Friday 29 March 2024
 
»
 
»
Story

Malaysia plans $1bn green sukuk issuance

KUALA LUMPUR, August 30, 2017

There could be up to $1 billion in green sukuk issuance from Malaysia in the next year, said a top official, highlighting that half of this issuance could be issued by year-end, in a report in Responsible Finance & Investment (RFI) Foundation newsletter.

Malaysia has an expansive ambition in Islamic finance, with a specific focus on encouraging a connection between Islamic finance and responsible investment.  The effort to bring these together is being driven by the sustainable and responsible investment (SRI) sukuk framework for the capital markets, and an SRI funds framework for the asset management sector is planned by year-end, it said  
On the banking side, Bank Negara, the central bank, has a strategy paper open for comment through the end of August focusing on the role of Islamic banks in the development of responsible finance, which could support future issuance of SRI sukuk by Islamic banks. In both banking and capital markets there is a regulatory drive by the government toward sustainable energy (particularly solar), which is pushing renewable energy developers, capital market investors and the banking sector to become more active in green finance.

These developments, supported by Malaysia’s long history in Islamic capital markets growth, have attracted attention and support from international organizations. Bank Negara and the Securities Commission, which regulates capital markets, have teamed up with the World Bank Group Global Knowledge and Research Hub in Malaysia to ensure coordination on responsible finance growth that goes beyond a sole focus on green finance.

Speaking to RFI Foundation on the origins of Malaysia’s work in bringing together approaches to Islamic finance and responsible investment, Zainal Izlan Zainal Abidin, managing director of Development & Islamic Markets at the Securities Commission Malaysia, pointed to efforts to build on “significant similarities in the underlying principles between Islamic finance and sustainable & responsible investment”.  

As a starting point, the Securities Commission developed an SRI sukuk framework to bridge the gap between social impact-focused investment such as green finance and unique approaches from Islamic finance such as waqf, or Islamic endowments.  As Zainal explained: “The objective of waqf is to generate social benefit for the community.  Many strategically located waqf assets in Malaysia could generate more value and would do so in a way that naturally achieves social impact”.  

The broad approach that is embedded within the SRI sukuk framework was outlined in a process that started in 2013, when the framework was drafted ahead of its release in 2014.  The first SRI sukuk, from Malaysian sovereign fund Khazanah Nasional, was issued in June 2015.  

Amid the background of the COP 21 climate change negotiations, an easy way to generate attention for the SRI framework would have been a ‘green sukuk’ from Khazanah. Instead, Khazanah opted for a more innovative pay-for-performance social-impact sukuk focused on improving education outcomes at government schools as part of the Yayasan AMIR Trust Schools Programme.  The first tranche, for RM100 million, was issued in 2015, and a second tranche, also raising RM100 million, was issued this month.  

Khazanah’s second sukuk (which was followed by a RM5 million ($1.17 million) exchange-listed sukuk on August 8) followed on the heels of the first green sukuk issuance in Malaysia, by Tadau Energy, which raised RM250 million at the end of July.  Tadau’s sukuk was the first labelled green sukuk in the world, with certification from Norway-based Center for International Climate and Environmental Research, or CICERO.  

Juniza Zahari, Director of Debt & Capital Markets at Affin Hwang Investment Bank, which arranged Tadau’s sukuk, said she expects more project companies in Malaysia to issue green sukuk.  She noted that the Energy Commission has allocated a total of 1,000 MW for the large-scale solar power programme and the capacity will come online between 2017 and 2020.  

These large-scale projects will likely look to the capital markets for financing, including through sukuk. In many cases, the choice of sukuk versus other financing options will be easier for issuers because of the tax deduction of the value of issuance costs for SRI sukuk that applies most green sukuk which are eligible under the SRI sukuk framework.

Echoing Zahari’s comments, Chris Wai Kit Lee, CEO of RAM Consultancy Services, suggested that depending on market conditions there could be up to $1 billion in green sukuk issuance from Malaysia in the next year. Half of this issuance could be issued by year-end, Lee said.

Malaysia’s Energy Commission, through its second round of tendering is expected to award 10–30 MW solar plants to each company. Zahari said that since these projects are smaller they will be more likely to rely on the loans market, which could provide a longer-term pipeline for green sukuk from Islamic financial institutions.  

Malaysia appears to have set its sights on having a more regional presence in responsible finance, after hosting the most recent meeting of the ASEAN Capital Markets Forum.  One area of focus during the Forum is the endorsement of a cooperation between ACMF and the International Capital Market Association (ICMA) to introduce ASEAN green bond standards that will be applied across capital markets in ASEAN. The ASEAN Green Bond Standards will be developed based on ICMA’s Green Bond Principles (GBP). Zainal wasn’t able to speculate on the final outcome of the negotiations but said that the objective of the work would be to “provide guidance to potential issuers who would like to issue in conformance within green guidelines in order to create a new asset class in region”.

Several others we spoke to shared the belief that green sukuk issuance would expand beyond Malaysia. Faris Hadad-Zervos, World Bank Group Representative to Malaysia and Country Manager, suggested that the “growth trajectory of green Islamic finance will mirror that of the early years of both green bonds and Islamic finance”.  Several countries--including Kenya, Nigeria, Morocco and Jordan--have expressed interest in or begun the process of issuing both sovereign sukuk and sovereign green bonds. Building on his experience in the green bond market's development, Sean Kidney, co-founder and CEO of the Climate Bonds Initiative, said that “as soon as we start seeing more issuance of green sukuk, it will likely reveal latent demand not yet evident in the market”.  

Speaking about their experience in using green sukuk, Susanna Lim, managing director of Tadau, said that “companies doing sustainable projects could turn to green sukuk as a marketable source of financing.”

Harald Franke Lund, senior advisor to CICERO, commented about broader investor acceptance of green sukuk: “Green bond investors will likely recognize practices including earmarking investments to specific purposes and delivering more than just financial returns, both of which could expand appeal for green sukuk.”

In developing a new asset class, Malaysia’s Securities Commission is starting from a strong point, having accumulated a 30 per cent market share of responsible investment assets in Asia excluding Japan as of 2016, according to the Global Sustainable Investment Review.  This market share, built in part through 32 per cent growth in assets between 2012 and 2014 and 16 per cent growth through 2016, should be enhanced under initiatives outlined in the Blueprint on Islamic Fund and Wealth Management which the Securities Commission put in place last year.  The Blueprint includes an explicit focus on the overlaps between responsible investment and Islamic finance.  

The next step, according to Zainal, is to raise regulatory support for development of Malaysia as a regional center for sustainable and responsible investment.  He said, “Because of significant similarities between green [principles] and Shariah, there should be significant alignment between [sustainable and Islamic finance], which would fit within the SRI fund framework.  This framework will stipulate an investment framework for collective schemes, which to be labelled as being ‘SRI’ will have to follow specific guidelines, and which will include a set of specific requirements for SRI funds to follow if they are Shariah-compliant.”

The debut green sukuk has spurred other issuers and demonstrates a value for the broader responsible finance ecosystem to develop, which includes banks, ratings agencies, and other intermediaries who support issuers.  This is likely to be a sizeable opportunity, and the pipeline of solar projects considering green sukuk could anchor the growth of responsible finance.  

Khazanah’s series of education-focused SRI sukuk (RM205 million of which has been issued from a RM1.0 billion program) shows the wider applicability for sustainable and responsible investment beyond green finance.  With the SRI fund framework (including rules for Shariah-compliant SRI funds) coming, there will come an opportunity to institutionalize the investor base needed to support growth of SRI sukuk and provide a powerful demonstration about how Islamic finance supports positive social impact.




Tags: sukuk | malaysia |

More Finance & Capital Market Stories

calendarCalendar of Events

Ads