Malaysia as a Global Leader in the Sukuk Market: Should We Worry?

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Malaysia was among the first countries to undertake the challenge of developing the Islamic finance industry and since its inception she, it seems, is not planning to slow down. From a pioneer in Islamic finance, Malaysia became the global leader in the Islamic finance industry, be it Islamic banking, capital market, takaful (Islamic insurance) or fund management industry.

Table 1: Statistics on Corporate Sukuk in Malaysia
Sukuk Approved 2009 2010 Q1-Q3 2011
Number of sukuk 11 21 26
Size of sukuk RM33.96bn RM40.33bn RM40.7bn
Size of total bonds approved RM57.50bn RM63.58bn RM63.8bn
% of size of sukuk to total bonds approved 59.1% 63.4% 64%
Sukuk Issued 2009 2010 Q1-Q3 2011
Size of sukuk issued RM32.30bn RM30.24bn RM33.00bn
% of sukuk issued to total bonds issued 52% 57% 62%
Sukuk Outstanding 2009 2010 Sep 2011
Size of outstanding sukuk RM172bn RM180bn RM200bn
% of outstanding sukuk to total outstanding corporate bonds 57% 57% 58%
Source: Securities Commission

Nowhere is Malaysia’s dominance more pervasive than in the Islamic capital market, especially the sukuk (Islamic certificates) market.

Nowhere is Malaysia’s dominance more pervasive than in the Islamic capital market, especially the sukuk (Islamic certificates) market.

After a slowdown in 2008, the market for sukuk is back on its track and rising. A huge drop in the issuance of sukuk in 2008 and a slow recovery in the following couple of years were mainly due to two reasons: (i) proclamation of the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI) stating that majority of the equity based sukuk in the market were not Shair’ah-compliant; and (ii) the global financial crisis that resulted in credit crunch and reluctance in overall performance of the economies all over the world.

Although the above-mentioned reasons for the slowdown of the sukuk market are commonly cited by market players, it is difficult to determine which one had a stronger effect. Nevertheless, given the current situation and the issuance of sukuk in 2011, it can be said that these two factors are very much overcome.

In fact, during the recent IFN Asia Forum 2011, held in Kuala Lumpur, various parties expressed their utmost satisfaction and happiness with the current market performance. Furthermore, they were also very optimistic about the future of the market.

Throughout the years, as mentioned above, the global sukuk market was dominated by the issuance coming from Malaysia (see Chart and Table 2 below). Thus, it is not surprise to find a lot of “first” being originated from Malaysia. For example: (i) Kumpulan Guthrie Bhd issuance of USD150 million in 2001 was the world’s first global corporate sukuk; (ii) issuance of USD600 million in 2002 by Government of Malaysia was the world’s first global sovereign sukuk; (iii) issuance of RM500 million (USD132 million) in 2004 by International Finance Corporation (World Bank) was designated as the first ringgit sukuk issuance by supranational agency… the list goes on.

Malaysian Dominance in the Sukuk Market: Advantages and Disadvantages

The statistics show that currently two-thirds or 66% of all sukuk issuance globally is from Malaysia. This is often cited as a good sign and success story of Malaysia. However, there is also the other side of the coin that is mostly overlooked by majority of the market players (if not all). In other words, there are advantages of the current development as well as the (possible) disadvantages. Let us look and analyze both sides here.

Table 2: Issuance of Sukuk from 2000 until Nov 2011
Year No. of Sukuk Issued Total Malaysia % Share of M’sia in Total
2000 3 336.30 336.3 100.00
2001 5 813.00
2002 31 2,503.51 1,678.18 67.03
2003 33 5,634.68 3,967.28 70.41
2004 62 6,869.49 4,256.48 61.96
2005 99 11,287.97 7,872.28 69.74
2006 208 26,133.92 13,428.53 51.38
2007 207 45,192.28 24,699.99 54.66
2008 227 17,937.48 7,175.84 40.00
2009 802 32,153.68 19,009.22 59.12
2010 796 47,892.15 35,630.13 74.40
2011 605 68,978.34 45,637.95 66.16
Source: Islamic Finance Information Service (IFIS)

 

It is indeed true that the dominance of the Malaysian market players in the global arena for sukuk is yet another achievement and a success story of all Malaysians. This is a result of coordinated effort towards the goal of making Malaysia the global Islamic finance hub put forward by Government of Malaysia, Bank Negara Malaysia (BNM), various specialized institutes serving the Islamic financial industry’s needs, as well as financial institutions that are operating with the Malaysian Islamic finance jurisdiction.

You may ask yourself “What is wrong in all of this?” Well, the success of the Malaysian sukuk market in particular and Islamic finance in general is definitely something that we (in the Islamic finance industry) are all very proud off. However, we should move ahead and relieve Malaysia from this burden, the burden of promoting and developing the Islamic finance industry by herself.

This brings us to the negative effects of the current development in the global sukuk market. First, while the domination of the Malaysia in the global sukuk market is a compliment for the excellence in her Islamic financial system, it can also be seen as a market failure on part of other jurisdictions in developing a viable and healthy Islamic financial system.

Second, if putting all eggs in one basket is arguable not a wise strategy in finance, then similarly hoping for the global success of the Islamic finance by relying on Malaysia alone will not bear fruits in the long run. Thus, there is a greater role to be played by other countries and markets.

This may lead to something that may be termed as “sukukization” similar to “financialization” that preceded the global financial crisis 2008-2009.

This said, what is needed for the further development of the Islamic finance industry is a greater contribution and efforts by other countries, jurisdictions and market players. Malaysia is indeed doing enormous job in promoting the industry. In this regard, SC indicated that a greater internationalization of the capital market is also a critical aspect for further strengthening Malaysia’s position as a global Islamic capital market hub.

Nevertheless, a word of caution seems appropriate here at this juncture as well. While a greater participation by other countries is welcome, we should avoid a simplistic approach to Islamic finance whereby the focus is given to the sukuk market alone while ignoring other sectors of the Islamic financial system. This may lead to something that may be termed as “sukukization” similar to “financialization” that preceded the global financial crisis 2008-2009.

Instead, we should look at the Islamic finance in a more holistic way. Then, and only then, we can hope to achieve a true global Islamic financial system with more cross-border transactions and internationalization. This may be achieved if we learn more from Malaysian experience and if we strive hard enough to implement that experience in our own backyards.

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