ROLE OF ISLAMIC FINANCE IN INFRASTRUCTURE FINANCING Financing Sources for Public-Private Partnerships (PPP) Sub-Regional Expert Group Meeting (EGM) for South-East Asian Countries

Nik Mohamed Din Nik Musa Bank Negara Malaysia Kuala Lumpur 24 November 2015

Source: US Bureau of Economic Analysis, Rreef Research, Ibid, World Bank, KFHR

GLOBAL INFRASTRUCTURE LANDSCAPE

OECD Estimated Average Annual World Infrastructure Expenditure based on sectors, 2000-2030

0

200

400

600

800

1000

1200

Road Rail Telecoms Electricity Water

US

D B

illio

n

2000-2010 2010-2020 2020-2030

Source: OECD; KFHR

• The World Bank estimated total global value of infrastructure investments at USD17 trillion (2013).

• North America required the highest investment with market size of 32%, followed by Asia Pacific (29%)

• By sector, water made up the largest contributor for infrastructure expenditure

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INFRASTRUCTURE OPPORTUNITIES - FOCUSING ON ASEAN

ASEAN infrastructure needs at USD7 trillion between 2015 to 2030

3

• USD73.1 billion infrastructure sukuk have been issued by more than 10 different countries between 2002 and 3Q2015.

• Infrastructure sukuk market dominated by issuances from Malaysia (61%), followed by Saudi Arabia (30%) and the UAE (7%).

• Malaysia’s Economic Transformation Programme (ETP) will accelerate spending plans to meet its economic and socio-economic targets by 2020.

• GCC infrastructure and real estate projects are forecasted to reach almost USD2 trillion by 2020.

INFRASTRUCTURE SUKUK

Malaysia, 61%

UAE, 7% Indonesia, 1%

Pakistan, 1%

Saudi Arabia, 30%

Others, 0.2%

Infra Sukuk Issued by Domicile of Issuer (2012 - 3Q2015)

Source: ISRA

Sukuk has played a pivotal role in infrastructure financing for public and private projects.

Infra sukuk USD 20.80

bil

% of Infra Sukuk Issuances (2009 -2011)

13%

Infra sukuk USD73.12 bil

% of Infra Sukuk Issuance (2012 - 3Q2015)

Total Sukuk Issuances

2012 - 3Q2015: USD420bil

17%

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INFRASTRUCTURE SUKUK - HIGHWAY

• Long-tenured government guaranteed sukuk.

• Generated very robust interest taking into consideration the large size of the issuance.

• First single largest bond issuance in Malaysia.

• First single largest Ringgit-denominated Sukuk issuance.

• First single largest sukuk issuance globally, in any currency.

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INFRASTRUCTURE SUKUK – MASS RAPID TRANSIT

• First ever sukuk in the world and fixed income asset listed on Bursa Malaysia for retail investors.

• Net proceeds: to finance the capital expenditure and operating expenses for the MRT project.

• The debut issuance of the ETBS (Exchange Traded Bond and Sukuk) was oversubscribed by 1.61 times (1,424 applications representing MYR484 million in value).

• Modes of public to purchase: via application forms or ATM (Automated Teller Machine) of participating banks.

• The landmark transaction is part of the initiatives under the Capital Market Masterplan 2 to facilitate greater retail participation in the bond and sukuk market and intend to make available wider range of investment products to retail segment.

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World’s first rated hybrid perpetual sukuk

• Largest perpetual sukuk issuance by a Malaysian corporate with a size of RM1 billion.

• Quasi-equity funding solution.

• Over-subscription of about 5.5 times (RM5.5 billion order book).

• Malaysia Airports - operations, management and maintenance of airports. Airports under its operations - 5 international gateways, 16 domestic airports, 18 short take-off and landing ports .

INNOVATIVE INFRASTRUCTURE SUKUK - AIRPORT

Awards received for breakthrough transaction:

• The Best Local Currency Sukuk – The Asset Triple A Islamic Finance Awards 2015

• Best Corporate Hybrid Sukuk – The Asset Triple A Islamic Finance Awards 2015

• Maiden Euromoney Award for Innovation in Islamic Finance 2015

• Market Pioneer Award 2015 - RAM League Award

• Sukuk proceeds to finance airport related working capital.

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MALAYSIA’S LOCAL CURRENCY BOND/SUKUK MARKET

• Malaysia has the second largest size of local currency bond (LCY) market in % of GDP (ex-Japan).

• This reduce dependency on direct banks financing

Source: Asian Bond Online

Government, 70%

PDS, 30%

0.001.002.003.004.005.006.007.008.009.00

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15

MYR

Bio

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15Conventional 4.95 3.37 7.02 3.00 4.18 4.70 2.45 2.13 5.46 3.37 4.55 2.91Islamic 6.57 4.03 6.15 3.28 5.63 7.73 1.80 1.13 5.19 7.98 6.95 4.24

132.69

125.20

48.08

60.67

0 50 100 150 200

Conventional

Islamic

Government PDS

Debt Securities Issuances in Malaysia

PDS monthly issuance shows preference over Sukuk

Source : BPAM 1USD = MYR4.11

MYR Bio

Total amount issued for 1-yr period (Jul 2014 – Jun 2015): MYR 366.65b (USD 89.21b) • Dominated by

Government issuances (public): 70%

• 51% are sukuk (public & private)

• Out of 30% private debt securities (PDS): 56% are sukuk

MYR BOND/SUKUK PRIMARY MARKET Preference over sukuk for issuances by private sectors

9

51%

Oct 14 – Dec 14 marks the highest trading for past year

PDS trading volume

Source : BPAM MYR Bio

MYR Bio

• Total amount traded for 1-yr period (Jul 2014 - Jun 2015): MYR 1,175.63b (USD 286.04b)

• Active securities trading: average monthly volume traded = USD23.84b

• Sukuk are more actively traded in the PDS market

0 50 100 150 200 250 300 350

Q3 2014

Q4 2014

Q1 2015

Q2 2015

163.02

192.14

174.19

118.81

153.16

133.69

130.72

109.90

Conventional Islamic

3.52 2.50

3.66

2.03 2.37 2.54 1.96

1.01

2.20 3.26

2.47 2.39

5.48

7.10

5.31 5.76

4.67 5.13

4.21 3.26

6.28 6.41

7.82 7.20

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15

Conventional Islamic

MYR BOND/SUKUK SECONDARY MARKET Malaysia has a deep and liquid bond/sukuk market…

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New Issuances by Country 1H 2015

Source: Zawya

MALAYSIA A LEADING SUKUK ORIGINATION MARKETPLACE

Global Sukuk (Islamic Bond) New Issuances (2002 – 1H2015) Malaysia’s global sukuk issuances shares declined slightly to 50% in 1H2015 as more new issuances from other jurisdictions.

• Malaysia remains the key driving jurisdiction in the sukuk market, followed by Indonesia, the UAE and Bahrain.

• Notably, Hong Kong issued its 2nd sovereign sukuk in 1H 2015 following the successful inaugural sovereign issuance in 2014.

• 1H2015 showed a total new issuances of USD39.8 billion globally, the lowest half yearly levels since 1H2011 (USD36.1bln), due to weaker sentiment in financial markets, as well as still-low oil prices.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H15Global Outstanding 9.63 16.21 27.58 51.59 94.72 104.81 123.16 142.31 177.85 229.31 269.42 300.90 312.97Malaysia Outstanding 7.62 11.95 20.14 33.31 57.28 61.93 74.78 89.21 107.07 143.92 158.25 172.80 171.70Malaysia Market Share 79.2% 73.7% 73.0% 64.6% 60.5% 59.1% 60.7% 62.7% 60.2% 62.8% 58.7% 57.4% 54.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

50

100

150

200

250

300

350

USD

bill

ion

Global Sukuk Outstanding 1H 2015

Malaysia’s share of global sukuk outstanding declined slightly to 54.9% in 1H2015 (1H2014: 57.4%), reflecting both lower issuances by Malaysia, as well as higher issuances from other jurisdictions including Indonesia and Hong Kong.

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MALAYSIA AS A LEADING SUKUK ORIGINATION MARKETPLACE

PLATFORM FOR MYR SUKUK BY FOREIGN & LOCAL ISSUERS

Foreign Issuers GLCs & MNCs Shell MDS Sdn. Bhd, MYR125mil (1990)

IFC, World Bank, MYR500 mil (2004), MYR760 mil (2005)

AEON Credit Services, MYR400 mil (2007)

Tesco Stores, MYR3.5 bil program (2007) Binariang GSM (Maxis Comm.) MYR15.35 bil (2007) Toyota Capital Services, MYR1 bil program (2008)

Islamic Development Bank, RM1 bil MTN (2008)

Sime Darby, MYR4.5 bil program (2009)

Development Bank of Kazakhstan RM240 mil (2012)

Abu Dhabi National Energy Company (TAQA) RM650 mil (2012)

Gulf Investment Corporation, RM1.675 bil (2011, 2012)

National Bank of Abu Dhabi MRY1.5 bil (2010, 2012)

Noble Group MYR900 mil (2012, 2013)

Bahrain Mumtalakat Holding Company MYR450 mil (2012, 2013)

PLUS, MYR30.6b program (2012)

Celcom Axiata, MYR4.2b (2010)

Danainfra, MYR1.5 bil (2013)

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DEEP SUKUK MARKET LIQUIDITY CREATES ATTRACTIVE PRICING

Source : BPAM

3-yr Bond yield matrix

MGS

Q1 15

Q4 14

Q3 14

Q2 14

14/8 15

3.37 3.70 3.51 3.55 3.68

4.12 4.18 4.09 4.13 4.19 AAA

4.28 4.34 4.25 4.29 4.34 AA

5.52 5.57 5.50 5.55 5.46 A

3.65 3.89 3.83 3.84 3.72 IRS

3-yr Sukuk yield matrix

GII

Q1 15

Q4 14

Q3 14

Q2 14

14/8 15

3.43 3.74 3.64 3.59 3.75

4.06 4.12 4.04 4.08 4.12 AAA

4.22 4.28 4.20 4.24 4.27 AA

5.46 5.51 5.45 5.50 5.39 A

3.65 3.89 3.83 3.84 3.72 IRS

Sukuk vs Bonds: Yield Comparisons showing Price Advantage for Sukuk Why the need to consider Islamic

finance?

• Tapping into new and wider investor base for sukuk vs bonds, creating higher demand, thus better pricing for issuers.

• Transparent and well-established price discovery mechanism, creating a deep and vibrant secondary trading market.

• Malaysia’s sukuk market has world-class infrastructure for data and valuation which meets global standards for Financial Reporting and Risk Management.

• Sukuk as a competitive and viable fund raising tool to finance working capital and other financial needs.

• An alternative source of financing, diversification of risk and portfolio, and new asset class.

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SUKUK FOR INFRASTRUCTURE FINANCING

Gaining prominence as an alternative source of funding

for large scale & long-term infrastructure projects

Promote good business practice -

avoid interest, uncertainties, over-

leveraging and speculation,

backed by real economic activities

Greater governance and transparency that promotes ethical and

fairness

Competitive pricing vis-à-vis bond – strong demand creates better

pricing

Tapping wider investor base -

Islamic and conventional

investors WHY SUKUK?

These massive global infrastructure requirements create financing opportunities for Islamic finance

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Key differences between sukuk and conventional bond are:

SUKUK VS CONVENTIONAL

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COMMON SUKUK STRUCTURE - IJARAH

1Malaysia Sukuk Global USD1.25 billion sukuk Ijarah

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MALAYSIA IS A MULTICURRENCY SUKUK ISSUANCE PLATFORM

ATTRACT STRONG DEMAND FROM GLOBAL INVESTORS

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VALUE PROPOSITIONS FOR SUKUK:THE CASE OF MALAYSIA

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Amounts to be Raised MYR 1,000,000,000

Upfront Fees Approximate Range

Item Sukuk (MYR) Bond (MYR)

Arranger Fees 500,000 500,000

Legal Counsel

For Issuer 200,000 200,000

For Arranger 200,000 200,000

Regulatory Fees

Securities Commission 51,000 51,000

BNM Depository Fees 20,000 20,000

BNM FAST Charges 1,200 1,200

Lead Manager / Bookrunner Fee Subject to issuance

Shariah Advisory Fee 100,000 -

Trustee / Paying Agent / Registrar 10,000 10,000

Facility Agent Fee 50,000 50,000

Rating Fee 500,000 500,000

Reporting Accountant Fee 200,000 200,000

Commodity Trading Fees 20,000 -

Misc. i.e. Printing, Advertising, etc 50,000 50,000

Total (MYR) 1,902,200 1,782,200

INDICATIVE EXPENSES ON ISSUANCE COSTS - SUKUK VS BOND Amounts to be Raised USD 1,000,000,000

Upfront Fees Approximate Range

Item Sukuk (USD) Bond (USD)

Arranger Fees 500,000 500,000

Domestic Legal Counsel

For Issuer 60,000 60,000

For Arranger 60,000 60,000

International Legal Counsel

For Issuer 300,000 300,000

For Arranger 320,000 320,000

Regulatory Fees

Securities Commission 6,000 6,000

Lead Manager / Bookrunner Fee Subject to issuance

International Rating Agency Fees 570,000 570,000

Shariah Advisory Fee 15,000 -

Trustee / Paying Agent / Registrar/Transfer Agent/Delegate 10,000 10,000

Reporting Accountant Fee 150,000 150,000

Commodity Trading Fees 20,000 -

Listing Fees

Processing and Listing Fee 25,000 25,000

Agent Fee 20,000 20,000

Roadshow Expenses 75,000 75,000

Misc. i.e. Printing, Advertising, etc. 50,000 50,000

Total (USD) 2,181,000 2,146,000 21

EFFICIENT LODGE & LAUNCH PROCESS: MYR TRANSACTION

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EFFICIENT LODGE & LAUNCH PROCESS: USD TRANSACTION

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ISLAMIC FINANCE GAINING PROMINENCE FROM WESTERN COUNTRIES

1st sovereign USD sukuk

1st sovereign GBP sukuk

UCITs funds platform

The State of Saxony Anhalt issued debut sukuk in 2004

Gov’t plans to examine tax law to ensure parity between Islamic and conventional financial products

Gov’t plans to develop Islamic wealth management industry

Gov’t plans to issue 1st Latin American sukuk

• J-sukuk framework extension until 2016

• 1st JPY sukuk by BTMU

(Mexico)

(U.K)

(South Africa)

(Luxembourg)

(Ireland)

(Australia)

(Hong Kong)

(Germany)

(Japan)

(Liechtenstein)

• 2 sovereign USD sukuk

• Gov’t published tax guidance on Islamic financing

• 1st sovereign EUR sukuk

• UCITs funds platform

Increasing number of traditional non-Muslim jurisdictions are tapping market opportunities in Islamic finance, particularly sukuk

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THANK YOU Financing Sources for Public-Private Partnerships (PPP) Sub-Regional Expert Group Meeting (EGM) for South-East Asian Countries

Nik Mohamed Din Nik Musa nikdin@bnm.gov.my Bank Negara Malaysia Kuala Lumpur 24 November 2015