TMR: AmIslamic Bank issues Malaysia’s 1st Basel III-compliant sukuk

By Farah Adilla

AMMB Holdings Bhd’s Islamic banking arm, AmIslamic Bank Bhd, had on Feb 28 issued a RM200 million Basel III-compliant Tier 2 Subordinated Sukuk Murabahah.

The bank claims it is Malaysia’s first Basel III-compliant Tier 2 Subordinated Sukuk issuance and the world’s first Basel III- compliant Tier 2 Subordinated Sukuk to be issued under the Shariah principle of Murabahah based on commodity trading.

In a statement last Friday, the company said the RM200 million Tier 2 Sukuk Murabahah, with a maturity of 10 years and callable at the end of year five, carries a semiannual profit payment of 5.07% per annum.

“This is a 30-year programme which will provide AmIslamic Bank greater flexibility to issue sukuk of varying tenures on a “need to” basis from time to time to fund its general working capital requirements that conform to Shariah principles at competitive pricing given its strong credit rating, underscored by its strengthening credit fundamentals and improving asset quality,” it said in the statement.

AmIslamic Bank was upgraded to AA2 by RAM Rating Services Bhd in November 2013 along with AmBank (M) Bhd and AmInvestment Bank Bhd.

The Tier 2 Sukuk Murabahah has been assigned AA3 rating by RAM Ratings, one notch below AmIslamic Bank’s long-term financial institution rating, which reflects their lower ranking in the priority of claims upon bankruptcy or liquidation, relative to senior unsecured creditors.

AmInvestment Bank acted as the sole principal advisor, lead arranger and lead manager for this Tier 2 Sukuk Murabahah (2014/2044) issuance which was made under the RM3 billion subordinated Sukuk Murabahah programme.

AMMB said the Tier 2 Sukuk Murabahah has been structured to qualify as an Islamic Tier 2 capital instrument for AmIslamic Bank under Bank Negara Malaysia’s (BNM) capital adequacy framework for Islamic banks issued in November 2012, which, among others, requires the Tier 2 Sukuk to have loss absorption features at the point of non-viability of AmIslamic Bank.

AmBank Group MD Ashok Ramamurthy said while a number of conventional banks have issued Basel III-compliant capital instruments in Malaysia and the region, incorporating the required characteristics of Basel-III capital instruments into an Islamic context presented a number of additional challenges requiring close cooperation with the regulators.

“The successful closing of this landmark transaction represents a significant milestone for the Malaysian sukuk market.

“At the same time, this issuance saw the engineering of a Shariah mechanism that is acceptable to both the regulators and the Shariah scholars.

“This is the first Basel III-compliant Tier 2 Sukuk issuance by a Malaysian issuer which demonstrates our capability in sukuk structuring and profound track record in product innovation,” Ashok said.

[THE MALAYSIAN RESERVE, 3 March 2014]

RHB Investment completes first global sukuk

STATEMENT FROM THE BANK:

Kuala Lumpur, 7 March 2014 – RHB Investment Bank successfully completed its first global sukuk offering as Joint Lead Manager for a landmark global sukuk bond issuance by IDB Trust Services Limited (IDBTS), a special purpose vehicle established to raise fund for the Islamic Development Bank (IDB).

RHB Investment Bank’s role also included underwriting IDBTS’s 5-year USD1.5billion sukuk issuance under its USD10billion sukuk programme. The issuance was initially over-subscribed by two times prior to a USD500million upsize to cater to the overwhelming response.

Mike Chan, Managing Director of RHB Investment Banksaid, “RHB Investment Bank is pleased to be part of this notable exercise. Our involvement in IDB’s programme is part of our strategy to internationalise the Islamic capital market. This global sukuk issuance is a first for RHB Investment Bank and is a stepping stone towards achieving our aspiration to be a significant player in the global sukuk market.

This issuance also represents the RHB Banking Group’s continuous drive for Malaysia to be the market leader in global sukuk issuance.

“Islamic finance continues to gain momentum and is pacing up to traditional banking around the world. We see this as an exciting time for the Group to be a part of this Islamic financial scene as we want to continue to grow and provide comprehensive financial instruments in our aim to attain global Islamic leadership status” said Ibrahim Hassan, Managing Director of RHB Islamic Bank.

The sukuk issuance is rated AAA, the highest credit rating, by Standard & Poor’s, Fitch and Moody’s and is listed on the London Stock Exchange, Bursa Malaysia and Nasdaq Dubai Exchange.

RHB's Sukuk Trading & Distribution offering under its Islamic banking

TMR: KPMG says M’sian markets lack depth, liquidity

by Tanu Pandey

PETALING JAYA: Malaysian financial markets may not be armed with enough depth with a dearth of eligible liquidity instruments like short-term bonds or sukuk being traded, a situation that needs to be addressed as the country moves towards the Basel III regulation.

“If there is not enough liquidity, that is a concern. In the event of a crisis there may not be enough liquidity in the market,” KPMG head of financial services and advisory Andrew Tinney said yesterday in Kuala Lumpur.

Tinney was in Malaysia to launch a survey by KPMG and the Institute of Bankers Malaysia on the readiness of Malaysian financial institutions to implement Basel III.

His comments came as a surprise at a time when Malaysian market regulators and bankers have been talking about the country’s deep markets and ample liquidity.

When asked further, Tinney said: “The markets may be deep enough under the rules but may not be so as required under the Basel III. In fact, there is a lot of uncertainty around it (optimum level). We would rather raise a flag early that, this could be a possible risk.

The Islamic bond market in the country is also not deep enough with low trading of the instruments in the secondary market, he added.

“The country needs depth of the ringgit market in the shortterm instruments,” he said.

According to the Malaysian Rating Corp Bhd, the issuance of the Malaysian Government Securities (MGS) and Government Investment Issue (GII) this year is estimated to be between RM85 billion and RM90 billion.

In 2013, the government raised a total of RM92.5 billion from 27 debt auctions, out of which about 56% or RM51.5 billion were offered via the MGS market while the remaining were from the GII market.

Malaysia, along with other nations, are working towards adopting Basel III regulations which promotes more resilient banking system and strengthened global capital and liquidity regulations. The countries have a deadline to adopt the regulations by 2019.

According to the survey by IBBM and KPMG, about twothirds of the respondents from Malaysia have taken a proactive stand on the readiness for Basel III.

Malaysia is working towards adopting Basel III regulations and fortifying its capital base. Bank Negara Malaysia recently sent a circular to banks to set aside a minimum of 1.2% of total loans or collective assessment ratio by end of next year.

[THE MALAYSIAN RESERVE, 27 Feb 2014]

REUTERS: Malaysia's AmIslamic plans region's first Basel III sukuk

AMMB Holdings , Malaysia's fifth largest lender, said its sharia-compliant unit would issue up to 3 billion ringgit ($903 million) of Islamic bonds, the first sukuk from East Asia structured to meet the capital requirements of Basel III, reports Reuters (13 Feb 2014).

AmIslamic's sukuk will fund working capital and boost Tier 2 capital reserves at the bank, AMMB said in a statement. The sukuk will use the murabaha format, a common Islamic structure, and have tenors of at least five years, it added without specifying when issues might occur.

Banks around the world will face larger capital requirements under Basel III standards that are being phased in over a period of several years.

Conventional banks in Malaysia have already begun issuing Basel III bonds; last September, CIMB Group Holdings sold a 750 million ringgit bond to raise Tier 2 capital.

The country's Islamic banks have not yet done so, partly because they are not now in urgent need of additional capital, bankers say. But the AmIslamic sukuk could help to start a trend.

"With Basel III regulation on capital components coming into effect early last year, we expect more issuances of Basel III-compliant sukuk in the Malaysian debt capital market," Kuala Lumpur-based RAM Ratings said.

AmIslamic's sukuk received regulatory approval from Malaysia's central bank and securities commission this week. RAM assigned a preliminary long-term rating of AA3 to the sukuk programme, citing the company's "strategic importance" to the AMMB group.

Since 2012, Islamic banks in the Gulf have been more active in using sukuk issues to boost their capital because of Basel III.

Saudi Hollandi Bank is among Saudi Arabian banks which have raised Tier 2 capital with sukuk, while in November 2012 Abu Dhabi Islamic Bank issued a hybrid sukuk, one with equity-like characteristics, to boost its Tier 1 capital. Dubai Islamic Bank sold a similar $1 billion instrument in March 2013.

First ever sukuk by anb exporrt-import bank

By Datuk Adisadikin Ali & Syed Alwi Mohamed Sultan

Introduction


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.



Conclusion


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.

[THE MALAYSIAN RESERVE, 24Feb 2014]

RUSHDI: Knowing the numbers game in Islamic Finance

‘A good decision is based on knowledge and not on numbers.’ — Plato.

A day does not go by in the global media without an article on Islamic finance, but it’s mainly rear view coverage and/or analysis.

Yes, we know about the prohibitions, as stories are generally about the “don’ts,” no interest, pork, alcohol, gambling, etc. Surely, the spirit of Islamic finance is about the “positives” of sustainability, governance, stewardships, financial inclusion, etc.

Yes, we know about the connection to ethical finance, meaning financing, investing, and insuring in the non-sin economic sectors. But, is ethical finance talking about Islamic finance? Yes, we know Islamic finance is about connecting the real economy to finance economy, hence, excesses, derivatives and speculation are prohibited. But, if Islamic finance is both commodity Murabahah centric and real estate biased, then where is the innovation that finances the other nine economic sectors?

Yes, we know the size, US$1.3 trillion (RM4.3 trillion), and growth rates, 15%-20% per annum, but is it profitable growth? What happens to Islamic finance when the price of oil goes to less than US$50 per oil barrel? When will it de-link from oil?

Yes, we know about sukuk, from size, issuance, growth, league tables, etc. If sukuk has become the alter ego of Islamic finance, when will we see Mushrakah and Mudarabahah Sukuk spark development of the Islamic equity capital market?

Islamic Finance 1.0

It took Islamic finance 40 years to reach 1.0, that is, US$1 trillion in size, or less than the 1% of global banking assets. During the launch phase, the KPI (key performance indicator) was general awareness about the collateral based finance niché market, ie, rules of engagement.

It was a Muslim country phenomenon, led by the UAE (Dubai), Malaysia, Bahrain, etc, and “international” transactions took place in London and money was managed in a compliant manner by the private Swiss banks for high net worth individuals.

The key takeaway question during this time period: Was the enabling foundation and infrastructure for growth, innovation, development, and cross border expansion established?

Islamic finance 2.0

Depending on how one views the numbers games, Islamic finance has not breached the US$2 trillion mark, but is expected to reach the milestone before 2016. But, if it’s still Murabahah centric with real estate biased, and continues to focus on the Islamic debt capital market (DCM) with nominal compliant SME, VC, and micro-financing, then we are quick-sand stuck in stage 1.0.

The best way to describe 2.0 is to mention sampling of its attributes, as that will get us to US$2 trillion, satisfying those who are numbers obsessed. It should be remembered that a milestone is just a sign post on the road to development and the positioning of Islamic finance as an efficient alternative to conventional finance.

Some of the signs for 2.0 include:

(1) Wakala based Islamic inter-bank benchmark rates;

(2) short term sukuk (programmes) to address asset/liability mismatch and liquidity;

(3) expansion of project based sukuk to build out infrastructure in Organisation Islamic Cooperation (OIC) and municipality needs indebted western countries;

(4) Islamic bank and Takaful consolidation to achieve critical mass, and robust Retakaful to address “leakage”; and

(5) establishment of OIC (subset is Islamic) asset management hub which implies expansion of Islamic asset classes to include, say, compliant trade finance funds (implies increased trade).

Notice, I have deliberately omitted the usual suspects of standardisation, arbitration, cross currency swaps, bankruptcy/lender of last resort, Shariah scholars, qualified human capital, etc., as we need to “do rather than rehash talk of the known knowns”.

Islamic Finance 3.0
It should no longer be a numbers game, at, say US$3 trillion, as it will still be less than 5% of conventional banking. Islamic finance 3.0 should be about:

(1) Branded as Participation Finance, where focus is on business and over religion and does not represent a “threat” or favouritism towards one religion by a country.

(2) A dedicated sovereign wealth fund that builds out Islamic asset classes and acts as feeder to pension funds in Muslim (and non-Muslim) countries.

(3) An authentic (electronic) Islamic stock exchange of only Shariah based (OIC/Non-OIC) companies (Islamic banks, Takaful operators, leasing companies, iREITs), Islamic closed end funds, exchange-traded funds, listed tradeable Sukuk, etc. Starts process (a) financing a knowledge based economy and (b) reducing DCM bias!

(4) Harvard-like business school for Islamic finance and the US$2.6 trillion halal industry, as today’s kaleidoscope of Islamic finance certificates, courses, diplomas, training, etc, scattered in many countries produces varying qualities of graduates! Furthermore, Islamic finance industry seems to cherry experienced conventional bankers to train them in Islamic finance over few weeks/months, and the graduates cannot compete!

(5) Convergence by financing Muslim consumerism of the US$2.6 trillion halal industry’s six silos, food/beverage, clothing/fashion, media/ entertainment, pharmaceutical, cosmetics, and tourism/travel.

Conclusion

“Anyone who thinks there’s safety in numbers hasn’t looked at the stock market pages.” — Irene Peter.

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Rushdi Siddiqui, a former global director at Dow Jones Indexes and global head at Thomson Reuters in Islamic finance, is now president/ED of a (halal) US-based agro-food company. This article first appeared in The Malaysian Reserve, 17 Feb 2014

TMR: Stakeholders urged to explore trade financing

By Kazi Mahmood

Trade financing, one of the ready opportunities available for Islamic banks to tap, is among the many areas where the industry has not yet made its mark, said a report published by the Kuwait Finance House Research Ltd (KFHR).

However, one of the challenges to the Islamic trade financial sector is the readiness of the Islamic financial institutions to proactively develop products to meet the changing needs of the market players involved in global trade, the report said.

“By expanding this part of Islamic financial product, it will open up to wider sets of opportunities to Islamic finance eg the halal industry.” the report, entitled “Islamic Finance Outlook 2014” indicated.

The general preference of the Islamic banks is attributed to be a direct lending over trade financing, keeping transactions straightforward and simple, and they should move away from that by expanding into other areas of business.

According to the report, these are the sectors in which Islamic banking and finance could penetrate, as there are substantial market potential for industry suppliers to tap into. The sectors are:

• Infrastructure and government developmental plan in the Organisation of the Islamic Conference jurisdictions.

• Increasing participation of western financial centres to tap the industry and this will create a healthy competition and encourage greater innovation.

• Greater partnership among the regulatory and supervisory bodies to enhance regulatory frameworks for Islamic financial institutions.

• Low penetration rates of the various Islamic finance sectors in most jurisdictions.

• Strong support from various multilateral and international organisations.

• Increasing trends of cross-jurisdictions partnership and financial linkages to facilitate cross border financial activities of Islamic finance.

• Increasing awareness and familiarity among stakeholders on the value propositions of Islamic finance.

In order to be able to join these sectors, Islamic financial institutions need to demonstrate how Shariah-compliant products are economically feasible and competitive as per the conventional finance, in order to generate further growth and acceptance of the industry’s offerings.

Meanwhile the report noted that in 2013, of the top 10 largest sukuk issuances in terms of issue size for 2013, six of these sukuk were issued by non-Malaysian issuers domiciled outside Malaysia.

The increases in shares of other jurisdictions in 2013 were supported by some notable sukuk issuances in non-Malaysian domiciles.

In 2013, Malaysia once again led the primary market issuances with a 69% share of total issuances, followed by Saudi Arabia at 12%, United Arab Emirates (UAE) (6%), Indonesia (5%), and Turkey (3%).

In 2012, the respective shares of top primary sukuk market issuers were as follows: Malaysia 74%, Saudi Arabia 8%, UAE 4.7%, Indonesia 4.6%, Qatar 4.2% and Turkey 1.8%.

Compared to the previous year (2012), the share of Malaysia declined as a proportion of total issuances while those of others increased. The increases in the shares of other jurisdictions in 2013 were supported by some notable sukuk issuances in non-Malaysian domiciles.

Overall, Islamic finance in 2014, is set to experience another increased momentum, particularly in the sukuk market with the issuances by few sovereigns (eg) the UK and Luxembourg.

The Islamic banking sector is likely to witness a surge in demand underpinned by greater economic participation of Muslim nations as well as driven by stronger demand from the population towards Shariah-compliant or ethical financing solutions.

Instrumental roles played by multilateral organisations and regulatory bodies are expected to further benefit the Islamicbanking and takaful industry, especially to low-to-medium income customers as the financial inclusion objective has been strongly emphasised moving forward.

Thriving interest of key global/regional financial centres in developing Islamic finance, for instance London, Hong Kong, Singapore, Luxembourg, further adds weight to the strong prospects of Islamic finance as markets globally look for alternative sources of funding and investment avenues.

The industry will continue to grow, driven by both demand and supply factors, and further facilitated by government agencies and financial regulators. In the next few years, we foresee the industry’s focus into four key spectrums that will take the industry to greater heights, the report added.

[THE MALAYSIAN RESERVE, 10 Feb 2014]

Bloomberg: Fitch Joins HSBC Seeing Record 2014 Sukuk Sale

Persian Gulf government spending will help drive what may be a record year for Islamic bond sales, Fitch Ratings said, echoing HSBC Holdings Plc (HSBA) forecasts, reports Bloomberg (Jan 20, 2014).

Sales will probably match the 2012 high, the rating company said in a note last week even amid the slowest start to issuance since 2010. Mohammed Dawood, global head of sukuk financing at HSBC, said last month that sales will rebound from a decline last year.

Borrowers sold $133 million of syndicated sukuk to Jan. 19, the least since $47 million in the same period four years ago, according to data compiled by Bloomberg.

Economic growth in the oil-rich Gulf Cooperation Council countries and possible debut Islamic debt sales from the U.K. and Hong Kong will help the long-term outlook for sukuk sales, Fitch said. Qatar’s plans for the 2022 soccer world cup, Dubai’s preparations for the Expo world fair in 2020, and Saudi Arabia and Abu Dhabi’s spending commitments should boost issuance, according to the rating company.

The report quoted Rizwan Kanji, Dubai-based partner at King& Spalding LLP, as saying: “There has been preparation work done, issuers just haven’t gone to market yet. Everyone is taking a breather after the record close to last year. We expect an active, fruitful year.”