Malaysia Green Sukuk Gets Khazanah Debut Boost

Malaysia’s state-owned sovereign wealth fund is giving the government’s green financing initiative a boost with a plan to sell the nation’s first sukuk under socially responsible investment guidelines.

Khazanah Nasional Bhd. is considering issuing a benchmark sized ringgit-denominated Islamic bond to finance expansion in its education or renewable energy businesses, Chief Financial Officer Mohd Izani Ghani said in Nov. 20 interview in Kuala Lumpur. The notes will probably be issued in the second half of 2015, he said.

Malaysia, which pioneered Islamic finance 30 years ago and is now the world’s biggest Shariah-compliant debt market, is promoting green and socially responsible investment bonds after introducing guidelines in August. Khazanah is the second entity after the London-based International Financial Facility for Immunization to announce plans to sell ethical-based sukuk, helping diversify options in the $2 trillion global industry.

“Khazanah’s planned sale will be the catalyst for other Malaysian companies to follow suit,” Mohd. Effendi Abdullah, head of Islamic markets at AmInvestment Bank Bhd. in Kuala Lumpur, said in Nov. 21 phone interview. “This is a positive development as it will introduce a new asset class in the Islamic finance industry.”

Ethical Principles

Growing awareness of the need for achieving sustainable and environmentally friendly development has led to an increase in green projects from the likes of the World Bank and European Commission. In 2008, the World Bank took the lead in issuing green and socially responsible bonds and has sold $6.4 billion of the debt on its own behalf in the conventional market, according to its website.

Malaysia’s ethical initiatives come under three groups encompassing green technology financing, socially responsible investment sukuk, and environmental, social and governance.

The challenge in having a sustainable green sukuk market is to assure investors that Islamic bond proceeds will be used for projects with economic value, while meeting accepted and credible green standards, Foo Su Yin, RAM Rating Services Bhd.’s chief executive officer, told reporters at a Sept. 3 briefing in Kuala Lumpur.

Ethical or green sukuk aren’t governed by any industry standards and don’t need a separate endorsement from an Islamic scholar, according to Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd. As long as the funds raised are for socially responsible investments and don’t contravene Shariah principles they are seen as ethical, he said.

Wildlife Sanctuaries

Shariah-compliant bonds fit well with the socially responsible theme because Islam emphasizes the need to preserve the environment, Zakariya Othman, head of Islamic ratings at RAM Ratings, said in a Sept. 8 interview. Illegal logging is prevalent across Malaysia and has even penetrated protected areas like wildlife sanctuaries, the Star local newspaper reported on Nov. 20, citing Anthony Sebastian, chairman of Malaysia Nature Society Kuching.

The socially responsible investment, or SRI, sukuk is the Islamic capital market’s response to the rising trend of green bonds, Nik Ramlah Mahmood, deputy chief executive officer at the Securities Commission Malaysia, said in a September report by the Malaysia International Islamic Financial Centre.

Environmental Interest

The principles underlying SRI have been observed to be not dissimilar with those underlying Islamic finance, Nik Ramlah said in Sept. 3 speech in Kuala Lumpur. Hence, the Securities Commission believes the sukuk initiative is timely in bringing together the growing green sector and Malaysia’s well-developed Islamic finance industry, she said.

“While it may take time to create greater awareness in Malaysia of SRI sukuk, Khazanah’s planned offering is a start,” Elsie Tham, senior fund manager at Kuala Lumpur-based Manulife Asset Management Services Bhd., who oversees more than $1 billion, said in phone interview yesterday. “There will be demand for such debt from global investors who have the environmental interest in mind.”

Khazanah, which has 103.5 billion ringgit ($31 billion) in assets including stakes in CIMB Group Holdings Bhd. and Tenaga Nasional Bhd., is rated A3 by Moody’s Investors Service, the fourth-lowest investment grade and the same as the sovereign.

Malaysian Pathway

The company is a leading innovator in a market that Ernst & Young LLC sees reaching $3.4 trillion in Islamic banking assets by 2018. Khazanah sold the world’s first Shariah-compliant yuan bonds in Hong Kong in 2012 and was the first foreign issuer of Singapore dollar sukuk in August 2010. It also debuted exchangeable sukuk in 2006.

“Khazanah has been mainstreaming Islamic finance transactions since 2005 to help promote Malaysia as a global Islamic hub,” CFO Izani said. “Our role is to create a pathway for Malaysian companies to follow.”

Shariah-compliant debt sales in Malaysia rose 51 percent to 52.7 billion ringgit in 2014 from a year earlier, surpassing the 49 billion ringgit for all of 2013, according to data compiled by Bloomberg. Global issuance climbed 17 percent to $42.7 billion, near 2013’s $43.1 billion.

The Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index, a benchmark that tracks the most-traded local-currency notes, gained 2.6 percent this year to a record 107.9. The gauge advanced 2.8 percent in 2013.

Global Map

Khazanah’s SRI sukuk may be of the Wakalah or Musharakah structures, Izani said, declining to elaborate. Musharakah is a profit-and-loss sharing agreement based on underlying assets, while Wakalah is where a lender acts as an agent and is paid fees and commissions in place of interest.

The International Financial Facility for Immunization is seeking to sell as much as $500 million of dollar-denominated ethical-based Shariah-compliant notes, Michael Bennett, head of derivatives and structured finance at the World Bank’s treasury department, the intermediary for the sale, said in a Sept. 3 interview in Kuala Lumpur. The non-profit organization will sell the three-year vaccine bonds backed by commodities, he said.

“Khazanah’s debut SRI sukuk sale will put Malaysia on the global map as not many countries are promoting such debt,” Badlisyah at CIMB Islamic Bank, a unit of CIMB Group Holdings, said in a Nov. 21 phone interview in Kuala Lumpur. “It will also help the SRI agenda as a priority in terms of national and Islamic finance development.”

Originally published on www.bloomberg.com