Asia Trails Gulf Global Sales on Capital Curbs: Islamic Finance

Growth in Asia’s foreign-currency sukuk issuance is being hindered by capital controls, leaving the Persian Gulf dominating a market that exceeded $17 billion in the past two years.

Malaysia’s central bank requires local companies seeking to sell overseas bonds to show a legitimate funding need to reduce currency speculation, while there’s no restriction in the Middle East. In Indonesia, corporations must supply information on the potential foreign-exchange risk, whether they intend to hedge, as well as their dollar and rupiah cash flows under rules put in place by the Financial Services Authority in 2002.

Foreign-currency Shariah-compliant notes issued from Asia accounted for 13 percent of the $17.5 billion sold globally last year, compared with 8 percent in 2012, data compiled by Bloomberg show. Export-Import Bank of Malaysia Bhd. became only the sixth company from the region to sell such bonds last week, when its dollar-denominated sukuk attracted bids for 10 times the $300 million offered.

“The rules are there to mitigate foreign-exchange risk,” Mohamed Azahari Kamil, chief executive officer at Asian Finance Bank Bhd. in Kuala Lumpur, said in a Feb. 18 phone interview. “Offerings of U.S. currency Shariah-compliant debt won’t be as huge for Asian issuers because they don’t have much of a dollar requirement, unlike their counterparts in the Middle East.”

Ringgit Dominates

Malaysia and Indonesia were among Asian countries that tightened capital controls after the 1997-98 financial crisis, when a devaluation of the Thai baht had triggered a collapse in regional currencies.

Sales of ringgit-denominated Islamic bonds outweigh those in foreign currencies. In the Middle East, dollar issues tend to be preferred because many are oil-producing countries with currencies pegged to the greenback.

Sukuk offerings from Malaysia climbed 29 percent in 2014 to 7.1 billion ringgit ($2.2 billion) from the year-earlier period, data compiled by Bloomberg show. Issuance totaled 49 billion ringgit in 2013 and reached a record 96 billion ringgit in 2012.

The other Asian sellers of foreign-currency Shariah-compliant securities are from Malaysian palm-oil producer Sime Darby Bhd., mobile phone operator Axiata Group Bhd., state-owned Petroliam Nasional Bhd. and Khazanah Nasional Bhd. Japan’s Nomura Holdings Inc. completed a U.S. currency offering in 2010 and those notes have already matured.

‘Great Demand’

Sales of both rupiah and foreign-currency sukuk from Indonesia are also subdued because the nation has yet to introduce laws that avoid double taxation on the debt. Unlike regular bonds, Shariah-compliant securities pay returns on assets to comply with Islam’s ban on interest. That makes them subject to taxes from capital gains and profit from the underlying asset.

“There’s great demand for dollar bonds and sukuk in Indonesia as there are few avenues to place your dollars onshore,” Yudistira Slamet, head of fixed-income research at PT Danareksa Sekuritas, the nation’s third-largest debt arranger, said in a Feb. 18 phone interview in Jakarta. “We’ve also heard of companies wanting to offer dollar sukuk.”

Indonesia is due to undertake a review of the taxation laws, Nurhaida, executive head of capital markets supervision at the Financial Services Authority, said in a Feb. 7 interview in Jakarta, who declined to be specific on the details.

“We are in the middle of reviews on the Shariah capital market to see what can be done to deepen this market,” said the FSA’s Nurhaida, who like many Indonesians uses only one name. “We want to focus on promoting issuance.”

Protect Reputation

Companies from the Southeast Asian nation sold 2.2 trillion rupiah ($187 million) of Islamic bonds last year, compared with 1.88 trillion rupiah in 2012, according to FSA data. There’s been zero issuance so far this year.

“Malaysia and Indonesia want to protect their reputation and ensure that issuers won’t default on foreign-currency debt,” Lam Chee Mun, a Kuala Lumpur-based fund manager at TA Investment Management Bhd. overseeing 680 million ringgit, said in a telephone interview yesterday. “They are prudent as they don’t want a repeat of the crisis, when some companies went into receivership because of currency volatility.”