More Islamic products seen in the market


This is the second in a series of articles on CIMB's venture into Islamic banking. The first was published on March 10

THE Islamic capital markets offer a range of products with an international appeal to suit the financial needs of issuers, but most Malaysian issuers have not bothered to venture beyond the Bai Bithaman Ajil (BBA) (deferred payment sale) type of issuance such as BBA Islamic debt issuance (BaIDS) or the Murabaha commercial paper/medium term notes programme. 

To them, trying new products is akin to moving to uncharted territories even though the benefits are better.  

One such product is the Sukuk Al-Ijarah where issuers can get tax breaks for the fund-raising expenses for five years from date of the issue.  

Badlisyah Abdul Ghani

Yet this is rarely issued. Tax breaks are also available for issuing Mudharabah and Musyarakah papers. 

In fact, the Malaysian government was the prime mover of Sukuk Al-Ijarah, following the success of Kumpulan Guthrie's global Sukuk issue. So far, no other party has issued it in the local market although that is a product that gained Malaysia international acclaim.  

The government raised US$600mil, which was arranged by HSBC, while Guthrie raised US$150mil arranged by Bank Islam. 

Clearly, there are vast markets internationally for Islamic products and the government is keen that Malaysia become a centre in this region for Islamic products. 

According to Badlisyah Abdul Ghani, head of Islamic banking at CIMB Bhd, Islamic capital market products under the syariah principles of BBA, Murabaha and Istisna’ are commonly used here.  

They are popular because the structuring of these products is thought to be less tedious than structuring other Islamic instruments.  

However, Badlisyah said, this was a misconception. 

After spending six years in the promotion and structuring of Islamic products, he stated that there were other Islamic products that could be done in Malaysia which commanded international appeal such as: 

  • Sukuk Al-Ijarah (trust certificates with an underlying sale and leaseback); 

    lSukuk Al Istismar (trust certificates with an underlying agency); 

  • Mudharabah ABS (Islamic asset backed securities); 

  • Ijarah CP (asset based commercial papers); 

  • Istisna'-Ijarah Sukuk (project financing); 

  • Salam papers (advance payment sale); and 

  • Musyarakah papers (joint venture). 

    Badlisyah pointed out that the Mudharabah or Musyarakah papers were deemed quasi equity, an element fixed income investors did not normally take. 

    “So what we can do to alleviate this risk is to do it with an underlying Istisna’ and/or Ijarah that will provide certainty on the return to investors,” he said. 

    In fact, the issuers of Islamic securities are not necessarily Muslims. 

    According to Badlisyah, anyone who wishes to do financing free of riba (interest) can engage in Islamic way of financing be it from a commercial banking or the capital market point of view. 

    In Malaysia, Lembaga Tabung Haji, takaful companies and Islamic banks are some of the traditional buyers, but other portfolio managers are also taking a serious look at Islamic papers.  

    Generally, issuing Islamic securities will attract a wider investor base at both primary and secondary levels. 

    “The mix of investors found in the Middle East is the same as Malaysia, both the conventional and Islamic investors. Some prefer Islamic products whilst others stick to conventional ones, and some are indifferent.  

    “So it is not true to say that in the Middle East, investors prefer Islamic products when the same investors go for conventional products as well.  

    “The Middle East Islamic banking and finance market is fast growing and we believe that is a new growth market for us and we want to tap it,'' Badlisyah said. 

    He and his team have made several exploratory trips to the Middle East, mainly to Bahrain, Dubai and Abu Dhabi. Their next trip would include Saudi Arabia, Kuwait and Qatar. 

    This is the first in a series of articles on CIMB's venture into Islamic banking.:Going international on Islamic products 

    Related story:Understanding the difference in Islamic and conventional products

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