ISLAMIC FINANCE AWARENESS GROWING IN GLOBAL BOND MARKETS

Malaysia 2017 | FINANCE | VIP INTERVIEW

TBY talks to Datuk Chung Chee Leong, CEO of Cagamas, on 2016 sukuk issuances, becoming a center of Islamic finance, and celebrating three decades of operations.

Could you brief us on the increase in issuances over 2016?

In 2016, we issued a total of MYR7.4 billion, though the total purchases was MYR5.7 billion. This year, we expect to buy MYR10.5 billion and issue MYR11 billion, which is a large increase from last year. We have continued to issue in foreign currencies since the inception of our EMTN program in 2014—having issued a total of MYR7.8 billion equivalent in foreign currencies, including CNH, USD, SGD, and HKD. Thus far, sukuk issuances in foreign currency have only been done in SGD. The Company has performed well, and we made profits of around MYR332 million in 2016.

How do you market your products and where does interest for these issuance come from?

Even before we established the EMTN program, we visited a number of financial centers to meet with investors and determine their needs. We continuously interact and engage with our existing investors and potential investors in Hong Kong, Singapore, London, the Middle East, Taiwan, and Japan, among other countries. We keep in close contact with them, and that allows us to close an issuance quickly. As a result, we recently concluded a public issuance of USD350 million in less than a week. We are active in branding our services abroad, and people have become more familiar with Cagamas. We have also won a number of awards in various forms, including 2016's Global Islamic Finance Advocacy Award for an Institution.

What should Malaysia do to unlock the full potential of Islamic finance?

Islamic finance is still growing in terms of the capital market. When we first started meeting with investors in Hong Kong and London, some of them did not want sukuk unless we gave them a higher yield in comparison with conventional bonds. Over the years, we have found that the acceptance of sukuk has changed, especially after the governments of the UK and Hong Kong started issuing sukuk themselves. The acceptability, awareness, and understanding of sukuk have significantly grown around the world. Unlocking the full potential of Islamic finance is about creating awareness and understanding. In Korea, Taiwan and Japan, there is a great deal of room for growth of sukuk. Within ASEAN, we can focus on Thailand, the Philippines, and Vietnam to build more awareness. In Malaysia, about 23-25% of all banking assets are already in Islamic finance, with a strong prominence in the housing sector, for example. With our established Islamic finance and sukuk investor niche—consisting of Islamic pension funds, Islamic banks, Islamic fund managers and takaful operators—we are able to offer sukuk more competitively than conventional bonds in the local market. This is possible since conventional investors can also buy sukuk while Islamic institutions cannot buy conventional bonds. In Malaysia, the market demand for sukuk is in fact greater. Previously, investors expected sukuk to pay a higher yield; however, in Malaysia that scenario is the reverse and we are either paying lower or equal to what we pay for conventional papers. In terms of government securities, we have Malaysian government securities (MGS) and Malaysian government investment issue (MGII). Previously in 2013-2014, foreign participation in the MGII was small, at about 1-3% in comparison to the MGS, which was about 40%. The yield for MGII was also 20-30 points higher than MGS. After the rebranding from GII to MGII and investors realized it was related to the Malaysian government, foreign participation increased significantly. It is still lower than MGS; however, it has grown significantly from to a high of 13%. This shows that the demand and awareness for sukuk has grown in terms of buying sukuk in the form of the MGII. Since the US Presidential Election, we have seen volatility in the market and foreign holdings of Malaysian government papers have also gone down overall; MGII and MGS combined are about 30%.

Cagamas is celebrating 30 years of operations in 2017. How successful have you been in terms of your social economic role in society in promoting house ownership?

As far as promoting home ownership is concerned, Cagamas has contributed by purchasing housing loans from financial institutions and hence, providing the much needed liquidity to the banking system to further finance house purchases. Cagamas has refinanced about two million homes since its inception. Currently we look at areas that promote economic activities such as infrastructure and the SME sector. Another area that we focus on is affordable housing. We work to see how Cagamas can play a role in promoting affordable housing. Cagamas has participated in two government schemes in terms of mortgage guarantee, such as My First Home scheme (SRP) and the Youth Housing scheme (YHS). A sister company, Cagamas SRP, provides the mortgage guarantee on such loans to the first time homebuyers. This allows borrowers to borrow up to 100% of the house value. This helps some young individuals below the age of 40 who individually earn less than MYR5,000 a month or MYR10,000 in a joint household income. This scheme helps these individuals to own their first home. For the SRP scheme, there are 23 participating banks whereas the YHS is offered by Bank Simpanan Nasional. These are efforts that the government has put in place to help young individuals own houses and Cagamas plays a role in terms of providing the mortgage guarantee. We also look at the role we can play in terms of affordable housing and are working on certain ideas there.

What makes Cagamas outstanding in the international market?

Cagamas continued to be accorded the international rating of A3 by Moody's Investors Service (Moody's) and the domestic ratings of AAA by both Malaysian Rating Corporation Berhad and RAM Rating Services Berhad. This is a testament to Cagamas' consistent track record of strong governance, robust assets quality, stable profitability and prudent risk management. In the past 30 years, there were two spikes during periods of crisis. During crises, banks usually would face a liquidity crunch and thus, would sell more loans while we also continue issuing bonds/sukuk to fund the purchases. There were adequate buyers of our papers even during crisis periods. When investors look to buy a bond/sukuk, they look at the rating, the yield, and liquidity of the papers. When investors buy a bond/sukuk, majority of them would want to keep it. That may not attract certain investors, particularly foreign investors to come in. For investors to buy a Cagamas MYR paper, they want to be sure they can exit at any point in time to sell the paper. What we have achieved is that some of our issuances are now included in some of the influential benchmark indices that investors look at, including dollar issuances and MYR issuances. Certain investors base their investment decision on the basket in the benchmark. To be within the benchmark is important in terms of creating secondary liquidity. The next thing we did was to create a dedicated pricing page in both Bloomberg and Thomson Reuters. These pages show our outstanding bonds/sukuk to investors and also served as platforms for investors to obtain indicative pricing of Cagamas bonds/sukuk in the secondary market. Cagamas is the only corporation in the world that has a dedicated pricing page in Bloomberg and Thomson Reuters. In 2016, we achieved MYR17.1 billion in volume in terms of secondary trading, which was more than double the MYR5.3 billion in 2015. As a result of these initiatives, foreign holdings of Cagamas papers including both bonds and sukuk increased from 0.5% in 2015 to about 8% in October 2016. However, after the US Presidential Election, there was an outflow, particularly by some banks and the foreign holdings of Cagamas bonds/sukuk is about 5-6% which is still credible.