Islamic Finance Bulletin - December 2008

December 2008 Issue #22

Islamic Finance Bulletin ..………….………………………………………………

Towards an informed market Islamic Finance Bulletin, a quarterly release on the Islamic capital market in Malaysia, is dedicated to informing and educating those active in the growing market of Islamic finance on issues, developments and trends in the domestic Islamic capital market.

…in this issue

The contents are intended to be educational, to accelerate the learning curve of those new to Islamic finance and to stimulate further discussions, research and development - all with a view to enabling the Malaysian Islamic capital market to effectively meet the increasing sophistication of the investment community.

Shariah Aspect of Ijarah Muntahiyah Bittamleek Contract

Should you wish to share any views or comments, or to contribute to the bulletin by way of editorials, please send your e-mail to [email protected].

Islamic Treasury Money Market Instruments for Liquidity Management

Risk Associated with Islamic Financial Contracts: Part 5

Malaysian Sukuk Market in Review

Market Statistics

Ringgit Sukuk Market Report

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TOWARDS AN INFORMED MARKET FOREX - A SHARIAH DISCUSSION

Islamic Treasury Money Market Instruments for Liquidity Management Rafe Haneef, Managing Director of Fajr Capital

Introduction

Current Islamic Liquidity Management Tools

S

ince the emergence of the contemporary Islamic finance market, the treasury departments of Islamic financial institutions (“IFIs”) have been facing many challenges in managing their surplus liquidity. The recent surge in liquidity, primarily driven by spikes in oil prices, has exacerbated liquidity-management challenges. This article, however, will only focus on Islamic money-market-type instruments. The key characteristics of a moneymarket instrument are as follows: (i)

Enables large sums of money to be transferred quickly, at a low cost. (ii) Has a short maturity (1 day to 1 year). (iii) Can be converted to cash quickly and at a low cost (active secondary market). (iv) Has low price risk due to short tenure. (v) Has a high degree of safety with regard to principal investment. The attributes above are collectively referred to as “the Five Characteristics”.

Islamic Finance Bulletin Rafe Haneef

i) Commodity Murabaha The earliest form of Islamic liquiditymanagement tool had been commoditylinked investments based on the murabaha principle. The commodity murabaha product had been principally developed as an alternative source of funds for the commodity desks of some international banks. Instead of borrowing internally from their treasury, the commodity desks had bought the commodities on deferred-payment terms from IFIs. In the early days, the Islamic deferred-payment terms had often been more competitive than the international banks’ internal treasury rates. This had encouraged several international banks to seek commodity murabaha trades with IFIs. Commodity murabaha trades are usually carried out in the following way: (i)

(ii)

The IFI will buy “spot” certain commodities, usually commodity warrants traded on the London Metal Exchange, from a supplier at a price of, say, X. The IFI will then sell the commodity to the bank at a higher price, e.g. X+Y, payable in 3 months. The Y could be computed based on various benchmarks,

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e.g. the 3-month USD LIBID minus 12.5 basis points. (iii) The bank’s commodity desk will use the commodity acquired for its trading book. (iv) On the maturity of 3 months, the bank will pay a deferred price of X plus Y (for the commodity) to the IFI. This instrument only satisfies some of the Five Characteristics; it fails to meet the first and third ones.

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The IFIs are not able to transfer large sums at quick notice; once the commodity murabaha trade has been concluded, the IFIs are not able to convert the trade into cash before maturity, due to various Shariah restrictions on the trading of debt. The IFI can, of course, negotiate with the bank to pre-pay the commodity murabaha debt before maturity, and offer the bank a discount based on the concept of dha wa ta’ajjal (debt discounting for early payment). However, the process is not as straightforward as a secondarymarket trade.

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(ii) Commodity Tawarruq

(ii)

Following the above, commodity murabaha financing adopted a different form based on the tawarruq model. Although this new form is often known as a commodity murabaha trade, the proper terminology is “commodity tawarruq trade” - because the buyer will always subsequently sell the commodity to the supplier. The tawarruq model has helped IFIs conduct commodity trades directly with the treasury departments of banks, and has provided the IFIs with a broader base of investors to deploy their shortterm liquidity. Commodity tawarruq trades are normally conducted as follows: (i)

(iii)

(iv)

The IFI will then sell the commodity to the bank at a higher price, e.g. X+Y, payable in 3 months. The Y could be computed based on various benchmarks, e.g. the 3-month USD LIBID minus 12.5 basis points. The bank’s treasury department will immediately sell the commodity to another supplier (and sometimes to the original supplier), for a price equal to X. Upon maturity 3 months later, the bank will pay a deferred price of X plus Y (for the commodity) to the IFI.

The IFI will buy “spot” certain commodities, usually commodity warrants traded on the London Metal Exchange, from a supplier - at a price of, say, X.

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Although this instrument satisfies 4 of the Five Characteristics, but the IFIs are still not able to convert the trade into cash before the maturity of the commodity tawarruq trade, due to various Shariah restrictions on debt trading, as mentioned earlier. Commodity tawarruq financing has been the most widely used form of liquiditymanagement instrument to date, due to its ease of execution and wide acceptability among IFIs and banks. In recent years, however, some of the IFIs have been reluctant to use commodity tawarruq instruments due to their disapproval of the concept of tawarruq. Commodity tawarruq trade is often characterised as a paper trade or “cash-for-cash contract” since the commodity merely passes into the accounts of the supplier or suppliers (in some cases). The commodity title will flow from the supplier to the IFI, and then to the bank, before reverting to the original supplier or to another supplier (which invariably has a special arrangement with the original supplier). All these title movements often occur within a few hours, if not minutes. In most cases, neither the IFI nor the bank takes possession of the commodity; the reality is that they never intended to take any possession. This form of financing has attracted a lot of criticism within the Islamic finance industry, and some have declined to use this method. (iii) Investment Agency Some of IFIs, which find the commodity tawarruq model objectionable, have devised an alternative scheme based on the wakalah al-istismar (investment agency) concept. Islamic Finance Bulletin Rafe Haneef

This scheme is ordinarily structured as follows: (i)

The IFI will appoint the bank as its investment agent (“Agent Bank”), and will place or deposit its surplus funds with the Agent Bank for a certain period. (ii) The Agent Bank will irrevocably undertake to invest the funds according to Islamic principles, with a targeted return that is at least equal to the “expected return” of the IFI, and will return the original investment and expected return on the maturity date. (iii) The IFI’s expected return is often linked to prevailing money-market rates. (iv) The Agent Bank will invariably get a return on the investment that is higher than the IFI’s expected return. (v) The Agent Bank will return the original investment, together with the expected return, to the IFI upon maturity. This arrangement often works out as anticipated with reputable Agent Banks with the track record of managing the investments with a return greater than the IFI’s expected return. However, during a market downturn there is a possibility that the Agent Bank may suffer losses on the investment and may even end up losing the entire investment. This risk however is often intentionally not covered by the investment agency contract and it is uncertain whether the IFI will insist on the undertaking of the Agent Bank to return the original investment and the expected return and claim damages for the Agent Bank’s breach of undertaking. From a Shariah perspective, the Agent

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Bank is only responsible for the breach of the undertaking if it has defaulted or been negligent in investing or managing the funds. The IFI will have the onus of proof to establish the willful default or negligence of the Agent Bank. This instrument fails to meet the first, third and fifth characteristics. It is often very cumbersome for the IFIs to negotiate the agency arrangement with the Agent Bank and this inhibits their ability to transfer funds quickly.

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Also, the IFIs could not unwind the transaction and obtain cash before the maturity due to the agency terms. Further, the agency relationship opens up the possibility that the IFIs as principal may end up bearing the losses related to the investments which reduces the degree of safety of principal (the fifth characteristic).

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(iv) Government Investment Issues (“GII”) In 1983, the Malaysian Central Bank introduced an Islamic liquiditymanagement programme for IFIs, based on the concept of qard al-hasn (benevolent loan) and voluntary hiba (gift). This programme is structured as follows: (i)

The IFI will deposit its surplus liquidity as a benevolent loan to the Central Bank, for an agreed period. (ii) The agreement will clearly set out that the IFI is contractually not entitled to receive any return on the loan. (iii) The Central Bank will use the loan to undertake development projects for the benefit of the nation, and repay the loan upon maturity. (iv) The Central Bank will usually, however, make a voluntary hiba to the IFI - invariably linked to the prevailing money-market rates.

Islamic Finance Bulletin Rafe Haneef

This instrument satisfies all of the Five Characteristics. Under Malaysian Shariah interpretation, IFIs are able to trade GII certificates in the secondary market pursuant to the concept of bay al-dayn (sale of debt). As such, their trading of GII certificates in the secondary market is similar to that of any conventional money-market instrument. Nonetheless, the voluntary hiba arrangement has not been accepted by Shariah scholars in the Middle East, based on the maxim that "what is a matter of common practice has the same effect as an express condition". The “sale of debt” concept has also been rejected by Middle Eastern scholars on various Shariah grounds. Hence, this type of instrument is only prevalent in Malaysia, and has limited applications elsewhere.

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In 2001, the Malaysian Central Bank introduced a new structure based on bay al-inah (sale and buy-back). This structure involves the following: (ii) (i)

(ii)

(iii)

The IFI will use its surplus liquidity to buy an identified asset (i.e. a physical asset) from the Central Bank, on spot-payment basis. The Central Bank will then buy the asset back from the IFI at original cost plus a profit (equal to the prevailing money-market rate), on a deferred-payment basis. The IFI will receive the original amount and the profit on the maturity date, from the Central Bank.

This instrument also satisfies all of the Five Characteristics. Under Malaysian Shariah interpretation, both the bay alinah and bay al-dayn concepts are recognised as valid Shariah contracts; therefore, IFIs are able to trade GII certificates in the secondary market. Like the “sale of debt” contract, however, the “sale and buy-back” contract has also been rejected by Middle Eastern scholars. As such, this type of instrument is again only common in Malaysia and has limited applications elsewhere.

(iii)

(iv)

(v)

(v) Sukuk al-ijara Most recently, the sukuk al-ijara (leasing certificate) concept has been used to facilitate an Islamic money-market programme. The structure of the programme is as follows: (i)

The Government (acting through the Ministry of Finance or the Central Bank) establishes a

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(vi)

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special-purpose vehicle (which could be a limited-liability company) to facilitate the sukuk issuance (“Issuer SPV”). The Issuer SPV then buys certain Government assets (e.g. government administrative buildings, education facilities, airports). The Issuer SPV then leases different portions of these assets to the Government for different tenures and rental rates (e.g. 50% of the undivided assets leased for 6 months at a rental rate of 3% per annum, and 30% for 9 months at 3.25% per annum, and 20% for 12 months at 3.5% per annum). This form of arrangement is based on undivided ownership of assets and is commonly known as sharikat al-mahassa. It has been approved by the majority of Shariah scholars in the Middle East and Far East. The Issuer SPV then issues 3 series of sukuk with 6-, 9- and 12-month tenures to different classes of investors. The respective sukuk will carry yields of 3.0%, 3.25% and 3.5% per annum. Before the maturity of the respective sukuk, the Issuer SPV can renew the lease with the Government for another term, at a new rental rate. Upon maturity of the respective sukuk, the Issuer SPV will issue a new sukuk reflecting the new term and rental rate, and will use the sukuk proceeds to redeem the previous issue. This renewal process can be repeated until notice is given by the Government to end the lease Issue #22

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arrangement and buy back the assets leased by the Issuer SPV. The Issuer SPV will then sell the assets to the Government at their original cost; the sale proceeds will be used to redeem the outstanding sukuk. This instrument also satisfies all of the Five Characteristics. Most importantly, the sukuk al-ijara concept is widely accepted by most contemporary scholars in the Middle East and Far East (including Malaysia).

Governments are often reluctant to transfer national assets (e.g. government administrative buildings, education facilities, medical facilities, roads, airports, and sea ports) to the programme due to various reasons, including prevailing political sentiments and sensitivities. A paradigm shift is required at the Government’s level to help develop the Islamic finance industry, and to support a key element of such growth by facilitating this type of liquiditymanagement programme.

This instrument may be the most ideal solution to the prevailing liquiditymanagement challenges faced by the Islamic finance industry. The biggest hurdle faced in implementing this programme is the ability to source suitable underlying government assets to facilitate the leasing arrangement.

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Alternative Liquidity Management Instruments vi) Sukuk al-istismar In some instances, the government may not have sufficient suitable assets due to various reasons, and the sukuk al-istismar (investment certificate) structure may offer a feasible solution. Sukuk alistismar is a relatively new technique, first deployed by the Islamic Development Bank in its sukuk issuance, where its created a portfolio comprising 30% physical assets and 70% financial assets, or receivables using the principle of khulta (in this context, the mixing of 2 different asset classes into a single, indivisible portfolio). When an object consists of 2 substances and one of those is prohibited under Shariah, the object can still be construed as Shariah-compatible if the quantity of the non-compatible substance is insubstantial. For example, if a ring is made of gold and silver, it is permissible for a Muslim male to wear it if the quantity of the gold substance is insubstantial. There are different opinions among scholars as to what amounts to an “insubstantial” quantity. Most scholars have taken the view that the noncompatible substance will be regarded as insubstantial if the quantity of the Shariah-compatible substance is at least 30%. Some Hanafi scholars have taken a more liberal view of the khulta principle. They have not allocated any fixed percentage or quantity, but have left the matter to be decided on a case-by-case basis.

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Using the khulta principle, contemporary Shariah scholars have allowed the sukuk evidenced by only 30% of physical assets and 70% of financial assets to be tradable in the secondary market. The structure of the sukuk al-istismar is as follows: (i)

(ii)

(iii)

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The Government (acting through the Ministry of Finance or the Central Bank) establishes a special-purpose vehicle (which could be a limited-liability company) to facilitate the sukuk issuance (“Issuer SPV”). The Issuer SPV then buys a portfolio of assets from the Government, comprising a minimum of 30% physical assets (e.g. government administrative buildings, education facilities, airports) and 70% eligible receivables. The Issuer SPV then leases the physical assets to the Government for a certain period (e.g. 5 years), with the lease rental payable on a, say, quarterly basis. ƒ The quarterly rental rates can be mutually varied before the commencement of each quarterly lease period (e.g. the first quarterly rental could be 3% per annum while the next quarterly rental may be fixed at 3.5% per annum; this process can be repeated every quarter during the 5-year lease term). The returns can be linked to prevailing money-market rates). Issue #22

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(iv)

(v)

(vi)

(vii)

(viii)

(ix)

The Issuer SPV then issues sukuk in the primary market, with a 3month tenure and a 3.0% return per year. The Issuer SPV then appoints the Government to collect the eligible receivables from the creditors/payers, and distribute to the Issuer SPV on a quarterly basis. The Issuer SPV will use the rental and receivables paid by the Government to distribute quarterly returns/profits to the sukuk holders. The Issuer SPV will only receive an amount equal to the return/profit component for the 70% of the sukuk amount (the return/profit component for the other 30% will stem from the lease rentals). The Issuer SPV will instruct the Government to invest all surplus funds under Islamic principles, to generate a return equal to the return/profit indicated under the sukuk. Before redeeming the respective sukuk, the Issuer SPV will issue a new series of sukuk in the primary market, to replace the maturing sukuk. The new series of sukuk may have different rates of return and tenures. The proceeds from the new sukuk will be used to redeem the maturing issue. This renewal process can be repeated until notice is given by the Government to end the lease arrangement and buy back the portfolio of assets (30% physical assets and 70% eligible receivables) from the Issuer SPV. The Issuer SPV will sell the portfolio of assets to the

Islamic Finance Bulletin Rafe Haneef

(x)

Government at the original cost; the sale proceeds will be used to redeem the outstanding sukuk. If the lease rentals and receivables paid by the Government are not sufficient to cover the quarterly returns/profits to the sukuk holders, the Issuer SPV has the option to terminate the arrangement and require the Government to immediately purchase the entire portfolio at the original cost.

This instrument, although much more complex than the prevailing structures, also satisfies all of the Five Characteristics. Most importantly, the sukuk al-istismar concept is widely accepted by most of the contemporary scholars in the Middle East and Far East (including Malaysia). This instrument may be another ideal solution to the current liquidity-management challenges faced by the Islamic finance industry, and could reduce the hurdles encountered by many governments in sourcing underlying assets that are 100% tangible.

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Eligible receivables following: ƒ

ƒ

ƒ

include

the

Receivables due from Islamic facilities (e.g. home financing) extended to civil servants (i.e. current receivables). Receivables due from Islamic facilities extended to various government ministries, state or provincial governments (i.e. current receivables). Receivables due from grants or non-interest-bearing facilities extended to various government ministries, state or provincial governments (i.e. current receivables).

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ƒ

ƒ

Taxes due and/or payable by a list of identified Shariahcompatible corporates (i.e. current and future receivables). Royalties, fees, other charges due and/or payable by a list of identified Shariah-compatible corporates (i.e. current and future receivables)

Some contemporary Shariah scholars are agreeable to both current as well as future receivables, although others only accede to current receivables. There is still a lack of consensus on this matter, and further research needs to be conducted.

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(vi) Islamic Equity-linked Instrument Another innovative solution to Islamic liquidity management may be the currently fashionable Islamic equitylinked instruments. The proposed structure of such instruments is as follows:

(vi)

(vii) (i)

(ii)

(iii)

(iv)

(v)

The Government (acting through the Ministry of Finance or the Central Bank) establishes a special-purpose vehicle (which could be a limited-liability company) to facilitate the sukuk issuance (”Issuer SPV”). The Issuer SPV then issues sukuk in the primary market, with a 3month tenure and a return of 3.0% per annum (the return can be linked to the prevailing money-market rate). The Issuer SPV then buys a portfolio of eligible equities from the market and passively holds the equities in trust. The Issuer SPV subsequently obtains an irrevocable undertaking from a market counterparty (e.g. a reputable financial institution), to purchase the equity portfolio at a price equal to the sukuk issue amount plus a profit equal to 3.0% per annum. No fee is payable to the counterparty in respect of the undertaking. The Issuer SPV also provides an irrevocable undertaking to the market counterparty to sell the equity portfolio at a price equal to the sukuk issue amount (exercisable only if the purchase undertaking is not exercised). No fee is payable to the Issuer SPV in respect of the undertaking.

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(viii)

Upon maturity of the sukuk, the Issuer SPV will exercise the purchase undertaking and compel the market counterparty to purchase the equity portfolio at the pre-agreed price. Upon receiving the purchase price from the market counterparty, the Issuer SPV will redeem the sukuk. The Issuer SPV may issue many series of sukuk in the primary market, with each series having different tenures and returns as well as market counterparties.

This instrument not only satisfies all of the Five Characteristics, but is also reasonably easy to implement and execute. Since the sukuk is fully evidenced by eligible equities, it is accepted by most of the contemporary scholars in the Middle East and Far East. The eligible equities can be selected based on the prevailing Shariah screenings applicable to equities, such as the Dow Jones Islamic Equities Screening Methodology. This instrument can effectively resolve the current problems faced by many governments in sourcing underlying assets that are 100% physical for sukuk issuance. However, some Shariah scholars have raised certain objections against the nature of the undertaking. Again, further research needs to be conducted in this area.

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Illustration

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RAFE HANEEF Rafe Haneef is currently a Managing Director at Fajr Capital, a new Islamic investment company based in London, Dubai and Kuala Lumpur. He was previously the Head of Islamic Banking for Citigroup Asia based in Kuala Lumpur. He was responsible for developing Malaysia as a regional Islamic finance hub for Citigroup and spread its Islamic business footprint across the region. Prior to joining Citigroup, he established the Global Islamic Finance Department at ABN AMRO based in Dubai and was in charge of the Islamic wholesale and retail businesses for the group. Prior to that, he was with HSBC Amanah in London and Dubai focusing on Islamically-structured cross-border transactions and the Sukuk market. He lead the first global sukuk offering for the Government of Malaysia in 2002. Rafe Haneef read law and Shariah at the International Islamic University in Malaysia. He was admitted to the Malaysian Bar and was practicing law in Malaysia specialising in Islamic finance. He then pursued his Master of Laws at Harvard Law School and subsequently qualified to the New York Bar.

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Shariah Aspect of Ijarah Muntahiyah Bittamleek Contract Islamic Banking and Finance Institute Malaysia Sdn Bhd

Introduction

Modus Operandi

I

The customer approaches the bank to finance a vehicle, by promising to lease the vehicle from the bank. Based on the customer’s promise, the bank purchases the vehicle from the dealer.

jarah Muntahiyah Bittamleek is a form of leasing contract which includes a promise by the lessor to transfer ownership of the leased property to a lessee, either at the end of the Ijarah term or by stages during the tenure of the contract. It is a lease agreement combined with an undertaking by the lessee to purchase the leased goods at any time during the term of the lease, at an agreed price. The transfer of ownership may come in various ways, such as the following: a) b) c) d)

By purchase of the asset at market value (before maturity); By the payment of the final instalment (at maturity); By way of minimal amount, e.g. RM 1.00 (at maturity); As a gift (at maturity).

At this juncture, the bank - as the owner of the vehicle - will lease the vehicle to the customer, at an agreed rental amount. The rental will be fixed for the entire tenure. However, if the bank wants to change the rental rate, it must be communicated and agreed to by the other party beforehand. Throughout the lease period, the ownership of the vehicle shall remain with the bank. Ownership shall transfer to the customer at the end of the lease period, provided that all rental amounts have been paid.

Illustration

3 

2

Seller 

The Bank  4 

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Customer  5

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Description  1 

The  customer  approaches the  bank  to  purchase  the  vehicle.  The  customer agrees to lease the vehicle from the bank.  

2 

The bank purchased the vehicle from the seller.

3 

The bank pays the seller.

4 

The bank leases the vehicle.

5 

The Customer pays rental until maturity.

Shariah Aspect Ijarah is derived from the Arabic word ajara or ujr, meaning remuneration or reward. Ijarah is a contract of lease in Islamic law, which means to take possession of some utility or services for payment. Ijarah indicates the sale of a benefit, use or service for a price that can be either fixed or floating.

The Ijarah agreement is preceded by the drawing up of a master agreement covering a number of Ijarah transactions between the bank and the customer, setting out the general terms and conditions of agreement between the 2 parties. Subsequently, there may be:

Ijarah Muntahiyah Bittamleek is one of the categories of Ijarah, which concludes with the sale or gift of the asset; the legal title of the leased asset will be transferred to the customer after a certain period.

•

a separate lease contract for each transaction, in a specific written document signed by the 2 parties; or

•

the two parties exchange notices of offer and acceptance by referring to the terms and conditions contained in the master agreement; or

•

the bank leases an asset it already owns to the customer, where the Ijarah contract is drawn up and signed directly; or

•

the bank purchases an asset from a customer and subsequently leases it back to that customer (sale and leaseback).

The rules of the Ijarah Muntahiyah Bittamleek transaction are no difference from those of the original Ijarah, except that it is associated with a promise by the owner of the asset to transfer ownership to the hirer at the end of the Ijarah term. The validity of this form of Ijarah is confirmed by the Resolution of the International Islamic Fiqh Academy No. 110 (4/12). The ljarah contract can be executed by any of the following ways: •

The customer requests the bank to acquire an asset, or to acquire the usufruct of an existing asset which the customer promises to lease (promise to lease).

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At the end of the contract, the bank transfers its ownership of the leased asset to the customer via one of the following methods: •

•

Selling for a specific consideration if the customer pays all the rental instalments. The promise to sell is separately expressed and independent of the underlying Ijarah. As a gift, conditional upon the fulfilment of all the Ijarah obligations, after which ownership shall be transferred at the end of the Shariah tenure.

Shariah Contract The underlying Shariah contract used to finance a vehicle is known as Ijarah Muntahiyah Bittamleek (Ijarah ending with ownership). The following is the relevant fiqh literature and supporting evidence for the said contract. The Basis of the Shariah Contract The Ijarah contract is permissible based on the Qur’an, the Sunnah, Ijma and qiyas. Allah SWT says:

employment for the hand of his daughter in marriage. Allah SWT says:

“Then they both proceeded, till when they came to the people of a village, they asked them for food, but they refused to entertain them. Then they found therein a wall about to collapse and he (Khaidir) set it up straight. (Musa) said: if you had wished, surely you could have taken wages for it!” (Surah al-Kahfi: Verse 77) From the Sunnah, Abu Hurairah RA related that Rasulullah SAW said: “Give the hired man his wages before his sweat dries” (lbn Majah). Said bin al-Musayyib RA clearly narrated that Ijarah for asset’s usufruct is also permissible. He said: “We used to lease out land for some portion of the agricultural products, and the Prophet SAW prohibited us from such (practice). Instead, he asked us to lease it out for gold or money”. There is consensus among the fuqaha from the time of sahabah that Ijarah is permissible because of the fact that people’s need for the assets’ usufruct is as much as their need to (own) the assets.

And said one of them (the 2 women): “O my father! Hire him! Verily, the best of men for you to hire is the strong, the trustworthy.” (Surah al-Qasas: Verse 26)

Ijarah is also acceptable by reasoning (qiyas) because it is a convenient means for people to acquire the right to use assets that they do not own, since not everyone is able to own the assets.

The verse narrates the story of Prophet Syuaib AS and Prophet Musa AS. The former offered the latter a contract of Islamic Finance Bulletin IBFIM

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Primary Shariah Requirements Ijarah Muntahiyah Bittamleek The validity of the Ijarah Muntahiyah Bittamleek contract depends on its compliance with Shariah requirements. Thus, in order for a transaction to be valid, it must fulfil the essential elements (rukn) of the contract, which has its own necessary conditions (syart) that need to be observed. The following are the essential elements and necessary conditions of an Ijarah contract: Essential Element

Necessary Conditions

Owner (lessor)

• •

Hirer (Lessee)

• • •

Be of sound mind (not insane) Have reached majority age (18 years old) i.e. has the capacity to enter into a contract. Not restricted to do business, i.e. not a bankrupt Not an extraordinarily extravagant person Not forced to enter into the contract

Asset

• • • • • • •

Belongs to the owner Specific and known Deliverable to the hirer Capable of being used Not perishable or consumable Exists throughout the lease period Physically fit for leasing and free from any defect

• • • • • •

Can be valued with money. Used for purposes that do not contradict Shariah. Hirer can and is able to fully utilise the benefit/usage. Is known and has been identified. Benefit derived for a specific period Benefit derived from the asset must not lead to the asset’s destruction

• •

Determined at the point of contract. Specified in terms of currency.

Benefit/ Usage of the Asset

Rental

The validity of Ijarah Muntahiyah Bittamleek is endorsed by the International Fiqh Academy of Organisation of Islamic Conference (or OIC), and the National Shariah Advisory Council of Bank Negara Malaysia.

Islamic Finance Bulletin IBFIM

October - December 2008

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TOWARDS AN INFORMED MARKET ISLAMIC TRUSTS – LAWS, PRACTICES & ITS DISTRIBUTION

For more information, please contact:

Islamic Banking and Finance Institute Malaysia Sdn Bhd (340040-M) Level 3, Dataran Kewangan Darul Takaful Jalan Sultan Sulaiman 50000 Kuala Lumpur, Malaysia Tel: +603-2031 1010 Fax: +603-2031 9191 E-mail: [email protected] Website: www.ibfim.com.my

ISLAMIC BANKING AND FINANCE INSTITUTE MALAYSIA SDN BHD Islamic Banking and Finance Institute Malaysia Sdn Bhd (IBFIM) is an institute dedicated to producing well-trained, highcalibre individuals and management teams with the required expertise in the Islamic finance industry. Based on the industry’s demands and customers’ needs, we provide complete assistance to our clients through a wide spectrum of inter-related services: training and education, advisory and consultancy, and research and development in Islamic finance. Our close relationship with the industry gives us the opportunity to share knowledge and resources. We also enjoy a strong network with local and international authorities and financial institutions. Having assisted numerous governments, financial institutions, and other organisations in this arena, we are driven to serve the need for further enhancement and development of the industry in years to come.

Islamic Finance Bulletin IBFIM

October - December 2008

Issue #22

23

TOWARDS AN INFORMED MARKET RISKS IN ISLAMIC CONTRACTS

Risks Associated with Islamic Financial Contracts: Part 5 Meor Amri Meor Ayob Bond Pricing Agency Malaysia Sdn Bhd

Introduction

Types of Risk Associated with the Contracts of Musharakah

As highlighted in the earlier parts (please refer to the series of articles published in the previous Bulletins), a competent pricing specialist must have a strong foundation in risk identification and assessment. From this understanding, plus an in-depth knowledge of financial engineering, the fair valuation of any financial asset can be determined. This skill set is not only relevant to the conventional bond market, but also to the sukuk market. The purpose of this series is to provide some essential reading to anyone who is serious about the science of sukuk valuation. This series is the basis for the underlying valuation methodology for Islamic financial assets, developed by Bond Pricing Agency Malaysia Sdn Bhd (or BPA Malaysia). Here, Part 5 will highlight, as completely as possible, all the identifiable risks associated with the Musharakah contract.

Islamic Finance Bulletin BPAM

A typical Musharakah contract can be segmented into 3 transaction stages. Each stage has its own unique risks. The following sections detail the risks identified for each stage of the contract. 1. Contract The partners execute a partnership (Musharakah) agreement that specifies: •

Offer and acceptance;

•

Contracting parties: A financing institution can enter into a partnership with non-Muslims or conventional institutions or companies provided that such partner’s capital is from permissible sources. The operations of the Musharakah must be in accordance with Shariah rules and regulations;

•

Amount of capital and structure: The capital can be in the form of cash, gold, silver or their equivalent in value and tangible assets. Debt (receivables) alone is not permissible as the capital, unless the debt is

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TOWARDS AN INFORMED MARKET RISKS IN ISLAMIC CONTRACTS

inseparable from other assets that can be presented as contribution to capital. Funds in the current account can be withdrawn as contribution to capital. Any contribution in foreign currencies to the Musharakah capital must be translated in to the currency of the Musharakah, at the current exchange rate. A partner cannot guarantee the capital of another. The management of the Musharakah can be restricted to certain partners or a single partner. A fixed remuneration to such “managing” partner(s) is not allowed, although the partner(s) can earn a greater allocation of profit, at a higher ratio than its share of capital contribution. A manager other than the partner(s) can also be appointed to administer the Musharakah, at a fixed remuneration and a share of the profits, if any; •

Profit sharing ratio: The profit allocation is calculated net of operating costs, expenses and taxes. The ratio can be amended from time to time. The profit allocation can be equal to the ratio of invested capital or different, as agreed between the partners provided that the ”sleeping partner” is not entitled to more than their ratio of invested capital. The share of profit cannot be stated in a lump sum or a percentage of the capital.

Islamic Finance Bulletin BPAM

The profit will be finally allocated from the sale proceeds existing assets (actual valuation), or based on the valuation of assets at fair value (constructive valuation). The allocation of profits must be based on actual profits earned. Profits can be carried forward and set aside as reserves (investment risk reserves and profit equalisation reserve), subject to the provisions of the articles of association of the Musharakah.. The loss shall be borne periodically by the respective partners in accordance with their capital contribution. It is not permitted to hold one partner or a group of partners liable for the entire loss, or liable for a percentage of loss that does not match their share of ownership. However, a partner can take responsibility to bear the loss at the time of the loss without any prior condition. A number of risks are present at this stage. Capital recovery due to credit risk is one of them. The Musharakah capital may not be recovered as it ranks lower than debt instruments upon liquidation. Nevertheless, a third-party guarantee can be obtained for the capital loss by some or all the partners provided that the legality and financial liability of the guarantee is independent from the contract, the guarantee is not limited in any manner to the contract, the third-party guarantor does not hold more than a 50% equity in the entity to be guaranteed and the guaranteed entity does not own more than 50% of the guarantor. Another form of capital recovery risk is when it is due to market risk. Although a third-party guarantee can be obtained for

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the loss of capital of some or all partners, there are certain Shariah restrictions on the use of this mitigation technique.

promise must not be stated in the Musharakah contract, but in a separate purchase and sale agreement.

Meanwhile, counterparty risk is when the partner does not pay the profit that the financing institution is entitled to. The loss-making operations that require additional capital injection exposes the financing institution to the risk of capital impairment and the opportunity to reinvest in other types of investments. A mitigating strategy is for the Musharakah customer to create a takaful reserve to mitigate the risk of losses. Also, staggered principal redemption may reduce the overall exposure throughout the Musharakah period.

There is counterparty risk present at this stage. This occurs when the withdrawing partners owes money to the financing institution. Nevertheless, the financing institution is able to buy the withdrawing partner’s share or to find a new partner to takeover.

Shariah compliance risk is another possibility. For example capital contribution from the current account is not properly withdrawn and transferred into the Musharakah fund (nonrecognition of capital). 2. Early Termination A partner can at anytime withdraw from the partnership by giving notice to this effect unless the contract explicitly states that the partnership is to survive for a fixed period, whereby termination before the agreed expiry date of the Musharakah is not allowed. A partner can enter into a binding promise to buy at any time, all the assets of the Musharakah based on the market value on the acquisition date. A partner is also allowed to give a promise to gradually buy the equity of another partner, until the title of the equity is completely transferred. This

Islamic Finance Bulletin BPAM

There is also price risk, whereby the financing institution as the buying partner is exposed to fluctuations in the share price (low investment value). The parties should also be mindful that the purchase and sale are effected in a separate agreement and the acquisition price of the equity is not fixed at the original or face value (as it can be construed as a price guarantee and, therefore, non-recognition of income). This is a Shariah-compliance risk. 3. Maturity Upon maturity, the assets are liquidated (sold) or undergo constructive liquidation (valuation). The assets shall be sold at current market values and the proceeds will be utilised for payment in the following order: • • •

Liquidation expenses; Financial liabilities of the net assets; Distribution of the remaining assets among the partners, in accordance with their ratios of invested capital; or if it falls short, on a pro rata basis vis-a-vis the ratio of invested capital.

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The next article will look at the risks associated with the contract of Mudharabah.

Bibliography Ayob, Meor Amri Meor (May 1999). Rating Islamic Debt Securities: A Primer. RAM’s Special Highlights. RAM BNM (November 1999). The Central Bank and the Financial System in Malaysia - A Decade of Change. BNM BNM Annual Reports from 1996 to 2005. BNM BNM’s website: www.bnm.gov.my Bursa Malaysia (previously known as Kuala Lumpur Stock Exchange). Website: www.bursamalaysia.com Capital Market Masterplan (February 2001). Securities Commission Ismail, Mohd Izazee (March 2002). Islamic Private Debt Securities: Issues & Challenges. RAM’s Special Highlights. RAM IFSB’s website: www.ifsb.org Securities Commission (Malaysia) website: www.sc.com.my Securities Commission’s Quarterly Bulletin of Malaysian Islamic Capital Market (May, August, November 2006). Securities Commission

Islamic Finance Bulletin BPAM

October - December 2008

Issue #22

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TOWARDS AN INFORMED MARKET RISKS IN ISLAMIC CONTRACTS

The author, Meor Amri bin Meor Ayob, is the Chief Executive Officer of Bond Pricing Agency Malaysia Sdn Bhd (previously known as Bondweb Malaysia Sdn Bhd). Meor has over 16 years of professional work experience as a regulator in Bank Negara Malaysia and as a credit analyst with Rating Agency Malaysia Berhad (now known as RAM Holdings Berhad). In RAM, his last position had been Head of Financial Institutions Ratings. He has a wealth of experience, especially oin the risk elements of the bond market. He is also has vastly experienced in the sukuk market.

For more information, please contact:

Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn Bhd)

No. 17-8 & 19-8, The Boulevard Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur Malaysia Tel: +603 2772 0899 Fax: +603 2772 0808 Website: www.bpam.com.my

Islamic Finance Bulletin BPAM

BOND PRICING AGENCY MALAYSIA SDN BHD (formerly known as BondWeb Malaysia Sdn Bhd) BPAM, as Bondweb Malaysia Sdn Bhd, was incorporated on 27 September 2004 under the Malaysian Companies Act 1965. It was registered as a bond-pricing agency (“BPA”) by the Securities Commission on 28 April 28 2006, and has met and exceeded the requirements outlined in the Guideline on the Registration of Bond Pricing Agencies. On 15 September 2008, Bondweb Malaysia Sdn Bhd changed its name to Bond Pricing Agency Malaysia Sdn Bhd (or BPAM). This coincides with BPAM’s aim of consolidating its position as Malaysia’s pioneer bondpricing agency, and to further strengthen its position by focusing on its core business evaluated bond pricing. The bond-pricing agency is an initiative by the Securities Commission of Malaysia to boost the transparency and quality of pricediscovery mechanisms and valuation practices in the Malaysian bond market. BPAM was officially appointed Malaysia's first bondpricng sgency on 18 April 2006. With this status, BPAM is recognised as one of the official sources for evaluated prices on ringgit bonds.

October - December 2008

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TOWARDS AN INFORMED MARKET MALAYSIAN SUKUK MARKET

Malaysian Sukuk Market in Review RAM Rating Services Berhad

Introduction Global market turmoil, recession worries and widening credit spreads have all made their presence felt in the domestic bond market. The sukuk market contracted more than 70% in 2008 contrary to the initial view that the industry would remain largely insulated from the slump. A total of 39 new corporate sukuk deals with a prospective issuance value of RM16.1 billion – were announced last year. This accounted for 26% of the domestic market’s RM61.6 billion of rated corporate bond issues for the same period. Actual issuance, however, declined to RM8.8 billion last year, compared with RM39.6 billion in 2007.

Application of Sukuk Funding The application of Islamic finance was observed across various economic sectors last year. Given the sheer funding requirements typical of port and highway projects, power plants and telecommunication businesses, the infrastructure sector retained its dominance with a 55%-share.

Islamic Finance Bulletin RAM Ratings

Notable issues from this sector include a RM4.0 billion sukuk Musharakah programme by PLUS SPV Berhad (“PLUS SPV”), a wholly owned specialpurpose vehicle of PLUS Expressway Berhad (“PEB”); a RM1.5 billion medium-term notes sukuk programme by Lingkaran Tans Kota Sdn Bhd (“Litrak”); and RM1.0 billion Senior and Junior sukuk programmes by MRCB Southern Link Berhad. In second place, the industrial sector garnered a 14%-share of the market. Fund-raising exercises by Hong Leong Industries Berhad, Muhibbah Engineering (M) Berhad, Tanjung Offshore Berhad and Chemical Company of Malaysia Berhad accounted for most of the sukuk originating from this segment. Elsewhere, the capital-raising efforts of Gamuda Berhad, WCT Engineering Berhad and Sunrise Berhad constituted most of the sukuk stemming from the real-estate and construction industry.

October - December 2008

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TOWARDS AN INFORMED MARKET MALAYSIAN SUKUK MARKET

2008 Corporate Sukuk Programme by Economic Sector Total Rated Facility Programme: RM16.1 billion (excluding unrated and self-managed issues)

Plantations 1%

Property, Real Estate & Construction 11%

ABS / Structured Finance 9%

Consumer Products & Services 4%

Banking & Financial Services 6% Industrial Products & Services 14%

Infrastructure & Utilities 55%

Source: FAST, various websites, RAM Ratings

The RM4.0 billion (nominal value) sukuk programme by PLUS SPV was the largest sukuk deal in 2008. PLUS SPV is an independent special-purpose company through which PEB had issued sukuk to meet its funding requirements. Under this transaction, PLUS SPV had issued an initial RM1.055 billion of sukuk Musharakah. PEB, on the other hand, is an investment-holding company that is primarily involved in the operation of toll roads, both in Malaysia and abroad. PEB’s domestic toll-road concessionaires include Projek Lebuhraya Utara-Selatan Berhad, Expressway Lingkaran Tengah Sdn Bhd, Linkedua (Malaysia) Berhad and Konsortium Lebuhraya Butterworth Kulim (KLBK) Sdn Bhd. In addition, PEB has ventured into overseas markets such as India and Indonesia, with stakes in 3 toll-road concessionaires.

Islamic Finance Bulletin RAM Ratings

Meanwhile, another sizeable transaction last year was the RM1.5 billion mediumterm notes sukuk programme by Litrak. A single-purpose company, Litrak owns concession rights to collect toll on the 40km intra-urban Lebuhraya DamansaraPuchong. Proceeds from the sukuk issuance had been used to refinance Litrak’s existing debts, including RM324.10 million of Redeemable Unsecured Loan Stocks, and also deployed towards upgrading works on its concession assets, capital expenditure, working capital, and other Shariahcompliant purposes. Notably, Menara ABS’s RM1.0 billion Islamic asset-backed sukuk Ijarah represents as the largest securitisation of property assets to date. The transaction involves the securitisation of properties with a combined value of RM1.03 billion,

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TOWARDS AN INFORMED MARKET MALAYSIAN SUKUK MARKET

comprising buildings currently used as the corporate headquarters of the Telekom Malaysia (“TM”) Group, specifically Menara TM, Menara Celcom and TM Cyberjaya, as well as TM Taman Desa, an office building used for TM’s back-room operations. In this transaction, TM had sold the properties to Menara ABS; in return, the latter had issued the sukuk to finance the purchase. Subsequent to the sale of the properties, Menara ABS had entered into a 15-year Master Ijarah Agreement with TM, as Head Lessee for the utilisation of the properties. Another noteworthy sukuk issue in 2008 is Al-‘Aqar Capital’s RM300 million Sukuk Ijarah - recognised as the first domestic commercial–real-estate-backed transaction involving hospital properties. Under this transaction, Al-‘Aqar Capital had issued medium- and short-term sukuk Ijarah to acquire the beneficial interests in its 6 hospitals, i.e. Ampang Puteri Specialist Hospital, Damansara Specialist Hospital, Johor Specialist Hospital, Ipoh Specialist Hospital, Selangor Medical Centre and Puteri Specialist Hospital, from Al-‘Aqar KPJ Real Estate Investment Trust (“Al-‘Aqar REIT”).

Islamic Finance Bulletin RAM Ratings

The redemption of the sukuk Ijarah is expected to be met via a purchase undertaking by Al-‘Aqar REIT to reacquire the 6 hospitals upon the expected maturity of the Sukuk Ijarah, or via the disposal of the underlying assets in the open market. On a separate note, RAM Ratings published the ratings of 24 new corporate sukuk issues in 2008, with an aggregate issuance value of RM12.8 billion; about 55% or RM6.6 billion of this had already been issued by the end of the year. This constituted about 74% of the entire market’s RM8.8 billion of sukuk issued as at the same date.

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TOWARDS AN INFORMED MARKET MALAYSIAN SUKUK MARKET

In terms of rating distribution, the AA rating bracket had the highest density visà-vis RAM Ratings’ sukuk portfolio in 2008, skewed by the large sukuk programmes originated by infrastructure project-based obligors. In this regard, the ratings are supported by the robust cashgenerating ability of the concession assets, strong debt-protection measures, stringent covenants and cash-trap mechanisms to meet the periodic returns as well as final capital repayment.

Islamic Finance Bulletin RAM Ratings

Meanwhile, the creditworthiness of the sukuk issued by Menara ABS and AlAqar Capital had been rated based on the asset-backed/structured-finance ratings methodology. Here, the focus had been on the robustness of the underlying assets in generating sufficient funds to meet the special-purpose vehicles’ ongoing profit obligations, and in supporting the realisable sustainable values of the underlying assets to meet principal redemption at the end of their tenures.

October - December 2008

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TOWARDS AN INFORMED MARKET MALAYSIAN SUKUK MARKET

Malaysian Sukuk League Table 2008 The RM16.1 billion of sukuk issues in 2008 were successfully brought to the market by 13 financial and advisory institutions. RAM Ratings’ provisional tabulation, based on data collated from Bank Negara Malaysia’s FAST information system and the websites of the rating agencies, indicates that CIMB Investment Bank Berhad topped the sukuk league table last year, with a 46.4%-share. This was followed by Maybank Investment Bank Berhad and AmInvestment Bank Berhad, with respective 13.3% and 8.6% slices of the pie.

Islamic Finance Bulletin RAM Ratings

October - December 2008

Issue #22

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TOWARDS AN INFORMED MARKET MALAYSIAN SUKUK MARKET

Prospects of the Sukuk Market in 2009 RAM Ratings expects sukuk issuance to resume momentum once some semblance of normalcy returns to the global financial markets, fuelled by the massive investment and financing needs of the Gulf economies and emerging markets in Asian countries. Islamic finance, sukuk in particular, is an emerging asset class that will sit well with investors throughout the world. As a pioneer in the Islamic finance industry, Malaysia has set the standard and led the way on many fronts.

Islamic Finance Bulletin RAM Ratings

The latest development in the domestic sukuk market - through the introduction of new rules by Bursa Malaysia under its Listing Requirements for Islamic securities or sukuk and debt securities will further strengthen Malaysia’s standing as a leader in the sukuk market. Under this new framework, ringgit- and foreign-denominated sukuk issues will be allowed to be listed on Bursa Malaysia. This is envisaged to enhance transparency for investors, apart from offering valuable profiling opportunities for the sukuk issuers.

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TOWARDS AN INFORMED MARKET MALAYSIAN SUKUK MARKET

For more information, please contact:

Noor Maliana Mansor Analyst – Islamic Ratings [email protected] Mohamed Firdaus Kader Mohideen Head – Islamic Ratings [email protected] Liza Mohd Noor Chief Executive Officer [email protected]

RAM Rating Services Berhad (763588-T) Suite 20.01, Level 20 The Gardens South Tower Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur Malaysia Tel: +603 7628 1000 Fax: +603 7620 8251 Website: www.ram.com.my

Islamic Finance Bulletin RAM Ratings

RAM RATING SERVICES BERHAD (“RAM Ratings”) Incorporated in 1990 as the pioneer in the provision of credit-rating services for the Malaysian capital market, RAM Ratings’ portfolio encompasses a vast range of local and foreign corporates, multinationals, banks, insurance companies, government-linked and other public-financed entities, myriad complex investment vehicles and the ringgitdenominated securities they issue, structuredfinance transactions backed by receivables or other financial assets, and Islamic securities (commonly known as sukuk). As one of the region’s most experienced rating agencies, RAM Ratings plays a leading role in providing crucial and independent credit opinions that are sought after by investors and other market participants, with a view to being more confident about their investment and financial decisions. Underscored by its renown in the rating business, RAM Ratings’ credit assessments have been habitually used as points of reference by regulators, the financial community and the investment fraternity. RAM Ratings is a public limited company and is wholly owned by RAM Holdings Berhad. Its ultimate shareholders comprise major financial institutions in Malaysia, Asian Development Bank and Fitch Ratings.

October - December 2008

Issue #22

35

TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Capital Market     Malaysian Rated Corporate Sukuk Market   League Table of Lead Managers as at 31 December 2008                                           

 

RM Million          6,365         2,432         1,100            800            721            772            590            550            500            500            373            370            348            250            250            150             70    

  CIMB Investment Bank Berhad Aseambankers Malaysia Berhad AmInvestment Bank Berhad OSK Investment Bank Berhad RHB Investment Bank Berhad MIDF Amanah Investment Bank Berhad OCBC Bank (Malaysia) Berhad Citibank Berhad  Bank of Tokyo‐Mitsubishi UFJ (Malaysia) Berhad Hong Leong Bank Berhad  RHB Islamic Bank Berhad  Bank Muamalat Malaysia Berhad HSBC Bank Malaysia Berhad Bank Islam Malaysia Berhad Kuwait Finance House (Malaysia) Berhad Affin Investment Bank Berhad KAF Discounts Berhad 

    16,139  

   

 

 

% 39.4% 15.1% 6.8% 5.0% 4.5% 4.8% 3.7% 3.4% 3.1% 3.1% 2.3% 2.3% 2.2% 1.5% 1.5% 0.9% 0.4%

100%

  The value of consortium issues have been equally divided by the number of lead managers of a consortium    Source : RAM Ratings/ FAST 

 

Islamic Finance Bulletin Market Statistics

 

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TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Capital Market

Islamic Finance Bulletin Market Statistics

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TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Capital Market

Islamic Finance Bulletin Market Statistics

October - December 2008

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TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Capital Market

Islamic Finance Bulletin Market Statistics

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TOWARDS AN INFORMED MARKET MARKET STATISTICS

Sukuk Rated by RAM Ratings

Islamic Finance Bulletin Market Statistics

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TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Banking Market

Islamic Finance Bulletin Market Statistics

October - December 2008

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TOWARDS AN INFORMED MARKET RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk Market Report Sukuk - Total Traded Amount for the Quarter ended 31 December 2008

Sukuk - Total Sukuk Outstanding (RM ‘Mil) by Class: 31 December 2008

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, noninfringement, timeliness, completeness, or that the information is always up-to-date.

42

TOWARDS AN INFORMED MARKET RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk Market Report Sukuk New Facilities created for the Quarter ended 31-Dec-2008 Facility Name

Instrument

Maturity Date

Facility Limit

200800087

CCMB RM500.0 MILLION MMTN

MTN

28-Nov-23

500000000

200800083

PLSA RM415.0M 29 YRS SUKUK MUDHARABAH PROGRAMME

BONDS

30-Oct-37

415000000

200800094

TH GROUP RM330M ICP/IMTN PROGRAMME

CP/MTN

31-Dec-14

330000000

200800084

PLSA RM330.0M 19 YRS SUKUK IJARAH PROGRAMME

BONDS

29-Oct-27

250000000

200800089

OCBC Al-Amin Bank Bhd RM200mil Islamic Sub Bonds II

BONDS

24-Nov-21

200000000

200800090

GAMUDA RM100M ISLAMIC CP PROGRAMME

CP

4-Dec-15

100000000

Facility Code

Top 10 Sukuk Tender Result for the Quarter ending 31-Dec-2008

Stock Name

Issue Date

Maturity Date

Actual Issue

Successful Yield

31-Oct-18

3500

4.295

PROFIT- BASED GII 4/2008 31.10.2018

31-Oct-08

BNMN-IDB 146/2008 65D 05.03.2009

30-Dec-08

5-Mar-09

200

2.958

BNMN-IDB 147/2008 91D 31.03.2009

30-Dec-08

31-Mar-09

200

2.963

BNMN-IDB 145/2008 42D 03.02.2009

23-Dec-08

3-Feb-09

200

2.918

BNMN-IDB 144/2008 65D 26.02.2009

23-Dec-08

26-Feb-09

200

2.924

BNMN-IDB 142/2008 42D 29.01.2009

18-Dec-08

29-Jan-09

200

2.929

BNMN-IDB 143/2008 63D 19.02.2009

18-Dec-08

19-Feb-09

200

2.952

BNMN-IDB 141/2008 63D 17.02.2009

16-Dec-08

17-Feb-09

200

2.997

BNMN-IDB 140/2008 37D 22.01.2009

16-Dec-08

22-Jan-09

200

2.995

BNMN-IDB 138/2008 40D 20.01.2009

11-Dec-08

20-Jan-09

200

2.96

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, noninfringement, timeliness, completeness, or that the information is always up-to-date.

43

TOWARDS AN INFORMED MARKET RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk Market Report 10 Most Active Bonds Traded between 01-Oct-2008 and 31-Dec-2008 STOCK NAME

LAST TRADED PRICE

LAST TRADED YIELD/DISCOUNT

PROFIT-BASED GII 2/2008 30.06.2011

102.95

3.13

TOTAL VOLUME TRADED LAST QTR 3263

PROFIT- BASED GII 4/2008 31.10.2018

108.8

3.24

2888

PROFIT- BASED GII 3/2008 14.02.2014

104.73

3.26

1563

PROFIT-BASED GII 1/2006 14.04.2009

100.25

3.1

1432

MITB 19/2008 364D 27.11.2009

97.37

2.9

1270

SBNMI 1/2008 12.02.2009

99.98

3.55

742

BNMN-IDB 35/2008 182D 20.11.2008

99.88

3.5

680

RANTAU IMTN 15.03.2011-MTN 1

101.87

3.5

659

BNMN-IDB 132/2008 63D 29.01.2009

99.71

2.9

620

BNMN-IDB 105/2008 28D 04.11.2008

99.9

3.45

599

YTM Curves as at 31 December 2008

Tenure

LT IslmGov-GII

LT IslmQuasi GovKhazanah

LT IslmCorporateAAA

LT IslmCorporateAA2

3m 6m 1y 2y 3y 5y 7y 10y 15y 20y

2.81 2.83 2.9 3.03 3.11 3.17 3.2 3.26 3.55 3.82

2.97 3 3.06 3.12 3.18 3.3 3.42 3.6 3.89 4.17

3.65 3.7 3.92 4.17 4.44 4.73 5.03 5.35 5.71 6.08

3.98 4.06 4.36 4.68 5.02 5.37 5.73 6.1 6.49 6.9

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, noninfringement, timeliness, completeness, or that the information is always up-to-date.

44

TOWARDS AN INFORMED MARKET RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk Market Report 5-YEAR YTM Historical Chart (weekly closing, last 6 months)

YTM Spread (5-YEAR GII) as at 31 December 2008 YTM Matrix – Item Spread Principle: Islamic Date: 31 December 2008

Class1

Class2

3M

6M

1Y

2Y

3Y

5Y

7Y

10Y

15Y

20Y

Government

GII

2.81

2.83

2.9

3.03

3.11

3.17

3.2

3.26

3.55

3.82

Quasi Government

Khazanah

0.16

0.17

0.16

0.09

0.07

0.13

0.22

0.34

0.34

0.35

Corporate

AAA

0.84

0.87

1.02

1.14

1.33

1.56

1.83

2.09

2.16

2.26

Corporate

AA2

1.17

1.23

1.46

1.65

1.91

2.2

2.53

2.84

2.94

3.08

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, noninfringement, timeliness, completeness, or that the information is always up-to-date.

45

Malaysian Sukuk Market Handbook  Your Guide to the Malaysian Islamic Capital Market      ISBN: 978‐983‐44255‐0‐0   Published by RAM Rating Services Berhad    As a pioneer in the Islamic finance industry, Malaysia has been setting benchmarks while  assuming  a  pivotal  role  on  the  sukuk  pitch.  The  nation’s  Islamic  capital  market  has  been  experiencing exponential growth, and we are well poised as the world’s most competitive  and attractive sukuk market, underscoring Malaysia’s significance as the largest and most  innovative global sukuk marketplace.   The Malaysian Sukuk Market Handbook, published by RAM Rating Services Berhad (“RAM  Ratings”),  is  a  comprehensive  guide  that  serves  as  a  practical  tome  for  institutions  and  professionals keen on unlocking maximum value from the domestic Islamic capital market.  The  contributors  to  this  handbook  are  eminent  personalities  from  various  backgrounds,  well known in their respective fields of expertise. This handbook – the first of its kind ‐ also  strives to broaden the sukuk investor and issuer bases, and covers inter alia the applicable  Shariah principles, the Malaysian regulatory framework, the role of Shariah advisors, legal  and  tax  considerations,  rating  approaches,  market  infrastructure  and  details  of  hallmark  sukuk transactions.  RAM  Ratings,  a  leading  credit‐rating  agency  in  Asia,  was  incorporated  in  1990  as  the  pioneer  of  the  Malaysian  capital  market  in  this  sphere.  In  sukuk  transactions,  our  task  involves  both  quantitative  and  qualitative  analysis  vis‐à‐vis  evaluating  the  financial  strength  of  obligor  institutions  with  such  underlying  structures,  as  approved  by  Shariah  scholars. RAM Ratings’ portfolio encompasses a vast range of local and foreign corporates,  multinationals,  Islamic  and  conventional  banks,  takaful  and  insurance  companies,  government‐linked and other public‐financed entities, myriad complex investment vehicles  and the ringgit‐denominated securities they issue, structured‐finance transactions backed  by  receivables  or  other  financial  assets,  and  sukuk.  As  one  of  the  region’s  most  experienced  rating  agencies,  RAM  Ratings  is  a  leader  in  the  provision  of  crucial  and  independent credit opinions that are sought after by market participants as regards their  investment and financial decisions.   For  further  enquiries,  kindly  contact  Mr  Mohamed  Firdaus  Kader  Mohideen  at  +603‐ 76281018  or  [email protected];  or  Ms  Noor  Maliana  Mansor  at  +603‐76281029  or  [email protected].    

Information contained in this publication is obtained from sources believed to be reliable and correct at the point of writing; however, its accuracy or completeness cannot be guaranteed. Opinions in this publication are expressed from the point of view of the writers and are not necessarily those of the Publisher. The views or opinions expressed are subject to change at any time. No statement in this publication is to be construed as a recommendation to buy, sell or hold securities. All rights reserved. No part of this publication may be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold or stored for subsequent use for any such purpose, in whole or in part, in any form or manner or by any means whatsoever by any person, without prior written consent from the Publisher and/or the writers.