Malaysia lags behind in Basel III sukuks

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Bank islamRegulatory issues and comfortable balance sheets are causing Malaysia to lag behind Gulf countries in one Islamic finance innovation, capital-boosting sukuks, Reuters reported

Since 2012, Gulf banks have been developing sukuk designed to increase their capital in order to meet new Basel III banking standards due to be phased in around the world over the next several years.

In November 2012 Abu Dhabi Islamic Bank issued a hybrid sukuk, one with equity-like characteristics, to boost its Tier 1 capital. Dubai Islamic Bank sold a similar $1 billion instrument in March 2013.

There have also been subordinated sukuk issues to raise Tier 2 capital, including a 1.4 billion riyal ($373 million) sale by Saudi Hollandi Bank last November. Saudi British Bank, which issued a Tier 2 sukuk in March 2012, aims to sell another one by the end of this year.

Within Malaysia, conventional banks have been among the first institutions in Asia to move to issue Basel III bonds; CIMB Group Holdings sold one this month, raising $238 million of Tier 2 capital. Public Bank and RHB Investment Bank have prepared similar bond programmes.

But so far no Islamic bank in Malaysia has established a programme to issue capital-boosting sukuk – partly because they see no strong need, bankers say.

“You find that in Malaysia most of the banks are fairly comfortable, with some banks more capitalised than others,” said Badlisyah Abdul Ghani, chief executive of CIMB Islamic Bank, the Shariah-compliant unit of southeast Asia’s fifth-largest lender by assets.

“At the earliest you will probably see – perhaps next year – some banks going to market, but most will not really be in the market because they are well-capitalised.”

Malaysia’s version of Basel III does require loss absorption, however, which could raise costs for the issuer of a subordinated sukuk. Islamic banks in Malaysia are still studying how to include the clauses, so the timing of the first Basel III sukuk remains uncertain.

But for now at least, Malaysia’s Islamic banks see little urgency to raise capital. The central bank requires all banks to have a core equity Tier 1 capital ratio of 4.5 per cent of assets, a Tier 1 capital ratio of 6 per cent and a total capital ratio of 8 per cent of risk-weighted assets by January 2015.

Malaysian banks in general are so well capitalised that they could sustain a 300 per cent rise in non-performing loans without Tier 1 common equity falling below 7 per cent, Moody’s Investors Service estimated in a recent report. Islamic banks are especially comfortable.

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Reading Time: 2 minutes

Regulatory issues and comfortable balance sheets are causing Malaysia to lag behind Gulf countries in one Islamic finance innovation, capital-boosting sukuks, Reuters reported

Reading Time: 2 minutes

Bank islamRegulatory issues and comfortable balance sheets are causing Malaysia to lag behind Gulf countries in one Islamic finance innovation, capital-boosting sukuks, Reuters reported

Since 2012, Gulf banks have been developing sukuk designed to increase their capital in order to meet new Basel III banking standards due to be phased in around the world over the next several years.

In November 2012 Abu Dhabi Islamic Bank issued a hybrid sukuk, one with equity-like characteristics, to boost its Tier 1 capital. Dubai Islamic Bank sold a similar $1 billion instrument in March 2013.

There have also been subordinated sukuk issues to raise Tier 2 capital, including a 1.4 billion riyal ($373 million) sale by Saudi Hollandi Bank last November. Saudi British Bank, which issued a Tier 2 sukuk in March 2012, aims to sell another one by the end of this year.

Within Malaysia, conventional banks have been among the first institutions in Asia to move to issue Basel III bonds; CIMB Group Holdings sold one this month, raising $238 million of Tier 2 capital. Public Bank and RHB Investment Bank have prepared similar bond programmes.

But so far no Islamic bank in Malaysia has established a programme to issue capital-boosting sukuk – partly because they see no strong need, bankers say.

“You find that in Malaysia most of the banks are fairly comfortable, with some banks more capitalised than others,” said Badlisyah Abdul Ghani, chief executive of CIMB Islamic Bank, the Shariah-compliant unit of southeast Asia’s fifth-largest lender by assets.

“At the earliest you will probably see – perhaps next year – some banks going to market, but most will not really be in the market because they are well-capitalised.”

Malaysia’s version of Basel III does require loss absorption, however, which could raise costs for the issuer of a subordinated sukuk. Islamic banks in Malaysia are still studying how to include the clauses, so the timing of the first Basel III sukuk remains uncertain.

But for now at least, Malaysia’s Islamic banks see little urgency to raise capital. The central bank requires all banks to have a core equity Tier 1 capital ratio of 4.5 per cent of assets, a Tier 1 capital ratio of 6 per cent and a total capital ratio of 8 per cent of risk-weighted assets by January 2015.

Malaysian banks in general are so well capitalised that they could sustain a 300 per cent rise in non-performing loans without Tier 1 common equity falling below 7 per cent, Moody’s Investors Service estimated in a recent report. Islamic banks are especially comfortable.

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