Bankers await details on ‘Agrosukuk’

KUALA LUMPUR: (Reuters) -- The government has launched a campaign to encourage more agricultural-sector companies to fund through Islamic bonds. The move is seen as a bid to develop the country's sukuk market and stimulate its agricultural industry.

In the 2013 Budget, tabled a couple of weeks back, Prime Minister and Finance Minister Datuk Seri Najib Razak detailed a number of steps to stimulate and strengthen the country's capital markets.

These include tax breaks, the creation of retail bonds and an additional RM400 million allocation to state-owned guarantee agency Danajamin Nasional.

It is, however, the promise of Islamic bonds from the agricultural sector that has had the markets buzzing.

Najib announced that the Securities Commission (SC) will create a framework to allow agriculture companies to issue special sukuk. Under the framework, expenses incurred in the so-called "Agrosukuk" deals will receive double tax deduction over the four tax years from 2012 to 2015.

While the idea was promising, local debt bankers said they were yet to grasp fully what it involves.

"To be frank, we are in the dark. My sense is that the SC itself has not finalised any details on this Agrosukuk and only the Islamic division at the SC seems to be aware of this new instrument," said one head of debt origination. It is at such a preliminary stage that we are surprised that the PM decided to announce it."

"The government is trying to focus on the agriculture sector, following the listing of Felda Global Ventures Holdings Bhd, but, again, the devil is in the details. How will it work?" asked one foreign banker.

Seen against the entire budget, it may make a little more sense why the agricultural sector has been singled out. For instance, RM5.8 billion is being allocated to the Ministry of Agriculture and Agro-based Industry.

Bankers, however, believe the government will need to provide more than just tax incentives to encourage these potential issuers to come to the capital markets. "The big agricultural or plantation companies, such as IOI and KL Kepong, have ready access to not only the sukuk markets, but also to bank lending," said a banker.

"However, apart from these companies, which are rated at least Double A, not many others will be able to access the markets, given investors' aversion to anything rated below that. There is a bit of disconnect there, since the tax incentive will only help the big companies. In the end, I'm not sure how it will benefit the industry as a whole," he added.