Cagamas Sukuk `Big Step' for Malaysian Middle East Sales: Islamic Finance

Duet Mena Ltd. and Algebra Capital Ltd., Dubai-based managers of $500 million, said they may buy Islamic bonds from Malaysia’s Cagamas Bhd., the first under a new structure that complies with the Persian Gulf’s stricter religious laws.

Cagamas, the nation’s biggest mortgage holder, plans to seek funds in the oil-rich region by offering 5 billion ringgit ($1.5 billion) of notes that meet the guidelines of the Bahrain- based Accounting & Auditing Organization for Islamic Financial Institutions. Fatwas, the judgment of a scholar based on his interpretation of Shariah law, from Malaysia aren’t generally accepted in the Middle East.

Demand from Dubai investors would benefit borrowers in Malaysia, the largest Asian sukuk market. Saturna Sdn., the Malaysian investment fund whose Washington-based parent oversees $3 billion of Islamic assets, said it is counting on the sale to attract funds from the Middle East.

“This is a big step forward and we will definitely be interested,” Rabih Sultani, who helps oversee $200 million at Duet Mena, said in an interview yesterday. “We had been reluctant to invest in Malaysia because of the different structure.”

Global standards are still developing in the Islamic finance industry, whose assets may almost triple to $2.8 trillion by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board. AAOIFI’s Secretary General Mohamad Nedal Alchaar said in an interview in May that his body planned to introduce the initiative to screen products and encourage greater harmonization of Islamic financial practices.

‘Bridge’ Laws

“This is the first time, as far as we know, that anyone, anywhere, has managed to bridge the Shariah laws in Malaysia and the Middle East,” Cagamas’ Chief Executive Officer Steven Choy said in an interview today. “For us to achieve this is a key milestone” in respect to market progress, he said.

Issuers from Persian Gulf states sold $2.5 billion of Islamic notes so far in 2010, down 24 percent from a year earlier, and the lowest level since 2005, data compiled by Bloomberg show. Global issuance fell 29 percent to $6.65 billion.

Cagamas will issue short- and medium-term bonds using a new Sukuk al-Amanah Li al-Istithmar structure, or Sukuk ALIm, according to a statement on July 13. Choy said then the company may offer 1 billion ringgit of notes within a month. London- based Royal Bank of Scotland Group Plc, Riyadh-based Al-Rajhi Bank and Kuala-Lumpur-based RHB Bank Bhd. will help arrange the sale, according to the CEO and a report from the official Bernama news agency.

Sukuk ALIm

“Sukuk ALIm are tradable in the secondary market, and since they preclude certain principles which may be contentious to Shariah, are expected to meet the requirements of a wider range of investors,” Ahmed Rehman, chief executive officer of Al-Rajhi Bank Malaysia, said at a press conference in Kuala Lumpur on July 13.

Cagamas and Al-Rajhi “have worked together in structuring the sukuk, so there will be no difficulty in getting it approved from our Shariah boards,” Duet Mena’s Sultani said.

The mortgage company raised 480 million ringgit from Islamic securities in 2006 and 2007 based on deferred-payment contracts, or so-called Bai Bithaman Ajil bonds, according to the company’s website. It separately sold 620 million ringgit of commercial paper and 8.85 billion ringgit of medium-term notes based on Islamic principles since 2007.

Malaysia Yields

The Bai Bithaman Ajil refers to a sale and purchase contract for the financing of an asset that allows for deferred payments and installments with a pre-agreed profit margin. Scholars in the Persian Gulf have said the structure doesn’t comply with Shariah because the profit is akin to an interest payment, which is banned under Shariah law.

Islamic bonds returned 7.1 percent so far this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while regular debt in developing markets gained 8.4 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 rose three basis points to 3.09 percent, according to prices from Royal Bank of Scotland Group Plc. The yield gap between the Dubai Department of Finance’s 6.396 percent sukuk maturing in November 2014 and Malaysia’s debt has widened to 435 basis points, from 356 basis points on June 10, reflecting growing appetite for Asian Islamic debt.

‘More Stability’

Saturna’s Chief Investment Officer Bryce Fegley said Asia’s economic growth and more advanced Islamic bond market may attract investors from Dubai or Qatar. Malaysia, the world’s biggest issuer of debt that adheres to Muslim principles, accounts for more than 60 percent of the $130 billion of outstanding sukuk.

“There’s a little bit more stability behind the Malaysian economy and the funding mechanism for sukuk and more harmonized standards from the regulatory perspective,” said Fegley, whose Kuala-Lumpur-based fund is a unit of Saturna Capital in Bellingham, Washington. The Middle East tends to attract the most “speculative money from the oil wells,” he said.

The World Bank predicted last month that economic growth in the Middle East and North Africa will accelerate to 4 percent in 2010 from an estimated 3.2 percent last year as oil prices rebound. Malaysia is forecast by the government to expand 6 percent this year after shrinking 1.7 percent in 2009.

Tarek Elalaily, head of fixed-income asset management in Cairo at Beltone Financial, which manages 21.7 billion of Egyptian pounds ($3.8 billion) of assets, said he wouldn’t consider buying the Cagamas bonds because they aren’t rated by Moody’s Investors Service or Standard & Poor’s.

“We would not currently look at issues that are not locally or internationally rated,” Elalaily said in an e-mail yesterday. “Internationally accepted sukuk standards would naturally be a key impetus for the sukuk market.”

‘Work in Progress’

Persian Gulf states aim to have a single Shariah board by 2013, Hussain Hamed Hassan, chairman of the Shariah Coordination Committee of the Islamic Financial Institutions in the United Arab Emirates, said in an interview in Dubai on June 10. The committee is a grouping of religious scholars aiming to standardize fatwas in the country.

Mohieddine Kronfol, a managing director at Algebra Capital, which has more than $300 million of assets under management, said he hopes the lead taken by Cagamas will promote more dollar-denominated sukuk from Southeast Asia.

“Global standards in Islamic finance are a work in progress,” Kronfol, whose company is a unit of San Mateo, California-based Franklin Resources Inc., which owns 40 percent of Algebra, said in an interview yesterday.

“Transactions that evolve from consultations with recognized bodies like AAOIFI and multiple regulators are typically accepted by a wider investor base,” Kronfol said.

To contact the reporter on this story: Khalid Qayum in Singapore at kqayum@bloomberg.net

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