Zeti Akhtar Aziz: Sukuk development and financial stability
Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara
Malaysia), at 10th World Islamic Economic Forum (WIEF) "Sukuk Development and Financial
Stability", Dubai, 28 October 2014.
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It is my great pleasure to be here in Dubai at this World Islamic Economic Forum 2014 to
speak at this dialogue session on the potential of the sukuk market and its role in the
economic development process and in contributing towards financial stability. This recent
decade has witnessed the accelerated development of the global sukuk market. The global
sukuk market which has now reached USD$270 billion outstanding is evolving to become a
distinct platform for fostering greater international economic and financial linkages. The
success of the sukuk market reflects its ability to meet the changing and differentiated
demands of the modern economy, to develop innovative and cutting edge structures and
products, and to achieve such issuances at competitive pricing.
The sukuk market has drawn increasing interest from sovereigns, multilateral institutions,
multinational and national corporations both from developed and emerging economies to
finance investments in a wide range of economic activities and development projects. The
geographical reach of the sukuk market has also become more extensive, with the global
sukuk outstanding now being domiciled in more than 20 countries, while the investor base
that spans from Asia, the Middle East and Europe. In addition to issuances in international
reserve currencies that includes the US Dollar, the British Pound and Euro, more recently in
Malaysia has been the issuance of sukuk in Renminbi.
For the investors, the sukuk offers the diversification into multiple asset classes and different
techniques used to structure medium to long term instruments. Given that the sukuk is based
on underlying assets, it discourages over-exposure of the financing beyond the value of the
underlying assets. Issuers are thus discouraged from leveraging in excess of the asset value.
The prospect of over-indebtedness and its consequences on financial stability are thus
reduced. There is also potential for direct participation of investors in the project, thereby
granting investors beneficial ownership in the underlying assets, with the rights to receive a
share of profits or rental income from the underlying asset of the sukuk while taking the
associated risk of such ownership.
The sovereign sukuk is generally the first inroad into Shariah compliant funding in the capital
market, enabling the creation of reference prices over time, to which private sector entities
can benchmark their fund raising activities. Governments have for the most part, remained
the most active issuers in the history of the global sukuk market with sovereign issuances
accounting for more than 80 percent of the global sukuk issuances. This recent few years
has also seen a number of jurisdictions in developed economies strengthening their legal,
regulatory and governance framework to facilitate such sukuk issuances.
Going forward, the financing requirements for economic development are envisaged to be
massive, particularly for emerging and developing economies in the Asian and Middle
Eastern regions that are seeking huge amounts of capital to fund new infrastructure and to
support economic development. Given the sheer size of these projects, equity and
government budgets cannot be the only source of financing for this next phase of economic
growth and industrialisation in our regions. The sukuk market has become a potentially
important new source of funding for such long term projects. In the recent decade, a total of
US$95 billion of infrastructure sukuk has been issued by more than 10 different countries. In
Asia, it is estimated that a funding of US$8.3 trillion is required until 2020 for infrastructure
projects, while the funding requirements in the Middle East are estimated to be US$2 trillion
over the same period. Developing economies in Africa have also already begun its entry into
the sukuk market for such infrastructure financing with some having put in place the legal
groundwork for such sukuk issuances.
However, low sovereign ratings have limited the ability of certain high-growth developing
countries to source such funding, despite being rich in natural resources. Countries that are
rich in natural resources may however, pledge these resources for such issuance. Funding
may thus be secured arising from the securitisation of such assets. Given the recourse to the
asset by investors, it provides the incentive for disciplined and appropriate governance of the
management of the project. Additionally, multilateral development banks may also facilitate
this process by providing credit guarantees to these countries to reduce the financing cost
and improve the quality of the sukuk issuances. On this front, multilateral development banks
such as The Islamic Development Bank (IDB) Group and The Asian Development Bank
(ADB) commenced initiatives to support member countries to leverage on Islamic finance for
sourcing of funds, through the provision of advisory services, capacity development and
technical assistance.
Allow me to now share Malaysia's experience in the development of the sukuk market in our
Islamic finance marketplace. The Islamic capital market in Malaysia has been systematically
developed to ensure accessibility whilst ensuring the protection of investors and efficiency in
the intermediation process. The initiatives to develop the market are also strongly backed by
the legal and Shariah framework which is further supported by a robust financial
infrastructure, including the settlement and bond information system that enables Malaysia to
provide a complete sukuk issuance and trading platform.
Since the first sukuk issuance in 1990 by a multinational corporation in Malaysia, the sukuk
outstanding in the Malaysian marketplace is now US$158 billion. In 2002, the Malaysian
government issued its inaugural global sovereign sukuk, raising US$600 million, which
became an international benchmark for the issuance of global sovereign sukuk. The
marketplace has now been liberalised to allow for multilateral financial institutions,
multinational and national corporations from other jurisdictions to issue both ringgit and
nonringgit denominated sukuk in our sukuk market with increasing foreign investor participation
in such issuances
The sukuk market in Malaysia has seen wide ranging innovative structures and a greater
diversity in the type and maturity of the sukuk. A landmark issuance is the US$750 million
exchangeable sukuk Musyarakah in 2006 by Khazanah, the government's investment
corporation for the purpose of selling a stake in Telekom Malaysia. It marked the first
issuance of its kind, incorporating full convertibility features common to conventional
equitylinked transactions. A further notable issuance was the pioneering retail exchange-traded
sukuk to raise funds for a transportation project that allowed retail investors the opportunity to
have direct access to the sukuk and thus a stake in a massive infrastructure development in
the country, therefore broadening the range of low-risk investment products available to such
investors. In terms of maturity, the ringgit sukuk market has seen issuances of maturities to
30 years which were well received by the financial market. Regular sukuk issuances with
different maturities by the Malaysian government has also created a benchmark yield curve
for market reference, of which is complimented by the establishment of a number of indices
for non-ringgit and ringgit denominated sukuk that serve as benchmarks to track the
performance of sukuk. These initiatives have progressively contributed towards creating a
vibrant secondary sukuk market in Malaysia, with increased depth and liquidity.
In complementing the sukuk market as a source for fund raising, also being explored are
other funding channels to assist small and medium enterprises, new growth industries and
entrepreneurs that have limited access to the sukuk market. A multi-bank investment
platform is now being developed for the effective matching of funds from potential investors
with targeted industries and ventures in the real sector. Foreign Islamic financial institutions
and investors also stand to benefit from this platform, with the offering of multi-currency
financing options for foreign projects. The platform facilitates Islamic banks to perform
investment intermediation functions. It enhances further the intermediation role of the Islamic
banking institutions to also function as an investment intermediary.
In an increasingly internationalised global financial marketplace that has generated
significant cross-border flows, one of the requirements as we advance forward is the need for
more tradeable cross-border Islamic financial instruments that can cater to the different
profiling of investors' risk appetites. The issuance of the short-term sukuk by the International
Islamic Liquidity Management Corporation (IILM) is a breakthrough in innovation towards
increasing cross-border liquidity flows that could potentially enhance financial stability and
the efficient functioning of the Islamic financial markets.
Let me conclude my remarks. There is clear indication of the growing relevance and
importance of the sukuk market, with the growing interest from both emerging and developed
jurisdictions and the strategic approaches taken to diversify the funding sources through the
sukuk market. The overall direction and potential of the global sukuk market are certainly well
recognised, particularly in its role in contributing towards greater economic development.
There is significant potential for the sukuk, in particular to fund infrastructure projects. This is
particularly relevant for the GCC, African and Asian regions given the infrastructure needs
going forward. This would contribute towards building deeper and more liquid, efficient and
effective global sukuk market. The dynamism of the sukuk market also contributes towards
strengthening financial stability and in facilitating the expansion of inter-regional investment
flows. As we move towards increasing this internationalisation of Islamic finance, and thus
towards greater global financial integration, it will contribute towards a global growth process
and financial stability that will be mutually reinforcing.