The strengthening resolve of Islamic finance

The strengthening resolve of Islamic finance
Mukhtar Hussain, chief executive officer of HSBC Bank Malaysia

Mukhtar Hussain, chief executive officer of HSBC Bank Malaysia Berhad and global CEO of HSBC Amanah speaks of HSBC’s strengthening position in the global sukuk market as Islamic finance entrenches itself further into Asia’s mainstream financial markets.

Sukuk still remains one of the more developed products in Islamic finance. What are some of the innovations in HSBC Amanah around sukuk?
The last couple of years have seen seismic movements in the sukuk industry despite the global economic downturn. In this time, we have seen newcomers to the global sovereign sukuk market such as the Republic of Indonesia, greater facilitation of cross boarder liquidity penetration such as the National Bank of Abu Dhabi’s Malaysian ringgit issuance; growth and innovation around asset type. Such asset type growth is evidenced by the Trans Thailand Malaysia (TTM) Malaysian ringgit issuance, the first Thai entity sukuk and first project finance sukuk in Asia, as well as the innovatively structured Sabana Shari’ah Compliant Reit, which was a credential showing the growth of the Islamic capital markets within the equity capital markets space and generally the continual development of the Islamic wholesale finance market.

The Sabana Shari’ah Compliant Reit was the largest Shari’ah-compliant Reit in the world. It was one of the first Singapore Reits listed under Shari’ah compliance standard applicable to both the Asian and Middle Eastern standards. It is also possibly the Islamic finance transaction of the year due to innovation and strengthening of an asset class Islamic finance should develop. HSBC believes that this is the tip of the iceberg in terms of what we will see in the future with regards to Shari’ah-compliant Reits, both regionally within Asia-Pacific and also in the global Islamic finance market.

These are a selection of the transactions HSBC Amanah was proud to be involved in and lead. Out of the global sukuks issued this year HSBC played a lead role in over half of the issuances, displaying the trust customers have in our HSBC Amanah franchise. Our capabilities within HSBC Group to support end-to-end Shari’ah-compliant transactions are unrivalled. The Sabana Shari’ah Compliant Reit transaction saw HSBC Group provide sole services across structuring, advisory, capital markets and various agency roles. We also were one of the three financing parties. The transaction was co-ordinated across multiple geographies and the financial solution delivered in a seamlessly integrated fashion. HSBC, from our Amanah platform, was uniquely positioned to provide cross geography Islamic finance solutions meeting customer needs, maintaining the highest Shari’ah standards and contributing to the growth of the industry.

We talk about a price advantage for Malaysia-based investors/borrowers participating in the sukuk market. How far away are we from seeing this same trend regionally or globally? What is HSBC Amanah doing to extend its global reach?
The sukuk market appeals to a wide investor class of both conventional and Islamic investors. As the market develops we see an increase in acceptance from conventional investors and growth in both size and sophistication of the Islamic investor base. As a result we are now witnessing more diversity across investor class and geography. The expansion and diversity of the investor base can potentially create a price tension, thus potentially result in a finer pricing for sukuk issuance. This dynamic will only come of age when there is an optimal mass of participating conventional and Islamic investors. However, the market has seen the early signs through the 2009 TDIC global issuance of both conventional and Islamic debt capital market instruments with the sukuk pricing tighter than the conventional versus sovereign premium.

To maximise global investor liquidity in order to benefit sukuk there will have to be a continual education of sukuk as an alternative investment in the debt capital markets, standardisation of sukuk offerings as well as the development of greater tenor flexibility to take advantage of sweet spots in the market when they arise. HSBC Amanah has access to a global investor pool and is a leader in sukuk structuring. Thus it is uniquely positioned to promote crossborder issuances and subscriptions contributing to development of sukuk awareness and participation.

Overall there is still a lack of depth and infrastructure to what Islamic finance can provide in comparison to conventional asset management. What are the inroads made at HSBC Amanah to keep it competitive?
Islamic finance is a rapidly growing and evolving industry. There are over 500 Islamic funds across various asset types and the demand for Shari’ah-compliant assets is not limited to institutional investors, but includes retail investors, which is pretty good for an industry that has only really come of age in the past decade. Asset management will become increasingly important in the years to come as Shari’ah-compliant asset management solutions increase, driven by demand from a growing Muslim wealth population. As was the case with sukuk in its infancy, with increasing demand there will be a development of depth within asset management. HSBC have dedicated Islamic finance professionals within the wider asset management business across multiple geographies. We cater directly for demand in key Amanah geographies and can provide access otherwise to customers globally. HSBC Amanah is committed to growing this part of the business and we believe it is one that will be of primary importance in both the wholesale and retail space over the next decade.

Generally there is a point to make regarding the growth of asset classes within Islamic finance. In the traditional wholesale banking and asset management space, after sukuk, asset management is one of the next big things for Islamic finance due to the demand being responded to by regulators looking to facilitate supply and market growth. However, we also see that other asset classes such as Reits and project finance sukuk are making an impact on the global Islamic finance scene. As such we believe that it is an exciting time for other Shari’ah-compliant vehicles and instruments alongside the continual successes in the sukuk market. This is a direct indication of the maturing nature of the Islamic finance industry.

Following the Gulf crisis, Islamic finance was seen as a scapegoat to many of the flaws in the system set up by the Gulf Cooperation Council (GCC). How did this impact your business?  What has been done to re-educate the market?
The entire financial system was impacted by the severe downturn in the GCC. It was a bad time for both conventional and Islamic financial services. Banks particularly exposed to real estate had a very tough 18 months. As the market recovers today we see both Islamic and conventional financial services industries benefiting. An area Islamic finance benefits from is in terms of certain maxims currently adopted in the industry such as prohibition on speculation and other principles that inhibit exposure to exotic and then potential toxic asset classes. What the market has seen is that at the same time there was an unfortunate environment in the GCC for Islamic finance, whereas Asia was seeing a continual evolution of the industry. Malaysia continued to develop in Islamic finance and regional neighbours Singapore, Indonesia, Thailand as well as Bangladesh have seen positive steps to promote the growth of the industry either locally or globally. It should also be noted that Hong Kong, Japan and South Korea are currently putting in place or looking into legislation that will support sukuk issuances. The East meets East theme is one with high relevance to Islamic finance.

Asia is a region where consumption and growth will be strong and is backed by well developed financial markets. As Islamic finance regulation spreads in the region there is a large potential to see Middle Eastern investors seek interest in financial instruments and vehicles that are within the standards of Shari’ah.

What are your expectations of the Islamic Liquidity Management Corporation (ILMC) that was launched at this year’s Global Islamic Finance Forum?
We applaud the ILMC initiative and we believe that this will help in the issuance of high quality Shari’ah-compliant instruments, particularly short-term instruments, to create and facilitate liquidity management for the global sukuk market and thereby creating a deeper infrastructure to support issuance. Sukuk is a relevant instrument for conventional and Islamic investors. To cater for the widest investor audience, a liquid secondary trading environment is an important requirement. The ILMC will help in achieving this important market dynamic.

 

This article was first published in the December 2010/January 2011 issue of FinanceAsia magazine.

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