MALAYSIA may sell longer dated government sukuk to help alleviate a shortage of investments for takaful firms, an Islamic insurer said, which would help address a barrier to the industry’s growth.

An illiquid sukuk market and a shortage of Islamic assets, especially long-term paper, have generated an over-reliance on regional equity and real estate markets, rendering the the US$14 billion takaful industry vulnerable to sudden shocks.

Takaful Ikhlas, Malaysia’s third largest Islamic insurer, said authorities have held discussions to tackle the problem of a lack of Islamic investments.

“The government is taking action, there’s been some discussion in arranging for long term sukuk. We’re looking at something beyond 10 years: 10, 15, 20 years,” Takaful Ikhlas chief executive Syed Moheeb Syed Kamarulzaman said in an interview.

 
“There have been discussions at the (central bank) and the finance ministry level on this and hopefully something will happen this year. They have indicated that they are working on something.”

He said returns on Islamic insurers’ investments are affected by the limited supply of instruments. Takaful companies can only invest in assets that comply with Islamic law, ruling out investments involving excessive speculation, gambling, pork and alcohol.

Takaful Ikhlas is a subsidiary of Malaysian insurer MNRB Holdings Berhad.

Sharia financial institutions should receive private placements or allocations of Islamic paper, Syed Moheeb said.

“Islamic instruments are not privy to us alone, it’s open to all and sundry,” he said. “We will have to rush to the line and normally we will be standing behind others as well.”

Islamic bond issues are regularly oversubscribed, as there is more demand than supply of sharia-compliant assets, and long term investors such as pension funds tend to hold them until maturity.

Islamic paper accounted for about a third of total Malaysian government bond issuance of RM88.5 billion last year, according to central bank data.

Malaysian Islamic government bonds typically have a tenor of less than 10 years.

The last government sukuk auction, a RM3 billion, 3-1/2-year issue in January, fetched an average yield of 3.288 per cent with a bid-to-cover ratio of 2.12 times. This compared to a yield of 3.146 per cent for the benchmark three-year government bond at the time. - Reuters