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Asia trails Gulf in 
global sukuk sales
on capital curbs

Growth in Asia’s foreign-currency sukuk issuance is being hindered by capital controls, leaving the Arabian Gulf dominating a market that exceeded $17 billion in the past two years.

Malaysia’s central bank requires local companies seeking to sell overseas bonds to show a legitimate funding need to reduce currency speculation, while there’s no restriction in the Middle East. In Indonesia, corporations must supply information on the potential foreign-exchange risk, whether they intend to hedge, as well as their dollar and rupiah cash flows under rules put in place by the Financial Services Authority in 2002.

Foreign-currency Shariah-compliant notes issued from Asia accounted for 13 per cent of the $17.5 billion sold globally last year, compared with 8 per cent in 2012, data compiled by Bloomberg show. Export-Import Bank of Malaysia Bhd became only the sixth company from the region to sell such bonds last week, when its dollar-denominated sukuk attracted bids for 10 times the $300 million offered.

“The rules are there to mitigate foreign-exchange risk,” Mohamed Azahari Kamil, chief executive officer at Asian Finance Bank Bhd in Kuala Lumpur, said in an interview. “Offerings of US currency Shariah-compliant debt won’t be as huge for Asian issuers because they don’t have much of a dollar requirement, unlike their counterparts in the Middle East.”

Malaysia and Indonesia were among Asian countries that tightened capital controls after the 1997-98 financial crisis, when a devaluation of the Thai baht had triggered a collapse in regional currencies. Sales of ringgit-denominated Islamic bonds outweigh those in foreign currencies. In the Middle East, dollar issues tend to be preferred because many are oil-producing countries with currencies pegged to the greenback.

Sukuk offerings from Malaysia climbed 29 per cent in 2014 to 7.1 billion ringgit ($2.2 billion) from the year-earlier period, data compiled by Bloomberg show. Issuance totaled 49 billion ringgit in 2013 and reached a record 96 billion ringgit in 2012.

The other Asian sellers of foreign-currency Shariah-compliant securities are from Malaysian palm-oil producer Sime Darby Bhd, mobile phone operator Axiata Group Bhd, state-owned Petroliam Nasional Bhd and Khazanah Nasional Bhd. Japan’s Nomura Holdings Inc completed a US currency offering in 2010 and those notes have already matured.

Sales of both rupiah and foreign-currency sukuk from Indonesia are also subdued because the nation has yet to introduce laws that avoid double taxation on the debt. Unlike regular bonds, Shariah-compliant securities pay returns on assets to comply with Islam’s ban on interest. That makes them subject to taxes from capital gains and profit from the underlying asset.