RUSHDI: Malaysia’s role in facilitating cross-border investments

The most common Islamic investable asset classes include compliant equity funds, sukuk, commodity murabaha and real estate, then trade finance funds, micro-finance, and SME (small and medium enterprise), and finally, very little venture capital. What about the US$685 billion (RM2.19 trillion) halal-agrofood sector as an investment class?

Today, where is Islamic crossborder investing?

1. Commodity murabaha is on the London Metal Exchange and not Malaysia’s Suq Al-Sila.

2. About 85% of the market capitalisation of a global Islamic index is in the Group of 20 (G-20) non-Muslim countries with bias in three economic sectors, technology, healthcare and energy. These sectors have very little publicly listed company representation in the Organisation of Islamic Cooperation (OIC).

3. Real estate acquisitions are typically in Europe, Australia, the US, etc.

4. Islamic venture capital only exists at conference presentations by academics and Islamic microfinance is a rounding error in the US$1.3 trillion Islamic finance industry.

Thus, at one level, there is crossborder Islamic investing, but it’s about Shariah-compliant capital flight from Muslim countries, ex- Malaysia? Furthermore, the other major export from Muslim countries is talent, hence, there is a link between (outbound) capital flight and brain drain!

For example, if Malaysia can establish the Talent Corp Malaysia Bhd to address brain drain, then a comparable entity needs to be established address to guide OIC capital flight within the cluster! Thus, an OIC, not just Islamic, wealth management hub is a pressing need of the hour.

Malaysia, How You Get the Vision, Will and Means to Lead?

Islamic cross border investing is timely topic, as certain markets, like Malaysia have financially matured Islamically, especially on the Islamic debt capital markets and retail, and overseas expansion may be the only way forward. But, today, Malaysia is an island onto itself as counterpart jurisdictions with Islamic finance do not have the comparable enabling infrastructure, including Dubai and London.

Furthermore, for less mature Islamic finance markets, from Africa to MENA to Centre of Islamic Studies (CIS) to G-20, the lessons from Malaysia may be the best case study for their road ahead. Malaysia’s experiment with Islamic finance started in 1983, nearly 10 years after the (alleged) first Islamic Bank, Dubai Islamic Bank, and today, many countries and international lending agencies look at Malaysia’s blueprint for developing this niche market.

Thus, the easiest place to better understand the challenges with cross border Islamic investing may be start with Shariah-compliant equity investing.

CROSS-BORDER INVESTING

Malaysia has a comprehensive infrastructure for Islamic investing, as Securities Commission Malaysia introduced Shariah screening before the launch of Dow Jones Islamic Market Index in 1999. It recently added financial ratios to the Shariah screening, but international Islamic portfolio investors still have not flocked to Bursa Malaysia to invest in the compliant companies!

The first take-away lesson is Shariah- compliance is only one factor for cross-border equity investing.

The analysis for investing includes examining all opportunities, currency risk, liquidity of company, performance, growth prospects of sector/company, including dividend yield, purification, which reduces returns, etc. For example, Islamic emerging-market funds may look at compliant listed companies on OIC exchanges, especially if they are part of MSCI Emerging Market Index, but will by default focus on markets like China, India, Russia, etc.

The second lesson is better posed as a question: why are Shariah-compliant Malaysian investors not investing in compliant companies listed in Saudi Arabia, United Arab Emirates, Pakistan, Turkey, Egypt, Nigeria or other OIC countries with stock exchanges?

Furthermore, the same question applies to investors in these countries for opportunities in Malaysia.

Is it because they know their listed companies and markets better than overseas? Or is it because the information has not been presented in a dash-board manner?

In June 2012, S&P/OIC COMCEC 50 Shariah Index was launched, and it was designed to measure the performance of 50 leading Shariah compliant companies from the 19 OIC markets/territories. As expected, Malaysia, Indonesia and Saudi Arabia comprise nearly 60% market capitalisation of index with 23 of the 50 companies.

But, have there been press releases on funds or an exchangetraded fund launched off this index?

INFORMATION PRESENTATION

Now, as a local investor in Malaysia, I know S&P/OIC COMCEC 50 Index companies like Maxis Bhd, IOI Corp Bhd and Sime Darby Bhd. For me to better understand overseas compliant companies, I would like to see an information dash board of such Malaysian companies compared to listed counterparts like Mobile Telecomm (Kuwait), Telekomunikasi Indonesia, Industries Qatar, Saudi Basic Industries, etc.

Furthermore, if I’m interested in agro-food companies, I would like to see a graph that captures a world index, Islamic world index and food product index. If you look at a graph of MSCI World Food Products index of agro-food companies and compare it to MSCI World and MSCI World Islamic Index, you will see world food product index has better returns than world Islamic and more stable/linear growth than World Index for the time period.

Thus, agro-food as an asset class addressing OIC food security. What if the food index happened to be halal agro-food companies from the OIC?

Today, there is cross-border Islamic investing, but its mainly outbound from Muslim world to safe, liquid and diversified asset classes in the non-Muslim world. To redirect some of the capital flight requires: 1) dashboard home and host country opportunities; 2) introducing new asset classes, like halal agro-food; and 3) establishing an OIC Wealth Management Hub. Thus, the challenge is the opportunity.

[Rushdi Siddiqui, 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.]

THE MALAYSIAN RESERVE, 26 November 2013

HUMAYON: Is public-listed Twitter Shariah-compliant?

Technology sector has done fairly well when it comes to Shariah-compliancy of stocks listed on exchanges around the world. On Nov 7, 2013, Twitter went public with a well-publicised initial public offering (IPO), sparking interest from the investors from around the world. Before this Facebook went for a rather controversial IPO on May 12, 2012.

Edbiz Consulting Ltd, a London- based Islamic finance advisory firm that has partnered with Nasdaq to develop a Shariah- compliant version of Nasdaq 100, reported that Twitter stock was Shariah-compliant when the company went public. What does it mean?

There are a number of Shariah screening methodologies that have been employed by index providers around the world to construct, maintain and market what are known as Islamic indices. The most widely used methodology is that of Dow Jones but other methodologies, ie, that of FTSE, MSCI and Nasdaq do not significantly differ.

There are two screens employed by Shariah screening companies: 1) business screen; and 2) financial screen. The former ensures that the overall business of a firm is not outright in contradiction with Islamic teachings on business and commerce.

The business screen, therefore, excludes all the stocks that lie in the impermissible sectors like financials (except Islamic banks and other financial institutions that explicitly commit to Shariah guidelines for conducting their businesses), gambling and gaming, entertainment (including but not limited to pornography), weapons manufacturing, alcohol, pork and tobacco etc.

The financial screen is based on a number of financial ratios. The most frequently used financial ratios are the following:

• Gearing ratio: Total interestbearing debt divided by market capitalisation of the company.

• Liquidity ratio: Cash plus interest bearing securities divided by market capitalisation.

• Cashflow ratio: Receivables divided by market capitalisation.

• Income ratio: Impermissible income divided by total income.

Dow Jones Shariah screening methodology employs the above-mentioned gearing ratio, liquidity ratio and the cashflow ratio and excludes all those stocks that exceed a threshold level of 33%.

They recommend to investors to employ a 5% threshold for the income ratio, although they do not incorporate income ratio in the process of constructing and maintaining their family of Islamic indices.

FTSE, on the other hand, uses total assets in the denominator as opposed to market capitalisation when computing the above ratios. They also include cash in addition to the receivables in the numerator when calculating the cashflow ratio. They use 33.33% as threshold for the gearing and liquidity ratios while a higher threshold level (50%) for the cashflow ratio.

FTSE may seem a bit liberal financial screening methodology but it actually depends on the market conditions to infer whether it is more conservative or liberal as compared to Dow Jones.

In bullish market conditions, Dow Jones may prove to be more liberal than FTSE, and the other way around in bearish markets.

MSCI has a similar approach to FTSE in terms of denomination of ratios but their thresholds are more consistent with Dow Jones. All the three ratios have a threshold of 33.33%.

Russell-Jadwa Islamic indices use financial ratios similar to Dow Jones’s but threshold of their cashflow ratio (with cash included in the numerator) is far higher than the Dow Jones’ — 70% for Russell-Jadwa as opposed to 33% for Dow Jones.

Securities Commission of Malaysia (SC) uses a more detailed Shariah screening methodology. Unlike other methodologies (which use 5% threshold for the income ratio), the SC uses two thresholds for this ratio to determine whether a business is Shariah-compliant.

Stocks are excluded from Shariah universe if the business of the companies issuing such stocks generates more than 5% revenue from the following sectors:

• Conventional banking including insurance.

• Gambling.

• Liquor and liquor-related activities, pork and pork-related activities, non-halal food and beverages.

• Shariah repugnant entertainment. • Interest income from conventional accounts and instruments.

• Tobacco and tobacco-related activities and other act ivit ies deemed Shariah repugnant.

The stocks will be excluded from Shariah universe only if the issuing companies generate more than 20% of their income from the following business activities:

• Hotel and resort operations. • Share trading and stock broking business.

• Rent received from tenants engaged in Shariah repugnant businesses.

• Other activities that are deemed Shariah repugnant. The other financial ratios (ie, gearing ratio and liquidity ratio) are the same as that of FTSE.

Twitter stock, when went public on Nov 7, 2013, fulfilled the requirements of all the internationally known Shariah screening methodologies.

This is true for Facebook stock as well, which along with Google, is included in Edbiz- Nasdaq 100 Shariah index.

Another interesting stock is Apple, which was Shariah-compliant until its iTunes businesses started generating more revenue, making it noncompliant with Shariah as it breached the 5% threshold on the income ratio.

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

THE MALAYSIAN RESERVE, 25 November 2013

RUSHDI: Questions over halal industry approach

The halal industry — encompassing food, pharmaceuticals, cosmetics, logistics/distribution and tourism — is US$2.6 trillion (RM8.33 trillion), almost twice the size of US$1.3 trillion Islamic finance. But, it gets the respect, recognition and reverence of a lunch meeting comprising of “halal kebabs” by Islamic bankers.

Let us put the halal text (facts) into the permissibility context (niche market). It is a demand-based consumer non-cyclical, and less volatile than real estate, a favourite of Islamic finance.

It has greater reach and penetration, present in all Group of 20 countries, than Islamic finance, and leading entry into non-Muslim emerging/frontier and developed markets like Vietnam, South Korea, Australia, the US, UK, France and Germany.

It is an indicator of Muslim purchasing power and increasing presence, especially in non-Muslim countries, like the UK, where there are now aisles of halal foods and a store within store, ie, National halal meats in selected Tesco outlets.

Although, there are five Financial Services Act (FSA) approved Islamic banks in the UK, the only deposit taking bank, Islamic Bank of Britain, has encountered financial challenges since its launch in 2004.

It is a national security concern, as part of food security, in all 57 Muslim countries, where food, agriculture, and land bank funds have be en launched, and dedicated companies, like Hassad Foods in Qatar, have been established by sovereign wealth funds.

It, food supply chain, is not controlled/owned by Muslims, unlike Islamic finance, hence, concerns of rising integrity risks, where pork DNA is appearing in foods in Europe. For example, it is estimated 85% of the halal food supply is produced by non- Muslim owned companies. It is about 100% purity, where traces of pork makes the food consumption prohibited, unlike Islamic finance, where “minor” amounts of impermissible revenue/interest, needing purification, still validates the transaction.

It is focused on the certification process for halal compliance, much like Islamic finance focus on standardisation of Shariah-compliance, yet, harmonisation is still work in progress for both.

It does not have global industry body for information intermediation, unlike Islamic finance with accounting/auditing, prudential regulations and capital requirements, and liquidity and hedging documentation contracts.

It is now an asset class, as the socially acceptable market investments (SAMI) Halal Food Index, launched in 2001 by former Prime Minister Tun Abdullah Ahmad Badawi, yet halal equity funds, exchange trade funds, private equity funds have not been launched successfully.

The SAMI halal food index has about 95 companies from Malaysia, yet, Bursa Malaysia has not created a halal economic sector index.

ACID TEST

One way to determine the importance of any existing product offering is to ask the following hypothetical question:

If halal products were no longer available, what alternatives would the Muslims have?

Would they become vegetarians? Possibly.

Would they convert? Unlikely.

Would they eat kosher?

Most likely, as many Muslims in the US, including myself, consume Kosher when halal is not available.

It is reported that US Muslims consume more kosher products than US Jews.

Now, if Islamic finance is no longer available in, say, Malaysia, global hub for Islamic finance and bell-weather for the industry, what alternatives would the Muslims (and non- Muslims) have?

Would they turn to cashbased economy? Yes, for some transactions, but would be inefficient and disintermediation to the interest-based economy.

Would they turn to ethical finance? Yes, but the preconditions of interest, speculation, uncertainty, and permissibility of underlying asset must still be met for investing, financing and insuring.

For example, on the investing side, the negative screening of Islamic screening, following Securities Commission Malaysia, is aligned to negative screen associated with ethical investing, but Islamic looks at the three financial ratios, where as ethical does not. Thus, ethical investing is not a practical alternative to Islamic investing.

Going forward, I will examine the issues, challenges, convergence, and way forward for the halal industry as part of Muslim consumerism, a subset for an Islamic economy.

[Rushdi Siddiqu, 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]

THE MALAYSIAN RESERVE, 18 November 2013

RUSHDI: The way forward for ESG Index (Part 2)

Budget 2014’s reference and allocation to socially responsible investment (SRI) sukuk and environmental, social and governance (ESG) index are indeed welcomed and forward-looking developments.

ESG INDEX

The proposed ESG index is the (equity) flip side of the (fixed income) SRI sukuk, ie responsible citizenship. To build bridges to different communities, geographies and ways of investing/financing, there must be dialogue of aligned interests based upon common values.


It all sounds good on paper, but the challenge is actually establishing the blueprint, execution, and acceptance, ie funds with assets under management, otherwise it’s a good academic exercise.

There is precedence for an ESG index from the Muslim world. For example, in 2011 the Standard & Poor's (S&P)/Hawkamah ESG Pan Arab Index was launched.

S&P stated: “It is now widely recognised that ESG issues can have long-term consequences for financial performance, and linking stock market performance to ESG is perhaps the most effective way to highlight the concept of ESG…” For the first time, the ESG performance of companies in the MENA (the Middle East and North Africa) region has been extensively researched, quantified and translated into a series of scores that will be used as the basis for an index that will help raise awareness of a company’s impact on people, planet and profit...”

It has a vigorous and transparent screening methodology for inclusion, and has companies from 11 Arab countries: Bahrain, Egypt, Jordan, Lebanon, Kuwait, Morocco, Oman, Qatar, Saudi Arabia, Tunisia and the United Arab Emirates.

Thus, for a region with a disproportionate contribution to carbon emissions, the index was a welcomed first step in realising and highlighting responsible companies.

A Malaysian ESG index, while extremely important, may encounter the challenge of having enough constituents companies and the liquidity of these companies.

Furthermore, it may encounter the same challenges of the MY-ETF, the first Islamic ETF in Asia launched in 2008, where the Malaysia- only exposure did not allow it to get the expected investors from the Gulf countries.

Nevertheless, it could still be attractive proposition, if:
• Underlying screening methodology is transparent;
• Market performance, via back testing, to the national index and Islamic index;
• There is seed money;
• Investment vehicle is an exchange traded fund (ETF) on Bursa Malaysia or a low-cost index fund.

Thus, an ESG index is about awareness, education and aligning investing to values. It is a good and necessary step in building responsible capital markets.

It could also draw global patient investors to Malaysia, where their names may be more important than their money!

CONCLUSION

To build bridges, one must have a solid footing and foundation, otherwise the sustainability and scalability of the offering will slowly sink.

The announcement of a SRI Sukuk and ESG index is actually building a suspension bridge with expanding two-way lanes.

A good example of Malaysia leading Organisation of Islamic Cooperation on responsible capital market development.

[Rushdi Siddiqui, 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.]

THE MALAYSIAN RESERVE, 30 October 2013 

RUSHDI: Malaysian leadership in capital markets

The Budget 2014 was announced by Prime Minister Datuk Seri Mohd Najib Razak, and reference and allocation to socially responsible investment (SRI) sukuk and Environmental, Social and Governance (ESG) index are indeed welcomed and forward looking for developments.

It not only shows Malaysia’s leadership in the capital markets for the (56 countries) Muslim world, the Organisation of Islamic Cooperation, but, more importantly, the announcements are also building bridges to the (post financial crisis) ethical and responsible movements in Europe and US, estimated at US$2.2 trillion (RM6.82 trillion).

I hope we will see the following blueprint, in both areas, in the next few months.

The only disappointment was the lack of direction on the halal industry, as Malaysia also positioned itself as a halal hub. The conversation surrounding halal industry in Malaysia must be taken to the next level as (resurging) Dubai has made a commitment to an Islamic economy, where one leg of it is the halal industry.

SRI SUKUK

The concept of a Green sukuk was raised in Dubai few years ago by the Gulf Bond and Sukuk Association, however, issuance has not yet materialised. The green concept, as many people equate it to the “colour” for/of Islam, for raising money and investing has not gotten traction in Islamic finance! Why? For example, in 2006, while at Dow Jones Indexes, I led a team to launch the world’s first Islamic Sustainability Index, however, no funds were launched off of it.

Maybe the concept of “positive” screening was ahead at the time, hence, market place was still trying to understand “negative” screening, when the Dow Jones Islamic Market index was launched in 1999.

Furthermore, to my knowledge, not one Islamic bank is a signatory member of the Climate, Carbon or Equator Principles! Yet, Islamic banks have historical bias towards financing real estate/infrastructure projects, which obviously have an environmental impact.

To the enlightened, there is confidence that a SRI sukuk will happen in Malaysia, as led by the globally recognised and highly respected Securities Commission. Indeed, Malaysia is a sukuk hub, based upon issuance, volume and secondary market trading. Obviously, details will be thought through, thorough and unveiled going forward.

I would hope, some of the attributee include:

• Benchmark size: US$500 million to US$1 billion, as size matters, and part of an ongoing programme to build a SRI sukuk yield curve;

• 10- to 15-year tenure, as infrastructure projects are not short-term plays;

• Denominated in hard currency for widest available of investors as an inclusionary approach is also cross sell of Islamic finance;

• Signed off by international Shariah scholars from the Gulf Cooperation Council (GCC), Malaysia, Pakistan, etc;

• Backed by the Islamic Development Bank, International Monetary Fund, World Bank and Asian Development Bank;

• Syndicate led by Islamic banks and blue chip western investment banks with Islamic finance presence;

• Investors include sovereignwealth funds, especially in GCC, to have their “profile” commitment;

• Listed in London, Dubai and Malaysia.

The SRI sukuk is also about impact investing and financing, a concept raised by the MD of Kazanah Nasional Bhd, Tan Sri Azman Mokhtar, at last week’s Securities Commission World Capital Markets Summit.

Thus, it’s both intellectually and financially interesting, while showcasing our commitment to becoming responsible stewards for the planet’s future generations.

[Rushdi Siddiqui, 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. His comment on the ESG index will run tomorrow.]

THE MALAYSIAN RESERVE, 30 October 2013   

TMR: Introduction of ESG Index, SRI sukuk ‘will boost’ Islamic finance

By Kazi Mahmood

The newly announced Environmental, Social and Governance (ESG) Index in Budget 2014 could help investors pick Shariah-compliant companies that are also highly socially responsible.

Consultant and academician at the University Malaya, Sherin Kunhibava (picture) said the introduction of the ESG, the first in Malaysia, is an excellent move which will recognise companies that already have high socially responsible practises and encourage others to follow suit.

During the budget speech, Prime Minister Datuk Seri Mohd Najib Razak announced that Valuecap Sdn Bhd will allocate RM1 billion to invest in companies that score high on the ESG Index.

“I trust this will encourage more companies to show high commitment towards social responsibility,” Najib said. The ESG is one of the measures that will help enhance the profile of listed companies which have high socially responsible practices, the premier said.

These efforts were hailed as innovative and an excellent move in the context of Islamic finance, as the index will allow investors to pick Shariah-compliant companies, said Sherin.

However, she said Islamic financial Institutions will have to strive harder to meet the criteria of Shariah-compliance and high social responsibility. The challenge will be on how to calibrate the ESG index and rate listed companies, Sherin said in a post budgetary speech comment to The Malaysian Reserve.

In the Budget 2014 speech on Islamic finance, the government focused on the need for social responsible investment (SRI) and announced it will set up a SRI Fund to be invested in listed companies which demonstrate high accountability, transparency and sustainability, including inclusiveness in diversity encompassing gender, age and ethnicity.

Sherin said the challenge in this case will be to “identify the companies that uphold these criteria”.

Najib said the Securities Commission Malaysia will introduce the framework of SRI sukuk instrument or SRI sukuk to finance various sustainable and responsible investment initiatives.

To this, Sherin said it is an innovative, “welcomed and timely move in light of world current affairs; this move will see companies stepping up efforts to initiate sustainable and responsible business growth opportunities to be eligible as an investment initiative for the SRI sukuk,” Sherin said the idea of the SRI sukuk will also help the Malaysian Islamic finance sector gain an edge over other financial centres.

THE MALAYSIAN RESERVE, 28 October 2013   

TMR: Mideast 'can emulate' M'sia Islamic finance framework

By Sathish Govind

There is a great deal that countries in the Middle East can do to emulate the Malaysian regulatory framework particularly in Islamic financing solutions for green technology, an expert in corporate finance said.

Deloitte Corporate Finance Ltd, United Arab Emirates, assistant director Goutam Palukuri said that many Malaysian companies are financing their green technology initiatives through Islamic banks and this is only because there is a commitment on the part of the authorities here to put a sound foundation in the regulatory framework coupled with providing the right incentives.

“Many in the Middle East can emulate what they see in Malaysia as Middle Easterners would prefer to finance green technology projects that are Shariah-compliant,“ he told The Malaysian Reserve in an interview.

He said that financing of green technology through Islamic banks in the Middle East is still at a nascent stage but Malaysia’s progress in the sector could be emulated.

“The process of putting in place a tangible policy framework and incentives and motivation like that given by the Malaysian authorities can spur green financial industry in the Middle East further,” Palukuri said.

The idea of “exporting” Malaysia’s success in Islamic finance and banking sectors has been floating around for some time now.

The need for foreign nations to learn from Malaysia in Islamic finance was also expressed by Greg Clark, financial secretary to the Treasury of the UK during his recent visit to Malaysia.

Green Technology Financing Scheme (GFTS) is an initiative by the government to promote investments in green technology, a sector that is envisaged to be the emerging drivers of economic growth of our country.

It is a national initiative aimed at achieving a sustainable environment. The participating financial institutions’ role is critical in ensuring success of GFTS, which entails the financing of companies that supply and utilise green technology.

Asked to comment on Islamic financing in Malaysia , particularly green financing, Palukuri said that Islamic financing in Malaysia has really “taken off” and green growth financing would spur fur ther development of Islamic banking in Malaysia .

Palukuri said that such a financing mechanism based on Islamic principles to fund the development of green technology to protect the environment would appeal to the Islamic world and catapult the green technology sector further.

Islamic Banking and Finance Institute of Malaysia, (IBFIM) said that the event Discover Green Technology Industry in Malaysia current and future prospects of “Islamic Financing Solutions” is to leverage on the Islamic financial systems in Malaysia to boost economic development.

Islamic finance for green technology is a positive initiative to match Islamic risk capital with financing opportunities in the emerging green technology sector and to accelerate the use of Islamic finance globally and maximise economic yields.

The entire aim of promoting finance for green technology is to promote socioeconomic growth in developing economies, IBFIM said. IBFIM is one of the co-sponsors of the “Discover Green Technology Industry in Malaysia” alongside with Green Technology Corp or GreenTech Malaysia.

THE MALAYSIAN RESERVE,  21 October 2013