IDB opens Malaysia office to plug trading gap

by **Cals** Tue 29 Apr 2014, 22:16

Business & Markets 2014

Written by Bloomberg

Tuesday, 29 April 2014 11:13

(Apr 29): Islamic Development Bank, the Saudi Arabia-based multinational lender, is seeking to boost trading in Shariah-compliant products by opening an office in Malaysia.

Islamic Cooperation for the Development of the Private Sector, a unit of IDB, got a license in February from the Southeast Asian nation’s central bank to start offering Islamic investment products in Kuala Lumpur and will focus on money- market instruments, foreign exchange and sukuk, Chief Executive Officer Khaled Mohamed Al-Aboodi said in an April 24 interview. It has hired two traders and will also act as an intermediary for businesses between Asia and the Middle East, he said.

Trading volumes of non-Shariah-compliant bonds in Malaysia are more than double those that comply with Islam’s ban on interest this year, according to central bank data. In a market where investors tend to hold sukuk until maturity, a lack of liquidity is hindering growth in an industry that Ernst & Young forecasts grew to $1.7 trillion in assets in 2013.

“The dearth of liquidity management has been a deterrent to stronger growth in the Islamic finance industry,” Mohamed Azahari Kamil, chief executive officer at Asian Finance Bank Bhd. in Kuala Lumpur, said in a telephone interview yesterday. “The presence of the IDB unit will help build liquidity and trading of Islamic financial instruments.”

Trading Volumes

Malaysia, the world’s biggest sukuk market, is also home to the International Islamic Liquidity Management Corp., set up by nine central banks in 2010 to sell short-term bills as a means to increase interbank trading and boost the pool of investments for lenders. Since the debut issuance in August last year, those offerings reached $3.19 billion from a combined five sales.

Sukuk trading volumes in the Southeast Asian nation amount to 66 billion ringgit ($20.2 billion) this year, trailing the 166 billion ringgit of non-Islamic securities, according to figures on Bank Negara Malaysia’s website. Islamic debt sales in Malaysia, both government and corporate, totaled $82.4 billion last year, accounting for 68.8 percent of global issuance, according to the central bank’s annual report issued in March.

International sales of bonds that comply with Koranic principles climbed 15 percent to $17.2 billion this year, after rising to $43.1 billion in 2013, the second-highest on record behind 2012’s $46.5 billion, data compiled by Bloomberg show. A decade ago, annual issuance was as small as $5.6 billion. Offerings in Malaysia have more than doubled to 26 billion ringgit so far this year.

A plan to create a multinational Islamic bank that could handle larger debt deals and boost liquidity has stalled. Malaysia’s central bank Governor Zeti Akhtar Aziz first touted the idea to counterparts in the Middle East in 2009 to create a megabank, though no firm proposal has ever materialized.

Malaysia Hub

The Jeddah-based IDB signed a memorandum of understanding with Dallah Albaraka Group in Riyadh and the Qatari government in April 2012 to set up a similar financial institution and again the plan never came to fruition.

“The Islamic Cooperation’s move will complement the roles of other financial institutions such as IILM,” Nik Norzrul Thani, the chairman of Kuala Lumpur-based law firm Zaid Ibrahim & Co., said in a phone interview yesterday. “This will reinforce the notion of Malaysia as a hub for Islamic finance as the nation needs diversity in players.”

Islamic Cooperation plans to increase the team in Kuala Lumpur as and when needed, said Chief Executive Officer Al- Aboodi. The recruits are now working on developing the infrastructure and building relationships with other banks in the region, he added.

It plans to trade and sell Islamic investment products such as those that comply with the Shariah concepts of Wakalah and commodity Murabahah, said Al-Aboodi. Wakala is a leasing contract where the bank is paid a fee for services rendered. In a Murabahah contract, goods are bought and then resold with a pre-agreed mark-up to allow lenders to cater for customers that want to lock in payments in the future.

Add Depth

The organization, whose shareholders consist of IDB, 51 member countries and five public financial institutions, was formed in November 1990 and has paid-up capital of $568 million, according to its website. Assets rose 16 percent to $982.6 million in 2012, of which $375.6 million was invested in equities and sukuk, $280.6 million in what it calls liquid assets, and the balance in term financing and other products, its website says.

“If Islamic Cooperation can come out with a variety of Shariah-compliant products and the quantity, it will be a good start and would add depth to the market,” James Lau, who helps manage $300 million as director of investment a Pheim Asset Management Sdn. in Kuala Lumpur, said in a telephone interview yesterday. “There are a lot of Shariah funds looking to invest in Islamic products, particularly at the short-end of the scale.”