Going international on Islamic products


BY B.K. SIDHU

CIMB Group is expanding its reach in the Islamic financial market with a goal to becoming a predominant player given its strong market position and track record in the conventional market. 

To do that it wants to develop and distribute Islamic financial products that have international appeal for there are abundant opportunities for Islamic banking and finance businesses not just within Malaysia, but regionally and in the Middle East. 

Nazir Razak

“The first thing for us now is to win the lion’s share of the primary business in Islamic sukuk (papers/certificates) locally,” CIMB managing director and chief executive officer Nazir Razak said in an interview. 

CIMB recently set up an Islamic division with a team of five bankers, who have vast experience in Islamic banking. It is led by Badlisyah Abdul Ghani – formerly with Bank Islam Malaysia – who has over six years experience of originating and distributing Islamic products both here and abroad. CIMB also plans to set up an in-house Shariah advisory and supervisory council that would comprise scholars and experts from all parts of the world. 

But CIMB is no newcomer to Islamic banking and finance business. It began with the RM1bil project finance deal for PUTRA in 1996. Over the years it managed to garner a cumulative 15% market share of all Islamic sukuk issued in the country but Nazir felt that “CIMB did not get the market reputation it deserved.”  

Locally, it is estimated that RM40bil debt deals would be concluded this year and a large chunk in Islamic instruments given that the government has been generous with tax breaks.  

Last year about 65% or RM14bil of total private debt securities (PDS) issuances of RM22bil were Islamic. 

“With a dedicated team, we believe we are in an enviable position to increase our market share of 15% to at least 25% - 30% this year,” Nazir said, adding that last year alone CIMB successfully closed five Islamic sukuk deals. 

To kick-start its foray into the region, CIMB plans to offer its Islamic banking and finance experience to each of the neighbouring countries. Both the Singapore and Indonesian markets have begun issuing Islamic instruments the past two-years but are confined to Mudharabah Certificates. 

For its venture into the Middle East market, CIMB recently completed a road show covering Dubai, Abu Dhabi and Bahrain, where it met over 30 investors, comprising a mixture of bankers, intermediaries to investors, a few wealthy families, and high net worth individuals who are influential in that market. 

Nazir said the response was encouraging and a second trip has been planned. However, he felt that while it was not easy to get business just from one trip, CIMB would not have taken the plunge if it did not see vast opportunities there. 

CIMB also plans to establish a strategic alliance with an entity in the Middle East that could provide a gateway into that market. 

Nazir explained that the Islamic capital market refers to the market where fund raising activities are carried out in ways that are not prohibited under the religion of Islam. Therefore it is free from the involvement of prohibited activities such as usury (riba), gambling (maisir) and ambiguity (gharar). 

The Islamic capital market is one of the components of the overall capital market and plays a similar important role as other capital market components in generating the economic growth of the country.  

He said any issuer who issues Sukuk based on the principle of Ijarah (which employs the sale and leaseback structure), Musyarakah (joint venture) and Mudharabah (partnership) would be able to deduct all expenses incurred for the fund raising exercise from their taxable income for the next five years.  

However, Badlisyah felt that while the government was committed towards broadening and deepening the Islamic capital market, there was an urgent need for the authorities to address several issues surrounding the structuring of financing products based on the Islamic principles. 

“These issues, among others, relates to real property gains tax, stamp duties and income tax,” Badlisyah said, adding that due to the issues some issuers preferred to stick to the products that were readily available instead of trying new structured Islamic products. 

Distribution is also an important component to the success of an issue and the onus lies on industry players. 

“Distribution should not be confined to onshore only. The real challenge is in the ability to be intermediary to onshore and offshore and if CIMB proves to be a good distributor of Sukuk then we can make a mark in the Islamic capital markets,” Nazir said. 

But what products would appeal internationally? 

For one, the US$600mil global Sukuk issued by the government last year was a hit.  

The Baharin Monetary Agency just issued a sukuk last month and the Islamic Development Bank in Saudi Arabia is planning a US$300mil global Sukuk this year. 

“There is certainly room for more issuances this year, not just in Malaysia, but in South East and the Middle East, and these are markets we seriously want to tap into,” Nazir said. 

“It is also important to note that Islamic finance can be as flexible as conventional finance. Initially everyone thought that zero coupon bond issues (BBA Papers) were the best but we now know that the Sukuk can also be coupon bearing notes (Ijarah).” 

CIMB is also looking at the existing range of conventional products to design them into Islamic versions.  

Last year, CIMB launched its CIMB Muamalat Fund – the first Islamic private equity fund in Asia – and the response has been encouraging. This product would be extended to the Middle Eastern market soon. 

But then not all Islamic products available in the local market except the Sukuk Al-Ijarah was widely accepted in the Middle East.  

There is a debate over the Syariah compliance issue but Nazir said CIMB would only create products meant for the international market place after taking the Middle East investor's preference. 

“There is also no real boost to the Islamic capital markets without the Middle Eastern money so it is a matter of patience, endurance and going through the protracted convincing process (for them to begin investing in our Islamic instruments),” Nazir said. 

Nazir also felt that the International Offshore Financial Centre (IOFC) should perhaps be moved out of Labuan to Peninsular Malaysia for it lacked the critical mass of activities and people to grow. 

He said there was better accessibility and generally better conditions for international banks to operate in the Peninsular.  

He even suggested Johore as a location for it provided an environment where an IOFC could “compete with and complement Singapore.”  

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