Firms eye islamic bonds for funds

A number of private firms and state-owned enterprises plan to raise funds in the Middle East to tap petrodollars.

At least three property firms plan to issue Islamic bonds - known as sukuk - with a combined value of Bt15 billion, Dheerasak Suwanayos, adviser to Krung Thai Asset Management, said yesterday.

He said if the central bank started to raise policy rates to curb inflationary pressure, land developers would quickly turn to the Middle East as the cost of raising funds there would be cheaper.

Dheerasak would not reveal the names of the companies, but said they wanted to issue US dollar-dominated Islamic bonds in the Middle East.

Meanwhile, Pongpanu Svetarundra, director-general of the Public Debt Management Office, said two state enterprises - Thai Airways and the Electricity Generating Authority of Thailand - might next year raise funds in the Middle East.

He said the Finance Ministry and other ministries had begun to study how to create the legal infrastructure to accommodate the issuing of Islamic bonds.

The interministry task force is expected to propose laws or regulation amendments to accommodate Islamic bonds in the next six months, he added.

The Revenue Department has to change its tax regulations, because the current system would  make it more expensive to issue Islamic bonds than conventional bonds. Laws and regulations related to land transactions will also need to be changed.

Ornjira Tangwongyod-ying, a partner at PricewaterhouseCoopers Thailand, said sukuk were subject to high tax costs in Thailand due to double transfers of underlying assets.

There are also withholding taxes and value-added taxes on lease payments, she said yesterday at the "Second Thailand Islamic Finance Conference".

Mohammad Razif Abdul Kadir, deputy governor of the Malaysian central bank, said Malaysia, which has one of the world's biggest sukuk bond markets, had provided tax incentives to lower issuing costs over conventional bonds.

Investors in Malaysia also preferred Islamic bonds to conventional bonds due to higher returns, he said.

Jaseem Ahmed, director of the Governance, Finance and Trade Division at the Southeast Asia Department of the Asian Development Bank, estimated that total value of assets currently under Islamic finances amounted to US$1 trillion (Bt33.5 trillion) and was growing at an estimated rate of 10-15 per cent a year.

Islamic bonds exceeded $70 billion.

A conventional bond is a contractual debt obligation whereby the issuer is contractually obliged to pay interest and principal to bondholders on a specified date.

In comparison, under the sukuk structure, the bondholders each hold an undivided beneficial ownership interest in the underlying assets.

Sukuk involves some transactions of assets, such as land, so it is subject to high taxes in Thailand under the current taxation system.