Keynote Address
By
Zainal Izlan Zainal Abidin Managing
Director, Development & Islamic Markets
Securities Commission Malaysia
at the IFN Asia Forum 2017
Kuala Lumpur
10 April 2017

Distinguished speakers, ladies and gentlemen

1. It gives me great pleasure to be here this morning. I wish to thank the organisers for inviting me to say a few words at this annual event that has become a key permanent feature on the Islamic finance calendar.
2. I am also very pleased to see such a large turnout, which reflects the relevance of the programme put together by REDmoney and its Forum partners over the next two days. It is also testament of the continuing and sustained interest in Islamic finance and its value proposition. Furthermore, the interest has extended beyond faith-based considerations, thus attracting governments, institutions, corporations and individuals that do not need to seek Shariah-compliant solutions but instead voluntarily choose to do so. This certainly augurs well for the continuing development and expansion of the industry.
3. As today’s agenda has been designated as the Capital Raising and Banking Day, please allow me to provide some recent statistics on capital raising activities in Malaysia. In 2016, a total of RM98.5 billion was raised through the Malaysian capital market, out of which RM85.7 billion was raised through the sukuk and bond market and RM12.8 billion through the primary and secondary equity markets. The amount raised through the sukuk and bond market in particular has remained steady, despite broad global uncertainties, with an average size of RM86 billion per annum raised over the last three years of 2014 to 2016.
4. Corporate sukuk issuance of RM64.8 billion in 2016 accounted for about 66% of total capital raised and 76% of the sukuk and bond total. Sukuk has maintained a majority share as a capital raising instrument in Malaysia over the last three years. This reflects the broad acceptance of sukuk as a viable mechanism to raise capital in view of its ability to attract a wider range of investors – both conventional and Shariah-inclined investors.
5. Globally the sukuk market registered a 13.2% growth in total issuance in 2016 with a size of USD74.8 billion. Reflecting the greater diversity of the market, Malaysia accounted for 46.4% of the total, followed by Indonesia and the UAE with 9.9% and 9.0% respectively. The GCC countries collectively had a market share of 26.2%. Overall, the US Dollar is the currency of choice in 2016, accounting for 48.9% of total issuance, while 27.9% were denominated in Malaysian Ringgit. In the first two months of 2017, total global sukuk issuance amounted to USD11 billion.
6. Total sukuk outstanding increased by 8.7% globally to USD349.1 billion as at end 2016. Malaysia with a size of USD183.8 billion had a 52.6% share, followed by Saudi Arabia at 16.3% and the UAE at 8.9%. Over the past ten years, the size of global sukuk outstanding has grown steadily from USD94.7 billion in 2007.
7. The growth of the global sukuk market is indeed commendable, measured not only by the size and number of issuances but also by the expanding geographical distribution of the issuers and more diversified profile of the issues. In February this year, the Hong Kong Government undertook its third sukuk issuance with a size of USD1 billion and a tenure of 10 years, making it the first AAA-rated sovereign sukuk for such a tenure. This is a significant milestone as it helps develop an extended yield curve that may facilitate other potential issuances in Hong Kong and globally. Meanwhile Morocco is working on its maiden sukuk issue and several other countries are looking to add to the initial issuances in their respective market.
8. Looking ahead, further growth of the sukuk market is expected to be driven, among others, by the large capital requirements for infrastructure development across the globe. For instance, McKinsey has estimated that such requirements range between USD57 trillion and USD67 trillion for the period 2013-2030, or an average of between 3.2 and 3.7 trillion US Dollars per annum. A recent World Bank policy paper estimates that the infrastructure investment requirements for the emerging markets and developing countries over 2014-2020 would be USD836 billion annually. The suitability of sukuk structures in financing most infrastructure projects combined with their appeal to a wider investor universe provides a strong case for sukuk to be a preferred instrument to raise such capital.
9. Another source of growth is the Islamic financial institutions which are expected to continue raising capital through sukuk issuance to enhance their Tier 1 and Tier 2 capital in meeting the requirements under Basel III. This potential has already been reflected partly during 2016 where the corporates accounted for over 63% of total issuance, departing from past trends where sovereigns typically were the main issuers. Of these corporate issuers, 80.7% were from the financial services sector.
Ladies and gentlemen
10. Within the overall sukuk and bond market, the increasing focus on ensuring sustainable development through achieving both commercial returns and positive social outcomes in the course of doing business has contributed to the emergence and growth of financing alternatives that support the sustainable and responsible finance segment. Green, climate and social impact bonds are being increasingly issued for these purposes. In 2016, a total of USD81 trillion worth of bonds aligned with international definitions of “green” were issued globally, representing a growth of 92% over 2015.
11. On a related note, global sustainable investment or SRI assets increased 25% over the two years from 2014 to 2016 to USD22.9 trillion. Malaysia with 30% share in Asia ex Japan is the largest SRI market in the region. The Global Sustainable Investment Alliance, which compiles the statistics and issues the report, recognizes Shariah-compliant funds as part of the SRI universe. To extend the point further, in view of the significant commonalities in the principles underlying both Islamic and sustainable and responsible finance, the role of sukuk as a capital raising instrument to facilitate sustainable and responsible projects and ventures becomes somewhat inevitable.
12. Indeed, Malaysia has pioneered the development of this segment through the formulation of the Sustainable and Responsible Investment or SRI Sukuk framework by the Securities Commission in 2014, which identifies four broad areas for determining project eligibility – natural resources, energy-related, social impact and waqf. The first SRI sukuk was subsequently issued by Khazanah Nasional in 2015 to finance the development of trust schools.
13. Efforts in this segment are also being undertaken at the regional, particularly ASEAN, level. The ASEAN Capital Markets Forum is developing Green Bond Standards that would facilitate cross border capital raising for green-related projects. This initiative, in collaboration with the International Capital Market Association, would include among others the adoption of a common definition of “green” and additional guidance on application of the principles, which will enhance transparency, consistency and uniformity of ASEAN green bonds. In this regard, it is envisaged that the SRI Sukuk framework is not inconsistent with the Green Bond Principles, which is a significant aspect for the orderly development of this asset class.
14. Another initiative that will contribute towards a more internationalised sukuk market overall has been undertaken by the Islamic Financial Services Board, or IFSB, Just last week, the IFSB Council approved the adoption of the Guiding Principles on Disclosure Requirements for Islamic Capital Market Products, namely sukuk and Islamic collective investment schemes, which has been developed by an IFSB working group chaired by SC Malaysia. One of the key objectives of the Guiding Principles is to enable greater cross border offering of sukuk through harmonized disclosure requirements.
Ladies and gentlemen,
15. Sukuk are an effective capital raising instrument as they also enable participation by individual investors through the issuance of retail sukuk. Several countries have already introduced retail sukuk including Malaysia and Indonesia, which serve to broaden the range of target investors for issuers seeking to raise funding.
16. More recently, another avenue for capital raising to facilitate greater participation especially among individual or retail investors is via the digital platforms. In Malaysia, the SC’s regulatory framework for equity crowdfunding and P2P financing is facilitating small businesses and start-ups to raise the necessary funding through the capital market including the Islamic capital market. The six equity crowdfunding or ECF operators registered with the SC were already operational in 2016 and have achieved some level of success in fulfilling the SC’s intended objectives of developing this particular market segment, which include enhancing access to financing and increasing investor participation.
17. To cite some of the early achievements of Malaysia’s ECF market – over 85% of the successful ECF issuers to date had initial funding targets of less than RM500,000. At the same time, more than half of the investors were retail investors who had invested less than RM5,000 per deal. Inclusiveness is about enabling issuers and investors of varying needs and preferences to participate in the capital market through suitable products and services. The SC is confident that the six P2P operators will also contribute positively towards the intended objectives.
18. Malaysia is also undertaking efforts to enhance the development of the venture capital and private equity industry. The Malaysian Venture Capital and Private Equity Development Council (MVCDC), chaired by the SC, has set up an industry-led working group to identify opportunities, issues and challenges in the industry and to propose appropriate recommendations to the Council.
 19. Venture capital and private equity are effective channels for businesses and entrepreneurs to raise capital to fund their start-ups or expansion. Furthermore, the role of the VC and PE industry in facilitating the development of Shariah-compliant businesses such as the broad halal industry is important especially given the largely risk-sharing nature of VC and PE structures. It is worth noting in this context that promoting the growth of private equity is one of the 11 specific recommendations in Malaysia’s Islamic Fund and Wealth Management Blueprint that was launched in January.
20. Before I end, please allow me to touch on a source of potential capital that is uniquely Islamic – waqf assets. While there is no authoritative source on the actual or even reasonably estimated size of waqf assets globally, it is widely recognized that the value is very substantial. It is also generally believed that a very significant portion of waqf assets are not optimized in terms of their potential to generate income which will ultimately be advantageous to the beneficiaries. There are already various initiatives to explore and identify strategies to mobilise the vast pool of the waqf assets for more productive usage. These efforts create ample opportunities for these assets to be a source of capital for viable Shariah-compliant ventures.
 21. Efforts by the SC to facilitate businesses ranging from large corporations to the micro, small and medium enterprises to meet their respective needs for seed capital, working capital and capital for growth will continue. The focus will remain on providing facilitative, inclusive, effective and efficient ecosystem components for capital raising that include regulations such as the Lodge and Launch framework; products, services and platforms some of which I have mentioned earlier; and intermediaries who operate within the ecosystem.
 22. Islamic finance is playing an increasingly pivotal role in the capital raising ecosystem. Its ability to broaden connectivity and target markets is a universal value proposition, as are its underlying principles which among others promote sustainable and equitable development. It is our collective responsibility to continue harnessing the potential that Islamic finance has to offer to drive economic, business and social development globally.
Thank you.