Malaysias state-owned sovereign wealth fund is about to test appetite for the nations first

socially responsible Islamic bonds and plans to issue such debt annually.
Khazanah Nasional Bhd. will start marketing as much as 150 million ringgit ($42 million) of the
seven-year sukuk on Monday, Chief Financial Officer Mohd Izani Ghani said in a May 14
interview in Kuala Lumpur. The offering will fund 20 schools in Malaysia, he said, adding that
future sale options may include healthcare and affordable housing.
The worlds biggest Shariah-compliant debt market is setting a precedent for Socially
Responsible Investment sukuk after pioneering Islamic finance 30 years ago. While its an
innovative concept that will appeal to some funds, it might be a challenge to sell such products
given they wont fall into many investors mandates, according to Manulife Asset Management
Services Bhd.
Khazanahs sukuk meets the social responsibility criteria as it provides funding for projects that
will improve the well-being of the people, said Mohd. Effendi Abdullah, Kuala Lumpur-based
head of Islamic markets at AmInvestment Bank Bhd. While it would be a challenge convincing
investors to buy because the concept is new, the offering will be a catalyst for further issuance in
an area thats still nascent.
Performance Based
The SRI sukuk will pay fixed, periodical profit rates throughout the bonds term, with principal
repayments linked to the individual schools performance in terms of the quality of education
provided, said Izani. Before maturity, the profit rate will be adjusted lower, he said.

The step-down yield could be 100 basis points below the coupon rate, Izani said. For those
who may wish to put all their maturing cash back into the schools, Khazanah will buy back the
debt at one ringgit and the investor will receive a tax allowance from the government, he said.
This is a feel-good sukuk for investors who want to give back to society, Izani said. We
acknowledge that its challenging to get fixed-income fund managers to accept a step-down yield
but its for a good cause.
Khazanah will sell the debt via its unit Ihsan Sukuk Bhd. at the end of this month and the coupon
will be set at about 50 basis points above Malaysia Government Securities, Izani said.
Yields on the nations 2022 non-Islamic debt dropped 27 basis points, or 0.27 percentage point,
to 3.79 percent this year, according to a central bank index. The rate on Khazanahs existing
similar-maturity sukuk fell 10 basis points to 4.23 percent over the same period.
Top Rated
The company hired CIMB Group Holdings Bhd. and Amanie Advisors to assist with the offering
from its 1 billion ringgit ethical sukuk program that has been assigned a preliminary AAA credit
by RAM Rating Services Bhd., the top investment grade. Khazanah has 110.8 billion ringgit in
assets including stakes in Malaysian Airline System Bhd. and Tenaga Nasional Bhd., according
to the funds Jan. 14 statement
Malaysias ethical initiatives introduced in August last year come under three groups
encompassing green technology financing, socially responsible investment sukuk, and
environmental, social and governance.

The World Bank took the lead in issuing such bonds in 2008 and has sold almost $8 billion of the
debt on its own behalf through over 90 transactions in 18 currencies, according to its website.
The lender helped the London-based International Financial Facility for Immunization sell $500
million of floating rate dollar-denominated ethical Islamic notes in November. The 2017 debt
was scored as Aa1, the second-highest investment-grade, by Moodys Investors Service.
Focused Objectives
Khazanahs socially responsible sukuk has very focused objectives and may encourage other
issuers to follow suit, said Elsie Tham, a senior fund manager at Kuala Lumpur-based Manulife
Asset Management Services, which oversees more than $1 billion.
With this sukuk, you know exactly where the funds are being channeled unlike outright
donations, said Tham, who wont buy the notes because they arent aligned to her funds
mandate. The sukuk will probably be a success because its small in size and its the first of its
kind.(Chew, 2015).

BIBLIOGRAPHY

Chew, Elffie. (2015, 18/May/2015). Khazanah Debuts Ehtical islamic bonds with annual sales
planned. Bloomberg business. Retrieved 22/May/2015, 2015, from
http://www.bloomberg.com/news/articles/2015-05-17/khazanah-debuts-ethical-islamicbonds-with-annual-sales-planned