“In Malaysia, rating is required for issuance while in GCC, it is largely avoided,” said moderator Abdulkader Thomas in opening the second session. He then sought the panelists’ views on this issue.

Rasheed Khan felt that while rating is an attractive feature, it draws additional cost. “Shell MBS Sukuk was not rated because this was not required back then. It gave Shell an advantage because the company enjoyed a lower cost of fund. From a lawyer’s perspective, rating represents an additional cost for the issuer,” he said.

To Asim Basharullah, rating “would not only increase the investor base, it would also create the future price benchmark for the issuer”. Yakub concurred, noting that a majority of GCC Sukuk issuance came from well-known GCC companies that did not require ratings due to the excess liquidity available. However, as the market is developing and with the current credit crunch, he believes it is vital to implement ratings in order to reach other investors like those from Japan, China and Hong Kong.

Rafe Haneef added that ratings would also be extremely helpful to determine the best price of an issuance. “If an issue is not rated, the investors would have to do their own credit analysis and come up with different pricing due to the different methods used. When a rating is done, then it’s easier to make a peer comparison. For example, if we are given a BBB rating, we can look at the trading price of other BBB securities to determine our price,” he explained.

In response to Abdulkader’s question on the need to develop a unique Islamic benchmark, Rafe said that as long as the Islamic product fits within the mainstream product, there is no need to develop a unique Islamic benchmark. “In my opinion, we could not create another benchmark for an Islamic product that fits within the mainstream product (Sukuk is like a bond) because the dominant benchmark (the conventional benchmark in this case) will force the new benchmark to converge. This is the law of one price in economics. However, if we change the way we structure our product (for example, if the redemption price of Sukuk is based on market price), then the pricing criteria would be different. We would have to look into the internal rate of return [IRR] in that case. If we don’t change the product, neither will the price,” he concluded.

Asim agreed, adding that Al Rajhi benchmarks its pricing based on the cost of fund, which is tied to either the London Interbank Offered Rate/Singapore Interbank Offered Rate (Libor/Sibor) in Saudi Arabia and to the Mudarabah Interbank Investment Rate (MIIR) for Al Rajhi Malaysia.

Vaseehar then raised a question from the floor regarding the benchmark issue. “Bankers today evolved from the conventional space and are attached to Libor. In my opinion, Libor is a short-term solution and in the long run, Islamic banks should aim for financing that is detached from Libor i.e. move toward equity financing,” he said.

In response, Rafe drew the attention of the floor to an important practical problem of the benchmark issue. “Bankers would want to use other benchmarks. However, our biggest problem is that the customers do not want it. CFOs of firms today are having a costing model and request either conventional equivalent financing or quasi-equity financing. Until customers change their request, it would be difficult to see a major transformation take place in the way we finance their needs,” he pointed out.

In discussing whether the availability of long-term Sukuk in Malaysia will attract investors to the country, Rafe highlighted the different approaches that the GCC and Malaysian markets have taken.

“In the GCC region, most issuance is for floating rate notes that will attract financial institutions as these investors are looking for liquid investments. If we look at Malaysia, more fixed income securities are issued in order to attract institutional investors (Takaful and pension funds) because these are the type that will be interested in the fixed income, longer-term Sukuk as they need more conservative and stable investment avenues. Thus there is a global need to establish more Takaful and pension funds if we wish to see more longer-term Sukuk issuance and trading in the secondary market,” he concluded.

In response to Abdulkader’s final question on what it takes to attract high-quality issuers to Malaysia, Asim noted that promotion of the Malaysian International Islamic Finance Center is important as a lot of issuers will look into the non-ringgit funding opportunities.

Yakub conceded that Malaysia has a strong market with the right infrastructure and framework but that other countries could replicate these factors. Thus, he said, the distinguishing factors would be the ability to execute a deal and the speed of execution. “We need to be very efficient in executing MIFC’s objectives if we wish to draw top-quality issuers to Malaysia,” he said before wrapping up the session.