Malaysian mortgage firm eyes Gulf Islamic market

MORTGAGE PLAN: Malaysian mortgage firm Cagamas Bhd may help set up companies in the Middle East. (Getty Images)

Malaysian mortgage firm Cagamas Bhd may help set up secondary Islamic mortgage companies in the Middle East and securitise loans from Gulf banks to tap rising demand for Islamic products in the region, its chief executive said on Tuesday.

Islamic banking players in mostly Muslim Malaysia are seeking overseas markets as a growing number of institutions compete for a modest market of 27 million people at home.

Malaysian firms are especially eager to court an estimated $300 billion of petrodollars from the Middle East, but some Gulf investors have shunned Malaysian Islamic products, saying they do not fully meet sharia, or Islamic law, standards.

The $1 trillion Islamic banking industry has built a sizeable following worldwide on its premise of social and ethical investments that avoid interest-based banking, conventional insurance and sectors such as gaming, weapons and pornography.

Cagamas chief Steven Choy said the firm is exploring ways to create Islamic products that are acceptable to Middle East investors, including purchasing loans from Gulf banks and then issuing bonds backed by those loans.

"If I could buy some assets from the Middle East that are globally or Gulf sharia-compliant and if I issue (bonds) out of here, there's no reason why they can't buy it back there," Choy told Reuters in an interview.

Cagamas, which was among the world's 10 largest issuers of Islamic bonds last year, is studying the markets in Saudi Arabia, United Arab Emirates and Kuwait for this, he added.

Some Malaysian Islamic financing structures, including the deferred payment system, are rejected in the Middle East.

Gulf investors object to the deferred payment model, saying it resembles another structure where an asset is sold to a buyer at one price with a deal to buy it back at a higher price. Some Middle Eastern bankers say that is little more than a conventional interest-based loan.

Cagamas recently issued 2.02 billion ringgit ($598.9 million) of Islamic bonds under the murabaha principle, where a financier buys a commodity and sells it to the customer at a higher price. The bonds met the Gulf's standards on sharia-compliance.

Another avenue for Cagamas to tap the Middle East market is to help create secondary Islamic mortgage firms in the region under a similar model to its own, Choy said. The Malaysian firm is considering creating such agencies in Saudi Arabia, United Arab Emirates and Kuwait, Choy said. "We have been talking with quite a number of players out there," he said, but declined to elaborate.

He said the Middle East lacked major secondary mortgage market firms, with such companies existing in the United States, Canada, Hong Kong and South Korea.

Cagamas issues debt and uses the funds to buy housing loans from financial institutions and the government, enabling the lenders to give out more loans. It is the second-largest issuer of debt instruments after the Malaysian government, having sold 218.4 billion ringgit of bonds since it was set up in 1987.

HOME GROUND

In the domestic market, Cagamas plans to sell about 1.5 billion ringgit of Islamic bonds by year-end, Choy said.

The company was expected to issue 12 billion ringgit of bonds this year, slightly slower than the 14 billion ringgit sold in 2007, he said. It has sold over 7 billion of the targeted 12 billion so far this year.

"We are a regular issuer," Choy said. "Our business is such that regardless of market conditions, we are always out there. We don't sit it out and wait in that regard."

Cagamas also planned to launch more synthetic securitisation deals to help smaller business raise funds when global credit markets become calmer, Choy said.

A synthetic securitisation uses credit derivatives to transfer the credit risk of assets to a special purpose vehicle. The vehicle issues bonds that are backed by its assets and proceeds from the sale are used to pay any claims made.

Cagamas had launched a 600 million ringgit synthetic securitisation deal last year.

But Cagamas was unlikely to issue more bonds backed by housing loans to government employees this year, Choy said.

The mortgage agency has been selling such bonds as part of a plan to securitise about 25 billion ringgit in civil servant housing loans over 4 years as the government cuts debt to finance new projects.

About 13 percent of total Malaysian banking assets fulfil sharia conditions, and the industry ranges from banking, insurance, stockbroking to fund management and pawnbroking. (Reuters)

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