Malaysia steps up bond push

* Agrosukuk to boost local capital markets

* Double deduction tax for issuance expenses

* Bankers say more needed to help smaller borrowers

By Kit Yin Boey

Oct 5 (IFR) - The Malaysian 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 Malaysia's latest budget release, on September 28, Prime Minister Najib Tun 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 M$400m (US$131m) allocation to state-owned guarantee agency Danajamin Nasional.

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

Najib announced that the Securities Commission would create a framework to allow agriculture companies to issue special sukuk. Under the framework, expenses incurred in the so-called 'Agrosukuk' deals will receive a 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, but, again, the devil is in the details. How will it work specifically?" 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, M$5.8bn is being allocated to the Ministry of Agriculture and Agro-based Industry.

Apart from the commodities sector dominated by palm oil and rubber industries, which have enjoyed widespread benefits from previous years because of the major contributions they make to the country's economy, the growths of other agro-based industries, such as rice farming and fishing, have lagged.

More cynical observers say that the move to extend funding access to smaller agriculture companies forms part of the government's populist budget, dismissing the move as a token gesture designed to capture votes in the rural areas in the next general election. Prime Minister Razak has to call an election before April next year.

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 one local 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."

(Reporting By Kit Yin Boey; Editing by Steve Garton and Christopher Langner)