Malaysia debt markets report: Islamic markets

The IDB deal, led by CIMB and Standard Chartered, was particularly significant: it attracted RM500 million of commitments for a RM300 million deal, and came in a difficult market. A multilateral development bank owned by nine Islamic countries, it was particularly useful because it showed a Middle East institution accepting that Malaysia is a suitable place to raise Shariah funds – a perennial bugbear given differing interpretations of some Shariah principles between the two locations. “It’s important because they are saying: Malaysia is a funding base,” says Dato’ Mohd Razif Abdul Kadir, Deputy Governor of Bank Negara Malaysia (see full interview p xx).

So how big an issue is this question of differing interpretation? From an issuance perspective, questions of compliance don’t matter so much. “The way the Malaysian market has been formulated is that all Shariah interpretations are doable, as long as it is done under a valid Shariah school of thought,” says Abdul Ghani. “We do not discriminate against any interpretation, and as a result it creates vibrancy in the market. As long as the structure is approved by the regulator, we will take it.”

Instead, it comes up on the investor side. Even here, though, some think the concern is overdone. One banker recalls being involved in a sukuk in Malaysia that was meticulously structured to meet Shariah compliance requirements worldwide, but which would not sell in the Gulf, supposedly for Shariah reasons. Yet when Malaysia’s debt rating was upgraded, and the issuer with it, 20 Gulf institutions expressed an interest in buying it. It became clear then that their initial aversion had been not about Shariah principles at all but about credit.

It is also interesting that many new Islamic transactions in Malaysia these days (including the Pinnacle and TSH sukuk ijarah deals in the first quarter of 2009) tend to be sukuk al-ijarah, a structure that is now in vogue in the Gulf but was once considered unacceptable.

Nevertheless, it has never helped the development of Islamic finance anywhere that there is divergence of interpretation between places in the Islamic world, although this is being addressed by groups such as AAOIFI in Bahrain and various Malaysian study initiatives.

A large part of the reason for the establishment of the Malaysian International Islamic Financial Centre (MIFC) was to attract capital from the Middle East. There are now eight licensed foreign Islamic fund managers with fully-fledged licences and seed capital active in Kuala Lumpur, and the hope is that they will bring more money with them. If it does indeed come from the Middle East then it will be a firm indication that the differences in Shariah interpretation do not preclude flows of funds from one bloc to another. Some feel that this capital has already been more active in Malaysia than is commonly assumed. “There have been some GCC investors that have invested in the Malaysian ringgit sukuk market for many years, and they do it privately because they themselves have been here for many years,” says Abdul Ghani.

In any event, sukuk issuers do not have to come from the Islamic world. Next off the line will be GS Caltex, a Korean company 50-50 owned by Goldstar of Korea and Chevron of the US. This will be the first Korean sukuk. “There is interest because the Islamic pool of investors is bigger than that compared to conventional product, so we can probably do a bit more with high quality names,” says Chay Wai Leong at RHB. According to Dato’ Razif at Bank Negara, an Australian institution plans a sukuk too.

Naturally there are limits to issuers who can access these markets. The Korean banks who were the most prominent in the conventional ringgit markets can’t access sukuks, because the only way they could do so is if those funds were for use to launch, for example, an Islamic subsidiary – highly unlikely in Korea.

But for those who do take the sukuk route, there is the attraction of a deep market with well-constructed infrastructure. “At the end of the day any issuer, when they want to come to the market, want to go for a new investor base or they want to go for good pricing,” says Abdul Ghani. “And if they can get both, why not.” Malaysia, at least at times, has offered both. “People are beginning to realise that the only place that has this infrastructure is Malaysia. Elsewhere you really do not know how to gauge whether or not your issue was done efficiently or at the best price because there’s no benchmark. Malaysia has that benchmark.”