LONDON -- Last Thursday, the order book for "the world's first rated Islamic Residential Mortgage-backed Securitization transaction" based on the issuance of a Musharaka-based Sukuk (Islamic bond), closed in Kuala Lumpur in Malaysia.
This followed a number of road shows in Malaysia, Singapore, Hong Kong and the Middle East in July for what is expected to be one of the largest such transactions to date. Although the transaction is expected to close on Aug. 8, the issuer the Malaysian Mortgage Corporation, Cagamas MBS Berhad, is proposing a RM2.05 billion 6-tranche Sukuk issue of tenors ranging from 3 years to 15 years (the final issue size will be finalized upon the completion of the book building exercise).
The originator of the issue is the Malaysian government which through its Housing Loans Division appointed Cagamas in April 2004 to securitize the entire pool of the government's Housing Loans and Home Financing mainly given to civil servants and pensioners. The mandate is not only for the existing portfolio but extends to all future Malaysian government Housing Loans and Home Financing.
In this respect, the mortgage securitization potential and sector is set to take off in a massive way, with the government sector driving the market. Once again, the Malaysians are pioneering a sector which could very well be the model for other countries especially where the government provides subsidized mortgages and home financing for civil servants and public employees. In Malaysia, all Muslim civil servants who get government housing are obliged to use Islamic mortgages as a condition of tenure.
As such since Muslims constitute the largest proportion of civil servants in Malaysia, the pool of Islamic mortgages in the government sector has been building up especially after the building of the new administrative capital in Putrajaya, south of Kuala Lumpur city centre. This in turn is a major boost for Islamic mortgage securitization, which would in turn further stimulate the Islamic secondary market in Malaysia.
Cagamas, which has a paid-up capital of RM150 million and which is owned by the major financial institutions in the country, has incorporated a Special Purpose Vehicle (SPV) to issue the Sukuk which will be used to purchase from the Government of Malaysia on a non-recourse basis a specific pool of Shariah-compliant mortgages, given out to active civil servants (99.6%) and pensioners (0.4%).
The issue is lead arranged by leading Malaysian issuing house, CIMB, and HSBC Bank Malaysia Berhad, who are also the principal advisers and bond coordinators on the transaction. The joint lead managers include CIMB, HSBC, ABN-AMRO, and AmInvestment Group. The pricing of the Sukuk will be finalized when the transaction is closed in a week's time, but the Sukuk has been assigned the highest rating of AAA by both domestic rating agencies, Rating Agency of Malaysia (RAM) and Malaysian Rating Corporation ((MARC).
Cagamas, incorporated in December 1986, promotes home ownership among Malaysians and provides alternative financial products to primary lenders, making housing loans more affordable to house buyers. Its principal activities consist of the purchase of mortgage loans, hire purchase and leasing debts from primary lenders and the issue of bonds and notes (both conventional and Islamic) to finance these purchases. Cagamas also purchases Islamic house financing debts and Islamic hire purchase debts and issues bonds under Islamic principles. At end 2004, Cagamas' outstanding bonds (both conventional and Islamic) amounted to RM26,752 million, representing 14.9% of the outstanding private debt securities in the market.
The housing market in Malaysia, thanks to a robust economy whose GDP growth rate was 5 per cent in 2004 and rising to 7 per cent this year, remains buoyant. Government policies are deliberately aimed at social and financial inclusion, including access to affordable housing for everyone. The 2004 Budget, for instance, allocated RM13.80 billion to the economic, infrastructure and industrial sectors.
The government also allocated RM558.80 million to Syarikat Perumahan Negara Berhad (SPNB), the state housing construction entity, for the construction of low-and-medium-cost houses, and another RM3.40 billion for the rehabilitation of abandoned housing projects under the Low-cost Housing Revolving Fund. The then Mahathir government also introduced full financing for low-cost housing, and even set up the Housing Tribunal to settle disputes in the sector.
In the Malaysian banking sector, property financing constitutes the highest segment of consumer financing. In the Islamic banking sector, according to Bank Negara, the central Bank, out of a total Islamic financing of RM48.62 billion, some RM 20.48 billion was directed towards the broad property sector in 2003. Out of this residential property financing accounted for an overwhelming RM14.34 billion.
The general housing market has also been helped by a low and stable interest rate climate in a market flush with ample liquidity. Loan disbursements by the banking system to the private sector, says CIMB, increased year-on-year by 2.4 percent to RM514 billion in 2004, including RM208.51 billion (40.6 percent) loans to the property sector.
According to CIMB, lending for residential property purchases increased by 9 percent in 2004, and by 11 per cent for non-residential property purchases. However housing loans sold to Cagamas showed a 17.3 percent decrease. Loan disbursements to low-cost houses showed a marginal decrease of 0.1 percent in 2004 despite the full loan given for purchases of such units under the budget 2004 incentive. A priority of the government of Prime Minister Abdullah Badawi is poverty alleviation especially amongst the rural poor in Malaysia. This includes provision of affordable low-cost housing.
Mushtak Parker
© Arab News 2005
