$170 Billion in Malaysia Pensions Cry Out for More Islamic Bonds

  • Sovereign debt should be 50% sukuk: Employees Provident Fund
  • More supply would expand yield curve, investor base: Aberdeen

Malaysia’s biggest pension fund is calling on the government to increase the supply of ringgit Islamic bonds as the manager of $170 billion starts a Shariah-compliant option for savers.

The Employees Provident Fund, the largest buyer of the country’s debt and stocks, said ideally half of sovereign bond sales should be sukuk as it prepares to launch the Islamic plan with an initial 100 billion ringgit ($25 billion) in January. Currently the Shariah-compliant share of issuance is 42 percent. 

“The government is actively looking at it now,” Shahril Ridza Ridzuan, EPF’s chief executive officer, said in an interview in Kuala Lumpur. “If the government can push up sukuk issuance to 50 percent, that would be great.”

Boosting sales would help expand the range of maturities of the securities and their investor base, making them more popular with institutions. Overseas investors owned 19 billion ringgit of the government’s Islamic bonds in April, 8.2 percent of their total note holdings in the nation, central bank data show. That’s up from 6.7 percent in March.

“With EPF’s plan to set up an Islamic retirement scheme, it’s crucial for the government to step up Islamic bond sales to meet demand from the big players,” said Badlisyah Abdul Ghani, president of the Chartered Institute of Islamic Finance Professionals in Kuala Lumpur. “There’s no reason why all Malaysian government debt can’t be Shariah-compliant.”

Reduce Arbitrage

Malaysia should consider just offering sukuk to remove the arbitrage opportunities that exist, said Badlisyah, the former CEO of the nation’s biggest arranger of debt that prohibits paying interest. Ten-year Islamic notes currently pay 3.99 percent, compared with a yield of 3.84 percent on similar conventional securities.

QuickTake Islamic Finance

Finance Ministry officials couldn’t immediately be reached by phone or e-mail to comment on whether they have any plans to boost supply of Shariah-compliant securities.

There are limitations to increasing issuance of the government sukuk given you need to have sufficient assets, said Hasif Murad, an investment manager at Kuala Lumpur-based Aberdeen Islamic Asset Management Sdn., whose parent oversees the equivalent of $2.9 billion. Islamic bonds pay returns from an underlying asset, such as property or income streams that have to conform to Shariah principles. Businesses involved in alcohol, pork and some entertainment establishments are deemed as unacceptable.

Bonds Dominate

Bonds account for the biggest proportion of EPF’s portfolio. As of the end of last year, about 51 percent of its 684.5 billion ringgit was in fixed income, 43.8 percent in equities, 3.2 percent in real estate and infrastructure and the remainder in money markets, according to its annual report. Overseas investments are equivalent to 25 percent of the total funds, CEO Shahril said.

About 40 percent of EPF’s investments comply with religious principles, according to a Jan. 21 statement.

“As an investor, you would always want to have as liquid and as deep a market as possible because you then have more choices,” Shahril said.

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