).

The article quotes figures from Malaysia's Halal Industry Development Corporation (HIDC). It says the global market for halal foods -- that is, those that comply with Islamic religious law -- was worth 64.2 trillion yen ($622 billion) in 2010. It is expected to top 70 trillion yen by 2015.

The Japanese and U.S. food giants see Southeast Asia as an attractive location to turn out halal products, both because the region is home to many Muslims and because many of the raw materials needed are readily available. The food processors plan to build halal-certified production and export bases in Southeast Asia to take advantage of this increasingly lucrative global market, it adds.


'Non-halal' signboard

GCH Retail (Malaysia), a subsidiary of a Hong Kong-based conglomerate, operates the Giant supermarket chain in the Southeast Asian country.

The Giant outlet in Kuala Lumpur's entertainment district has a tiny section with a sign touting non-Halal foods. These include products made with pork or alcohol, which Muslims are forbidden from consuming. The vast majority of the supermarket's products comply with Islamic dietary strictures.

Malaysia is a majority-Muslim country of about 30 million people. About 40% of the population consists of ethnic Chinese and Indians, many of whom are not Muslims. Nevertheless, halal foods dominate store shelves. "It would be difficult to sell our products through distribution channels such as supermarkets and other retailers if they were not halal," said an official at a local food maker.

A similar phenomenon can be seen in Muslim areas in Singapore and Thailand, although Muslims make up only around 10% of these countries' total populations.

Many mouths to feed

Ajinomoto has exported its seasoning of the same name, Aji-no-moto, made in Malaysia, to Saudi Arabia and other Muslim countries since the 1990s. In late 2012, the Japanese company built a state-of-the-art plant in Indonesia and developed a high value-added product targeting consumers in Asia and the Middle East.

"We will make Southeast Asia a base to tap the global halal market," said Etsuhiro Takato, general manager of Ajinomoto's department overseeing the region. The condiment maker plans to set up a new, 900 million yen production line at the plant, which is in a suburb of Jakarta. The new line will go into production just a year and a half or so after the original facility was built.

Other Japanese food makers have also been expanding in Southeast Asia. Kewpie opened a halal-certified plant in Malaysia in 2010. It also plans to start production of mayonnaise products and sandwich fillings in Indonesia this autumn. Frozen food maker Nichirei received halal certification for its plant in Thailand in 2010.

Kellogg, an American company best known for its breakfast cereals, plans to spend about 13 billion yen on a snack plant in Malaysia, as it tries to grab a larger share of the growing halal market. The facility will be located in the southern Malaysian state of Negeri Sembilan and is scheduled to go online in 2015.

Major U.S. chocolate maker Hershey also plans to build a big new factory in thesouthern Malaysian state of Johor at a cost of about 25 billion yen. It will make halal-certified products for export to 25 countries and regions, mostly in Asia.

Southeast Asian charms

In addition to having a sizable indigenous Muslim population and strong connections to Muslim markets in the Middle East and elsewhere, Southeast Asia is favored as a stable location for foreign investment. Food processors can also easily procure raw materials such as palm oil, which is used in frozen foods and confectioneries. Malaysia and Indonesia together account for 80% of the world's palm oil production, and Indonesia is also one of the world's largest cocoa producers. 

[Nikkei Asian Review, 22 Feb 2014]