CASE STUDY

Helping Malaysia develop thegreen sukuk market
OVERVIEW
The green sukuk is a new climate
finance instrument (green Islamicbond) that has the potential to channel
the $2 trillion Islamic Finance market tofund green and sustainable investment
projects. The World Bank partneredwith the government to develop thegreen sukuk market in Malaysia.
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Background
Developing countries have limited access to capital
to invest in key sustainable infrastructure, often
resorting to local bank loans with unsuitable terms.
Capital markets offer a cheaper source of longerterm finance. Green bonds have been identified asa new source of climate finance for cities,municipalities and low carbon infrastructure
projects across many sectors and an opportunity
for the private sector to address global
development priorities.
The World Bank, which launched the first labeledgreen bond in 2008 and has since then issued
over $10 billion equivalent, is a key promoter ofgreen bonds as an important means to address
climate change.
A sukuk is an interest-free bond that generates
returns to investors without infringing the principlesof ‘Shari’ah’ (Islamic law). There are commonalities

between sukuk and green bonds that can easily bechanneled to tap the Islamic Capital Markets andmaximize private sector financing for environmental
projects:
1) Both raise funds for a specific purpose. The
asset-based structure of a sukuk complements thegreen bond structure as it provides investors with ahigh degree of certainty that the funds raised are
only used for the designated purpose.
2) The values of both are deeply rooted upon
ethical and socially responsible principles. The
assets financed by sukuk exclude investments ingambling, weapons, pork and alcohol.
3) The notion of environmental stewardship, theprotection of air, water and land, and theecosystems that depend on them are intrinsic to
Shari'ah principles.
Despite the huge potential, the green sukuk market
had not taken off mainly due to lack of knowledge
at the issuer and investor levels about the process

and benefits of such issuances; perceptions aboutcomplexity and pricing; lack of a framework, lack ofconsensus among government agencies on policy
coordination, lack of bankable green projects, etc.
Malaysia is the world’s biggest Shari’ah-compliant
debt market, accounting for $34.7 billion (46.4%) of
the $74.8 billion issued globally in 2016. In 2014
Malaysia introduced the Socially Responsible
Sukuk (SRI) Guidelines to establish itself as acenter for sustainable finance.

Financing Objectives
The Financing objective is to help the Malaysian
government
developinnovative
financial
instruments to address its infrastructure and green
financing needs, including its target of generating
7,200 megawatt (MW) of renewable energy by
2020, of which 2,080 MW will be contributed bysolar energy.

Financial Solution
In January 2017, the World Bank joined a Technical
Working Group with the Central Bank andSecurities Commission of Malaysia to explore
options to encourage investments in green or
sustainable projects through the development ofgreen Islamic finance markets. The Malaysia Green
Finance Project facilitated the development of thegreen sukuk market in Malaysia which led to thelaunch of the first green sukuk in the world.

World Bank’s Role
The World Bank, identified the opportunity toleverage Malaysia’s role in Islamic finance tocombine the sukuk and the green bond and meet
Malaysia’s need for financing green initiatives. The
Technical Working Group promoted the concept ofthe green sukuk and shared international
experience of green bond issuance with various
stakeholders in the green economy, including
Ministry of Energy, Green Technology and Water(KeTTHA), Green Tech Malaysia Sdn Bhd, Ministryof Finance, financial institutions and potentialissuers.

Specifically, the World Bank:•Identified the complementarity between
Malaysia’s SRI Sukuk Guidelines and Green
Bond Principles to enable potential issuers toissue green sukuk in the absence of anationally adopted green bond framework;•

Provided guidance on how the government cankick-start the local market by facilitating andreducing costs to issuers through incentives;•

Provided guidance on eligible green projects
and helped identify potential issuers fordemonstration issuances;•

Advised on the role of independent third party
reviews; convened international certifiers; andfacilitated the role of local institutions to
conduct such assurance tasks at low cost;•

Helped the first issuers navigate government
policies and international best practices.

OutcomeOn July 27th, 2017 Tadau Energy Sdn Bhd, issued
the first green sukuk in the world, raising MYR250
million ($59 million) to finance a 50MW solar
photovoltaic power plant in Sabah, Malaysia. Thesukuk was issued under Malaysia’s SRI sukuk
framework, endorsed by the Shari’ah Advisory
Council, and received the highest rating by theCenter for International Climate and Environmental
Research Oslo (CICERO).
A key demonstration of the success of this project
was that another issuer—Quantum Solar—
followed quickly with a larger (MYR1 billion)
issuance. A number of others are in the pipeline,
such as PNB Merdeka Ventures (MYR 2 billion fora green building) and Sinar Kamiri (MYR 245 millionfor another solar project.
The World Bank team, comprising the World Bank
Treasury, Malaysia Knowledge and Research Huband Finance & Markets Global Practice Group,
continues to work with issuers to further deepen thegreen sukuk market. The model is now being
replicated in other countries that requested
technical support encouraged by the success of theMalaysian project.