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Tuesday December 1, 2009
By DALJIT DHESI
PETALING JAYA: The debt payment crisis of conglomerate Dubai World will not adversely affect the Islamic finance industry in Malaysia as it has limited exposure to the sheikhdom’s debt, according to industry observers.
CIMB Islamic Bank Bhd CEO Badlisyah Abdul Ghani said the situation in Dubai was purely a credit issue and applicable for both conventional interest-based and Islamic capital market in the Middle East.
Credit issue was not exclusive to Islamic capital market and the problem Dubai was facing had no bearing on the structure of the sukuk market or its instruments in particular, he said in an email reply to StarBiz.
“What’s happening in Dubai has no impact on Islamic finance in Malaysia as Malaysian Islamic banks are not exposed to the Dubai market, with most concentrating on doing business in Malaysia only or regionally in South-East Asia. If (there is) any, exposure would be extremely insignificant,” he added.
The Malaysian Islamic finance industry, he said, was unparallelled in terms of depth and sophistication and had gone through two major global financial crises with one involving Malaysia directly and emerged practically unscathed both times.
Ernst & Young Advisory Services head of assurance Abdul Rauf Rashid agreed, saying that there was limited direct implication to the local financial industry as not many investors were directly exposed to Dubai or papers issued by organisations from the Gulf Cooperation Council (GCC) countries.
In response to a query, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said: “The Malaysian conventional and Islamic banks have limited exposure to Dubai and the recent development has not had an impact on their operations.
“The fundamentals of the banking system remain strong and continue to support the economic recovery process.”
A banking analyst from a foreign research house said the exposure of banks in Malaysia to Dubai World’s bonds or other assets was minimal and would not derail earnings momentum.
Another banking analyst with an investment bank said it was yet to determine the extent of the exposure of Dubai World’s assets to banks in Malaysia, but believed it was limited. “Banks have yet to get back to us on their asset holdings of Dubai World or its subsidiaries. (We) need to wait and see, but it should not be alarming.”
The emirate recently announced it would delay payment of US$59bil in debt held by government controlled holding company Dubai World and its property arm Nakheel, which sent the global markets reeling.
RAM Rating Services Bhd head of financial institutions ratings Promod Dass felt Islamic finance and the sukuk market in Malaysia were in a strong position as the sukuk market was a proven fund-raising platform for corporates, government-related entities and the Malaysian government.
Macquarie Equities Research said in a note it saw potential for small balance sheet hits among Asian banks (smaller Hong Kong and China banks most likely), especially those that bought related debt but the impact was likely to be relatively insignificant.
Promod felt the Dubai World crisis was a credit issue and not related to the nature of the financing instrument, be it sukuk or conventional funding.
Investors were clear about this and therefore there was no direct implication on Islamic finance here, he noted.
HSBC Bank Malaysia Bhd deputy chairman and CEO Irene Dorner in a statement said: “HSBC Bank and our Islamic subsidiary HSBC Amanah continue to focus on growing our business here in Malaysia.
“Bank Negara has put in place a strong regulatory framework, including for Islamic finance, which serves as a strong foundation for continued growth of the banking and financial sectors.”
HSBC Group chief executive Mike Geoghegan said although its business in the Middle East represented only 2% of the group’s balance sheet, it nonetheless was an important and a high-potential part of HSBC’s international business mix and a region it was completely still committed to.
On the possibility of downgrades of local sukuk amid the Dubai World debt debacle, Malaysian Rating Corp Bhd CEO Mohd Razlan Mohamed said credit ratings were lowered whenever the rating agency believed the likelihood of default had risen with a particular issuance.
Dubai World’s credit challenges were mostly country- and borrower-specific and as such, should have no rating implications for the domestic sukuk universe, he noted.
He added that the current global economic downturn was a common factor for heightened vulnerability of credit quality for sukuk issuances.
Hence, further downgrades or even defaults remained a possibility for local sukuk issuers depending on how well their business fundamentals were able to withstand the present economic challenges, Razlan said.
He also denied there was a possible loss of confidence among investors for local Islamic finance, saying that investors had become more familiar with Islamic financing concepts and understood that credit risk was an “indispensable part of the equation”.
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