KHAZANAH SRI SUKUK: A CASE STUDY 2 nd Islamic Finance Intellectual Discourse Sustainable Development Goals: Way Forward in Islamic Finance 22 February 2018 RHR Hotel @ UNITEN, Putrajaya Noor Suhaida Kasri, Ph.d, Researcher/Head of Islamic Capital Market Unit ()
PRESENTATION OUTLINE What is SRI? Malaysia s Agenda on SRI SC s SRI Sukuk Framework Khazanah SRI Sukuk Program The Impetus for SRI Sukuk Project Yayasan AMIR Trust School Program Khazanah SRI Sukuk Structure Socio-Economic Impact Moving Forward
What is SRI? q Sustainable responsible investment (SRI) is referred to as an investment discipline that considers environment, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact (The Forum for Sustainable and Responsible Investment, 2016). It covers any type of investment process that ties investors financial objectives with their concerns on environmental, societal and governance issues.
Malaysia s Agenda on SRI The Malaysia s agenda on SRI was announced by the Prime Minister of Malaysia in his 2014 Budget Speech that, Malaysia's position as a leader in the Islamic capital market is an advantage in attracting funds and issuance of securities. To enhance global competitiveness, efforts will be intensified to promote Malaysia as a market for Social Responsible Investment (SRI).The Securities Commission will introduce the Framework of Socially Responsible Sukuk Instrument or SRI Sukuk to finance various sustainable and responsible investment initiatives.
Securities Commission s SRI Sukuk Framework August 2014 the Malaysian Securities Commission has officially provide in their regulatory policy, guidelines on issuance of SRI sukuk. This is in line with the announcement made by the Prime Minister, in 2014 Budget, that efforts will be intensified by the SC to promote Malaysia as a market for SRI.
Securities Commission s Guidelines on Unlisted Capital Markets Products The definition of SRI sukuk is mentioned in Chapter 7, Part 3 of the Securities Commission Guidelines on Unlisted Capital Markets Products where the sukuk issuer must ensure that proceeds raised from the issuance of the SRI sukuk are utilised for the purpose of funding eligible SRI projects.
Continued Para 7.03 stipulates that eligible SRI projects are projects that aim to: Preserve and protect the environment and natural resources; Conserve the use of energy; Promote the use of renewal energy; Reduce greenhouse gas emission; or Improve the quality of life for the society.
Continued Relevant to this presentation is para 7.04(c) that states projects that relates to the community and economic development are deemed as eligible SRI projects. That para enlists the followings: Public hospital/medical services; Public educational services; Community services; Urban revitalisation; Sustainable building projects; Affordable housings.
Khazanah SRI Sukuk Programme June 2015 Khazanah launched Malaysia s inaugural RM1 billion SRI Sukuk programme for a period of 25 years, with the first tranche of RM100 million. The proceeds from this tranche will be utilised for Yayasan Amir Trust Schools Programme 2015. July 2017 Khazanah launched the second tranche of RM100 million including a retail portion of RM5 million. The proceeds from this tranche will be utilised for Yayasan Amir Trust Schools Programme 2016.
The Impetus for Khazanah SRI Sukuk Project Despite the heavy spending by the Government of Malaysia on education (roughly between 5 to 6% of GDP), Malaysian pupils still perform poorly in the international tests. Since 1999, Malaysian students have sat for two international student assessments that are known for its quality educational assessment benchmarking across different educational system.
Continued In the 2011 result for the Trends in International Mathematics and Science Study (TIMSS) assessment, the Malaysian students score has slipped below the international average in Mathematics and Science. 35% and 38% of the Malaysian students failed to meet the minimum proficiency levels in Mathematics and Science respectively. These students were identified as possessing only limited mastery of basic mathematical and scientific concepts.
Continued While the result from the Program for the International Student Assessments (PISA) was also disappointing. Malaysia ranked in the bottom 3 rd of 74 participating countries, below the international and Organisation for Economic Co-operation and Development (OECD) average. About 60% of the Malaysian students failed to meet the minimum proficiency level in Mathematics while 44% and 43% did not meet the minimum proficiency level in Reading and Science respectively (Ministry of Education, 2013).
Comparison of Malaysia s PISA 2009 and Ranking against Other Countries
Continued The results from this international assessment programs, as clearly shown in earlier Table demonstrated that Malaysian education systems lags behind other advance education system like Singapore, Hong Kong, China and the like. These advance education system equipped their students with the importance of knowledge as well as higher-order thinking skills. The students from these countries performed extremely well in the international assessment programs as they were assessed from a variety of cognitive skills such as application and reasoning.
Malaysia Education Blueprint 2013-2015 Therefore to galvanise Malaysia s education system to be at par with these advance education system, in 2013, the Government of Malaysia issued the Malaysia Education Blueprint 2013-2015. The aim of this Blueprint is to set the stage to transform the Malaysian education system to reach the same standard as the other high performing education system. This Blueprint outlines five outcomes that Malaysian education system aspired to achieve accessibility, quality, equality, unity and efficiency (Ministry of Education, 2013). This aim is in line with the support given by the Government of Malaysia to the United Nation s Sustainable Development Goals (2016-2030) to ensure inclusive and equitable quality education and promote lifelong learning for all. العالمیة للبحوث
Yayasan AMIR Trust School Program To assist the education transformation agenda, Yayasan AMIR, a non-for-profit foundation that was set up by Khazanah Malaysia was task to shoulder this responsibility. The principal activity of Yayasan AMIR was to collaborate with the Ministry of Education in accelerating the development of a holistic educational experience for students in government schools via the Trust Schools Programme. The Yayasan AMIR s Trust Schools Program is introduced to improve overall school management, curriculum, and delivery of education of selected schools.
Continued To achieve this, 4 strategic goals have been identified to be met by the Yayasan Amir Trust Schools Program namely: Develop High Quality Leadership Maximise Student Potential & Achievement Improve the Quality of Teaching & Learning Strengthen the Engagement of Parents, Community and Other Stakeholders
Continued In line with the proposed changes outlined in the Malaysia Education Blueprint, the schools under the Trust School Program are given the autonomy and decision making capabilities in how their school is to be run particularly on matters pertaining to curriculum, staffing, procurement, pupil policies, utilisation of funds allocated as well as time table and school calendars.
Continued The Trust School Program commenced in 2011 with an initial cohort of 10 schools. By 2015 it has garnered 62 participating schools and by the end of 2016, there are 83 schools participating the program. The schools that have been designated as Yayasan AMIR Trust Schools span almost all the states in Malaysia - Johor, Sarawak, Selangor, Terengganu, Perak, Negeri Sembilan, Pahang, Sabah, Kelantan and the Federal Territory of Kuala Lumpur. This surpasses the initial target as set out in the Malaysian Education Blueprint of 20 schools by 2015.
The Map of Yayasan AMIR Trust School Program
The Map of Yayasan AMIR Trust School Program
Continued The Malaysian Government aims to set up a total of 500 Trust Schools across the country by 2025.
SRI Khazanah Sukuk In supporting and facilitating the education transformation agenda further, Khazanah Malaysia through a Special Purpose Vehicle (SPV) called Ihsan Sukuk Berhad (Ihsan) issued a sukuk programme of Ringgit Malaysia One Billion in 2015. This is the first ever sukuk issued under the Malaysian Securities Malaysia s Sustainable and Responsible Investment (SRI) Sukuk program. The proceeds from this 1 st tranche 7 years sukuk issuance are used to fund 20 schools under the 2015 Trust School Program. While the 2 nd tranche is also to cover 20 schools under the 2016 Trust School Program.
Comparison Table of Khazanah SRI Sukuk Offering Tranche Tranche 1 Tranche 2 Sukuk Issuer Ihsan Sukuk Berhad Ihsan Sukuk Berhad Sukuk Obligor Khazanah Nasional Berhad Khazanah Nasional Berhad Currency/Format Ringgit Malaysia Ringgit Malaysia Structure Wakalah bi al-ishtithmar Wakalah bi al-ishtithmar Obligor/Sukuk ratings Exchange AAA RAM Rating Services Berhad Bursa Malaysia Securities Berhad AAA RAM Rating Services Berhad Bursa Malaysia Securities Berhad
Comparison Table of Khazanah SRI Sukuk Offering Tranche Tranche 1 Tranche 2 Facility Tenure 7 Years 7 Years Issue Date 18 June 2015 8 August 2017 Maturity Date 18 June 2022 18 June 2024 Amount RM100 million RM100 million (incl. 5M retail) Profit Rate If KPIs are not met 4.30% p.a. and redemption at 100% If KPIs are met Reduced to 3.50% via a mandatory reduction of 6.22% of the principal by redeeming the SRI Sukuk at 93.78% If KPIs are not met 4.60% p.a. and redemption at 100% If KPIs are met Reduced to 4.20% via a mandatory reduction of 3.18% of the principal by redeeming the SRI Sukuk at 96.82% Order Book Fully Subscribed Oversubscribed by 1.3 times العالمیة للبحوث (64,810 units) more than the expected unit which is 50,000.
The SRI Khazanah Sukuk Structure Source: Rafe Haneef, 2016
Wakalah Bi Al-Istithmar The issuance of Khazanah SRI sukuk utilizes the Islamic principle of Wakalah Bi Al-Istithmar that is effected as follows: Pursuant to a Wakalah Agreement between the CIMB Islamic Trustee Berhad, the Sukuk Trustee (on behalf of the Sukukholders) and Ihsan, the Sukuk Trustee appointed Ihsan to act as its Wakeel to invest the Sukuk Proceeds in Sukuk Investments. Ihsan, in its capacity as Wakeel to the Sukukholders, appointed Khazanah as the Investment Wakeel to invest the Sukuk Proceeds on behalf of the Sukukholders. Ihsan, as the Issuer, declared a trust over the Sukuk Proceeds and over the Sukuk Investments. The Sukuk Ihsan shall represent the Sukukholders undivided and proportionate beneficial interest in the Trust Assets.
Sukuk Investments q The Investment Wakeel shall invest the Sukuk Proceeds into the relevant investment portfolio which shall comprise of: (i) Tangible Assets; and (ii) Commodity Murabahah Investment. The Investment Wakeel shall ensure that the Tangible Assets shall at all times be a component of the Sukuk Investments.
(i) Tangible Assets The Investment Wakeel shall invest at least 33% of the Sukuk Proceeds into the Tangible Assets. The above ratio of at least 33% is only applicable at the point of initial investment of each tranche of the Sukuk Ihsan and does not need to be maintained throughout the tenure of the Sukuk Ihsan. Pursuant to a substitution agreement, the Issuer shall have the right to substitute, via an exchange agreement from time to time, any of the Tangible Assets with qualified assets of equal value that are Shariah-compliant and approved by the Joint Shariah Advisers.
(ii) Commodity Murabahah Investment The remaining balance of the Sukuk Proceeds shall be invested into the Commodity Murabahah Investment. The Commodity Murabahah Investment shall be effected as follows: Khazanah as the Buyer shall issue a Purchase Order to the Investment Wakeel and the Sukuk Trustee or via its agent with an undertaking to purchase the Shariah-compliant commodities from the Sukukholders at the Deferred Sale Price. The Investment Wakeel or via its agent will purchase the Shariahcompliant commodities on spot basis from a Commodity Supplier at a Purchase Price equivalent to the remaining balance of the Sukuk Proceeds in excess of the amount invested in the Tangible Assets.
Continued Upon acquiring the Shariah-compliant commodities, the Investment Wakeel will thereafter sell those Shariah-compliant commodities to Khazanah as the Buyer for a Deferred Sale Price. The Deferred Sale Price shall be equal to the aggregate of the Periodic Distribution Amount if any, and the nominal value of the Sukuk Ihsan. Upon the purchase of the Shariah-compliant commodities, the Buyer or via its agent, will immediately sell the Shariah-compliant commodities to a Commodity Buyer on spot basis for cash, equivalent to the Purchase Price.
Commodity Murabahah Structure 1. Purchase order with purchase undertaking to purchase the commodity from the sukukholder on deferred basis. Khazanah 4. Khazanah sell the commodity on spot for cash. Commodity Buyer 3. Sell the commodity on deferment basis 2. Purchase commodity on spot basis at agreed purchase price. CIMB Islamic Trustee & Khazanah (as Investment Wakeel) Commodity Seller
Periodic Distribution Returns generated from the Sukuk Investments will be up to the expected return, i.e., at the Periodic Distribution Rate per annum, calculated based on the actual number of days in the relevant period. The same shall be distributed periodically in the form of Periodic Distribution. The Periodic Distributions shall be made on the Periodic Distribution Date. The Periodic Distribution Date shall be on each anniversary of the issue date of the SRI Sukuk
Continued On the (i) Periodic Distribution Date; (ii) Scheduled Dissolution Date; or the (iii) Dissolution Declaration Date, as the case may be, any returns from the Sukuk Investments in excess of the Periodic Distribution Amount and/or the Dissolution Distribution Amount due and payable under the SRI Sukuk shall be retained by Khazanah as an incentive fee for the Investment Wakeel. For the avoidance of doubt, the Investment Wakeel shall not be entitled to any incentive fee until all amounts due and payable under the SRI Sukuk have been fully settled and in the case of a Scheduled Dissolution Date and/or the Dissolution Declaration Date, the SRI Sukuk have been fully redeemed.
Purchase Undertaking Khazanah (as the Obligor) shall grant a Purchase Undertaking to the Sukuk Trustee (for the benefit of the Sukukholders), whereby on a Scheduled Dissolution Date (the sukuk maturity date) or the Dissolution Declaration Date (the date declared as Event of Default has occurred), whichever is the earlier, the Obligor shall purchase the Sukukholders undivided and proportionate beneficial interest in the Tangible Assets at the Exercise Price. The Exercise Price shall be at the market value of the Tangible Assets or in the case of non-listed shares, based on the net tangible assets of the underlying company at the relevant Scheduled Dissolution Date(s) or the Dissolution Declaration Date, as the case may be.
Continued Upon the Scheduled Dissolution Date or the Dissolution Declaration Date, the Exercise Price shall be waived by the Sukukholders and kept by Khazanah as incentive fee. Upon exercise of the Purchase Undertaking and the full payment of all amounts due and payable under the SRI Sukuk, the relevant trust in respect of the Trust Assets will be dissolved and the relevant Sukuk held by the Sukukholders will be cancelled.
Utilisation of Proceeds of the Khazanah SRI Sukuk Under the Wakalah Bi Al-Istithmar structure: (i) The proceeds raised from the issuance of the Sukuk shall be utilised by the Issuer or the Investment Wakeel to purchase the Sukuk Investments. (ii) Khazanah will use the proceeds from the Sukuk Investments for the purpose of funding Shariahcompliant Eligible SRI projects. For the avoidance of doubt, the proceeds from the issuance of the Sukuk will be utilised for Shariah-compliant purposes only.
Continued Note for item (ii) above: Under the investment of the Tangible Assets, Khazanah as seller, would obtain the proceeds from the Sukuk Investments from the Investment Wakeel (acting on behalf of the Sukukholders), via the sale of the Tangible Assets to the Investment Wakeel (acting on behalf of the Sukukholders). While under the investment in the Commodity Murabahah Investment, Khazanah, would obtain the proceeds from the Sukuk Investments via the sale of the Shariah-compliant commodities to the Commodity Buyer on spot basis for cash. Khazanah as recipient of the proceeds from the Sukuk Investment shall utilise the same to fund the Shariah-compliant العالمیة projects. للبحوثSRI Eligible
Key Performance Indicator (KPI) The return to the sukukholders is based on the outcome of the project. The structure has its target that the Yayasan AMIR Trust School Program have to meet. Hence the target or Key Performance Indicator (KPI) to be achieved is as follows: A minimum of 20 schools are selected under Yayasan AMIR s Trust Schools Program for a 5 year intervention period (the 5-Year Intervention Period ) during the term of the SRI Sukuk ( Identified Schools ); At least 50% of the teachers of the Identified Schools are rated at the prescribed establishing level or above after the end of their respective Identified Schools 5-Year Intervention Period; العالمیة للبحوث
Continued At least 50% of the senior leadership of the Identified Schools are rated at the prescribed establishing level or above after the end of their respective Identified Schools 5- Year Intervention Period; and (A) At least 50% of the students of the Identified Schools are rated at the prescribed establishing level or above, after the end of their respective Identified Schools 5-Year Intervention Period; and (B) the set targets in relation to discipline as well as literacy and numeracy skills for the students at the Identified Schools are achieved after the end of their respective Identified Schools 5-Year Intervention Period.
KPI Evaluation Report The evaluation of the KPI is made six months prior to the maturity date (the 7th year) of the SRI Sukuk by an independent auditor for example Ernest and Young, Deloitte etc.. The Independent Auditor shall provide a report (hard copy and electronic format) on the KPIs ( KPI Evaluation Report ) to Khazanah, the Sukuk Trustee and the Facility Agent. Khazanah and the Facility Agent shall then make available the KPI Evaluation Report to the Retail Sukukholders via Bursa Securities and FAST, respectively within three (3) Market Days from the date of receipt of the KPI Evaluation Report.
Continued The KPI Evaluation Report shall contain, amongst others, details of each KPI, the evaluation method of each KPI and whether each KPI is met. If the KPI Evaluation Report is unable to provide a complete evaluation of each KPI or if the KPI Evaluation Report is not provided to Khazanah, the Sukuk Trustee and the Facility Agent at least six (6) months prior to the maturity date of the Sukuk, the KPIs will be deemed not to be met. For the avoidance of doubt, the evaluation and opinion of the Independent Auditor shall be conclusive and binding on all the Sukukholders, the Issuer and Khazanah.
Step-Down Approach Hence if the KPIs are met, the nominal value in relation to the Dissolution Distribution Amount payable to the Sukukholders will be reduced, regardless of any failure and/or delay of Khazanah and/or the Facility Agent in delivering the KPI Evaluation Report to the Sukukholders. For the first tranche, there will be a reduction of 6.22% of the nominal value. In this case the sukuk will be redeemed at 93.78%. For the second tranche, there will be a reduction of 3.18% of the nominal value. In this case the sukuk will be redeemed at 96.82%.
Sukukholders option to waive their rights The Sukukholders may, at their option, waive their rights, benefits and entitlements to the Periodic Distributions and the nominal amount payable under the relevant SRI Sukuk (in whole and not in part), by selling/transferring to Khazanah their Sukukholdings for a nominal consideration. The Sukukholders shall be entitled to exercise the option to waive the above: - on the issue date of the relevant SRI Sukuk; and/or - such point(s) of time after the issue date but prior to the maturity of the relevant SRI Sukuk following which such Sukuk shall no longer be tradeable nor transferable.
Continued The Retail Sukukholders may incur a transfer fee (including GST) payable to Bursa Depository ( Transfer Fee ) to effect the sale/transfer pursuant to the Option to Waive. In the event the Transfer Fee is payable, Khazanah will pay such Transfer Fee on behalf of the Retail Sukukholders to Bursa Depository via the Registrar on or before the Settlement Date. By submitting the Waiver Notice, the Retail Sukukholders agree to net off the nominal consideration payable for the sale/transfer with the Transfer Fee and that no monies will be paid by Khazanah to the Retail Sukukholders pursuant to the Option to Waive.
Continued The transaction documents shall detail the mechanism to exercise such option to waive including but not limited to the issuance of certain notices and the timing of such issuances.
Tax Incentives Subject to meeting certain procedure as prescribed in the legal documentation, the Sukukholders are entitled to receive tax vouchers: (a) pursuant to them exercising their Option to Waive; (b) in the event the KPIs are met that resulted to the reduction in the nominal value of the SRI Sukuk. The rational is because they are deemed as contributions made to Yayasan AMIR, which has an approved organisation status under Section 44(6) of the Income Tax Act, 1967.
Continued Yayasan AMIR, through Khazanah, will provide the relevant tax vouchers to the relevant Sukukholders. Such tax vouchers will be dated the same date as the Settlement Date, and shall be for an amount equal to the nominal value of the Sukukholdings sold/transferred to Khazanah as well as the mandatory reduction for meeting the KPI (if applicable).
Estimation of the Expenses in the SRI Sukuk Offering
Continued These expenses were merely estimation. They were finalized when the Sukuk was issued. In addition, there will be future expenses for the appointment of Independent Auditor who will prepare the KPI Evaluation Report to be made available to the Sukukholders. The fees and expenses incurred in connection with the retail offering will be borne by Khazanah.
Socio-Economic Impact The SRI Sukuk project via the Yayasan AMIR Trust School Program has abled to turn classroom learning into an exciting and simple one. Students have become more engaged in the classroom. They displayed maturity in their thinking and articulation - potential sign of future leaders. Teachers have also started using innovative teaching approach that expose and facilitate students to creative and critical thinking in the classrooms. This development has set an exemplary benchmark for other government schools to join in and adopt the Yayasan AMIR Trust School Program methodology (Yayasan Amir, 2015).
Continued This is further reflected in improvements in Malaysia s Trends International Mathematics and Science (TIMSS) scores for 2015. It is reported that our students have scored better in Mathematics and Science in the assessment (Pemandu Annual Report 2016). It is reported in 2016 that Malaysia registered 465 points, a 25-point improvement from 2011 in its Mathematics score.
Continued Among the 16 countries that have improved in Science, Malaysia has showed the biggest improvement, with a 44-point jump, and scored 471 points. Malaysia aims to be in the top one-third of participating countries in international assessments by 2025. Currently, based on TIMSS 2015 results, Malaysia is placed among the top two-third of participating countries in international assessments, as it ranked 22nd for Mathematics and 24th for Science, out of 39 countries participated (Malaysia was placed 57 th for Mathematic and 52 nd for Science in 2011).
Continued In another global benchmark, the Program for International Student Assessment (PISA), Malaysia also recorded improvements in Mathematics, Reading and Science in 2015. Malaysia recorded 446, 431 and 443 points, respectively against 421, 398 and 420 in its last assessment in 2012. This means that Mathematics, Reading and Science have improved by 25, 33 and 23 points respectively.
Continued UNESCO has ranked Malaysia the 9th-preferred destination for tertiary education among international students in its 2016 International Students Mobility Survey. This marks an improvement from the country s 12thplace ranking in 2014. Efforts under this initiative include closely monitoring students and schools to maintain the quality of the country as an education hub
Moving Forward Similar fund raising mechanism should be replicated in building other economic sector in line with the United Nation s Sustainable Development Goals
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