Barclays Adding Malaysia Sukuk to Index Draws $3 Billion

Malaysian Shariah-compliant bonds may receive a $3 billion injection when they get added to a Barclays Plc index, making them cheaper relative to the country’s non-Islamic notes.

The nation’s Shariah-compliant government investment issues will be included in the Barclays Global Aggregate Index on March 31, with a weighting of 0.18 percent, the U.K. lender said on Jan. 13, estimating it would attract at least $2.5 billion to $3 billion. The average yield on 10-year Malaysian sovereign sukuk is 4.23 percent, compared with 3.93 percent for non-Islamic notes of the same maturity, Bank Negara gauges show.

“Barclays’ move will help narrow the premium between the conventional and Islamic notes,” Azidy Daud, head of treasury at Asian Finance Bank Bhd. in Kuala Lumpur, said in a phone interview yesterday. “It will also spur growth in the Islamic finance industry, as it will create demand from more conventional banks and investors.”

Malaysia, which pioneered Islamic finance in the 1980s, has 211.9 billion ringgit ($59 billion) of government sukuk outstanding, 39 percent of its total sovereign debt, central bank data show. Lower yields for Islamic bonds will provide some relief to Prime Minister Najib Razak as he grapples with a drop in state oil revenue caused by a 57 percent plunge in the price of Brent crude since the end of June.

Non-Islamic Favored

The country has increased sales of Shariah-compliant debt over the past few years, with the proportion of annual issuance rising from 19 percent in 2007 to a forecast 48 percent this year, Barclays said in a Jan. 13 research note. Foreign investors still favor the non-Islamic sovereign notes though, holding 145.3 billion ringgit of them at the end of November, compared with 4.8 billion ringgit of sukuk, central bank figures show.

Barclays’ move to include Islamic notes in the index will boost international demand, helping Malaysia to maintain its pre-eminent position in the industry worldwide, according to Manulife Asset Management Services Bhd., a unit of Canada’s biggest insurer. The country accounted for 63 percent of all government and corporate sukuk sold in the first six months of 2014, Finance Ministry figures show.

“It will indeed re-affirm and promote Malaysia as a hub for Islamic finance,” Jason Chong, the chief investment officer at Manulife in Kuala Lumpur, said in a Jan. 15 e-mail interview.

Unacceptable Structures

While inclusion in the Barclays index will attract more non-Islamic investors to Malaysian sukuk, it’s unlikely to boost investment from the Persian Gulf, Asian Finance’s Azidy said.

Authorities in Kuala Lumpur mainly use the Bay’ al-inah and Murabaha structures. The former, involving the sale and buyback of an asset by the seller, isn’t acceptable in the Middle East, while the latter, which uses cost plus mark-up transactions between parties, faces restrictions there, Azidy said

Worldwide sales of bonds that comply with Islam’s ban on interest rose 7 percent to $46.3 billion last year, while Malaysia issuance climbed 27 percent to 62 billion ringgit.

Shariah-compliant finance is expanding beyond its traditional strongholds in the Middle East and Southeast Asia as governments and companies seek to tap an industry that Ernst & Young LLP forecasts will double to $3.4 trillion in assets by 2018. The U.K., Hong Kong and Luxembourg sold debut sukuk last year and are seeking to become Islamic finance hubs.

Indexes Important

Barclays’ move makes it more likely other lenders will add sukuk to their indexes, said Lee Kok Kwan, the Kuala Lumpur-based chief executive officer for corporate banking at CIMB Group Holdings Bhd., the top global arranger of Islamic debt. The HSBC Asia Local Bond Index already contains Shariah-compliant Malaysian government notes, he said.

“Inclusion in global indexes is important as fund managers benchmark their performance to indexes and hence has significant implications to the construction of their portfolios,” Lee said in an e-mail interview yesterday. “This will further help to narrow the yield gap, which has traditionally been an impediment for issuers, and is crucial to further drive the development of the global sukuk market.”

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