Malaysia and the Sukuk World

malaysiaMalaysia has long played and as a matter of policy it continues to play a leading part in the development of Shariah finance. Though at one time this was a way of seeing to it that the devout Moslem population of the country will have access to financial services, over time this feature of the country has enhanced its standing as an international hub.

Recent days have seen three developments worthy of note in the overlap of Malaysia and Shariah financial news, especially with regard to the issuance of sukuk, the Islamic functional analog of corporate or sovereign bonds.

Moody’s Rates Telekom Malaysia sukuk

First, Moody’s Investor Services has assigned a provisional A3 rating to a $750 million multicurrency sukuk issuance program established by Telekom Malaysia Berhad.

This rating is with reference to the special purpose vehicle established for this purpose, it does not constitute a rating on the individual sukuk certificates, which will be subject to separate review.

This rating comes with the caveat that Moody’s would “like to see an improvement in [TMB’s] free cash flow.” The desired improvement would result in a ratio of FCF to debt consistently above 15-20%, and adjusted debt/EBITDA consistently below 2.

In this transaction, Moody’s understandably takes no position on theology. It notes in its rationale for the ratings action that its “sukuk rating does not express an opinion on the structure’s compliance with [Shariah law], and for this it refers to the Fatwa provided” by the religious advisers to TMB.

An SRI Sukuk

Second, Shariah finance is these days cross-fertilizing with the SRI movement (usually that stands for “socially responsible investing” although thanks to the vagaries of the English language the phrase can also be “sustainable responsible investing” or some close kin.)

The Securities Commission in Malaysia approved the country’s first SRI Sukuk, one issued by Khazanah Nasional Berhad. The Malaysia-based ratings service RAM is more than just approving, it is enthusiastic. In a statement Thursday, April 23, RAM Ratings’ CEO, Foo Su Yin, said that RAM sees “tremendous growth potential.”

The specific Shariah doctrine at work in the issuance of the KNB sukuk is Wakalah Al-Istithmar. A “wakalah” is simply an agency contract, and “istithmar” refers to intangible assets. This appears to be tricky ground. In the words of the valuable reference website Islamic Banker, the creation of a sukuk typically begins with an analysis of “what exactly the business of an originator entails and what assets (if any) are available to support the issuance of sukuk.” It is only if one finds it impossible to identify tangible assets that one invokes Istithmar, though the reference cites also acknowledges that this isn’t “universally accepted” and that “care needs to be taken so as to ensure that this is not construed as trading in debt,” which – frankly, to an outsider’s eyes – is what it sounds like.

It also sounds as if the relevant authorities are at least sometimes inclined to be more flexible when the underlying investment is deemed socially responsible.

Who Is the Biggest Player  

The League Table has changed a bit. CIMB Holdings has long been Malaysia’s top arranger of sukuk. Last year, CIMB engaged in merger talks with a smaller rival (RHB Capital, then #4 in the league) and with Malaysia Building Society, aimed at creating a single Islamic-finance powerhouse.

Alas, it was not to be, and the parties abandoned the talks in January 2015.

Now the figures for market share for 2014 are in, and RHB has leapt from 4th place to 1st. It now has 25.7% of the market in facilitating sukuk issuances. CIMB is at 25.7%. Third place AmInvestment comes in at 15%.

The market as a whole grew, though only slowly (by 1.5%), in 2014. The total sukuk issuance in 2013 was 65.1 billion ringgit. In 2014 it was 66.1 billion. In U.S. dollars, that’s a move from $18.4 to $18.7 billion.

It was CIMB that got a piece of the big Hong Kong sukuk deal last year.



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