Countries across the Asia-Pacific region have been discussing how to develop their sukuk markets for the past few years, but very few deals have been done, and at present market conditions mean that a growing sukuk market in Asia ex-Malaysia has minimal benefits for investors or issuers.
According to Dealogic data, only two sukuk deals were done in Asia ex-Malaysia last year, and there have been no deals at all this year. The Republic of Indonesia issued a seven-year US$1 billion sukuk on November 14 last year, and a much smaller, US$42 million deal came from Citydev Nahdah on September 5. In comparison, US$58 billion worth of sukuk was issued out of Malaysia alone last year.
“I see this market growing a bit but I’m still moderate in my thinking. The key question that needs to get asked is why a sukuk? Does it actually get you tighter pricing? Or does it get you additional investors? Unfortunately I can’t give a blanket yes to that,” said one co-head of DCM in Hong Kong.
Malaysia’s sukuk is the one notable success. It’s liquid, and it’s a natural fit for Malaysian investors, the majority of which are Muslim. Outside Malaysia there’s been very little progression in developing sukuk markets in Asia as the obstacles remain high.
“It’s a pretty controversial topic. I think many locations have their own challenges from a structural perspective and its always an issue when you’re asking issuers to take a look at things that are new so as with everything else in the capital markets it takes time,” said a head of DCM origination at a global bank.
Novelty and regulatory pressures are just two of the problems facing any real progress in the region’s position as a sukuk centre. As it stands, conditions are simply not attractive for issuers or investors, which naturally results in a shortage of sukuk.
“The fact is today if an Asian issuer was to go and tap let’s say the dollar form in the sukuk format, you are paying a slight premium. If that is five or thirty basis points remains to be seen, but there is a premium,” said head of DCM origination.
In addition to this, sukuk investors tend not to want debt that exceeds five years in duration.
“Secondly, you’re not getting your tenors. Now personally I’ve done the Malaysia 10-year, Indonesia 7-year, but there’s no denying the fact that 5-year speaks most to Islamic investors,” said the DCM head.
Not only this, but pricing in the Middle East is wider than the pricing in Asia. As such, the largest sukuk investor pool in the world is, to all extents and purposes, inaccessible.
“If I were a middle eastern investor, I’m going to sit back and think: OK guys I’m based in Dubai, I know this company in Dubai inside out, it’s a highly rated credit, I’m getting a higher price, why do I need to stick my neck out for a huge amount in Asia,” said the co-head of DCM.
This price discrepancy is evident from two deals priced in November last year. Indonesia (rated 'BBB-','BBB-' and 'Baa3' by Standard & Poor’s, Fitch and Moody’s) issued a US$1 billion seven-year sukuk on November 14 which carried a 4% coupon. A week later, on November 20, Bahrain (rated 'BBB','BBB' and 'Baa1') issued a US$750 million seven-year sukuk paying 6.27%.
The lack of sukuk emanating from Asia ex Malaysia is not a result of political indifference. The topic has been much discussed by the region’s leaders and regulators. The third World Islamic Banking Conference summit for the region has just come to an end in Singapore.
Dheerasak Suwannavos the president of the Islamic Bank of Thailand has suggested several times that the arrival of the country’s debut Islamic security is in the works. However the first sukuk, which was first mooted in 2003 is yet to make an appearance.
Meanwhile, in November last year, Japan introduced a set of regulatory rules designed to allow sukuk issuance in the country. Hong Kong has discussed it, so has the Philippines.
In order to get the market off the ground, dealers say issuers will either have to generate local interest in buying Sharia compliant debt, or become less competitive to attract international funding. The former, particularly for countries like Thailand with a 4% Muslim population, may be difficult. The latter depends on how much corporations need Middle Eastern funding.