Kuala Lumpur can pro­mote its sukuk ar­chi­tec­ture model as the uni­ver­sally pre­ferred and proven choice

New Straits Times - - Opinion - The writer is an in­de­pen­dent Lon­don-based econ­o­mist and writer

WHAT is the to­tal vol­ume of for­eign cur­rency sukuk is­sued in Saudi Ara­bia and Malaysia in Q1 2017? The fig­ure for Saudi Ara­bia, my re­search shows, is US$13.75 bil­lion (RM59.69 bil­lion) com­pris­ing US$10.75 bil­lion from three US dol­lar is­suances by the Saudi Gov­ern­ment, Is­lamic De­vel­op­ment Bank and DAAR, the re­alty developer, and one is­sue in Saudi riyals (equiv­a­lent to US$3 bil­lion) by Saudi Aramco, the world’s largest oil com­pany.

In con­trast, ac­cord­ing to Se­cu­ri­ties Com­mis­sion of Malaysia (SC) data, there were no for­eign cur­rency sov­er­eign and cor­po­rate sukuk is­sued in Malaysia in 2017 to date.

The Fi­nance Min­istry, re­port­edly, is plan­ning to is­sue an in­ter­na­tional sukuk this year. SC data shows there were six cor­po­rate ring­git sukuk is­sued in Malaysia in the first two months of 2017.

Is the dom­i­nance of sukuk is­suance shift­ing from Kuala Lumpur to Saudi Ara­bia?

The defin­ing de­vel­op­ment in April 2017 is the en­try of Saudi Ara­bia as a sov­er­eign is­suer with a record de­but US$9 bil­lion sukuk, on the back of the US$3 bil­lion maiden sukuk by Saudi Aramco. This, and other de­vel­op­ments such as an es­ca­lated role by the In­ter­na­tional Mon­e­tary Fund (IMF) in the Is­lamic fi­nance space and the Bank of Eng­land’s en­dorse­ment of a Wakalah-based cen­tral bank de­pos­i­tory fund to help syari­ah­com­pli­ant banks in the UK, could be game chang­ers for the de­vel­op­ment of the Is­lamic cap­i­tal mar­ket (ICM).

The Saudi sov­er­eign sukuk is the sin­gle largest US dol­lar sukuk to date and was over­sub­scribed to the tune of US$33 bil­lion, in­di­cat­ing huge ap­petite for such cer­tifi­cates, which are as at­trac­tive to West­ern pen­sion funds as they are to in­vestors in the Mus­lim world.

Sukuk dom­i­nance for the short-to- medium term will con­tinue to be out of Malaysia, whose Is­lamic fi­nan­cial ar­chi­tec­ture in­clud­ing cap­i­tal mar­ket reg­u­la­tion and fa­cil­i­ta­tion, and liq­uid­ity re­leas­ing sec­ondary trad­ing, is light years ahead of Saudi Ara­bia and other coun­tries, and whose Malaysia In­ter­na­tional Is­lamic Fi­nance (MIFC) plat­form un­til re­cently at­tracted a spate of for­eign is­suers from the GCC, Turkey and Ja­pan to is­sue sukuk in the ring­git mar­ket.

It is the eco­nomic im­pact of the re­cent fall in crude oil prices and the volatil­ity in the value of the ring­git against the US dol­lar that has tem­po­rar­ily damp­ened this de­vel­op­ment.

The size of the Malaysian ICM, ac­cord­ing to SC, to­talled RM1.692 tril­lion in 2016 ac­count­ing for 60 per cent of the to­tal Malaysian cap­i­tal mar­ket of RM2.84 tril­lion.

To­tal sukuk out­stand­ing in 2016 was RM661.08 bil­lion, which is 56.36 per cent of to­tal bonds and sukuk out­stand­ing.

Sim­i­larly, to­tal sukuk (gov­ern­ment and cor­po­rate) is­suance amounted to RM129.45 bil­lion in 2016, giv­ing it a 53.81 per cent mar­ket share of to­tal bond and sukuk mar­ket in Malaysia, which also ac­counts for 60 per cent of the to­tal global sukuk mar­ket.

Malaysia should wel­come the de­vel­op­ments in Saudi Ara­bia. The busi­ness case is clear. Not only is there huge po­ten­tial for co­op­er­a­tion, but Kuala Lumpur could also pro­mote its sukuk ar­chi­tec­ture model as the uni­ver­sally pre­ferred and proven choice. The world lacks high qual­ity sukuk such as the sov­er­eign Saudi one, which also qual­ify for in­clu­sion in the High Qual­ity Liq­uid As­sets (HQLA) uni­verse of the Basle III Liq­uid­ity Cov­er­age Ra­tio stan­dard. In­vestors are scream­ing for such pa­pers to in­vest in.

Malaysia’s Em­ploy­ees Prov­i­dent Fund (EPF), the pub­lic pen­sion fund with as­sets in ex­cess of RM700 bil­lion, in Jan­uary launched a ded­i­cated Is­lamic pen­sion fund, Sim­panan Syariah, with a fund size of RM100 bil­lion to be in­creased to RM150 bil­lion in 2018.

EPF needs syariah-com­pli­ant as­sets to in­vest in un­der the above scheme and for as­set al­lo­ca­tion di­ver­si­fi­ca­tion pur­poses. The Saudi sukuk is mu­sic to the ears of EPF chief ex­ec­u­tive officer Datuk Shahril Ridza Ridzuan. It would also help if the Saudis open up di­rect in­vest­ment by for­eign ac­counts in their do­mes­tic sukuk.

The Saudi sukuk is also the only sukuk which in­cludes a dis­clo­sure in the prospec­tus on credit risk re­ten­tion re­quire­ments, to com­ply with the US Dodd-Frank Act, fol­low­ing its in­tro­duc­tion by the US Congress af­ter the 2008 fi­nan­cial crisis to re­duce risk-tak­ing.

This could be im­por­tant for the fur­ther glob­al­i­sa­tion of sukuk in the US and West­ern mar­kets.

Sukuk, as a fundrais­ing in­stru­ment, is unique to Is­lamic fi­nance, but its ap­pli­ca­tion as an al­ter­na­tive eth­i­cal fi­nanc­ing tool is uni­ver­sal, ir­re­spec­tive of eth­nic­ity or creed. Its im­por­tance as a po­ten­tial in­fra­struc­ture de­vel­op­ment and ur­ban re­gen­er­a­tion mode of fi­nanc­ing has, in re­cent years, been recog­nised by the G20, IMF, World Bank, the In­ter­na­tional Fi­nance Cor­po­ra­tion (IFC) and the Basel Com­mit­tee Bank­ing Su­per­vi­sion.

Its pro­lif­er­a­tion is con­fined to is­suers in tra­di­tional mar­kets in Asia and the Mid­dle East and North Africa re­gion, with the odd sov­er­eign is­suances by the UK, Lux­em­bourg and South Africa, and cor­po­rate ones by Gold­man Sachs, HSBC, No­mura, Gen­eral Elec­tric and Tesco (in Malaysia). The World Bank and IFCG have also is­sued sukuk to fund projects in mem­ber coun­tries.

It is one of the va­garies and mys­ter­ies of the con­tem­po­rary Is­lamic fi­nance in­dus­try that it has failed to un­leash the power of sukuk as an ex­em­plary fi­nanc­ing in­stru­ment in the af­ter­math of the 2008 fi­nan­cial crisis.

The rea­sons are man­i­fold, among oth­ers, lack of con­fi­dence of Mus­lim coun­tries, poor eco­nomic gov­er­nance and man­age­ment, the dearth of pub­lic pol­icy com­mit­ment to Is­lamic fi­nance and sukuk, reg­u­la­tory and le­gal frame­work gaps and deficits, and mis­guided as­set al­lo­ca­tion strate­gies.

Also, the fact that Is­lamic fi­nance is still a nascent in­dus­try in its fifth decade, com­pared with the 200-year his­tory of con­ven­tional fi­nance.


Sukuk dom­i­nance for the short-to- medium term will con­tinue to be out of Malaysia, whose Is­lamic fi­nan­cial ar­chi­tec­ture is light years ahead of Saudi Ara­bia and other coun­tries.

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