Islamic Finance Bulletin September 2009

September 2009 Issue #25

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

Towards an informed market

…in this issue 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. 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. 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].

The Bright Side of a Downturn

Islamic Home Financing: The Case of Saudi Arabia

Performance of the 3 Major Assets Classes

Hallmark Sukuk Issues

Market Statistics

Ringgit Sukuk Market Report

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TOWARDS AN INFORMED MARKET THE BRIGHT SIDE OF A DOWNTURN

The Bright Side of a Downturn AmIslamic Capital Markets

Introduction

C

ountless articles have been written on the global financial crisis, discussing when, why, what and how it all went wrong. Economists, industry experts and policy makers have been debating on what could and should have been done to prevent the financial catastrophe from happening. We can continue dwelling on our misfortunes, point fingers at certain parties, and accuse investment banks of being greedy and responsible for all this. Then again, this would have been covered by most business journalists. Sadly, though, the brighter side of the crisis has not been covered enough to brighten the mood of those affected. It is well known that the financial crisis has adversely affected the economy, the banking industry and employment, among many other things. Islamic finance has also not been spared, although it has been enjoying tremendous growth since its debut in the 1970s, mainly to attract petro-dollars from the Middle East. Islamic finance, coincidentally, had risen in tandem with the surge in oil prices and prosperous economic activity worldwide; it had not shown any sign of slowing down until the recent global financial crisis. Despite the gloomy sentiment when the financial crisis is mentioned, a lot of good can be learned from these trying times.

During periods of prosperity and robust economic growth, we often forget the pains and struggles our predecessors had had to endure to nurture this baby we call Islamic finance to the phenomenon it is today - the envy of many. Amid a downturn, most can take time to improve and streamline the processes that have guided us to where we are today - be it revamping our current system and policies or building on the existing ones to enhance control and management. We do not have to wait for a crisis to hit us before starting to ponder what went wrong. Instead, we are in an opportune position to learn from others’ mistakes, to not let the same happen to us. Islamic finance players can use this financial crisis as a lesson and tool for their future endeavours and survival. It is the duty of the current players in the Islamic finance industry to continue the legacy of our predecessors. The present financial crisis, which has been dubbed the worst since the Great Depression of the 1930s, has not only affected the United States’ (“US”) banking system but that of the entire world. As a result, the Federal Reserve and global central banks have taken steps to expand their money supplies, to avoid a global meltdown. Stimulus packages have been introduced to offset shrinking

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demand from the private sector following the crisis (source: Wikipedia). Proposals for the reformation of policies and re-regulating of banks have taken centre stage in the US, as existing policies had failed to keep up with the advancement of financial instruments. Regulators and financial-industry players have had their hands full cleaning up the mess. In the Middle East, real estate and the equity market have taken big hits. Developers have been forced to lay off workers en masse and large-scale projects have been shelved due to weak demand. The Dubai dream has turned into a nightmare. In Asia, countries like Japan, Hong Kong, South Korea, Taiwan, Singapore and Malaysia have not been spared. Malaysia has become a victim in spite of its minimal involvement in the sub-prime market or innovative financial instruments - once the pride of Wall Street. The effects of the global financial turmoil on the economies of the Far East are clear - evidence that the world is one market and no particular country will be excluded from the negative happenings on foreign shores. During this slow period, Malaysia known as a de facto’ Islamic financial hub - has taken the opportunity to be proactive in strengthening its position. The country has not only enjoyed contributions from the regulators, but has also received encouraging response from the industry players. In March 2009, the Malaysian government announced the second stimulus plan or mini budget amounting to RM60 billion to be implemented over 2009 and 2010, to pump prime the economy and encourage viable businesses while mitigating the effects of the downturn. This amount

translates into 9% of the country’s GDP and includes tax incentives, equity and fiscal injections. Almost half of the stimuli have been allocated to assist the private sector and for a working-capital guarantee scheme. The Malaysian sukuk market which has been on the rise since the early 2000s1, saw growth stunted by the global financial crisis. Sukuk issuance in Malaysia for the year 2008 fell to RM20.8 billion from RM58 billion as reported in 2007. The slowdown did not dampen the spirits of industry players, in fact their efforts continued tirelessly as can be seen for the 1H2009 period. Sukuk issuance in 2009 took a turn to post growth albeit slower pace and by the end of July 2009, about RM18.3 billion of sukuk had been issued compared with RM20.8 billion for the whole of 2008. The value of outstanding sukuk had also increased to RM167.7 billion as at the end-July 2009, compared to RM152.8 billion as at end-20082. The volume of sukuk issuance in the 4th quarter of this year is expected to be further spurred along with the ongoing implementation of the financial-guarantee scheme under Danajamin Nasional Berhad, which forms part of the stimulus package. There have also been ongoing developments in the Malaysian Islamic finance sector. Bursa Malaysia recently introduced the much-anticipated Commodity Murabahah House or CMH. CMH is designed to be a multi-currency and multi-commodity exchange-traded platform to facilitate the trading and settlement of commodities, which acts as 1

Source: Malaysian sukuk market reported an average growth of 22% from 2000 – 2007; Financial Stability and Payment Systems Report 2007, Bank Negara Malaysia; 2 Source : Securities Commission, Malaysia.

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the underlying transaction for liquidity management between Islamic financial centres. It is the first commodities-trading platform in the world that uses crude palm oil as the underlying commodity for Islamic transactions. CMH expects RM1 billion of transactions daily via its Internet-based platform (source: Bank Negara Malaysia Governor’s opening speech at the launch of CMH). The USD1.5 billion 5-year Petronas Emas Global Sukuk, which marks the beginning of the foreign-currency sukuk market in Malaysia after the effects of the global downturn, shows Malaysia’s resilience against its impact. The issue has been highly successful despite the challenging global financial markets, attracting significant interest from a broad investor base, i.e. 60% from East Asia and 13% from the Middle East and the US. The local regulators have also continuously striven to strengthen the Islamic capital markets. In July 2009, the Securities Commission (“SC”) launched the Islamic Capital Market Graduate Training Scheme (“ICMGTS”). The scheme, established pursuant to the Malaysian Government’s second stimulus package, aims to develop talent to facilitate the robust development of the nation’s Islamic capital market. In line with other Islamic educational institutions such as International Centre for Education in Islamic Finance (INCEIF), Islamic Banking and Finance Institute Malaysia (IBFIM), International Centre for Leadership in Finance (ICLIF) and International Shariah Research Academy for Islamic Finance (ISRA), the SC – together with the Securities Industry Development Corporation (SIDC) recognises the need for qualified Islamic finance professionals, and that the shortage of qualified Islamic finance

practitioners needs to be taken seriously. By introducing the ICMGTS, the SC, as one of the strong promoters of Islamic capital markets in Malaysia, has taken proactive steps to ensure that Malaysia is prepared vis-à-vis achieving a skilled pool of human capital. In a follow-up to the ICMGTS, the SC has published a series of books on Islamic capital markets, which will form the foundational module in its syllabus that represents a step forward towards pooling various resources to build expertise in Islamic capital markets. In August 2009, the SC streamlined the registration process for Shariah advisors, making it easier for individuals and corporations providing advice on Islamic capitalmarket products and services - by issuing the new Registration of Shariah Advisors Guidelines. Under this new guideline, Shariah advisors need only register once before offering advice on all Shariahbased products and services regulated by the SC, rather than registering separately for each product and service, as had been the previous practice. This will encourage new registration of Shariah advisors entering the industry. Given the growing demand for practising Shariah advisors, this move by the SC is very encouraging. Bank Negara Malaysia recently introduced the Shariah parameters for various Islamic principles commonly employed by financial institutions in Malaysia, for clarification and to achieve common understanding among players on the tenets and mechanisms under each Islamic financial principle. The rating agencies, on the other hand, have also taken steps to introduce prudent measures to further enhance transparency on rating methodologies and disclosure on sukuk structures that conform to Shariah principles.

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Other nations have also not been excluded from implementing measures for prudence and economic advancement in the areas of Islamic finance. Countries like the United Kingdom and South Korea have amended or introduced tax laws to make it conducive for corporations to issue sukuk on their shores. Acknowledging the importance of liquidity for the prosperity of the Islamic finance industry within its borders, Pakistan has introduced 2 inter-bank trading agreements to kick-start its Islamic inter-bank money market. This move will create more liquidity for Islamic money markets and improve efficiency in lowering the cost of funding and investment, which can be passed on to the end-users. The United Arab Emirates, after witnessing Dubai’s distress amid the current financial crisis, has drafted laws that allow government entities to issue sukuk, but only with the approval of the Federal Cabinet. This move is necessary following the defaults by Golden Belt Sukuk and Investment Dar in the GCC markets. Malaysia, having learned from its experience from the 1997/98 Asian financial crises, has already lined up conservative, strict measures and controls to stop its economy from sliding into devastation again. Back then, the capital controls implemented by the Malaysian

authorities had been frowned upon by western economies as they had not promoted free market practices as in the US and Europe. Now, however, those critics are imposing the same kind of measures to re-regulate their banking systems. Nevertheless, our controls have equipped us with the ability to ride the financial tsunami, and the lessons learned recently will keep us prepared in facing the next hurdle in our path. A global financial meltdown therefore does not always spell doom and gloom. Economies can take heed from the experience and reflect on what has happened, to introduce and improve measures and policies to strengthen themselves against the next meltdown. Although Malaysia has been criticised for imposing measures that defy the spirit of capital markets and has been accused of protectionism, these critics have been silent amid the present turmoil. On the contrary, Malaysia is now being commended for introducing such measures and is in a favourable position to take advantage of new opportunities while others are left licking their wounds.

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For more information, please contact:

Mohd Effendi Abdullah Director/Head, Islamic Markets [email protected] Salina Burhan Director, Islamic Markets [email protected] Mirza Abdul Rahim Shah Associate Director, Islamic Markets [email protected] AmInvestment Bank Berhad 21st Floor, Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur, Malaysia Tel: 603-2036 2633

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TOWARDS AN INFORMED MARKET ISLAMIC HOME FINANCING: SAUDI ARABIA

Islamic Home Financing: The Case of Saudi Arabia Edib Smolo International Shari’ah Academy for Islamic Finance

Introduction

T

he Kingdom of Saudi Arabia is one of the biggest countries and economies in the Middle East. Its population is around 25 million, of which some 5 million are foreigners. The economy of Saudi Arabia is overdependant on oil production, which accounts for roughly 75% of its revenue, 45% of its GDP, and 90% of its export earnings. Although there are many ongoing projects that are trying to address a chronic need for homes, Saudi Arabia still faces a huge deficit in available homes, as demand is currently far greater than supply across all sectors and price levels. According to some estimates, Saudi Arabia is in need of about 1 million extra units (GulfNews.Com, 2009). In July 2008, the Shura Council approved the long-awaited mortgage law, although it is yet to be verified and implemented by the government. It is believed that this law, once in force, will increase demand for housing by up to 50% (Al-Othman, Raghu, Elia, & Ramadoss, June, 2009, p. 2) and the yearly turnover of the house financing industry will come in at 150 billion to 180 billion Saudi riyals (Merzaban, 2009). Saudi Arabia is considered a fertile ground for the mortgage industry, and offers much better prospects than other Gulf countries. Islamic Finance Bulletin ISRA

Real Estate and Construction Sector Due to strong economic expansion, robust demand and an extremely large young population looking to become future homeowners, the real-estate sector in Saudi Arabia promises healthy growth for years to come. Where residential and office space is concerned, demand is currently far greater than supply across all sectors and price levels. With a mismatch between inflation and salaries, Saudi Arabia is experiencing an acute need for affordable housing. This problem is partially being addressed by the government, through its plan to deliver 35,000 low-cost housing units over the next 2 years (Oxford Business Group, 2009). However, this is far short of the estimated need of about 1 million extra units (GulfNews.Com, 2009). The long-awaited mortgage law, approved by the Shura Council in July 2008, will establish a home-finance market, which will certainly unleash latent demand for homes. According to a report by the Kuwait Financial Centre, there will be up to a 50% increase in demand for housing once this mortgage law is effected (Al-Othman, et al., June, 2009, p. 2).

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Major banks have begun offering Shari’ah-compliant home financing in anticipation of the implementation of this law. It is believed that this mortgage law will allow wider access to property ownership upon government approval. The Strategic Mortgage Finance Group estimates a yearly turnover of 150 billion to 180 billion Saudi riyals for the home-financing industry once the mortgage law is implemented (Merzaban, 2009). During the 1980s, almost all housing and real-estate developments had been governmentsponsored. The situation is changing fast today, with the private sector taking over the market. More than 50 companies were licensed to sell and develop real estate in the Kingdom in 2007 alone. Apart from the banks that provide home financing, there is also Saudi Home Loans, a venture backed by Dar al-Arkan Real Estate Development, i.e. Saudi Arabia’s largest developer by market value (National, 2009).

Islamic Financial Services Saudi Arabia is the largest market for Islamic finance. Islamic banks are operating side by side with conventional banks, and most, if not all, of the conventional banks have opened Islamic windows offering Islamic products (Ahmed, 2006; Molyneux & Iqbal, 2005). The popularity of Islamic finance is on the rise, and Islamic banking is expected to grow by more than 20% y-o-y in terms of assets (Hawa & Singh, 2008, p. 15). However, there is a dire need for a better regulatory regime as well as greater financial expertise in the field of Islamic finance, in order for the sector to develop further, not only in the Kingdom but also in the region (Ahmed, 2006). Saudi banks, in general, are among the most liquid and best-capitalised banks in the developing world (Ahmed, 2006, p. 102). Saudi Arabia’s financial sector in general, and Islamic banks in particular, are supervised by the Saudi Arabian Monetary Authority (or SAMA), which was established in 1952 and acts as the Kingdom’s central bank. Although Shari’ah law is the law of the land, Saudi Arabia does not have any Islamic banking law (Ahmed, 2006, p. 103).

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Islamic Finance Bulletin ISRA

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5K 1 Years Yes 5% to 5.25% 180/300 10 0% to 10% 4M 200K Yes 1700 1500 23-70 land 18 2% to 5%

Min. Salary Min. Yrs of Services Joint Loan

Profit Margin

Max. Tenor (Months) Max. age of house (Years)

Down Payment

Max. Amount Min. Amount Insurance Estimation fee Management fee Age

Late payment Penalties

Early settlement after one year Source: Various websites and reports.

Murābahah

Murābahah /Ijārah

Products offered

any time

2% to 5%

5M 150K Yes 1000 1475 22-60

0% to 15%

5K 1 Year Yes 4.25% to 4.75% 300 10

SAMBA

ANB

Bank

any time

2% to 5%

4M 150K Yes 1500 1500 21-60

5% to 10%

5K 1 Year Yes 4.75% to 5.99% 300 25

Ijārah

SABB

5M 150K Yes 1500 1000 20-60 2% to 5% for each late installment after one year

10%

240/360 26

4.25% to 6.5%

5K 6 months Yes

Murābahah /Ijārah

Riyad Bank

NCB

Albilad

BSF

any time

NO

any time

2% to 5%

any time

NO

any time

2% to 5%

Murābahah/ Murābahah Ijārah/Istisna’/ Ijārah Murābahah /Ijārah Mushārakah 2K 5K 5K 5K 6 months 1 Years 1 Year 1 Year Yes suspend Yes Yes 4.5% to 4.75% to 4.75% to 5.5% 4.75% 4.9% 5.5% 300 300 240 300 20 10 20 15 10% For 10% 10% No Land & 15% for Home 5M 3M 3M 1.5M 30K 150K 100K 150K No Yes Yes Yes 2000 1500 2000 2000 0 500 0 1500 18-60 25-60 21-60 22-60

RAJHI

Table 1: Home Financing Programs Comparison

TOWARDS AN INFORMED MARKET ISLAMIC HOME FINANCING: SAUDI ARABIA

The following are the major players in the market:

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TOWARDS AN INFORMED MARKET ISLAMIC HOME FINANCING: SAUDI ARABIA

Islamic Home-Financing Instruments in Saudi Arabia Buying a home is a big commitment that consumes almost half of the purchaser’s monthly salary. Islamic banks in Saudi Arabia have developed several mechanisms to tackle the issue of home financing that is in line with Shari’ah rulings. The models for Islamic home financing currently used by Islamic banks in Saudi Arabia are murābahah, ijārah, mushārakah mutanāqisah and istisnāc. Different models are used for different purposes. For example, completed houses can be financed under the murābahah, ijārah and mushārakah mutanāqisah structures, while incomplete houses or those under construction can be financed under the istisnāc structure. Detailed discussions on these structures are provided in the following paragraphs. Murābahah (cost plus profit) Murābahah simply means increase or growth from the Arabic verb rabaha or rabiha ), which also may imply profit (Wehr, 1980). In other words, murābahah is ”cost-plus financing” (Thani, Mohamed Abdullah, & Hassan, 2003, p. 57), ”markup sale” (Rosly, 2005, p. 87) or resale based on a profit margin above the cost.

Islamic Finance Bulletin ISRA

This is a sale contract whereby a product is sold at a price equivalent to the cost price of that product plus a profit margin. For example, if the cost price of a product is RM1,000 and the profit margin is RM200, then the price of that product, under the murābahah principle, will be RM1,200. Murābahah is used for the sale of completed properties. There are several conditions laid down by the jurists for the validity of a murābahah sale. For sale to be valid under the murābahah structure, the subject matter of the sale must be in existence at the time of the sale, and the institution (bank) must possess the property before selling it to the customer. This means that the property must be owned by the bank prior to the sale. The ownership of the property can be held directly by the bank or indirectly through a special-purpose vehicle (or SPV) or through its agent. This means that the bank can appoint its client (the buyer) as its agent (when necessary) to buy the property on its behalf. In this case, the relationship between the bank and the buyer is that of a principle and an agent. Murābahah is the oldest model and is still the most widely used by Saudi banks. Figure 1 below shows the murābahah model in brief.

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Due to the law and restrictions, some of the Islamic and also conventional banks establish SPVs in order to own and manage all real-estate transactions and ownership responsibilities. The murābahah model with an SPV is shown in Figure 2 below.

Ijārah (leasing) Literally, the term ijārah means “to give something on rent” (Usmani, 2002, p. 69). Technically, it refers to the sale of usufructs and/or services (Mohamed, 2005, p. 19). Ijārah can be also defined as "a contract of hire or lease for a service or for the use of certain movable and immovable property for a consideration" (Buang, 2000, p. 139). Besides the general ijārah contract, Islamic banks have developed another mode of financing that could be seen as a derivative of the ijārah contract, called ijārah wa iqtinā or ijārah muntahiya bi al-tamlīk (lease ending in ownership or hire-purchase). Ijārah wa iqtinā is the alternative for the conventional leasepurchase contract developed by Islamic banks. The mechanism of ijārah wa iqtinā is more or less the same as the mechanism of ijārah explained above. The only difference is that the former includes the promise by the lessor to transfer ownership of the leased asset to the lessee after the lease period is over. Islamic Finance Bulletin ISRA

This promise is only binding on the lessor, as the lessee has the option to buy the leased asset at the end of the lease period. The lessee can also return the asset to the lessor. In any case, the promise must be one-sided as promises from both sides would render this contract invalid according to the principles of Shari’ah. The following are the steps (see Figure 3) involved in the ijārah wa iqtinā operation (Khoja, 2002, p. 76): 1. Asset-purchase contract: Upon receiving demand from a client, the bank buys the asset from the vendor. 2. Delivery and receipt of the asset: The vendor delivers the asset to the bank or any other party designated by the bank. The client will notify the bank upon the receipt of the asset.

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3. Lease contract: The bank will start leasing the asset to the client with the promise (by the bank) to transfer the asset to the client, either as a gift or at a nominal price. Throughout the period, the client will pay rental to the bank. 4. Transfer of ownership: Once the client has paid all the instalments due and the lease period is over, the bank will transfer ownership of the asset to the lessee as a gift or through a sale. The lessee becomes the legal owner of the asset.

Islamic Finance Bulletin ISRA

Transfer of ownership through ijārah wa iqtinā can be done in 3 ways. Firstly, the property can be given to the lessee as a gift (hibah) from the lessor. This way, there is transfer of ownership without consideration or price. Secondly, at the end of the lease period, the transfer of ownership or title is done at a certain price, normally at a nominal value. Finally, the title can be transferred to the lessee even before the end of lease period, for a price that is equivalent to the remaining ijārah instalments.

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Mushārakah Mutanāqisah (declining partnership) A mushārakah mutanāqisah partnership or mushārakah tantahī bi al tamlīk (partnership that ends in the transfer of ownership to one party - the client) is a hybrid product of Islamic banks, and relatively new in Saudi Arabia. It is a combination of joint-venture, lease and sale contracts, whereby ownership is transferred through sale and this transfer is done via a profit-sharing arrangement. The mushārakah mutanāqisah model can be easily implemented for various financing purposes. However, it is most commonly used for home financing. The basic steps involved in the mushārakah mutanāqisah structure for home financing are: i)

First Step a. The customer identifies the property that he/she wants to purchase and approaches the bank for a financing facility. b. The customer and the bank will enter into a mushārakah mutanāqisah arrangement; the purpose of this partnership is to acquire a property. c. The initial deposit/downpayment made by the customer at this stage will be his contribution towards the mushārakah mutanāqisah venture; the bank’s contribution will comprise the financing amount.

ii) Second Step a. The bank subsequently leases the acquired property to the customer. b. The rental paid by the customer will be distributed among the partners, in accordance with the prevailing shareholding structure at the point the rental is paid/received. c. The bank’s portion of the rental income is similar to a financing profit earned by a conventional bank. iii) Third Step a. Throughout the tenure of the lease, and at agreed intervals, the customer will buy shares from the bank. He will use his portion of the rental income to purchase the bank’s stake in the property (contract of bay’ takes place). He may also add more money in order to accelerate the acquisition of the bank’s shares. The shares of the bank will be reduced by every purchase of shares by the customer. b. At the end of the tenure of the lease, the property will be wholly owned by the customer and ownership will be transferred to him. With this, the mushārakah mutanāqisah will be terminated. The steps above are illustrated in Figure 4.

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Istisnāc Literally, istisnāc comes from the Arabic verb sanaca, which means to manufacture, to produce, or to construct something. Therefore, istisnāc means manufacturing or production. Technically, it represents a contract to purchase a product that is to be manufactured later, according to the agreed price and specifications between the parties. In the istisnāc model, the customer may ask the bank to finance the construction of a house. Once the project and the client are approved, the bank will appoint the builder or constructor to build the house, either directly or indirectly through its agent or SPV. Once construction is done, the bank will sell the house to the customer, through either the murābahah, ijārah wa iqtina’ or mushārakah mutanāqisah model. The price of the house will be equal to the cost incurred by the bank plus the premium mutually agreed upon between the bank and the customer.

Islamic Finance Bulletin ISRA

This product allows the client to own a suitable residence through various options: 1.

The bank builds the estate completely for the client, on land owned by the client or by a third party.

2.

The bank builds the estate completely for the client, on land owned by the bank.

3.

The bank completes the construction of an estate (partial istisnāc).

The downpayment is deposited into the client’s current account before signing the contract, to make sure that the client is capable of making the initial payment. The amount is withdrawn after the contract has been signed. The estate and the land are valued by 2 estate offices selected by the bank. It is acceptable to have 2 clients as joint-venture partners

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in a contract with the bank. The client is exempted from the 10% initial downpayment if he is the owner of the land. The time line for the construction is specified in the contract. Depending on the size, design, and evaluation of the project, the

construction period will span 8 to 24 months. The client decides on the architectural design and the contractor. However, the contractor must be approved by the bank in terms of trustworthiness. The process is depicted in brief in Figure 5 below:

Conclusion This paper argues that Islamic home financing in Saudi Arabia will undergo tremendous development in years to come. With a huge population, robust demand for real estate and a new mortgage law around the corner, the true potential of home financing in Saudi Arabia has yet to be achieved. Consequently, Islamic home financing, supported by many government initiatives, is about to flourish in the country where demand for Shari’ah-compliant products is very high. There are several Shari’ah-compliant products available in the market, such as murābahah, ijārah, mushārakah mutanāqisah and istisnāc. While the murābahah, ijārah and mushārakah mutanāqisah concepts can be applied to completed projects and are relatively easy to implement, the istisnāc financing mechanism is slightly more complicated. All in all, Saudi Arabia is a “promised land” for the real-estate industry, although its potential can only be realized after the introduction of the long-awaited mortgage law. Nevertheless, the vast promise of the market will push players into being more innovative and proactive in structuring and developing new products to cater to market needs.

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The author, Edib Smolo, is an associate researcher in the Islamic Banking Unit, International Shari’ah Research Academy (ISRA) for Islamic Finance. He obtained his undergraduate double-degree in Economics and Islamic Revealed Knowledge with Honors as well as Master in Economics from International Islamic University Malaysia (IIUM), Malaysia. Prior to joining ISRA, Edib worked for an insurance company in Bosnia and Herzegovina and at the same time he was Assistant Professor at Faculty of Economics, Sarajevo School of Science. He participates in conferences and seminars related to economics, business and finance. He published several papers on Islamic microcrediting, economics, and finance. His interests are in Islamic banking and finance, microcrediting, and Islamic capital market products, among others.

INTERNATIONAL SHARI’AH RESEARCH ACADEMY FOR ISLAMIC FINANCE The establishment of the International Shari’ah Research Academy for Islamic Finance or more commonly known by its acronym, ISRA, is to promote applied research in the area of Shari’ah and Islamic finance. It will also act as a repository of knowledge for Shari’ah views or fatwas and undertake studies on contemporary issues in Islamic financial industry. ISRA will contribute towards strengthening human capital development in the areas of Shari’ah and provide platform for greater engagement amongst practitioners, scholars, regulators, academicians via research and dialogues, both in the domestic and international environment.

Islamic Finance Bulletin ISRA

Through pioneering research and rigorous intellectual dialogue, ISRA aims to promote innovation and dynamism into new boundaries of Islamic finance. It is envisioned that with greater research and dialogues, mutual respect and recognition would emerge within Islamic financial industry global community. As a part of the International Centre for Education in Islamic Finance (INCEIF), ISRA is able to leverage on the existing infrastructure and facilities as well as to tap on the knowledge, expertise and resources of the academic faculty and post graduate students in INCEIF. To provide input and assistance in the strategic direction of ISRA’s research works, the Council of Scholars, a group comprising of eminent local and international Shari’ah scholars, has been setup.

For more information, please contact:

International Shari’ah Research Academy for Islamic Finance 2nd Floor, Annexe Block Menara Tun Razak Jalan Raja Laut 59350 Kuala Lumpur Malaysia Tel: +603 2781 4000 Fax: +603 2692 4094 Website: www.isra.my

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TOWARDS AN INFORMED MARKET PERFORMANCE OF THE 3 MAJOR ASSETS CLASSES

Performance of the 3 major assets classes - government, quasi-government and corporate - under Islamic principles Meor Amri Meor Ayob Bond Pricing Agency Malaysia Sdn Bhd

Introduction

S

ukuk investors should be interested to know which classes of sukuk perform best during a market upswing and which move the least in a down-cycle. The Malaysian sukuk market is fortunate to have depth, breadth and history to facilitate such empirical studies. We will investigate the relative movements of 3 specific classes of Islamic bonds, i.e. government, quasigovernment and corporate sukuk.

TM

With the launch of the BPA Bond Index SeriesTM by Bond Pricing Agency Malaysia Sdn Bhd (or BPA Malaysia) on 19 December 2008, the market barometers that we will use for this particular exercise are: (1) the FiiXTM – Islamic Government Bond Index; (2) the FiiXTM – Islamic Quasi-Government Bond Index; and (3) the FiiXTM – Islamic Corporate Bond Index. The period under review will the whole of 2008, chosen because the year encompasses substantial market volatility arising from the global financial crisis.

Figure 1: FiiX – Islamic Government Bond Index, FiiX TM FiiX – Islamic Corporate Bond Index throughout 2008

Islamic Finance Bulletin BPAM

TM

– Islamic Quasi-Government Bond Index and

July - September 2009

Issue #25

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TOWARDS AN INFORMED MARKET PERFORMANCE OF THE 3 MAJOR ASSETS CLASSES

As shown in Figure 1, there appears to be a distinctive structural break in terms of the performance behaviour of corporate sukuk, as represented by the FiiXTM – Islamic Corporate Bond Index. The structural break seems to occur around the time of the onset of the global financial turbulence. In early June 2008, the performance characteristics of the FiiXTM – Islamic Corporate Bond Index suggests that corporate sukuk were more volatile and suffered much more than other sukuk classes. An obvious performance gap can be clearly seen from June 2008 onwards. In the final month of the year, the gap was even wider. These observations imply the following: ƒ

Government and quasi-government sukuk appears to share the same performance path.

ƒ

During times of stress, government and Islamic quasi-government sukuk are less volatile than corporate sukuk.

ƒ

At the onset of an economic downturn, the performance of government and quasi-government sukuk starts to overshadow that of corporate bonds, as the uncertainties start to progressively affect market confidence and credit risks.

There are a number of possible reasons for such observations. Most infrastructure projects in Malaysia issue sukuk as the preferred source of funding because of the push for sukuk issuance in Malaysia. At the time of the capital markets’ steep downward spiral in June 2008, the sukuk market had also suffered another setback in the form of the “windfall tax” imposed on Malaysian independent power Islamic Finance Bulletin BPAM

producers. This particular group of issuers has approximately RM27 billion of outstanding sukuk; as a comparison, they only have some RM6 billion of outstanding conventional bonds. The tax, which had affected a substantially sized portfolio, had depressed the entire Islamic corporate debt segment even further visà-vis the conventional market’s woes during that period. All said, there will have to be more indepth research if we wish to glean the more precise reasons behind the statistics. Considering the size of the Malaysian sukuk market, which was valued at RM237.59 billion as at 31 July 2009, such research is well worth investing time and effort in. By being able to analyse the market trend, portfolio managers may utilise investment strategies that maximise gains and minimises losses by switching sukuk holdings within particular tenures and maturity buckets. This important consideration gives rise to why additional resources should be deployed on research of the sukuk market, as results from such studies can help portfolio managers maximise returns. Taking advantage of characteristics such as market movements or the market’s risk-return patterns can only be done if an information database is available. This database on the sukuk market is not only valuable to the investing community but also to sukuk issuers, product-development specialists and policy makers. Fresh products and new regulatory policies to enhance the sukuk market’s existing infrastructure can be more efficiently designed to yield the best results.

July - September 2009

Issue #25

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TOWARDS AN INFORMED MARKET PERFORMANCE OF THE 3 MAJOR ASSETS CLASSES

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 in the risk elements of the bond market. He is also 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 bond-pricing agency on 18 April 2006. With this status, BPAM is recognised as one of the official sources for evaluated prices on ringgit bonds

July - September 2009

Issue #25

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TOWARDS AN INFORMED MARKET HALLMARK SUKUK ISSUES

Hallmark Sukuk Issues RAM Rating Services Berhad Introduction

T

his article deals with several sukuk transactions, chosen to illustrate the use of a particular type of Islamic contract. It must be noted that while a transaction may be predominantly premised on a certain type of Islamic contract, the structure itself may comprise more than one type of Islamic contract. Similarly, securities based on the same type of Islamic contract may have different structures from the studies profiled in this article.

RM442 million Sukuk Ijarah by Golden Crop Returns Berhad Golden Crop Returns Berhad (“Golden Crop”) is a bankruptcy-remote, specialpurpose company that had been set up as the financing vehicle for the RM442 million sukuk Ijarah or sale-and-leaseback transaction, backed by the plantation assets of Boustead Holdings Berhad (“Boustead”). The sukuk was issued on 22 November 2005, with Affin Bank Berhad as the lead arranger/financial adviser and costructuring adviser with Pacific Alliance Capital Sdn Bhd. Dr Mohd Daud Bakar had been the Shariah adviser while CIMB Trustee Berhad and HSBC (Malaysia)

Islamic Finance Bulletin RAM Ratings

Trustee Berhad are the share trustee and security trustee, respectively. Seventeen plantations and 5 palm-oil mills had been securitised under this transaction, structured using the contract of Ijarah. The Boustead Group had sold its beneficial interests and rights in the plantation assets to Golden Crop via sale and purchase agreements. The proceeds from the issuance of the RM442 million sukuk Ijarah and a RM300 million Musharakah facility, contracted between Boustead’s largest shareholder - Lembaga Tabung Angkatan Tentera - and Golden Crop, had been used to partially fund the purchase as well as to pre-fund the deposit required under the 3 master Ijarah agreements between Golden Crop and the Boustead Group.

RM80 million Sukuk Mudharabah by PG Municipal Assets Berhad This was issued in February 2005 under the Islamic contract of Mudharabah. AmInvestment Bank Berhad had been the lead arranger, with Dr Mohd Daud Bakar as the Shariah adviser and Amanah Raya Berhad, the sukuk trustee.

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TOWARDS AN INFORMED MARKET HALLMARK SUKUK ISSUES

The sukuk allows the Pasir Gudang Local Government Authority to access the capital market without having to depend on the Government for its funding needs. As 60% of the authority’s revenue comes from property tax assessments, PG Municipal Assets Berhad (“PG Municipal”), an orphan special-purpose vehicle, had leveraged on this to raise the RM80 million of Mudharabah securities with an AAA rating. The authority will use the funds derived from this transaction to repay its existing bank loans, fund the development of the Pasir Gudang area and for working-capital requirements. The transaction comprises 6 series of Mudharabah notes with different maturities, issued by PG Municipal. It had been Malaysia’s first structured transaction backed by property taxes collected by a local authority, and the first of its kind approved under the Security Commission’s Guidelines on the Offering of Islamic Securities (published in 2004).

RM10 billion Sukuk Musharakah by Rantau Abang Capital Berhad Issued in March 2006 under the Islamic contract of Musharakah, the instrument comprises a RM3 billion Islamic commercial papers/medium-term notes programme (“CP/MTN”) and a RM7 billion Islamic MTN programme. The lead arranger had been CIMB Investment Bank Berhad while the Shariah adviser had been the CIMB Shariah Committee; the trustee is PB Trustee Services Berhad.

Islamic Finance Bulletin RAM Ratings

Rantau Abang Capital Berhad (“Rantau Abang”) is a wholly owned subsidiary of the Government’s investment arm, Khazanah Nasional Berhad (“Khazanah”). It had been incorporated as a financing vehicle. The RM10 billion sukuk Musharakah had been issued to fund Khazanah’s investments, refinance borrowings and as working capital. Under this transaction, Khazanah and its unit had formed a partnership - at the portfolio level - as the Musharakah partners, with Rantau Abang acting as the wakeel for the sukuk investors. The partnership will invest in portfolio units under the investment portfolio, stemming from a pool of Shariah-compliant shares and assets identified and provided by Khazanah for the purpose of the transaction.

RM950 million Sukuk Mudharabah by Mukah Power Generation Sdn Bhd Issued under the Islamic contract of Mudharabah by Mukah Power Generation Sdn Bhd (“Mukah Power”) in December 2006, the instrument comprises a RM665 million senior tranche issued under the Islamic principles of Mudharabah and Istisna, and a RM285 million junior sukuk Mudharabah programme. The lead arranger/principal adviser had been RHB Islamic Bank Berhad while the Shariah adviser had been the RHB Islamic Shariah Committee; the trustee is Amanah Raya Berhad.

July - September 2009

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TOWARDS AN INFORMED MARKET HALLMARK SUKUK ISSUES

Mukah Power is an independent power producer (“IPP”) that had been incorporated to design, construct, own, operate and maintain a 270-MW coalfired power plant in Matadeng, Sarawak, pursuant to a 25-year power purchase agreement between Syarikat SESCO Berhad and the IPP. The sukuk Mudharabah had been issued to partially finance the construction of the plant and related facilities, and for profit payments during the construction period. The sukuk will also be used for the first profit payment upon completion of the plant, for pre-operating expenses and other project costs.

RM1 billion Sukuk Musharakah Programme by Toyota Capital Malaysia Sdn Bhd Issued in June 2008 under the Islamic contract of Musharakah, the instrument comprises a RM1 billion Musharakah CP/MTN that had been issued to meet the Shariah-compliant working-capital and/or capital-expenditure requirements of Toyota Capital Malaysia Sdn Bhd (“Toyota Capital”) and its subsidiaries, and to refinance Toyota Capital’s existing debt securities or bank borrowings. The joint lead arrangers/principal advisers had been Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad and CIMB Investment Bank Berhad. The Shariah adviser had been the CIMB Islamic Shariah Committee while the trustee is CIMB Trustee Bhd.

Islamic Finance Bulletin RAM Ratings

Toyota Capital is the second Japanese corporate (the first being AEON Credit Service (M) Berhad) to make use of the Malaysian capital market as an alternative funding avenue. The sukuk Musharakah will allow sukuk holders, from time to time, to invest in the venture via subscription of the sukuk. For transaction purposes, the Musharakah venture involves investing in a pool of Shariahcompliant assets provided by Toyota Capital.

Sukuk Musharakah Programme by Binariang GSM Sdn Bhd Issued in December 2007, the instrument comprises a RM2 billion CP programme, a RM19 billion MTN programme and a cumulative non-convertible Islamic junior sukuk of an aggregate nominal value of the ringgit equivalent of USD900 million. The lead arrangers/principal advisers had been ABN Amro Bank Berhad (now known as The Royal Bank of Scotland Berhad) and CIMB Investment Bank Berhad. The Shariah adviser had been the CIMB Islamic Shariah Committee and the trustee is CIMB Trustee Berhad. The sukuk had been issued to refinance the bridging loan of up to RM20 billion that had been initially drawn down to fund the privatisation of Maxis Communications Berhad; to pay for the fees, costs and expenses in relation to the sukuk; and to fund group capital expenditure and working capital in the form of advances, subscription of redeemable preference shares or any other form of equity injection.

July - September 2009

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TOWARDS AN INFORMED MARKET HALLMARK SUKUK ISSUES

Already Malaysia’s largest-ever issuance of Islamic securities and the country's largest corporate bond issue, it is also believed to be one of the largest Asian (ex-Japan) corporate bond issues. The proceeds had been used to refinance the aforementioned RM20 billion bridging loan. The remaining outstanding amount under the bridging loan had been refinanced through a syndicated term loan of up to USD1.5 billion.

USD750 million Exchangeable Trust Certificates by Rafflesia Capital Ltd Issued in September 2006, the instrument comprises USD750 million of exchangeable trust certificates. The joint managers had been CIMB Islamic Bank Berhad, UBS Investment Bank and HSBC Amanah. The Shariah adviser had been the CIMB Islamic Shariah Committee. This sukuk issue is listed on the Labuan International Financial Exchange and the Hong Kong Stock Exchange. Khazanah, via special-purpose vehicle Rafflesia Capital Limited, had successfully launched the world’s first issuance of Shariah-compliant exchangeable trust certificates. It represents the first issue of its kind that incorporates full convertibility features that are common with conventional equity-linked functions.

the Government’s investment arm. The TM shares are Shariah-compliant. The more than USD3.2 billion of proceeds from the offering will be used as working capital and for general purposes relating to Khazanah’s principal business activities.

USD600 million Sukuk Ijarah by Malaysia Global Sukuk Inc Issued in June 2002, the instrument had comprised a USD600 million sukuk Ijarah, with HSBC Amanah Finance and HSBC Financial Services (Middle East) Ltd as the lead arrangers/book-runners. The sukuk, which would enable the Government to raise financing in accordance with Shariah principles, had been listed on the Luxembourg Stock Exchange, the Labuan International Financial Stock Exchange and the Bahrain Stock Exchange. This USD600 million 5-year sukuk issued by Malaysia Global Sukuk Inc, a government-owned special-purpose vehicle - has become an international benchmark for the issuance of global sukuk. Proceeds from the sukuk issuance had been used to purchase the beneficial titles to parcels of land located in and around Kuala Lumpur.

The offering comprises USD750 million of 5-year certificates (due in 2011), which are exchangeable into Telekom Malaysia Berhad (“TM”) shares currently held by

Islamic Finance Bulletin RAM Ratings

July - September 2009

Issue #25

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TOWARDS AN INFORMED MARKET HALLMARK SUKUK ISSUES

RM500 million Bai’ Bithaman Ajil Islamic Debt Securities by International Finance Corporation Issued in December 2004 under the Islamic contract of Bai’ Bithaman Ajil by International Finance Corporation (“IFC”), the private-sector arm of the World Bank, the lead managers had been CIMB Investment Bank Berhad and HSBC Bank Malaysia Berhad. IFC had been the first supranational to issue sukuk in the local market. It also represents the first-ever sukuk issuance by a supranational in any domestic capital market. The transaction had allowed IFC to achieve its objectives: cost-effective funding, investor-based diversification and assistance in the development of Asia’s domestic bond markets.

RM760 million Bai’ Bithaman Ajil (BBA) Sukuk by the World Bank Issued in May 2005, the principal adviser/lead arranger had been ABN AMRO Bank Berhad and CIMB Investment Bank Berhad, with the former also acting as the arranger. The Shariah adviser had been the CIMB Shariah Committee. The sukuk is also known as the World Bank’s Wawasan Bonds; the bank had become the third supranational to raise ringgit sukuk after Asian Development Bank and IFC. The Wawasan Bonds have enhanced the investment alternatives available to investors, by providing a high-grade and well-recognised credit product. It has also expanded the universe of investors that can invest in ringgitdenominated sukuk.

This is an excerpt from the Malaysian Sukuk Market Handbook - Your Guide to the Malaysian Capital Market.

Islamic Finance Bulletin RAM Ratings

July - September 2009

Issue #25

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TOWARDS AN INFORMED MARKET HALLMARK SUKUK ISSUES

RAM RATING SERVICES BERHAD (“RAM Ratings”) For more information, please contact:

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

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.

Islamic Finance Bulletin RAM Ratings

July - September 2009

Issue #25

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TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Capital Market    

 

 

 

Malaysian Rated Corporate Sukuk Market   League Table of Lead Managers as at 30 September 2009                         

    CIMB Investment Bank Berhad AmInvestment Bank Berhad Maybank Investment Bank Berhad  OSK Investment Bank Berhad  MIDF Amanah Investment Bank Berhad  MIMB Investment Bank Berhad  RHB Investment Bank Berhad Kenanga Investment Bank Berhad

RM Million    9,000  5,700  1,200  400  350  140  134  100 

%    52.9% 33.5% 7.0%  2.3%  2.1%  0.8%  0.8% 0.6%

 

 

 

   

17,024 

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

 

July – September 2009

Issue #25

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TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Capital Market Issued Sovereign & Corporate Bonds Gross figures ( not inclusive of redemptions) RM Million

End-Aug

Instruments

2005

Malaysian Government Securities Khazanah Bonds Government Investment Issues

2006

2007

2008 44,618.5

28,276.0

26,830.0

43,187.4

833.2

2,000.0

524.4

4,000.1

9,500.0

10,000.1

1,483.1

-

1,578.6 2,540.0

6,950.0

1,750.0

541.0

37,227.9

45,280.0

55,461.8

63,142.6

3,868.9

8,667.1

7,008.4

17,477.4

Straight Bonds

-

Convertible Bonds

3,744.7

-

-

-

Malaysia Savings Bonds

Bonds with warrants

-

9,500.0

16,500.0

Cagamas Bonds Total Sovereign & Near-Sovereign (1)

-

-

2009

9,500.0 400.0

-

-

155.8

30.8

846.9

Islamic Bonds

9,697.3

4,780.6

12,127.0

7,467.5

Asset Bac ked Bonds *

6,049.3

1,545.9

4,005.0

1,300.0

Medium Term Notes *

12,145.9

16,587.5

41,766.0

26,068.0

682.0

Total Corporate Issues (2)

35,506.1

31,736.9

64,937.2

53,159.9

2,631.0

72,734.0

77,016.9

120,399.0

116,302.4

12,131.0

Total Bonds Issued (1 + 2)

1,549.0 -

Proportion of Total Bonds Issued: Sovereign & Near Sovereign

51.2

58.8

46.1

54.3

78.3

Corporate Issues

48.8

41.2

53.9

45.7

21.7

Note: * Inc ludes Islamic issues - no breakdown available Sourc e: BNM

Islamic Finance Bulletin Market Statistics

July – September 2009

Issue #25

26

TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Capital Market Outstanding Bonds (RM Million) Source: Bank Negara Malaysia

As at end 2007 Conventional Islamic

As at end 2008 Conventional

Islamic

As at end September 2009 Conventional Islamic

Asset Backed Securities

                  11,985             5,552

                  11,028                     6,169

                     10,203                      5,928

Asset Backed Securities (Commercial Papers)

                         ‐

                         ‐

                        ‐

                            ‐

                         ‐

Asset Backed Securities (MTN/IMTN)

                    1,037                  ‐

                     1,562

                        ‐

                       2,002

                         ‐

Bonds

                  49,985           70,870

                  60,991                   71,822

                     60,560                    71,866

Medium Term Notes

                  20,740           55,072

                  28,209                   67,668

                     34,426                    83,890

Commercial Papers

                    4,701             5,738                      3,827                     5,308

                       3,751                      4,062

Commercial Papers‐CPN

                    2,865                 720                      4,850                         580

                           300                            22

Loan Notes

                    1,146                  ‐

                        857

                        ‐

                           130

                         ‐

Loan Stocks

                  11,374                  ‐

                     8,899

                        ‐

                       8,603

                           58

                103,833         137,953

                120,223                151,546                    119,976

Total Corporate Issues  Aggregate Corporate Issues

                 ‐

        241,786

               271,770

                165,826                 285,803

Bank Negara Bills/Negotiable Notes

                         ‐

                 ‐

                         ‐

                        ‐

                            ‐

                         ‐

Bank Negara Monetary Notes‐CB

                    7,000                  ‐

                         ‐

                        ‐

                            ‐

                         ‐

Bank Negara Monetary Notes‐DB/IDB

                  41,500           17,600

                  30,700                     7,300

Bank Negara Monetary Notes‐IPB

                         ‐

                         ‐

                    1,000                             ‐

                         ‐

Bank Negara Monetary Notes‐NF

                        500                  ‐

                     3,000

                        ‐

                            ‐

                         ‐

Cagamas Bonds

                    9,895                  ‐

                     3,435

                        ‐

                       1,805

                         ‐

Cagamas Notes

                        200                  ‐

                         ‐

                        ‐

                            ‐

                         ‐

Cagamas Notes‐CPN

                         ‐

                 ‐

                         ‐

                        ‐

                            ‐

                         ‐

Danaharta Bonds

                         ‐

                 ‐

                         ‐

                        ‐

                            ‐

                         ‐

Danamodal Bonds

                         ‐

                 ‐

                         ‐

                        ‐

                            ‐

                         ‐

            2,500

                     28,500                          ‐

Khazanah Bonds

                    1,000             6,350                      1,000                     3,350                             ‐

                     1,000

Government Investment Issues

                         ‐

          28,000

                         ‐

                  42,500                             ‐

                   64,000

Islamic Cagamas Papers

                         ‐

            4,295

                         ‐

                    2,925                             ‐

                     1,465

Sukuk Bank Negara Malaysia Ijarah

                         ‐

                400

                         ‐

                        400

                         400

Malaysian Government Securities

                190,200                  ‐

                211,801

                        ‐

                   236,635

                         ‐

Malaysian Government Securities Callable

                    1,500                  ‐

                     2,000

                        ‐

                       2,000

                         ‐

Malaysian Treasury Bills

                    2,320             2,000                      2,320                     2,000

                       2,320                      2,000

Total Sovereign & Near – Sovereign Issues 

                254,115           61,145

                254,256                   59,475                    271,260                    68,865

Total Debt Securities AGGREGATE

                357,948         199,098         557,046

                374,480                211,021                    391,236                 234,691                585,501                 625,928

Islamic Finance Bulletin Market Statistics

July – September 2009

Issue #25

27

TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Capital Market Corporate Sukuk Market Issued & Rated by Economic Sector  as at September 2009 (by number of issues)

Asset‐backed  securities 11%

Diversified holdings Public Finance 4% Financial services 1% 6%

Infrastructure &  utilities 24%

Mining & petroleum 2% Plantation &  agriculture 9% Consumer products 1% Industrial products 13%

Trading & services 6%

Transportation 3%

Property & real estate 16%

Construction &  engineering 4%

Total number of issues = 493 Source : RAM Ratings

Corporate Sukuk Market  Issued & Rated by Financing Contract  as at September 2009 (by number of issues)

Musharakah 11%

Mudharabah 3%

Corporate Sukuk Market Issued & Rated by Economic Sector as at September  2009  (by value)

Public Finance 0%

Trading & services 5%

Diversified holdings 12%

Transportation 1%

Financial services 15%

Property & real  estate Construction &  9% engineering 2% Industrial products 4%

Mining & petroleum Plantation &  2% agriculture 1% Consumer products 1%

Total value = RM283 billion Source : RAM Ratings

Corporate Sukuk Market  Issued & Rated by Financing Contract  as at September 2009 (by value)

Musharakah 34%

BBA 29%

Ijarah 20%

Asset‐backed  securities 4%

Infrastructure &  utilities 44%

BBA 24%

Mudharabah 1% Istisna 3%

Murabahah 34% Total number of issues = 493 Source : RAM Ratings

Islamic Finance Bulletin Market Statistics

July – September 2009

Ijarah 5%

Murabahah 29% Istisna 7% Total value = RM283 billion Source : RAM Ratings

Issue #25

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TOWARDS AN INFORMED MARKET MARKET STATISTICS

Sukuk Rated by RAM Ratings RAM Ratings‐Rated Sukuk (long‐term)  as at September 2009 (by number of issues) B 1.0% BB 0.6%

BBB 6.1%

C 0.6%

D 2.6%

A 28.1%

RAM Ratings‐Rated Sukuk (long‐term)  as at September 2009 (by value)

A 8.4%

AAA 23.9%

AA 37.1%

BBB 0.7%

BB 0.2%

B 0.9%

C 0.1%

AAA 46.0%

AA 43.1%

Total number of issues = 310 Source : RAM Ratings

RAM Ratings‐Rated Sukuk (short‐term)  as at September 2009 (by number of issues) P3 18.4%

D 0.6%

NP 5.3%

Total value = RM243 billion Source : RAM Ratings 

RAM Ratings‐Rated Sukuk (short‐term)  as at September 2009 (by value)

P2 3.1%

P3 6.0%

NP 0.7%

P2 10.5%

P1 65.8%

P1 90.2%

Total number of issues = 38 Source : RAM Ratings

Islamic Finance Bulletin Market Statistics

July – September 2009

Issue #25

Total value = RM19 billion Source : RAM Ratings 

29

TOWARDS AN INFORMED MARKET MARKET STATISTICS

Malaysian Islamic Banking Market Islamic Assets in the Banking Sector Source: Bank Negara Malaysia

18%

250,000

15.0%

200,000 12.3% 12.4%

12.6%

12.9% 12.9% 12.7% 13.1% 13.0%

13.4%

13.7% 13.6% 13.8% 13.8%

14.0%

14.3% 14.4% 14.3% 14.4%

15.7% 15.7% 15.4% 15.6%

16%

14.5%

14% 12%

RM million

150,000 10% 8%

Islamic banks' assets Islamic banks' deposits Islamic financing

100,000 6%

Market share

4%

50,000

2% 0

0% Sept  Oct  Nov  Dec  Jan  Feb  Mar  Apr  May  Jun  July  Aug  Sept  Oct  Nov  Dec  Jan  Feb  Mar  Apr  May  Jun  July  Aug  '07 '07 '07 '07 '08 '08 '08 '08 '08 '08 '08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '09 '09

Islamic Banking by Financing Concept as at August 2009

Ijarah Thumma  Al‐Bai 30.5%

Murabahah 16.9%

Ijarah 2.7% Others 14.0% Bai Bithaman Ajil 32.3%

Musharakah 1.6% Mudharabah 0.3% Istisna' 1.2%

Total financing: RM121.29 billion Source: BNM Statistics

Islamic Finance Bulletin Market Statistics

July – September 2009

Issue #25

30

TOWARDS AN INFORMED MARKET RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk Market Report Sukuk - Total Traded Amount for the Quarter ended 30 September 2009

Sukuk - Total Sukuk Outstanding (RM mil) by Class: 30 September 2009

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.

31

TOWARDS AN INFORMED MARKET RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk Market Report Sukuk New Facilities created for the Quarter ended 30-Sept-2009 Facility Code 200900027 200900050 200900049 200900048 200900045

Facility Name BNMN-IDM PRASARANA RM4.0B IMTN PROGRAMME CIMBI RM2.0B T-2 JUNIOR SUKUK PROGRAMME UMWH 10-YR RM500.0 MILLION IMTN2 MUSB RM100 MILLION AL-ISTISNA BOND

Instrument

Maturity Date

Facility Limit

BNM(LT)

31-Dec-36

250,000,000,000

MTN

28-Sep-29

4,000,000,000

BONDS

25-Sep-31

2,000,000,000

MTN

16-Sep-19

500,000,000

BONDS

20-Aug-13

100,000,000

Top 10 Sukuk Tender Result for the Quarter ending 30-Sept-2009

Stock Name

Issue Date

Maturity Date

Actual Issue

Successful Yield

Successful Price

PROFIT-BASED GII 4/2009 31.07.2014

31-Jul-09

31-Jul-14

4500

3.909

100.000

PROFIT-BASED GII 5/2009 15.03.2013

15-Sep-09

15-Mar-13

4000

3.278

100.001

BNMN-IDM 14/2009 91D 31.12.2009

1-Oct-09

31-Dec-09

1000

1.919

99.524

BNMN-IDM 13/2009 182D 16.03.2010

15-Sep-09

16-Mar-10

1000

1.998

99.014

BNMN-IDM 12/2009 91D 08.12.2009

8-Sep-09

8-Dec-09

1000

1.988

99.507

BNMN-IDM 11/2009 91D 03.12.2009

3-Sep-09

3-Dec-09

1000

1.969

99.511

BNMN-IDM 10/2009 182D 02.03.2010

1-Sep-09

2-Mar-10

1000

1.968

99.028

BNMN-IDM 9/2009 91D 26.11.2009

27-Aug-09

26-Nov-09

1000

1.921

99.523

BNMN-IDM 8/2009 91D 19.11.2009

20-Aug-09

19-Nov-09

1000

1.915

99.525

BNMN-IDM 7/2009 82D 03.11.2009

13-Aug-09

3-Nov-09

1000

1.921

99.570

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.

32

TOWARDS AN INFORMED MARKET RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk Market Report 10 Most Active Bonds Traded between 01-July-2009 and 30-Sept-2009 STOCK NAME

LAST TRADED PRICE

LAST TRADED YIELD/DISCOUNT

TOTAL VOLUME TRADED LAST QTR

PROFIT-BASED GII 3/2009 30.12.2014

100.42

3.81

4977

PROFIT-BASED GII 4/2009 31.07.2014

100.64

3.76

3796

PROFIT-BASED GII 2/2008 30.06.2011

103.33

2.42

3690

BNMN-IDM 2/2009 68D 15.09.2009

99.90

1.99

2187

BNMN-IDM 12/2009 91D 08.12.2009

99.65

1.89

1994

BNMN-IDM 11/2009 91D 03.12.2009

99.66

1.92

1908

BNMN-IDM 5/2009 86D 22.10.2009

99.71

1.92

1700

PROFIT-BASED GII 5/2009 0% 15.03.2013

100.01

3.27

1549

PROFIT-BASED GII 2/2009 13.04.2012

100.60

2.83

1335

BNMN-IDM 13/2009 182D 16.03.2010

99.06

1.98

1240

YTM Curves as at 30 September 2009

Tenure

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

LT IslmGov-GII

LT IslmQuasi GovKhazanah

1.88 1.92 2.05 2.52 3.05 3.81 3.97 4.22 4.51 4.79

2.09 2.14 2.20 2.67 3.12 3.90 4.10 4.41 4.69 4.97

LT IslmCorporateAAA

LT IslmCorporateAA2

2.25 2.57 3.07 3.48 3.89 4.45 4.87 5.32 5.74 6.16

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.

2.88 3.23 3.81 4.25 4.69 5.26 5.72 6.24 6.70 7.16

33

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 30 September 2009 YTM Matrix – Item Spread Principle: Islamic Date: 30 September 2009

Class1

Class2

3M

6M

1Y

2Y

3Y

5Y

7Y

10Y

15Y

20Y

Government

GII

1.88

1.92

2.05

2.52

3.05

3.81

3.97

4.22

4.51

4.79

Quasi Government

Khazanah

0.21

0.22

0.15

0.15

0.07

0.09

0.13

0.19

0.18

0.18

Corporate

AAA

0.37

0.65

1.02

0.96

0.84

0.64

0.90

1.10

1.23

1.37

Corporate

AA2

1.00

1.31

1.76

1.73

1.64

1.45

1.75

2.02

2.19

2.37

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.

34

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 advisers, 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  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.