Keynote Address by
Y Bhg Dato’ Dr Nik Ramlah Mahmood
Deputy Chief Executive, Securities Commission Malaysia


Islamic Bonds (Sukuk) Outlook Conference
Thursday 26 April 2012
The Prince Hotel and Residence, Kuala Lumpur
“Outlook and Way Forward for Malaysian Sukuk Market”

Distinguished guests,
Ladies and gentlemen,

Assalamualaikum and a very good morning.


First, I wish to thank the organizers – for inviting me to speak at this Islamic Bonds (Sukuk) Outlook Conference.


The purists in the audience will not allow me to use the terms Islamic bonds and sukuk interchangeably. Some may even say that it is because there is little that is Islamic about bonds that we have seen the birth and phenomenal growth of sukuk! Others would argue equating the two has stifled innovation and prevented the wider use of indigenous participatory Shariah principles and concepts. It is not my intention to expand on that debate but I will be using the term sukuk.


The sukuk market is a very important segment of Malaysia’s capital market, and in particular the Islamic capital market, therefore I am naturally delighted to be given this opportunity to share my thoughts with you on the outlook and way forward for the Malaysian sukuk market.

The Malaysian Islamic Capital Market and the Sukuk Market


The Islamic capital market has contributed significantly to the development of the overall capital market in Malaysia and now represents over half of the total size of the Malaysian capital market. Between 2000 and 2010, the First Capital Market Masterplan period, the Islamic capital market more than tripled in value to RM1.05 trillion, growing at an annualized rate of 13.6%. The sukuk segment expanded at a rate of 22.2%1 per annum over the same period and made up 28% of the Islamic capital market as at the end of 2010.


Malaysia continues to be the global leader in the sukuk market which enjoyed a record year in 2011 in terms of total issuance value. The total value of sukuk issued globally in 2011 amounted to USD92 billion, representing a 68% increase, year on year. Malaysia accounted for 73% or USD67 billion of this total. Malaysia is also the domicile for 68% of the USD210 billion total sukuk outstanding globally as at end-20112 . Furthermore, Bursa Malaysia is the leading exchange for listed sukuk.


Malaysia has also remained at the forefront in the innovation and development of sukuk. Our successes include the issuance of the largest Singapore Dollar-denominated sukuk and the first ever Renminbi-denominated sukuk.


The impressive growth of the sukuk segment has increased its market share of the overall bond market in Malaysia tremendously. From a share of 14.5% in 2000, sukuk accounted for almost 42% of the total bonds outstanding as at the end of 20113 .

Ladies and gentlemen,
Factors Contributing to the Development of the Sukuk Market


So what you may ask, is the story behind such impressive number?


Steadily growing demand from a lengthening list of institutions that seek Shariah-compliant instruments as well as the expanding size of assets under their management has been a major impetus for the sukuk market. The list has also expanded beyond institutions that are required to invest solely in Shariah-compliant instruments, to those that invest in them by choice or preference.


Unlike conventional bonds that gain the interest of only conventional investors, sukuk issuances are able to capture a wider investor base – in fact the potential investor base for sukuk is universal. This, in turn, has provided a distinct commercial benefit to sukuk issuers, at least in Malaysia, in terms of attracting very competitive pricing thus contributing to the growing pool of issuers that now show preference for sukuk over conventional bonds.


As part of Malaysia’s holistic approach to developing the Islamic finance industry, relevant legislative changes have been undertaken to remove or minimize legal impediments to Islamic finance transactions, including sukuk origination, in Malaysia and to achieve greater certainty and enforceability in respect of Islamic finance contracts. Further work in this area is now being spearheaded by the Law Harmonisation Committee that was established in 2010.


Similarly, the authorities have taken the necessary steps to provide tax neutrality between Islamic and conventional capital market transactions so that the former do not incur higher tax liabilities. Furthermore, tax and other incentives have been introduced to enhance the attractiveness of sukuk to issuers, investors and intermediaries. For instance, incentives for issuers include tax deductions on issuance-related expenses and for using certain structures such as wakalah, stamp duty exemptions and flexibility to swap issuance proceeds into foreign currencies. Investors meanwhile benefit from tax exemption on profits received from investing in sukuk, while intermediaries receive tax exemption on certain fees and profits earned in relation to the arranging, underwriting, distribution and trading of non-ringgit sukuk issued from Malaysia.


Cognizant of the criticality of having in place a clear regulatory framework for sukuk especially in fostering market confidence, the SC has issued the Islamic Securities Guidelines (Sukuk Guidelines), inter alia to accord the same level of investor protection, clarity and certainty for sukuk as that for conventional bonds. The Sukuk Guidelines were revised in 2011 to provide greater clarity on the application of Shariah rulings and principles endorsed by the SC’s Shariah Advisory Council in relation to sukuk transactions. The revisions also facilitate more informed investment decision-making with additional provisions to ensure greater disclosure of relevant information to investors.


The robust Shariah governance framework for Malaysia’s Islamic capital market, anchored by the national-level Shariah Advisory Council and enhanced by requirement for the appointment of SC-registered Shariah advisers at the industry level, provides greater certainty and consistency on Shariah-related matters in the Islamic capital market and allows industry participants to operate on a common Shariah platform. Recent provisions empowering the SAC to make binding rulings on Islamic capital market issues that are referred to it by the courts have further enhanced the Shariah governance, as well as legal, framework in the country in respect of its Islamic capital market.


The Bursa Suq Al-Sila’ is an international commodity trading platform managed by Bursa Malaysia to facilitate liquidity management by Islamic financial institutions through cross-border, multi-currency, commodity-based Islamic financing and investment transactions. The availability of this platform has also served to facilitate the structuring of sukuk under the murabahah principle. Indeed, sukuk structured based on the principle of murabahah led the Malaysian sukuk market in 2011, accounting for almost 50% of total issuance.


Malaysia’s steady economic performance over the years has also contributed significantly to the strong growth of the sukuk market. The rollout of numerous large-scale projects has generated the need for substantial amount of funding – and sukuk, primarily because of factors I have just mentioned, has been one of the instruments of choice for this purpose.

Ladies and gentlemen,

Outlook for Malaysian Sukuk Market


The Malaysian sukuk market is poised for further growth in the years ahead. The Second Capital Market Masterplan, or CMP2, which spans the ten-year period to 2020, outlines the growth strategies that are aimed at expanding the role of the capital market, including the Islamic capital market, in enhancing the performance of the Malaysian economy. The CMP2 projects that the size of Malaysia’s Islamic capital market will expand at an average rate of 10.6% per annum, to reach RM2.9 trillion by 2020. The sukuk segment is expected to account for RM1.3 trillion or 46% of this total, translating to an average annualized growth forecast of 16.3% over this period4 .


Much of this growth is projected to be driven broadly by further internationalization of the Islamic capital market. In the sukuk segment, such internationalization will be achieved primarily through greater diversity of domestic and foreign issuers, more issuances in non-Ringgit currencies, and wider investor base from different geographical and economic regions.


The growth in Malaysia’s external trade and investment activities augurs well for further development and internationalization of the sukuk market. The resultant financing and funding requirements among Malaysian businesses and their foreign counterparties, present vast opportunities for the broadening and deepening of the sukuk market. The move internationally towards a generally more facilitative regulatory environment will also enable greater cross-border investments in sukuk thus widening the demand base substantially.


The Global Financial Crisis have drawn greater attention towards Islamic finance. Since then, the industry as well as governments and regulators have sought viable alternatives that can address at least some the major shortcomings of the conventional banking and financial system. In this regard, Islamic finance has stood out in view of the fundamental Shariah requirements for underlying productive assets, equitable risk sharing, and avoidance of excessive speculation, to name a few. Islamic finance therefore represents an attractive value proposition, at the very least in providing diversification benefits – and sukuk as an instrument that has relatively universal appeal and Malaysia as the leading domicile for sukuk issuance stand to gain.


On the domestic front, the Economic Transformation Programme (ETP) is projected to involve RM1.4 trillion in investments, whereby 92% of the total funding is expected to come from the private sector. The sukuk market is primed to benefit from the rollout of projects, such as the integrated urban mass rapid transit system which is said to require an overall investment in excess of RM36 billion5 . For reasons I highlighted earlier, particularly in respect of the highly competitive pricing for sukuk in Malaysia, funding requirements for some if not most of these projects will likely be met through sukuk issuance.


Global standard-setting organizations such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) play an important role in the development of the Islamic finance industry, including the sukuk segment, through the issuance of standards and guidelines applicable to the industry players. Further work and greater standardization in the areas of governance and documentation, for instance, will facilitate the process of issuing sukuk across jurisdictions thus encouraging further growth of the sukuk market.


The Malaysian sukuk market will continue to benefit from the availability of existing tax and other incentives aimed at catalysing its development and growth. In the 2012 Budget, it was proposed that tax deduction be given, for a three-year period commencing from the year of assessment 2012, on expenses incurred for issuance of sukuk wakala, a structure that is widely accepted internationally from a Shariah perspective. In addition, income tax exemption given for non-ringgit sukuk issuance and transactions is extended for another three years until the year of assessment 2014 – this incentive is intended to encourage the development of a truly multi-currency sukuk market.

Ladies and gentlemen,

Challenges & Way Forward


The positive overall outlook for sukuk is not without significant challenges, and for the market to realize its full potential, these challenges must be effectively addressed.


Lack of liquidity in the secondary market remains a key issue for sukuk. In March this year, the SC and the Oxford Centre for Islamic Studies (OCIS) jointly hosted the third SC-OCIS Roundtable, on the theme “Solutions for Liquidity Management”. This closed-door thought-leadership forum, attended by Islamic finance experts from various fields, aimed – among others – to identify pathways to strengthen the international sukuk market particularly in the context of liquidity.


Discussion focused on the lack of secondary trading, the scarcity of supply, lack of infrastructure, trading mechanisms that are not globally accepted and unresolved issues over valuation.


There is therefore a need to develop a more robust secondary market for sukuk that would enhance its appeal especially to active investors, such as fund managers.


In this regard, differing views among international Shariah scholars on the trading mechanisms, and indeed the tradability, of sukuk pose a key challenge to achieving a global sukuk market. Furthermore, differences in acceptability of certain sukuk structures are also limiting the marketability of such sukuk on the international front. In order to overcome this challenge, sukuk issuers that seek to maximise their investor base are now opting for structures that are more broadly accepted by most jurisdictions. At the same time, increased engagement and exchange of views among Shariah scholars and advisers should contribute to improved appreciation of these differences.


The operationalisation of the International Islamic Liquidity Management Corporation (IILM) should help to mitigate the lack of market liquidity. The IILM has been established to facilitate cross-border liquidity management among institutions offering Islamic financial services by making available a variety of Shariah-compliant instruments, including sukuk, on commercial terms, to suit the varying liquidity needs of these institutions. It also seeks to foster regional and international co-operation to build a robust liquidity management infrastructure at national, regional and international levels.


Disparity in legal, tax and regulatory frameworks across the various jurisdictions currently represents another major challenge in achieving a truly internationalized sukuk market as it effectively narrows the scope for cross-border offering of sukuk. Legal, tax and regulatory frameworks that do not provide for a level playing field between sukuk and conventional bonds within a jurisdiction also serve to discourage the growth of its domestic sukuk market due to commercial or practical disadvantages.


Ladies and gentlemen,


Let me conclude by quoting the Global Islamic Finance Report 2011 published by BMB UK. I quote “Malaysia is to Islamic finance, what America is to Capitalism, its indefatigable champion. Every limb and branch of the Islamic finance paradigm, Malaysia has a perceptible influence: from innovation in the capital markets to developing cogent education policies. Even in a dual market where conventional and Islamic finance co-exist, the government has shown more enterprise and boldness than any other self-proclaimed Islamic finance hub to create an infrastructure that will fortify the domestic and global Islamic finance market” Unquote.


While such a strong independent testimonial from an international stakeholder should rightly be a source of pride to all of us, we must remind ourselves that getting to the top is always easier than remaining there. So while the outlook for sukuk remains bright not only in Malaysia but also globally we cannot and must not rest on our laurels reminiscing about past achievemnts. Efforts to broaden the base of both issuers and investors of sukuk must be more vigorously pursued. Further innovation is not an option but a necessity as issuers seek the most optimal structures to meet their respective needs while addressing the investors’ preferences. It is for this reason that events like this must continue to be supported as it provides the platform for these issues to be discussed and debated. And I congratulate ASLI for the foresight in organizing this Sukuk Outlook Conference. Together I am confident that we can continue to strengthen the country’s position as a leading international Islamic financial centre.


Thank you.






Capital Market Statistics, SC




Malaysia’s Capital Market, Transforming Vision into Opportunities