Category Archives: Malaysia

Bringing Islamic finance back to its roots in a regulated manner

Bringing Islamic finance back to its roots in a regulated manner



Islamic Finance is in vogue. Various financial centres around the world are vying with each other to assume the mantle of pre-eminence in Islamic finance, challenging upstarts with a wider variety of Islamic finance and product “innovation”

In the Gulf, Bahrain has tried to develop such a niche, while Malaysia has been a pioneer in the Far East. But it is London, with five licensed Islamic finance institutions, that has been making the running, and the finance institutions located in that city have been vigorous in lobbying the UK government to treat Islamic finance products on a par with non-Islamic offerings.

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U.S And Malaysian Banks Can Join Forces In Islamic Financial Services

U.S And Malaysian Banks Can Join Forces In Islamic Financial Services

International Trade and Industry Minister Tan Sri Muhyiddin Yassin called on American bankers Monday to join forces with their Malaysian counterparts in the area of Islamic financial services.

Urging them to cooperate to enter markets in Asean and the Middle East, Muhyiddin said demand for Islamic financial products and investments was increasing, especially in the Middle East.

In addition, demand for such products was also on the rise in the non-Muslim economies in the West, he said at an investment seminar here.

The Malaysia-US Business Opportunities seminar, attended by about 200 representatives from the business sector, was held in conjunction with a trade and investment mission led by the minister.

Covering Detroit and New York in one week from May 13, the 46-member mission comprises government officials and representatives of the private sector. “Malaysia is keen to capitalise on these growth trends and has since positioned itself as an international hub for Islamic banking,” Muhyiddin said.

He said Islamic finance has evolved to become an integral part of the international financial system and was now being offered in more than 75 countries with an asset size of over US$1 trillion (US$1.00=RM3.25).

“It is envisaged that by 2010, Islamic banking will constitute more than 20 percent of the global Islamic banking,” he added.

Muhyiddin also said that Malaysia has been cited as a model for good governance and has one of the most extensive and effective regulatory Syariah and legal framework for Islamic banking and finance.

He also encouraged American businessmen to source halal products from Malaysia as well as to explore new market opportunities with their Malaysian counterparts.

The minister said Malaysian halal products were gaining international recognition and they were able to meet stringent benchmarks such as Hazard Analysis Critical Control Points (HACCP) and Good Manufacturing Practices (GMP).

Malaysia has distinct advantages in the supply of halal products, he said. On another note, Muhyiddin said Malaysia’s trade with the United States increased four-fold to US$43.4 billion in 2007 from US$9.9 billion in 1990.

Malaysia’s total trade with the US, through the Port of New York and New Jersey in 2007, was valued at US$2.4 billion, up by 20 percent compared with US$2 billion in 2006.

New York, the last leg of the trade and investment mission, is the leading centre of banking, finance and communications in the US.

Toyota considers Shariah bond to help Malaysian business

Toyota considers Shariah bond to help Malaysian business

Toyota is considering issuing a bond that complies with Islamic law to help its expanding business in Malaysia, a company spokeswoman said.

The Malaysian financial authorities have given UMW Toyota Capital, based in Petaling Jaya, Malaysia, permission to issue up to 1 billion Malaysian ringgit, or $312 million, in Islamic bonds.

Under Shariah, or Islamic law, interest is banned and purchasers of Islamic bonds, or sukuk, instead would receive a dividend from UMW Toyota Capital.

“We are looking to issue Islamic bonds with a view to expanding our loan and lease business in Malaysia,” said Mio Sugito, an assistant manager at Toyota Financial Services. “We are considering when to issue, and could go ahead as early as this month.”

The company began offering Islamic loans in Malaysia in November 2005, and it started leases in August 2007, using cash borrowed from banks under Islamic law.

Apart from reducing the dependence on bank loans, the move would make it easier for local people to take out a loan with the company, Sugito said.

These loans and leases make up about 15 percent of Toyota’s total of ¥50 billion, or $484.6 million, in loan and lease business in Malaysia, and Sugito estimates Toyota’s business in Islamic finance could expand to approximately 20 percent of all business “over the next year or two.”

This would be the first time Toyota has raised money using Islamic finance.

The Malaysian unit of AEON Credit Service issued a series of Islamic bonds in 2007, and other companies are expected to follow to answer the religious and social needs of an expanding Islamic middle class in countries like Malaysia and Indonesia.

Oil exports rose significantly from 2002 to 2006 in the area, and rising prices for crude oil have made the Middle East a lucrative source for companies and organizations looking to raise cash.

Sukuk issues rose from $800 million in 2002 to $20.5 billion in 2006, with an outstanding issuance of $50.5 billion as of the end of 2006.

Total worldwide assets of Islamic financial institutions exceeded $250 billion as of December 2005 and are growing 15 percent annually, according to the International Monetary Fund.

UMW Toyota Capital is 70 percent owned by Toyota Financial Services of Nagoya, Japan. Toyota Financial Services is the finance arm of Toyota Motor. The Malaysian financial services provider CIMB Group is set to be lead manager of the bond issue.

Credit crisis delays new plant

A senior Toyota executive said Monday that plans for an auto assembly plant in Mississippi were being delayed by the U.S. credit crisis and worries about U.S. auto sales, The Associated Press reported from Tokyo.

The vehicle assembly plant, being built in Blue Springs, Mississippi, had been expected to be running in late 2009 or early 2010, said Toyota Motor’s executive vice president, Mitsuo Kinoshita.

That date has been changed to mid-2010 after Toyota reviewed the plans and considered the slowdown in the U.S. car market after the subprime mortgage crisis, Kinoshita said in Tokyo.

“We made adjustments within a certain range of time,” he said. “The change wasn’t that critical.”

Toyota had been on a roll with its small cars and gas-electric hybrids as oil prices rose.

But the company expects rough months ahead because of an expected decline in U.S. sales and a weak dollar that will lower the value of its overseas earnings.

Last week, Toyota forecast that for the financial year ending March 31, 2009, its annual sales will drop for the first time in nine years and its profit will decline for the first time in seven years.

Toyota’s list of problems is growing and includes rising material and energy costs and a stagnant auto market in Japan.

Malaysian Islamic banks avoid sub-prime hit

Malaysian Islamic banks avoid sub-prime hit

None of Malaysia’s Islamic banks have been hit by writedowns resulting from the U.S. subprime crisis, and the resulting global credit crunch has spurred greater interest in Sharia-compliant financing, Malaysia’s second finance minister said on Monday.

“There is a feeling that the way Islamic finance is structured — the lack of freedom in leveraging, the need for real assets — that there will be some who will find Islamic financing interesting,” Nor Mohamed Yakcop said at the Reuters Islamic Finance Summit.

Holders of sukuk or Islamic bonds, who are paid returns derived from underlying assets instead of interest, have been shielded from the worst effects of the subprime mortgage meltdown which have hit the conventional banking sector, the minister said.

He said interest in financial instruments that comply with Islamic prohibitions against investing in sectors such as alcohol, pornography and gambling was starting to emerge in China and South Korea, adding that officials from Hong Kong had consulted with Malaysia on Islamic finance.

Non-traditional players, facing credit tightening from their usual sources of borrowing, are reported to be looking to tap into demand from the world’s 1.3 billion Muslims who are keen for Sharia-compliant financial assets.

A Deutsche Bank executive told Reuters that it was helping U.S. and Canadian firms to sell Islamic bonds in Malaysia this year worth between $300-500 million in ringgit.

“Sukuk has now become a very popular product,” said Nor Mohamed, adding that he was not aware of any potential issuance from North American companies.


Nor Mohamed said Malaysia had about 76 percent of outstanding sukuk in the world but was on the lookout for ways to develop the Islamic financing industry through new products such as Sharia-compliant hedging instruments.

Malaysia issued the first international sukuk in 2002, raising $600 million, but the minister said the country had no plans to launch one this year as it has ample domestic liquidity.

“If we think we are breaking new ground, we will issue a new international sukuk bond (this year),” Nor Mohamed said, adding that the Malaysian Treasury and its state investment arm Khazanah Nasional Berhad could be sources of such innovation.

The minister also ruled out an easing of the country’s currency controls, which some investors say limit the growth of Malaysia-issued Islamic bonds.

Nor Mohamed noted that the flow of investment from Asia to the West as a result of the subprime crisis was the reverse of what happened during the 1997 Asian financial crisis.

“This is a healthy sign of growing interdependence in the world,” he said.

But he said Malaysia would not follow the footsteps of neighboring Singapore, whose sovereign wealth funds have taken high profile stakes in Western financial institutions such as UBS AG and Citigroup.

“We are not in talks with anyone. Malaysia does not have a sovereign fund the size of Singapore’s or those in the Middle East,” he said.

Indonesia’s Legal Snags Stymie Islamic Finance

Indonesia’s Legal Snags Stymie Islamic Finance

With 200 million Muslims, more than in any other country, Indonesia is still struggling to make a success of Islamic finance, which it could use to raise money for much-needed roads, ports and power stations.

Reasons for that underperformance go back two centuries.

In 1816, Britain ended its brief control of Indonesian territories and ceded them to the Netherlands as it had agreed to do once Napoleon Bonaparte was defeated.

While any manner of colonial rule is morally repugnant, from a purely economic perspective Indonesia was unlucky to become a Dutch colony and thus miss out on the common-law tradition that its neighbors Malaysia and Singapore got from the British. What has all this to do with Islamic finance?

A lot. Take a sukuk, or an Islamic bond. It’s the fastest- growing segment of the $700 billion Islamic finance industry. Moody’s Investors Service expects issuances globally will increase 30 percent to 35 percent this year compared with 2007.

Setting up a sukuk al-ijara — a popular, leasing-type product — requires the issuer to transfer the usufruct — or the beneficial ownership of an asset — to a special-purpose vehicle. The SPV pays the issuer by selling sukuk certificates to investors, who earn a share of the lease rentals rather than interest, which is prohibited in Islam.

In Indonesian law, there’s neither an explicit acknowledgement of usufruct nor formal recognition of a company set up purely as a financing vehicle.

Indonesia Versus Malaysia

How does one do sukuks in Indonesia then? There have been a few domestic, corporate sukuk issuances in Indonesia; however, a product that’s acceptable to global investors will need more legal clarity.

Contrast this state of ambiguity with Malaysia, a common-law jurisdiction where SPVs can be easily set up as trusts and where courts accept the difference between beneficial and actual ownership. In Malaysia, almost 13 percent of banking assets are compliant with Shariah, or Islamic law, compared with less than 2 percent in Indonesia.

Sukuk issuances trumped sales of conventional bonds in Malaysia last year. With no difference in taxation, highest-rated companies in Malaysia can save as much as 25 basis points by issuing sukuks instead of bonds.

Malaysian offerings are also becoming more sophisticated.

In March, Khazanah Nasional Bhd., Malaysia’s sovereign- wealth fund, sold a $550 million, five-year Islamic bond. The sukuk certificates issued by Khazanah are exchangeable into Hong Kong shares of Parkson Retail Group Ltd., China’s biggest department-store operator.

Introducing ‘Trust’

The reason Malaysia has done rather well in Islamic finance — and Indonesia hasn’t — has much to do with the flexibility of common-law institutions to accommodate innovation.

“The concept of `trust’ under the common law has facilitated the issuance of Islamic securities,” Zeti Akhtar Aziz, Malaysia’s central bank governor, said in a 2007 speech. “Some civil-law countries have enacted specific legislation to provide for the introduction of trust so as to align their legal systems with the requirements of Islamic finance.”

Qatar, a civil-law country like Indonesia, did this by setting up Qatar Financial Centre as a common-law jurisdiction. Indonesia is taking the longer route of changing the code.

Long-awaited legislation for sovereign sukuks was finally passed by parliament last month; after President Susilo Bambang Yudhoyono makes the new law effective, the Indonesian government may announce its maiden global offering of these securities. Malaysia, Pakistan, Qatar, Bahrain, the United Arab Emirates and Brunei already have sovereign sukuks.

Sukuk Law

More crucially, after the law is in force, there will be, for the first time in Indonesia, explicit sanction for both sale of usufruct as well as for the creation of SPVs.

The same principles will then have to be introduced, via another new law, for corporate sukuks. The existing legal code will have to be harmonized to accommodate the additions.

It’s a tedious process, but one that matters a great deal to investors. Indonesian companies have routinely floated SPVs in the Netherlands to raise conventional bond financing.

Yet, the validity of these structures came under severe doubt in November 2006 when the Indonesian Supreme Court nullified $500 million of bonds sold by a unit of Asia Pulp & Paper Co., Southeast Asia’s biggest defaulter, on the grounds that the offshore SPV used in the transaction was illegal.

Creditors were stumped.

Plugging Loopholes

It’s important for Indonesia to fix the legal status of financing arrangements related to sukuks in order to avoid a repeat of that earlier fiasco.

Indonesia needs $22 billion annually through 2011 for public amenities that would boost the capacity of the economy and allow it to grow faster than the average 5.5 percent pace at which it has expanded in the past five years.

Amid a global credit crunch, sukuks would be a great way to access a large pool of money at a reasonable cost. Indonesia mustn’t squander the opportunity.

The economic consequences of a country’s legal origins can be profound. Indonesia can’t go back in time and change where its laws come from, but with a little ingenuity and some foresight it may yet script a new future.