IFR Asia Malaysia debt markets report, April 2009

Take a look at any area of Islamic finance in Malaysia and there will be a statistic to support its success. Banking? There are 16 Islamic banks, 11 Islamic windows, four international Islamic banks. Insurance? Eight takaful, four retakaful and one international takaful operator. Fund management? Malaysia had 149 Islamic unit trusts at the end of 2008, the highest number in the world, with RM17.19 billion of assets, ranked second in the world after Saudi Arabia.

And the Islamic capital markets provide the most compelling evidence of all. As of September 2008, 64% of all total sukuk outstanding worldwide were from Malaysia, and, while 2008 was much quieter for new issuance, the country still accounted for 36.92% of new launches that year, still the highest chunk anywhere in the world. Malaysia has pushed sukuk with vigour, to the point that 57% of outstanding corporate bonds in Malaysia take the Islamic form. Between 2001 and 2007 there was an average annual growth rate of some 22%. Along the way Malaysia was home to the largest sukuk issue ever launched, for Binariang, at RM 15.35 billion.

More than that, sukuk is an area of clear innovation in Malaysia. Exchangeable sukuks have been launched by groups including, repeatedly, Khazanah; Maybank in 2007 came out with the world’s first international subordinated sukuk; and Malaysia was also home, back in 2002, to the world’s first global sovereign sukuk.

“It is the deepest and broadest sukuk market anywhere in the world,” says Badlisyah Abdul Ghani, CEO of CIMB Islamic. “There is nowhere else you can find a 50-year sukuk. There is nowhere else you can find a RM15 billion sukuk, a straight sukuk, a stapled sukuk, asset-backed securitizations, subordinated sukuks. Whatever you can find in the conventional bond market you can find in the sukuk market in Malaysia.”

Malaysia has achieved this by making an effort to build the most sophisticated regulatory environment in the world for Islamic finance. It has been able to do so because of a combined view at government, central bank and regulator level – in the form of the Ministry of Finance, Bank Negara Malaysia and Securities Commission – that combined action was needed to make it work. Separate interviews with Bank Negara and the Securities Commission in this guide give a sense of how seriously they take it.

International issuers have started to take notice. Ever since Shell launched the first ever Islamic corporate bond in ringgit in a private placement in 1990, Malaysia has sought to attract international issuers to its markets, and that approach has gathered pace through 2004 (IFC, the first ringgit sukuk by a supranational) and 2005 (World Bank, the largest supranational deal in ringgit to that point), until it really took hold in 2007. Issuers since then have included Japan’s Aeon Credit Services and Toyota Capital, and the UK’s Tesco Stores.

Additionally, this is one area where Malaysia’s long-held ambition to attract capital from the Middle East is bearing fruit. In recent years two major Gulf issuers, the Islamic Development Bank and Gulf Investment Corporation, have raised funds in ringgit, although GIC’s maiden issue was a conventional deal. Some managers boast lengthy lists of Middle Eastern institutions in varying states of readiness, some with rating in place and due diligence done, waiting for the right market conditions to return or for a private placement opportunity. “We’ve got a healthy pipeline from the GCC looking for ringgit issuance,” says Abdul Ghani.

For all the recent success, though, the sukuk market has not been immune from problems in the conventional markets. “You can’t really segregate the sukuk market from the broader bond market,” says Abdul Ghani. “It exists in the same market space, it goes after the same investor base, albeit there are Islamic investors who chase sukuk. Broadly the same forces that influence the debt capital market influence the sukuk market.” That’s evident in new issuance volumes: There were 47 sukuk worth RM43.23 billion issued in 2008 compared to 59 worth RM121.3 billion in 2007. Also, the same problems in the swap markets that inhibit foreign borrowers from approaching conventional ringgit deals apply in Islamic ones too.

That said, Malaysian markets generally have not suffered anything like the same ructions as those elsewhere in the world. “In Malaysia, both the Islamic and conventional markets were not as affected by what happened elsewhere in the world,” he says. “There were no toxic assets.” Malaysia also boasts the only sukuk market in the world with meaningful secondary trading.

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