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Wednesday, 21 November 2007

Isamic bonds (sukuk) to debut in South Korea

Goodmorning Shinhan Securities launched a private equity fund (PEF) investing in the palm oil business in Malaysia. It also plans to issue Sukuk, an Islamic bond, which would help Korean companies raise money at lower borrowing costs. ``Malaysia's palm oil takes 46 percent of the edible oil production around the world. Palm trees are around 10 times more productive than beans in oil production, and its high productivity makes it eco-friendly,'' said Jung Yoo-shin, vice president of Goodmorning Shinhan SecuritiesManaged by KIBB Securities of Malaysia, the fund aims at an annual 18 percent investment return. KIBB Securities has investor relations scheduled in London, New York, Dubai and Beijing for the 270 billion won fund. Seoul is its first destination for the investor relations tour. Palm oil is used not only for food but also for soap and cosmetics. It could be used as bio diesel, though this has been less attractive due to recent price hikes, according to Jung. The fund would be managed flexibly, investing in either uncultivated farmland or in small or poorly operated farms where there is room to enhance effectiveness. ``They have know-how in palm cultivation. International palm price has been rising on surging demand especially in China and India,'' Jung said. The fund is open to both institutional and individual investors, but the minimum investment is to be around 5.5 billion won. Although it is a 10-year investment, one can sell the stake before the due date. The brokerage house also issues Sukuk. Sukuk works like a bond in terms of cash flow, but it pays dividend not interest for the investors, to comply with the Islamic law that prohibits charging of interest. ``Malaysia is the financial hub in the Islamic world, issuing 56 percent of the $57 billion Sukuk in the global market,'' said Tunku Afwida, CEO of KIBB Securities. She said it doesn't invest in industries related with alcohol, weapons, pork, gambling or involving excessive risk, all banned in the Islamic law. Sukuk has been surging thanks to the abundant oil money in the Islamic world. ``There would be a gap of least 150 basis points between Sukuk and the interest rate. It will help Korean businesses raise money at lower borrowing costs, and build reputation in the Islamic world by issuing Sukuk,'' said Lee Dong-girl, CEO of Goodmorning Shinhan Securities. He said it would be especially attractive for the ones doing business in Southeast Asia or the Middle East. Bank of Korea advised that the government and businesses prepare to advance into Islamic financing, which has been growing over 15 percent annually. ``The Islam financing involves no cost in the beginning as the user doesn't have to pay for it until it makes an earning. Islamic countries are also giving tax benefits on the Islamic bonds,'' the central bank said. Non-Islam countries such as the United Kingdom and Singapore are actively looking for ways to make use of the Islamic money, it added.

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