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Malaysia Eyes More Islamic Bond Offerings
Liau Y-Sing | March 17, 2010

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Kuala Lumpur. Malaysia may sell longer-dated government sukuk , or Islamic bonds, to help alleviate a shortage of investments for takaful companies, or Islamic insurers, and help address a barrier to the industry’s growth, one insurer said.

An illiquid sukuk market and a shortage of Islamic assets, especially long-term paper, have generated an over-reliance on regional equity and real estate markets, rendering the $14 billion takaful industry vulnerable to sudden shocks. Takaful Ikhlas, Malaysia’s third-largest Islamic insurer, said authorities have held discussions to tackle the problem of a lack of Islamic investments.

“The government is taking action, there’s been some discussion in arranging for long term sukuk. We’re looking at something beyond 10 years: 10, 15, 20 years,” Takaful Ikhlas chief executive Syed Moheeb Syed Kamarulzaman said.

Returns on Islamic insurers’ investments are affected by a limited supply of instruments. Takaful companies can only invest in assets that comply with Shariah, or Islamic law, ruling out investments involving excessive speculation, gambling, pork and alcohol.

Takaful Ikhlas is a unit of Malaysian insurer MNRB Holdings.

Shariah financial institutions should receive private placements or allocations of Islamic paper, Syed Moheeb said. “Islamic instruments are not privy to us alone, it’s open to all and sundry,” he said. “We will have to rush to the line and normally we will be standing behind others as well.”

Islamic bond issues are regularly oversubscribed, as there is more demand than supply of Shariah-compliant assets, and long term investors like pension funds tend to hold until maturity.

Islamic paper accounted for about a third of total Malaysian government bond issuance of 88.5 billion ringgit ($26.72 billion) last year, central bank data showed.

Malaysian Islamic government bonds typically have a tenor of less than 10 years.

The last government sukuk auction, a 3 billion ringgit, 3-1/2-year issue in January, fetched an average yield of 3.288 percent with a bid-to-cover ratio of 2.12 times. This compared with a yield of 3.146 percent for the benchmark three-year government bond at the time.

 

Reuters