Anaylsis Markets

Financial Sukuk Supply Growing in Advance of Basel III Implementation

While most of the attention in sukuk is placed on GCC as the source of most of the international sukuk, Malaysia has been consistently leading with roughly two-thirds of total issuance between Asia and the GCC (the most active markets

Sukuk issuance in the first half of the year was led by Asian countries on the back of continued strong issuance volume out of Malaysia. Malaysia is by far the largest issuer in Asia, but some of that sukuk volume is accounted by issuance with tenors under 6 month from Bank Negara and the Government of Malaysia. In the six months to June 30, 2014, Bank Negara issued $23.8 billion in short-term sukuk while the Government issued another $245 million. In addition, the Malaysia-based International Islamic Liquidity Management Corporation issued $2.7 billion from a Luxembourg-domiciled vehicle. Excluding the short-term government, corporate and IILM sukuk issuance, the volume of sukuk with more than 1 year tenors is relatively similar between Malaysia and the GCC with the former representing $18.1 billion and the latter $16.5 billion. Behind Malaysia in sukuk issuance is Indonesia, led by the sovereign issuance in both local currencies and international markets.  There has been some corporate issuance but it has not grown along with the sovereign issuance (including the $1.5 billion raised in an international sukuk in September 2014) prompting the Bank Indonesia and the Financial Services Authority (OJK) to recently float the possibility for shorter-tenor corporate sukuk.

The industry breakdown of Asian sukuk issuance in the first half of the year was led primarily by sovereign institution, even excluding the short-term BNM sukuk. Following sovereign issuance, is financial services as many Malaysian Islamic financial institutions tapped markets to add to their Tier 2 capital levels with sukuk compliant with Basel III rules. None of the issuance by Malaysian banks was for Additional Tier 1 (AT1) capital in the rst half, unlike the GCC where several banks have used perpetual sukuk to raise AT1 capital. This is set to change as Maybank became the first to announce it had secured a rating for a proposed RM 10 billion ($3.1 billion) AT1 sukuk programme. Behind financial services are construction, power & utilities, transport and real estate, all sectors with significant amounts of capital expenditure that are frequent visitors to the fixed income markets and particularly to sukuk markets where structures involving tangible assets are the most simple to isssue. Other sectors have seen much less issuance, including some sectors like oil & gas with high capital requirements or sectors like retail and food where issuers in the GCC (Alhokair and Almarai being notable examples) have looked to sukuk. Finally, the structures used in Malaysia represent a big departure from what is seen outside in the region and globally with many murabaha sukuk, which replaced BBA and Bay’ al-inah which have fallen out of favor because of questions about their sharia compliance. The use of murabaha is still unusual; not for sharia compliance issues around the structure but differences of opinion about tradability (permitted in Malaysia but not in most other countries). It is possible that at least some of the murabaha issuance (a lot of which is from BNM) will be replaced by equity based mudharabah structures according to BNM Governor Dr. Zeti Akhtar Aziz
who raised the prospect in her keynote address at the Global Islamic Finance Forum 2014

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