IFR Asia Malaysia debt markets report, April 2009
Interview with Dato’ Mohd Razif Abdul Kadir, Deputy Governor, Bank Negara Malaysia
Dato’Razif, a more than 30-year veteran of Bank Negara, supervises regulation and development of sectors including banking, insurance, Islamic banking and takaful.
Public speakers on Islamic finance project different personas from the podium. Some are aggressive about the strength of the discipline compared to the conventional world; others are humble, recognising the gulf in scale between Islamic and conventional finance; some are a bit self-righteous, enjoying the lack of collapses among Islamic financial institutions as western banking behemoths crash and burn. Dato’ Razif: he’s just enthusiastic.
“I can talk for hours about this, days,” he says, flicking through a presentation he has made just weeks earlier at the University of Reading. His mantra is that Islamic finance is a source for stability, and he’s right, he really can talk for hours about the reasons: the direct link to the real economy; the lack of leverage; the ethical stance; the greater transparency and disclosure that comes from the additional level of Shariah governance; the greater fiduciary duties and accountability that come from the same source; and the different contractual relationship of the Islamic world, with equity-based and risk-sharing transactions rather than “a debt credit relationship where if you default I will go after you.”
One can argue at length whether Islamic banks have escaped the credit crunch more through luck or judgment, but Razif is in any event realistic that the sector has not emerged unscathed. “I always emphasise that Islamic finance is not insulated from what’s happening in the world,” he says. “The first phase of the crisis was not a problem because Islamic principles ensured there was no way [Islamic banks] would get hold of toxic assets. But the second wave, of underlying economic activity, has severely affected it. There’s no way any system can withstand it, and especially Islamic finance because the underlying has to be from those economic activities.”
So where do those principles leave sukuk today? Clearly sukuk issuance slowed in 2008: from RM121.3 billion of new issues in 2007 to RM43.23 billion in 2008, although the number of issues didn’t decline so much, from 59 to 47. “There is a lot of interest,” says Razif. “That’s not a problem. But the underlying market is very bad. It is so difficult to get the supply of dollars. This is nothing to do with Islamic finance: people are waiting to see the best time. A sukuk is a long term commitment and people don’t want to lock the cost, so in the meantime they’d prefer to access bank finance and then issue when it is settled and back to normal.”
Razif claims the interest is coming from both domestic and international issuers, and says there are “six or seven” issues waiting to come. Interestingly, he confirms an issue is in the queue from an Australian issuer, though he declines to name it; Australia is one of the many markets Razif and others have visited on roadshows to promote the idea of sukuk issuance in Malaysia. Another, unsurprisingly, is the Middle East.
Razif was delighted to see the issue last year from the Islamic Development Bank, the multilateral institution owned by many Middle Eastern nations, in ringgit. “It’s important because they are saying: Malaysia is a funding base. They know the market is so liquid. And for issuers you don’t want a one-off issue, you want your name to be known.” He cites the example of Toyota, whose most recent sukuk issue was a RM1 billion private placement in May. For companies like that, he said, the ringgit market (and particularly the Islamic ringgit market) present a strong source of liquidity and usually of pricing, so “even after the swap it’s cheaper.”
Like the conventional markets, sukuks have a problem with swap market capacity. “That is a global phenomenon, not only Malaysia,” he says. Is it capacity or cost? “Both. Supply is quite difficult,” he says.
Bank Negara is the driving force behind the Malaysia International Islamic Finance Centre (MIFC), which has now issued eight fully-fledged fund management licences, with the latest going to Aberdeen Asset Management, Nomura and CIMB Principal. Each has been given seed capital – the amount varies depending on “their commitment”, Razif says – and mandates, with the hope that in time they will then bring further capital to Malaysia from outside it. That, if it happens, should increase the liquidity still further.