Malaysian Islamic Financial Market Liberalisation is a 'Revelation' for Foreign Banks
The opening up of the Islamic finance market through the liberalisation measures announced in April 2009 by Prime Minister Mohd Najib Abdul Razak and over the years, and Malaysia's interest in developing cross-border activity have been a revelation, confirms Richard Thomas, CEO of Gatehouse Bank plc, the latest Islamic investment bank to be authorised by the UK s Financial Services Authority (FSA)."I have been looking at Malaysia for the last 20 years and found it a difficult market to penetrate in the past. But suddenly with the new regime and the liberalisation; and the work done by Governor Dr Zeti Akhtar Aziz at Bank Negara Malaysia (BNM) and Chairman Zarinah Anwar at the Securities Commission of Malaysia (SC) has really made the difference between mere interest and practical development. We are directly engaged with the work done by both. We have some small direct equity investment in Malaysia but we are also working very closely with the authorities there and with Bursa Malaysia, the stock exchange, in developing future products," added Richard Thomas.
From the banking side bankers stress that they are seeing progress on standardising capital markets and money market products which now allows London and Kuala Lumpur to cooperate in the future in banking and finance. In terms of asset management there are a lot of opportunities for Malaysia as a destination for capital, but also as asource of capital for regional investment.
The above sentiments are virtually universal in the Islamic finance sector, which sees Kuala Lumpur providing essential leadership to the global industry. At the same time, Malaysia is a strong supporter of mainstreaming Islamic finance as part of the global financial system, and is also keen to encourage cross-border financial and economic links between Malaysia and the member countries of the Islamic Development Bank and the major financial markets of the world.
These liberalisation measures which will be implemented over the period 2009 to 2012, explained Prime Minister Mohd Najib Abdul Razak, are in line with the Government's initiative to promote structural change within the economy and diversify sources of growth to further drive economic expansion. The financial services sector is an integral component of the economy, and has increased its share in GDP from 9.2 per cent in 2000 to11 per cent in 2008. More than 140,000 workers are employed by banking institutions and insurance companies in Malaysia.
The latest measures are in line with the provisions set out in the Financial Sector Master Plan (FSMP) announced in 2001 by the then Government of Prime Minister Dr Mahathir Mohamed and which set out the roadmap for the liberalisation of the conventional and Islamic banking and insurance sectors in Malaysia. According to BNM, around 90 per cent of the FSMP initiatives have already been completed.
BNM fast-tracked the liberalisation of the Islamic financial sector under the FSMP by three years through the issuance in 2006/7 of dedicated Islamic banking licences to Al-Rajhi Bank of Saudi Arabia; Kuwait Finance House; and a consortium led by Qatar Islamic Bank. BNM two years ago also approved the acquisition of a substantial minority stake by Dubai International Group in the flagship Bank Islam Malaysia Berhad (BIMB), the first Islamic bank to be authorised in Malaysia in 1983. BNM stresses that the new measures are aimed at enhancing interlinkages to leverage on global developments in Islamic finance and reinforce Malaysia's position as an international Islamic financial hub.
Under the new liberalisation measures announced by the Government, BNM will issue;
- up to two new Islamic banking licences in 2009 under the Islamic Banking Act 1983 to world class foreign players to establish new Islamic banks with paid-up capital of at least USD1bn; and
- up to two new family Takaful (Islamic insurance) licences in 2009 to players that can offer significant value proposition to Malaysia to spur the development of the Takaful industry.
The Government has also changed the ceilings for foreign equity ownership in onshore Malaysian Islamic banks, investment banks, insurance companies and Takaful operators from the current 49 per cent to 70 per cent. This means that foreign shareholders can have a majority equity stake in a Malaysian financial institution in the above categories, which does not include commercial domestic Malaysian banks where the foreign equity shareholding remains at the current 30 per cent. Where this happens, the paid-up capital of the bank must be maintained at a minimum of USD1bn. Such alliances would strengthen business potential and enhance growth prospects of Malaysian financial institutions through the international expertise and global networks of foreign shareholders.
The liberalisation plan, will be supplemented with sufficient safeguards to ensure that the overall financial intermediation function of the financial system remains intact, effective and sound. Capacity and institutional building efforts will continue to be pursued, complemented by enhancements to the regulatory, supervisory and surveillance framework to preserve the resilience of the financial system.
The Government is also giving locally-incorporated foreign commercial banks greater flexibility to increase branches so as to achieve greater financial inclusion and insurance penetration in the country. Locally-incorporated foreign commercial banks will be allowed to establish four new full-fledged branches with effect in 2010 and ten microfinance branches with effect from this year. Similarly, the Government is easing visa requirements for the employment of expatriates in specialist areas that can contribute to the development of the financial sector.
Bank Negara Malaysia's Shariah Paramaters Promotes Standard References and Risk Mitigation Malaysia's efforts to promote greater harmonisation in the Islamic finance industry and to bridge the governing Shariah principles with the practice of Islamic finance took a step nearer following the launch of the inaugural industry reference guideline, "Shariah Parameter Reference 1" or "Murabahah Parameter (SPR1)" at the end of August 2009 by BNM.
The Shariah Parameters are aimed at promoting consistent interpretation and application of Shariah views and opinions on Murabahah contracts (cost-plus-financing contracts based largely on commodity transactions). Indeed, the Malaysian central bank is already working towards finalising the launching of further Shariah parameters on other Shariah contracts including Ijarah (leasing), Mudarabah (trust financing), Musharakah (partnerships), Istisna (construction financing) and Wadiah (current accounts).
SPR1, which is fully endorsed by BNM's Shariah Advisory Council, has been circulated to all BNM-authorised financial institutions that provide Islamic banking services in the country. A number of Islamic banks abroad including from London have welcomed the move stressing that initiatives that would provide a better understanding of the principles and basis of adopting Shariah contracts for Islamic financial products, is an important move towards harmonization of Islamic financial practices in the industry.
The objectives of the SPR1 include: to clarify the concepts, principles and conditions of Shariah contracts; to provide focus on the features of the Shariah contracts that form the basis of Islamic financial products; to provide the basis for decisions on matters relating to conditions, mechanisms and the implementation of Shariah contracts; to facilitate Islamic finance professionals and practitioners in the design and development of Islamic financial products; and to facilitate the formulation of policies and guidelines on contracts adopted by Islamic financial services industry.
At the 4th IFSB Seminar on Legal Issues in the Islamic Financial ServicesIndustry held in Kuala Lumpur on 28 September 2009, BNM Governor, Dr Zeti Akhtar Aziz, reiterated the importance of a robust legal framework in Islamic finance because it instills public confidence in the Islamic financial system; provides an enabling platform for practitioners to develop more innovative and complex financial products to meet the increasingly multifaceted demands of consumers and investors and provides the mechanism for dispute settlement that takes into account the distinct features of Islamic financial transactions.
In providing legal services, the industry has an important role of bridging the Shariah parameter with the legal parameters of the Islamic financial contracts. This is important in preparing the legal documentation of Islamic financial transactions so as to avoid ambiguity, inconsistency and to avoid the risk that the legal document be considered void by a court of law on the grounds of contravention with Shariah. In addition, by ensuring that the legal parameters are in compliance with Shariah parameters and the regulations, it also becomes a risk mitigator.
BNM conducted extensive research, compiled various Fatwas (Islamic legal opinions) as well as consulted with several local and international Shariah boards. In this regard, the Shariah parameter document provides an important reference for Shariah Committee Members to arrive at decisions pertaining to Islamic financial transactions, products and services.
Malaysia has championed the development of a modern scientific and systemic approach to the Shariah governance process in the Islamic finance industry. Under the watch of Governor Dr Zeti Akhtar Aziz, the most senior financial regulator in global finance, the Malaysian banking regulatory and supervisory model has flourished worldwide (see adjoining brief). The development of Shariah Parameters, together with master agreements for agency and Murabahah contracts, an Islamic interbank deposit scheme based on corporate Murabahah, are the latest manifestations of this essential process.
An equivocal approach in formulating Shariah rulings for a particular product or financial service that has a wide implication across industry and sovereignty, stressed BNM in the consultation document, calls for a more systematic Shariah ruling formulation process. This is important if consistent Shariah opinions are to be adopted within or across jurisdictions that allows comparison of Shariah rulings.
The consultation revealed that in implementing Shariah rulings, the Islamic financial industry is faced with a number of challenges. These include a lack of familiarity and ability to understand Islamic finance concepts; a lack of published references on how to operationalise Shariah-approved contracts from Shariah authorities; and a lack of publicly available documents on Fatwas and Shariah resolutions as a source of reference.
The consultation also revealed that the implementation of Shariah rulings is limited to product approval and not comprehensively across product development and life cycles comprising product idea generation, monitoring and supervision. BNM remains confident that SPR1 and its future sister Parameters will serve as important reference documents, particularly for Islamic financial institutions (IFIs), Shariah advisories, academia, researchers, students and members of the public who are interested in Islamic finance.
Malaysian Islamic Money and Liquidity Management Markets Go International. The completion of the first trade outside Malaysia based on the Bursa Suq Al-Sila' platform signed by CIMB Islamic Bank and Gatehouse Bank plc in September 2009 heralds a potentially new era for global Islamic liquidity management. The platform, launched by Bursa Malaysia, the national stock exchange, is an end-to-end Shariah-compliant trading platform that facilitates commodity-based Islamic financing under the Murabahah contract.
Bursa Suq Al-Sila' is a continuation of the Commodity Murabahah House (CMH), which is a pioneering effort, mooted in 2007, as a collaborative initiative of BNM, SC, Bursa Malaysia and the market players. This follows the launch of another pioneering Malaysian initiative in the Islamic money market in August 2009 by the Association of Islamic Banking Institutions Malaysia (AIBIM), the statutory banking organisation for Islamic financial institutions authorised in Malaysia, namely, the Corporate Murabahah Master Agreement (CMMA), a standard document for deposit-taking between financial institutions and corporate customers.
The CIMB/Gatehouse trade on the Bursa Suq Al-Sila' platform pioneered another cross-border development in the use of the two standardised interbank master agreements for Islamic deposit-taking and placement transactions - Interbank Murabahah Master Agreement (IMMA) and Master
Agency Agreement (MAA), which were introduced by AIBIM in April this year.
This is the first time that the AIBIM documentation has been used to effect a cross-border money market transaction between Malaysia and the UK. However, a small number of minor amendments were made to the standard documents to facilitate the transaction under English law. These changes were documented by way of an amendment letter. The standard documentation together with the agreed form of amendment letter will now allow transactions to be executed in a faster, more efficient manner and, more significantly, beyond those between Gatehouse Bank and CIMB Islamic to all institutions who wish to do so.
The global commodity Murabahah market is estimated at USD1.2 trillion. Commodity Murabahah transactions are conducted in all the main markets in global Islamic banking, and London has long been a centre for structuring and brokering commodity transactions especially through metal contracts on the London Metals Exchange (LME).
As such, the Bursa Suq Al-Sila' platform offers market players another choice but with the underlying commodity being palm oil contracts, launched in August 2009. The platform is multi-currency and multi-commodity but at the moment trades are effected only using the palm oil contracts although Bursa Malaysia stresses that more commodities including metals may be added to the universe in the future.
The above developments have exciting international synergies and may be attractive for IFIs because they are based on a holistic joined-up approach to inter-bank money market and liquidity management. According to Dato Yusli Mohamed Yusoff, CEO, Bursa Malaysia, "Malaysia is already benchmarked worldwide as a centre of Islamic Finance excellence and innovation, and all efforts by regulators and players have been geared towards making Shariah-compliant financing facilitative and easier the world over. This first international trade on Bursa Suq Al-Sila' affirms the viability of Bursa Malaysia's end-to-end Shariah commodity platform in facilitating cross-border financing. This also means opening up of our Islamic markets as multi-currency trades are now accessible via this platform."
The platform does indeed facilitate trades in the main international currencies other than in Malaysian ringgit. However, for the moment, explained Raja Teh Maimunah, Global Head Islamic Markets at Bursa Malaysia, the platform can only facilitate a full cycle trade in one currency, and not a basket of say US dollar, euro, yen and sterling, or cross currency trades. The potential for cross-border trades on the platform is huge and CIMB Islamic Bank CEO, Badlisyah Abdul Ghani, is confident, that this inaugural Islamic money market transaction with Gatehouse will pave the way for further cross border transactions and further displaying Islamic finance as a progressive, dynamic and global approach to banking.
The transaction will also further boost cooperation between Malaysia and the UK in the Islamic finance space. Bank Negara Malaysia and the UK Trade and Investment (UKTI), the UK Government entity that supports companies trading internationally and overseas enterprises seeking to locate in Britain, signed a memorandum of understanding (MoU) in February 2009 to establish a collaborative framework to promote mutual co-operation in the area of Islamic finance.
Under the MoU, a joint Council was set up. In July 2009, UK cooperation with Malaysia in the sphere of Islamic finance was reinforced with the visit to Kuala Lumpur of a high-level Islamic finance delegation headed by the Lord Mayor of the City of London, Alderman Ian Luder, and organized by the Malaysia-United Kingdom Islamic Finance Forum in collaboration with the Commonwealth Business Council.
At the same time, the success of the Corporate Murabahah Master Agreement (CMMA) in the Malaysian domestic market has important implications for the global Islamic money market because it introduced a common modus operandi for Islamic financial institutions in accepting deposits via commodity Murabahah. AIBIM President, Zukri Samat believes that the CMMA would unlock the vast potential of the domestic Islamic money market, whose average daily transactions is estimated to top RM6bn. The CMMA is thus predicted to assume a significant role in raising the innovation level of deposit products.
"The adoption of the CMMA for corporate deposits is expected to result in cost and resource savings for both Islamic banks and corporations. Such a standard agreement will certainly promote and uphold the tenets of transparency and consistency in Islamic financial transactions, which eventually will result in product effectiveness and operational efficiencies of Islamic banks. It will help eliminate the need for corporate customers to vet through each and every agreement proposed by different Islamic financial institutions on the same product. The
agreement will also provide certainty and standard methodology in ensuring principal and profit due to corporate depositors," explained Zukri Samat.
Under the CMMA, a company (the Deposit Placing Entity (DPE)) with surplus funds, for instance, can open a commodity Murabahah deposit account with an Islamic bank (the Deposit Taking Entity (DTE)) which also acts as the buying agent. The bank buys a commodity such as a metal or palm oil on behalf of the company, and then offers to buy the commodity from the company on a deferred payment basis. The sale price includes a cost-plus margin which is the sale profit to the company. The purchase by the bank, in its capacity as the agent of the principal, will be affected upon spot payment and immediate delivery by suppliers.
Mobile Phone Airtime Emerges as Brave New Asset Class for Islamic Financial Innovation. The use of mobile phone airtime is emerging as an innovative new commodity type asset class pioneered by RHB Islamic Bank, a subsidiary of the RHB Group, the 4th largest banking group in Malaysia. The airtime-based concept, stresses Jamelah Jamaluddin, Managing Director of RHB Islamic Bank, can also be applied for trade finance facilities, remittances as well as deposit products.
This follows RHB Islamic Bank's foray into the airtime market in late August 2009 with the launch of a unique Tawarruq product, which the Bank claims is the first commodity Murabahah type product based on mobile phone airtime. RHB Islamic Bank signed an agreement with Sedania Media Group and E-Pay for the introduction of telecommunication air time in its classical Tawarruq offerings.
The operational flow for a Murabahah financing using airtime as the commodity is straightforward. The customer applies for financing facility at the Bank, which approves the application according to its criteria. The customer accepts the offer and opens a deposit account with the Bank and signs the legal documents. Upon completion of the documentation exercise, the Bank performs the commodity trading by purchasing airtime credit (amount is equivalent to the financing amount) from Broker A. The Bank then sells the airtime to the customer at a mark-up and deferred basis. The Bank then assists the customer to sell the airtime to Broker B. The sale amount is equivalent to the financing amount. Broker B pays the sale amount into customer's deposit account. This is when the disbursement occurs. The customer will need to bear the actual commodity trading costs, which is minimal, besides the existing cost of financing.
RHB Islamic Bank stresses that this is a classical Tawarruq, with the only technical difference being the akad (contract) which is done through a mobile phone text message instead of written documents, and the asset to be transacted is airtime as opposed to physical commodities such as wheat, palm oil or metals. The Bank is aware of the International Council of Fiqh Academy (ICFA) Resolution 179 (19/5) in relation to 'Tawarruq: its meaning and types (classical applications and organized Tawarruq)' which was adopted by the Academy at its 19th Session in Sharjah, UAE earlier this year.
The RHB Group Shariah Committee, explains Jamelah Jamaluddin, is of the view that Tawarruq contract is a valid and legal contract from a Shariah perspective. In this regard, the Bank should observe the restrictions set by the Shariah Committee of AAOIFI on the Tawarruq transaction. These require that the commodity trading should adhere to a true sale and purchase. Moreover, the commodity brokers should be separate legal entities and the Bank can not act as an agent to sell the commodity on the customer's behalf.
Market players and most Shariah scholars agree that currently there is no alternative to Tawaruq as a cash management and liquidity facility for Islamic financial institutions. Tawarruq is also an essential tool in developing alternatives to Islamic derivative products. However, the consensus among Shariah advisories including the RHB Group Shariah Committee, is that Tawarruq where possible should be considered as a product of last resort.
At the same time, the promoters of the airtime-based Tawarruq stress that the new structure revolutionizes the way such transactions are conducted. For instance, once a customer has applied for Tawarruq, the transactions between E-PAY, RHB Islamic Bank, customers and ultimately Sedania is 100 percent paperless. Here Sedania acts as the ready buyer and E-Pay as the ready seller for the commodity. The Tawarruq Trading System, provided by Idottv Sdn Bhd, a subsidiary of Sedania, says Azrin Mohd Noor, Group Chief Executive Officer of Sedania, allows for not only greater efficiency and reduced waiting time but ultimately operating cost. Our proposition is to provide RHB Islamic Bank with an alternative which addresses the challenges in the current Tawarruq practice, thus giving RHB Islamic Bank market advantage over its competitors.
RHB Islamic Bank currently uses the airtime-based Tawarruq for its Personal Financing facility, which has a minimum financing of RM3,000 and an upper limit of RM150,000. The buying and selling of the airtime is based on each customer transaction and on the amount requested. The Bank will buy the airtime from the Broker at cost price and sell it to the customer at the mark up price depending on the rate of the facility at the point of application and the customer can choose the payment period between 2 years to 10 years.
Jamelah Jamaluddin maintains that at present, Tawarruq is the best concept for a cash management tool. The additional cost for the Tawarruq structure is mainly depending on the practice and management of the structure. The current Tawarruq practice utilizes commodities such as metals, aluminium and zinc, and others such as crude palm oil, all of which have certain limitations.
They are subject to existing market conditions which are not conducivefor Tawarruq, nor flexible to ensure a smoother transaction process. The commodities are subject to price fluctuations and in some circumstances, where the London Metal Exchange contracts are used, there is also risk of forex fluctuations, thus making it difficult for banks to manage their profitability. Due to the nature of the commodities and requirements of a Tawarruq transaction, additional costs such as transport and storage are also involved. There may also be a doubt over the transparency of the transaction as more often the selling and buying brokers are related or are the same party. The nature and high costs of the commodities makes them non-conducive for mass market appeal.
In contrast, continues Jamelah Jamaluddin, the advantage of airtime is that it does not require huge storage space; it is highly liquid and is not subject to price and forex exposures. Both traders (brokers) are independent of each other so there could be no doubt over transaction transparency. A customized system to facilitate the process flow creates an efficient Tawarruq transaction environment. The only additional cost to the customer is the trading fees for the brokers. The rest of the features are similar to the conventional cash financing products.
INCEIF Spearheads Human Capital Development Challenge for Global Islamic Finance Industry Concomitant with the rapid growth of the global Islamic finance industry come the major challenge of human capital development especially in nurturing the next generation of Islamic bankers. Islamic financial institutions rue the lack of qualified young Islamic bankers, although this mismatch is slowly starting to recede especially in Malaysia, where the Kuala Lumpur-based International Centre for Education in Islamic Finance (INCEIF), an educational trust which has university status under the Malaysian law, has ambitions of becoming the Islamic finance educational equivalent of INSEAD in France and Harvard Business School.
INCEIF, which is effectively the post-graduate training arm of BNM since its establishment in 2006, has spearheaded the human capital challenge not only of the Islamic finance industry in Malaysia but also globally, for INCEIF graduates come from all over the world, including Muslims and non-Muslims. Its prime objective, according to Agil Natt, Chief Executive Officer of INCEIF, is not only to produce top Islamic finance graduates who would command premium salaries, but also academics who would teach the next generations of Islamic bankers.
Agil Natt knows that this development curve is steep. Very few of the current generation of Islamic bankers have worked exclusively in the industry. Most of them started their banking careers in conventional finance. Also, with a supply bottleneck, the sector has experienced the phenomenon of the poaching of staff, which is an opportunity cost for the losing institution.
INCEIF over the last few years has forged strategic alliances with several foreign educational and training institutions, especially with the International Capital Market Association (ICMA) Centre at University of Reading in the UK. "Our cooperation is not based on one size fits all", confirmed Agil Natt, "but depends on the university and country. The core basis is sharing of intellectual property, curriculum and content. It is no point each one reinventing the wheel. The important thing is that the curriculum can be adopted or adapted depending on the legal framework of each country or institution. The qualification can be theirs or ours or joint. In the case of University of Reading, we are jointly offering a 1-Year Masters (MSc) in Investment Banking and Islamic Finance. Student have the option to either spend two terms on the campus at the University of Reading and one term at INCEIF in Kuala Lumpur; or to fully complete the program at the University of Reading. In Indonesia and Bahrain, we run our program jointly with the universities."
Since the first intake of its CIFP (Chartered Islamic Finance Professional) Qualification students in mid-2006, INCEIF has rapidly expanded. Currently it has 1,200 registered students. The first group of CIFP students in fact graduated in February 2009.
"The bulk of our students still do the distance-learning course, but an increasing number are now opting for the fulltime courses. In June 2009 we had an intake of another 70 students for our fulltime program. At the moment, some 30 per cent of the students are non-Malaysian and we also have a small number of non-Muslim students. Our aim is to increase the number of non-Muslims and non-Malaysian students at INCEIF. In the first batch of graduates, we had students from Yemen, Syria, Indonesia and Thailand. But now we have students from Japan, Hong Kong, CIS, Europe, Thailand and the Middle East. In fact, the President's Award for the Best Student in the CIFP in the first batch of graduates went to a non-Muslim student. In addition, we have also started to offer Masters and PhD programmes" said Agil Natt.
All INCEIF qualifications are recognised by the Malaysian Qualifications Agency (MQA). The CIFP is recognized as equivalent to a Master's program by the MQA, which allows holders of such a certificate to register for a PhD program either at INCEIF or at Malaysian universities.
INCEIF is keen on collaborations with foreign institutions. Already it has partnerships with institutions in Pakistan, Indonesia, UAE, Bahrain, Syria, Sudan, Iran, where they are either adopting the INCEIF program or adapting it to suit their local needs. INCEIF also encourages more Shariah graduates to pursue a career in banking. But it is aware that recruitment in the sector is subject to the vagaries of market conditions.
"True, traditionally the way into Islamic banking has been through the conventional banking sector. Ten years ago, there were no universities offering Islamic finance as a discipline. The banks had no choice but to recruit from the conventional banks. The downside was that these recruits had no grounding in Shariah matters. They had to unlearn and relearn. Our terms of reference are to create a new breed of bankers. Our intake profile also shows a good number from other disciplines such as law, accountancy etc. In terms of our graduates, they have been snapped up very quickly but the economic downturn has affected recruitment. The good times will come back and these people will get jobs in the market. The best accolade for us is when our graduates get snapped up and get paid a premium. This is how I am going to measure the benchmark" explained Agil Natt.
"One major problem for institutions such as INCEIF is the lack of a uniform global standard in Islamic finance education. Several organisations are coming up with various courses - some at the basic, some intermediary,and some at a higher standard. However, there is no recognised international quality control and certification for these courses. I would advise prospective candidates to scrutinize the curriculum, the courses, resources, staff etc. before they enroll for a particular course in Islamic finance. Unfortunately, it seems anybody can set up courses and claim that they are offering expert tuition. When it comes to a uniform standard, the industry has to step in and make sure it is at the required level. What is absent is the standard-setting board for everyone. I do not know how this will be solved. At present, it is best for the standard-setting board in each country to oversee this", added Agil Natt.
NEWS IN BRIEF
Bank Negara Malaysia Signs MoU with HKMA to Advance Islamic Finance Bank Negara Malaysia (BNM) and the Hong Kong Monetary Authority (HKMA) signed a Memorandum of Understanding (MoU) on 28 September 2009 to cooperate in the development of the financial services industry, especially in Islamic finance. The aim is to establish a long-term strategic partnership between the two regulatory authorities, and to cooperate in capacity building; human capital development; exchange of information and experience in developing legal, regulatory and supervisory frameworks for Islamic finance; harmonisation of standards and documentation relating to Islamic finance transactions; and to promote cross-border transactions. Bank Negara Governor, Dr Zeti Akhtar Aziz, is confident that this effort which extends the cooperation in the area of Islamic finance will provide further opportunities for increased economic and financial flows between Hong Kong and Malaysia. HKMA Chief Executive, Joseph Yam, similarly believes that the MoU reflects a joint commitment to further develop the Islamic finance industry and paves the way for future initiatives that will benefit both Malaysia and Hong Kong. The Hong Kong Government has publicly stated its ambition of developing the enclave into a global Islamic capital markets hub and as an investment gateway to Mainland China. The Hong Kong Government is currently reviewing its legal and tax frameworks with the aim of introducing tax neutrality to facilitate Islamic financial transactions such as Sukuk (Islamic bonds). Malaysian financial entities such as the CIMB Group have structured an exchangeable Sukuk for Paxo against assets based in Mainland China and is listed on the Hong Kong Stock Exchange.
Malaysia Institutionalises Dual Banking Model in Law Malaysia's new Central Bank of Malaysia Act 2009 codifies the duality of the Malaysian financial system, whereby an Islamic financial system operates side-by-side a conventional financial system. This measure has been adopted by the Government of Prime Minister Mohd Najib Abdul Razak in view of the importance for Islamic finance to be supported by a robust legislative framework. This statement of law is supported by a comprehensive legal framework already put in place for the regulation and supervision of Islamic finance in Malaysia, encompassing the banking,Takaful (Islamic insurance) and Islamic capital market industries. The legal recognition of the distinct features of Islamic financial transactions and the availability of a dispute settlement mechanism capableof applying these distinctive features, reduces the legal risks as well as risk of non-compliance with Shariah principles. Malaysia's Dual Banking Model has been emulated by many other countries including Indonesia,Brunei, Turkey, Pakistan, Qatar, Bahrain, UAE and Bangladesh.
Bond Issuance Overtake Sukuk Offerings in GCC States The value of corporate conventional bonds issued in the Gulf Cooperation Council (GCC) states for the first time has overtaken that of corporate Sukuk issuances, according to a study by City-based international law firm, Trowers & Hamlins. Gulf corporates have issued USD12.8bn in conventional bonds for the year ending 30 June 2009, compared to just USD4.3bn in Sukuk. This is a 15 per cent increase on the USD11.2bn of conventional corporate bond issuance in the Gulf in 2008, whilst Sukuk issuance fell a massive 74 per cent from last year's USD16.9bn. Trowers & Hamlins blames this development on investors demanding very high yields on Sukuk which forced Gulf corporates to switch to issuing cheaper conventional bonds. According to Neale Downes, Regional Banking and Finance Partner in the Trowers & Hamlins Bahrain office, during times of financial stress investors tend to avoid newer, complex and less tested forms of investment such as Sukuk for more traditional investments such as bonds. Similarly, real estate and construction companies have been relatively heavy issuers of Sukuk, as such, as property prices in the GCC took a hit, this may have had a knock on impact on investors' attitude towards Sukuk issued by companies in these sectors. In 2007-2008, for instance, 38 per cent of Sukuk issuance was by real estate companies whereas only 5 per cent of conventional GCC corporate bond issuance in the same period was from realty companies. The fall out of the AAOIFI statement on Musharakah and Mudarabah in February this year which raised questions as to whether such Sukuk structures were strictly in accordance with Shariah principles has also dampened enthusiasm for Sukuk amongst some investors. An even greater problem, according to Mr Downes,is the broader legal uncertainty whether, on the default of a Sukuk, the investors will really have security over the assets on which the Sukuk is based. When some originators have found themselves in financial trouble or, worse, have become insolvent, Sukuk investors have found themselves unexpectedly competing with the general body of creditors, rather than simply enforcing against or taking possession of the assets "supporting" their Sukuk. Subscribers to Sukuk are meant to be part owners of assets so their credit and risk profiling should be based on an assessment of the revenue generating potential of those assets, instead of just the paying ability and balance sheet of the company issuing the Sukuk. In the absence of such a treatment, Sukuk become no different from conventional corporate bonds. The defaults have highlighted the disparities between English/Common law, by which nearly all Sukuk documentation has been governed; and civil law systems that prevail in most of the GCC states calling into doubt the validity of the transfers of assets from the balance sheet of originators to issuer SPVs and the trust arrangements upon which issuers hold assets for the benefit of their investors. Bankers stress Malaysia does not have these legal anomalies because the Sukuk structures and contracts have been tried and tested in the Malaysian market. Trowers & Hamlins however stress that in the Third Quarter 2009, sentiment towards corporate Sukuk has recovered substantially since the worst of the market in early 2009, and their yields are now moving close to their levels pre the collapse of Lehman Brothers. Indeed, stressed the law firm: The long term appetite for Shariah-compliant investments is most definitely there and the need for private sector funding of the growing Gulf economies is a given.
Petronas Gold Standard USD1.5bn Sukuk IssuanceThe 5-year USD1.5bn Sukuk Al-Ijarah issued by Malaysian state oil company, Petroliam Nasional Bhd (Petronas), in late August 2009 marked a new era of bond and Sukuk (Islamic bonds) issuance in the country with its inaugural 'Emas' (Gold) symbol designation, which according to BNM, the centralbank, will provide greater visibility to the Malaysian market for the raising of funds by local and foreign corporations and symbolises "universal value and security".
BNM, in a statement stressed that "in Malaysia, the Sukuk component has grown to be larger than its conventional counterpart. Malaysia is currently the global leader in Sukuk issuance, accounting for 62 per cent of total global Sukuk outstanding. Given the growing maturity of our bond market, it is timely that Malaysia should offer its own brand proposition to distinguish foreign currency denominated bonds and Sukuk originating from Malaysia in the global capital market. This is something that is being used in different parts of the world like Maple in Canada, Kangaroo in Australia, Shogun and Samurai in Japan. This issuance showcases Malaysia's credentials as a centre of origination not only for ringgit bonds and Sukuk, but also for issuance of foreign currency-denominated bonds and Sukuk."
The Petronas EMAS Sukuk which was lead arranged by Morgan Stanley, CIMB Bank Bhd and Citigroup Inc. and priced to yield 162.5 basis points (bps) over comparable U.S. Treasuries, had an uptake of 60 per cent by investors from Asia; 34 per cent from Europe and the Middle East; and the rest from the United States. It was also part of a total USD4.5bn bond package issued by the oil utility company comprising a USD3bn conventional bond and a USD1.5bn Sukuk, which in total was the single largest US dollar issuance by an Asian entity outside Japan this year. The issue is also the largest international US dollar Sukuk since the USD1.5bn Dubai Ports issue in 2007. Similarly, the Sukuk which was assigned a rating of "A1" by Moody's Investors Service, its fifth highest investment-grade rating, and "A- (A minus)" by Standard & Poor, is one of the first listed on Bursa Malaysia, as well as on the Labuan International Financial Exchange (LFX) and the Luxembourg Stock Exchange.
