Sukuk a strategic tool to access capital in Asean

THE story of Islamic finance as understood by many people has Malaysia, Indonesia and the Middle East as its main characters. But a closer reading reveals a more nuanced narrative, one that parallels the evolving economic story of a multi-faith region made up of countries with differing legal structures and at different stages of economic development: Asean.

Sukuk is the Islamic finance’s blue-eyed boy, having largely delivered what was expected and certainly drawn attention for the industry. As the product gains mainstream awareness in the debt capital markets and as sukuk structures evolve, the feasibility for new issuers improves.

The scale of the sukuk market, though dwarfed by the conventional bond market, still remains relevant, largely driven by a growing pool of investors for sukuk.

Access to a new pool of investors is always of strategic benefit for an issuer. Since the financial crisis, this has been even more pronounced but not just because of the access to investors and liquidity.

The sukuk market has shown it can be counter-cyclical or resilient at a time the bond market is struggling. One only has to look back at the successful government of Indonesia’s sukuk in 2009 that bucked the trend in the wake of the Lehman’s crash or the government of Malaysia’s 2010 and 2011 sukuk that shrugged off the European debt crises. Both deals were materially oversubscribed and priced well.

Those involved in the transaction, such as HSBC, noted a conventional bond would have had difficulty at those times. For Asean countries, particularly sovereigns, the sukuk market cannot be ignored. It is a strategic tool to access capital.

Malaysia uses it as a primary tool and Indonesia, as a secondary tool. Both recent and regular issuers, both seeing success. As the Asean credit story builds, as it is building, as usage of capital market grows, sukuk will be a natural part of the funding tool evolution of issuers led by sovereigns and eventually by others.

Moving to the opposite end of the spectrum from wholesale markets, we move to the retail market. Financial inclusion is becoming important in prudent policymaking for regulators. It is more broadly important for countries in terms of navigating uncertain times by increasing the number and amount of savings within the financial system.

Within the Asean region, there are Muslim-majority and Muslim minority countries. The Muslimmajority countries naturally have to address financial inclusion topic earlier. The matter exists in Muslim-minority countries and will need to be addressed, when it comes to how one banks, faith related considerations are a matter of values and not preference to a material number of Muslims.

Islamic finance is a vehicle for non-Muslim countries to promote financial inclusion and thus greater integration within a country’s systems and institutions.

The leading example is the United Kingdom for supporting its Muslim-minority population; Singapore also has a good framework. Through a period of recovering from a global economic downturn, giving people an ability to access the financial system and see their prospects change is undoubtedly desirable.

For exclusion based on faith will undoubtedly cause friction and discontent. Although thus far the rationale is focused on Muslim-minority countries adopting Islamic finance, there is more to do in Muslim-majority countries.

Particularly for Malaysia and Indonesia, a need to invest more into Islamic finance to ensure its offerings are on par with conventional offerings but within the industry’s values is also important. This growth also supports the financial inclusion and societal integration benefits Islamic finance can help in.

All of this sounds quite relevant but how easy is it really? Let us take an example in the Philippines. A Muslim-minority country, a very active issuer in the conventional bond market and one Islamic bank, Al Amanah, which has had challenges in being able to grow. How appealing would the time to build out Islamic finance locally be? That is for the country to decide. Part of that decision will be based on how easy it will be to implement. This is the third thread in regional examples to follow.

Between Malaysia, Indonesia and Singapore, there is a common law, civil law, developed, developing, Muslim-majority, Muslim-minority, island, mainland and archipelago countries. There are models and frameworks to follow. A lot of collective learning to share, adopt or build upon. Within Malaysia specifically, there are a raft of institutions, public, professional and academic set up to support countries developing Islamic finance.

Using examples of those who went first, the Philippines can cut short its route to Islamic finance and likely have examples on how to address issues that will be faced along the way. This is true for the Philippines as much as it is true for other Asean countries.

Given all that context, the story is clear — Islamic finance gives Asean nations access to more capital in uncertain times and helps citizens chart a better future without compromising their values. It’s a story that deserves to be told.

Given all that context, the story is clear — Islamic finance gives Asean nations access to more capital in uncertain times and helps citizens chart a better future without compromising their values.