LONDON: The global Islamic capital market is once again focused on Malaysia with the recent launch by Bank Negara Malaysia, the central bank, of its new Islamic monetary management instrument, the Bank Negara Monetary Notes-Istithmar (BNMN-Istithmar).

At the same time, according to Islamic banking market sources, the Malaysian government has appointed the local Maybank Group and the CIMB Group, together with Citigroup and HSBC, to lead arrange a third global sovereign US dollar sukuk offering.

Similarly in June 2011, Cagamas Berhad, the National Mortgage Corporation, launched its third domestic sukuk — a RM150 million 1-year sukuk commodity murabahah.

In April this year, Cagamas launched a 2- to 15-year multi-tenured Cagamas sukuk amounting to RM45 million; while in February it issued a RM400 million 4-year Sukuk.

This brings Cagamas total sukuk offerings in 2011 thus far to RM595 million.

All the Cagamas sukuk will be redeemed at their full nominal value on maturity and are listed and tradable under the Scripless Securities Trading System.

They are effectively unsecured obligations of the company, ranking pari passu among themselves and with all other existing unsecured obligations of the company.

According to Bank Negara Malaysia, the BNMN-Istithmar notes are based on the Istithmar (investment) concept, which refers to portfolio investments into a combined structure of sale and leaseback of assets (ijarah) and commodity cost-plus financing transaction (murabaha).

In fact, the inaugural auction, which is a competitive exercise via the domestic principal dealer network, took place on June 21 with an issue size of RM500 million, which was snapped up in no time.

The Malaysian central bank, said in a statement that the main objective of issuing BNMN-Istithmar notes “is to increase efficiency and flexibility of liquidity management in the Islamic money market by expanding the Shariah concept used in Bank Negara Malaysia’s Islamic monetary instruments. BNMN-Istithmar would contribute toward expanding investment instruments and the investor base as well as promote greater liquidity in the Islamic money market.”

Bank Negara Malaysia also confirmed that the BNMN-Istithmar notes will be traded using current market conventions and has been accorded the same regulatory treatment as all existing Bank Negara monetary notes issuance.

As far as the country’s third global sovereign sukuk is concerned, no size or any firm decision to launch the offering has been taken.

Malaysian sources stress that any issuance will only go ahead if the pricing, demand and market conditions are spot on.

But, a series of global investor road shows taking in the usual suspects of capitals in the Gulf Cooperation Council (GCC) countries, Asia, Western Europe and the US, did commence on June 23, perhaps indicating the confidence of the issuer that market conditions are indeed conducive and opportune.

This proposed latest offering follows the first international sovereign sukuk pioneered by Malaysia in 2002 — a $600 million Sukuk Al-Ijara issued by 1 Malaysia Sukuk Global Berhad; and the country’s second international Sukuk Al-Ijara offering in mid-2010 by the same special purpose vehicle to the tune of $1.25 billion.

Both these and the proposed new sukuk offering will be 144A/Reg-S registered securities on behalf of the Malaysian government.

The final pricing for the $1.25 billion Malaysia Global Sukuk in 2010 at US Treasury 5-Year plus 180 basis points with yields touching 3.928 percent to be distributed on a fixed-rate basis annually, did please the Malaysians.

At the time, the joint lead managers and bookrunners, CIMB of Malaysia, Barclays Capital and HSBC, maintained that the pricing reflected the lowest absolute yield achieved by an Asian sovereign in the past five years.

That sukuk was also the second bond to be issued by an emerging market country in the past five years to yield below four percent, and the first ever by an Asian emerging market sovereign issuer. It also had a strong order book and investor demand.

By the close of the order book, demand had increased to an overwhelming six billion from more than 270 domestic and international investors, reflecting the confidence of the global investors on the strong macroeconomic fundamentals of Malaysia.

This compared with the $750 million sukuk issued by the Islamic Development Bank (IDB) in May this year under its $3.5 billion Trust Certificates Program, when in reality it was forced to downsize the issuance to $750 million partly because total applications in the order book for the issuance was very disappointing and hardly reached $900 million.

Market sources stress that the structure of the third Malaysia global sukuk is likely to be a Wakala (agency) sukuk.

In fact, the issuer, trustee, lessor, and the purchaser and seller of the asset pool, is the Wakala Global Sukuk Berhad and the issuance like the previous two will have full recourse to the government of Malaysia.

Like the last Malaysia global sukuk, the A3 (stable) by Moody’s Investors’ Service and A- (stable) by Standard & Poor’s (S&P), may well inspire market confidence in this latest proposed issuance, whose asset pool components comprise 52 percent tangible assets that will be redeemed at maturity and 42 percent Murabaha receivables which will be the initial investment.

The proposed third Malaysia global sukuk will be listed on the Hong Kong Stock Exchange, the Labuan International Financial Exchange and Bursa Malaysia.

The timing of the issuance perhaps reflects the strong recovery of economic growth in the Malaysian economy and in the East Asian region.

Malaysian real GDP Growth in 2010 touched 7.2 percent, which is the highest rate in the last five years.

The government GDP growth forecast for 2011 is between five to six percent.

Malaysian Prime Minister Muhammad Najib Razak in his additional capacity as the country’s Finance Minister, in his Budget 2011 speech to parliament last October stressed a growing role for the Islamic finance sector in the Malaysian economy and emphasized the transformation of Malaysia into a developed and high-income economy with inclusive and sustainable development, spearheaded by the private sector.

A number of strategic high-impact projects are expected to involve both conventional and Islamic financing and investment.

The biggest boost to the global Islamic finance industry came when Prime Minister Najib stressed that it would play an important role in the country’s then newly-launched economic transformation program (ETP) over the next decade, and that the globalization of Islamic finance has been instrumental in forging stronger financial ties between developed countries and the Asian and the Middle East regions.

At the same time, he added, Islamic finance is expected to contribute to higher and more sustainable economic growth while encouraging greater financial and trade flows between the Middle East and Asia.

Malaysia is the only country that has identified Islamic finance as one of the important growth areas for the National Key Economic Activities, which is one of the two components of the ETP responsible for driving growth.

The other is the Strategic Reform Initiatives that, according to the government, are the enablers of growth.

He stressed that the sector presents a viable and competitive funding option to sustain robust economic growth in Asia, whose cumulative savings are projected to reach $80 trillion over the next decade, which in turn can fuel productive economic activity in the region.

Malaysia alone has a total funding requirement of over $450 billion for its economic transformation over the next decade, including for a wide variety of projects — from nuclear energy to a mass railway network.

The bulk of this funding is expected to come from the private sector, with government-linked companies and the public sector contributing the rest.

“I am confident that some of these funding needs will be addressed through a sukuk-raising exercise as the global market picks up. As the market continues to face a supply shortage, new issuance of sukuk may be cheaper or else met by a high take-up rate, which will also increase its attractiveness,” he added.

Not surprisingly, the proposed third sovereign Malaysian global sukuk is the first that will be launched since Prime Minister Najib launched his Economic Transformation Program last November.