CRITICAL ANALYSIS OF SUKUK INNOVATION IN
ISLAMIC BANKING AND FINANCE:
CASE STUDY OF CAGAMAS BERHAD’S SUKUK
AL-AMANAH LI AL-ISTITHMAR (ALIm)
BY
MUZAINI OSMAN
A Research paper submitted in fulfilment of the
requirements for the degree of Master of Science in
Islamic Banking and Finance
Institute of Islamic Banking and Finance
International Islamic University
Malaysia
August 2013
ii
ABSTRACT
The sukuk market is developing rapidly as investors are turning into viable
alternative to the traditional debt market in meeting their funding requirements.
The thriving sukuk market has resulted in the evolution of sukuk structures
beyond the simple structures such as the zero-coupon, non-tradable sukuk and
pure Ijarah sukuk. Recent sukuk structures are more complex, specifically tailor-
made in the form of structured investments products linked to specific
underlying assets such as securities, index, currency, commodity or a
combination of any of these, based on the risk and return profile of the investors.
For instance, the US$400 million hybrid sukuk offered by the Islamic
Development Bank (IDB) in 2003 was based on the combination of Ijarah,
Murabahah and Istisna’ contracts.
Notwithstanding the complexity of the sukuk structure, there are great pulling
factors towards the acceptance of sukuk. This study aims to identify the
objectives and challenges lies in developing and innovating complex sukuk
structures, with specific reference to Malaysia’s Cagamas’ Sukuk al-Amanah Li
al-Istithmar (ALIm). The study aims to surface the real objective to what has
been an innovation of the sukuk market. It also highlights the challenges towards
the new existence of sukuk structure. Clear idea on the basis for the product
structure would benefit the stakeholders in understanding and appreciating the
reasons behind the complex product structure. By focusing on the case of the
sukuk ALIm, the study concentrates on the documentations relating to the sukuk
ALIm structure initiation including the product structure diagram and relevant
agreements. In addition, semi-structured interview is conducted to seek the
opinion on the roles of sukuk innovation and the needs to innovate new sukuk
structure.
The study finds that despite the main objective of profit maximization, there are
evidences that the other objectives of the sukuk ALIm innovation derived from
the needs, market pioneering motives and wider market penetration. Further, the
replication of conventional bond raises the issues of the complex sukuk structure.
iii
خلاصة البحث
ظهر السوق الإقتصادي للصكوك ظهوراً مسرعاً وهذا لأجل المستثمرين الذين يسلكون تبديل جدوي ما
و كيان ازدهار السوق الإقتصادي . سوى السوق الإقتصادي التقليدي لتوفير حاجاتهم في استثمار الأموال
السند الصفري والصكوك غير مثلهللصكوك يؤدي إلى تغير الصكوك من كونها بسيطاً إلى شئ مركب
إن الصكوك الحديثة كونها مركباُ و مزدحماً . قابلة للتصدير و الإستيراد والصكوك الإجارية الحقيقية
واستصناعها بنماذج نتاج الذي يبنى على العقود المختلفة التي تعتمد على الوثائق المخصصة نحو
سعلة أو اختلاط بين هؤلأ التي قد ذكرنا مع تأمل خطيرة الأرقام القياسية و العملات والمصنوعات أو الأ
مليون USD400وارباح من قبِل سوق الإستثمار ، و على سبيل المثال هي الصكوك المهجنة بقيمة
ملادية التي تتكون على 3002في سنة Islamic Development Bank (IDB)التي اصدرها
ولو كانت مركبة و مزدحمة هناك عناصرشائقة .ناعإجماع بين عقود الإجارة والمرابحة و الإستص
من اهداف هذا البحث هي لتحقيق مقاصد و تحديات في استصناع او . تؤدي إلى سعي المستثمرين إليها
التي اصدرها (ALIm)إنتاج الصكوك الحديثة، مع تركيز خاص عن شأن صكوك الأمانة للإستثمار
في اختراعات الصكوك الحديثة و سوف يبدي حقيقة اصليةوهذا البحث . بمليزيا Cagamasالشريكة
سوقها وكذلك التحديات في تركيب او تكوينها، ليظهر احسن استفهام و أجدر شطارة للمستثمرين عن
، هذا البحث (ALIm)وبالتخصص في الصكوك . النتاج الذي يبنى على عقود مختلفة و مركبة
. وينها مع رسم و صور تركيبها و وثائق اخرى متعلقة بهاسيوضح عن وثائق اسسية التي ترتبط في تك
وزيادة على ذلك هناك تحاور مع الناس عن ابتداع الصكوك ليكشف ارائهم عن دور الصكوك و
استثناءً على احصال اعظم الربح وقد ظهر من هذا البحث ان . حاجاتهم الى الصكوك الحديثة المتنوعة
هي لتوفير حاجة الناس أى المستثمرين و كي ALImالصكوك هناك علامات و مشاهدات بان ايجاد
واخراً، هناك شأن . تكون الشريكة رائدةً في هذا المجال الاقتصادي وكذلك ليشيع ناحية تجارية الشريكة
.و قضية ان هذه الصكوك مماثلة بالسند التقليدي و هذا من قبل كونها مركبا و مزدحما
iv
APPROVAL PAGE
I certify that I have supervised and read this study and that in my opinion it confirms
to acceptable standards of scholarly presentation and is fully adequate, in scope and
quality, as a thesis for the degree of Master of Science in Islamic Banking and
Finance.
------------------------------------
Salina Kassim
Supervisor
This thesis was submitted to the IIUM Institute of Islamic Banking and Finance and is
accepted as a fulfilment of the requirements for the degree of Master of Science in
Islamic Banking and Finance.
------------------------------------
Ahamed Kameel Mydin Meera
Dean, IIUM Institute of Islamic
Banking and Finance
v
DECLARATION PAGE
I hereby declare that this dissertation is the result of my own investigations, excerpt
where otherwise stated. I also declare that it has been previously or concurrently
submitted as a whole for any other degrees at IIUM or other institutions.
Muzaini Osman
Signature................................ Date............................
vi
INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA
DECLARATION OF COPYRIGHT AND AFFIRMATION
OF FAIR USE OF UNPUBLISHEDRESEARCH
Copyright @ 2013 by International Islamic University Malaysia. All right reserves.
CRITICAL ANALYSIS OF SUKUK INNOVATION IN
ISLAMIC BANKING AND FINANCE:
CASE STUDY OF CAGAMAS BERHAD’S SUKUK
AL-AMANAH LI AL-ISTITHMAR (ALIm)
I hereby affirm that The International Islamic University Malaysia (IIUM) hold all
rights in the copyright of this work and henceforth any reproduction or use in any
form or by any means whatsoever is prohibited without the written consent of IIUM.
No part of this unpublished research may be reproduced, stored in a retrieval system,
or transmitted, in any form or by means, electronic, mechanical, photocopying,
recording or otherwise without prior written permission of the copyright holder
Affirmed by Muzaini Osman
--------------------------- ----------------------------
Signature Date
vii
ACKNOWLEDMENTS
First, I would like to express my utmost gratitude to Allah SWT., all praises belong to
Allah, the Lord of universe, the All-Knowing of the knowledge of the unseen and the
witnessed. I thank Him for all His blessing, especially to the message He sent through
His messenger Muhammad (PBUH).
I would like to express my deepest appreciation and respect to Assoc. Prof. Dr Salina
H. Kassim for her commitment, fruitful and helpful advice, relentless guidance and
moral encouragement throughout the development and eventual completion of this
study. I am greatly indebted to her for everything she did. May Allah give her the best
rewards in this world and hereafter.
I am grateful to all my lecturers in IIUM Institute of Islamic Banking and Finance
especially Prof. Dr Ahamed Kameel Mydin Meera, Assoc. Prof. Dr Dzuljastri Abdul
Razak, Tuan H. Mustapha Hamat and Tuan H. Md Ali Md Sarif for their invaluable
knowledge imparted onto me.
I deeply appreciate the academic staff of IIUM Institute of Islamic Banking and
Finance particularly sister Norma Taharin, sister Shakirah Muchlish, sister Nur
Syuhada Mohamed Zain and sister Haslina Othman for their advice and supports to
me throughout my tenure as a master student.
My since gratitude to the staff of Cagamas Berhad particularly sister Munerah Arif,
sister Nor Adilah Md Razi and sister Norasmah Abdullah for their support,
motivational encouragement and assistance.
My sincere appreciation to all those are from whom I have directly and indirectly
benefited in my studies and also the completion of this research. My special thanks to
brother Syaiful Nizam Abd Majid, brother Ahmed Turmizi Hamezah and sister Nadia
Rosdin for their fruitful discussion, encouragement and assistance throughout the
completion of this paper.
Finally, I would like to record my unbounded indebtedness and sincere respect,
support, prayers and sacrifices of my beloved parent, Allahyarham H. Osman H.
Hussain and H. Suhaifah H Arshad. Deepest gratitude to my beloved wife, Noor
Safiyyah Mohd Najib and both of my children Noor As Syifa’ Hairani and
Muhammad As Syafi Hayyan for their support, encouragements, patient, strength
loving care and determination to complete my study.
viii
TABLE OF CONTENTS
Abstract…………………………………………………………………………….. ii
Abstract in Arabic………………………………………………………………….. iii
Approval Page……………………………………………………………………… iv
Declaration Page…………………………………………………………………… v
Copyright Page……………………………………………………………………... vi
Acknowledgements………………………………………………………………… vii
List of Charts………………………………………………………………………. x
CHAPTER 1: INTRODUCTION………………………………………………. 1
1.1 Background of the study…………………………………………………….. 1
1.2 Background of Cagamas……………………………………………………... 10
1.3 Background of Sukuk Al Amanah Li Al Istithmar (ALIm)…………………. 12
1.4 Problem Statements and Motivation of Study………………………………. 14
1.5 Objectives and Research Questions………………………………………….. 17
1.6 Contribution of the Study……………………………………………………. 17
1.6.1 Literature on Sukuk…………………………………………………... 18
1.6.2 Industry Players/Investors……………………………………………. 18
1.6.3 Regulators……………………………………………………………. 19
1.7 Organization of the Study…………………………………………………… 19
CHAPTER 2: LITERATURE REVIEW………………………………………. 21
2.1 Introduction…………………………………………………………………….. 21
2.2 Needs and Motivation of Product Innovation & Development………………... 22
2.2.1 Product Replication…………………………………………………….. 24
2.2.2 The Market Forces……………………………………………………... 26
2.2.3 The Shift of Goals from Sacred to Secular…………………………….. 28
2.3 Challenges in Product Innovation & Development……………………………. 29
2.3.1 Internal Challenges……………………………………………………... 30
2.3.2 Pricing of Islamic Products…………………………………………….. 31
2.3.3 Issues on Shariah Principle Used………………………………………. 31
2.3.4 Issues on Sukuk Default………………………………………………... 32
2.3.5 Substance over Form Issues……………………………………………. 33
2.4 Conclusion……………………………………………………………………… 33
CHAPTER 3: METHODOLOGY......................................................................... 34
3.1 Introduction……………………………………………………………………. 34
3.2 Methods………………………………………………………………………… 34
3.2.1 Sukuk ALIm Relevant Documents……………………………………… 35
3.2.2 Interview………………………………………………………………… 38
3.2.2.1 The Respondents………………………………………….…. 38
3.2.2.2 Interview with the Relevant Parties…………………………. 38
ix
3.2.2.3 Interview by Third Party………………………………….…. 40
3.2.2.4 Description of Data Analysis Method………………….…… 41
3.2.2.5 Data Integration and Analysis………………………………. 42
3.3 Informants of the Study……………………………………………………….. 42
3.4 Limitations……………………………………………………………………... 43
CHAPTER 4: RESULT.......................................................................................... 44
4.1 Introduction……………………………………………………………………. 44
4.2 Interview Result………………………………………………………………... 44
4.2.1 Motives and Objectives…………………………………………………. 44
4.2.1.1 Attractiveness of Sukuk ALIm……………………………… 44
4.2.1.2 Profitability………………………………………………….. 47
4.2.1.3 Market Needs………………………………………………... 49
4.2.1.4 Market Share………………………………………………… 51
4.2.1.5 Middle East Penetration……………………………………... 53
4.2.1.6 Product Pioneering…………………………………………...57
4.2.2 Challenges and Issues…………………………………………………… 58
4.2.2.1 Structuring…………………………………………………... 59
4.2.2.2 Execution……………………………………………………. 68
4.2.2.3 Reporting……………………………………………………. 70
4.2.2.4 Shariah Issues……………………………………………….. 71
4.2.3 Innovation vs. Replication………………………………………………. 72
CHAPTER 5: CONCLUSION............................................................................... 74
5.1 Introduction…………………………………………………………………….. 74
5.2 Summary of Main Findings……………………………………………………. 74
5.2.1 Objective of Sukuk Issuance…………………………………………….. 74
5.2.2 Challenges and Issues…………………………………………………… 75
5.2.3 Pulling Factors…………………………………………………………... 75
5.3 Recommendation……………………………………………………………….. 76
5.4 Limitation of Study…………………………………………………………….. 78
BIBLIOGRAPHY………………………………………………………………… 79
APPENDIX………………………………………………………………….. 83
x
LIST OF CHARTS
Charts No.
Chart 1.1 New Issues of Private Debt Securities by Sector
Chart 1.2 Sukuk Outstanding as at 2012 by Country
Chart 1.3 Sukuk Approved by Shariah Principle, 2007 and
2012
Chart 1.4 Sukuk Issued 2012 by Country
Chart 1.5 Malaysian Issuances against global issuances for
sukuk
Page No.
2
5
6
8
10
1
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In general, bonds are issued with the objective of mobilising funds to finance either to
new or existing business projects and activities. In this context, sukuk (or Islamic
bond) helps in the mobilisation of capital to the productive uses and contributes
towards greater economic activity as capital requirement is one of the essential
components in order to achieve the economic growth. According to Rosly and Sanusi
(1999), when there is insufficient capital to generate growth, two options need to be
taken into account, namely to pull in the foreign investment or to induce saving.
Capital control, economic and political uncertainties are among the important
variables which determined the potential in drawing foreign investment. Meanwhile,
the economic recession may lessen the corporate earnings and household income
which lower the savings by both sectors. Having lower saving will give the country
lower capital to stimulate economic growth.
Traditionally, bond has become one of the funding engines to generate
economic activities such as in the financial, agriculture, transportations and
construction sectors. Chart 1.1 shows the new issues of private debt securities by
sector (excluding Cagamas bond) in Malaysia from 2001-2011. The total bond issued
by sectors from 2001-2011 amounting RM791.5 billion, of which RM356.2 billion or
45 percent goes to the finance, insurance, real estate and business services, followed
by transport, storage and communications at RM110.8 billion or 14 percent, and
2
electricity, gas and water at RM95 million or 12 percent as well as government and
other services at RM95 million or 12 percent. These are the four largest sectors of the
bond issuance by sector during the period.
Chart 1.1: New Issues of Private Debt Securities by Sector*, 2001-2011
Agriculture, Foresty and
Fishing
1%
Mining and Quarrying
0%Manufacturing
4%
Construction11%
Electricity, Gas and Water
12%
Transport, Storage and
Communications
14%
Finance, Insurance, Real
Estate and
Business Services45%
Government and Other Services
12%
Wholesale, Retail Trade, Hotels and
Restaurants
1%
Note: Figures exclude Cagamas bond.1
Source: Bank Negara Malaysia (2011) New Issues of Private Debt Securities
(excluding Cagamas Bonds) by Sector.
Bond market is part of the capital market together with stock market,
commodities exchanges and any virtual services or intermediaries that debt and equity
can be bought or sold. The primary goal of bond market is to offer means for long
term funding facilities of government and private expenditure. When organizations
1 Retrieved 24 April 2012 from http://www.bnm.gov.my
3
require liquidity to fund a certain project, bond issuance is one of the ways the
organizations can adopt by providing broad arrays of instrument from short term to
medium and up to long term of tenure to maturity over 30 years. Bond may be issued
either to public or other organisations with the objective to pull in capital. One of the
examples is the issuance of RM30.6 billion sukuk by Projek Lebuhraya Utara-Selatan
(PLUS) in 2012. The proceeds from the issuance by PLUS are used to finance the
purchase of the asset, liability, business, undertakings and rights of five toll
concessions (The Star, 2012).
In relation to its nature as debt instrument, bond has become popular due to its
characteristics as investment with lower risk portfolio as compared to equity
investment. Equity investment comes with greater risk as the stock value
corresponding with the value of the company, thus the stock price fluctuation will
depends on the market value the company. On contrary, the disadvantages of bond
may come from the insolvency in which, when the insolvency hit, the bond holders
will be the last to claim their rights of the asset. Weighing the advantages and
disadvantages, bond is still the best instrument for funding and capital mobilisation.
Pettinger (2009) documents that the stock market was the first hit by the instability of
the credit market in 2008 as compared to bond. Bond is more resilience because of its
low risk and less being influenced by credit crunch especially bond issued by
government.
In line with the rapid development of the Islamic banking and finance industry,
the Islamic capital market has expanded rapidly due to the various factors supporting
the development of the industry. This includes, among others, the active involvement
4
of regulatory bodies such as Bank Negara Malaysia (BNM), Securities Commission
(SC), Accounting Auditing Organisation of Islamic Financial Institutions (AAOIFI)
and International Islamic Research and Training (IRTI), Islamic Development Bank.
According to Financial Stability and Payment Systems Report by BNM (2011), the
efficient liquidity management framework is the key to the development of a
comprehensive and stable Islamic financial system. This is the important component
for Islamic financial institutions to do their funding and investment. In view of this,
BNM has shown great interest to further develop the Islamic capital market. In
addition, the significant growth in Islamic capital market is mainly due to address the
needs for liquidity management in the financial institutions. In respond to this
demand, sukuk is one of the Islamic capital market products that have captured the
attention of the industry players around the world.
As at end of 2012, total global sukuk outstanding is US$267.6 billion, in which
Malaysia contributed the largest share of the sukuk market in the world, constituting
to 68 percent of total sukuk outstanding (or equivalent to US$181.9 billion) (Chart
1.2). In 2012, Malaysia maintained its status as the global leader in sukuk issuance
with market share of 77 percent or US$110.4 billion as at end 2012. The issuance of
PLUS Bhd amounting US$10.4 or RM30.6 billion marked the single largest global
issuance of sukuk (Securities Commission Malaysia).
5
Chart 1.2: Sukuk outstanding as at 2012 by Country
Source: Malaysian ICM Bi-Annual Buletin (2013), Securities Commission
Malaysia Robust Fund-Raising Activities in 2012.2
In terms of type of sukuk, in 2007, 58 percent of shariah principle used in
sukuk issuance were mostly based on Musharakah. This trend has changed towards
2012, whereby Murabahah became the commonly used shariah principle in sukuk
issuance, leaving Musharakah sukuk issuance to only 19 percent (Chart 1.3). In the
same year, the hybrid (combination) sukuk showed the tendency of growing as
commonly used shariah principle in sukuk issuance. The increase used of Murabahah
may arise most probably due to the acceptability of Murabahah as shariah principle
based on commodity i.e. Crude Palm Oil (CPO) transaction in global market
especially by Gulf Country Corporation (GCC).
2 Retrieved 21 May 2013 from http://www.sc.com.my
6
Chart 1.3: Sukuk approved by shariah principle, 2007 and 2012
Source: Malaysian ICM Quarterly Buletin (2008) and Bi-Annual Buletin (2013), Securities
Commission Malaysia. 3
Apart from the acceptance of sukuk in the Muslim countries, non-Muslim
countries have also shown their interests on this instrument, for example Japan, South
Korea and United Kingdom. For South Korea in particular, the interests in Islamic
finance stem from the experience in the post-2008 crisis where Islamic finance has
proven its resilience to the crisis. According to Lee Chang Ho, acting chairman and
CEO of the Korea Exchange (KRX), Islamic finance has attracted the investors in the
post-crisis period by “providing security and stability due to its asset-backed nature”.
However, the main challenge for Korea is to educate the investors as most of them are
unfamiliar with sukuk and its mechanism (Halim, 2010). Meanwhile, the United
Kingdom (UK) aims to become the gateaway for sukuk at the global-front by setting
up London as the western hub of islamic finance. The UK government has set up a
“task force” in which the role to raise London’s profile as the centre of Islamic
3 Retrieved 21 May 2013 from http://www.sc.com.my
7
transaction Report by Bloomberg (2013) indicated that the UK government is
considering revicving plan to sell sukuk as part of the initiative to enhance Britain’s
role as a center of shariah compliance financing. According to London Stock
Exchange, more than US$34 million worth of sukuk issuance with 49 sukuk issues
through London Stock Exchange (2013).
Japan is also one of the countries that has shown interests in Islamic finance to
woo the investors demanding shariah compliant asset. In fact, they are in effort to
alter their tax system to exclude dividend received arising from sukuk from taxation
(Reuters, 2010). The issuance of 100 million sukuk ijarah by Nomura Holding marks
the first sukuk issuance by Japanese corporation in United States dollar-dominated
issued outside Malaysia (Raj,2010).
Furthermore, the issuance of General Electric Company (“GEC”) of US$500
million from United States in 2009 has marked the first Ijarah based sukuk originate
from the American corporate. According to the deal’s lawyer, Allen & Overy, the
issuance is due to the fast capital growing in Asia and Middle East, establish a new
investors based and tapping the unchartered market (Halim, 2010). The issuance was
based on ijarah structure using the aircraft as the underlying asset and involve some
aspect of comodity Murabahah. In addition, the global financial crisis in 2008/2009
shows that the growth in sukuk has not been affected albeit has not been as huge as it
impacted the conventional bond. Thus, drawing the global investors’s attention toward
sukuk as compare to conventional bond.
8
Notwithstanding the participation by the non-Muslim countries, Malaysia still
positions itself being as the biggest issuer which constitutes to 77 percent (2012) of all
total sukuk issuance (Chart 1.4). In five years period from 2003 to 2008, sukuk has
grown in Malaysian capital market share from 24 percent to 36 percent. This
tremendous grow is due to the growth in shariah compliant investment product which
act as the alternative to the investor couple with the proactive encouragement from the
Bank Negara Malaysia. According to the Malaysian Debt Securities and Sukuk
Market (2009), the corporate Sukuk market has grown tremendously at the annual
growth of 21 percent between 2001 and 2008. Indeed the outstanding sukuk have
surpassed its counterpart which is conventional in the domestic market.
Chart 1.4: Sukuk issued 2012 By Country
Source: Malaysian ICM Bi-Annual Buletin (2013), Securities
Commission Malaysia Robust Fund-Raising Activities
in 2012.4
4 Retrieved 21 May 2013 from http://www.sc.com.my
9
In Malaysia, there are several big players in sukuk issuance namely Danga
Capital (9.4 percent share) and Cagamas Berhad (7.7 percent share) ranking of 2nd
and
3rd
respectively as Asian & GCC Top Issuers of Islamic Bonds. Cagamas as an active
sukuk issuer in Malaysia has strived from being the 7th
rank in February 2010 to 3rd
rank in February 2011 with an increased market share from 4.9 percent to 7.7 percent
(Islamic Finance Asia, Feb, 2010).
Sukuk issuances reach its peak in 2007 at US$31 billion worth of global sukuk
issuance (Chart 5). Subsequent year, the global sukuk issuances record its tremendous
declining in with the average of US$17.4 billion per year for 2008, 2009 and 2010.
This due to the financial crisis brought from the property bubble in United States.
Nevertheless, 2011 shows great increase in global sukuk issuances with total issuances
of US$36.3 billion, 17 percent higher than 2007 and double from the previous year
which is 2010. The trend can be seen similar to the Malaysian sukuk issuance which at
its peak in 2011 at US$26.5 billion which constitute 73.1 percent market global
market shares.
10
Chart 1.5: Malaysian issuances against global issuances for sukuk (seven-year trend)
Note: The figure is in US$ million
Source: Islamic Finance News (2012) Sukuk Market Review & Outlook for 20125
1.2 BACKGROUND OF CAGAMAS
Cagamas Berhad (“Cagamas”) was registered as a company in December 1986. It is
not regulated under BAFIA nor IBA as its status as a non-bank institution. Cagamas
started its operation in October 1987, 10 months of its registration as a company
where Bank Negara Malaysia holds 20 percent of the total shares. It kicked starts its
business by purchasing RM110 million conventional housing loans from three
primary lenders for five year period at a fixed interest rate. Corresponding to the
purchase, Cagamas has issued an unsecured bearer bond of RM100 million, fixed-rate,
fixed semi annual coupon, and single bullet capital.
Cagamas’s initial primary function is to assist housing lenders to manage their
financial risk and expand their lending. The establishment of Cagamas in 1986 is to
promote the secondary mortgage market in Malaysia. Over the years Cagamas has
evolved becoming a leader in securitisation. Cagamas issues debt securities both
5 Retrieved 24 May 2013 from http://www.islamicfinance news.com
11
conventional and Islamic to finance the purchase of housing/hire-purchase/personal
loans/financing from financial institution and non-bank institution. The Cagamas’s
intermediary role will provide the liquidity for the primary lender to encourage them
for further expand their loan/financing at the affordable cost. Since the incorporation
till end of 2012, Cagamas has cumulatively issued RM266.3 billion of conventional
and Islamic debt securities (March, 2013).6
Cagamas has embarked in Islamic securitisation in 1994 in which it purchased
house financing from Bank Islam Malaysia Berhad (BIMB) and issued sukuk under
the concept of Mudharabah. Subsequently, in 2001 Cagamas started purchased
Islamic hire purchase financing from Malayan Banking Berhad (MBB) and in 2008,
Islamic personal financing from Bank Kerjasama Rakyat Malaysia Berhad (BKRM).
In 2005, Cagamas under its subsidiary Cagamas Mortgage Backed Asset (CMBS)
purchased house financing from government and issue sukuk under the concept of
Musharakah.
In 2006, another subsidiary has been set-up, namely Cagamas Bank Negara
Sukuk Berhad (BNM Sukuk Berhad). The initial operation of BNM Sukuk Berhad
was issuance of sukuk Ijarah amounting RM400 million which later in 2009, the
subsidiary expanded by issuing sukuk Murabahah amounting RM500 million (1st
tranche). BNM Sukuk Berhad has been the engine of Bank Negara Malaysia in their
operation of managing their liquidity operating under Cagamas.
6 Retrieved 20 May 2013 from http://www.cagamas.com.my
12
Cagamas’s involvement in Islamic finance has been further evolved in 2008
where a joint venture (“JV”) has been established with Hong Kong Mortgage
Company, thus the establishment of Cagamas Hong Kong Company (CHKMC) has
been incorporated, a new associate company of Cagamas. CHKMC main activity is
the guarantee of mortgage loan or financing both conventional and Islamic under the
concept of Wakalah.
In 2011, in replicating the operation of CHKMC, the new subsidiary, Cagamas
Skim Rumah Pertamaku (CSRP) has been incorporated on 7 January 2011. Its
operations involve the guarantee of 10 percent in loans or financing by the financial
institutions in Malaysia under the “Skim Rumah Pertamaku”. The scheme has been
announced by the government in the Malaysian Budget 2011 and was later revised in
Budget 2012
1.3 BACKGROUND OF SUKUK AL AMANAH LI AL ISTITHMAR (ALIm)
Cagamas is a well known company in Malaysia who has been pioneer in several sukuk
issuances in Malaysia. For instance in 2005, Cagamas under its subsidiaries Cagamas
Mortgage Backed Securitization (CMBS) has issued sukuk Musharakah, the first in
Malaysia to issue asset-backed sukuk (Securities Commission, 2008). Its initial key
activity which is the securitization has evolved to becoming the worldly known sukuk
issuer. The active involvement in sukuk issuance can be seen in issuance of sukuk
Musharakah in 2005, sukuk Ijarah in 2006 and sukuk Murabahah in 2009.
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In 2010, Cagamas had issued an innovative Islamic finance product, namely
Al-Amanah Li Al- Istithmar (“ALIm”) which is the combination of tangible and
intangible assets, the first time of such issuance by Cagamas. This landmark product is
the effort of the company in serving the Islamic capital market with new “added
flavour” beside the “plain vanilla” sukuk. The issuance of sukuk ALIm is structured
under RM5 billion Islamic Commercial Paper (“ICP”) and Islamic Medium-Term
Note (“IMTN”) Programme which are jointly structured by Cagamas and Ar-Rajhi
Bank. The distinct features of sukuk ALIm include the following:
1) Its portfolio is a hybrid of two types of assets, namely tangible assets (real property)
and intangible or financial asset (receivables).
2) The tangible assets, i.e. real property constitute 51 percent of the total assets meant to
tackle the issue of tradability of the sukuk in secondary market.
3) The financial asset trading is done through commodity Murabahah (Tawaruq) which
involves three parties, intended to steer away from the counter-sell concept of Bay
Inah (sale buy-back).
4) Upon maturity, an auction will take place in repurchase of the asset as oppose to via
Wa’ad (purchase undertaking).
Sukuk ALIm is a combination of four Islamic shariah concepts, namely Ijarah
(leasing), Bay (sale), Bay Bithaman Ajil or BBA (sale with deferred payment) and
Wakalah (agency). According to the Arab News, this product has been the first of its
kind and so far the most innovative sukuk in Malaysia which is expected to capture the
Middle East market (Parker, July 2010).
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1.4 PROBLEM STATEMENT AND MOTIVATION OF STUDY
Islamic banking and finance has been a very competitive industry where all the
Islamic financial institutions in Malaysia competing in developing and innovating
their new products in the market. One of the biggest challenges in the Islamic product
development is the shariah-compliancy issue. During the earlier years of sukuk
issuances, the product used single shariah contract with simpler product structure.
Over the years, there is conflicting issue with shariah with regard to the shariah
contract used which more on the debt-base nature. Therefore, current sukuk structure
adopt combining two or several shariah contract in one issuance and in order to
ensure shariah compliancy, the product structure has become more complex and
involves numerous documents and also strict regulations.
Shariah compliancy is essential as it is the key underlying component of
Islamic finance and has become the foundation on every particular product
development. Failing to comply with shariah will result to departure of shariah
compliance, thus losing its status as shariah-compliance product. In many cases,
according to Nienhaus (June 2011), the existing Islamic financial product is
increasingly replicating the conventional product (Islamic Finance News). The effort
to comply with the shariah has been a heavy task for product development team
where the replication of conventional product is the one of the criteria in arriving to
the new structured product. This replication would enable the issuer to tackle the non-
shariah compliance components in the conventional product by analyzing the issues,
and then later associate it with relevant shariah contract. This resulted in the new
product being developed becoming more complex, delicate in term of regulations and
