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. * * * 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 bis central bankers ’ speeches 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