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Hong Kong’s Donald Tsang – Sees Islamic banking market for Mainland China borrowers.
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Hong Kong, S’pore woo Islamic banking market
30-04-2008
HONG KONG – Malaysia has become the biggest player in Islamic banking in the world, having pioneered combinations of financing tools based on Shari'ah law.
Malaysia expects Islamic finance to account for 20 per cent of its banking assets by 2010, says Moody's Investor Service in a review of Islamic banking, and the outlook for 2008. Islamic banking currently accounts for 14 per cent of Malaysia's banking market.
The rating agency's research team, which wrote the report, say Malaysia's target is achievable, given the efforts of its domestic banking in the issuance of Islamic banking licences to foreign players.
"This creates significant growth potential for Sukuk, which can be used by Islamic banks for long-term funding and asset-liability management purposes," says the agency.
Sukuk is the fastest-growing segment, with global volume reaching US$97.3 billion last year. More than 95 per cent of Sukuk issued in the Asia Pacific is issued by Malaysia.
Moody's said overall Sukuk issuance should continue to increase by around 30-35 per cent a year. Sovereign Sukuk is likely to gain in popularity, with a new preference for Sukuk out of Japan, Thailand and the United Kingdom.
Given that most Gulf Co-operation Council (GCC) currencies will continue to be pegged to the US dollar in 2008 – due to inflationary pressures and the need to create a benchmark against which to value corporate Sukuk – a number of GCC governments might be considering issuing Sukuk. In comparison to Malaysia, Asia's largest Muslim countries – Pakistan and Indonesia – have small, although growing, Sukuk markets. However, both of these are expected to grow significantly in coming years.
Rapid growth of Islamic financing continues in the face of a global credit crunch, prompting non-Islamic countries to look to this segment of global financing, estimated to be worth around US$700 billion, for future growth.
Islamic financing has grown at around 15 per cent in each of the past three years, partly as a result of increased wealth in Islamic countries driven by high oil prices.
Moody's says Asian-currencies-denomin-ated Sukuk outstanding grew by close to 50 per cent, to US$65.3 billion, in 2007, from US$43.6 billion in 2006. And, despite the financial market melt-down in the aftermath of the US sub-prime crisis from the middle of last year, Sukuk issuance continued in the second half of 2007. Notwithstanding the global credit crunch, Asian-currencies-denominated Sukuk issuance rose 27 per cent from July to end-December.
Both Singapore and Hong Kong, which consider themselves the leading financial centres in the region, are stepping up their efforts to capture a slice of this growing market.
In addition to concessionary tax treatment for Sukuk – similar to that for conventional bonds – Singapore has waived the double imposition of stamp duty on real estate financing structured under Shari'ah law. Several banks in Singapore are also looking at specialist subsidiaries. The Monetary Authority of Singapore last May granted a full banking licence to its largest bank, DBS, to launch the Islamic Bank of Asia. Singapore’s financial community is actively looking at Islamic funds management.
Hong Kong's Securities and Futures Commission approved the first Islamic Fund (Hang Seng Islamic China Index Fund) last November, and the Hong Kong Monetary Authority said in January that it will apply for associated membership of the Islamic Financial Services Board. Membership will enable Hong Kong to position itself as an international platform for Islamic funding for Mainland China needs, particularly for infrastructure projects.
(In January, the Chief Executive of Hong Kong, Donald Tsang, headed a high-level business mission to Kuwait, Saudi Arabia and the UAE. He said Hong Kong could play a significant role in structuring Islamic investment products to meet the needs of Mainland Chinese borrowers.) Moody's says that, in the medium term, there could be significant potential for Hong Kong to launch cross-border and residential mortgage-backed Sukuk issuance. By focussing on Sukuk, says Moody's, Hong Kong could also become a platform for the development of Islamic securitisation.
Japan is the most recent major developed economy to tap into the Sukuk market, and planned to issue its first sovereign Islamic Sukuk in the first quarter of 2008. Japan's Sukuk market will raise between US$300 million and US$500 million through the Japan International Bank for Co-operation. Thailand and Singapore also plan to issue their first Sukuk in 2008.
Moody’s says the Malaysian Government has been very pro-active in encouraging Islamic finance, implementing measures such as tax benefits that favour Sukuk funding over conventional methods.
In 2007, Malaysia had the biggest domestic Islamic banking market in the world. Ringgit-denominated Sukuk issued in 2007 was equivalent to US$64.4 billion, representing 66 per cent of global outstandings as of December 31.
Malaysia's national mortgage agency, Cagamas Berhad, went to the Sukuk market several times last year, raising more than M$2 billion (US$600 million) from just one Sukuk, Musharaka Residential Mortgage-backed Securities (RMBS). (Malaysia launched its first Islamic RMBS in 2005.) Cagamas combined conventional and Islamic commercial paper and medium term notes (MTN) in the issuance. Similarly, Bumiputera Commercial Holdings raised US$1.7 billion (M$6 billion) in A conventional and Islamic commercial paper and medium term notes programme.
Last year, the Malaysian Securities Commission approved US dollar-denominated Sukuk issued by foreign corporations to raise more than US$8.3 billion. This was much higher than the total approved foreign currency- denominated issues in the previous two years.
Malayan Banking Berhad (Maybank) issued Sukuk to raise US$300 million to fund its Islamic operations last year, representing the first cross-border subordinated Sukuk issuance.
Moody's expects Malaysia to lead again this year in new Islamic securitisation transactions. In January, Menara ABS Berhad issued US$306.1 million in Sukuk Ijarah, backed by four properties. (Sukuk Ijarah is a leasing structure). The Malaysian central bank, Bank Negara, plans to encourage foreign banks to conduct Islamic banking in multiple currencies. It will issue more licences to these banks, and give them special tax incentives as part of its strat-egy to promote Malaysia as an international hub for Islamic finance.
Other segments of Islamic financing include Takaful. Malaysia accounts for 90 per cent of Takaful customers worldwide. Global premiums have reached nearly US$2.5 billion and are expected to be worth US$7.4 trillion by 2015. (Takaful is a Shari'ah-compliant system of issuance based on the principle of mutual support.) The first Islamic Private Equity fund was launched in 2007. The main factor constraining Islamic finance private equity issuance has been the reliance of transactions on leverage.
Shari'ah-compliant project finance is already used in the Middle East and North Africa (MENA) region. Saudi Arabia accounts for nearly half of the US$167 million market. The funds were raised for petrochemical, independent water and power projects, telecoms and infrastructure finance.
Islamic real estate investment trusts represent another growth area. Last September, the Malaysian Securities Commission approved issues of up to 300 million Malaysian Ringgit (US$86 million) to establish the Al-Aqar KPJ Healthcare Islamic Real Estate Investment Trust (RIET). The fund was raised through a Sukuk Ijarah programme, combining both medium-term notes and commercial paper.
The Moody’s report says that Sukuk REITs, both in Asia Pacific and the GCC, are expected to reach new record issuance. The potential for growth is fuelled by a tremendous concentration of high net worth individuals and family businesses whose collective wealth in the GCC alone is estimated at more than US$1.3 trillion.
Moody's says that, in 2008 and beyond, diversification is expected to be high on Islamic bank agendas. A handful of GCC-based Islamic banks have started exploring new horizons in Asia – but also beyond the natural borders of the Islamic universe.
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