Islamic Finance Bulletin - December 2008

December 2008 Issue #22

Islamic Finance Bulletin

. . … … … … . … … … … … … … … … … … … … … … … … …

Towards an informed market

…in this issue

Islamic Treasury Money Market Instruments for Liquidity Management

Shariah Aspect of Ijarah Muntahiyah Bittamleek Contract

Risk Associated with Islamic Financial Contracts: Part 5

Malaysian Sukuk Market in Review

Market Statistics

Ringgit Sukuk Market Report

Islamic Finance Bulletin, a quarterly release on the Islamic capital market in Malaysia, is dedicated to informing and educating those active in the growing market of Islamic finance on issues, developments and trends in the domestic Islamic capital market. The contents are intended to be educational, to accelerate the learning curve of those new to Islamic finance and to stimulate further discussions, research and development - all with a view to enabling the Malaysian Islamic capital market to effectively meet the increasing sophistication of the investment community. Should you wish to share any views or comments, or to contribute to the bulletin by way of editorials, please send your e-mail to [email protected].

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T O W A R D S A N I N F O R M E D M A R K E T FOREX - A SHARIAH DISCUSSION

Islamic Finance Bulletin October - December 2008 Issue #22 1 Rafe Haneef

Islamic Treasury Money Market Instruments for Liquidity Management Rafe Haneef, Managing Director of Fajr Capital Introduction

ince the emergence of the contemporary Islamic finance market, the treasury departments

of Islamic financial institutions (“IFIs”) have been facing many challenges in managing their surplus liquidity. The recent surge in liquidity, primarily driven by spikes in oil prices, has exacerbated liquidity-management challenges. This article, however, will only focus on Islamic money-market-type instruments. The key characteristics of a money-market instrument are as follows: (i) Enables large sums of money to be

transferred quickly, at a low cost. (ii) Has a short maturity (1 day to 1

year). (iii) Can be converted to cash quickly

and at a low cost (active secondary market).

(iv) Has low price risk due to short tenure.

(v) Has a high degree of safety with regard to principal investment.

The attributes above are collectively referred to as “the Five Characteristics”.

Current Islamic Liquidity Management Tools i) Commodity Murabaha The earliest form of Islamic liquidity-management tool had been commodity-linked investments based on the murabaha principle. The commodity murabaha product had been principally developed as an alternative source of funds for the commodity desks of some international banks. Instead of borrowing internally from their treasury, the commodity desks had bought the commodities on deferred-payment terms from IFIs. In the early days, the Islamic deferred-payment terms had often been more competitive than the international banks’ internal treasury rates. This had encouraged several international banks to seek commodity murabaha trades with IFIs. Commodity murabaha trades are usually carried out in the following way: (i) The IFI will buy “spot” certain

commodities, usually commodity warrants traded on the London Metal Exchange, from a supplier - at a price of, say, X.

(ii) The IFI will then sell the commodity to the bank at a higher price, e.g. X+Y, payable in 3 months. The Y could be computed based on various benchmarks,

S



e.g. the 3-month USD LIBID minus 12.5 basis points.

(iii) The bank’s commodity desk will use the commodity acquired for its trading book.

(iv) On the maturity of 3 months, the bank will pay a deferred price of X plus Y (for the commodity) to the IFI.

This instrument only satisfies some of the Five Characteristics; it fails to meet the first and third ones.

The IFIs are not able to transfer large sums at quick notice; once the commodity murabaha trade has been concluded, the IFIs are not able to convert the trade into cash before maturity, due to various Shariah restrictions on the trading of debt. The IFI can, of course, negotiate with the bank to pre-pay the commodity murabaha debt before maturity, and offer the bank a discount based on the concept of dha wa ta’ajjal (debt discounting for early payment). However, the process is not as straightforward as a secondary-market trade.



(ii) Commodity Tawarruq Following the above, commodity murabaha financing adopted a different form based on the tawarruq model. Although this new form is often known as a commodity murabaha trade, the proper terminology is “commodity tawarruq trade” - because the buyer will always subsequently sell the commodity to the supplier. The tawarruq model has helped IFIs conduct commodity trades directly with the treasury departments of banks, and has provided the IFIs with a broader base of investors to deploy their short-term liquidity. Commodity tawarruq trades are normally conducted as follows: (i) The IFI will buy “spot” certain

commodities, usually commodity warrants traded on the London Metal Exchange, from a supplier - at a price of, say, X.

(ii) The IFI will then sell the commodity to the bank at a higher price, e.g. X+Y, payable in 3 months. The Y could be computed based on various benchmarks, e.g. the 3-month USD LIBID minus 12.5 basis points.

(iii) The bank’s treasury department will immediately sell the commodity to another supplier (and sometimes to the original supplier), for a price equal to X.

(iv) Upon maturity 3 months later, the bank will pay a deferred price of X plus Y (for the commodity) to the IFI.



Although this instrument satisfies 4 of the Five Characteristics, but the IFIs are still not able to convert the trade into cash before the maturity of the commodity tawarruq trade, due to various Shariah restrictions on debt trading, as mentioned earlier. Commodity tawarruq financing has been the most widely used form of liquidity-management instrument to date, due to its ease of execution and wide acceptability among IFIs and banks. In recent years, however, some of the IFIs have been reluctant to use commodity tawarruq instruments due to their disapproval of the concept of tawarruq. Commodity tawarruq trade is often characterised as a paper trade or “cash-for-cash contract” since the commodity merely passes into the accounts of the supplier or suppliers (in some cases). The commodity title will flow from the supplier to the IFI, and then to the bank, before reverting to the original supplier or to another supplier (which invariably has a special arrangement with the original supplier). All these title movements often occur within a few hours, if not minutes. In most cases, neither the IFI nor the bank takes possession of the commodity; the reality is that they never intended to take any possession. This form of financing has attracted a lot of criticism within the Islamic finance industry, and some have declined to use this method. (iii) Investment Agency Some of IFIs, which find the commodity tawarruq model objectionable, have devised an alternative scheme based on the wakalah al-istismar (investment agency) concept.

This scheme is ordinarily structured as follows: (i) The IFI will appoint the bank as its

investment agent (“Agent Bank”), and will place or deposit its surplus funds with the Agent Bank for a certain period.

(ii) The Agent Bank will irrevocably undertake to invest the funds according to Islamic principles, with a targeted return that is at least equal to the “expected return” of the IFI, and will return the original investment and expected return on the maturity date.

(iii) The IFI’s expected return is often linked to prevailing money-market rates.

(iv) The Agent Bank will invariably get a return on the investment that is higher than the IFI’s expected return.

(v) The Agent Bank will return the original investment, together with the expected return, to the IFI upon maturity.

This arrangement often works out as anticipated with reputable Agent Banks with the track record of managing the investments with a return greater than the IFI’s expected return. However, during a market downturn there is a possibility that the Agent Bank may suffer losses on the investment and may even end up losing the entire investment. This risk however is often intentionally not covered by the investment agency contract and it is uncertain whether the IFI will insist on the undertaking of the Agent Bank to return the original investment and the expected return and claim damages for the Agent Bank’s breach of undertaking. From a Shariah perspective, the Agent



Bank is only responsible for the breach of the undertaking if it has defaulted or been negligent in investing or managing the funds. The IFI will have the onus of proof to establish the willful default or negligence of the Agent Bank. This instrument fails to meet the first, third and fifth characteristics. It is often very cumbersome for the IFIs to negotiate the agency arrangement with the Agent Bank and this inhibits their ability to transfer funds quickly.

Also, the IFIs could not unwind the transaction and obtain cash before the maturity due to the agency terms. Further, the agency relationship opens up the possibility that the IFIs as principal may end up bearing the losses related to the investments which reduces the degree of safety of principal (the fifth characteristic).



(iv) Government Investment Issues (“GII”) In 1983, the Malaysian Central Bank introduced an Islamic liquidity-management programme for IFIs, based on the concept of qard al-hasn (benevolent loan) and voluntary hiba (gift). This programme is structured as follows: (i) The IFI will deposit its surplus

liquidity as a benevolent loan to the Central Bank, for an agreed period.

(ii) The agreement will clearly set out that the IFI is contractually not entitled to receive any return on the loan.

(iii) The Central Bank will use the loan to undertake development projects for the benefit of the nation, and repay the loan upon maturity.

(iv) The Central Bank will usually, however, make a voluntary hiba to the IFI - invariably linked to the prevailing money-market rates.

This instrument satisfies all of the Five Characteristics. Under Malaysian Shariah interpretation, IFIs are able to trade GII certificates in the secondary market pursuant to the concept of bay al-dayn (sale of debt). As such, their trading of GII certificates in the secondary market is similar to that of any conventional money-market instrument. Nonetheless, the voluntary hiba arrangement has not been accepted by Shariah scholars in the Middle East, based on the maxim that "what is a matter of common practice has the same effect as an express condition". The “sale of debt” concept has also been rejected by Middle Eastern scholars on various Shariah grounds. Hence, this type of instrument is only prevalent in Malaysia, and has limited applications elsewhere.



In 2001, the Malaysian Central Bank introduced a new structure based on bay al-inah (sale and buy-back). This structure involves the following: (i) The IFI will use its surplus

liquidity to buy an identified asset (i.e. a physical asset) from the Central Bank, on spot-payment basis.

(ii) The Central Bank will then buy the asset back from the IFI at original cost plus a profit (equal to the prevailing money-market rate), on a deferred-payment basis.

(iii) The IFI will receive the original amount and the profit on the maturity date, from the Central Bank.

This instrument also satisfies all of the Five Characteristics. Under Malaysian Shariah interpretation, both the bay al-inah and bay al-dayn concepts are recognised as valid Shariah contracts; therefore, IFIs are able to trade GII certificates in the secondary market. Like the “sale of debt” contract, however, the “sale and buy-back” contract has also been rejected by Middle Eastern scholars. As such, this type of instrument is again only common in Malaysia and has limited applications elsewhere. (v) Sukuk al-ijara Most recently, the sukuk al-ijara (leasing certificate) concept has been used to facilitate an Islamic money-market programme. The structure of the programme is as follows: (i) The Government (acting through

the Ministry of Finance or the Central Bank) establishes a

special-purpose vehicle (which could be a limited-liability company) to facilitate the sukuk issuance (“Issuer SPV”).

(ii) The Issuer SPV then buys certain Government assets (e.g. government administrative buildings, education facilities, airports).

(iii) The Issuer SPV then leases different portions of these assets to the Government for different tenures and rental rates (e.g. 50% of the undivided assets leased for 6 months at a rental rate of 3% per annum, and 30% for 9 months at 3.25% per annum, and 20% for 12 months at 3.5% per annum). This form of arrangement is based on undivided ownership of assets and is commonly known as sharikat al-mahassa. It has been approved by the majority of Shariah scholars in the Middle East and Far East.

(iv) The Issuer SPV then issues 3 series of sukuk with 6-, 9- and 12-month tenures to different classes of investors. The respective sukuk will carry yields of 3.0%, 3.25% and 3.5% per annum.

(v) Before the maturity of the respective sukuk, the Issuer SPV can renew the lease with the Government for another term, at a new rental rate. Upon maturity of the respective sukuk, the Issuer SPV will issue a new sukuk reflecting the new term and rental rate, and will use the sukuk proceeds to redeem the previous issue.

(vi) This renewal process can be repeated until notice is given by the Government to end the lease



arrangement and buy back the assets leased by the Issuer SPV. The Issuer SPV will then sell the assets to the Government at their original cost; the sale proceeds will be used to redeem the outstanding sukuk.

This instrument also satisfies all of the Five Characteristics. Most importantly, the sukuk al-ijara concept is widely accepted by most contemporary scholars in the Middle East and Far East (including Malaysia). This instrument may be the most ideal solution to the prevailing liquidity-management challenges faced by the Islamic finance industry. The biggest hurdle faced in implementing this programme is the ability to source suitable underlying government assets to facilitate the leasing arrangement.

Governments are often reluctant to transfer national assets (e.g. government administrative buildings, education facilities, medical facilities, roads, airports, and sea ports) to the programme due to various reasons, including prevailing political sentiments and sensitivities. A paradigm shift is required at the Government’s level to help develop the Islamic finance industry, and to support a key element of such growth by facilitating this type of liquidity-management programme.



Alternative Liquidity Management Instruments vi) Sukuk al-istismar In some instances, the government may not have sufficient suitable assets due to various reasons, and the sukuk al-istismar (investment certificate) structure may offer a feasible solution. Sukuk al-istismar is a relatively new technique, first deployed by the Islamic Development Bank in its sukuk issuance, where its created a portfolio comprising 30% physical assets and 70% financial assets, or receivables using the principle of khulta (in this context, the mixing of 2 different asset classes into a single, indivisible portfolio). When an object consists of 2 substances and one of those is prohibited under Shariah, the object can still be construed as Shariah-compatible if the quantity of the non-compatible substance is insubstantial. For example, if a ring is made of gold and silver, it is permissible for a Muslim male to wear it if the quantity of the gold substance is insubstantial. There are different opinions among scholars as to what amounts to an “insubstantial” quantity. Most scholars have taken the view that the non-compatible substance will be regarded as insubstantial if the quantity of the Shariah-compatible substance is at least 30%. Some Hanafi scholars have taken a more liberal view of the khulta principle. They have not allocated any fixed percentage or quantity, but have left the matter to be decided on a case-by-case basis.

Using the khulta principle, contemporary Shariah scholars have allowed the sukuk evidenced by only 30% of physical assets and 70% of financial assets to be tradable in the secondary market. The structure of the sukuk al-istismar is as follows: (i) The Government (acting through

the Ministry of Finance or the Central Bank) establishes a special-purpose vehicle (which could be a limited-liability company) to facilitate the sukuk issuance (“Issuer SPV”).

(ii) The Issuer SPV then buys a portfolio of assets from the Government, comprising a minimum of 30% physical assets (e.g. government administrative buildings, education facilities, airports) and 70% eligible receivables.

(iii) The Issuer SPV then leases the physical assets to the Government for a certain period (e.g. 5 years), with the lease rental payable on a, say, quarterly basis. The quarterly rental rates can

be mutually varied before the commencement of each quarterly lease period (e.g. the first quarterly rental could be 3% per annum while the next quarterly rental may be fixed at 3.5% per annum; this process can be repeated every quarter during the 5-year lease term). The returns can be linked to prevailing money-market rates).



(iv) The Issuer SPV then issues sukuk in the primary market, with a 3-month tenure and a 3.0% return per year.

(v) The Issuer SPV then appoints the Government to collect the eligible receivables from the creditors/payers, and distribute to the Issuer SPV on a quarterly basis.

(vi) The Issuer SPV will use the rental and receivables paid by the Government to distribute quarterly returns/profits to the sukuk holders.

(vii) The Issuer SPV will only receive an amount equal to the return/profit component for the 70% of the sukuk amount (the return/profit component for the other 30% will stem from the lease rentals). The Issuer SPV will instruct the Government to invest all surplus funds under Islamic principles, to generate a return equal to the return/profit indicated under the sukuk.

(viii) Before redeeming the respective sukuk, the Issuer SPV will issue a new series of sukuk in the primary market, to replace the maturing sukuk. The new series of sukuk may have different rates of return and tenures. The proceeds from the new sukuk will be used to redeem the maturing issue.

(ix) This renewal process can be repeated until notice is given by the Government to end the lease arrangement and buy back the portfolio of assets (30% physical assets and 70% eligible receivables) from the Issuer SPV. The Issuer SPV will sell the portfolio of assets to the

Government at the original cost; the sale proceeds will be used to redeem the outstanding sukuk.

(x) If the lease rentals and receivables paid by the Government are not sufficient to cover the quarterly returns/profits to the sukuk holders, the Issuer SPV has the option to terminate the arrangement and require the Government to immediately purchase the entire portfolio at the original cost.

This instrument, although much more complex than the prevailing structures, also satisfies all of the Five Characteristics. Most importantly, the sukuk al-istismar concept is widely accepted by most of the contemporary scholars in the Middle East and Far East (including Malaysia). This instrument may be another ideal solution to the current liquidity-management challenges faced by the Islamic finance industry, and could reduce the hurdles encountered by many governments in sourcing underlying assets that are 100% tangible.



Eligible receivables include the following:

Receivables due from Islamic facilities (e.g. home financing) extended to civil servants (i.e. current receivables).

Receivables due from Islamic facilities extended to various government ministries, state or provincial governments (i.e. current receivables).

Receivables due from grants or non-interest-bearing facilities extended to various government ministries, state or provincial governments (i.e. current receivables).

Taxes due and/or payable by a list of identified Shariah-compatible corporates (i.e. current and future receivables).

Royalties, fees, other charges due and/or payable by a list of identified Shariah-compatible corporates (i.e. current and future receivables)

Some contemporary Shariah scholars are agreeable to both current as well as future receivables, although others only accede to current receivables. There is still a lack of consensus on this matter, and further research needs to be conducted.



(vi) Islamic Equity-linked Instrument Another innovative solution to Islamic liquidity management may be the currently fashionable Islamic equity-linked instruments. The proposed structure of such instruments is as follows: (i) The Government (acting through

the Ministry of Finance or the Central Bank) establishes a special-purpose vehicle (which could be a limited-liability company) to facilitate the sukuk issuance (”Issuer SPV”).

(ii) The Issuer SPV then issues sukuk in the primary market, with a 3-month tenure and a return of 3.0% per annum (the return can be linked to the prevailing money-market rate).

(iii) The Issuer SPV then buys a portfolio of eligible equities from the market and passively holds the equities in trust.

(iv) The Issuer SPV subsequently obtains an irrevocable undertaking from a market counterparty (e.g. a reputable financial institution), to purchase the equity portfolio at a price equal to the sukuk issue amount plus a profit equal to 3.0% per annum. No fee is payable to the counterparty in respect of the undertaking.

(v) The Issuer SPV also provides an irrevocable undertaking to the market counterparty to sell the equity portfolio at a price equal to the sukuk issue amount (exercisable only if the purchase undertaking is not exercised). No fee is payable to the Issuer SPV in respect of the undertaking.

(vi) Upon maturity of the sukuk, the Issuer SPV will exercise the purchase undertaking and compel the market counterparty to purchase the equity portfolio at the pre-agreed price.

(vii) Upon receiving the purchase price from the market counterparty, the Issuer SPV will redeem the sukuk.

(viii) The Issuer SPV may issue many series of sukuk in the primary market, with each series having different tenures and returns as well as market counterparties.

This instrument not only satisfies all of the Five Characteristics, but is also reasonably easy to implement and execute. Since the sukuk is fully evidenced by eligible equities, it is accepted by most of the contemporary scholars in the Middle East and Far East. The eligible equities can be selected based on the prevailing Shariah screenings applicable to equities, such as the Dow Jones Islamic Equities Screening Methodology. This instrument can effectively resolve the current problems faced by many governments in sourcing underlying assets that are 100% physical for sukuk issuance. However, some Shariah scholars have raised certain objections against the nature of the undertaking. Again, further research needs to be conducted in this area.



Illustration



RAFE HANEEF Rafe Haneef is currently a Managing Director at Fajr Capital, a new Islamic investment company based in London, Dubai and Kuala Lumpur. He was previously the Head of Islamic Banking for Citigroup Asia based in Kuala Lumpur. He was responsible for developing Malaysia as a regional Islamic finance hub for Citigroup and spread its Islamic business footprint across the region. Prior to joining Citigroup, he established the Global Islamic Finance Department at ABN AMRO based in Dubai and was in charge of the Islamic wholesale and retail businesses for the group. Prior to that, he was with HSBC Amanah in London and Dubai focusing on Islamically-structured cross-border transactions and the Sukuk market. He lead the first global sukuk offering for the Government of Malaysia in 2002. Rafe Haneef read law and Shariah at the International Islamic University in Malaysia. He was admitted to the Malaysian Bar and was practicing law in Malaysia specialising in Islamic finance. He then pursued his Master of Laws at Harvard Law School and subsequently qualified to the New York Bar.

T O W A R D S A N I N F O R M E D M A R K E T SHARIAH ASPECT OF IJARAH MUNTAHIYAH BITTAMLEEK CONTRACT

Islamic Finance Bulletin October - December 2008 Issue #22 19 IBFIM

Seller The Bank Customer

2 3

54

Shariah Aspect of Ijarah Muntahiyah Bittamleek Contract Islamic Banking and Finance Institute Malaysia Sdn Bhd Introduction

jarah Muntahiyah Bittamleek is a form of leasing contract which includes a promise by the lessor to

transfer ownership of the leased property to a lessee, either at the end of the Ijarah term or by stages during the tenure of the contract. It is a lease agreement combined with an undertaking by the lessee to purchase the leased goods at any time during the term of the lease, at an agreed price. The transfer of ownership may come in various ways, such as the following: a) By purchase of the asset at market

value (before maturity); b) By the payment of the final

instalment (at maturity); c) By way of minimal amount, e.g.

RM 1.00 (at maturity); d) As a gift (at maturity). Illustration

Modus Operandi The customer approaches the bank to finance a vehicle, by promising to lease the vehicle from the bank. Based on the customer’s promise, the bank purchases the vehicle from the dealer. At this juncture, the bank - as the owner of the vehicle - will lease the vehicle to the customer, at an agreed rental amount. The rental will be fixed for the entire tenure. However, if the bank wants to change the rental rate, it must be communicated and agreed to by the other party beforehand. Throughout the lease period, the ownership of the vehicle shall remain with the bank. Ownership shall transfer to the customer at the end of the lease period, provided that all rental amounts have been paid.

I



Description

1 The customer approaches the bank to purchase the vehicle. The

customer agrees to lease the vehicle from the bank.

2 The bank purchased the vehicle from the seller.

3 The bank pays the seller.

4 The bank leases the vehicle.

5 The Customer pays rental until maturity.

Shariah Aspect

Ijarah is derived from the Arabic word ajara or ujr, meaning remuneration or reward. Ijarah is a contract of lease in Islamic law, which means to take possession of some utility or services for payment. Ijarah indicates the sale of a benefit, use or service for a price that can be either fixed or floating. Ijarah Muntahiyah Bittamleek is one of the categories of Ijarah, which concludes with the sale or gift of the asset; the legal title of the leased asset will be transferred to the customer after a certain period. The rules of the Ijarah Muntahiyah Bittamleek transaction are no difference from those of the original Ijarah, except that it is associated with a promise by the owner of the asset to transfer ownership to the hirer at the end of the Ijarah term. The validity of this form of Ijarah is confirmed by the Resolution of the International Islamic Fiqh Academy No. 110 (4/12). The ljarah contract can be executed by any of the following ways: • The customer requests the bank to

acquire an asset, or to acquire the usufruct of an existing asset which the customer promises to lease (promise to lease).

The Ijarah agreement is preceded by the drawing up of a master agreement covering a number of Ijarah transactions between the bank and the customer, setting out the general terms and conditions of agreement between the 2 parties. Subsequently, there may be: • a separate lease contract for

each transaction, in a specific written document signed by the 2 parties; or

• the two parties exchange notices of offer and acceptance by referring to the terms and conditions contained in the master agreement; or

• the bank leases an asset it already owns to the customer, where the Ijarah contract is drawn up and signed directly; or

• the bank purchases an asset from a customer and subsequently leases it back to that customer (sale and lease-back).



At the end of the contract, the bank transfers its ownership of the leased asset to the customer via one of the following methods: • Selling for a specific consideration

if the customer pays all the rental instalments. The promise to sell is separately expressed and independent of the underlying Ijarah.

• As a gift, conditional upon the fulfilment of all the Ijarah obligations, after which ownership shall be transferred at the end of the Shariah tenure.

Shariah Contract The underlying Shariah contract used to finance a vehicle is known as Ijarah Muntahiyah Bittamleek (Ijarah ending with ownership). The following is the relevant fiqh literature and supporting evidence for the said contract. The Basis of the Shariah Contract The Ijarah contract is permissible based on the Qur’an, the Sunnah, Ijma and qiyas. Allah SWT says:

And said one of them (the 2 women): “O my father! Hire him! Verily, the best of men for you to hire is the strong, the trustworthy.”

(Surah al-Qasas: Verse 26) The verse narrates the story of Prophet Syuaib AS and Prophet Musa AS. The former offered the latter a contract of

employment for the hand of his daughter in marriage. Allah SWT says:

“Then they both proceeded, till when they came to the people of a village, they asked them for food, but they refused to entertain them. Then they found therein a wall about to collapse and he (Khaidir) set it up straight. (Musa) said: if you had wished, surely you could have taken wages for it!”

(Surah al-Kahfi: Verse 77) From the Sunnah, Abu Hurairah RA related that Rasulullah SAW said: “Give the hired man his wages before his sweat dries” (lbn Majah). Said bin al-Musayyib RA clearly narrated that Ijarah for asset’s usufruct is also permissible. He said: “We used to lease out land for some portion of the agricultural products, and the Prophet SAW prohibited us from such (practice). Instead, he asked us to lease it out for gold or money”. There is consensus among the fuqaha from the time of sahabah that Ijarah is permissible because of the fact that people’s need for the assets’ usufruct is as much as their need to (own) the assets. Ijarah is also acceptable by reasoning (qiyas) because it is a convenient means for people to acquire the right to use assets that they do not own, since not everyone is able to own the assets.



Primary Shariah Requirements Ijarah Muntahiyah Bittamleek

The validity of the Ijarah Muntahiyah Bittamleek contract depends on its compliance with Shariah requirements. Thus, in order for a transaction to be valid, it must fulfil the essential elements (rukn) of the contract, which has its own necessary conditions (syart) that need to be observed. The following are the essential elements and necessary conditions of an Ijarah contract:

Essential Element Necessary Conditions

Owner (lessor) • Be of sound mind (not insane) • Have reached majority age (18 years old) i.e. has the capacity

to enter into a contract. • Not restricted to do business, i.e. not a bankrupt • Not an extraordinarily extravagant person • Not forced to enter into the contract

Hirer (Lessee)

Asset

• Belongs to the owner • Specific and known • Deliverable to the hirer • Capable of being used • Not perishable or consumable • Exists throughout the lease period • Physically fit for leasing and free from any defect

Benefit/ Usage of the

Asset

• Can be valued with money. • Used for purposes that do not contradict Shariah. • Hirer can and is able to fully utilise the benefit/usage. • Is known and has been identified. • Benefit derived for a specific period • Benefit derived from the asset must not lead to the asset’s

destruction

Rental • Determined at the point of contract. • Specified in terms of currency.

The validity of Ijarah Muntahiyah Bittamleek is endorsed by the International Fiqh Academy of Organisation of Islamic Conference (or OIC), and the National Shariah Advisory Council of Bank Negara Malaysia.

T O W A R D S A N I N F O R M E D M A R K E T ISLAMIC TRUSTS – LAWS, PRACTICES & ITS DISTRIBUTION


ISLAMIC BANKING AND FINANCE INSTITUTE MALAYSIA SDN BHD Islamic Banking and Finance Institute Malaysia Sdn Bhd (IBFIM) is an institute dedicated to producing well-trained, high-calibre individuals and management teams with the required expertise in the Islamic finance industry. Based on the industry’s demands and customers’ needs, we provide complete assistance to our clients through a wide spectrum of inter-related services: training and education, advisory and consultancy, and research and development in Islamic finance. Our close relationship with the industry gives us the opportunity to share knowledge and resources. We also enjoy a strong network with local and international authorities and financial institutions. Having assisted numerous governments, financial institutions, and other organisations in this arena, we are driven to serve the need for further enhancement and development of the industry in years to come.

For more information, please contact:

Islamic Banking and Finance Institute Malaysia Sdn Bhd (340040-M) Level 3, Dataran Kewangan Darul Takaful Jalan Sultan Sulaiman 50000 Kuala Lumpur, Malaysia Tel: +603-2031 1010 Fax: +603-2031 9191 E-mail: [email protected] Website: www.ibfim.com.my

T O W A R D S A N I N F O R M E D M A R K E T RISKS IN ISLAMIC CONTRACTS

Islamic Finance Bulletin October - December 2008 Issue #22 24 BPAM

Risks Associated with Islamic Financial Contracts: Part 5 Meor Amri Meor Ayob Bond Pricing Agency Malaysia Sdn Bhd Introduction As highlighted in the earlier parts (please refer to the series of articles published in the previous Bulletins), a competent pricing specialist must have a strong foundation in risk identification and assessment. From this understanding, plus an in-depth knowledge of financial engineering, the fair valuation of any financial asset can be determined. This skill set is not only relevant to the conventional bond market, but also to the sukuk market. The purpose of this series is to provide some essential reading to anyone who is serious about the science of sukuk valuation. This series is the basis for the underlying valuation methodology for Islamic financial assets, developed by Bond Pricing Agency Malaysia Sdn Bhd (or BPA Malaysia). Here, Part 5 will highlight, as completely as possible, all the identifiable risks associated with the Musharakah contract.

Types of Risk Associated with the Contracts of Musharakah A typical Musharakah contract can be segmented into 3 transaction stages. Each stage has its own unique risks. The following sections detail the risks identified for each stage of the contract. 1. Contract The partners execute a partnership (Musharakah) agreement that specifies: • Offer and acceptance; • Contracting parties:

A financing institution can enter into a partnership with non-Muslims or conventional institutions or companies provided that such partner’s capital is from permissible sources. The operations of the Musharakah must be in accordance with Shariah rules and regulations;

• Amount of capital and structure:

The capital can be in the form of cash, gold, silver or their equivalent in value and tangible assets. Debt (receivables) alone is not permissible as the capital, unless the debt is



inseparable from other assets that can be presented as contribution to capital. Funds in the current account can be withdrawn as contribution to capital.

Any contribution in foreign currencies to the Musharakah capital must be translated in to the currency of the Musharakah, at the current exchange rate.

A partner cannot guarantee the capital of another.

The management of the Musharakah can be restricted to certain partners or a single partner. A fixed remuneration to such “managing” partner(s) is not allowed, although the partner(s) can earn a greater allocation of profit, at a higher ratio than its share of capital contribution. A manager other than the partner(s) can also be appointed to administer the Musharakah, at a fixed remuneration and a share of the profits, if any;

• Profit sharing ratio:

The profit allocation is calculated net of operating costs, expenses and taxes. The ratio can be amended from time to time.

The profit allocation can be equal to the ratio of invested capital or different, as agreed between the partners provided that the ”sleeping partner” is not entitled to more than their ratio of invested capital. The share of profit cannot be stated in a lump sum or a percentage of the capital.

The profit will be finally allocated from the sale proceeds existing assets (actual valuation), or based on the valuation of assets at fair value (constructive valuation). The allocation of profits must be based on actual profits earned. Profits can be carried forward and set aside as reserves (investment risk reserves and profit equalisation reserve), subject to the provisions of the articles of association of the Musharakah.. The loss shall be borne periodically by the respective partners in accordance with their capital contribution. It is not permitted to hold one partner or a group of partners liable for the entire loss, or liable for a percentage of loss that does not match their share of ownership. However, a partner can take responsibility to bear the loss at the time of the loss without any prior condition. A number of risks are present at this stage. Capital recovery due to credit risk is one of them. The Musharakah capital may not be recovered as it ranks lower than debt instruments upon liquidation. Nevertheless, a third-party guarantee can be obtained for the capital loss by some or all the partners provided that the legality and financial liability of the guarantee is independent from the contract, the guarantee is not limited in any manner to the contract, the third-party guarantor does not hold more than a 50% equity in the entity to be guaranteed and the guaranteed entity does not own more than 50% of the guarantor. Another form of capital recovery risk is when it is due to market risk. Although a third-party guarantee can be obtained for



the loss of capital of some or all partners, there are certain Shariah restrictions on the use of this mitigation technique. Meanwhile, counterparty risk is when the partner does not pay the profit that the financing institution is entitled to. The loss-making operations that require additional capital injection exposes the financing institution to the risk of capital impairment and the opportunity to reinvest in other types of investments. A mitigating strategy is for the Musharakah customer to create a takaful reserve to mitigate the risk of losses. Also, staggered principal redemption may reduce the overall exposure throughout the Musharakah period. Shariah compliance risk is another possibility. For example capital contribution from the current account is not properly withdrawn and transferred into the Musharakah fund (non-recognition of capital). 2. Early Termination A partner can at anytime withdraw from the partnership by giving notice to this effect unless the contract explicitly states that the partnership is to survive for a fixed period, whereby termination before the agreed expiry date of the Musharakah is not allowed. A partner can enter into a binding promise to buy at any time, all the assets of the Musharakah based on the market value on the acquisition date. A partner is also allowed to give a promise to gradually buy the equity of another partner, until the title of the equity is completely transferred. This

promise must not be stated in the Musharakah contract, but in a separate purchase and sale agreement. There is counterparty risk present at this stage. This occurs when the withdrawing partners owes money to the financing institution. Nevertheless, the financing institution is able to buy the withdrawing partner’s share or to find a new partner to takeover. There is also price risk, whereby the financing institution as the buying partner is exposed to fluctuations in the share price (low investment value). The parties should also be mindful that the purchase and sale are effected in a separate agreement and the acquisition price of the equity is not fixed at the original or face value (as it can be construed as a price guarantee and, therefore, non-recognition of income). This is a Shariah-compliance risk. 3. Maturity Upon maturity, the assets are liquidated (sold) or undergo constructive liquidation (valuation). The assets shall be sold at current market values and the proceeds will be utilised for payment in the following order: • Liquidation expenses; • Financial liabilities of the net

assets; • Distribution of the remaining assets

among the partners, in accordance with their ratios of invested capital; or if it falls short, on a pro rata basis vis-a-vis the ratio of invested capital.



Bibliography

Ayob, Meor Amri Meor (May 1999). Rating Islamic Debt Securities: A Primer. RAM’s Special Highlights. RAM

BNM (November 1999). The Central Bank and the Financial System in Malaysia - A Decade of Change. BNM

BNM Annual Reports from 1996 to 2005. BNM

BNM’s website: www.bnm.gov.my

Bursa Malaysia (previously known as Kuala Lumpur Stock Exchange). Website: www.bursamalaysia.com

Capital Market Masterplan (February 2001). Securities Commission

Ismail, Mohd Izazee (March 2002). Islamic Private Debt Securities: Issues & Challenges. RAM’s Special Highlights. RAM

IFSB’s website: www.ifsb.org

Securities Commission (Malaysia) website: www.sc.com.my

Securities Commission’s Quarterly Bulletin of Malaysian Islamic Capital Market (May, August, November 2006). Securities Commission

The next article will look at the risks associated with the contract of Mudharabah.



The author, Meor Amri bin Meor Ayob, is the Chief Executive Officer of Bond Pricing Agency Malaysia Sdn Bhd (previously known as Bondweb Malaysia Sdn Bhd). Meor has over 16 years of professional work experience as a regulator in Bank Negara Malaysia and as a credit analyst with Rating Agency Malaysia Berhad (now known as RAM Holdings Berhad). In RAM, his last position had been Head of Financial Institutions Ratings. He has a wealth of experience, especially oin the risk elements of the bond market. He is also has vastly experienced in the sukuk market.

BOND PRICING AGENCY MALAYSIA SDN BHD (formerly known as BondWeb Malaysia Sdn Bhd) BPAM, as Bondweb Malaysia Sdn Bhd, was incorporated on 27 September 2004 under the Malaysian Companies Act 1965. It was registered as a bond-pricing agency (“BPA”) by the Securities Commission on 28 April 28 2006, and has met and exceeded the requirements outlined in the Guideline on the Registration of Bond Pricing Agencies. On 15 September 2008, Bondweb Malaysia Sdn Bhd changed its name to Bond Pricing Agency Malaysia Sdn Bhd (or BPAM). This coincides with BPAM’s aim of consolidating its position as Malaysia’s pioneer bond-pricing agency, and to further strengthen its position by focusing on its core business - evaluated bond pricing. The bond-pricing agency is an initiative by the Securities Commission of Malaysia to boost the transparency and quality of price-discovery mechanisms and valuation practices in the Malaysian bond market. BPAM was officially appointed Malaysia's first bond-pricng sgency on 18 April 2006. With this status, BPAM is recognised as one of the official sources for evaluated prices on ringgit bonds.


Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn Bhd) No. 17-8 & 19-8, The Boulevard Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur Malaysia Tel: +603 2772 0899 Fax: +603 2772 0808 Website: www.bpam.com.my

T O W A R D S A N I N F O R M E D M A R K E T MALAYSIAN SUKUK MARKET

Islamic Finance Bulletin October - December 2008 Issue #22 29 RAM Ratings

Malaysian Sukuk Market in Review RAM Rating Services Berhad Introduction Global market turmoil, recession worries and widening credit spreads have all made their presence felt in the domestic bond market. The sukuk market contracted more than 70% in 2008 - contrary to the initial view that the industry would remain largely insulated from the slump. A total of 39 new corporate sukuk deals - with a prospective issuance value of RM16.1 billion – were announced last year. This accounted for 26% of the domestic market’s RM61.6 billion of rated corporate bond issues for the same period. Actual issuance, however, declined to RM8.8 billion last year, compared with RM39.6 billion in 2007. Application of Sukuk Funding The application of Islamic finance was observed across various economic sectors last year. Given the sheer funding requirements typical of port and highway projects, power plants and telecommunication businesses, the infrastructure sector retained its dominance with a 55%-share.

Notable issues from this sector include a RM4.0 billion sukuk Musharakah programme by PLUS SPV Berhad (“PLUS SPV”), a wholly owned special-purpose vehicle of PLUS Expressway Berhad (“PEB”); a RM1.5 billion medium-term notes sukuk programme by Lingkaran Tans Kota Sdn Bhd (“Litrak”); and RM1.0 billion Senior and Junior sukuk programmes by MRCB Southern Link Berhad. In second place, the industrial sector garnered a 14%-share of the market. Fund-raising exercises by Hong Leong Industries Berhad, Muhibbah Engineering (M) Berhad, Tanjung Offshore Berhad and Chemical Company of Malaysia Berhad accounted for most of the sukuk originating from this segment. Elsewhere, the capital-raising efforts of Gamuda Berhad, WCT Engineering Berhad and Sunrise Berhad constituted most of the sukuk stemming from the real-estate and construction industry.



ABS / Structured Finance

9%

Consumer Products & Services

4%

Banking & Financial Services

6%

Industrial Products & Services

14%

Infrastructure & Utilities55%

Plantations1%

Property, Real Estate &

Construction11%

2008 Corporate Sukuk Programme by Economic Sector Total Rated Facility Programme: RM16.1 billion (excluding unrated and self-managed issues)

Source: FAST, various websites, RAM Ratings

The RM4.0 billion (nominal value) sukuk programme by PLUS SPV was the largest sukuk deal in 2008. PLUS SPV is an independent special-purpose company through which PEB had issued sukuk to meet its funding requirements. Under this transaction, PLUS SPV had issued an initial RM1.055 billion of sukuk Musharakah. PEB, on the other hand, is an investment-holding company that is primarily involved in the operation of toll roads, both in Malaysia and abroad. PEB’s domestic toll-road concessionaires include Projek Lebuhraya Utara-Selatan Berhad, Expressway Lingkaran Tengah Sdn Bhd, Linkedua (Malaysia) Berhad and Konsortium Lebuhraya Butterworth Kulim (KLBK) Sdn Bhd. In addition, PEB has ventured into overseas markets such as India and Indonesia, with stakes in 3 toll-road concessionaires.

Meanwhile, another sizeable transaction last year was the RM1.5 billion medium-term notes sukuk programme by Litrak. A single-purpose company, Litrak owns concession rights to collect toll on the 40-km intra-urban Lebuhraya Damansara-Puchong. Proceeds from the sukuk issuance had been used to refinance Litrak’s existing debts, including RM324.10 million of Redeemable Unsecured Loan Stocks, and also deployed towards upgrading works on its concession assets, capital expenditure, working capital, and other Shariah-compliant purposes. Notably, Menara ABS’s RM1.0 billion Islamic asset-backed sukuk Ijarah represents as the largest securitisation of property assets to date. The transaction involves the securitisation of properties with a combined value of RM1.03 billion,



comprising buildings currently used as the corporate headquarters of the Telekom Malaysia (“TM”) Group, specifically Menara TM, Menara Celcom and TM Cyberjaya, as well as TM Taman Desa, an office building used for TM’s back-room operations. In this transaction, TM had sold the properties to Menara ABS; in return, the latter had issued the sukuk to finance the purchase. Subsequent to the sale of the properties, Menara ABS had entered into a 15-year Master Ijarah Agreement with TM, as Head Lessee for the utilisation of the properties. Another noteworthy sukuk issue in 2008 is Al-‘Aqar Capital’s RM300 million Sukuk Ijarah - recognised as the first domestic commercial–real-estate-backed transaction involving hospital properties. Under this transaction, Al-‘Aqar Capital had issued medium- and short-term sukuk Ijarah to acquire the beneficial interests in its 6 hospitals, i.e. Ampang Puteri Specialist Hospital, Damansara Specialist Hospital, Johor Specialist Hospital, Ipoh Specialist Hospital, Selangor Medical Centre and Puteri Specialist Hospital, from Al-‘Aqar KPJ Real Estate Investment Trust (“Al-‘Aqar REIT”).

The redemption of the sukuk Ijarah is expected to be met via a purchase undertaking by Al-‘Aqar REIT to reacquire the 6 hospitals upon the expected maturity of the Sukuk Ijarah, or via the disposal of the underlying assets in the open market. On a separate note, RAM Ratings published the ratings of 24 new corporate sukuk issues in 2008, with an aggregate issuance value of RM12.8 billion; about 55% or RM6.6 billion of this had already been issued by the end of the year. This constituted about 74% of the entire market’s RM8.8 billion of sukuk issued as at the same date.



In terms of rating distribution, the AA rating bracket had the highest density vis-à-vis RAM Ratings’ sukuk portfolio in 2008, skewed by the large sukuk programmes originated by infrastructure project-based obligors. In this regard, the ratings are supported by the robust cash-generating ability of the concession assets, strong debt-protection measures, stringent covenants and cash-trap mechanisms to meet the periodic returns as well as final capital repayment.

Meanwhile, the creditworthiness of the sukuk issued by Menara ABS and Al-Aqar Capital had been rated based on the asset-backed/structured-finance ratings methodology. Here, the focus had been on the robustness of the underlying assets in generating sufficient funds to meet the special-purpose vehicles’ ongoing profit obligations, and in supporting the realisable sustainable values of the underlying assets to meet principal redemption at the end of their tenures.



Malaysian Sukuk League Table 2008 The RM16.1 billion of sukuk issues in 2008 were successfully brought to the market by 13 financial and advisory institutions. RAM Ratings’ provisional tabulation, based on data collated from Bank Negara Malaysia’s FAST information system and the websites of the rating agencies, indicates that CIMB Investment Bank Berhad topped the sukuk league table last year, with a 46.4%-share. This was followed by Maybank Investment Bank Berhad and AmInvestment Bank Berhad, with respective 13.3% and 8.6% slices of the pie.



Prospects of the Sukuk Market in 2009 RAM Ratings expects sukuk issuance to resume momentum once some semblance of normalcy returns to the global financial markets, fuelled by the massive investment and financing needs of the Gulf economies and emerging markets in Asian countries. Islamic finance, sukuk in particular, is an emerging asset class that will sit well with investors throughout the world. As a pioneer in the Islamic finance industry, Malaysia has set the standard and led the way on many fronts.

The latest development in the domestic sukuk market - through the introduction of new rules by Bursa Malaysia under its Listing Requirements for Islamic securities or sukuk and debt securities - will further strengthen Malaysia’s standing as a leader in the sukuk market. Under this new framework, ringgit- and foreign-denominated sukuk issues will be allowed to be listed on Bursa Malaysia. This is envisaged to enhance transparency for investors, apart from offering valuable profiling opportunities for the sukuk issuers.



RAM RATING SERVICES BERHAD (“RAM Ratings”) Incorporated in 1990 as the pioneer in the provision of credit-rating services for the Malaysian capital market, RAM Ratings’ portfolio encompasses a vast range of local and foreign corporates, multinationals, banks, insurance companies, government-linked and other public-financed entities, myriad complex investment vehicles and the ringgit-denominated securities they issue, structured-finance transactions backed by receivables or other financial assets, and Islamic securities (commonly known as sukuk). As one of the region’s most experienced rating agencies, RAM Ratings plays a leading role in providing crucial and independent credit opinions that are sought after by investors and other market participants, with a view to being more confident about their investment and financial decisions. Underscored by its renown in the rating business, RAM Ratings’ credit assessments have been habitually used as points of reference by regulators, the financial community and the investment fraternity. RAM Ratings is a public limited company and is wholly owned by RAM Holdings Berhad. Its ultimate shareholders comprise major financial institutions in Malaysia, Asian Development Bank and Fitch Ratings.


Noor Maliana Mansor Analyst – Islamic Ratings [email protected] Mohamed Firdaus Kader Mohideen Head – Islamic Ratings [email protected] Liza Mohd Noor Chief Executive Officer [email protected] RAM Rating Services Berhad (763588-T) Suite 20.01, Level 20 The Gardens South Tower Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur Malaysia Tel: +603 7628 1000 Fax: +603 7620 8251 Website: www.ram.com.my

T O W A R D S A N I N F O R M E D M A R K E T MARKET STATISTICS

Islamic Finance Bulletin October - December 2008 Issue #22 36 Market Statistics

Malaysian Islamic Capital Market

Malaysian Rated Corporate Sukuk Market League Table of Lead Managers as at 31 December 2008

RM Million % CIMB Investment Bank Berhad 6,365 39.4% Aseambankers Malaysia Berhad 2,432 15.1% AmInvestment Bank Berhad 1,100 6.8% OSK Investment Bank Berhad 800 5.0% RHB Investment Bank Berhad 721 4.5% MIDF Amanah Investment Bank Berhad 772 4.8% OCBC Bank (Malaysia) Berhad 590 3.7% Citibank Berhad 550 3.4% Bank of Tokyo‐Mitsubishi UFJ (Malaysia) Berhad 500 3.1% Hong Leong Bank Berhad 500 3.1% RHB Islamic Bank Berhad 373 2.3% Bank Muamalat Malaysia Berhad 370 2.3% HSBC Bank Malaysia Berhad 348 2.2% Bank Islam Malaysia Berhad 250 1.5% Kuwait Finance House (Malaysia) Berhad 250 1.5% Affin Investment Bank Berhad 150 0.9% KAF Discounts Berhad 70 0.4% 16,139 100%

The value of consortium issues have been equally divided by the number of lead managers of a consortium

Source : RAM Ratings/ FAST












Sukuk Rated by RAM Ratings



Malaysian Islamic Banking Market

T O W A R D S A N I N F O R M E D M A R K E T RINGGIT SUKUK MARKET REPORT

42

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd (formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-infringement, timeliness, completeness, or that the information is always up-to-date.


Sukuk - Total Traded Amount for the Quarter ended 31 December 2008

Sukuk - Total Sukuk Outstanding (RM ‘Mil) by Class: 31 December 2008


43



Sukuk New Facilities created for the Quarter ended 31-Dec-2008

Facility Code Facility Name Instrument Maturity Date Facility Limit

200800087 CCMB RM500.0 MILLION MMTN MTN 28-Nov-23 500000000

200800083 PLSA RM415.0M 29 YRS SUKUK MUDHARABAH PROGRAMME BONDS 30-Oct-37 415000000

200800094 TH GROUP RM330M ICP/IMTN PROGRAMME CP/MTN 31-Dec-14 330000000

200800084 PLSA RM330.0M 19 YRS SUKUK IJARAH PROGRAMME BONDS 29-Oct-27 250000000

200800089 OCBC Al-Amin Bank Bhd - RM200mil Islamic Sub Bonds II BONDS 24-Nov-21 200000000

200800090 GAMUDA RM100M ISLAMIC CP PROGRAMME CP 4-Dec-15 100000000

Top 10 Sukuk Tender Result for the Quarter ending 31-Dec-2008

Stock Name Issue Date Maturity Date Actual Issue Successful Yield

PROFIT- BASED GII 4/2008 31.10.2018 31-Oct-08 31-Oct-18 3500 4.295

BNMN-IDB 146/2008 65D 05.03.2009 30-Dec-08 5-Mar-09 200 2.958

BNMN-IDB 147/2008 91D 31.03.2009 30-Dec-08 31-Mar-09 200 2.963

BNMN-IDB 145/2008 42D 03.02.2009 23-Dec-08 3-Feb-09 200 2.918

BNMN-IDB 144/2008 65D 26.02.2009 23-Dec-08 26-Feb-09 200 2.924

BNMN-IDB 142/2008 42D 29.01.2009 18-Dec-08 29-Jan-09 200 2.929

BNMN-IDB 143/2008 63D 19.02.2009 18-Dec-08 19-Feb-09 200 2.952

BNMN-IDB 141/2008 63D 17.02.2009 16-Dec-08 17-Feb-09 200 2.997

BNMN-IDB 140/2008 37D 22.01.2009 16-Dec-08 22-Jan-09 200 2.995

BNMN-IDB 138/2008 40D 20.01.2009 11-Dec-08 20-Jan-09 200 2.96


44



10 Most Active Bonds Traded between 01-Oct-2008 and 31-Dec-2008

STOCK NAME LAST TRADED PRICE

LAST TRADED YIELD/DISCOUNT

TOTAL VOLUME

TRADED LAST QTR

PROFIT-BASED GII 2/2008 30.06.2011 102.95 3.13 3263

PROFIT- BASED GII 4/2008 31.10.2018 108.8 3.24 2888

PROFIT- BASED GII 3/2008 14.02.2014 104.73 3.26 1563

PROFIT-BASED GII 1/2006 14.04.2009 100.25 3.1 1432

MITB 19/2008 364D 27.11.2009 97.37 2.9 1270

SBNMI 1/2008 12.02.2009 99.98 3.55 742

BNMN-IDB 35/2008 182D 20.11.2008 99.88 3.5 680

RANTAU IMTN 15.03.2011-MTN 1 101.87 3.5 659

BNMN-IDB 132/2008 63D 29.01.2009 99.71 2.9 620

BNMN-IDB 105/2008 28D 04.11.2008 99.9 3.45 599

YTM Curves as at 31 December 2008

Tenure LT Islm-Gov-GII

LT Islm-Quasi Gov-Khazanah

LT Islm-Corporate-

AAA

LT Islm-Corporate-

AA2

3m 2.81 2.97 3.65 3.98 6m 2.83 3 3.7 4.061y 2.9 3.06 3.92 4.36 2y 3.03 3.12 4.17 4.68 3y 3.11 3.18 4.44 5.02 5y 3.17 3.3 4.73 5.37 7y 3.2 3.42 5.03 5.73

10y 3.26 3.6 5.35 6.1 15y 3.55 3.89 5.71 6.49 20y 3.82 4.17 6.08 6.9


45



5-YEAR YTM Historical Chart (weekly closing, last 6 months)

YTM Spread (5-YEAR GII) as at 31 December 2008 YTM Matrix – Item Spread Principle: Islamic Date: 31 December 2008

Class1 Class2 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y

Government GII 2.81 2.83 2.9 3.03 3.11 3.17 3.2 3.26 3.55 3.82

Quasi Government Khazanah 0.16 0.17 0.16 0.09 0.07 0.13 0.22 0.34 0.34 0.35

Corporate AAA 0.84 0.87 1.02 1.14 1.33 1.56 1.83 2.09 2.16 2.26

Corporate AA2 1.17 1.23 1.46 1.65 1.91 2.2 2.53 2.84 2.94 3.08

Malaysian Sukuk Market Handbook Your Guide to the Malaysian Islamic Capital Market ISBN: 978‐983‐44255‐0‐0

Published by RAM Rating Services Berhad

As a pioneer in the Islamic finance industry, Malaysia has been setting benchmarks while assuming a pivotal role on the sukuk pitch. The nation’s Islamic capital market has been experiencing exponential growth, and we are well poised as the world’s most competitive and attractive sukuk market, underscoring Malaysia’s significance as the largest and most innovative global sukuk marketplace.

The Malaysian Sukuk Market Handbook, published by RAM Rating Services Berhad (“RAM Ratings”), is a comprehensive guide that serves as a practical tome for institutions and professionals keen on unlocking maximum value from the domestic Islamic capital market. The contributors to this handbook are eminent personalities from various backgrounds, well known in their respective fields of expertise. This handbook – the first of its kind ‐ also strives to broaden the sukuk investor and issuer bases, and covers inter alia the applicable Shariah principles, the Malaysian regulatory framework, the role of Shariah advisors, legal and tax considerations, rating approaches, market infrastructure and details of hallmark sukuk transactions.

RAM Ratings, a leading credit‐rating agency in Asia, was incorporated in 1990 as the pioneer of the Malaysian capital market in this sphere. In sukuk transactions, our task involves both quantitative and qualitative analysis vis‐à‐vis evaluating the financial strength of obligor institutions with such underlying structures, as approved by Shariah scholars. RAM Ratings’ portfolio encompasses a vast range of local and foreign corporates, multinationals, Islamic and conventional banks, takaful and insurance companies, government‐linked and other public‐financed entities, myriad complex investment vehicles and the ringgit‐denominated securities they issue, structured‐finance transactions backed by receivables or other financial assets, and sukuk. As one of the region’s most experienced rating agencies, RAM Ratings is a leader in the provision of crucial and independent credit opinions that are sought after by market participants as regards their investment and financial decisions.

For further enquiries, kindly contact Mr Mohamed Firdaus Kader Mohideen at +603‐76281018 or [email protected]; or Ms Noor Maliana Mansor at +603‐76281029 or [email protected].

Information contained in this publication is obtained from sources believed to be reliable and correct at

the point of writing; however, its accuracy or completeness cannot be guaranteed. Opinions in this publication are expressed from the point of view of the writers and are not necessarily those of the Publisher. The views or opinions expressed are subject to change at any time. No statement in this

publication is to be construed as a recommendation to buy, sell or hold securities.

All rights reserved. No part of this publication may be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold or stored for subsequent use for

any such purpose, in whole or in part, in any form or manner or by any means whatsoever by any person, without prior written consent from the Publisher and/or the writers.

Documents

Islamic Finance Bulletin - December 2008