Cross-border sukuk on the rise

Cross-border sukuk originations into and out of Malaysia are set to increase as the global sukuk market continues its rebound. Investors are looking for better and more diversified returns, as the Malaysian government’s policy of encouraging government-linked companies (GLCs) and local financial institutions and corporates to increase their cross-border exposure to Islamic capital market instruments start to take effect.

Foreign issuers that have originated sukuk in Malaysia include the World Bank and its private sector funding arm, the International Finance Corporation (IFC), The Islamic Development Bank, Nomura and the National Bank of Abu Dhabi.

The Japan Bank for International Cooperation (JBIC) was on the verge of using a sukuk, only to be foiled by the onset of the global financial crisis and the credit crunch in 2008.

In the other direction, last year Khazanah Nasional Berhad, Malaysia’s sovereign wealth fund, issued its first cross-border sukuk in Singapore.

Indeed, Kuwait-based Gulf Investment Corporation (GIC), whose shareholders include the governments of the six Gulf Cooperation Council (GCC) states (Kuwait, Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman), is the latest Middle East institution to raise funds from the Malaysian market through a 600 million Malaysian ringgit ($196 million) local currency five-year Sukuk Wakala bi Istithmar issuance, which will be officially launched on March 1.

The issuance is the first tranche of a 3.5 billion Malaysian ringgit (RM) Sukuk Wakalah bi Istithmar Program planned by GIC.

Leading Malaysian rating agency, RAM Ratings, has assigned a long-term rating of AAA to the corporation’s RM3.5 billion sukuk program. Concurrently, RAM Ratings has also reaffirmed GIC's respective AAA and P1 long-and short-term financial institution ratings, and its AAA long-term ratings of the corporation's RM600 million conventional Senior Unsecured Bonds (2008/2013) and RM400 million Senior Unsecured Bonds (2008/2023). All the long-term ratings have a stable outlook.

In its ratings rationale, RAM Ratings stressed “GIC's ratings remain supported by its unique position within the GCC region, and the strong support from its shareholders. GIC's mandate is to support the development of private enterprises and economic growth within the GIC region. Given its strategic role, the corporation enjoys immunity and exceptions in terms of regional regulatory norms, including exemptions from asset nationalization, currency controls and taxes.”

The corporation reported a net profit of $129 million for the first nine months of 2010, surpassing the $91 million for the entire fiscal year 2009. RAM Ratings stressed that the performance of GIC’s key principal investments, particularly those in metal-and petrochemical-related industries, driven by the more encouraging economic outlook on the GCC, have improved.

While the corporation recorded a larger share of profits from its subsidiaries and associates in the same nine-month period, its dividend receipts for the year are expected to remain unchanged from historical levels given the nascent stage of its major principal investments.

The GIC sukuk issue was oversubscribed and the issuer decided to increase the size from RM500 million to RM600 million. It was jointly managed by Royal Bank of Scotland (RBS), who was also the adviser and book runner, and Maybank Investment Bank, and was priced at a yield of 5.25 percent.

The GIC sukuk follows the recent RM500 million 10-year sukuk issued by the National Bank of Abu Dhabi.

Malaysia originates more than 60 percent of global sukuk outstanding. This has generated significant cross-border flows as funds are raised from beyond domestic financial markets and as investors diversify their portfolios into assets from other jurisdictions. According to the Securities Commission, between January and September 2010, over 55 percent of all bonds approved by the commission were sukuk.

GIC, stressed RAM Ratings, is perceived to have a healthy liquidity position. At end-September 2010, its cash balances and available-for-sale securities amounted to $633 million and $2.5 billion respectively.

Contrasting against the corporation's $565 million of debt repayments due in December 2011, these are adequate. At the same time, GIC's overall risk-weighted capital-adequacy ratio (RWCAR) had increased to 30.23 percent at end September 2010 compared with 27.7 percent at end December 2009, backed by profit accumulation and revaluation gains on its equity investments.

At the same time, the de-leveraging of its balance sheet eased its leverage ratio (total assets/equity) from 3.5 times to 2.8 times.

While the expansion of the corporation's equity investment portfolio will elevate both its RWCAR and leverage ratios, the management, according to the Malaysian rating agency, will maintain a prudent near-term minimum RWCAR of 20 percent and a maximum leverage ratio of four times.

In his budget 2011 speech to the Malaysian Parliament late October, Prime Minister Mohd Najib Tun Abdul Razak emphasizes the transformation of Malaysia into a developed and high-income economy with inclusive and sustainable development, spearheaded by the private sector. A number of strategic high-impact projects are expected to involve both conventional and Islamic financing and investment.

To this end, government-linked investment companies (GLICs) will be allowed to increase investment in overseas markets to explore opportunities for better returns. For example, the Employees Provident Fund (EPF) will increase its investment overseas from the current 7 percent to 20 percent of the total assets managed, including in Islamic instruments such as sukuk.

“Efforts will be taken to strengthen Malaysia's position as a premier Islamic capital market,” said Najib. “Bursa Malaysia will develop an international board to enable foreign securities to be listed, including Shariah-compliant products. To further promote innovation in Islamic securities products, the government proposes that expenses for the issuance of Islamic securities which adopt the principles of Murabaha and Bai Bithaman Ajil based on Tawarru’ be given tax deduction. This will strengthen Malaysia’s position as the leading sukuk market and promote transactions in Bursa Suq al-Sila, the world’s first Shariah-compliant commodity trading platform. The government proposes that Takaful contributions for export credit be given double tax deduction.”

Bursa Malaysia, the national stock exchange, stresses that the global sukuk market saw a rebound in 2010 with total issuance outstanding reaching $30 billion, an increase of 20 percent on 2009 and double the volume of 2008, when the market hit an all-time low. Bursa Malaysia in fact attracted some $8.6 billion of sukuk listings in 2010, accounting for almost one-third of total global issuances.

The listings include Sime Darby Berhad’s RM4.5 billion Musyarakah Sukuk; the government of Malaysia’s $1.25 billion Global Sukuk Al-Ijarah and the Islamic Development Bank’s $3.5 billion sukuk. The total value of sukuk listed on Bursa Malaysia at Dec. 31, 2010 stood at $27.7 billion, thus retaining the exchange’s position as the leading sukuk listing destination in the world.

“[The] general consensus amongst industry players is that global sukuk issuances for 2011 will surpass the record high of $34.2 billion in 2007,” says Raja Teh Maimunah, global head of Islamic markets at Bursa Malaysia.

“As Malaysia has a well-established legal and regulatory framework to support sukuk issues, we are hopeful that 2011 holds greater promise in this space for us. We are seeing issuers more willing to list their issues and be subjected to reporting and disclosure requirements in order to attract investors, as the credit crisis have caused investors to be more aware of the importance of transparency and are thus demanding greater governance. We see this as a positive development as the industry steps to the next level in embracing higher governance standards.”

Arabnews.com

Amana Investments: The torchbearer of Islamic banking in Sri Lanka

Amana Investments Ltd. has been the torchbearer of Islamic banking in Sri Lanka for almost the last two decades. In that time the parent company also established a Takaful (Islamic insurance) subsidiary, Amana Takaful, in a joint venture with Syarikat Takaful Malaysia and Amana Capital. At the helm at Amana are Chairman Osman Kassim and Managing Director and CEO Faizal Salieh, arguably the two most seasoned Islamic bankers in the country. Years of lobbying finally paid off when the Sri Lankan government a few years ago amending its existing banking rules to facilitate the authorization of a Shariah-compliant commercial bank.

Last month, President and Finance Minister Mahinda Rajapakse and the Central Bank of Sri Lanka granted a full commercial banking license to Amana Investments Ltd. to set up Amana Bank, which is scheduled to start full operations later this year. The bank is headquartered in Colombo and has 13 branches in the west and east of the country as well as one in the south, in Galle, that are being converted into fully fledged branches of Amana Bank.

Salieh discusses with Arab News the core objectives of the bank; the potential and opportunities for Islamic finance in Sri Lanka’s development and economy; and the challenges and issues that remain.

What is the license status of Amana Bank?

Faizal Salieh: We have been granted a full commercial-banking license to establish Amana Bank. It was granted on Jan. 24, 2011. The authority is the Monetary Board of the Central Bank of Sri Lanka with the concurrence of the Minister of Finance Mahinda Rajapakse. The license was granted pursuant to Banking Act No. 30 of 1988.

What is the paid-up capital of the bank and who are the main shareholders?

The stated capital is 3.4 billion Sri Lankan rupees ($1 = Rs.110.87) which is what the bank has raised. The minimum required regulatory capital is Rs.2.5 billion. The main shareholders are Bank Islam Malaysia Berhad (with a 20 percent equity stake), Albaraka Bank of Bangladesh (with a 15 percent equity stake), the Jeddah-based Islamic Development Bank (with a 10 percent equity stake) and the local Akbar Bros. (with a 10 percent equity stake).

Which activities are you allowed to conduct under the provisions of the bank license and the law?

Amana Bank is allowed to conduct all commercial banking activities both domestic and offshore banking and Islamic banking products. Amana Bank will engage only in Shariah-compliant banking products and services. The license specifically requires us to assist the government of Sri Lanka to raise long-term funds through Islamic finance products.

What are your core business objectives and which products will you concentrate on?

Our core business objectives are to offer our customers a principled and attractive alternative to interest-based banking; infuse a new and innovative dimension to the country’s banking industry through our business model; and add value to the economy. In this process we aim to be among the top ten banks in the country in terms of brand equity in five years. We wish to touch the hearts and lives of many people as possible through our consumer-banking product offerings and also enable the corporations and small- and medium-sized businesses to access and benefit from our ethical financing products.

What is the potential for Islamic banking in Sri Lanka? Apart from Amana are their any other institutions that provide Islamic financial products, including through windows or ad hoc stand-alone products?

The potential market size for Islamic banking is estimated at $1.5 billion. There is growing awareness even among the non Islamic market segments. The other operators include two conventional banking Islamic windows, one of which is a wholly state-owned bank; two Islamic-leasing windows by a state-owned leasing company and a private sector leasing company; two Islamic windows by private finance companies; and a few small-time fund management entities.

What has been the support from the Sri Lankan government and its central bank in facilitating the introduction of Islamic financial products in Sri Lanka? Is it part of a financial inclusion policy?

The support from the government and the central bank has been essentially in response to Amana’s consistent lobbying efforts and continued dialogue with the regulators, which resulted in some significant amendments being made to the banking law in 2005; the articulation by the Ministry of Finance in the government’s budget proposals about the need to recognize Islamic finance for the purpose of tax neutrality in the country’s tax statutes in November 2010; and the issuance of the country’s first banking license to Amana Bank for the purpose of carrying on Islamic banking in January of this year. The government has recognized the global growth and value of Islamic finance and has expressed its desire to see the economy benefit from it. Yes, Islamic finance is now part of a financial-inclusion policy.

How can Islamic finance contribute to economic growth, infrastructure development and financial stability in Sri Lanka?

Islamic finance is ideally suited to participate in the long-term financing of the country’s infrastructure requirements as it has the right product structures for that purpose. The asset-based financing emphasis will be a positive factor in enabling real economic growth and promoting financial stability. Islamic financial institutions have been successful in tapping the informal sector and integrating it with the formal economy as demonstrated by Amana’s own business experience over the past 12 years. Islamic financial institutions that subscribe to good governance standards, best practices and compliance would by definition become formidable assets in ensuring true stability in the financial system.

Arabnews.com

(Source: Arab News, Jeddah, Saudi Arabia)By Md Rasooldeen, Arab News, Jeddah, Saudi Arabia

Feb. 06--RIYADH -- The Jeddah-based Islamic Development Bank (IDB) has taken a 10-percent stake in the first commercial Islamic bank in Sri Lanka, which is to be opened shortly in the island, a senior official from the Amana Bank Limited in Colombo told Arab News Saturday.

Amana Bank Limited, which obtained the provisional approval license from the central bank last year to become a bank, has got the green light from the island's Finance Ministry to operate as a commercial bank in the country.

According to the official, the new bank will start operations in the course of this year.

"Amana Bank will be Sri Lanka's first licensed commercial Islamic bank to conduct all its business operations in complete harmony with the principles of Islamic banking," he said.

Islamic banking is an emerging alternative to the interest-based banking practice and is gaining popularity across the world's communities.

The bank's shareholding amounts to 3.4 billion Sri Lankan rupees and constitutes both strategic and retail shareholders with the capital raised by a private placement of shares.

Its key shareholders are Bank Islam, Malaysia Berhad with a 20 percent stake, AB Bank, Bangladesh with 15 percent, Islamic Development Bank, (IDB) Saudi Arabia with 10 percent, and Sri Lankan tea exporter Akbar Brothers with 10 percent.

The bank has engaged KPMG Sri Lanka as its financial advisers to the capital raising.

Amana Bank will acquire the assets and liabilities of Amana Investments through an asset purchase agreement.

With the end of the ethnic conflict in all parts of Sri Lanka analysts predict good business for the newly set up bank.

Incorporated in 1997, Amana Investments Limited (AIL), being the investment and financing arm of the group, offers a range of Shariah-compliant financial solutions to its customers. Since its inception, Amãna has emerged as robust trendsetter in Sri Lanka's financial services sector and shown remarkable growth in business.

Its entire range of products are interest-free and structured on the principles of Shariah equity and fairness and available to all persons, irrespective of their ethnicity. All products are approved by its Ulema Supervisory Council and subject to regular Shariah audits

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Copyright (c) 2011, Arab News, Jeddah, Saudi Arabia

Afghan central bank sees Islamic banking law enacted in 2011

(Reuters) - Afghanistan's central bank expects an Islamic banking law to be enacted by September, drawing billions in deposits from citizens wary of the conventional banking system, a senior official said.

The central bank's sharia board will meet Sunday to finalize the law, said Muhammed Qaseem Rahimi, director general of the central bank's Financial Supervision Department. It will then go to the Justice Ministry and parliament for approval.

"Most of the people who can access banking services don't use them just because of the interest, which is not allowed in Islam," Rahimi told Reuters via email.

"The demand for Islamic bank services is very high in banked and unbanked populations of Afghanistan."

Of 17 banks in Afghanistan, six have Islamic banking windows. The central bank hopes to approve the creation of fully fledged Islamic banks after the law is passed, Rahimi added.

Total deposits stood at $3.58 billion as of August 2010, according to a central bank report. But bankers estimate that there is close to $30 billion in circulation that remains untapped by the banking sector.

An Islamic banking law could revive an industry hit by scandal in recent months.

The central bank took over Kabulbank in September, the country's largest private bank, after irregularities of about $579 million raised red flags with authorities.

The crisis added another layer of uncertainty for the country, which already struggles with record levels of military and civilian casualties as well as corruption concerns.

But Islamic banking could renew trust in the sector, said Alam Hamdard, Kabulbank's head of Islamic banking.

"The crisis showed Islamic banking provides more transparency," he said in a telephone interview. "We could show them that their money was safe and secure in tangible projects that were being developed."

Hamdard said Islamic bank customers at Kabulbank did not withdraw funds at the same level as conventional banking customers during the scandal.

SHAKING OUT PILLOWS

But reaching the conservative Muslim masses and educating them in how Islamic banking differs from the conventional system is a challenge, with some bankers taking to the airwaves or sitting down at religious gatherings in rural areas to preach Islamic finance.

"Our ultimate goal is to shake out all the money that is lying in pillows and not with the economy in order to contribute to the rebuilding of Afghanistan," Khan Afzal Hadawal, Chief Executive Officer of Bank-e-Millie Afghan, said by telephone.

Hadawal said Bank-e-Millie's Islamic banking business has $15 million in deposits and that is projected to rise to $50 million by the end of the year as demand grows.

The Islamic banking sector in Afghanistan could attract up to $6 billion in five years, he said, if the sector starts to offer products such as Islamic credit cards, debit cards and automated teller machine facilities. (Editing by Robert Birsel)

REUTERS

QCB's Islamic banking rule shocks banks

DOHA: Conventional banks are taken aback by the directive of the Qatar Central Bank (QCB) to close down their Islamic banking activities by the year-end.

Banking industry sources say more shocking is the suddenness with which the announcement has been made and it has not been made clear why the move was being made.

There are about 16 Islamic banking branches of commercial banks in the country with the largest lender, half state-owned Qatar National Bank (QNB), also having an Islamic banking outlet in Sudan.

It’s not clear what the QCB’s directives are regarding this overseas branch of the QNB, say industry sources.

What intrigues the banking industry more is the fact that barely seven months ago, the QCB Governor, H E Sheikh Abdullah bin Saud Al Thani, inaugurated HSBC’s Islamic bank branch with much fanfare.

“The same branch (and some 15 others) will now be closed down…Banking is serious business. It’s no gimmick,” said an industry source, criticising the QCB move.

He said he believed if such key policy decisions are taken ‘overnight and on ad-hoc basis’, they would spoil Qatar’s top ranking as far as ‘Transparency in Doing Business’ is concerned.

While the affected banks are left wondering how to recover their investments in Islamic banking activities and manage their long-term credit portfolios, experts say the QCB must review its decision.

“Qatar follows free market policy and its thrust is on ending monopoly and encouraging competition, but the QCB’s decision is against those principles,” banking expert Abdullah Al Khater told Al Sharq.

He said the move threatened to undermine the interests of both, the banks and their customers.

“We need to study the possible impact of the banking regulator’s move and see what viable alternatives we have so that we don’t lose our customers,” said Abdullah Al Raisi, deputy chief executive of Commercialbank, in remarks to the daily.

True. Since the QCB allowed commercial banks to open Islamic banking windows and branches in 2005, the ‘beneficiary’ banks have widened their customer base to some 80,000 individuals and corporate entities.

They have attracted billions of riyals in deposits and given away equally large sums as part of their medium and long-term credit portfolios.

“The time given to us to wind up our Islamic banking activities is so short that we can’t even imagine how to recover our investment and manage the credit portfolio,” said another industry source.

Islamic banking customers would at no cost accept doing transactions with the conventional banks due to the taboo of ‘riba’ (interest), and transferring their accounts to the full-fledged Islamic banks would choke up their limited networks and services.

“There has been a lot of improvement in Islamic banking services and products since 2005 thanks to QCB’s liberalised policy of permitting commercial banks to offer Shariah-compliant banking services,” said the source.

But with the monopoly returning, the services can only be expected to deteriorate rather than improve further.

The QNB is said to have no less than 45,000 customers of its Islamic banking services alone. The division netted profits to the tune of a whopping QR900m last year.

The division, additionally, employs scores of citizens and expatriates in its Islamic banking branches. The vast majority are nationals. “What would happen to these staff members—is a major question,” asks yet another banking source.

Then, there are other banks which face similar predicament.

“Frankly, nobody knows what’s going to happen to some of the Islamic banking experts, especially, those who are employed with these banks… They can’t work elsewhere, not even in commercial banking set-ups since they wouldn’t have Islamic banking operations,” said the source.

And if the government somehow allows the QNB to retain its Islamic banking services, the step would be impartial.

“Well, the Islamic banks could buy the 16 branches in question, but that wouldn’t be fair to the conventional banks who built the network and customer base with so much difficulty and over years,” he said.

Incidentally, the QCB’s move comes at a time Islamic banking is witnessing record growth in the country (which underlines the need to rather make Islamic banking more competitive).

Islamic banking is estimated to command a market share of around 20 percent.

Some experts say a much better option would be to ask the affected banks to declare their Islamic banking branches separate entities altogether so that the confusion between their conventional and Islamic banking activities are removed for ever.

“Since the main objection of the QCB is that conventional banks are messing up between their commercial and Islamic banking activities, it would be wise to make the two areas into separate entities,” said a banking industry source.

There are four Islamic banks in the country at the moment and the pace at which Shariah-compliant banking has been growing in the country, surely demands more banks in the arena, he argued.

Sources say if a bank or two have committed an error and that is why the QCB is clamping down on the entire conventional banking industry, the move should not be justified. Only the erring bank or banks must be punished. 

The Peninsula