Takaful: Rise in Islamic debt financing, Islamic Capital Market

Takaful: Rise in Islamic debt financing, Islamic Capital Market

By BALJEET GREWAL

 KUALA LUMPUR, MALAYSIA —IT should be recognised from the outset that the Islamic Capital Market in Malaysia is an essential element of the capital market.

Within the broader market, Islamic finance has effectively functioned as an alternative market for capital seekers and providers, at the same time playing an important complementary role to the Islamic banking and Takaful industry.

In short, the broadening and deepening of the Islamic financial market in this country has all the three strategic pillars: banking, takaful and more distinctively, the capital market.

The Islamic capital market complements the conventional market by providing value-added services that meet the needs of the market for a broad range of instruments, and have effectively mobilised and channelled funds to fuel economic growth.

The Islamic capital market accounts for a large proportion of the Private Debt Securities (PDS) market in Malaysia. In the last six years, the composition of Islamic fixed rate securities grew unabated and increased in significance.

Demand for domestic Islamic debt instruments, which accounted for only 7% of total bonds raised in 1999 grew to 25% in 2000 and subsequently to 76% in 2005, primarily due to investor awareness of alternative funding sources – Islamic instruments and the increased number of Islamic funds launched over the years.

No fewer than 45% of outstanding domestic bonds are now Syariah-compliant, especially the larger issues, and this proportion continues to grow.

The result is that Malaysia’s Islamic financial landscape has advanced in terms of diversity of instruments and its modernity, as well as boasts a dual banking model whereby a developing Islamic financial system exists in parallel to the conventional banking system.

To chart the growth of Islamic fixed income securities, total Islamic PDS (IPDS) issued since 1991 (matured and outstanding) amounted to RM147.99bil at 333 issues.

In terms of total number of IPDS issued, infrastructure/utilities and property/real estate sectors dominated at 53% and 21% respectively given the large-scale nature of these projects.

In 2006, the Malaysian bond market is expected to continue its aggressive stance with an estimated RM38bil to RM40bil worth of new debt to be issued, of which 80% of the bonds are expected to be Syariah-compliant.

A large proportion of these new bonds will be channelled to finance infrastructure projects given that 2006 is the first year of the Ninth Malaysia Plan (9MP).

Project financing via the Islamic route has gained impetus since the late 1990s. Some notable projects include Putra – Star LRT (RM1bil Istisna financing), Putrajaya Holdings (RM2.2bil Sukuk), SAJ Holdings water project (RM680mil Sukuk), toll road operators as well as other infrastructure and utilities players.

The thrust of the 9MP will continue to drive demand for Islamic project finance structures specifically in the areas of infrastructure financing for water projects, education, healthcare, roads and so forth.

Nevertheless, like all financial mechanisms that are in the emerging stages of development, the Islamic industry poses some overreaching challenges.

The main hurdle identified is in accessing long-term investors and ensuring sustainability of the Islamic industry – which can be mitigated by a greater understanding/familiarity of Islamic structures and a wider skill base.

Further to this, creating a deep and liquid secondary market for Islamic instruments through the enhancing of risk management tools and innovation of new products will ensure that standards remain adaptive and effective in riding the evolutionary waves of financial innovation.

The nature of project finance itself, which requires large funding, will enable issuers to tap a wider pool of investors here and abroad – simultaneously establishing sizeable Islamic markets and participants, leading to cheaper funding costs.

The crux however is being able to structure a deal, which is not only marketable, but also able to secure a wide distribution network.

Further prospects also exist for Islamic products in the areas of asset origination and asset management.

Following on from the theme of innovation, structures that can be explored include the gradual shift to Istisna, Ijarah and Salam based products, short-term oil and commodity linked products, equity/debt hybrids as well as internationalising distribution lines.

Continuous research and development in the areas of product development can also enhance growth in Islamic equity funds, cultivate liquidity management of assets as well as create Syariah-based equity benchmarks.

2006 will see Malaysia’s gross domestic product grow by 5.5% to 6%, with key sectoral drivers being the oil and gas industry, construction and plantations.

As such, fund raising activities will also boast Syariah-compliant structures that support activities in these key areas.

The Malaysian bond market has displayed exemplary growth with the onset of Islamic debt, thus contributing towards the resilience of the overall international financial architecture.

Note: The author is Chief Economist & Head, Research with Aseambankers Malaysia Bhd, the investment banking arm of Malayan Banking Bhd

SOURCE: http://tyo.ca/islambank.community/modules.php?op=modload&name=News&file=article&sid=3743