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Sukuk and Islamic investments

Entering sukuk market is a growing trend for many developed and developing economies. In 2014 the U.K., Luxembourg and South Africa sold debut sukuk, entering a global market that PWC estimates will reach $2.6 trillion by 2017.

Worldwide offerings, which include local-currency sukuk, climbed to $46.3 billion in 2014, shy of 2012’s unprecedented $46.8 billion, data compiled by Bloomberg show. Sales so far this year total $1.7 billion. In 2015 experts estimate the global issuance of sukuk for $145 billion.

This year Russia plans to open its first Islamic bank this year, seeking to attract Shariah-complaint funds. The State Duma, the lower house of parliament, may review the law to allow Islamic banking in the next two months, said Anatoly Aksakov, a deputy in the assembly and president of the Association of Regional Banks of Russia. The goal is to establish a legislative framework in the second half of the year, he said.

“The amendments are aimed at attracting capital from Islamic countries first of all, the United Arab Emirates, Arab states, Malaysia, Indonesia,” Aksakov said by phone from Moscow on Feb. 19. Russia aims to attract “tens of billions of dollars,” including Shariah-compliant funds, to finance government-backed projects such as railroads and domestic manufacturing, he said.

Russian economy is under high pressure from a combination of oil low prices and information pressure of US rating agencies Moody’s and Standard and Poor’s which cut the country’s credit rating to junk last week, though the country has already gone through exchange rate shocks, oil prices lowest point and the country’s restricted access to European capital market. Growth of Russian economy slowed to 0.6 percent last year from 1.3 percent in 2013 as the ruble slumped 46 percent and oil tumbled almost 50 percent. Oil and natural gas account for about half of Russia’s revenue. However, last 10 years Russian manufacturers have actively installed high tech equipment imported from US, EU and Japan, as well as China. Though this trend will slow now there are big opportunities for existing businesses and export.

“Amid the ruble devaluation, we can supply the domestic market with goods that used to come from abroad and have become too expensive,” Aksakov said. “We are hoping Islamic finance resources will help with new projects.”

Who can become partners to develop Russian sukuk market?

Malaysia is home to Asia's third largest bond market and has the world's biggest market for sukuk, but deals are dominated by highly rated issuers. Close to 90 percent of all bonds and sukuk are rated AA or AAA.

Malaysia's Danajamin Nasional Bhd, the country's sole specialised credit guarantor, plans to introduce partial guarantees to encourage a wider range of issuers in the country's conventional and Islamic bond markets, its top official said.

Set up in 2009 to help develop the domestic debt market, Danajamin has provided guarantees for over 7 billion ringgit ($1.92 billion) of issuance, 45 percent of that amount in the form of sukuk.The firm is one of a small but growing number of guarantors worldwide which support sukuk deals.

Danajamin, owned by the finance ministry and Credit Guarantee Corp Malaysia Bhd, now plans to expand its use of partial as well as temporary credit guarantees, chief executive Mohamed Nazri Omar said in an interview.

"If we guarantee every single issuance they'll all be rated triple A and there will be no diversity. From a developmental angle, we want to deepen and stretch the market with new products."

The move comes as Malaysia plans to remove mandatory credit ratings from 2017, in an effort to reduce issuance costs and boost market volumes.

In the same time, the former Prime Minister, Tun Dr Mahathir Mohamad noted out that there is the tendency of “very rich” Malaysian institutions to invest abroad by purchasing and constructing properties overseas.He has singled out the Employees Provident Fund (EPF), the biggest government al institution, which is allowed to invest 23% of its funds outside Malaysia.

On a separate issue, Dr Mahathir also criticised the government-backed fund, 1 Malaysia Development Bhd (1MDB, for its plans to sell some RM8.4 billion worth of Islamic bonds, calling it “borrowed money”.)

“Borrowed money cannot be regarded as sovereign wealth fund … When you want to spend money to build up assets in the country or outside the country, it must not be from borrowed money. It must be from surplus. We have no surplus,” he said.

Current Prime Minister Datuk Seri Najib Razak chairs 1MDB’s advisory board. If 1MDB’s mega sukuk plan materialises, it will the world’s biggest Islamic bonds offering in 2014. But, it will also add on to the company's mounting debt of RM38 billion. These comments followed Mahathir’s already vocal and public display of unhappiness towards the Najib administration.

While he admitted that his comments were “annoying” to some quarters of the government, the former premier said he felt inclined to make “nasty” remarks when the government’s decisions do not contribute to the economy.

Cheaper oil has opposite impacts on Indonesian and Malaysian Islamic bonds.

The yield on Indonesia’s dollar sukuk due 2022 fell to a 21-month low of 3.72 percent in February, while Malaysia’s 2021 debt yield climbed to 2.98 percent, the highest since September, data compiled by Bloomberg show.

Fitch cut the outlook on Malaysia’s A- rating, the fourth- lowest investment grade, to negative in 2015. Standard & Poor’s and Moody’s Investors Service have the same credit assessment but with respective outlooks of stable and positive. Indonesia is rated three levels lower by Moody’s and Fitch, while S&P classes it as junk, as the nation’s dependence on commodities remains a key credit weakness.

Indonesia is seeking to return to the global sukuk market in the first half after last selling such debt in September, when it paid a coupon of 4.35 percent for 10-year notes. Malaysia’s sale will be its first since 2011.

It’s set to be a bumper year for overseas Islamic bond issuance in dollars from Asia. Malaysia’s state-oil company Petroliam Nasional Bhd is said to be planning a record offering of the notes, which will take the amount outstanding from the region to $19 billion. Asia sold a combined $4.3 billion last year, the largest in Bloomberg-compiled data going back to 2010.

In Russia Muslims are around 15% of Russian 145 mil population. Financial institutions of Povolzhie Region and the Northern Caucasus can attract Islamic investments if the Russian legislation is regulated in time.

Source -
The Edge Markets
The Khaleej Times
The Jakarta Post

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