Friday April 27, 2012
Liquidity hampers sukuk
BY DALJIT DHESI
There’s a need to develop a more robust secondary market for sukuk, says SC
KUALA LUMPUR: Lack of liquidity in the secondary market remains a key issue for sukuk, according to Securities Commission deputy chief executive Datuk Dr Nik Ramlah Mahmood.
She said there was 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 syariah 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,'' she said in her keynote address entitled Outlook and Way Forward for Malaysian Sukuk Market at the Islamic bonds (sukuk) outlook conference.
In order to overcome this challenge, she said sukuk issuers who sought to maximise their investor base were now opting for structures that were more broadly accepted by most jurisdictions.
At the same time, Nik Ramlah added that engagement and exchange of views among syariah scholars and advisers should contribute to improved appreciation of these differences.
The operationalisation of the International Islamic Liquidity Management Corp (IILM) should help to mitigate the lack of market liquidity, she noted. The IILM was established to facilitate cross-border liquidity management among institutions offering Islamic financial services by offering a variety of syariah-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.
She said disparity in legal, tax and regulatory frameworks across the various jurisdictions represented another major challenge in achieving a truly internationalised sukuk market as it effectively narrowed the scope for cross-border offering of sukuk.
Nik Ramlah said legal, tax and regulatory frameworks that did not provide for a level playing field between sukuk and conventional bonds within a jurisdiction also served to discourage the growth of its domestic sukuk market due to commercial or practical disadvantages.
She said the Second Capital Market Masterplan (CMP2) projected that the size of Malaysia's Islamic capital market would expand at an average rate of 10.6% per annum to reach RM2.9 trillion by 2020, adding that the sukuk segment was expected to account for RM1.3 trillion or 46% of this total, translating to an average annualised growth forecast of 16.3% over this period.
Much of this growth, she said, was projected to be driven broadly by further internationalisation of the Islamic capital market. In the sukuk segment, such internationalisation would 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, she noted.
Global standard-setting organisations 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 standardisation in the areas of governance and documentation, for instance, would facilitate the process of issuing sukuk across jurisdictions, thus encouraging further growth of the sukuk market, Nik Ramlah added.
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 Islamic capital market more than tripled in value to RM1.05 trillion, growing at an annualised rate of 13.6%.
The sukuk segment expanded at a rate of 22.2% per annum over the same period and made up 28% of the Islamic capital market as at the end of 2010. Malaysia continued 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 US$92bil, representing a 68% increase, year-on-year, with Malaysia accounting for 73% or US$67bil of this total.
Malaysia was also the domicile for 68% of the US$210bil total sukuk outstanding globally at the end of 2011.