Malaysia is a key driver of sukuk growth

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Before my last business trip to Dubai, I performed a non-scientific test of local appetite for Malaysia by searching for Malaysian food. I easily found a bounty of sambal prawns, decent-looking mee goreng, even a place claiming to serve the best nasi lemak in town. This triggered a thought: considering the delicious examples that Malaysia sets in cuisine, how can the world learn from Malaysia’s success in finance, too?

As head of debt capital markets for Southeast Asia at Deutsche Bank, one of my objectives is to promote cross-border understanding and collaboration between Southeast Asia and the world, with a focus on finding investors for Southeast Asian credit and non-Asian issuers for the Asian bond markets.

Over the past few years, Malaysia’s positive reputation among financiers in the Middle East, US, Europe and greater Asia has grown. Malaysia’s dedication to the Islamic finance market, strong and stable economy, and increasingly liquid local bond market are attractive to an expanding range of issuers and investors.

Islamic finance stands out among the many opportunities in Malaysia, and it continues to lead the world in Islamic finance development.

Globally, Islamic finance volumes are booming. In the first three months of 2012, US$109 billion (RM333.24 billion) of sukuk (Islamic bonds) was issued, representing an increase of 69% from 2011. Malaysia is a key driver of that growth, and often represents 70% to 80% of the total sukuk issuance around the world, with the ringgit as the dominant global currency for sukuk issuance.

Despite these achievements, cross-border flows in sukuk have a long way to go. Fortunately, signs are positive that more will be achieved with time.

While Middle Eastern investors were active buyers of the Malaysian government’s innovative US dollar sukuk transaction in June 2011, and also prominently supported the Republic of Indonesia’s landmark US dollar sukuk transaction last month, the supply of international US dollar sukuk from Malaysia (and Southeast Asia) remains relatively light.

Investors across the Middle East, Asia, and the globe would certainly support more US dollar transactions, particularly from Malaysia.  Although a handful of Middle Eastern issuers have successfully placed sukuk in ringgit this year, including Gulf Investment Corp and National Bank of Abu Dhabi (among others), sukuk transactions from issuers based outside of Malaysia still represent a small portion of total ringgit issuance volumes.

Outside of traditional sukuk currencies, Axiata issued a successful offshore renminbi (CNH) sukuk in 2012, following Khazanah’s successful CNH transaction in 2011 and demonstrating the continued internationalisation of sukuk.

What will lead to more cross-border flows in Islamic finance? I believe education, uniformity, and time are key factors.  Malaysia’s financial regulators, working through the Malaysia International Islamic Financial Centre initiative, have done a superb job promoting Islamic finance around the world, and more countries are taking note of robust global Islamic finance markets.

Bank Negara, through the Syariah advisory council, has played a leadership role in creating uniform Syariah boards and standards, and I hope more countries and regions will follow suit.  Malaysia is known for creativity in Islamic finance, and efforts to develop new sukuk structures (and syariah-compliant derivatives) will continue to broaden the market.  Global progress is slow, but I expect it will come.

Turkey issued its first US$1.5 billion sovereign sukuk in September, and Qatar issued a US$4 billion sukuk — the largest ever — in July 2012.  Looking at potential new markets, Japan launched a “J-Sukuk” framework in 2011 to level the playing field between traditional bonds and sukuk. While few issuers have taken advantage of the J-Sukuk framework, I hope that Japan will keep the door open and encourage more issuers to borrow in sukuk format locally.

The education process will require time. Japanese investors are clearly interested in buying more Malaysian credit, but few are familiar with sukuk. Indeed, a Malaysian issuer executing a sukuk in yen would provide a perfect starting point for many local buyers. In Southeast Asia, Indonesia’s sukuk volumes are growing locally and internationally, and Singapore, Hong Kong, Thailand, and the Philippines have established (or are reported to be exploring) Islamic finance frameworks.

Similarly, I believe more global issuers could be encouraged to consider the ringgit bond market as a source of financing. Multinational corporations are constantly on the lookout for new funding sources, while Middle Eastern issuers — the most frequent users of Islamic finance, outside of Malaysia — will likely show increasing interest in ringgit bonds as local market liquidity grows.

To support this initiative, banks (including Deutsche Bank) must continue to educate issuers on the depth of the ringgit bond market, and also demonstrate the liquidity of the swap market for those requiring swaps back to their home currency.

As year-end approaches, bankers tend to become reflective on their achievements. I am sure every market participant will agree that 2012 was a phenomenal year for the growth in Asian bond markets, and for Islamic finance as well.

Looking forward to 2013, market uncertainty remains: the US fiscal cliff debate is the current “hot topic”, but the European economy continues to struggle and geopolitical conflicts are simmering in many parts of the world.  Sometimes the best advice is simple advice: for issuers with funding requirements, the current market environment is ideal.

Rates are low, and appetite for credit is strong. When a good window is available, I recommend decisive action.  I would strongly encourage any potential issuer to consider the benefits of Islamic finance in ringgit, US dollars, or emerging currencies, and I would also strongly suggest engaging with the broadest potential range of investors prior to an issue.  

As an added benefit, should an investor road show include a trip to the Middle East, you would be able to confirm those claims of the best nasi lemak in town.

David Greenbaum is head of debt capital markets for Southeast Asia at Deutsche Bank. The views expressed are those of the author and do not necessarily reflect the official views of Deutsche Bank or its related entities.

This article first appeared in The Edge Financial Daily, on Dec 11, 2012.

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