DANAJAMIN Nasional Bhd was established in the aftermath of the global financial crisis on March 10, 2009, almost in passing by then deputy prime minister and finance minister Datuk Seri Najib Razak when he unveiled the Supplementary Supply Bill 2009 in the Dewan Rakyat.
The bill was a mini budget, or part of a RM60 billion second economic stimulus package to help Malaysia weather the global economic crisis, which was ravaging, especially the United States, Europe and Japan, with recession. It was the worst economic contraction the world had witnessed since the Great Depression of the 1930s.
Eight years on, Danajamin has turned out to be a blessing for Malaysia’s capital market. In hindsight, it was one of the best and most unassuming policy decisions taken by Najib, who became prime minister the following year.
Danajamin is not exactly a household name, but to me, it is another of the unsung heroes of the capital market, especially the Islamic capital market. Its mandate is of national importance simply because of its role to ensure continued flow of credit in the financial system to businesses by giving financial guarantee insurance to investment grade companies that are raising funds from the market through the issuance of bonds and sukuk, thus contributing to the democratisation of the capital market.
Danajamin, headed by chief executive officer Mohamed Nazri Omar, has provided credit enhancement guarantees for RM9 billion bond/sukuk programmes issued by 31 Malaysian companies across various sectors, and brought about a market impact of RM16 billion through its risk-sharing collaboration with partner banks, including Maybank and CIMB.
These include guaranteeing sukuk issuances to finance the West Coast Expressway Project, connecting the west coast of the peninsula from Banting, Selangor, to Taiping, Perak, and to part finance the construction of the Immigration and Customs Complex in Bukit Kayu Hitam, Kedah.
Recently, Danajamin took a major step forward in becoming the first financial guarantee insurer in the world to issue its own sukuk, the proceeds of which would support its capital, thus enabling it to help more local companies raise funds through accessing the debt capital market by issuing bonds or sukuk. The agency issued its maiden Tier II Subordinated RM500 million Sukuk Murabahah, with a tenure of 10 years and priced at a yield of 4.8 per cent per annum on Oct 6 — the first tranche under its RM2 billion Sukuk Issuance Programme.
The demand from investors was so encouraging that Danajamin decided to upsize the issuance from an initial RM300 million to RM500 million.
Danajamin’s continued progress, especially in the sukuk market, is universally important for many reasons. The fact that the entity is the only state financial guarantee insurer of sukuk in the world shows how far the corporate sukuk and bond industry, especially in emerging countries, still has to travel in its future development.
Financial guarantees are effectively insurance (Takaful) policies to cover bonds/sukuk issued by governments, banks, corporates and social organisations. These guarantees are either given by the state through the Finance Ministry or by one of its agencies, such as Danajamin in Malaysia, the United Kingdom Export Finance or Coface in France, or by private sector companies. These guarantees are deemed credit enhancement instruments because they enhance the ability of issuers of bonds/sukuk to raise funds from the market, which is credit.
Governments usually guarantee their bond and sukuk issuances directly, otherwise very few such issuances would come to the market because of the potential risks attached. These risks include political, terrorism, market, credit and a host of other risks. Malaysia’s inaugural US$600 million sovereign sukuk in 2002, the first in the world, for instance, was guaranteed by the Finance Ministry and is the global benchmark for government issues.
Some corporates, banks and government-linked companies get financial guarantee insurance for their issuances from third-party providers, such as Danajamin and its variants elsewhere.
Others issuances are guaranteed by financially sound parent companies, for instance, a Maybank Islamic sukuk is guaranteed by Maybank Group.
There are many companies, however, that find it difficult to issue bonds/sukuk because investors would see them as too risky. This is where third party guarantees given by entities such as Danajamin and Islamic Corporation for the Insurance of Investment and Export Credit, in which Malaysia is an equity subscriber, come in. They are deemed syariah-compliant because they are not directly involved in a transaction and are therefore “independent” guarantors.
Sukuk, by its very nature, cannot be guaranteed by the issuers, but can be guaranteed by a third party. Regardless of who gives them, these third party guarantees should be distinguished from the guarantees of return by the issuer, especially in Murabaha and Mudharabah Sukuk, irrespective of the performance of the issuer. But, once again, it is possible for a bona fide third party to do so, provided that the guarantee obligation is separately documented and voluntary in nature.
If we have more institutions such as Danajamin in the 57 Organisation of Islamic Cooperation countries, it could be a game-changer for sukuk issuance and for the Islamic capital market, which in countries such as Malaysia, Saudi Arabia and United Arab Emirates is an important contributor to the gross domestic product.
[email protected] Mushtak Parker is an independent London-based economist and writer.