KUALA LUMPUR: Malaysia is in many ways one of the world’s leading Islamic financial markets, but regulatory issues and comfortable balance sheets are causing it to lag behind the Gulf in one innovation: capital-boosting sukuk.
Since last year, Gulf banks have been developing sukuk designed to increase their capital, in order to meet new Basel III banking standards due to be phased in around the world over the next several years.
In November 2012 Abu Dhabi Islamic Bank issued a hybrid sukuk, one with equity-like characteristics, to boost its Tier 1 capital. Dubai Islamic Bank sold a similar $1bn instrument in March 2013.
Within Malaysia, conventional banks have been among the first institutions in Asia to move to issue Basel III bonds; CIMB Group Holdings sold one this month, raising 750m ringgit ($238m) of Tier 2 capital. Public Bank and RHB Investment Bank have prepared similar bond programmes.
But so far no Islamic bank in Malaysia has established a programme to issue capital-boosting sukuk — partly because they see no strong need, bankers say.
“You find that in Malaysia most of the banks are fairly comfortable, with some banks more capitalised than others,” said Badlisyah Abdul Ghani, chief executive of CIMB Islamic Bank, the sharia-compliant unit of southeast Asia’s fifth-largest lender by assets.
“At the earliest you will probably see - perhaps next year - some banks going to market, but most will not really be in the market because they are well-capitalised.”
Although subordinated debt is more expensive for issuers than secured debt, strong demand among local investors in the Gulf has allowed banks there to sell Tier 1 and Tier 2 sukuk at prices they find favourable.
Regulation is one factor encouraging such issuance. Although national financial regulators in the Gulf have not yet fully clarified how they will apply Basel III standards, bankers in the region expect local versions of Basel III will not include a loss absorption feature allowing regulators to convert debt into equity if an issuer faces insolvency.
This is particularly true in the United Arab Emirates. Because of their large state budget surpluses and lack of broad-based income taxes, Gulf governments do not see that much of a need to protect taxpayers from bank crises with loss-absorption clauses.
Malaysia’s version of Basel III does require loss absorption, however, which could raise costs for the issuer of a subordinated sukuk.
Reuters
