* Agrosukuk to boost local capital markets
* Double deduction tax for issuance expenses
* Bankers say more needed to help smaller borrowers
By Kit Yin Boey
Oct 5 (IFR) - The Malaysian Government has launched a
campaign to encourage more agricultural-sector companies to fund
through Islamic bonds. The move is seen as a bid to develop the
country's sukuk market and stimulate its agricultural industry.
In Malaysia's latest budget release, on September 28, Prime
Minister Najib Tun Razak detailed a number of steps to stimulate
and strengthen the country's capital markets. These include tax
breaks, the creation of retail bonds and an additional M$400m
(US$131m) allocation to state-owned guarantee agency Danajamin
It is, however, the promise of Islamic bonds from the
agricultural sector that has the markets buzzing.
Najib announced that the Securities Commission would create
a framework to allow agriculture companies to issue special
sukuk. Under the framework, expenses incurred in the so-called
'Agrosukuk' deals will receive a double tax deduction over the
four tax years from 2012 to 2015.
While the idea was promising, local debt bankers said they
were yet to grasp fully what it involves.
"To be frank, we are in the dark. My sense is that the SC
itself has not finalised any details on this Agrosukuk and only
the Islamic division at the SC seems to be aware of this new
instrument," said one head of debt origination. "It is at such a
preliminary stage that we are surprised that the PM decided to
"The government is trying to focus on the agriculture
sector, following the listing of Felda, but, again, the devil is
in the details. How will it work specifically?" asked one
Seen against the entire budget, it may make a little more
sense why the agricultural sector has been singled out. For
instance, M$5.8bn is being allocated to the Ministry of
Agriculture and Agro-based Industry.
Apart from the commodities sector dominated by palm oil and
rubber industries, which have enjoyed widespread benefits from
previous years because of the major contributions they make to
the country's economy, the growths of other agro-based
industries, such as rice farming and fishing, have lagged.
More cynical observers say that the move to extend funding
access to smaller agriculture companies forms part of the
government's populist budget, dismissing the move as a token
gesture designed to capture votes in the rural areas in the next
general election. Prime Minister Razak has to call an election
before April next year.
Bankers, however, believe the government will need to
provide more than just tax incentives to encourage these
potential issuers to come to the capital markets.
"The big agricultural or plantation companies, such as IOI
and KL Kepong, have ready access to not only the sukuk markets,
but also to bank lending," said one local banker.
"However, apart from these companies, which are rated at
least Double A, not many others will be able to access the
markets, given investors' aversion to anything rated below that.
There is a bit of disconnect there, since the tax incentive will
only help the big companies. In the end, I'm not sure how it
will benefit the industry as a whole."
(Reporting By Kit Yin Boey; Editing by Steve Garton and