10th Anniversary Regulators’ Keynote Address
by Dato’ Seri Ranjit Ajit Singh
Chairman of Securities Commission Malaysia
at the London Sukuk Summit in United Kingdom
on 25 May 2016

Your Excellencies, distinguished guests, ladies and gentlemen.
1 Good morning. It is a great pleasure for me to be here this morning, and I would like to thank the organisers for extending an invitation for me to speak here at the London Sukuk Summit.
2 Before I begin, Your Excellency Lady Morris, allow me to congratulate you on the summarily excellent speech. London’s ambition to become a hub for sukuk origination is very much welcomed, and it is remarkable to note the extent to which Islamic finance has already shaped this city’s modern-day skyline, from the athletes’ village for the 2012 Olympics to The Shard, and not to forget Malaysia’s investment in the redevelopment of the Battersea power station.
3 Having a city at the heart of global finance such as London plant a stake in the ground and declare its aspiration to become a centre for Islamic finance is not only an important milestone for the industry, but also a testament to the efforts of those who have endeavoured to develop and promote this sector over the last few decades.
4 Such collective efforts by various jurisdictions and organisations have been instrumental in driving growth in the Islamic financial sector, with recent estimates pegging the global total of shariah-compliant financial assets in the region of $2.5 trillion, with $2.1 trillion of assets domiciled in the Organisation of Islamic Conference countries and the remainder accounted for by early-mover non-OIC jurisdictions such as the United Kingdom, Hong Kong, South Africa and Luxembourg.1 This year, we expect to see more maiden sovereign sukuk issuances from countries such as Jordan and Kazakhstan, which follow in the footsteps of jurisdictions such as the Ivory Coast and Oman who made their debut issuances last year in 2015.
5 The increasingly diverse profile of sukuk issuers attests to growing international recognition of the value proposition of Islamic finance, both within and outside of the Muslim world. However, to focus solely on size and numbers would be to do Islamic finance an injustice, for its strength lies not only in its growth potential but also its fundamental character, as well as the socially desirable outcomes towards which it may be deployed.
6 The London Sukuk Summit in particular has been an important platform in highlighting these aspects of Islamic finance, and I would like to congratulate its convenors on the 10th anniversary of this Summit. By bringing together a diverse spectrum of stakeholders, ranging from policymakers, regulators, industry players, investors and the media, the Summit provides a valuable opportunity for all of us to discuss not only the prospects and practicalities of Islamic finance in great detail, but also broader issues which are shaping the global conversation on markets, economies and society at large.
7 These conversations are vital because our vision on the way forward for Islamic finance will only be complete through an appreciation of the socioeconomic context in which the financial system operates. This perspective is critical, as the priorities of the financial system must rightfully be guided by the needs and priorities of the real economy – not the other way around – to enable these two complementary aspects of the global economic order to remain harmonious and mutually reinforcing.
Ladies and gentlemen
Reopening the financing spigot
8 It is unfortunate that we needed a global financial crisis to remind us of this fundamental truth. The post-2008 years starkly illustrate the perils of a global economic ecosystem that – to quote Oscar Wilde – “knows the price of everything and the value of nothing.” A world which prizes short-term maximisation at the individual level over long-term optimisation at the aggregate level is not a world that produces sustainable outcomes for the present as well as the future generation, and the symptoms are clearly manifested in the widening chasms of inequality in our society:  a society where 62 individuals collectively own the same amount of wealth as the poorest 50% of the planet, and the average annual income of the poorest 10% has risen by less than $3 a year over the last 25 years – equivalent to an increase in daily income of less than a single cent a year.2
9 Resolving these issues requires something more far-reaching and transformative than what the world is already doing. While the emergency response measures introduced during the crisis have been largely successful in stemming the bleeding, they must be rightfully recognised as short-term stabilisation measures designed to offer immediate relief and must be unwound in an orderly manner once their objectives have been achieved.
10 At the same time, international standard-setting bodies remain committed towards efforts to strengthen the global financial regulatory architecture while promoting greater cross-border coordination and cooperation. Earlier this month, for example, I was in Peru to attend the Annual Conference of the International Organisation of Securities Commissions (IOSCO) – of which I am the Board Vice-Chair – and I am pleased to note that significant progress has been made on various policy fronts including enhancing oversight on the asset management industry, central counterparties, as well as wholesale market conduct.
11 Nevertheless, it remains difficult to reconcile the relative buoyancy of today’s financial markets with lingering fragilities in global economic recovery, which has yet to regain its post-crisis momentum. The missing link, I believe, is financing. The world economy is at present akin to a dam awash with liquidity on the supply side and starved of financing on the demand side. Hence, for global economic recovery to be catalysed and sustained, it is essential for pathways to be rebuilt between the real economy and the financial system, to enable financing to flow into areas where it is most needed.
12 However, at the global level, traditional sources of financing are currently faced with several constraints, with banks having to adopt a more conservative lending appetite in line with more stringent prudential requirements, and sovereign balance sheet pressures restricting the ability of governments to stimulate growth through large-scale fiscal stimuli. A corollary of the narrowing of traditional financing channels is therefore greater reliance on capital market-based financing, and securities regulators worldwide – including Securities Commission Malaysia – have correspondingly sought to ensure that a sufficiently broad suite of market-based financing instruments are available to fulfil these needs.
Ladies and gentlemen
Meeting “new generation” financing needs through Islamic capital market instruments
13 Ensuring ample and uninterrupted flow of market-based financing is particularly crucial for emerging market economies, many of which stand at a critical juncture in their long-term growth trajectory. As an upper-middle income economy seeking to achieve high-income status by the end of this decade, Malaysia is acutely aware of the need to cultivate sustainable and indigenous sources of growth, even as global macroeconomic factors such as the prolonged downturn in commodity prices continue to underscore the impetus for further economic diversification.
14 As the authority responsible for capital market regulation and development in Malaysia, the Securities Commission has taken the approach of first, identifying specific areas with the most acute financing needs, and subsequently tailoring our developmental strategy in a manner which accords priority to their fulfilment. Through this process, we have identified infrastructure, small businesses and sustainable and responsible investments (SRI) as the three critical areas for which viable market-based financing solutions need to be developed. Underpinning our approach is a commitment towards enabling sustainable and inclusive growth in the real economy – which closely dovetails with the fundamental premise of Islamic finance, as it strongly emphasises the notion of equity, fairness and long-term stewardship, making shariah-based capital market instruments an appropriate solution to our needs.
15 For Malaysia as well as the Asia Pacific region, one of the most critical sources of demand for financing comes from infrastructure development, driven by factors such as population growth and rapid urbanisation. The Asian Development Bank, for example, estimated that Asia needs to invest $8 trillion in national infrastructure over the decade between 2010 and 2020, with a separate study by McKinsey estimating that most economies – other than China and Japan – have historically underinvested in infrastructure and would therefore need to raise their investment levels just to maintain infrastructure stock at approximately 70% of GDP.
16 To mitigate risks traditionally associated with borrowings to finance infrastructure development such as currency and maturity mismatch risks, it is vital for an economy to be able to draw on a sufficiently broad and deep domestic capital market as a source of long-term financing. As Chair of the ASEAN Capital Markets Forum (ACMF), the grouping of securities regulators in the Association of Southeast Asian Nations, Malaysia has been working closely with our counterparts to build greater connectivity among our domestic capital markets, to gain scale and intra-regional mobilisation of financial capital into meeting ASEAN’s infrastructure financing needs, which would promote long-term regional development and reduce reliance on external financing.
17 The asset-backed nature of sukuk makes it an ideal instrument for infrastructure project financing – a prospect recognised by the G20 – with significant scope to leverage on Malaysia’s well-established framework for corporate and sovereign sukuk issuances, which in recent years has seen retail sukuk issued to finance the construction of the Mass Rapid Transit network in the Greater Kuala Lumpur urban area. Moving forward, further opportunities arise for issuers to tap into Asia’s deep pool of savings through structures such as renminbi sukuk, particularly within the context of China’s proposed Belt and Road Initiative.
18 At the other end of the spectrum, sustainable and inclusive economic growth is also predicated upon the development of a vibrant small and medium enterprises (SMEs) sector, including innovative ventures that form part of the emerging “digital economy”, which account for approximately 90% of businesses and 50% of employment globally – making them a vital source of employment, growth and competition.3 However, at the global level SMEs have traditionally suffered from relatively poor access to credit, with the SME credit financing gap in emerging markets estimated to range between $900 billion to $1.1 trillion.
19 Hence, while the capital market is typically associated with large issuers and sovereigns, Securities Commission Malaysia believes that it is crucial for the spectrum of market-based financing channels to be broadened and made accessible to SMEs as a complement for existing sources of financing such as loans and grants, to facilitate growth of existing firms and catalyse further business formation in a traditionally underserved segment of the economy. As a result, over the last two years, the SC has progressively introduced regulatory frameworks which allow businesses to obtain financing through equity crowdfunding and peer-to-peer financing, which were announced in February 2015 and April 2016 respectively.
20 A key feature of both frameworks is the imposition of certain requirements on the operator of the crowdfunding or P2P financing facility, including fit and proper requirements on its Board, CEO and primarily responsible personnel as well as rules on reporting and disclosure, to ensure that the interest of investors are accorded due protection.
21 Where an Islamic capital market product is offered, on or through the platform, the operator must appoint a Shariah advisor who must be a person or corporation registered with SC, a licensed Islamic bank, or a licensed bank or investment bank approved to carry out an Islamic banking business. The role and responsibilities of the Shariah adviser are provided for in the framework, including advising on compliance with Shariah principles relating to the offering of the Islamic capital market product as well as providing expertise and guidance on other matters such as documentation, structuring and compliance with applicable laws and guidelines. Today, 5 out of the 6 licensed equity crowdfunding platforms are in operation, with the SC still in the process of processing applications from prospective operators of the P2P financing platform.
22 The third critical source of demand for market-based financing are sustainable and responsible investments (SRI), also known as impact investing, which encompass a wide range of initiatives which aim to deliver healthy returns from a financial and social impact perspective. Global interest in SRI has grown in recent years, in line with heightened awareness on the value of non-financial metrics vis-à-vis corporate performance. There are tremendous synergies between the principles of SRI and Islamic finance, both of which are supportive of ethical and sustainable capitalism, that it is clear that Islamic capital market products are optimally placed as the financing instrument of choice for this sector.
23 It was for this reason that the SC introduced the SRI sukuk framework in August 2014, which are aligned with all existing rules for sukuk – including the ability to issue to institutional and retail investors – and appended with an additional layer of SRI-related requirements to facilitate the issuance process. Areas addressed in these additional requirements include the utilisation of proceeds, reporting and disclosure requirements, as well as the criteria for eligible projects, which fall under the categories of natural resources, renewable energy and energy efficiency, community and economic development, as well as waqaf properties and assets. Tax incentives are also provided for issuers of SRI sukuk until 2020 to promote the development of this segment.
24 In June 2015, Khazanah Nasional Bhd via a special purpose vehicle launched Malaysia’s first SRI sukuk programme worth RM1 billion, which was placed out to a diverse group of investors including foundations, corporations, banks, pension funds and asset management companies. The inaugural proceeds of this sukuk was earmarked for the Yayasan AMIR Trust Schools programme, which aims to improve the accessibility of quality education in Malaysian government schools through a public-private partnership with the Ministry of Education.
25 Clear SRI-related key outcomes were identified at the outset, based on a voluntary `step-down yield’ mechanism which assesses the social impact of the trust schools programme using pre-determined key performance indicators measured over a 5-year period. Upon maturity, if a pre-determined set of KPIs are met, sukukholders will forego a pre-agreed percentage of the nominal amount due to them as part of their social obligation in recognising the positive social impact generated by the programme. On the other hand, if the KPIs are not met, the sukukholders will be entitled to the nominal amount due under the sukuk as agreed at issuance.
26 At the international level, the SRI sukuk concept has also gained traction with the World Bank Treasury assisting the International Finance Facility for Immunisation in issuing what has been referred to as the Vaccine Sukuk to finance its child immunisation programme – an issuance that has received a very encouraging response from the market and bodes well for the SRI sukuk segment at large.
27 At the same time, Islamic finance can also play a role in plugging the shortfall of funds available to meet urgent and critical humanitarian financing needs. At the inaugural World Humanitarian Summit in Istanbul, which just concluded yesterday, it was pointed out that 90% of ongoing humanitarian crises are occurring in OIC member states, with 31 out of 33 active conflicts today taking place in Muslim-majority countries. Despite the growing need for aid, with the number of people in need doubling since 2004 to over 100 million presently, the shortfall in funding continues to widen, with the United Nations estimating a $15 billion annual funding gap due to non-delivery of funds from those who had initially pledged to contribute.
28 To examine the issue in greater detail and identify appropriate recommendations, the United Nations Secretary General Ban Ki Moon had appointed a High-Level Taskforce for Humanitarian Financing, which is co-chaired by His Royal Highness Sultan Nazrin Shah of Perak, the Royal Patron of Malaysia’s Islamic Finance Initiative, and Kristalina Georgieva, the European Commissioner for the Budget and Human Resources. It is worth noting that among the key recommendations of the Panel is Islamic social finance as a mechanism through which latent capital in the Muslim world in the form of waqaf assets and zakat contributions may be channelled through instruments such as sukuk into meeting these large and presently unmet humanitarian financing needs.
Ladies and gentlemen
29 I hope that my sharing of the Malaysian experience in developing the so-called “new generation” financing channels in alignment with Islamic financial principles as well as our motivations in designing our developmental strategy will help in some way to trigger more conversations among us on how innovations in the Islamic capital market may be further encouraged. Ultimately, I believe that there is no one-size-fits-all solution, and greater engagement among industry practitioners, Shariah experts and regulators are essential in developing jurisdiction-specific solutions that are contextualised to the needs of the real economy.

1 Islamic assets push towards $2.5 trillion https://www.islamicfinance.com/2016/04/islamic-assets-push-towards-2-5-trillion-sukuk-issuances-jump-21/

2 An Economy for the 1% Oxfam (2016)

3 International Finance Corporation (IFC)