RAM Ratings assigns top rating to Wego’s proposed Sukuk

Substantial comfort is derived from a Performance Guarantee (PG) of up to RM210 million extended to the Sukuk holders by United Overseas Bank (Malaysia) Berhad (UOBM) (rated AAA/Stable/P1), effective during the construction period. Under the PG, UOBM irrevocably and unconditionally undertakes to pay the nominal value of the Proposed Sukuk following the occurrence of an Event of Default, which includes the failure to complete construction within the stipulated time frame of up to 24 months from the construction commencement date. The PG largely protects sukuk holders against the adverse effects of any construction delays, which would otherwise constraint the rating.

The preliminary rating is further supported by Wego’s superior debt-servicing ability. Backed by a predictable stream of Repayment Charges (RC) amounting to MYR 25.92 million per annum, the Company is expected to sustain strong stressed minimum and average finance service cover ratios of 1.80 times and 1.89 times, respectively, throughout the tenure of the Proposed Sukuk. The tight financing structure and restrictive covenants of the transaction as well as the absence of operating risk further minimise potential cashflow leakage. Elsewhere, counterparty risk is deemed low as the obligor of concession payments is the Perak State Government, which has a counterparty rating of AAA under RAM’s methodology for rating Malaysian state governments (published in June 2014). 

 

However, timeliness is a key risk factor post-completion, as Wego will rely heavily on annual concession payments from the State to meet its obligations in respect of the Proposed Sukuk. Teething problems at the initial stage of payment are common and could delay the disbursement of RCs. The transaction is also exposed to the risk of termination of the CA. Non-performance on the part of either Wego or the State will result in the termination of the transaction, which will disrupt contractual payments from the State and affect the Company’s ability to meet its obligations under the Proposed Sukuk. That said, the risk of non-performance by Wego is low as there is no requirement for operating or monitoring the schools post completion.

In addition, RAM notes the possibility of early prepayment by the State Government. Under the CA, the State Government has the option to settle concession payments ahead of the 15-year period, on a lump-sum basis. Based on our calculation, we note that the sum, which is equivalent to the present value of all future RC payments, will always be MYR 50 million more than the total outstanding principal at any point of time. In such an event, Wego is required, under the covenant, to use the entire sum to redeem the Proposed Sukuk before any payments relating to construction cost can be made.

Prior to inking the CA, Wego, a licensed contractor, had undertaken and tendered for construction jobs. Going forward, the Company will cease to take on new jobs and focus solely on the Project. Accordingly, the covenants of the Proposed Sukuk require Wego to novate all other future projects.

(C P I Financial / 09 December 2015)

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Islamic Finance Institute Goes Global to Fill a Skills Void in $2 Trillion Industry

A Malaysian institute set up seven years ago to improve education standards for Islamic finance professionals is going global as it seeks to fill a void of experts with specialties such as insurance and law.

The Chartered Institute of Islamic Finance Professionals in Kuala Lumpur aims to increase membership of qualified practitioners to 3,000 in three years, from 400 now, Badlisyah Abdul Ghani, its president and former chief executive officer of CIMB Islamic Bank Bhd., said in an interview. The CIIF, which changed its name and geographical focus in 2015, is in talks with associations and regulators stretching from the Middle East to Indonesia as part of that campaign, he said.

The $2 trillion industry has long been plagued by a shortage of individuals who have studied beyond the prerequisite skill base and CIIF plans to start offering specialized courses next year to address the problem, which is hindering development, Badlisyah said. The Kuala Lumpur-based Finance Accreditation Agency estimates 56,000 more qualified experts will be needed to fill positions in the next five years as growth accelerates.

“There is a lack of accepted global standards for professional qualifications -- similar to accounting -- the absence of which has created differences in talent skills requirements across jurisdictions,” said Daud Vicary Abdullah, CEO of the International Centre for Education in Islamic Finance in Kuala Lumpur. “The industry is still at a nascent stage where talent development and planning are concerned.”

Common Standard

CIIF was formerly the Association of Chartered Islamic Finance Professionals, which was established in 2008 and whose intake was mainly graduates from Malaysia’s INCEIF. The newly formed institute will help promote members globally and aims to provide a common standard of education acceptable in the various countries offering Shariah-compliant products, Badlisyah said.

The standards and codes of conduct issued by CIIF will be recognized and adopted under the Islamic Finance Profession Charter, which was signed by key Shariah-compliant associations in Malaysia, Badlisyah said. The guidelines will extend to other qualified leading organizations such as the Bahrain-based General Council for Islamic Banks and Financial Institutions and the Indonesian Syariah Banking Association if they sign up, he said, adding that they could eventually be made a requirement across the board.

Asset growth in an industry where interest payments are forbidden showcases the need for trained professionals, with the Kuala Lumpur-based International Shariah Research Academy forecasting a $3 trillion market by 2018.

Mandatory Programs

Sales of Islamic bonds known as sukuk, which scholars need to vet for conformity with religious laws, have climbed to above $45 billion in the past three years, compared with less than $10 billion a decade ago, data compiled by Bloomberg show. Takaful contributions, the equivalent of conventional insurance, are expected to reach $20 billion by 2017 from $14 billion in 2014, according to Ernst & Young LLP.

There’s still a gap in the market for trained experts even as the range and selection of courses expands around the world. There are essentially two types of Shariah professionals, said Abdul Rahman Mohd Yusoff, head of the Shariah department at OCBC Al-Amin Bank Bhd. and also a CIIF member. There are those with a degree in pure Shariah law or Fiqh, or those with an equivalent degree in commercial and business aspects known as Muamalat, he said.

On the other hand, there also graduates with Bachelor’s degrees in non-Islamic disciplines who supplement them with qualifications in Shariah-compliant finance such as Ph.D’s or certificates from other accredited organizations, Abdul Rahman said.

“This makes the degree in Islamic finance an add-on rather than the primary one that will govern their future, lessening the pressure on them to go the extra mile to achieve the qualification,” said Abdul Rahman at the Islamic unit of Oversea-Chinese Banking Corp., Southeast Asia’s second-biggest lender. “To address the shortage, it might be useful to make it mandatory for all staff handling Islamic finance products to sit for at least the certification courses.

(Bloomberg Business / 10 December 2015)

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Turkish gov’t commences prep work to launch Islamic banking coordination mechanism

Deputy Prime Minister Mehmet Şimşek has said preparatory work to launch a coordination mechanism for Islamic banking in Turkey have started, and the related circular note has recently been sent to the Prime Ministry. 

Şimşek particularly stressed the rising popularity of interest-free Islamic banking, dubbed “participation banking” in Turkey, around the world since the 2008 financial crisis. 

“Britain performed its first sukuk export worth 200 million pounds in June 2014. TheCityUK group launched its ‘Secretary on Islamic Finance’ in 2011 to coordinate and support the development of Islamic finance. The Islamic Finance Task Force [IFTF] in the U.K. was established in 2013 with the aim of making the county an Islamic finance hub and to lure further investments in this field, so Britain aims to be a hub in Islamic finance,” he said. 

“Luxembourg has the largest Islamic finance investment funds among non-Muslim countries with its 5 billion euros of funds, following Saudi Arabia and Malaysia,” he added, as quoted by Anadolu Agency. 

Şimşek also stated that Russia’s Sberbank had earlier announced that it would launch Islamic finance services in its own country. 

“Turkey has had one of the highest potentials in developing alternative banking activities in addition to traditional banking. In order to be able to realize this potential, new additional initiatives need to be created in addition to existing ones,” he said. 

The development of Islamic financial instruments and the launch of the mechanism for coordination are one of the priorities of the 64th Government Program and the 10th Development Plan, he added. 

Şimşek noted that preparation has started in order to establish this coordination mechanism. 

(Daily News / 07 December 2015)

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Sukuk demand poised to outstrip supply by $253.7 billion in 2020

In spite of high demand for new sukuks, issuances had slowed down due to the persistent uncertainty, according to findings of Thomson Reuters-Barwa bank Sukuk Perceptions and Forecast study.

However, sukuk market players are optimistic for another robust year but. The global sukuk market in 2015 welcomed significantly fewer new issuers compared to 2014.

Total sukuk issued in the first nine months of 2015 dropped a drastic 38.6 per cent to $48.8 billion from $79.5 billion for the same period in 2014. The sukuk papers were also issued in 12 currencies in first nine months of 2015 compared to 16 over the same period in 2014.

Islamic finance analysts said the drop in oil prices has failed to dent investor appetite for Islamic bonds as markets across the region have ample liquidity to meet credit demand at competitive pricing. They said global sukuk market is expected to sustain the upward trend in 2015 and will reach $145 billion compared to $116.4 billion last year. The World Bank also estimates that sukuk represents approximately 15 per cent of the $1.8 trillion in global Islamic assets, growing at around 20 per cent annually for the past five years.

Nadim Najjar, managing director for the Middle East and North Africa at Thomson Reuters, said the global sukuk market in 2015 has dropped in terms of volume.

"We understand that the volatility in global markets has made the issuers more cautious with their funding decisions, as a result the volume has substantially dropped. Apart from market conditions, the decision by Bank Negara Malaysia to cut short term sukuk also resulted in further drop in sukuk issuance," said Najjar.

"As we have mentioned last year, the debutante sovereigns and corporates of 2014 may not continue to tap the sukuk market in 2015 and it did not, but the outlook remains stable and growth is forecasted for the upcoming years. With a strong pipeline of $32 billion from issuers in different countries and sectors, the sukuk market is forecasted to grow by 15 per cent in 2016," he added.

The report found that the potential demand and supply pipeline of sukuk is expected to grow.  Despite this increase, demand is still expected to outstrip supply substantially until 2020 reaching $253.7 billion.

Initially, the gap between supply and demand is forecasted to be $115.9 billion in 2016, increasing to $145.6 billion in 2017 as demand is growing faster than supply. It is expected that supply to increase in 2016 by 15 per cent as governments of oil-exporting countries start issuing sukuk to cover their deficits.

This growth will then slide down to eight per cent in 2017 and steady growth will settle in for the following three years - from 2018-20 - to be in line with the expected growth of Islamic financial assets.

The report argues that in the era of low oil prices and anticipation of increasing interest rates the outlook for the global sukuk market remains positive.

The drop in oil prices is a double-edged sword; many oil-exporting countries, such as Bahrain and Saudi Arabia, have started considering sukuk as a source of funding to cover their budget deficits. At the same time, the oil price drop could hurt their credit ratings; this has already happened.

(Khaleej Times / 04 December 2015)

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Malaysia, Bahrain and UAE lead growth in Islamic finance

Among the GCC countries, Bahrain maintained its second position globally, while the UAE switched positions with Oman to come third, with the latter dropping to fourth. Saudi Arabia, which is the world's second biggest jurisdiction in terms of Islamic finance assets, jumped to sixth from ninth overall, said the report released by Thomson Reuters and Islamic Corporation for the Development of the Private Sector.

The report, which was released for the third consecutive year, examines the key statistics and trends across five indicators that are deemed to be significant for measuring the development of the $1.8 trillion Islamic finance industry. These include Quantitative Development, Knowledge, Governance, Corporate Social Responsibility and Awareness. These indicators are tracked across 108 countries, which had contributions in all or some of these indicators.

Pakistan, Jordan, Hong Kong, India, Botswana and Ivory Coast are some of the countries that have demonstrated positive movements in the IFDI 2015 ranking.

"As the leading Islamic finance institution supporting private sector development across the Islamic world, we recognise that the industry requires effective holistic measures to focus our efforts to facilitate and ensure inclusive financial sector development," said Khaled Al Aboodi, CEO of ICD.

In 2014, global Islamic finance assets climbed to $1.814 trillion, representing a 9.4 per cent rise from $1.66 trillion in 2013.  This increase was driven by strong growth in all sectors - Islamic banking, takaful, sukuk and Islamic funds. The value of assets in the Islamic finance sector is expected to increase by 10 per cent per annum over the next five years, reaching $3.24 trillion by 2020.

"The Islamic finance industry has demonstrated tremendous growth over the last few years. We have seen the industry develop a conducive eco-system that made it possible for many countries to enter this space. Currently, there are more than 1,000 Islamic financial institutions most of which are located in the GCC and Southeast Asia and we expect this  number to increase significantly in the next decade," said Nadim Najjar, Managing Director, Middle East & North Africa, Thomson Reuters

The number of Islamic finance degrees and courses as well as research papers increased in 2014, with 2013 leaders Malaysia, Bahrain, and Jordan retaining their leadership positions on the Knowledge Indicator for 2014.

Some 378 institutions offered Islamic finance education in 2014. Malaysia and UK lead 36 countries that offer Islamic finance degrees, with 141 institutions offering Islamic finance courses.

Bahrain and Malaysia maintained their respective first and second positions on the overall Governance indicator, which considers three factors: Regulations, Corporate Governance, and Shariah Governance. There remains a huge gap between the two leaders and the rest of the countries.

Bahrain, Malaysia, Pakistan, Nigeria, and Indonesia are the jurisdictions with the most complete set of Islamic finance regulations. These are the jurisdictions providing best practice models for Islamic finance governance, and which are considered as models by new markets such as France, Germany, Ghana, and Russia.

(Khaleej Times / 04 December 2015)

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Tabung Haji To Gain RM579.2m From Bandar Malaysia Sukuk

Lembaga Tabung Haji (LTH) is expected to gain RM579.2 million from its RM920.8 million investment in 1Malaysia Development Bhd’s (1MDB) Bandar Malaysia sukuk issuance in February 2014, said Prime Minister Datuk Seri Mohd Najib Razak.

“To date, the fund had received RM7.85 million in returns according to schedule without any delay,” Najib, who is also the finance minister, said in a written reply in Parliament yesterday.

He was answering queries from Kota Tinggi MP Datuk Noor Ehsanuddin Mohd Harun Narrashid who wanted details on Tabung Haji’s investment in the Bandar Malaysia sukuk.

“The pilgrims’ fund invested in the Bandar Malaysia sukuk in two tranches and is expected to gain returns of 5.85% and 6.05% per annum for the period of seven and 10 years respectively,” said the premier.

1MDB sold RM2.4 billion worth of Islamic bonds to finance the construction of replacement facilities for the existing Sungai Besi Air Force Base to pave way for the proposed Bandar Malaysia development.

AmInvestment Bank Bhd had advised on the sale of the sukuk and was not rated by credit-rating firms.

LTH defended the investment as it was secured against parcels of land in Bandar Malaysia with security cover of at least 1.67 times.

Meanwhile, Najib said from January-September this year, the government has used RM18.6 billion for coupon payments to bond and sukuk holders.

Of the total, some RM400 million was paid for local issuance of bonds and sukuk while the balance was paid for offshore issuance.

Throughout last year, some RM22.6 billion was paid as coupon payments for bonds and sukuk, of which RM22.1 million was paid for local issuance, said Najib.

In May, LTH said at the end of the investment in Bandar Malaysia, it will receive a total proceeds of RM1.55 billion, resulting in a RM626.5 million profit.

(The Malaysian Reserve / 02 December 2015)

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Islamic finance ‘can boost investment in Mediterranean’

Islamic finance is emerging as one of the main tools for further economic development in the Mediterranean region, a panel of experts said Nov. 27.

Speaking at the 3rd Mediterranean Islamic Finance Forum at the 9th Mediterranean Week of Economic Leaders in Barcelona, experts said Islamic finance provides an alternative source of funds that could help financial institutions broaden their sources of funding.

Experts in the banking sector at the forum said that though the volume of Islamic finance has grown steadily, there are many challenges for Islamic finance, including the deteriorating global economic environment, lack of product awareness in the industry, technology risk, liquidity risk and legal and tax issues.

Marcos Eguiguren, the executive director for the Global Alliance for Banking on Values that was established seven years ago by several global banks, said no economic activity makes sense if serving people and society is not its main goal.

“Islamic banking is based on values. We should build bridges between value-based and Islamic banking,” Eguiguren said.

Pablo Moreno, head of Financial Organizations and International Relations of the Spanish Central Bank, said Islamic finance has grown 5 percent since 2008, faster than normal banking.

“Islamic finance is useful for infrastructure finance and for financing SMEs [small- and medium-sized enterprises]. Spain is highly dependent on SMEs for employment and growth. We face challenges in financing them, and, despite many attempts by EU to help, it is still not enough,” Moreno said.

Moreno said there are regulatory challenges for Islamic finance. “There is a need for greater harmonization of regulations that govern Islamic finance around the world,” he added.

Experts estimate Islamic finance currently manages assets of $2 trillion globally, an amount that is projected to increase to $6.5 trillion by 2020.

However, the decline in oil prices means that governments and companies in the Middle East --which represents about 40 percent of Islamic finance in terms of assets-- will have less to invest in Islamic financial products, according to a report by credit agency Standard & Poor’s (S&P) released on Oct. 19.

(Daily News / 04 December 2015)

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