Sukuk champion: Favourable environment attracts issuers

With more than 60% of global sukuk issuances taking place in Malaysia – and around 70% of the country’s domestic debt issuances now in the form of these Islamic bonds – these days, Kuala Lumpur can rightly claim to be the global capital of sukuk. This status looks set to continue too, with the government firmly backing market expansion, both via provisions in the Financial Sector Blueprint (FSB) and projects outlined in the country’s Economic Transformation Programme (ETP). Meanwhile, with global demand for sukuk rising fast, as the IFS sector expands and Islamic investors seek sharia-compliant products to manage their assets, the country’s sukuk-friendly regime continues to pull in issuers. Yet this position is not without its challenges. In particular, the issue of making sure Malaysian sukuks are more universally accepted, even among Islamic investors, is likely to continue to exercise minds.

A PIONEER: The government was the first issuer of sukuk in Malaysia, a move made in 1983 to enable asset management in the nascent Islamic banking sector. The first private sukuk issue came in 1990, a RM125m ($40.3m) Shell MDS issue, with two other global milestones being the issuance of the first sukuk ijara (Islamic equivalent of leasing) in 2002, and the first sovereign sukuk, also ijara, later that year. In 2005, Malaysia also saw the first musharaka (profit-loss sharing) sukuk issued, as well as the world’s first mudharaba (profit sharing) issue. The first international subordinated sukuk was issued by Maybank in 2007. Since then, the market has mushroomed, both in Malaysia and globally. By 2009, according to the ETP, sukuk accounted for RM32bn ($10.3bn) out of a total RM61bn ($19.7bn) of Malaysia’s corporate debt issue, with the sukuk figure some 47% of the global market. The highest peak was just before the global downturn, in 2007, when ringgit-denominated sukuk reached RM38.7bn ($12.5bn), according to Bloomberg. In 2010 this figure was RM32.9bn ($10.6bn), while 2011 appears to have exceeded even the 2007 record. According to the latest available figures from the Securities Commission (SC), the first half of 2012 saw some RM22.3bn ($7.19bn) of corporate sukuk approved, along with RM153.9bn ($49.65bn) issued, compared to RM90.6bn ($29.23bn) of corporate sukuk issued in the same period of the previous year. The figure for the first half of 2012 comprised some 49% of all bonds and sukuk outstanding in the Malaysian market.

STELLAR YEAR: Up to August 2012 some stand-out issuances included January’s world-record RM30.6bn ($9.9bn) sukuk, issued by Projek Lebuhraya Usahasama and aimed at securing financing for the purchase of five toll concessions. Khazanah Nasional sold a RM1.09bn ($351.6m) convertible sukuk in March, the same month Tanjung Bin Energy made a RM3.3bn ($1.1bn) sukuk private placement. A RM2.5bn ($806.5m) perpetual sukuk was then announced in June by Malaysian Airlines. Also in June, the National Higher Education Loan Corporation (PTPTN) issued a RM2.5bn ($806.5m) sukuk, while the Johor Corporation launched a RM3bn ($967.8m) sukuk the same month. Then there was the RM8bn ($2.6bn) sukuk announced in July to help finance the mass rapid transit project, initiated by Danainfra Nasional. These issuances from the first seven months of the year total RM50.99bn ($16.4bn).

MODELS: The SC figures show that the majority of the sukuk issued between the first and third quarter of 2011 – 59% – consisted of musharaka, with 13% ijara, 10% murabaha (cost-plus financing), 9% mudharaba and 9% wakala. Wakala uses a special-purpose vehicle to issue debt and is an innovative product which Malaysia began issuing in 2011 to high demand. This illustrated the long-term confidence of investors in this form of sukuk and in the Malaysian market.

As the sukuk market moves forward, it will likely see even more innovative products on offer, although to date, so-called plain vanilla sukuk have been popular enough. Indeed, many firms go for simpler products in order to keep costs down. Also helping with this is the positive tax environment, with investors exempted from capital gains taxes on non-ringgit sukuk up to 2014.