Getting Your Share of Islamic Money

by Cesar Bacani, 21 June 2010

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topics:
Corporate Finance

tags:
Binariang GE Capital Islamic bond Islamic finance McKinsey Shariah sukuk Tesco Toyota

I’ve been working for the last couple of months on a writing project about Islamic finance – and now I’m convinced that it’s a feasible route that Asia’s CFOs can consider to raise money, regardless of whether their company is Muslim or not.

Take GE Capital. The Fortune 500 company issued a US$500-million Islamic bond, known as sukuk, last year. About half of the offering was taken up by Islamic banks, a group to whom GE had never sold its paper before, the company told me. That was one of the goals of the exercise, to diversify beyond the conventional investor base. The bond’s subsequent listing in London, Kuala Lumpur and Dubai further expanded GE’s investor base across new currencies and markets.

Britain’s Tesco Stores and Japan’s Toyota Capital have also issued sukuks, joining a slew of companies in Malaysia, Indonesia and other Muslim countries in Asia. Islamic finance, in other words, is no longer just for Islamic companies. So long as they do not engage in activities that are anathema under Islamic law, such as alcohol, gambling and arms-dealing, non-Islamic companies are free to raise capital from the 1.5-billion strong Islamic world.

Sultan of Sukuk

At least this is the case in Malaysia, which has always promoted Islamic finance alongside conventional finance. It is now the global centre for sukuk issuances, accounting for 45% of the US$24.6 billion of all sukuks issued last year. It is possible to issue a sukuk in Indonesia as well, although that country accounts for less than 2% of the global total. And companies may soon be able to issue Islamic paper in Hong Kong and Singapore, which have announced plans to get in on the game.

Why the surge of interest in Islamic bonds? There’s simply a lot of money sloshing around Islamic pockets as oil prices stay at elevated levels. Management consultant McKinsey estimates that oil producers will generate excess cash of US$628 billion a year beginning in 2012. Muslim countries in the Middle East will account for the bulk of those investable petrodollars, so a large proportion of that money is expected to go to assets deemed compliant with Islamic law.

Malaysia is well-placed to catch a significant part of that overflow. “Its well-established Islamic banking system, strong regulatory framework, and government support have made the country a leading market for sukuk issuance,” says Standard & Poor’s. The credit-rating agency notes that “an increasing number of Asian corporates are looking to tap [the Islamic market] with the hope of lowering funding costs and obtaining much needed funding and liquidity in an otherwise difficult environment.”

As the Sultan of Sukuk, Malaysia is going all out to make things easy for them. In 2006 it established the Malaysia International Islamic Financial Centre (MIFC), which links together all the government agencies and financial and market regulators in one network. In theory, this means that a corporate issuer and its investment bankers need to deal only with the MIFC, which serves in effect as a one-stop shop for sukuks.

What You Need to Know

It’s not that easy in real life, of course. One issuer told me that the structuring, approval and issuance process, even with the MIFC’s assistance, takes longer to complete compared with a conventional bond. In part that’s because the Shariah Council, a consultative body made up of Islamic scholars, has to examine the deal and then issue a ruling on whether or not it complies with Islamic law (known as Shariah).

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