Wednesday, 3 September 2014

Indonesia Markets 10-Year Dollar Sukuk at Two-Year Low Yield

Indonesia is marketing its annual sale of dollar-denominated Islamic bonds at the lowest yield since 2012 amid optimism President-elect Joko Widodo will reduce fuel subsidies and cut red tape.
The country is offering a benchmark-sized sale of Shariah-compliant debt due in 10 years at an initial guidance of about 4.625 percent, according to a person familiar with the matter who asked not to be named as the information is private. That compares with the 6.125 percent yield the government paid on notes maturing in 5.5 years in 2013 and the record-low 3.3 percent rate on 10-year sukuk sold the previous year. A benchmark-sized offer is commonly at least $500 million.
The Constitutional Court rejected an appeal disputing the election result on Aug. 21, clearing the way for Widodo, known as Jokowi, to take power in October. Bank Indonesia has added $11.2 billion to its foreign-currency holdings this year as the rupiah rallied 3.6 percent to lead gains in Asia. That’s a far cry from 2013’s 21 percent plunge in the currency, which prompted officials to “compromise” and accept higher yields at the last dollar sukuk sale to bolster reserves.
“Indonesia can afford to offer a lower yield as the macro picture is much better,” Akbar Syarief,fund manager at PT MNC Asset Management in Jakarta, which oversees more than $200 million, said by phone today. “We think that fuel subsidies will be cut, which would be a positive. It’s only a matter of when and by how much.”

Falling Yields

The yield on the nation’s 3.3 percent Islamic dollar notes due November 2022 dropped 32 basis points this quarter to 4.16 percent, data compiled by Bloomberg show. That compares with a 25 basis point decline to 2.85 percent for similar-maturity Malaysian sovereign sukuk. The yield on the Indonesia’s non-Islamic dollar debt due January 2024 has dropped 41 basis points this quarter to 4.12 percent.
Jokowi said he is committed to reducing fuel subsidies that account for 14 percent of the proposed 2015 budget, after President Susilo Bambang Yudhoyono rebuffed his request to revise the spending last week.
Indonesia plans to sell sovereign bonds denominated in dollars, euros and yen next year to meet a record gross debt issuance target of 459 trillion rupiah ($39 billion), Robert Pakpahan, director general at the finance ministry’s debt management office in Jakarta, said in an interview yesterday. That’s 13 percent higher than this year’s goal.

Improving Confidence

Moody’s Investors Service ranks Indonesian government notes at Baa3, its lowest investment grade. Although the country has a small public debt burden, its low gross domestic product per capita and the high proportion of its debt owned by foreigners make it susceptible to external risks, Moody’s said in an Aug. 19 statement. Fitch Ratings also assigns Indonesia its top investment grade, while Standard & Poor’s rates the nation at its top junk level.
Investor confidence in Indonesia has improved after Jokowi secured victory in the July 9 presidential election. As governor of Jakarta since 2012, he has restarted stalled transport projects, increased tax revenue by moving collection online and dismissed senior officials for poor performance.
The cost to insure the nation’s debt against non-payment using five-year credit-default swaps slid 27 basis points this quarter to 133 basis points, according to data provider CMA. That compares with Thailand’s 25 basis point drop to 86.
“The numbers are more favorable for Indonesia this year,” Priyo Santoso, chief investment officer at PT Mandiri Manajemen Investasi, which oversees more than $2 billion in assets, said in an interview in Jakarta last week. “Investors see that Indonesia’s political risk has subsided, so that’s followed by a falling risk premium on the yield.”

Growing Interest

Indonesia’s government hired Standard Chartered Plc, HSBC Holdings Plc, CIMB Group Holdings Bhd. and Emirates NBD PJSC to arrange the sale, the debt office’s Pakpahan said in May.
The average yield on dollar-denominated sukuk fell eight basis points this quarter to 2.78 percent on Aug. 29, a Deutsche Bank AG index shows. That compares with the five basis point climb to 5.37 percent for the average yield on emerging-market sovereign debt, according to a JPMorgan Chase & Co. gauge.
Hong Kong and Luxembourg are set to follow the U.K. in selling bonds that pay returns on assets to comply with Islam’s ban on interest this year. Indonesia’s offer “reflects the growing interest in Islamic finance as a source of sovereign funding,” Khalid Howladar, global head of Islamic finance at Moody’s in Dubai, said in last month’s statement.
(Bloomberg / 02 September 2014)
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Islamic finance seeks to go green with environment-based products

Financial products based on renewable energy and sustainable agriculture are emerging in Islamic finance as asset managers seek a crossover opportunity between ethical and sharia-compliant investing.
Islamic finance follows religious principles which forbid involvement in activities such as gambling, tobacco and alcohol, but the industry has only recently begun to stress themes of wider social responsibility, such as protecting the environment.
Last week, Malaysia announced guidelines for issuance of socially responsible sukuk (Islamic bonds), aimed at helping firms raise money for projects ranging from renewable energy to affordable housing.
In April the Dubai Supreme Council of Energy, a government planning body, and the World Bank signed an agreement to develop funding for the emirate's green investment programme, including "green" Islamic bonds. Dubai aims to derive 5 percent of its energy from sustainable sources and retrofit buildings to reduce energy consumption.
Meanwhile, firms in Britain, Canada and Hong Kong are offering sharia-compliant investments in sustainable farming ventures, which may attract money from Islamic investors in the Gulf and southeast Asia as well as from local investors.
The reasoning is that green investment products can tap a wider range of demand if they are made sharia-compliant to appeal to Muslims. At the same time, non-Muslims who might normally shy away from Islamic investments - because of concerns about pricing, complexity and lack of familiarity - may embrace them if they are green.
It is not yet clear how much success these efforts will have. In past years, Islamic mutual funds made forays into the market for socially responsible investments, but those efforts have struggled, partly because of limited distribution channels.
Fund houses from the Gulf and southeast Asia sought to distribute some of their Islamic funds to European investors using UCITS, a "common passport" for investment products, but they have had only mixed success, and a high-volume business has not developed.
The new crossover products are not mutual funds but instruments tailored specifically to invest in a certain type of asset in a specific country or region. They combine Islamic screens - lists of criteria for sharia compliance - with other practices required by sustainable investment firms.
In June, Ontario-based AGInvest Properties developed a sharia-compliant investment product providing ownership of Canadian farmland, supervised by Bahrain-based advisory firm Shariyah Review Bureau (SRB).
The venture would buy prime agricultural land which the firm would manage to ensure sustainability through soil preservation, crop rotation and selection of farm operators, said Robbie Duncan, Dubai-based vice president of AGInvest.
The company, which currently manages 70 million Canadian dollars ($64 million) worth of agricultural land, has begun marketing its sharia-compliant product to investors in the Gulf.
A Saudi firm has expressed interest in setting up a similar fund with AGInvest as adviser, said Duncan, without naming the Saudi firm.
"We have found that three main trends have promoted this agri-business: the need for a stable ethical investment, an investment which promotes and aids the betterment of a community, and the need for food security."
It is the third agriculture-based investment screened by SRB since December, said Yasser Dahlawi, SRB's chief executive.
"There are only finite amounts of agricultural resources available to the Islamic investor community," Dahlawi said.
British-based SCS Farmland is offering a sharia-compliant investment programme for Argentinian farmland, while Hong-Kong based Treedom Group is offering Islamic investors an agarwood venture.
Success for all of these ventures is by no means guaranteed, and it is too early to say whether this form of crossover investing will have more success than the Islamic mutual funds previously marketed in Europe.
One environmentally friendly, sharia-compliant investment project in Britain failed to go through earlier this year.
British-based Islamic financial advisory firm Simply Sharia planned to raise 3 million pounds ($5 million) by the end of June to build a solar energy plant, using tax relief from the government's Enterprise Investment Scheme to create a wakala funding structure.
But the project was unable to reach its funding target by the deadline, partly because as a sharia-compliant structure it could not use leverage like conventional financial products, which limited the returns that could be offered. The project was too small to be financed with sukuk.
"There was a performance differential between conventional solar EIS products (target return 1.15 pounds per pound invested) and the sharia-compliant product (target return of 1.10 pounds per pound invested)," said Anas Hassan, managing director of business finance at Simply Sharia.

"This differential was mainly due to the high level of debt in the structure of the conventional product, whereas the sharia-compliant version was a pure equity play.
(Reuters / 02 September 2014)
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Monday, 1 September 2014

Event Summary (KLCIF2014) - KL Conference on Islamic Finance 2014

KL Conference on Islamic Finance 2014

Date    : 24-25 September 2014
Venue : Grand Seasons Hotel, Kuala Lumpur - Malaysia

“An international gathering of practitioners, scholars and experts to discuss and share their knowledge, expertise and experience on the principles, instruments and issues related to Islamic finance, to be held at the world’s leading Islamic financial centre…Kuala Lumpur.”

Event site :

- Product development and Implementation of Islamic financial products
- Ensuring Shariah compliance in Islamic financial instruments
- Sukuk: development, issues and challenges
- Islamic gold account: a golden opportunity
- Islamic mutual funds (unit trusts): factors to consider in making an investment
- The rise of Islamic wealth management in Islamic finance industry
- Islamic financial planning: success in both worlds
- Takaful: innovation and solutions
- Enterprise risk management for Islamic banks
- Enterprise risk management for takaful operators
- Accounting and auditing
- Human capital development in Islamic finance industry
- Legal issues and challenges in Islamic finance
- Dispute settlement in Islamic finance: issue and solutions
Islamic ethics in financial services industry
- Corporate governance for Islamic finance industry


Speakers are selected from Islamic banks, takaful operators, academicians, legal practitioners, consultants, regulatory bodies.

Among the speakers are:

- Islamic bankers/bankers
- Takaful/insurance operators
- Regulators
- Head of governmental departments
- Financial planners/wealth advisors
- Financial consultants
- Legal practitioners (lawyers)
- Academicians (lecturers)
- Entrepreneurs (businessmen/importers/exporters etc)
- Other professionals 

Early Bird Fee: 
Registration with payment by 25 August 2014
Malaysian   :  RM1,500
International  :  USD600

Normal Fee:
Registration with payment after 25 August 2014
Malaysian  :  RM1,800
International  :  USD700
Special fee for Malaysian university lecturers :  RM1,000 (group discount not applicable)

Fee is inclusive of lunch, refreshments and seminar package only.

Group Discount:
Enjoy 20% discount for third and subsequent delegates registered from the same organisation and the same billing source.

(will be uploaded soon...for now you may request for tentative program or you will be given a tentative program when register online)

 Download the brochure




Grand Seasons Hotel, Kuala Lumpur - Malaysia


Kuala Lumpur


Malaysia: RAM Ratings reaffirms AA1/Stable rating of SEB’s sukuk

KUCHING: RAM Ratings has reaffirmed the AA1/Stable rating of Sarawak Energy Bhd’s (SEB) sukuk musyarakah programme of up to RM15 billion (2011/2036).

According to a press statement, the reaffirmation of the rating reflects the strong support that SEB continues to enjoy from the Sarawak State and Federal Governments, given its pivotal role in the Sarawak Corridor of Renewable Energy (SCORE).

RAM viewed that the group to benefit from a “very high” likelihood of support from the Sarawak State Government in the event of financial distress, based on its rating methodology for government-linked entities. Notably, SEB’s financial profile remained in line with the rating agency’s expectations.

The rating is moderated by the group’s weak balance sheet and debt-servicing ability. In line with its hefty capitak expenditure (capex) programme, SEB’s debt load stood at RM6.1 billion as at end-of financial year 2013 (end-FY12 at RM6.28 billion).

“As a result of the lower debt level, SEB’s adjusted gearing ratio improved slightly to 3.44 times (FY12 at 3.71 times) while its adjusted funds from operations debt coverage (FFODC) remained relatively unchanged at 0.07 times (FY12 at 0.06 times).

“Its adjusted gearing ratio is projected to peak at 3.65 times in fiscal 2014 and its adjusted FFODC to improve slightly, averaging around 0.13 times between fiscal 2014 and 2018 as the hroup manages its costs and capex in accordance with its revised expectation of slower pace of customer demand,” it said.

RAM Ratings pointed out, “SEB remains exposed to demand risk, given the progressive take-up of power by SCORE customers relative to its immediate capacity expansion with the Bakun (2,400-MW) and Murum (944-MW) hydro plants.
“We note that a total of 2,100-MW of combined capacity has been met by committed demand from firm SCORE and export customers.”

Elsewhere, it noted SEB is inherently exposed to power-supply concentration risk as about 59 per cent of its current power supply emanates from the Bakun plant, which is owned by the Federal Government (via Sarawak Hidro Sdn Bhd).
“Reliance on Bakun is expected to be moderated when the Murum plant comes onstream in 2015. Any major interruption in power supply could undermine the state’s power system security and pose a challenge to SEB in negotiations with potential SCORE customers.

“However, we draw some comfort to learn that thegroup managed to secure new power purchase agreements and term sheets subsequent to the June 2013 blackout in Sarawak,” it commented.

(Borneo Post Online / 01 September 2014)
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Qatar: Islamic banks outperform conventional peers

DOHA: The Islamic banks in Qatar outpaced conventional banks in the country in terms of growth in net profit during the second quarter of 2014 (Q2,14).

Qatar Islamic Bank (QIB) reported a 15.0 percent YoY bottom-line growth in Q2, 14, mainly due to improvement in top-line as well as fee income. Top-line growth was backed by strong financing growth.

Masraf Al Rayan reported 12.1 percent YoY growth in its bottom-line due to strong growth in net financing income,  Global Investment House (GIH) noted in its Q2, 14 “GCC Banking Sector” analysis.

The GIH analysts who covered five major Qatar-based banks   said the loan books of banks in Qatar grew the most in the region, by registering 15.4 percent growth on year-on-year basis, followed by the banks in Saudi Arabia (9 percent), UAE (4.8 percent) and Kuwait (4.6 percent).  

Due to stable growth in loan book, net interest income (NII) of GCC banks rose 4.3 percent YoY. Qatar’s NII grew by 2.9 percent. NII growth was led by UAE-based banks (8.2 percent YoY), followed by those in  Saudi Arabia (7.3 percent. NII of Kuwait declined 6.8 percent.

The asset base of GCC banks expanded by 9.5 percent YoY to $1.11 trillionn in 2Q14, with all the countries witnessing stable YoY growth. Increase in loan book supported the overall asset growth. Qatar-based banks witnessed the strongest growth in total assets (13.9 percent YoY), followed by banks in Kuwait (8.9 percent ), Saudi Arabia (8.7 percent ) and UAE (7.7 percent )

Net earnings of  GCC banks under GIH coverage increased 11.1 percent YoY to $5.3bn in 2Q14, mostly due to higher NII non-interest income and a 7.7 percent YoY drop in provisions;though4.6 percent YoY increase in operating expenses (opex) partially dampened the profit growth. Net profit of banks in the Kuwait and UAE increased by 20.7 percent  and 20.1 percent YoY, respectively while net profit of Saudi Arabia and Qatar based banks increased decently by 7.4 percent and 3.5 percent , respectively.  On QoQ basis,  net profit  of  the GCC aggregate  increased  5.4  percent, with Saudi Arabia and UAE (7.9 percent each) , followed by  Qatar (6.0  percent) ;  while  Kuwait witnessed a 14.9 percent decline in net profit on QoQ basis.

Qatar-based banks maintained their loan growth momentum due to an increase in public sector spending backed by several developmental initiatives taken by the government.

Among Qatar -based banks, Commercial Bank of Qatar, Qatar Islamic Bank and Doha Bank registered higher growth in loan book of 33.4 percent, 31.8 percent and 25.3 percent YoY, respectively.

Provision expenses of  GCC banks under GIH coverage declined 7.7 percent YoY during  Q14; however, increased 14.0 percent QoQ. Banks in Qatar witnessed 21.2 percent YoY plunge in provisions. Provisions of Qatar National Bank reduced by 56.4 percent YoY during the quarter.

(The Peninsula / 31 August 2014)
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Saturday, 30 August 2014

Investor roadshows pave way for Hong Kong’s first sukuk issue

The HKMA said HSBC and Standard Chartered Bank have been mandated as joint global coordinators, lead managers and bookrunners of the proposed dollar-denominated sukuk offering. HKMA said other joint bookrunners include Asia-Pacific investment bank CIMB and the National Bank of Abu Dhabi.
The banks will arrange a series of “roadshows” in Asia, the Middle East, Europe and the US starting in September for the 144A/Reg S-registered Islamic bond.
‘Hong Kong Sukuk 2014’, a special purpose vehicle fully owned by the government and established for issuing shariah-compliant securities in international markets is set to raise the debut note.
The HKMA said in its annual report for 2013 (18-page / 1.56 MB PDF) that the development of the sukuk market in the territory “forged ahead” with the enactment of legislation in 2013. HKMA said amending Hong Kong’s tax laws was necessary to provide “a comparable tax framework for common types of sukuk, vis-a-vis conventional bonds”.
The HKMA said it also “took another important step in promoting the development of Islamic finance in Hong Kong by collaborating with Bank Negara Malaysia to set up a private sector-led Joint Forum on Islamic Finance to strengthen collaboration between market participants in Hong Kong and Malaysia.”
Hong Kong’s fund management industry grew 27.2% year-on-year to a record high of 16 trillion Hong Kong dollars (HKD) ($2.06tn) at the end of 2013, according to figures released earlier this year by the territory’s Securities and Futures Commission (SFC).
The survey said other private banking business increased by 2.7% to HKD 2.75tn ($387bn) in 2013 while fund advisory business grew by 11.6% to HKD 1.67tn ($250bn). The market capitalisation of SFC-authorised REITs (real estate investment trust) increased by about 1.7% to HKD 177bn ($23bn).
(Out-Law.Com / 30 August 2014)
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Sukuk Drought Poised to End on First-Time Sales: Islamic Finance

First-time sellers of bonds that adhere to Islam’s ban on interest are poised to revive an industry suffering its worst quarter in more than four years.
Luxembourg and Hong Kong aim to market debut offerings of sukuk next month, while Kenya, South Africa,Bangladesh and Tatarstan have announced plans for maiden issues. Islamic bond sales have fallen 82 percent to $2.6 billion this quarter compared with the previous three months, their lowest level since the first three months of 2010, according to data compiled by Bloomberg.
“All are seeking their share of fast-growing Islamic financial services activity,” Khalid Howladar, global head of Shariah-compliant finance at Moody’s Investors Service in Dubai, said in an Aug. 26 e-mail interview. “Initial sovereign issuances test and sometimes force the development of a legal environment conducive to Islamic finance.”
Offerings of Shariah-compliant bonds may top last year’s $43.1 billion and challenge the unprecedented $46.5 billion sold in the previous 12 months, according to CIMB Group Holdings Bhd., as an increasing number of non-Muslim countries tap the market. The U.K. sold its first sukuk in June, drawing bids for more than 10 times the 200 million pounds ($332 million) on offer.

Forcing Development

Islamic bond offerings were subdued in August due to the summer holidays and the month-long Muslim fasting period of Ramadan. At $828 million, it was the worst month in a year. Sales so far in 2014 gained 27.6 percent to $27.7 billion.
Issuance will start to pick up, said Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd., a unit of CIMB Group.
Luxembourg is planning to raise 200 million euros ($264 million) by the end of September, according to an Aug. 11 e-mailed statement from the finance ministry. The Hong Kong government will meet investors from Asia, the U.S., Europe and the Middle East from Sept. 1 for as much as $1 billion of Shariah-compliant securities, the central bank said in a statement today.
“Sukuk has gained in popularity as an alternative funding tool,” Angus Salim Amran, the Kuala Lumpur-based head of financial markets at RHB Investment Bank Bhd., a unit of RHB Capital Bhd., said in an e-mail interview yesterday. “The growing pool of Shariah-compliant liquidity available to the global market is the impetus for these issuers.”

‘Main Challenge’

Pakistan is seeking to sell its first dollar-denominated Islamic bonds since 2005 in September. The federal republic of Tatarstan, located 800 kilometers (500 miles) east of Moscow, is aiming to debut $200 million in an unspecified timeframe. That sale was originally targeted for 2013.
While sales of Islamic bonds have increased about five-fold in the last decade, they are still a fraction of Shariah-compliant assets worldwide that Ernst & Young LLP forecasts will double to $3.4 trillion by 2018.
“People now see the timing as more conducive for sukuk issuance,” CIMB’s Badlisyah said in an Aug. 26 phone interview from Kuala Lumpur. “The main challenge remains the same, which is the lack of an enabling framework in many jurisdictions.”
South Korea’s plan to introduce tax laws for Islamic bonds met with opposition from Christian groups, while an initiative by Australia has stalled. Thailand, France and Ireland have introduced legislation though none has issued sukuk.

Attractive Yields

The Philippine government is reviving its ambitions to sell Islamic bonds after trying for more than 40 years. Egypt’s regulator proposed new rules this month.
Borrowing costs are falling. Average global sukuk yields declined 61 basis points, or 0.61 percentage point, this year to 2.81 percent, according to an index from Deutsche Bank AG. They reached a one-year low of 2.78 percent in May, below the five-year average of 3.42 percent.
“The fact that governments and corporates can issue at such low yield levels at the moment has made sukuk particularly attractive,” Thomas Christie, head of fixed income at Prometheus Capital Finance Ltd., said in an Aug. 25 phone interview from Dubai. 
(Bloomberg / 28 August 2014)
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