Asia Businesses Turn to Sharia Debt

Malaysian institutional sized businesses plan to replace 28.8% of their conventional bank debt with Sharia compliant alternatives in the next 12 months, according to research from East & Partners Asia (East) and REDmoney.

Over the same period, Malaysian institutions plan to replace 22.1% of their bond offerings with Sharia- compliant Sukuk products.

The first round of East’s bi-annual research programme interviewed over 700 corporate borrowers and issuers in Malaysia and Singapore in October, with chief financial officers (CFOs) and corporate treasurers detailing the current penetration of Sharia compliant products today, with forecasts for the next 12 months.

The programme looks at product engagement by the private sector, market share and wallet share among providers and also at customer satisfaction levels, competitor by competitor for the delivery of Sharia compliant products. It also details drivers for engagement, and barriers.

The research found that, due to the support of Bank Negara Malaysia, Sharia banking penetration among private sector companies in Malaysia was significantly higher – as a percentage of assets and
debt – than Indonesia.

Institutional sized businesses in Malaysia, for example, report that Sharia compliant loans comprise 18.8% of their total loans, equivalent to an average balance of US$1.33bn.

In Indonesia, in comparison, the percentage is 7.8%, although the market average total loan balance is US$1.89bn.

As a percentage of outstanding bonds, Sukuk bonds comprise 26.6% of outstanding bonds issued by Malaysian corporates.

In Indonesia Sukuk bonds represent 7.2% of outstanding bonds. 

 

The research shows that institutional sized businesses are much more engaged with Sharia compliant products than smaller corporate businesses and small and medium sized enterprises (SMEs), but these two segments also plan to significantly increase with engagement in the next 12 months, particularly
with debt products.

Darryl Ye, East’s senior analyst in Singapore, said major banks were “racing to keep up” with the uptake of Sharia compliant products by private sector businesses.

“Even the Japanese and other non-regional international banks are responding to what is now a major component of the region’s banking landscape,” said Ye.

“Along with sovereign Sukuk issuance, which drove over US$7bn issued in September alone, Sharia compliant finance has significant momentum in key Asian markets and is here to stay.”

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