IN­NO­VA­TIVE CHINA JOINS THE FRAY

Its huge in­fra­struc­ture needs and large sov­er­eign wealth hold­ings are op­por­tu­ni­ties for Is­lamic fi­nance in­dus­try

New Straits Times - - Opinion -

WHO would have thought that two Chi­nese cor­po­rates with se­ri­ous main­land con­nec­tions would be spear­head­ing cap­i­tal mar­ket in­no­va­tion in Malaysia’s ring­git mar­ket, notch­ing up a num­ber of notable firsts in the process? Their en­try into the sukuk mar­ket with de­but is­suances, coin­ci­den­tally last Thurs­day, marks a new mile­stone in the five decades of the con­tem­po­rary Is­lamic fi­nance in­dus­try.

First, it was Tadau En­ergy Sdn Bhd, the Malaysian sub­sidiary of Edra So­lar Sdn Bhd and Ka­gayaki En­ergy Sdn Bhd, part of the gi­ant Chi­nese clean en­ergy group, China Gen­eral Nu­clear Power Cor­po­ra­tion, who closed “the world’s and Malaysia’s first green sukuk” — the RM250 mil­lion Green Sukuk Tadau. The pro­ceeds of the sukuk will be used to fi­nance the con­struc­tion of a 50 MWAc so­lar project in Ku­dat, Sabah un­der pur­chase agree­ments signed with Sabah Elec­tric­ity Sdn Bhd. The sukuk has been cer­ti­fied as a Green is­suance by the Cen­tre for In­ter­na­tional Cli­mate and En­vi­ron­men­tal Re­search in Oslo, Nor­way.

Next, it was the turn of BEWG Malaysia Sdn Bhd, a sub­sidiary of Hong Kong-based Bei­jing En­ter­prises Wa­ter Group Lim­ited (BEWGL), the lead­ing Chi­nese waste­water and san­i­ta­tion com­pany, with a RM400 mil­lion Sukuk Wakalah, the first ring­git sukuk is­sued by a Chi­nese con­glom­er­ate for a wa­ter in­fra­struc­ture project and the first sukuk is­sued by a Chi­nese com­pany. The pro­ceeds of the sukuk will be used to part fi­nance the RM687 mil­lion up­grad­ing of the Bukit Sah wa­ter treat­ment plant in Ke­ma­man, Tereng­ganu.

The last quar­ter may yet turn out to be game-chang­ing for the global sukuk mar­ket, which has US$350 bil­lion (RM1.49 tril­lion) of sukuk out­stand­ing. We have seen Saudi Ara­bia and its oil gi­ant, Saudi Aramco, is­su­ing iconic maiden sukuk both in the in­ter­na­tional and do­mes­tic mar­ket, fol­lowed by another sov­er­eign is­suance last week. Sov­er­eign In­done­sia, Oman, Turkey, Qatar, Bahrain; quasi-sov­er­eigns such as Khaz­anah Na­sional, the Is­lamic Devel­op­ment Bank and a spate of cor­po­rates fol­lowed suit with a va­ri­ety of is­suances.

Apart from the Saudi ac­tiv­ity, for ob­vi­ous rea­sons, be­ing the sin­gle largest Is­lamic fi­nance mar­ket in terms of as­sets, it is the two Chi­nese of­fer­ings that have caught the imag­i­na­tion.

Hith­erto sukuk ac­tiv­ity has been in the other di­rec­tion – Malaysian en­ti­ties is­su­ing sukuk to in­vest in as­sets in China. Khaz­anah and Ax­i­ata Group have both is­sued sukuk in the ren­minbi and HK dol­lar mar­kets. Last year, Khaz­anah is­sued a US$398.8 mil­lion Ex­change­able Sukuk, where in­vestors could ex­change pay­ments into Khaz­anah’s hold­ing of or­di­nary shares in BEWGL. Khaz­anah has pi­o­neered ex­change­able sukuk with the first of­fer­ing in­volv­ing ex­change­able shares into the main­land China out­lets of Park­son Re­tail Group.

The Chi­nese en­try into the Malaysian Is­lamic fi­nance mar­ket is a vin­di­ca­tion of Prime Min­is­ter Datuk Seri Na­jib Razak’s China pol­icy, which in­ter alia pro­motes close co­op­er­a­tion in trade, in­vest­ment and fi­nan­cial ser­vices, in­clud­ing open­ing the Is­lamic fi­nance sec­tor to both Chi­nese in­vestors and fundrais­ers. It is also the fruit of years of en­gage­ment by Bank Ne­gara Malaysia, Se­cu­ri­ties Com­mis­sion Malaysia (SC) and Malaysia In­ter­na­tional Is­lamic Fi­nan­cial Cen­tre (MIFC) with coun­ter­parts in China and Hong Kong.

China’s huge in­fra­struc­ture needs and its com­bined sov­er­eign wealth hold­ings of about US$1.75 tril­lion, the sin­gle largest by any coun­try, are mes­meris­ing op­por­tu­ni­ties for the Is­lamic fi­nance in­dus­try to cap­ture. Is­su­ing sukuk in ren­minbi could also help the Chi­nese cur­rency’s jour­ney to a wider in­ter­na­tional reach.

The Tadau Sukuk is also a ma­jor achievement of Malaysia’s ef­forts in es­tab­lish­ing a Sus­tain­able and Re­spon­si­ble In­vest­ment (SRI) and Green Bond/Sukuk mar­ket. In­deed the Tadau Green Sukuk is the first such is­suance un­der the SC’s SRI Sukuk Frame­work, the first of its kind in the world and de­vel­oped in co­op­er­a­tion with the World Bank, and es­tab­lished in 2014 as a chan­nel to ad­dress global fund­ing gaps in syariah-com­pli­ant green fi­nanc­ing.

Khaz­anah has been the trend­set­ter in SRI Sukuk with the world’s first “Pay-for-Suc­cess” RM100 mil­lion SRI Sukuk Wakalah bil Istith­mar in 2015, with a sec­ond sim­i­lar RM100 mil­lion tranche last month, the pro­ceeds of which will fund Khaz­anah’s Yayasan AMIR Trust School Pro­gramme pri­mar­ily in ru­ral Malaysia.

Cli­mate and so­cial-aligned fi­nance is a fast-grow­ing mar­ket. Backed by the ap­pro­pri­ate reg­u­la­tion and pub­lic pol­icy com­mit­ment, it is ripe for in­no­va­tion as Tadau and Khaz­anah have shown in the Is­lamic space. Their is­suance is a mere tip of the ice­berg.

In 2016, the cli­mate-aligned bond mar­ket grew by 16 per cent to US$694 bil­lion, US$118 bil­lion worth of which are la­belled green. Global SRI as­sets to­talled US$22.9 tril­lion in 2016.

Ac­cord­ing to the Global Sus­tain­able In­vest­ment Re­view 2016 Malaysia with 30 per cent share in Asia (ex Japan) is the largest SRI mar­ket in the re­gion, as it recog­nises syariah-com­pli­ant funds as part of the SRI uni­verse.

The to­tal global pri­mary sukuk mar­ket amounted to about US$89 bil­lion in 2016 and I ex­pect it to top US$100 bil­lion mark this year.

The Cli­mate Bonds Ini­tia­tive es­tab­lished a green sukuk work­ing group in 2012 to de­velop best prac­tices in the space but progress has been slow. Here is another op­por­tu­nity for SC and Malaysia to lead the way in green sukuk just as it has been do­ing in pro­mot­ing Is­lamic Cap­i­tal Mar­ket un­der the aegis of the In­ter­na­tional Or­gan­i­sa­tion of Se­cu­ri­ties Com­mis­sions (IOSCO). IOSCO re­cently es­tab­lished its first re­gional of­fice out­side its head­quar­ters, in Kuala Lumpur.

The SC, it seems, is up for the task ahead. Tan Sri Ran­jit Ajit Singh, SC chair­man, at the launch of Tadau Green Sukuk, re­minded that the is­suance “strength­ens Malaysia’s po­si­tion as a lead­ing Is­lamic fi­nance mar­ket­place as well as its value propo­si­tion as a cen­tre for sus­tain­able fi­nance. We be­lieve that there is a sig­nif­i­cant op­por­tu­nity aris­ing from strong global in­ter­est in green fi­nanc­ing where in­no­va­tive fundrais­ing in­stru­ments like green and SRI Sukuk is a vi­able so­lu­tion to ad­dress global needs for green and other forms of sus­tain­able and re­spon­si­ble fi­nanc­ing”.

FILE PIC

The Chi­nese en­try into the Malaysian Is­lamic fi­nance mar­ket is a vin­di­ca­tion of Prime Min­is­ter Datuk Seri Na­jib Razak’s China pol­icy, which in­ter alia pro­motes close co­op­er­a­tion in trade, in­vest­ment and fi­nan­cial ser­vices, in­clud­ing open­ing the Is­lamic fi­nance sec­tor to both Chi­nese in­vestors and fund rais­ers.

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