| KUALA LUMPUR/SYDNEY
KUALA LUMPUR/SYDNEY Feb 26 Issues of Islamic
bonds targeting retail investors in Indonesia, Malaysia and
Pakistan could broaden the appeal of sharia-compliant financial
products, create a more active investor base and convince more
companies to raise funds with sukuk.
Last year saw the first-ever issue in Malaysia of retail
sukuk, which are offered to the public rather than being sold to
banks or placed with large institutional investors.
The Malaysian issue was followed this month by Karachi's
electric utility; Indonesia's finance ministry has been offering
sovereign paper to the mass market since 2008.
Authorities hope that by involving large numbers of
individual investors, retail sukuk can become popular among 400
million Muslims across the three countries - roughly one in
every four Muslims in the world.
"We are very optimistic, as in the market there is demand
for sharia-compliant financial instruments," said Amir Khan
Afridi, director at Pakistan's Securities and Exchange
Proponents hope that retail sukuk will serve more than
investment and fund-raising purposes; they could raise awareness
of the principles of Islamic finance, such as its bans on
interest payments and pure monetary speculation.
"This will provide an opportunity to investors to debate
Islamic finance concepts. These debates and discussions will
help bring more clarity among the public," Afridi said.
Pakistani utility K-Electric, which serves over 20
million consumers, is in the process of raising 6 billion rupees
($57 million) through the country's first retail sukuk issue.
Afridi said another Pakistani firm, which he declined to name,
had applied for permission to conduct such an issue.
K-Electric decided on its issue after it sold a 2 billion
rupee conventional retail bond last year which was fully
subscribed within six weeks, a company spokesman said.
There are major obstacles to successful issuance of retail
sukuk, which explains why the instrument did not appear earlier
in Malaysia and Pakistan, and why non-government issuers have
not yet emerged in Indonesia.
In the Gulf, the world's other main centre of Islamic
finance, many sukuk are listed on stock exchanges - in theory
allowing them to be traded by individuals - but issues are
targeted at institutions, not at retail investors.
The United Arab Emirates' National Bonds Corp offers
sharia-compliant savings schemes in which investors can buy
savings certificates based on the mudaraba format in very small
denominations, but this stops short of a direct issue of sukuk
to the retail market.
In Malaysia, Jamaluddin Nor Mohamad, head of Islamic and
alternative markets at Bursa Malaysia, the national exchange,
said engaging with potential issuers was a "daunting task",
while it was hard to raise awareness of the product among retail
investors more accustomed to other instruments such as equities.
"The product features of a fixed income instrument did not
fit perfectly into the mind space of our existing investors."
Lack of familiarity has raised the costs of issuing. When
Malaysia's DanaInfra Nasional, set up by the finance ministry to
raise funds for the country's largest infrastructure project,
issued its debut 300 million ringgit ($91 million) sukuk in
January 2013, it structured the instrument to mimic an equity
IPO but still had to offer a price premium to attract buyers.
This created a "negative perception" among potential
issuers, Jamaluddin said. DanaInfra's subsequent retail sukuk, a
100 million ringgit issue last October, tried to correct this by
pricing in line with the over-the-counter market used by big
DanaInfra may make two more retail issues of 100 million
ringgit each in 2014, Jamaluddin said. "We continue to highlight
that it is difficult for us as an exchange to promote this
product when there is only one issuance. On that basis, we are
saying two is not enough."
In a statement, DanaInfra said the retail sukuk market
needed more time to mature. "It may only be achieved with
continuous support from all parties including the regulators,
the brokers and the market makers."
But issuers seeking to widen their investor base, or which
have huge capital requirements over a long period of time, can
benefit from retail sukuk, it said.
Since DanaInfra's retail sukuk are listed on Bursa Malaysia,
they can be relatively easily traded by investors. This could
help to develop a secondary market in sukuk; institutional
investors which buy sukuk in the over-the-counter market often
hold them to maturity, so secondary market trading is minimal.
Indonesia's government has sold retail sukuk every year
since 2008 but it remains the country's sole issuer; it hopes to
attract new investors with its upcoming March issuance.
"There are companies who have come to ask about the
mechanism, but for issuing this instrument, the cost has to be
taken into account," Dahlan Siamat, director of Islamic
financing policy at Indonesia's finance ministry, told Reuters.
Costs could come down if retail sukuk prove to be an
effective tool to fund infrastructure projects and are actively
traded in the secondary market, said Siamat.
"We want newcomers and not only our present investors," he
said, adding that with its sales network of 26 agents, including
19 banks, the ministry was now exploring smaller cities for
It has begun introducing sukuk to the academic community on
university campuses, and ramped up promotions in the east of the
country, where the financial industry is relatively undeveloped.
"The sukuk is offered directly to the people. Anyone willing
can go to any of our selling agents spread throughout the
Since 2008, the finance ministry has adapted the sukuk to
investors' appetites, Siamat said. It has introduced a minimum
holding period of one month before they can be sold in the
secondary market, and has been considering shorter maturities of
around three years.
Indonesians can buy into retail sukuk with a minimum order
of only 5 million rupiah ($430), compared to 1 billion rupiah
for the government's non-retail bonds.
The government sold 14.9 trillion rupiah worth of retail
sukuk last year, up from 13.6 trillion rupiah in 2012. The
ministry has now raised a total of 36 trillion rupiah this way,
or 21.4 percent of the country's outstanding sovereign sukuk.
(Editing by Andrew Torchia)