Malaysia is the world's largest sukuk issuer and holds around a quarter of the world's Islamic assets. That said, are there challenges that the industry still needs to overcome?
The lack of liquidity of most sukuks hampers the growth of the market. Many investors seek sukuks for their investment book and normally, they would be held until maturity. Investors that place a high value on liquidity may avoid sukuks entirely because of the absence of a secondary market. The liquidity also harms dedicated sukuk investors, because it leads to comparatively large bid-ask spreads and limits their investment strategies and portfolio diversification opportunities. The second challenge that needs to be addressed is a lack of uniform interpretations across jurisdictions. This matter further hinders the growth of the market. Structures that are deemed acceptable in one market may not be equally accepted in another jurisdiction. The most frequently cited example of this divergence in interpretation is the difference between structures that are considered tradable in Malaysia and those that can be traded in most GCC countries. Such lack of uniformity limits the depth of the market for any particular sukuk issue. Another issue is the lack of legal certainty in the sukuk market; for example, the extent to which courts will consider sharia compliance in evaluating the enforceability of an Islamic Finance contract remains an open question in most jurisdictions. As a result, there is a risk that a contractual obligation that would otherwise be found to be enforceable under the governing law of the contract may nonetheless be determine to be unenforceable due to some deficiency in its compliance with Sharia principles. Finally, the sukuk market suffers from a lack of frequent sovereign issues, in particular, high quality sovereign issues. Frequent, high quality sovereign issuance plays an important role in the development of all capital markets; as such issues serve the critical purpose of building a benchmark yield curve of the market. Without such benchmark yield curve, it is difficult for other issuers as well as investors to access the market with confidence. In addition, the availability of such frequent sovereign issues would help Islamic financial institutions to meet the regulatory requirements on capital compositions.
What role can Malaysia play in exporting Islamic finance to other countries?
Malaysia can share its experience and expertise on development of the Islamic marketplace, which is characterized by a robust regulatory, supervisory, sharia and legal framework, a deep primary and active secondary sukuk market, an efficient and transparent price discovery platform, and a diverse talent base with global capabilities and efficient multi-currency clearing and settlement. The marketplace enables the international financial community to benefit from the offering that caters to global jurisdictions, markets, and career needs. Malaysia also welcomes new market players to leverage its expertise and to establish operations in Malaysia. The key value proposition offered by Malaysia's marketplace is an end-to-end Sharia compliant business environment. In addition, Malaysia has set the pace for innovative development of new Sharia-compliant investment products to cater for market needs. The Malaysian Islamic capital market has experienced phenomenal growth and raised the bar globally for product innovation and financial intermediation. This market comprises the Islamic equity sector and fixed income. Malaysia also recently updated the sharia screening methodology to meet the strict global expectations for sharia-compliance of listed stocks. The development of sukuk in Malaysia over the last two decades has transformed the Islamic financial landscape at the national and international levels, and has propelled governments and jurisdictions to accommodate Islamic finance business and transactions by reviewing their existing tax, sharia, and regulatory framework. An increasing number of multilateral developments institutions, governments, and multinational corporations are using and considering sukuk as an attractive source of funding. There is growing acceptance from sophisticated global investors of sukuk as a viable and competitive asset class.