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Sukuk Shortage Stymies Funds With $192 Billion: Islamic Finance

April 09, 2012

Malaysian and Indonesian pension funds, which have a combined $192 billion of assets, say plans to increase holdings of Islamic bonds are being hampered by a shortage of investment-grade sukuk.

Kuala Lumpur-based Employees Provident Fund and Kumpulan Wang Persaraan (Diperbadankan), Malaysia’s two biggest pension managers, and PT Jaminan Sosial Tenaga Kerja (JAMSOS), Indonesia’s largest retirement fund, say they want more Shariah-compliant debt in order to diversify portfolios that must hold investment- grade securities. Kumpulan Wang, which runs Malaysia’s civil service scheme, is looking offshore for sukuk because of local scarcity, fixed-income director Ahmad Norhisham said in an April 6 interview.

While global sales of sukuk have more than doubled to $11.8 billion this year, that accounts for about 1 percent of the $1 trillion of Shariah-complaint financial assets worldwide, the Kuala Lumpur-based Islamic Financial Services Board estimates. Malaysia, Indonesia, Qatar, Bahrain and United Arab Emirates’ governments, the only investment-grade sovereign issuers, have a combined population of 286 million and $308 billion of currency reserves, data compiled by Bloomberg show.

“The pension funds are getting money faster than sukuk sales,” Badlisyah Abdul Ghani, chief executive officer at CIMB Islamic Bank Bhd. in Kuala Lumpur, said in an interview yesterday. “Despite the prolific sukuk issuance in Malaysia, it’s still small compared to the invest-able funds out there.”

Investment-Grade Sales

Sales of investment-grade bonds that comply with Islam’s ban on interest in 2012 have included Riyadh-based Saudi Electricity Co. (SECO)’s $1.25 billion of 4.211 percent debt due April 2022. Dubai-based Emirates Islamic Bank PJSC, a unit of Emirates NBD PJSC, sold $500 million of 4.718 percent securities maturing in January 2017 and MAF Sukuk Ltd., a subsidiary of Dubai-based mall and hotel operator Majid Al Futtaim Holding LLC, sold $400 million of 5.85 percent notes due February 2017.

Employees Provident Fund, Malaysia’s biggest pension provider with $153 billion of assets, will boost holdings of non-ringgit denominated sukuk from $1.7 billion to $3 billion by 2013, Chief Executive Officer Azlan Zainol said in an interview in Kuala Lumpur last month.

Islamic bonds returned 2.5 percent this year, the HSBC/ Nasdaq Dubai U.S. Dollar Sukuk Index shows, while debt in developing markets rose 4.8 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.

Average yields on Shariah-compliant debt advanced seven basis points, or 0.07 percentage point, to 3.69 percent last week, according to the HSBC/Nasdaq index. The difference in yield with the London interbank offered rate, or Libor, narrowed 10 basis points to 238 basis points.

‘Liquidity Premium’

Islamic securities account for about 3 percent of Jaminan Sosial Tenaga Kerja’s, or Jamsostek’s, 105 trillion rupiah ($11.5 billion) portfolio, according to data supplied by the fund in June 2011.

“Ownership of sukuk will be increased in the future because it is a long-term investment instrument that is safe and gives a competitive return,” Jamsostek President Director Hotbonar Sinaga said in a statement on March 21.

Yields on Indonesia’s 4 percent Islamic bonds due November 2018 were at 3.65 percent on April 6, according to data compiled by Bloomberg. Malaysia’s 2.991 percent sukuk maturing 2016 yielded 2.43 percent on the same day, according to prices from Royal Bank of Scotland Plc.

“Because the sukuk market is relatively new in Indonesia, its availability and liquidity is still not as high as for conventional bonds,” Angky Hendra, who helps oversee 11.2 trillion rupiah of assets as head of fixed-income at Batavia Prosperindo Aset Manajemen, said in an April 4 interview from Jakarta. “So the sukuk usually needs a liquidity premium.”

‘Suppressed’ Yields

Yields on Malaysia’s 3.928 percent global Islamic securities due June 2015 were little changed at 1.99 percent yesterday, according to Royal Bank of Scotland prices. The yield premium demanded on Dubai’s 6.396 percent sukuk due November 2014 and Malaysia’s bonds narrowed two basis points to 206 basis points, according to data compiled by Bloomberg.

The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index (BMSSITR), which tracks the most-traded government bonds, rose 0.1 percent last week to 107.13. The gauge has advanced 1.4 percent in 2012.

Kumpulan Wang Persaraan wants to raise its holdings of Shariah-compliant securities, which now account for about 23 percent of its 84 billion-ringgit ($27 billion) portfolio, fixed-income director Norhisham said. The fund is seeking government approval to invest in Indonesian sukuk, he said.

Moody’s Investors Service and Fitch Ratings assign Indonesia an investment-grade ranking, while Standard & Poor’s rates it the highest junk level. At its last sale of global sukuk, Southeast Asia’s largest economy sold $1 billion of notes on Nov. 14 with bids exceeding the amount offered by 6.5 times.

“If you just depend on the local market, there is a short supply of paper and yields are suppressed due to too much liquidity,” Norhisham said. “Sukuk is not a buyer’s market. If you negotiate too much with the issuer for better returns, you might not be able to secure any of the paper.”

- With assistance from Elffie Chew in Kuala Lumpur. Editors: Andrew Janes, Anil Varma

To contact the reporters on this story: Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net; Yudith Ho in Singapore at yho35@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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