In
this case, GIC, whose shareholders include the governments of the six
Gulf Cooperation Council (GCC) states, namely, Kuwait, Saudi Arabia, the
United Arab Emirates, Qatar, Bahrain and Oman, and whose mandate is to
promote private enterprise and support economic growth in the GCC
region, last week raised the RM750 million in the Malaysian market
through a 5-year sukuk issuance which has a profit payment of 4.9
percent to be paid twice a year. "We anticipate more issuers from
the GCC region following suit in tapping into non-traditional sources to
obtain long term funds," stressed Hisham Al-Razzuqi, GIC chief
executive officer in a statement.This must have been music to the
ears of the Malaysian government which through its Islamic financial
sector liberalization policies over the last few years and the
establishment of the Malaysia International Islamic Financial Centre
(MIFC) Initiative, inter alia seeks to promote Malaysia as the center
for sukuk origination and listing.The fact that GIC is a
Kuwait-based financial institution is pertinent given that Kuwait has no
sukuk law or trust laws in place and is still mired in a political
battle between the government and some factions in the National Assembly
over a draft sukuk law. Kuwaiti Islamic banking sources stress that the
draft law has been ready for some time, only the politicians seem not
to be able to have the political will to pass the legislation. The fact
that sovereign Kuwait has no urgency or any desire in going to the
market to raise funds through a debut sukuk issuance has also put a
dampener of the development of a local sukuk market in Kuwait. As such
Kuwaiti companies including The Investment Dar (TID), International
Investment Group (IIG), GIC and others have to go offshore to raise
funds through any sukuk issuance. GIC's origination strategy
comprises both conventional bonds and sukuk in the Malaysian capital
market. In 2008, the corporation issued its inaugural dual tranche
conventional bonds with tenures of five years (RM600 million or $202
million) and 15 years (RM400 million or $135 million), the first by a
GCC issuer in the Malaysian market. In fact, on Feb.16, 2011, GIC
successfully raised RM600 million ($197 million), through a 5-year fixed
rate conventional bond issue in Malaysia. Its sukuk issuance
program started in March this year through a RM600 million ($196
million) local currency five-year Sukuk Wakala bi Istithmar issuance -
the first tranche of a RM3.5 billion Sukuk Wakalah bi Istithmar Program,
which has a long-term rating of AAA assigned by the local RAM Ratings.
It was jointly managed by Royal Bank of Scotland (RBS), who was also the
adviser and bookrunner, and Maybank Investment Bank and was priced at a
yield of 5.25 percent. The 20-year program, according to GIC, will
provide the corporation greater flexibility to issue sukuk of varying
tenures of up to 10 years on a "need to" basis from time to time to fund
its general working capital requirements that conform to Shariah
principles at competitive pricing given its strong credit rating,
underscored by its strengthening credit fundamentals and improved asset
quality. The investors will provide capital as investment for their
subscription of a particular series.This latest RM750 million, which
was lead managed solely by AmInvestment Bank, is the second in the
program and is the largest issuance to date by GIC in Malaysia.
AmIslamic Bank acted as the transaction agent in order to facilitate the
commodity trading transactions through the Bursa Malaysia Suq Al-Sila'
commodity trading platform, based on the Tawarruq contract. The
promoter stressed that despite the recent uncertainties in the global
markets, the issuing pricing process was competitive and managed to come
in tighter than the issuance in March. It would be interesting to see
the pricing comparison with the conventional bonds issued by GIC in the
Malaysian market. The RM750 million issuance, which has a similar
AAA rating attracted a broad range of local investors including fund
managers, insurance companies, financial institutions and government
agencies. It was the AAA rating that enabled GIC to tap the Malaysian
market for long-term funding. The latest statistics underpin the
strong support which the Malaysian government and the SC have afforded
the development of the ICM over the last few years. The ICM totaled
RM1.07 trillion at the end of 2010, slightly lower than the conventional
capital market which reached RM1.19 trillion for the same period. The
ICM comprised RM756.1 billion in Islamic equities (mainly mutual funds);
RM294 billion in sukuk issuances; and RM24 billion in Islamic unit
trusts. Fund-raising through Shariah-compliant instruments,
according to the SC, continued to retain its popularity. The commission
approved 21 sukuk issues with a value of RM40.3 billion; which accounted
for 63.4 percent of total bond approvals in value in 2010. Fund-raising
through Shariah-compliant instruments, according to the SC, continued
to retain its popularity. The commission approved 21 sukuk issues with a
value of RM40.3 billion; which accounted for 63.4 percent of total bond
approvals in value in 2010. In its ratings rationale, RAM Ratings
stressed that "GIC's ratings remain supported by its unique position
within the GCC region, and the strong support from its shareholders.
GIC's mandate is to support the development of private enterprises and
economic growth within the GIC region. Given its strategic role, the
corporation enjoys immunity and exceptions in terms of regional
regulatory norms, including exemptions from asset nationalization,
currency controls and taxes."The corporation reported a net profit
of $151 million for 2010, surpassing the $91 million for 2009. Net
operating revenues grew by an annual 46 percent to $223 million, driven
by revenues from GIC's core business activities. Total shareholders'
equity stood at $2.12 billion at end 2010. GIC chairman, Zakaria
Ahmed Hejres, is confident that the Corporation's solid financial
strength and established regional franchise provides a platform for a
bright future growth. "GIC successfully executed important principal
investment projects in the GCC region, and completed several initiatives
that contributed to optimizing asset allocation, strengthening risk
controls and enhancing overall corporate governance," he explained in a
statement. Over the last year or so there have been several sukuk
originations which were sold in a market other than the issuer's. Kuveyt
Turk Participation Bank issued a 3-year $100 million Wakala Sukuk in
the GCC market, albeit it can now issue Sukuk Al-Ijara in its home
market given the adoption of tax neutrality legislation for the Sukuk
Al-Ijara structure by the Turkish parliament in February 2011. In fact,
the participation bank is planning a second issuance of a minimum of
$250 million but with a longer tenor, most likely 5 years. Similarly,
Emaar Properties of Dubai closed a $500 million sukuk in London. The
UK's International Innovative Technologies (IIT) privately placed a $10
million Sukuk Al-Musharaka with Millennium Private Equity Limited in
Dubai. Malaysia's Khazanah Nasional Berhad, the sovereign wealth fund,
issued a S$1.5 billion Wakala Sukuk in Singapore. Japan's Nomura
Holdings issued a $100 million Sukuk Al-Ijara in Malaysia. Other
foreign issuers that have originated sukuk in Malaysia include the World
Bank and its private sector funding arm, the International Finance
Corporation (IFC), The RM100 million Sukuk Al-Ijarah issued by Islamic
Development Bank and the RM500 million 10-year sukuk issued by the
National Bank of Abu Dhabi. However, the biggest breakthrough
potentially came in 2010 when Saudi Arabia's Al-Rajhi Bank, the largest
Islamic bank in the world in terms of balance sheet, collaborated with
Cagamas Berhad, the National Mortgage Corporation of Malaysia and
leading securitization house, to develop and launch the Sukuk Al-Amanah
Li Al-Istithmar (Sukuk ALIm), which was the underlying structure for
Cagamas's RM5 billion Islamic Commercial Paper (ICP) and Islamic Medium
Term Note (IMTN) program. This "first-of-its-kind" and "innovative"
structure was sold to investors in Saudi Arabia and is a manifestation
of Al-Rajhi's new-found strategy of bridging the gap and facilitating
cross-border activity in the Islamic capital market between Malaysia and
the Middle East.Malaysia of course originates more than 60 per cent
of global sukuk outstanding. This has generated significant
cross-border flows as funds are raised from beyond domestic financial
markets and as investors diversify their portfolios into assets from
other jurisdictions. According to the Securities Commission, between
January to September 2010, over 55 percent of all bonds approved by the
commission were sukuk.This would not have possible without the
strong support and measures introduced by the government, Bank Negara
Malaysia and the SC. Perhaps the most wide-ranging of the new measures
relating to Islamic finance came in Prime Minister Mohd Najib's 2011
budget speech. The budget, said Najib, emphasizes the transformation of
Malaysia into a developed and high-income economy with inclusive and
sustainable development, spearheaded by the private sector. A number of
strategic high-impact projects are expected to involve both conventional
and Islamic financing and investment."Efforts will be taken to
strengthen Malaysia's position as a premier Islamic capital market,"
said Najib. "To further promote innovation in Islamic securities
products, the government proposes that expenses for the issuance of
Islamic securities which adopt the principles of Murabaha and Bai
Bithaman Ajil based on Tawarruq be tax deductible with the objective of
maintaining the competitiveness of the sukuk market. This will
strengthen Malaysia's position as the leading sukuk market and promote
transactions in Bursa Suq Al-Sila, the world's first Shariah-compliant
commodity trading platform. The government proposes that Takaful
contributions for export credit be given double tax deduction." Malaysia's
capital market in fact reached a significant milestone of RM2,260.8
billion at the end of 2010, which is triple the RM717 billion size of
the capital market in 2000. Of this, the Islamic capital market (ICM)
alone exceeded RM1.07 trillion at the end of 2010, thus breaking the RM1
trillion barrier for the first time, and recording an impressive
year-on-year growth of 15.2 percent.The country's Capital Market
Master Plan 2 (CMP2), which was launched by Najib in April 2011, is also
aimed at internationalizing the Malaysian financial services industry,
and therefore the capital market, especially domestic companies
venturing cross-border to diversify investments and risks and to achieve
greater returns. "Our task now is to shift the focus of Islamic finance
from serving domestic needs toward tapping the tremendous growth
opportunities from intermediating international investments and
corporate transactions," said Premier Najib at the launch. Indeed,
the internationalization of the capital market is a necessary
pre-requisite to strengthening Malaysia's Islamic Capital Market hub -
set to increase almost threefold from RM1.1 trillion in 2010 to RM2.9
trillion in 2020. As such, according to Kuala Lumpur, CMP2 outlines
strategies to enhance the distinctive value propositions offered by
Malaysia for a broad range of Islamic intermediation activities,
including increasing its capacity to structure cross-border transactions
to make further inroads into the international sukuk market.According
to SC Chairman Zarinah Anwar, there are therefore enormous
opportunities to finance the expanding trade between the Middle East and
Asia, the value of which is growing steadily, through Islamic trade
instruments. "At the same time, capital investments among countries in
the two regions can be enhanced by the availability of Shariah-compliant
structures (such as sukuk) to deepen and broaden the capital markets in
this cluster which can then serve as a model for similar clusters to
develop within other regions as well as across regions," she added.
