Malaysia’s SME Bank Issues Debut RM500m (US$118.0m) Sustainability Sukuk Wakalah to Help SMEs Transition to a Green Economy

Sustainability Sukuk issuances continues to gain momentum in member countries of the Islamic Development Bank (IsDB) Group to help agencies, banks and companies transition to a Green Circular Economy in line with the provisions set out by the Paris Climate Agreement and the UN’s 17 Sustainable Development Goals (SDGs) agenda.

When Sukuk issuances are targeted at Small-and-Medium-sized Enterprises (SMEs) they assume even greater importance, especially during and in the aftermath of the COVID-19 pandemic which has hit the IsDB’s 57 member countries hard like elsewhere in the world.

There have been several Sustainability Sukuk issuances over the last three years albeit their proceeds are nowhere near meeting the demand for financing from SMEs. The IsDB has led with two issuances – a US$1.5 billion issuance in June 2020 and the second a US$2.5 billion in March 2021. Several governments and corporates have issued such Sukuk primarily in Malaysia, UAE, Saudi Arabia and Indonesia.

The latest foray into the Sustainability Sukuk Market is Malaysia’s SME Bank, an agency under the Ministry of Entrepreneur Development and Cooperatives (MEDAC), which successfully priced its debut Sukuk on 3 August 2021 raising RM500 million through an issuance of 5-year Sustainability Islamic Medium-Term Notes (IMTNs).

The notes were issued under SME Bank ‘s RM3 billion Sukuk Wakalah Programme launched in July 2021. Both the Sustainability Sukuk programme and the issuance are the first by a Development Financial Institution (DFI) in Malaysia. SME Bank had earlier mandated RHB Investment Bank as the Sole Principal Adviser and Sole Lead Arranger to the transaction to arrange a virtual meeting with investors. It also joined AmInvestment Bank, CIMB Investment Bank and Maybank Investment Bank as Joint Lead Managers to the issuance.

The Programme is made up of an Islamic Medium Term Notes (IMTN) Programme of up to RM3.0 billion (US$708.05 million) (which includes the Sustainability Sukuk) and Islamic Commercial Papers (ICP) Programme of up to RM1.0 billion, with a combined limit in nominal value of up to RM3.0 billion.

According to SME Bank, the issuance received an “overwhelming response from investors” with the book building process attracting RM1.78 billion at close at an oversubscription of 3.56 times. The Sukuk certificates were priced at a profit rate 3.10% at a spread of 59 basis points above the corresponding 5-year Malaysian Government Securities.

According to SME Bank Chief Executive Officer, Aria Putera Ismail, “taking into account of the challenging market situation, the Bank managed to price the issuance at a very competitive profit rate of 3.10%. This Sustainability Sukuk received an overwhelming demand not only from domestic institutional investors, but also from foreign asset managers. The investors’ profile is quite diversified and well supported by financial institutions, fund management companies, insurance companies and government linked companies.”

Dato’ Seri Nazir Ariff, Chairman of SME Bank, stressed that “the issuance of the Sustainability Sukuk opens up wider opportunities for our SMEs to develop their business, technology and services and supporting the Government’s aspiration of developing the green technology sector that is expected to contribute RM100 billion to the country’s GDP and generating 230,000 green job opportunities by 2030. These numbers will accelerate the economic recovery growth which was dampened by the pandemic.”

The proceeds raised from the issuance of the Sustainability Sukuk, according to SME Bank’ Chief Executive Officer, Aria Putera Ismail, “will address the issues of insufficient financing for the green and social related projects. These proceeds will also widen our horizon as we are able to finance projects that directly support 11 of the 17 United Nations Sustainable Development Goals (UN SDGs).”

The Bank has long been supporting green tech SMEs through the Green Technology Financing Scheme and other financing facilities. “SME Bank’s Sustainability Sukuk is a step forward in demonstrating our commitment to creating positive impacts on society and the environment. This is also aligned with the UN SDGs blueprint to achieve a better and more sustainable future for all,” added Aria.

SME Bank’s sustainability approach focuses on sustainable development, where the Bank strives to educate and create long-term value for stakeholders, including customers, employees, and society. At the same time, it aims to balance the economic, social and environmental impacts in all its business decisions. The Bank’s approach to sustainability is based on three pillars, namely responsible banking, responsible business practices and creating a positive social impact.

According to the IsDB, micro, small and medium-sized enterprises (MSMEs) are hardest hit in several member countries and will deteriorate further. Globally, the world has lost an estimated 25 million jobs since the onset of the pandemic, says the IsDB, which has received requests for financial support from more than 20 member countries. In OIC countries, MSMEs have an even greater importance with a rate of 53.2 enterprises per 1000 population, which is more than twice the global rate of 25.2 enterprises per 1000 population.

“Global supply chains,” adds the IsDB, “stand disrupted as a result of poor trading conditions, with SMEs being among the hardest hit. The economic crisis, compounded with dampened economic activity, commodity price volatility, lower tax receipts and low investments presents a huge risk to the Member Countries with a long-term impact on growth and productivity.”

Bank Negara Malaysia (BNM) defines SMEs as companies in the manufacturing sector with a sales turnover not exceeding RM50 million OR full-time employees not exceeding 200 workers, and those in the services and other sectors with a sales turnover not exceeding RM20 million OR full-time employees not exceeding 75 workers.

SME Bank’s sustainability agenda is also in line with BNM’s Performance Measurement Framework, which emphasises the importance of DFIs to incorporate additionalities as part of their business operations to promote greater development outcomes and strengthen their accountability as public institutions. Since its establishment in 2005, SME Bank has supported the growth of SMEs through financing as well as beyond financing efforts. SME Bank has approved over RM35 billion worth of financing to date to more than 19,000 SME customers.

Through its Centre for Entrepreneur Development and Research, SME Bank has trained and coached more than 60,000 participants at various levels of development through dedicated programmes. This commitment is in line with the SDGs to enhance the living standards of people and by meeting SMEs’ financial needs and delivering various services.

Malaysian Minister of Entrepreneur Development and Cooperatives, Dr Hj Wan Junaidi Bin Tuanku Jaafar welcomed the SME Bank Sustainability Sukuk issuance and stressed that it is “timely during this time of crisis whereby there is a need of balance in doing business for profit and doing good to fulfil our obligations towards the environmental, social and governance (ESG) factors. SME Bank’s effort to be part of the global trend is a smart move to secure a strong financial imprint in the country’s financial landscape for now and in the future.”

The first phase in SME Bank’s ESG journey is creating awareness amongst SMEs through financing facilities to finance projects that meet ESG requirements. The second phase is to conduct a series of engagements to educate SME entrepreneurs not only to use financing to meet their ESG needs, but also to apply the ESG elements in their business operations.

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