Sukuk & Capital Market - Islamic Finance News

Cover story
From a foreign issuer’s perspective, Sabri Ulus, the head of
treasury at Bank Islam Brunei Darussalam, is full of praise for
the Malaysian Sukuk market, particularly due to its government
and regulatory support, as well as its “very sophisticated”
investor base. He added: “There are also many Islamic financial
institutions, regulatory organizations and standard-setting
bodies. GCC entities come to Malaysia and issue ringgit Sukuk
mostly due to the premium on cross-currency swaps, thus
reducing their costs if they issue in Malaysia. The tax regime
and regulatory environment is also very encouraging to foreign
companies to issue in the ringgit market.”
Afaq Khan (caricature below), CEO of Standard Chartered
Saadiq believes that clear laws and precedence are key to
the success of any capital market in attracting cross-border
issuances; a feat Malaysia has achieved over a decade of
fine-tuning its Islamic capital market laws. “It is always a big
concern for issuers when they want to come to a new market
to issue paper. Malaysia’s regulations make it easy for the
Middle East issuers to come to a new legal jurisdiction, and the
ringgit market remains the most liquid in the Sukuk industry,
so Middle East issuers are confident they can meet their issue
size requirements by coming to the ringgit market as opposed
to going to any other regional currency.”
However, he adds that the main drawback of the ringgit market
is its failure to meet the requirements of most international
issuers in terms of currency. “The need of the issuer isn’t
exactly in the ringgit currency, and it has to be swapped
back into the currency which the issuer can use in their day
to day business. Sometimes you will see Sukuk issuances
in the ringgit market go up, or some taper off. At the back of
this there really is no concern. It is simple economics; once
they (the issuer) swap into a currency they can use, can it still
be considered a competitive financing for them? That is what
drives the issuances from the Middle East to the ringgit market;
when it is viable for them to competitively tap
this liquid and growing market.”
Another fundamental to Malaysia’s
popularity as an up and coming
jurisdiction for cross-border deals
involving Middle East entities is
its legal system, which is based
on Common law. Saad Rahman,
the executive director for global
Islamic banking at Credit Agricole
explains: “Most cross-border deals
are based on English, New York
or Texas law. As an issuer, you are
looking for transparency of contracts,
proper enforcement, and to seek
satisfaction under the enforcement; and
you get that under English law more
than civil law. There is a precedence
which exists in more codified forms of
law. As an investor and issuer you want
robustness of the contract and a legal
jurisdiction that gives you comfort on
both sides when it comes to a crossborder
deal.”
Badlisyah Abdul Ghani (caricature
right), CEO of CIMB Islamic believes
that it is imperative for the industry
to take a step back and evaluate its
position in the market. “Outside of
Malaysia, the Islamic capital markets
in other jurisdictions need to be aware
of the need to chart greater growth in
the future, and to create a platform
that will ensure success. In my
opinion, the infrastructure in
the global Islamic capital
markets is already there: with
RegS and 144A regulations
in place, however, from a
jurisdictional perspective, it is
unstable to rely on the global
market at all times.”
He added: “The framework is
available and the liquidity is
there. But as a nation, you do
not have control over the global
market, which creates instability.
What we want as a player is to be
able to go into a particular jurisdiction and to do transactions
in the local currency. Because in the long-run, that would be
more stable for issuers in terms of ability to tap the currency
that they require in a particular jurisdiction. As CIMB Islamic
try and facilitate issuers and issue Sukuk globally, we always
advise the issuer to do it in their local currency first, then in US
dollars. Outside of Malaysia and Saudi Arabia however, there is
currently no local currency market.”
Change in mindset
It has been said time and again that Islamic investors are
incredibly risk-averse, which in reality goes against the main
tenets of Islamic finance which promotes the sharing of risk.
This has proven to be a major drawback for the Islamic capital
markets, especially in its bid to create a more equity-based
issuance and investment environment.
According to Usman, innovation and growth can only
be achieved if the industry moves beyond fixed-income
instruments and embodies the true spirit of Shariah financing;
which involves the willingness to take up equity-type risk. “In
the capital markets we have only just scratched the surface
by relatively integrating Islamic finance with fixed-income
instruments. However, we haven’t even explored truly assetbacked
securities, infrastructure financing and equity-linked
issuances. It is important to understand first what differentiates
Riba from profit. It is the risk related to ownership; and therefore
we have to take real risk, relate to ownership of assets.
“We are still very far from the true spirit of Islamic finance,
and that is exactly what is holding us back in terms of the
development of new instruments. The whole world will open
up to us if we are willing to take equity-type risk. Fixed-income
Sukuk should just be seen as a means to an end. Issuers
should be encouraged to do Sukuk issuances because then
their equity will become Shariah compliant, and if they do a
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