Islamic Banker November 2013

IB November 2013 Cover Final _Layout 2 06/03/2014 23:30 Page 1 

Islamic Banker 

News and Analysis of Islamic Banking, Finance and Insurance 

Issue No. 214 

November 2013 

Dhul hIjja 1434 - muharram 1435 

Exclusive Interview: Dr Zeti Akhtar Aziz, Governor, BNM 

IF Industry is much sounder Today Than a Year ago 

The State of the Islamic Finance Industry 

Time for IF Industry to start realising its Potential 

Interview: Abdulrazzak Elkhraijy, NCB 

The Future is Islamic banking in saudi arabia 

Global Sukuk Market 

sukuk market to Withstand bond market volatility 

Mushtak Parker Associates Limited

IB November 2013 final _IB_JanFeb 2010.qxd 06/03/2014 23:55 Page 1 

islamic banker 

Leading the Way in Faith-based investment 

c ontents 

Issue No. 214 November 2013 

dhuL hijja 1434 - muharram 1435 

Publisher Leila badawi 

editor mushtak Parker 

Design & Production imtiaze manjra 

research & Development alan st clair 

marketing & Finance 

Contributing editors 

dr daud bakar (dubai) 

mustafa aksay (istanbul) 

dr adalet djabiev (moscow) 

stella cox (London) 

dr mohsin Khan (Washington) 

Wan abdul rahim Kamil (Kuala Lumpur) 

dr saleh malaikah (jeddah) 

dr abbas mirakhor (Washington) 

dr volker nienhaus (essen) 

adeel y siddiqi (London) 

richard thomas (London) 

adam ebrahim (cape town) 

tan sri nor mohamed yakcop (Kuala Lumpur) 

ali yasseri (tehran) 

shariah Consultant Professor abdul ali hamid 

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eDITorIAL The sTATe oF The IsLAmIC FINANCe INDusTry 2 

TIme For IF INDusTry To sTArT reALIsINg ITs PoTeNTIAL 

NeWs IN FoCus & bANKINg IN brIeF 3 

FINANCe exCLusIve INTervIeW: AbDuLrAzzAK m eLKhrAIjy, NCb 6 

The FuTure Is IsLAmIC bANKINg IN sAuDI ArAbIA 

demand for islamic banking and finance products and services is set to increase 

steadily over the next few years in saudi arabia, the world’s single largest such market, 

especially from young customers, corporates and government entities. this includes 

retail banking, corporate finance and investment banking in particular for sukuk 

issuance. Mushtak Parker discusses with Abdulrazzak M Elkhraijy, executive vice 

President and head of the islamic banking development group at National 

Commercial Bank (NCB), the state of, the current opportunities and future challenges 

of islamic banking in the Kingdom 

TILAL DeveLoPmeNT LAuNChes omAN’s FIrsT CorPorATe suKuK 9 

INTervIeW Dr zeTI AKhTAr AzIz, goverNor, bANK NegArA mALAysIA 10 

IF INDusTry muCh souNDer ToDAy ThAN A yeAr Ago 

Following in the tradition of her predecessors, dr Zeti akhtar aziz, governor of bank 

negara malaysia, the central bank, is the most proactive and experienced governors serving 

the islamic banking, finance and takaful industry. her influence transcends her home 

jurisdiction of malaysia to the corridors of power at the g8, the basle committee and the 

iFsb (islamic Financial services board). she is the archetypal ‘central banker’s central 

banker’ and commands huge respect both at home and abroad. in this in-depth interview, 

Governor Zeti Akhtar Aziz discusses with Islamic Banker the state of the global islamic 

finance industry; the latest developments in the malaysian and regional markets; and the 

challenges the industry is faced with going forward 

suKuK gLobAL suKuK mArKeT versus boND mArKeT 14 

suKuK mArKeT To WIThsTAND boND mArKeT voLATILITy 

the prospect of the us Federal reserve (Fed) tapering the monetary stimulus programme 

sent shockwaves through the financial markets. sukuk have not been spared by the impact 

of rising us yields. however, Ramlie Kamsari, chief executive officer, CIMB Principal 

Islamic Asset Management in Kuala Lumpur, maintains that the global sukuk market has 

proved relatively more resilient in the face of this volatility, and that this resilience has largely 

been a demand-driven phenomenon, propelled by investors for products that are more 

compliant with their religious faith 

suKuK KhAzANAh NAsIoNAL sg$600m exChANgeAbLe suKuK 16 

KhAzANAh Issues seCoND suKuK IN sINgAPore mArKeT 

Khazanah nasional berhad, the malaysian sovereign wealth fund (sWF), successfully 

completed a benchmark exchangeable sukuk offering of sg$600 million 

(rm1.524 billion), via a Labuan incorporated independent special purpose company, 

indah capital Ltd. in november 2013, which the company stressed is the first 

singapore dollar-denominated negative yield exchangeable sukuk, and the first 

offering to offer exposure to a growing private healthcare market. Islamic Banker reports 

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the views of contributors and guest w riters are not those of 

the editor and staff of islamic banker.


eDITorIAL 

The state of the Islamic Finance Industry 

time for iF industry to start realising its Potential 

as another year draws to a 

close the global islamic 

finance industry seems to 

be sustaining its traction 

especially in key markets in 

saudi arabia and malaysia, the two 

largest single islamic finance markets in 

the world by far. 

elsewhere, the encouraging signs have 

been in Qatar, turkey and indonesia, 

where there have also been regular 

domestic sovereign sukuk issuances for 

capital, reserve and liquidity management 

purposes, perhaps indicating the beginnings 

of a maturing of the local islamic 

finance market, especially of government 

policy towards the industry. 

in oman, tilal development company 

has recently issued the first corporate 

sukuk in the country perhaps paving the 

way for more such issuances. however, 

local institutions would prefer to get more 

guidance through a benchmark debut 

sovereign sukuk, although there have 

been very few signs that the ministry of 

Finance in muscat is currently contemplating 

such a move. 

two more recent debutantes in the 

sukuk market have been al hilal bank in 

abu dhabi, a potentially important development 

given that the bank is effectively 

a quasi-sovereign entity being whollyowned 

by the abu dhabi investment 

council, the investment arm of the government 

of abu dhabi; and osun state in 

nigeria, which last month became the first 

entity – sovereign or private – to issue a 

sukuk in africa. 

the market has also been buoyed by 

the developments in non-muslim jurisdictions 

such as the uK, Luxembourg and 

south africa, where work towards issuing 

debut sovereign sukuk in the international 

market is on track for the coming financial 

year 2014/15. 

uK Prime minister david cameron’s 

announcements at the World islamic 

economic Forum (WieF) held in London 

last month on six new initiatives on 

islamic finance has given further momentum 

to the market and has raised expectations 

further. 

already there are signs of movement in 

transactions in the real estate, housing, 

mergers and acquisitions (m&a) and 

infrastructure sectors. 

similarly, more new entrants to the 

market could also come from non-traditional 

countries such as senegal, which 

has recently mandated citigroup and the 

islamic corporation for the development 

of the Private sector (icd), the private 

sector funding arm of the islamic 

development bank (idb) group, to 

advise on and arrange its debut sovereign 

sukuk. 

as our two interviews in this issue suggest, 

the growth tensile for islamic finance 

in saudi arabia and malaysia is encouraging. 

abdulrazzak elkhraijy of the 

national commercial bank of saudi 

arabia (ncb) is rightly bullish about the 

prospects for the future expansion of 

islamic banking in the Kingdom. 

brIghT FuTure 

“every single day we see a growth in 

islamic banking. We have a commitment 

from our customers, from our shareholders 

and our management to grow this 

business. it started with us fulfilling our 

customers’ needs and the demand subsequently 

increased. this is the model we 

follow and hopefully there will be more 

expansion in islamic banking in this field. 

in the past customers used to take 

islamic banking for peace of mind. that 

was the demand, give me something to 

give me peace of mind, in terms of 

shariah compliance. today it is not only 

peace of mind, which is a must, but another 

thing is that islamic banking products 

have to be efficient and competitive with 

the others in the market. i strongly believe 

that the future of islamic banking in saudi 

arabia is very bright.” 

his estimate of islamic deposits 

accounting for between 40 to 45 per cent 

of total banking deposits in the country is 

revealing. if the growth trajectory continues 

upwards, driven by demand especially 

from young customers, it may be 

reasonable to assume that within the next 

few years islamic banking could overtake 

214 2 Islamic banker november 2013 dhul hijja 1434 - muharram 1435 

the conventional banking sector with 

more than half of the market share of the 

banking sector. 

similarly, in malaysia the market share 

of islamic banking of the total banking sector 

may not be as high but during the 

tenure of current bank negara malaysia 

governor dr Zeti akhtar aziz it has 

increased from 6 per cent in 2000 to 24 per 

cent at end november 2013. but future 

upward growth cannot be taken for granted 

even in the malaysian market, where competition 

from the conventional sector is 

entrenched, albeit the islamic sector has 

held its own over the last three decades. 

the global sukuk market too has proved 

relatively more resilient in the face of the 

volatility resulting from the prospect of the 

Federal reserve tapering the us monetary 

stimulus programme which sent shockwaves 

through the financial markets. the 

resilience of the global sukuk market has 

been largely a demand-driven phenomenon, 

propelled by investors for products that 

are more compliant with their religious faith. 

but banking is not merely about growth 

projections, market share, profitability etc. 

governor Zeti, in her idb Prize lecture 

this month, reminded that islamic finance, 

through its emphasis on risk-sharing for the 

attainment of socio-economic goals based 

on the objectives of shariah, provides the 

discipline that enhances the prospect of 

strengthening the link between finance and 

the real economy, thus contributing 

towards overall financial stability. 

“With the global economy now on the 

recovery path,” she added, “islamic finance 

offers enormous potential in supporting a 

more inclusive and sustainable economic 

growth. developing and emerging 

economies in particular stand to reap the 

largest benefits from this potential. to fully 

realise this potential, regulatory priorities in 

strengthening financial stability taking into 

consideration the specificities of islamic 

finance will ensure its continued resilience 

and its potential to effectively service the 

functioning of economies and the economic 

wellbeing of societies.” it is up to policymakers 

and the islamic finance industry to 

put substance to these lofty aspirations. .


Policy 

30. 

11. 

NeWs 

IN FoCus 

30. 

Zeti urges redifining of modern Finance 

dr Zeti akhtar aziz, winner of the islamic development bank (idb) Prize for islamic 

Finance in 2013, in the annual idb Prize Lecture given in jeddah in november 

2013, strongly stressed the need to redefine the fundamental character of modern 

finance and how it would interact with the economy and the broader society. “new considerations 

that prioritise justice and fairness, sustainability and inclusion have also 

become essential underpinnings of such a financial ecosystem. the recalibration of 

finance should aim to serve the needs of the real economy and more importantly the 

broader society. this would lead to more sustainable financial systems, and in turn contribute 

positively to growth and development,” urged dr Zeti, who is also the governor 

of bank negara malaysia, the central bank. 

indeed, islamic finance is a model to reanchor finance to the real economy, she suggested. 

this is because a core underpinning of islamic finance is the tenet that requires 

islamic financial transactions to be supported by genuine productive economic activity. 

islamic finance is also a financial regime that places emphasis on risk-sharing, thereby 

strengthening further the link of finance to the real economy. the concept of risk-sharing 

in finance is not new. in islamic finance, this is further reinforced by shariah principles that 

strongly discourage excessive debt given its detrimental effects on society. the use of risksharing 

transactions in islamic finance thus offers the potential to reinforce the links between 

finance and the real economy. the contractual arrangements between the financier and 

the entrepreneur place strong emphasis on the value creation and economic viability of the 

enterprise and also serves as a restraint on unbridled financial engineering. 

the move to embrace the risk-sharing dimension of islamic finance also presents 

new opportunities for financial management. indeed, in recent years, said dr Zeti, the 

greater use of equity-based models has been most evident in the sukuk market. the 

evolution of asset-backed and asset-based sukuk provides further options for investors 

to diversify their portfolio. asset-backed sukuk has profit and loss sharing elements that 

thus offers investment sustainability. the possibility of a default is minimised, as investors 

of asset-backed sukuk are not guaranteed to receive income or capital gains, and profits 

are paid by the issuers only when the underlying assets earn profits. 

similarly, argued dr Zeti, risk-sharing transactions and undertakings under the participatory 

finance models in islamic finance also enhances prospects for increasing financial 

inclusion and in bringing the financially unserved into the economic mainstream. in 

many idb member countries, studies have shown that economic development is constrained 

by the lack of access to finance, given that only about 30 per cent of the adult 

population use formal financial intermediaries. 

“greater outreach to small and medium enterprises (smes) and microenterprises can 

be achieved through the wider application of equity-based structures in financing for 

smes and islamic microfinance given their strong emphasis on promoting entrepreneurship 

and value-creating activities. this contributes towards the overall objective of 

generating inclusive growth that enhances the prospects for job creation. integration 

with other financial products such as microtakaful and social welfare arrangements such 

as endowment (waqf) can also provide a total financial solution for the lower income 

groups and small businesses,” she added. 

risk-sharing in islamic finance also extends to the creation of a more equitable and 

just distribution of wealth. it also has the potential for islamic finance to become a powerful 

tool that can enhance financial access for emerging economies, in particular the less 

developed countries. the continued success and viability of islamic finance will depend 

on ensuring focus on preserving financial stability. here, she stressed further progress 

on two fronts - continuing to evolve a more refined distinction within prudential and financial 

reporting frameworks to reflect the different nature and profile of risks under risksharing 

contracts; and the need to accelerate efforts to further strengthen the infrastructural 

underpinnings for the development of the overall islamic financial system. 

b A N K I N g 

I N b r I e F 

gCC/uK Investors in realty jv 

apache capital Partners LLP, the 

London and gulf-based real estate 

investment management firm, and 

tadhamon capital bsc, the bahrainbased 

islamic investment company, 

have set up a uK£100 million joint venture 

with mcLaren Property for the 

development of a major student accommodation 

and office scheme in 

shoreditch, London, which was 

acquired from ireland's national asset 

management agency (nama). the 

development will comprise 419 high 

quality student accommodation units 

and 43,000 sq ft of office space, with 

completion of the development scheduled 

for the start of the 2015 academic 

year. the development is well-located 

to benefit from the increasing demand 

from over 50,000 students studying 

within 20 minutes' walk of the 

site. shariah-compliant debt financing 

for the development is being provided 

by royal bank of scotland and the 

office development has been forward 

sold to helical bar Plc for uK£21 million. 

this transaction represents the 

second successful acquisition by 

mcLaren Property, apache and 

tadhamon from nama. the first was 

the 253-bedroom student accommodation 

develop-ment at Paris gardens, 

in southwark, London, which was completed 

in summer 2013 and achieved 

100 per cent occupancy during its first 

academic year. according to trowers 

& hamlins, the city law firm which 

acted for tadhamon and apache, he 

stable income-generation and capital 

growth potential of student accommodation 

make it a particularly popular 

asset class right now. 

gatehouse signs jv with sigma 

uK-based gatehouse bank has set up 

a uK£700 million jv with sigma capital, 

the edinburgh-based residential and 

urban regeneration specialist, which will 

support the roll-out of an initial 2,000 

new privately rented residential properties 

in the uK, with the potential to grow 

the portfolio to 6,600 new rental homes. 

Islamic banker november 2013 dhul hijja 1434 - muharram 1435 214 3


equities 

NeWs 

IN FoCus 

sc revises stock screening methodology 

bursa maLaysia main board 

Weightage oF shariah-comPLiant securities 

by sector november 2013 

mAIN mArKeT/ No. oF shArIAh- ToTAL % oF shArIAh 

Ace market Compliant securities -compliant 

securities 

securities 

CoNsumer ProDuCTs 106 133 80% 

INDusTrIAL ProDuCTs 194 261 74% 

mININg 1 1 100% 

CoNsTruCTIoN 36 44 82% 

TrADINg/servICes 143 206 69% 

ProPerTIes 59 86 69% 

PLANTATIoN 34 39 87% 

TeChNoLogy 71 95 75% 

INFrAsTruCTure 5 6 83% 

FINANCe 2 36 6% 

sPAC 2 2 100% 

hoTeLs 0 4 0% 

CLose-eND FuNDs 0 1 0% 

ToTAL 653 914 71% 

sourCe: securities commission maLaysia november 2013 

the securities commission 

malaysia, the 

securities regulator, has 

revised its shariah screening 

methodology for islamic 

equity funds and unit 

trusts regulated by the 

commission. the revised 

methodology has been 

approved by the shariah 

advisory council (sac) of 

the commission. 

under the revised 

screening methodology, 

the commission said in a 

statement, the sac adopts 

a two-tier quantitative 

approach, which applies the business activity benchmarks and the financial ratio 

benchmarks. the revision has taken into consideration of the rapid development 

of the islamic finance industry in malaysia, since the shariah screening methodology 

was first introduced in 1995. 

“the revision,” added the commission, “will potentially spur greater inflow of 

foreign islamic funds into malaysian shariah-compliant equities, thus expanding 

the islamic capital market’s global reach, as outlined in the capital market 

masterplan ii.” 

the sac last month also published its latest updated list of shariah-compliant 

securities, which features a total of 653 shariah-compliant securities and which 

constitute 71 per cent of the 914 listed securities on bursa malaysia, the national 

stock exchange. the list is updated every six months by the sac. the latest 

update is effective 29 november 2013. 

the list includes 16 newly classified shariah-compliant securities and excludes 

158 from the previous list issued in may 2013. it also indicates, according to the 

commission, that the shariah-compliant securities are well represented across 

the business sectors. to facilitate transition under the revised screening methodology, 

investors are given six (6) months from the effective date of the List of 

shariah-compliant securities, to dispose of securities that are excluded from the 

list, in the event that the respective market price of such securities exceeds or is 

equal to the investment cost. 

during the six-month period, according to the securities commission, dividends 

received and capital gains realised from the disposal of such securities may be 

retained by investors, without the need to channel any portion of the dividends 

and capital gains to baitulmal and/or charitable bodies. the next update will occur 

in may 2014. 

given that malaysia has over 14 islamic banks, the shariah-compliant securities 

list surprisingly contains only two financial entities, namely bimb holdings and 

syarikat takaful malaysia berhad. in addition there are four islamic real estate 

investment trusts (reits) listed on bursa malaysia, namely, al aqar KPj real 

estate investment trust, al-hadharah boustead reit, axis real estate investment 

trust, KLcc ProP & reits stapled sec. similarly, there is one islamic 

exchange traded Fund (etF), myetF dow jones islamic market malaysia titans 

25, managed by i-vcap management sdn bhd, a subsidiary of Khazanah nasional 

berhad, the malaysian sovereign wealth fund, also listed on bursa malaysia. 

b A N K I N g 

I N b r I e F 

ICD in jv Ijara Firm in Palestine 

the board of the islamic 

corporation for the development of 

the Private sector (icd) , the private 

sector funding arm of the islamic 

development bank (idb) group, has 

set up a joint venture leasing company 

in Palestine called Palestine 

ijara company (Pic), in partnership 

with the Palestine investment Fund 

(PiF) and the Palestine islamic bank 

(Pib). the company, said icd in a 

statement, will offer multiple leasing 

products and assist Palestinian 

smes in various economic sectors, 

including agribusiness, industry, construction, 

education, health care, and 

tourism, in fulfilling their growth 

potential by offering them a range of 

shariah-compliant financing products. 

the aim is also to generate 

employment especially amongst the 

youth. this is the 17th ijara company 

set up by icd in asia, the middle 

east and africa. 

Arzan uK£41m uK realty Deal 

mayfair-based 90 north real estate 

Partners LLP, an independent investment 

advisory firm, specialising in 

shariah compliant real estate investment, 

advised a middle eastern 

investor represented by dubai-based 

arzan Wealth, on the purchase of 

crossley retail Park, Kidderminster, 

Worcester-shire in a uK£41.5 million 

deal which is projected to give a net initial 

yield of 7.3 per cent per annum to 

the investor. the transaction was 

financed through a shariah-compliant 

debt facility provided by bank financing 

for the acquisition which was provided 

by aareal bank. nicholas judd, 

Founder Partner of 90 north stressed 

that “the investment platform we manage 

in partnership with arzan Wealth 

has now acquired approximately £110 

million of property and we are seeking 

further substantial acquisitions across 

a range of real estate sectors for 

2014”. north has over the last 18 

months transacted on 7 assets with a 

value of about uK£200 million. 

214 4 Islamic banker november 2013 dhul hijja 1434 - muharram 1435


Corporate sukuk 

NeWs 

IN FoCus 

riyad bank closes sr4bn sukuk offering 

riyad banK 

sr4bn suKuK aL-ijarah 

saLient Features at november 2013 

Issuer 

riyad banK 

DATe oF Issue november 2013 

sIze oF Issue 

sr4 biLLion (us$1.07bn) 

TeNor 7 years, caLLabLe aFter 5 

suKuK TyPe 

PrICINg 

LeAD mANAger AND 

FINANCIAL ADvIser 

CurreNCy 

use oF ProCeeDs 

goverNINg LAW 

DIsTrIbuTIoN 

years 

FiXed rate suKuK aL ijarah 

0.68% over 3-months sibor 

(saudi interbanK oFFered 

rate) 

riyad caPitaL 

saudi riyaL 

the Proceeds WiLL be used 

to diversiFy riyad banK’s 

sources oF Funding; reduce 

the asset /LiabiLity maturity 

mismatch by securing Long 

term Funding; and to suP- 

Port the Financing oF 

shariah-comPLiant business 

oF the banK. 

LaWs oF saudi arabia 

through Private PLacement 

to saudi institutionaL 

investors. 

sourCe: isLamic banKer and riyad banK november 2013 

riyad bank of saudi arabia successfully 

closed a sr4 billion 

(us$1.07 billion) 7-year local currency 

sukuk which was offered through a 

private placement to institutional 

investors in the local market. the 

issuance was duly over-subscribed. 

talal ibrahim al-Qudaibi, ceo of 

riyad bank, said in a statement to the 

saudi stock exchange (tadawul) that 

the sukuk will be for 7 years maturity 

callable after 5 years. riyad capital was 

the financial advisor and lead manager 

for this issuance. al-Qudaibi explained 

that riyad bank aims to diversify its 

sources of funding; reduce the asset /liability 

maturity mismatch by securing long 

term funding; and support the financing 

of shariah-compliant business. 

the issuance was priced at 0.68 per 

cent over 3-month sibor (saudi 

interbank offered rate). riyad bank, 

which is rated a+ by international rating 

agencies, standard & Poor’s and Fitch rating, is the latest saudi bank to raise 

funds from the local saudi riyal market through islamic finance instruments to support 

their capital structure and balance sheet activities. 

saudi hollandi bank, saudi british bank, banque saudi Fransi have all 

accessed the market through sukuk issuances. riyad bank recently recently 

announced increased profits of sr2,917 million in the first 9 months of 2013, which 

is 10 per cent higher than the same period in 2012. 

b A N K I N g 

I N b r I e F 

eIIb-rasmala in Trade Fund 

eiib-rasmala, a dubai-based joint venture 

islamic investment banking and 

asset management group, has launched 

the rasmala trade Finance Fund, 

which concludes a series of new fund 

launches in 2013, including the rasmala 

global sukuk Fund, the rasmala 

Leasing Fund and the rasmala gcc 

islamic equity income Fund. eiibrasmala 

comprises uK-based 

european islamic investment bank 

(eiib) and dubai-based rasmala 

group. according to eric swats, head of 

asset management, eiib-rasmala, the 

rasmala trade Finance Fund “will cater 

to the increasing demand for low risk, 

income-orientated shariah-compliant 

investment products. the Fund offers a 

diversified portfolio of trade finance transactions 

exposed to different geographies, 

industry groups and individual 

companies in order to lower exposure to 

rising interest rates. the fund will obtain 

enhanced investment returns from 

assets that can often be undervalued 

due to lack of recognition of their intrinsic 

payment capabilities. the overall strategy 

of the fund is expected to provide it 

with a means to achieve global diversification 

in trade finance markets.” 

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FINANCe 

exclusive Interview: Abdulrazzak m elkhraijy, NCb, saudi Arabia 

the Future is islamic banking in saudi arabia 

demand for islamic banking 

and finance products and 

services is set to increase 

steadily over the next few 

years in saudi arabia, the 

world’s single largest such market, especially 

from young customers, corporates 

and government entities. this includes 

retail banking, corporate finance and 

investment banking in particular for sukuk 

issuance. 

“once you bring a financial solution to 

your customers that is islamic and conventional, 

most of the time they will prefer 

to go with the islamic solution as long as 

it is shariah-compliant, efficient and price 

competitive. everything in terms of the 

process side is important - the procedure, 

the policy, pricing, efficiency - everything,” 

explained abdulrazzak m elkhraijy, 

executive vice President and head of the 

islamic banking development group at 

national commercial bank (ncb), one of 

the largest banks in the arab World, in an 

exclusive interview with Islamic Banker. 

“the young people are demanding 

alternative shariah-compliant financing 

complying with a modern offering. you 

see them using more of the alternative 

products today in our branches and about 

90 per cent of the transactions are done 

in this way. it shows you that demand for 

islamic finance is good. the future of 

islamic finance in the Kingdom is indeed 

very bright,” he added. 

in a country where some 60 per cent of 

the population is under 25 years old, the 

youth are an important driver of the 

islamic banking market. this cannot be 

over-stated nor stereotyped. banks certainly 

cannot take the young saudi customer 

for granted, because in terms of 

products, technology and delivery they 

are demanding that these have to be 

modern and up-to-date with what is and 

how it is offered in the market. 

“you see,” explained ncb’s 

abdulrazzak elKhraijy, “more people are 

now not using the original traditional channel 

through the branches. they are using 

the alternatives, either online banking, 

telephone banking and the atms. 

by mushtaK ParKer 

ncb’s own retail banking operations is 

99 per cent shariah-compliant driven 

entirely by customer demand. there are 

only a few conventional customers largely 

related to its credit card business. the 

bank’s entire retail branch network is fully 

shariah-compliant offering “everything” 

including online and telephone banking 

and a large atm network. the trend for 

corporate and structured finance in the 

Kingdom is the same. already some 50 per 

cent of ncb’s corporate financing business 

is shariah-compliant and increasing. 

DeFININg DePosITs 

“ncb since the start of its islamic banking 

business, has been involved in a banking 

revolution based on customer demand 

and needs. every time we introduced a 

new product we saw more demand and 

growth in the percentage of the customers 

who are involved in islamic transactions. 

hopefully soon we will be able to make our 

retail business a 100 per cent shariahcompliant,” 

says abdulrazzak elkhraijy. 

as far as market size in the Kingdom is 

concerned, he concedes that this is difficult 

to assess. if you take deposits, for instance, 

it depends on how you define deposits. 

“some banks define all their demand 

deposits as shariah-compliant, for instance. 

at ncb we do not define all our demand 

deposits as such, even though there is no 

interest paid or taken on demand deposits. 

if you consider the whole process, if the surplus 

of that deposit is not invested in a 

shariah-compliant way and it is not under the 

control of a shariah department and therefore 

board, we do not consider it as islamic 

although it is demand and there is no interest 

paid on that. so this is the difficulty of defining 

what is the percentage of islamic deposits in 

the banking system as a whole,” he added. 

he is confident that islamic banking constitutes 

more than 40 per cent of the total 

banking system and continues on an 

upward projection especially in terms of 

customer deposits, financing and assets. 

sutainability in financial services including 

retail banking comes with value-added product 

development and innovation, especially 

to keep the loyalty of a young and increasingly 

sophisticated customer profile who 

demand new products, new delivery mechanisms, 

maybe even new incentives. 

“to me,” he explained, “you use the word 

that is very dear to my heart and that is 

innovation. i believe that if you want to look 

at innovation, look at islamic banking. at 

ncb when we started our islamic banking, 

our vision and strategy was to be the innovators 

in the industry, because we saw the 

big gap between what is available on a 

conventional side and in the islamic space. 

and if we want to be competitive, we need 

to be innovative to bring products that could 

compete with the conventional ones and 

satisfy the customer need on the retail side. 

“and we are very proud with our achievement 

at ncb. We are the bank that established 

the standard for investing globally in 

equities that is shariah-compliant. 

nationaL commerciaL banK oF saudi arabia (ncb) 

seLected unaudited FinanciaL resuLts Q32012/2013 ‘000 saudi riyaLs 

eND 30/9/2013 eND 31/12/2012 eND 30/9/2012 

ToTAL AsseTs sr367,080,620 sr345,320,133 sr320,803,112 

NeT INvesTmeNTs sr127,182,521 sr116,427,793 sr115,007,336 

CAsh AND bALANCes WITh sAmA sr33,070,059 sr40,298,428 sr18,676,663 

CusTomer DePosITs sr294,775,091 sr273,530,090 sr251,326,413 

PAID uP CAPITAL sr15,000,000 sr15,000,000 sr15,000,000 

ToTAL equITy sr41,918,029 sr39,404,145 sr38,444,288 

ToTAL INCome sr11,192,637 - sr10,356,200 

ToTAL oPerATINg exPeNses sr4,906,980 - sr4,931,450 

NeT ProFIT sr6,161,961 - sr5,180,863 

LoANs AND ADvANCes sr184,412,738 sr163,479,092 sr157,212,261 

ToTAL rIsK WeIghTeD AsseTs (PILLAr 1) sr250,980,123 sr232,098,061 sr233,083,898 

Core CAPITAL ADequACy rATIo (PILLAr 1) 16.3% 16.5% 16.0% 

sourCe: NCb November 2013 



We were the first to introduce an islamic 

credit card; capital protection and other 

investment funds; and we were one of the 

first banks to finance a big housing project 

in saudi arabia. today we are concentrating 

maybe more on innovation in treasury 

products to find solutions for corporate 

clients.” 

ncb’s pioneering leadership in islamic 

equity funds is proven. it was Freddie 

crawford at Wellington management 

international that structured the first islamic 

equity fund of substance for ncb in the 

early 1990s under the bank’s al ahli brand. 

in its heyday al ahli global trading 

equity Fund used to be the single largest 

islamic equity fund in the world with a net 

asset value of just under us$2 billion. 

at end june 2013 however, the total 

assets under management reached a mere 

us$264.93 million, which still made it one of 

the largest if not the largest islamic equity 

funds. the decline reflects a wider trend in 

global islamic finance of the poor relation 

that islamic asset management is. this has 

been confirmed by several recent study 

published including one to be piublished in 

the new year by the malaysia international 

islamic Finance centre (miFc). 

islamic investment funds, according to 

various estimates, have a total size of 

assets under management not exceeding 

us$75 billion in 2013. this despite the fact 

that the actual number of funds has grown 

to some 1,060 at the end of 2013. 

the issue is that the aum of most of the 

funds are very small. equities have generally 

been a less preferred asset class of 

islamic investors, who have tended to prefer 

investment in real estate and sukuk. saudi 

arabia is the largest islamic funds aum 

domicile accounting for just over 40 per cent 

of global islamic funds assets followed by 

malaysia with just over 20 per cent. 

asked why islamic asset management 

especially equities have not taken off as an 

asset class compared to retail banking and 

sukuk, abdulrazzak elKhraijy believes that 

is essentially due to customer appetite. 

“i would love to see more islamic investment 

funds,” he contends, “but i think a 

combination of customer appetite, the perceived 

risks of investing in equities, and 

the volatility and past experience of stock 

exchange crashes including in saudi 

arabia and dubai, have affected this. 

there may also be a cultural aspect that is 

why the market needs to educate 

investors about asset management especially 

shariah-compliant asset classes 

such as equities.” 

he strongly believes that islamic asset 

management including investment in equities 

is here to stay, albeit its growth maybe 

not be as fast as it ought to be. ncb’s own 

islamic asset management business is 

arounf us$15 billion. 

in terms of corporate finance, while the 

potential is huge, not all saudi corporates 

are aware enough of the islamic finance 

products available in the market, while 

some remain reluctant and sceptival about 

them. ncb’s elkhraijy classifies saudi corporates 

in three categories in relation to 

accessing islamic finance. some of them, 

he explained, insist on using only islamic 

financing instruments. 

there is also increasing pressure on 

publicly-owned companies from the market, 

the customers and shareholders, that 

they use only shariah-compliant finance 

because they want to invest only in a 

company that uses shariah-compliant 

financing. 

suKuK mArKeT 

other companies unfortunately are neither 

interested nor really keen to understand 

islamic finance, and there are others 

still who are in the middle - they do not 

understand it, but they are trying to find a 

suitable product that fit their needs, and 

they are using it. 

on the capital market and especially 

sukuk front, the situation is different. the reason 

is that both the saudi government and 

the saudi arabian monetary agency 

(sama) are keen for local corporates to 

access their funding requirements from the 

capital market in the Kingdom because it is a 

valuable diversification of source of funding 

for saudi corporates, who are deemed to rely 

too much on bank financing which is more 

expensive. in many respects the islamic capital 

market especially sukuk is the preferred 

option for many saudi companies. 

elkhraijy is very bullish about the local 

sukuk market in 2014 and beyond. “We 

now see that there is more and more 

demand from saudi companies to finance 

their activities through the sukuk which is a 

very positive sign. the market is there but 

we need to be more active and to move at 

a faster speed. i believe that with all the 

state-sponsored infrastructure projects that 

are going on in saudi arabia, the government 

is encouraging the financing of these 

projects through the sukuk. 

We saw a sukuk being issued by the 

general authority for civil aviation (gaca) 

to finance the airports in jeddah and 

makkah. 

in saudi arabia there are many transportation 

projects that have been signed. i 

expect the sukuk market to really move 

very fast in saudi arabia.” 

to him the increasing number of new 

entrants to the market including smaller 

issuers is a good sign that the sukuk market 

is moving in the right direction. 

some of ncb’s clients insist on using 

only islamic instruments. What is also 

unique, stressed ncb’s elkhraijy, is the 

pressure especially on publicly-owned 

companies from customers and shareholders 

alike, that the companies use only 

shariah-compliant finance. ncb itself is 

working towards issuing its debut sukuk. 

most of the issuances in saudi arabia is 

through private placement by companies 

who are hungry for value-added shariahcompliant 

assets such as sukuk. but there 

have been significant international 

issuances by companies such as sabic 

(saudi basic industries corporation) and 

saudi electricity company (sec) and 

some of saudi aramco’s subsidiaries. 

another saudi company, al bayan, last 

year even raised funds in the malaysian 

ringgit market through a local currency 

issuance, a trend which issuers in several 

gulf countries including bahrain, Kuwait 

and the uae have pioneered. 

he does not see a rush of international 

sukuk issuances by saudi companies 

because it is much easier and less costly 

for them to first to do it locally and not to 

take the different risks such as currency 

risks. similarly, international investors will 

only invest in sukuk from issuers where the 

legal aspects and procedures are clearly 

defined and there is certainty in recourse 

to law and regulatory treatment of sukuk. 

in saudi arabia, there has also been 

some confusion over the position and 

precedence of sukuk certificate holders as 

far as creditors are concerned in a issuing 

company that has defaulted and in administration. 

“according to the shariah if it is a 

asset-based issuance it is thesukuk holders 

that are the owners, and we need to 

see this. clarification and clarity on this are 

very important for the whole industry,” 

maintained ncb’s elkhraijy. 

he does not believe that the above situation 

puts a damper on the development of the 

sukuk market. on the issue of a saudi sovereign 

sukuk issuance he maintained that he 

is “not in a position to answer such a question. 

i do not know.” another major issue is 

that saudi investors in sukuk like most in the 

region tend to hold on to the sukuk certificates 

until maturity rather than trading them. 



FINANCe 

exclusive Interview: Abdulrazzak m elkhraijy, NCb, saudi Arabia 

“We need to have a bigger market so 

people could really trade the sukuk. once 

this is done, i think we will start a very 

active secondary market, which is very 

important for the development of the 

islamic capital market. What is encouraging 

is the number of new issuers especially 

smaller companies as opposed to 

those huge utilities and conglomerates, 

which i think is a good development. 

even some of the smaller finance companies, 

such as car finance and leasing 

companies are starting to issue sukuk. 

We are moving in the right direction,” he 

added. 

a new type of sukuk - social sukuk - has 

emerged with the securities commission 

malaysia in the process of developing a 

regulatory framework for sri (sociall 

responsible investment) sukuk. social 

sukuk also include the securitisation of 

Waqf (endowment) assets, which has 

been neglected in many countries - both 

muslim and non-muslim. 

there are an estimated trillion dollars of 

Waqf (endowment) and other types of 

social assets. only one sukuk, a sg$25 

million issuance, to date in over 35 years 

of contemporary islamic finance has been 

issued against a Waqf asset, by the 

islamic religious council of singapore 

(muis). and yet it has never been repeated 

since then. 

“you touch on a very important point,” 

explained ncb’s abdulrazzak elkhraijy. 

“Waqf is a unique islamic endowment trust 

institution. they potentially play an important 

role in the development of the countries 

in which they are established. 

they amount to trillions of dollars of 

assets that are not generating much 

because of the different laws and regulations 

of the jurisdictions in which they 

exist. unfortunately, the administration of 

Waqf in general is mired in bureaucracy 

and lack of adequate regulation, which 

means the Waqf assets are not generating 

any real returns. 

We should seriously look at developing 

a framework for regulating Waqaf and 

business minded institutions to administer 

and leverage them under the shariah 

guidelines so as to generate investment 

returns for the benefit of the communities 

they are meant to help by helping to alleviate 

poverty and to generating employment.” 

a major issue for the islamic finance 

market globally is the lack of short-term 

cross border liquidity management instruments. 

ncb is a strong supporter of the 

international islamic Liquidity 

management corporation (iiLm). 

“i think what the iiLm is doing will 

improve the liquidity requirements of 

islamic banking and this is a positive 

move. of course the challenge is to have 

regular issuances on a roll over basis. but 

it is a start and we will support the iiLm,” 

he added. 

PoPuLAr TAWArruq 

he agreed that the involvement of 

saudi banks and the development of 

short-term cross-border liquidity management 

instruments for islamic banking is 

very important. he is confident that saudi 

banks will take the lead in many such initiatives 

and that ncb plans to complete 

the iiLm primary dealer appointment 

process. the involvement of the saudi 

banking sector in the primary dealership 

is probably more important than some of 

the other markets. saudi banks will take 

the lead in many such islamic banking initiatives, 

he added. 

alrajhi bank is already in the iiLm primary 

dealership universe and the 

corporation is in the process of expanding 

the universe in due course. 

sama last year abruptly divested its 

equity from the iiLm, a move which has 

baffled even the saudi banks. he would 

like to see sama return to the iiLm fold. 

abdulrazzak elkhraijy is adamant that 

the future of murabaha and tawarruq is 

well-established and will continue to thrive 

in the gcc especially saudi arabia, 

because “it is a good vehicle for the 

investment. i would like to see more.” 

ncb in fact was the first bank to introduce 

tawarruq in the Kingdom and today 

a big chunk of its personal finance business 

is done through tawarruq. 

“the reason we started tawarruq is 

because the only personal finance product 

available was for the customer to go 

and buy a new car and then immediately 

sell it. the value of the car would decreciate 

immediately by 20 to 25 per cent. so 

the cost of this finance was very high and 

prohibitive for the customer.” 

of course we have full shariah board 

approval for tawarruq, which initially was 

basd on international commodity contracts. 

today all of the retail side is done 

through commodity contracts in the local 

market, which have been approved by our 

shariah advisors,” he explained. 

“When we started tawarruq we started 

with the commodity murabaha in the international 

market. today all of the tawarruq 

transactions on the retail side is done 

through the local market and all the concerns 

of the shariah scholars have been 

addressed. our relation with the customer 

is transparent and the certificates that he 

owns based on a certain product at a certain 

location, he has the right to go to collect 

it or sell it. tawarruq has been a good 

product to solve a lot of issues for us and 

our customers,” he added. 

ncb uses the classical form of 

tawarruq, which scholars have approved. 

the controversy is against tawarruq 

munazzam, organised tawarruq, 

because of a direct relationship between 

the bank and a third party which buys the 

commodity from the customer effectively 

at a discount. 

the popularity of tawarruq in saudi 

arabia is such that banks such as ncb 

are now extending the financing service to 

their corporate clients. to ncb tawarruq 

is not an issue because it does “not do 

anything in the islamic finance space without 

the approval of its shariah board.” 

on the contrary, if there is any argument 

against tawarruq, it is that tawarruq is an 

easy mode of islamic finance, and that it is 

dominating the short-term finance and 

cash management space. this, stressed 

elkhraijy, is something he does not want 

to see in perpetuaty and would like the 

market to develop alternative products if 

only to give customers wider choice. 

When we started tawarruq we started with the commodity murabaha in the international market 

mainly through the Lme contracts in London. today all of the tawarruq transactions on the retail 

side is done through the local market and all the concerns of the shariah scholars have been 

addressed. our relation with the customer is transparent and the certificates that he owns based 

on a certain product at a certain location, he has the right to go to collect it or sell it. tawarruq has 

been a good product to solve a lot of issues for us and our customers 



going forward, elkhraijy belives the 

three growth areas in islamic finance are 

sukuk, retail banking and a resurgence of 

the real estate finance market. there are 

also opportunities for infrastructure financing 

but this will depend on a country to 

country basis. 

he believes there is much room for product 

innovation especially in the corporate 

finance side, 

ncb also has an interest in islamic insurance 

and has a 30 per cent equity stake in 

al ahli takaful which is a family (life) insurance 

company. in saudi arabia, sama is 

promoting the cooperative insurance 

model as opposed to takaful based on the 

Wakala and tabarru model. ncb like all 

the other cooperative insurance promoters 

ion the Kingdom rely on their shariah 

board for guidance as to whether the cooperative 

insurance model is shariah-compliant. 

“if it is a shariah issue, i am not really 

in a position to say. 

as long as our shariah scholars say it is 

permissible or not permissible we will go 

with whatever their decision is,” he 

explained. 

in saudi arabia insurance is a new business 

and will need some time for people to 

understand it. the other thing is that most 

insurance companies in saudi arabia are 

small companies. 

PeACe oF mIND 

“i do not think that they really have the 

capabilities of doing many things. so i am 

a little bit hesitant to say that we will see 

innovations in other areas such as commercial 

credit insurance, export credit 

insurance amd investment insurance. We 

need to build capacity in the insurance 

market in the Kingdom first. this can be 

done through the emergence of larger 

companies, maybe through the mergers 

between different insurance companies in 

the saudi market,” he said. 

as for ncb’s own islamic banking business, 

abdulrazzak elkhraijy is bullish 

about its future expansion. “every single 

day we see a growth in islamic banking. 

We have a commitment from our customers, 

from our shareholders and our 

management to grow this business. it 

started with us fulfilling our customers’ 

needs and the demand subsequently 

increased. this is the model we follow and 

hopefully there will be more expansion in 

islamic banking in this field. 

in the past customers used to take 

islamic banking for peace of mind. that 

was the demand, give me something to 

give me peace of mind, in terms of 

shariah compliance. today it is not only 

peace of mind, which is a must, but another 

thing is that islamic banking products 

have to be efficient and competitive with 

the others in the market. i strongly believe 

that the future of islamic banking in saudi 

arabia is very bright.” . 

Tilal Development Launches Oman’s First Corporate Sukuk 

the local tilal development company 

saoc (tdc), successfully issued 

oman’s first corporate sukuk in 

november 2013 – a omr50 million 

(us$130 million) sukuk al ijarah. 

the issuance was jointly lead managed 

by madina investment saog, bank 

nizwa, bank dhofar saog, meethaq 

islamic banking (bank muscat) and Qatar 

international bank. 

the omr50 million sukuk al ijarah, 

which has a tenor of 5 years, was issued 

through a special purpose vehicle, 

modern sukuk saoc, on behalf of tdc. 

in a statement, tdc stressed that the proceeds 

from the sukuk will be utilized for 

the expansion of the company's flagship 

project - the tilal complex, which is the 

first of its kind, offering mixed-use development 

comprising residential and retail 

units as well as a shopping complex 

known as the muscat grand mall. 

hamood bin sangour al-Zadjali, the executive President of 

central bank of oman, stressed at the sukuk launch that "issuing 

of the first ever islamic sukuk by the private sector is such 

a huge and important milestone in the history of the omani 

economy. We hope to see more expansion into islamic sukuk 

financing. as for the future possibility of the use of sukuk by the 

government, a bilateral committee has been formed by the 

ministry of Finance and the capital market authority. 

tiLaL deveLoPment comPany 

omr50m suKuK aL ijarah 


Issuer 

the committee is studying the 

issuance of government sukuk in 

omani riyals, and i hope that will attract 

further investment in the economy for 

the future." 

at the same time, abdul samad al 

maskari, chief executive officer of al 

madina investment saog, expects 

other omani firms to follow tdc in issuing 

sukuk. "this is a great achievement 

for the islamic capital market landscape 

in oman. We are proud of leading this 

historic transaction and arranging the 

first ever sukuk, taking into consideration 

that islamic Finance is at a very 

nascent stage in this market. We are 

certain that this pioneering issuance, 

along with the government's initiative to 

issue sukuk will encourage other corporates 

to consider sukuk as an alternative 

source of funding". 

the sukuk, which is rated bbb+ by capital intelligence, will 

pay a 5 percent profit rate per annum over its five year tenure. 

despite the above euphoria regarding the tdc sukuk, 

oman is a newcomer to islamic finance and a relatively smaller 

market. While the government is seemingly proactive in 

facilitating islamic banking up to a point, the sector is very 

nascent and will take time to entrench itself. the larger corporates 

however are still awaiting a lead from sovereign oman 

to issue its debut international sukuk before following suit. . 

modern suKuK saoc, on 

behaLF oF tiLaL deveLoPment 

comPany saoc (tdc) 

DATe oF LAuNCh november 2013 

sIze oF Issue 

omr50 miLLion 

Issue TyPe 

suKuK aL ijarah 

TeNor 

5 years 

CurreNCy 

omani riyaL 

ProFIT rATe 

5% Per annum 

joINT LeAD mANAgers 


aL madina investment 

saog; banK niZWa; banK 

dhoFar saog; meethaQ 

isLamic banKing; Qatar 

internationaL banK 

the Proceeds oF the suKuK 

WiLL be used to Finance the 

eXPansion oF tdc’s FLagshiP 

Project, the tiLaL comPLeX, 

a miXed-use deveLoPment. 

rATINg 

bbb+ by caPitaL inteLLigence 

sourCe: tdc november 2013 



INTervIeW 

Dr zeti Akhtar Aziz, governor bank Negara malaysia 

iF industry much sounder today than a year ago 

Following in the tradition of her predecessors, dr Zeti akhtar aziz, governor of bank 

negara malaysia, the central bank, is the most proactive and experienced governors 

serving the islamic banking, finance and takaful industry. her influence transcends her 

home jurisdiction of malaysia to the corridors of power at the g8, the basle committee 

and the iFsb (islamic Financial services board). she is the archetypal ‘central 

banker’s central banker’ and commands huge respect both at home and abroad. in 

this in-depth interview, Governor Zeti Akhtar Aziz discusses with Islamic Banker 

the state of the global islamic finance industry; the latest developments in the malaysian 

and regional markets; and the challenges the industry is faced with going forward 

Islamic banker: What sort of year is 

2013 turning out to be for the local 

malaysian Islamic finance market? 

governor zeti Akhtar Aziz: Well, we 

still have growth in islamic banking and 

there has not been a disruption in activities. 

the industry now accounts for about 

24 percent of the banking sector. 

It has increased a bit since last year? 

yes, it is quite significant. i remember 

when i became governor it was only 6 per 

cent. the fact that from the year 2000 until 

now it became 24 per cent, this is quite 

significant. it is almost a quarter of the 

banking system. so in that sense as an 

intermediation process it is growing. 

on the retail side there is interest from 

muslims and non-muslims, and that is 

quite a significant factor as well. in the 

case of the sukuk market, of course there 

was some slowdown because the overall 

growth has been affected by the economic 

contraction. in malaysia our gdP growth 

in the first half of the year was only 4.2 per 

cent, but we expect in the second half of 

the year for it to improve to nearer to 5 per 

cent for the year as a whole, or at least in 

the second half of the year. 

We expect the sukuk market to 

improve, but generally over the recent few 

years we have seen dollar issuance and 

renminbi issuance, and in addition to 

domestic currency issues we have seen 

foreign currency issuances. the takaful 

industry also has seen growth. so in general 

there is continued growth even in a 

challenging environment. 

so the growth driver on the retail and 

the commercial side is basically more 

people are coming to the sector, or is it 

government incentives to the industry? 

no, not at all it is not due to government 

incentives. it is because of the economic 

growth activity taking place. it is mostly 

domestic demand driving our economy, 

and the fact that islamic finance has been 

able to offer innovative financial products, 

and their products are competitive, in 

terms of mortgages and the financing 

instruments for even small and medium 

scale enterprises (sme's), that is what 

has contributed to the growth. 

There have been a number of 

government initiatives in the last few 

years to widen the market segment universe, 

and a couple of funds have been 

set up by the government that are 

shariah-compliant. how are they progressing? 

these are special in terms of giving incentives, 

but they are mechanisms and 

schemes that have been introduced for 

smes and other schemes for credit 

enhancements and so on. We think it is 

important to promote sme development, 

and to support the sme sector with advisory 

services, with guarantee schemes, and 

so on. this is important to generate growth. 

this is what i call Pro-growth Policies, so 

that even when you have a challenging 

environment it does not mean that you have 

to have a huge fiscal stimulus. it is by creating 

these kinds of schemes that will promote 

the private sector to drive itself. 

I remember it is quite an ambitious 

figure in terms of sme contribution to 

gDP? 

yes, and access to financing is important, 

and i should mention to you that for the 

sixth consecutive year, malaysia has 

been ranked number one for access to 

financing. you know the World bank has 

the Doing Business Index, and our prime 

minister mentioned that we have moved 

up to number six. 

When you look at the breakdown of that 

index, there is one component in the 

index which is Access to Financing and 

malaysia has been ranked first place for 

the last six years. islamic finance is an 

important part of that, but of course the 

other part is the conventional sector. 

Do you think that the establishment 

of the malaysia International Islamic 

Finance Centre (mIFC) as a premier 

international sukuk origination 

domicile has been vindicated by the 

number of gulf institutions raising 

funds in the ringgit market? 

Well because we have the elements of the 

market from the regulation to the legislation 

to the intermediaries and the price discovery 

and the depth of the market, so it 

has drawn participation from all over the 

world to the market. 

you do not think it is because 

malaysia is a cheap place to raise 

money, at least for the last few years, 

which makes it more cost-effective 

say than the gCC? 



Well i do not want to make the comparison. 

but in general you have to also look at the 

depth of the market and the demand, 

because you need demand and supply, and 

when there is a shortage of supply it creates 

opportunities for the issuers to be cost-effective 

in raising the funds. and of course we are 

an area of high percentage for demand for 

such papers. in asia there is surplus savings 

and there is that pent-up demand, which also 

improves the pricing. 

one encouraging feature is that a 

number of sukuk issuance globally 

is murabaha-based, so that means 

they are accepted. That is quite a 

departure from the past? 

yes, but there is quite a range of sukuk 

structures in general. 

In the malaysian National budget for 

2014, there is very little on Islamic banking, 

and a little bit on the development 

of the Islamic capital market with this 

new concept of socially-responsible 

investment (srI) sukuk Islamic and the 

introduction of an environmental, social 

and governance Index (esg) to raise 

the profile of listed companies which 

have high socially responsible practices. 

Is this a new phase in the philosophical 

development of malaysia’s 

Islamic finance proposition? 

in islamic finance this of course is already 

embedded. the Prime minister mentioned 

in his speech about environmental sustainability 

and socio-economic sustainability. 

this policy initiative is all part of it 

and to make it more explicit. the regulatory 

framework for the sri sukuk is being 

developed by the securities commission 

malaysia because they have been champions 

of the agenda of corporate social 

responsibility. 

just to clarify, does the srI sukuk initiative 

include things like social sukuk 

– this is sukuk issued against Waqf 

assets for example? I remember that the 

first such sukuk was issued by the 

Islamic religious Council of singapore 

(muIs), and it is never been repeated. 

given that the Waqf assets in the 

muslim world and elsewhere amount to 

almost an estimated trillion dollars, is it 

not important to leverage these assets 

for the benefit of the community, society 

and the economy? 

We are trying to encourage of course 

these Foundations, endowments and 

Waqf funds to be established. 

you are talking about issuing sukuk 

against these assets. We at bank negara 

malaysia have not been involved with any 

such initiatives. i am not quite sure 

whether that is something within our mandate. 

In singapore, muIs issued a sg$25m 

million musharakah sukuk against 

Waqf assets. The proceeds were used 

to renovate those assets which were 

subsequently rented out to generate 

returns for the Waqf and there fore the 

community. 

yes, but have they been any other issues 

of that nature? maybe we should look 

more into this issue of Waqf sukuk. 

As a member of the governing Council 

of the International Islamic Liquidity 

management Corporation (IILm) and in 

the context of its recent but modest 

debut sukuk issuance of us$$490 million, 

what is next on the cards for the 

Corporation? 

of course the iiLm have to keep up the 

pace of regular issuance. they have 

announced a us$2 billion sukuk 

issuance Programme and they have 

issued us$490 million thus far. so the 

next issuance has to be soon towards 

completion of the Programme. 

What you mean by soon? 

Well, in the next few months because 

these are 3-month papers so within that 

time they will mature. in the context of the 

corporation’s us$2 billion sukuk 

Programme, they have said that during 

that period they will have to have regular 

issuances and following the exhaustion of 

the Programme they will announce a new 

Programme for the subsequent year. and 

they have to have the underlying highquality 

assets for it. 

Is this regular rollover sukuk issuance 

enshrined in the mandate given to the 

IILm by its governing Council? 

all the operational issues of the issuance, 

the shariah issues, the issues of the primary 

dealers, the rating and so forth – 

have been dealt with. everything is within 

the expectations and the regulatory treatment 

of the Paper is subject to the rules 

and guidelines of individual regulators and 

so on. it was a highly complex exercise 

and it was achieved. and this is a major 

advancement because it represents a collaboration 

of nine central banks and one 

international development bank. 

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INTervIeW 

Dr zeti Akhtar Aziz, governor bank Negara malaysia 

The list of the primary dealers is conspicuous 

in terms of the absentees from 

for example saudi Arabia. Would you 

like personally to see saudi Arabia also 

involved? 

i have to tell you that there is a primary 

dealer bank from saudi arabia. each one 

of us nominated five or six primary dealers 

and it depends who was ready first. 

because the initial issuance was quite a 

small size (us$490 million), each one of 

us ended with only one actual nomination, 

i think there were only about seven pri- 

How difficult was it to get ? sover mary dealers for this first issuance so not 

eigns to commit assets to the pool, every name out of the pool of about 60 primary 

dealers participated in that. there is 

especially usually where sovereign 

assets are involved, there can one be saudi all bank, al rajhi bank, which is 

sorts of bureaucratic delays ? and included dif in that primary dealer pool. they 

ficulties? 

have gone through the primary dealer 

not at all. all these countries that are appointment process like the other banks. 

members have high-quality assets. yes, 

the legal documentation was highly challenging 

and therefore it took a long time monetary Agency (sAmA) return as an 

Would like to see the saudi Arabian 

for the legal process to be completed. and equity subscriber to the IILm? 

you know dealing with legal counsels, i look forward to their return. they are an 

they are very meticulous, and rightly so. important country and where islamic 

as such, it is not an issue of lack of finance operates. yes i do look forward to 

assets, there are immense assets, in fact their return to participate. and the other 

this is the advantage of such an arrangement 

because even countries that just who have shown interest both from 

members who, in the global community, 

have investment grade ratings, they can islamic countries and from non-islamic 

have high-quality assets and therefore countries, but we felt that in order to be fair 

there is a chance for them to actually monetise 

these high-quality assets. 

off should be for bringing new sharehold- 

to them, at least the first programme takeers. 

and that is important because at the 

I was actually referring to ? the initial will stage because we did not have any 

ingness of Sovereigns to contribute point of reference as a benchmark against 

assets, because, some sovereigns which to formulate this. this is all highly 

are a bit difficult in this respect. groundbreaking in that we do not have a 

Well it is not just about transferring ownership, 

it is also transferring the use of the 

assets (the usufruct) so in other words you 

are not actually transferring the ownership 

of the asset. 

And that process has got to comply 

with their own laws? 

yes exactly. so that is how it has been 

worked out. but the first two countries 

involved showed the process, so everything's 

groundbreaking because we do not 

have a prior reference point or precedent. 

so how many countries contributed to 

the pool in terms of assets? 

Well i think they (the iiLm) do not want to 

discuss it because they do not want to distinguish 

between pools of assets. in any 

case, the asset pool is a collective one to 

which any member country can contribute. 

reference point. so it is quite important to 

generate some income before we bring in 

new shareholders. 

In terms of the internationalisation of 

Islamic finance and forging international 

linkages, do think that the IFsb's 

mandate needs to be updated or 

revised? There is no unversal model or 

standard, say of authorising Islamic 

banks. some countries such as 

malaysia have a dedicated Islamic 

banking law; in oman and it comes 

under an amendment of the conventional 

banking act; in saudi Arabia they 

do not even do that, it is one banking 

act. so is it not high time that we had a 

universal authorisation model for 

Islamic banks? That would remove a lot 

of the uncertainty in terms of how the 

legal framework under which Islamic 

banks operate. Whenever I speak to 

IFsb they say it is not part of their mandate. 

but after all, the legal certainty has 

a direct and indirect impact on the prudential 

and supervisory process. 

i am trying to think, even in conventional 

finance they do not impose a legal framework 

for the financial sector. 

but it cannot be authorised say in 

the uK if you do not satisfy the provisions 

of the uK banking Act? 

of course. so each country has their legal 

framework and you cannot impose on them. 

I am not suggesting imposing, but if 

there is a standard, you will have a universally 

applicable process for relating 

to the enabling legislation, the treatment 

of special characteristics of Islamic 

banking for instance the treatment and 

nature of deposits, rebates, delayed 

payments and so on. The general and 

conventional banking acts do not 

accommodate these. I am thinking of 

legal clarity, uniformity and certainty for 

the ordinary person, for the customer 

both institutional and retail. how do you 

reconcile that? 

you need the legislation, and in most 

countries the legislation has to be 

approved by parliament and so on. 

Whereas in the case of prudential regulation, 

it does not go through that process. it 

is in the domain of policy-making decision 

bodies, the central banks and regulatory 

authorities. in the end all this depends on 

individual countries in how they perceive 

their islamic banking market. 

The IFsb is a standard setting body. We 

can argue that they have issued a 

shariah standard for instance. That 

does not have direct linkages to prudential 

and supervisory matters, so that is 

an exception in itself. Cannot an 

Authorisation standard, forget about the 

model, just serve as a guide to central 

banks such as the Central bank of 

oman, for instance? When I spoke to 

their deputy governor he said that the 

amendment to allow Islamic banks is 

just a starting point. eventually they will 

come to a position where they will have 

to adopt a dedicated Islamic bank law. 

yes, but is not that a role for the likes of the 

World bank or the islamic development 

bank? 

I will give you an example on Takaful 

where it directly affects the market, for 

instance, in saudi Arabia. They have the 

Cooperative Insurance Law - nobody 

knew whether it was shariah-compliant 

or not. The National Cooperative 

Insurance Co., which lead the process, 

did not have a shariah board for four 

years. At the start of 2013, sAmA directed 

that all insurance in saudi Arabia 

must be cooperative - they do not recognise 

Takaful. They jettisoned the Tabbaru 

and the Wakala model. so when you 

speak to both local Takaful companies, 

and global insurance companies with 

Takaful subsidiaries, they are absolutely 

exasperated and confused. 



I am not expecting you to comment on 

the saudi example, but on the principle. 

at this stage the iFsb must stay focused 

on its prudential and supervisory mandate. 

it just has to for a very important reason - 

for financial stability reasons. if they start 

broadening their horizons beyond what 

they have thus far achieved over the whole 

spectrum of the financial stability aspect, it 

might detract from the expertise that they 

have built up for this. 

they have not arrived there as such, but 

they have made tremendous progress on 

the financial stability areas - not only capitalisation, 

risk management, governance, 

liquidity management - but also stress testing, 

deposit insurance and the financial 

safety nets. 

so they have to complete this agenda 

and financial stability is very important 

because we have seen what has happened 

to conventional finance. they were 

in disarray trying to bring in all the financial 

reforms at a time when they are in financial 

stress. so if islamic finance is putting in 

place step-by-step all these reforms at a 

time when we are not experiencing financial 

stress and we deviate from this vital 

financial stability task and look into other 

aspects such as authorisation and enbaling 

legislation, at this stage i think it would 

be difficult. 

another aspect is that the iFsb recognised 

well before even the advanced 

economies how highly interconnected and 

related the different segments in the financial 

system are - banking, insurance 

(takaful) and capital market intermediation. 

as such it was incumbent on the iFsb 

to also set standards for all these parts of 

the financial system. 

not surprisingly, we have securities 

commissions and insurance and takaful 

commissions which are also members of 

the iFsb. the iFsb mandate is very comprehensive 

in its nature and so at this stage 

i am more inclined to stay with the 

Prudential and supervisory standard 

setting mandate so that we have a solid 

foundation for financial stability. 

Do you think that the malaysian and the 

global Islamic financial system are 

sounder today compared to a year or 

two ago? 

definitely, because we are looking at all the 

issues regarding financial stability, capital 

adequacy and stress testing. in addition, in 

malaysia, we are also putting together 

deposit insurance for islamic finance that 

includes both banking and takaful. 

We also have initiatives in place in the 

event that one financial institution is in trouble 

or is experiencing financial stress, then 

we have a mechanism for resolution. so 

definitely i feel more confident now than 

previously when we did not have all this. 

In terms of the basel Liquidity Coverage 

ratio (LCr) standard introduced in early 

2013, has bank Negara malaysia taken 

up the suggestion of the basel 

Committee relating to the components 

of high quality Liquid Assets (hqLA), 

which would qualify for contribution to 

capital structure? Are you allowing, or 

recognizing investment in qualifying 

sukuk to form part of the hqLA mix of 

Islamic banks licenced by bank Negara? 

yes, i think we are implementing that 

requirement by 2015, and it will include 

sukuk. 

bank Negara malaysia has recently published 

the latest progress report of the 

Law harmonisation Committee whose 

mandate is to ensure that the country’s 

legislation creates a level playing field for 

Islamic finance compared with conventional 

finance. I think there are three or 

four outstanding issues, but can you 

clarify this access to Islamic finance, 

especially involving malay reserved 

Land is concerned. 

you know the role of the Law 

harmonisation committee is to look at all 

the laws that have implications for islamic 

finance, which is a very good thing. this is 

important because in the past the implications 

of these laws were not fully obvious 

or realised. 

the committee review these laws and i 

think they have completed their review of 

17 laws thus far. that has been quite 

impressive actually, because it is very hard 

to make any changes and amendments to 

any laws from what i have experienced. 

the issue you are referring to concerns 

malay reserved Land. i will ask Wan mohd 

nazri bin Wan osman, our director of 

islamic Fiannce & takaful to eloborate 

because he has a legal background so he 

is in a better position to explain it. 

(A clarification from Wan nazri. It is 

quite simple. As far as Malay reserved 

Land is concerned, only Malays can own 

and deal in those lands. So we suggested 

to the relevant government authorities 

to allow Islamic banks to finance transactions 

that are collateralised by the Malay 

reserved Land, to get better value for 

these assets. It makes sense.) 

There are some risks involved in that 

you cannot sell the land to a nonmalay? 

as long as the status quo remains, this land 

is still being demarcated to remain under 

malay ownership. 

The malaysian National budget for 

2014 projected a gDP growth rate of 

about 4.5 to 5 per cent in 2013. Are you 

confident that this figure will be 

achieved? What will be the drivers for 

that assessment? 

in the First half of 2013 we already had 4.2 

per cent growth, but we saw the export 

sector improving, and we expect this to 

continue to do so in the second half of the 

year. domestic demand also continues to 

remain strong and is going to be the main 

driver, and at least the contraction in 

exports has not diminished. 

both consumption and private investment 

I believe? 

yes, and most important that the consumption 

is being reinforced by a significant 

growth in investment activity, especially 

by the private sector and that is why 

it is more sustainable. then there are few 

projects that are also being implemented 

including the mrt and other major infrastructure 

projects. 

In terms of FDI flows I think there is an 

upward trend? 

steady inflow, yes. malaysia still continues 

to be a growth centre, or profit centre 

rather, for Fdi. 

I noticed there is a projected budget 

deficit of about rm40 billion for 2014. 

Is that of any undue worry? 

the government has recognised that it has 

to reduce the size of this deficit and they 

have made significant progress over several 

years. at the peak of the deficit it was 

i believe 5.8 per cent of gdP and it has 

been brought down gradually now to 4 per 

cent of gdP. We are seeing the movement 

in the right direction there, so there is 

progress on that front. 

at the same time the government has 

already announced the subsidy rationalisation 

and the introduction of the valueadded 

tax and so on. so this will improve 

the revenue base and reduce the burden 

on the government of these huge subsidies 

that they are paying out. the savings from 

the subsidies will partly be used to reduce 

the deficit and partly used to finance those 

in the lower income categories. . 



suKuK 

global sukuk market versus bond market 

sukuk market to Withstand bond market volatility 

the prospect of the us Federal reserve (Fed) tapering the monetary stimulus programme 

sent shockwaves through the financial markets. sukuk have not been 

spared by the impact of rising us yields. however, Ramlie Kamsari, chief 

executive officer, CIMB Principal Islamic Asset Management, maintains that the 

global sukuk market has proved relatively more resilient in the face of this volatility, 

and that this resilience has largely been a demand-driven phenomenon, propelled 

by investors for products that are more compliant with their religious faith 

as a result of the global financial 

crisis and ensuing 

recession in the us, and in 

keeping with its mandate to 

achieve maximum employment, 

the us Federal reserve (Fed) 

responded by setting short-term interest 

rates to a near zero. the Fed also began 

purchasing vast quantities of us 

treasuries and mortgage-backed securities, 

a process referred to as quantitative 

easing (Qe). 

these Qe efforts, in combination with 

the anchoring of the short end rate, have 

kept the yield curve artificially low in an 

effort to revive the us economy. 

in sustaining this low rate environment 

via securities purchases, the Fed’s monetary 

policies have created massive liquidity 

in the capital markets. this influx of liquidity 

combined with low domestic interest 

rates provided both the means and the 

incentive for institutional investors to 

aggressively seek higher yields in alternative 

markets. many investors have looked 

to fixed income securities such as highyield 

bonds and emerging markets (em) 

fixed income securities, including us 

dollar-denominated global sukuk securities, 

for higher yields than were available 

from us treasuries. 

the idea that the Fed might begin the 

winding down of the third round of its quantitative 

easing programme (Qe3) has been 

a dominant focus since may 2013, due to 

Fed chairman ben bernanke’s public 

comment that the Fed could begin to taper 

its Qe3 purchases to later this year, if there 

were signs of a sustainable improvement 

in the us economy. 

since that time, yields have been rising 

quickly, with the 10-year us treasury 

going from a yield of 1.63 oer cent in early 

may to 3.00 per cent as of early 

september. during that time, in response 

to the Fed’s direction, the market was 

very much trading on technical based on 

us economic data, seeing it as a guide to 

the timing of Fed’s action to reduce and 

eventually end Qe3. 

moDesT us groWTh 

most recently, market participants 

seemed to reach a consensus, fuelled by 

further commentary by Fed officials and 

their reading of the economic data, that the 

Fed would start to taper to some extent following 

the september 2013 Federal open 

market committee (Fomc) meeting. 

during this same period, given the implications 

of a consequential rising in the 

rates environment, combined with receding 

excess in global liquidity, market participants 

reacted by selling off emerging 

market (em) equities, and further selling 

off government, quasi-government and 

corporate fixed income em assets. 

the result was a lack of market liquidity 

in those investment areas, as well as the 

significant spike in volatility witnessed over 

the past several months. the market’s 

reaction, or overreaction, caused a significant 

increase in yields and a commensurate 

fall in the prices of fixed income securities 

in most if not all global asset classes, 

leading to significant investment losses 

during the period following bernanke’s 

comments. 

since the june Fomc meeting, the 

stream of us economic data has been, on 

the whole, more positive than negative, 

supporting expectations of sustained albeit 

modest economic growth. bernanke provided 

some additional “clarity” in july, 

emphasising the staying power of the 

Fed’s accommodative policy in the near 

term should the economy not provide convincing 

and sustainable evidence of its 

strengthening. his remarks helped to calm 

global markets to a certain extent. 

however, uncertainty over the timing and 

pace of the reduction of purchases, as well 

as the unavoidable end of Qe3, continues 

to weigh on market participants. 

TAbLe 1. returns voLatiLity oF 

doW jones suKuK totaL return indeX (djsuKtXr) and 

jP morgan emerging marKet bond indeX (embi) gLobaL totaL return indeX 

over 2-year Period 

reTurNs voLATILITy 

DoW joNes suKuK ToTAL reTurN INDex 2.24% 

jP morgAN emergINg mArKeT boND INDex (embI) gLobAL ToTAL reTurN INDex 7.21% 

sourCe: bLoomberg and cimb PrinciPaL isLamic asset management sdn bhd as at 30 june 2013 

over the tWo-year Period ending 30 june 2013, the gLobaL suKuK marKet (rePresented by the doW jones suKuK totaL return indeX) 

eXhibited LoWer returns voLatiLity comPared to the em bond universe (rePresented by jP morgan emerging marKet bond indeX 

(embi) gLobaL totaL return indeX), suPPorting the vieW that, historicaLLy, gLobaL suKuK as an asset cLass is reLativeLy insuLated 

comPared to the conventionaL emerging bond marKet. 



the global market sentiment and volatility 

have caused dislocation in the mainstream 

fixed income markets and also 

affected the global sukuk market. 

nevertheless, sukuk is better insulated and 

unlikely to underperform compared to its 

conventional benchmarks due to its defensive 

nature and buy-and-hold investor base. 

As such, sukuk is less impacted compared 

to conventional em fixed income instruments. 

(refer to Table 1). 

increasing demand and popularity for 

shariah-compliant products and structures 

post the global financial crisis have formed a 

strong demand base for sukuk. moreover, 

the global demand for sukuk is forecasted 

to grow three-fold from us$300 billion to 

us$900 billion by 2017. the exponential 

rise is primarily a result of double digit 

growth of the islamic banking industry and 

the increasing appetite for credible, shariahcompliant, 

liquid securities. 

suKuK Less ImPACTeD 

in addition, two-year historical return 

performance for sukuk is comparatively 

better than for conventional bonds 

because the investor base is less affected 

by unwinding of fixed income securities 

and em asset positions. much of this 

demand originates from islamic financial 

institutions as well as fund managers and 

high net worth individuals. 

hydrocarbon based wealth and an economic 

resurgence in the middle east and 

north africa (mena) regions are key factors 

positively shaping the investor base for global 

sukuk investments. in addition to increasing 

the liquidity of the sukuk market, investors 

can expect to see more stability in the global 

sukuk market because a substantial proportion 

of the participants in this market have the 

intention of holding their sukuk investments 

for the medium-to-long term. 

sukuk is an ideal investment for investors 

looking for opportunities to position for economic 

recovery while maintaining exposure 

in islamic fixed income markets. the financial 

sector is considered a proxy for the 

growth of an economy since banking entities 

typically flourish as a function of economic 

expansion. given that shariah-compliant 

banks and other financials constitute 

the second largest sector at around 28 per 

cent of the dow jones sukuk total return 

index (djsuKtXr), as shown in Table 2, a 

diversified global sukuk portfolio can provide 

broad exposure to the financial sector 

including islamic banks such as Qatar 

islamic bank (Qatar), First gulf bank (uae) 

and abu dhabi islamic bank (uae). 

the challenge going forward is how to 

manage global sukuk portfolios in a rising 

rate environment. it is well known that interest 

rate volatility poses a real challenge to 

fixed income portfolio managers since rising 

rates can negatively impact the value 

of fixed income portfolios. 

cimb-Principal islamic asset 

management sdn bhd (cimb-Principal 

islamic) significantly reduced interest rate 

risk across their managed global sukuk 

portfolios by shortening duration earlier in 

2013. the market expectation is that the 

Fed will start to taper purchases gradually, 

starting as early as this year and would 

then start increasing short end Fed Funds 

rates gradually with the first increase anticipated 

sometime in early 2015. 

a sukuk portfolio that currently has a 

five-year average maturity would have only 

about three years to maturity by 2015, 

therefore escaping much of the durationrelated 

volatility as rates rise. over the 

course of this period, investors would be 

able to reinvest incoming proceeds in higher 

yielding short and medium maturity 

securities. 

depending on investment parameters 

and risk tolerance, our portfolio managers 

will look to add existing and newly issued 

higher yielding investment grade names to 

their portfolios. some high yield credits are 

expected to outperform and provide annual 

return of 6 per cent to 7 per cent. 

the expected returns on high-yield 

bonds are a function of two factors: (i) the 

magnitude of the recent sell-off which 

added significant yield for purchasers of 

the securities; and (ii) higher profit rates 

for new issues and positive price performance 

in the primary market. as 

economies recover, investors may tolerate 

more risk in their portfolios for added 

yield due to improving expectations on 

issuer performance and lower expectations 

for default. 

TAbLe 2. 

recently, international rating agency, 

moody’s investors service, announced 

that the global default rate on global highyield 

debt for the first quarter 2013 was 

2.4 per cent, near a record low. 

in terms of asset allocation, cimb- 

Principal islamic continue to favour financials 

within the gulf cooperation council 

(gcc) region such as saudi arabia, 

Qatar, abu dhabi and dubai. 

in addition to moving down the credit 

curve on senior unsecured securities in 

response to improving global economic 

growth data, our portfolio managers 

could allocate a certain proportion of their 

portfolios to subordinated sukuk instruments 

of the strongest banks in the gcc 

countries. 

suKuK resILIeNCe 

the prospect of the Fed tapering the 

monetary stimulus programme sent shockwaves 

through the financial markets. 

sukuk have not been spared by the impact 

of rising us yields. however, the global 

sukuk market proved relatively more 

resilient in the face of this volatility. 

the resilience of the global sukuk market 

has been largely a demand-driven 

phenomenon, propelled by investors for 

products that are more compliant with 

their religious faith. sukuk are also 

emerging as a new asset class for conventional 

investors as the asset class has 

undoubtedly filled a gap in the global capital 

market. 

in addition the global sukuk market is 

supported by cash-rich investors who 

tend to hold global sukuk securities until 

maturity. since the market is still very 

much focused on the possibility of the 

Fed reducing its bond purchases, one 

way to protect global sukuk portfolios 

from the potential effects would be to 

employ proactive portfolio managers that 

are attuned to managing these risks.. 

WorLd broad investment grade (WorLdbig) bond indeX 

and doW jones suKuK totaL return indeX sector Weightings 

WEIGHTINGS 

seCTor DoW joNes suKuK WorLD boND INvesTmeNT 

ToTAL reTurN INDex grADe (WorLDbIg) boND INDex 

goverNmeNT & goverNmeNT sPoNsoreD 44.42% 68.22% 

FINANCIALs 28.43% 5.75% 

eNergy AND uTILITIes 19.09% 2.41% 

INDusTrIAL 8.06% 6.77% 

CoLLATerALIseD (mbs & CovereD boNDs) - 16.85% 

sourCe: bLoomberg and cimb PrinciPaL isLamic asset management sdn bhd as at 30 june 2013 

FinanciaLs constitute the second Largest sector at around 28% oF the doW jones suKuK totaL return indeX. this oFFers an investment 

oPPortunity For conventionaL FiXed income investors Who Want to diversiFy the QuaLity oF their overaLL PortFoLio’s eXPosure 

to the FinanciaL sector as they can gain eXPosure to isLamic banKs such as Qatar isLamic banK (Qatar), First guLF banK (uae) and 

abu dhabi isLamic banK (uae). 



suKuK 

Khazanah sg$600m exchangeable sukuk 

Khazanah issues 2nd sukuk in singapore market 

Khazanah nasional berhad, 

the malaysian sovereign 

wealth fund (sWF), successfully 

completed a benchmark 

exchangeable sukuk offering 

of sg$600 million (rm1.524 billion), via a 

Labuan-incorporated independent special 

purpose company, indah capital Ltd. in 

november 2013, which the company 

stressed is the first singapore dollardenominated 

negative yield exchangeable 

sukuk, and the first offering to offer 

exposure to a growing private healthcare 

market. 

the sukuk, which was upsized from 

the initial size of sg$500 million (rm1.27 

billion), is exchangeable into ordinary 

shares of ihh healthcare berhad (ihh), 

one of the largest healthcare providers in 

the world by market capitalization, which 

is owned by Khazanah. 

the issuance was jointly lead managed 

by cimb bank berhad, deutsche bank ag 

and standard chartered bank, who are also 

the joint bookrunners for the transaction. 

this is Khazanah’s second sukuk offering 

in the singapore dollar market. the 

sWF issued its debut singapore dollar 

sukuk - a sg$1.5 billion (rm3.6 billion) 

offering in august 2010. since then it has 

pioneered the issuance of the first sukuk in 

the renminbi market - a rmb500m (rm246 

million) issuance in october 2011; and a 

us$357.8 million negative yield equitylinked 

exchangeable sukuk in march 2012. 

in a statement, Khazanah nasional 

stressed that this latest issuance is in line 

with its fund-raising strategy and long 

term commitment towards progressive 

divestment of its investments. the sg$denominated 

exchangeable sukuk also 

provides a natural currency hedge for 

Khazanah towards its singapore-related 

investments. in addition, for the first half 

of 2013, ihh’s singapore healthcare 

operations contributed about 35 per cent 

and 30 per cent of ihh group’s revenue 

and ebitda respectively in sgd, providing 

a natural currency link to the sukuk’s 

underlying stock. 

KhaZanah nasionaL bhd 

sg$600m negative yieLd 

eXchangeabLe suKuK 


Issuer 

indah caPitaL Limited, a 

Labuan incorPorated sPeciaL 

PurPose comPany, on 

behaLF oF KhaZanah 

nasionaL berhad 

sPoNsor & obLIgor Khazanah nasional berhad 

DATe oF LAuNCh november 2013 

sIze oF Issue 

sg$600m 

suKuK TyPe 

TeNor 

eXchangeabLe suKuK - the 

suKuK is eXchangeabLe into 

ordinary shares oF ihh 

heaLthcare berhad, Which 

is onWed by KhaZanah 

nasionaL bhd 

5 years With an investor 

Put oPtion Which is eXercisabLe 

at the end oF year 

three. uPon the eXercise 

oF the eXchange rights 

under the suKuK, its hoLd 

ers WiLL initiaLLy be entitLed 

to receive an aggregate 

oF 311.4 miLLion ordinary 

shares oF ihh, subject 

to adjustments Pursuant 

to the terms and 

conditions oF the suKuK. 

CurreNCy 

singaPore doLLar 

yIeLD To mATurITy -0.25% PLus a 17% 

DIsTrIbuTIoN 

LeAD mANAgers AND 

booKruNNers 


eXchange Premium P.a 

through an acceLerated 

booKbuiLding eXercise 

Which started on 17 

october 2013 

cimb banK bhd; deutsche 

banK ag; standard 

chartered banK 

this issuance is in Line With 

KhaZanah’s Fund-raising 

strategy and Long term 

commitment toWards Progressive 

divestment oF its 

investments. the sg$denominated 

eXchangeabLe 

suKuK aLso Provides a naturaL 

currency hedge For 

KhaZanah toWards its 

singaPore investments. 

LIsTINg 

singaPore eXchange; bursa 

maLaysia (eXemPt regime); 

Labuan internationaL 

FinanciaL eXchange inc. 

sourCe: KhaZanah nasionaL bhd november 2013 

Khazanah managing director, azman hj. 

mokhtar, explained that “islamic finance has 

become an indispensable part of the global 

financial system and malaysia is at the forefront 

of this dynamic market, continuously 

pushing the boundaries in product innovation 

and market depth. We are very pleased 

that this transaction has been executed at a 

very competitive price against the uncertain 

market backdrop, setting a benchmark 

for sukuk issuances with an order 

book that covered 5.5 times of the initial 

issue size. this proves the market’s 

strong faith and confidence in the quality 

of the sukuk, the underlying equity story 

of ihh and Khazanah’s credit.” 

the sukuk was successfully priced 

through an accelerated book-building 

process on 17 october 2013, at the tightest 

end of the price guidance of -0.25 per 

cent yield to maturity and 17 per cent 

exchange premium. on the equity front, 

ihh closed at rm4.19 per share which is 

a commendable 50 per cent increase 

from its iPo price of rm2.80 back in july 

2012. the transaction was significantly 

oversubscribed, attracting a diverse 

group of over 100 investors comprising 

long only funds, hedge funds, arbitrage 

funds as well as asset managers across 

asia and europe. 

according to Khazanah, the sukuk has 

a tenure of 5 years with an investor put 

option which is exercisable at the end of 

year three. upon the exercise of the 

exchange rights under the sukuk, its 

holders will initially be entitled to receive 

an aggregate of 311.4 million ordinary 

shares of ihh, subject to adjustments 

pursuant to the terms and conditions of 

the sukuk. this, says the sWF, represents 

approximately 3.8 percent of ihh’s 

current issued and paid up share capital. 

the sukuk will be listed on the 

singapore exchange, Labuan 

international Financial exchange inc and 

bursa malaysia (under an exempt 

regime). ihh is one of the leading international 

provider of premium healthcare 

services in attractive markets with strong 

and rapidly growing demand for quality 

healthcare. ihh is currently listed on 

bursa malaysia and the singapore 

exchange and operates an integrated 

healthcare business and related services 

with leading market positions in 

singapore, malaysia and turkey, as well 

as healthcare operations and investments 

in the china, india, hong Kong, vietnam, 

brunei, macedonia and the uae.. 


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IB Jan Feb 2012 CoverQ7 Final:Layout 2 5/6/12 00:23 Page 3

Islamic Banker November 2013

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