The Role of Sukuk in Islamic Capital Markets · global sukuk issuance. Classified as “matured”....

The Role of Sukuk in Islamic Capital MarketsPresented by Dr Marjan Muhammad (ISRA) and Ruslena Ramli (RAM Ratings)

The Role of Sukuk in Islamic Capital Markets (ICM)

Ruslena Ramli and Dr. Marjan Muhammad

10th MeetingCOMCEC Financial Cooperation Working Group

29 March 2018

1 SELECTION CRITERIA AND METHODOLOGY

2 DEVELOPMENT STAGE MATRIX

3 KEY FINDINGS, POLICY AND GENERAL RECOMMENDATIONS

PART 2: CASE STUDIES & RECOMMENDATIONS

3

Case study countries – Selection criteria and methodology

In deciding which country to choose the following analysis were undertaken:

1. Level of sukuk market activity.2. Country’s contribution to global sukuk issuance.3. Sukuk isssuance by type of issuer.

Infancy Developing Matured

Nigeria UAEIndonesia

TurkeyHong Kong

Malaysia

USD36.5b

USD10.9b

USD26.3b

Malaysia Public sector Private sector

2015 2016 2017

USD3.9b USD3.9b

UAE Public sector Private sector

2015 2016 2017

USD14.9b USD14.2b

USD668.1m

Indonesia Public sector Private sector

2015 2016 2017

End-2017, Malaysia accounted for 34.6% (USD36.5 billion) of total global sukuk issuance.

Classified as “matured”.

UAE made up 3.7% (USD3.9 billion) of total global sukuk issuance as at end-2017.

Classified as “developing”.

As at end-2017, Indonesia recorded 14.1% market share of total global sukuk issuance with the public sector representing 95.5% of total issuance.


Malaysia UAE Indonesia

4

Case study countries – Stage of sukuk market development

Growth driven by the development of its participation banks. Recorded a 3.1% market share end-2017.


Placed under “infancy”. Require development of market infrastructure and attainment of macroeconomic stability.

Hong Kong plays a complementary role to the Islamic finance community it serves.


Turkey Nigeria Hong Kong

USD150.0m USD150.0m

Nigeria Public sector Private sector

2015 2016 2017

USD1.0b USD1.0b

Hong Kong Public sector Private sector

2015 2016 2017

5

Case study countries – Stage of sukuk market development

USD3.2b

USD2.4b

USD865.3m

Turkey Public sector Private sector

2015 2016 2017

High Moderate Low

Matured Developing Infancy

Malaysia UAE- Advanced

Indonesia- Intermediate

Turkey- Beginner

Hong Kong Nigeria

Credit ratings A- (S&P), A3 (Moodys), A- (Fitch), A2 (RAM)

A- (S&P), A3 (Moodys), A- (Fitch), A2 (RAM)

BBB- (S&P), Baa3 (Moodys), BBB (Fitch), BBB2 (RAM)

BB (S&P), Ba1 (Moodys), BB+ (Fitch), BBB3 (RAM)

AA+ (S&P), Aa2 (Moodys), AA+ (Fitch)

B (S&P),

B2 (Moodys),

B+ (Fitch)

Legal framework Common law Civil law Civil law Civil law Common law Common law

Shariah governance

Regulatory framework

Tax neutrality

Tax incentives

Product innovation

Infrastructure

Investor diversification

6

Development Stage Matrix

7

Development Stage Matrix

High Moderate Low

Matured Developing Infancy

Malaysia UAE Indonesia Turkey Hong Kong Nigeria

Diversification and frequency of- Sovereign issuance- Corporate issuance

Cost competitiveness

Establishment of sovereign sukuk yield benchmark

Establishment of corporate sukuk yield benchmark

8

Key building blocks in developing the sukuk market – Spider chart

0

1

2

3

4

5

Legalframework &…

Regulatoryframework

Shariahgovernance…

Tax incentives

Tax neutrality

Productinnovation

Infrastructure

Diversificationof investor base

Diversificationof issuer

Costcompetitiveness

Benchmark yieldcurve

Malaysia – “matured”

0

1

2

3

4

5

Legal framework& dispute…

Regulatoryframework


Tax incentives

Tax neutrality

Productinnovation

Infrastructure



Costcompetitiveness

Benchmark yieldcurve

UAE – “developing (advance)”

0

1

2

3

4

5

Legalframework &…

Regulatoryframework


Tax incentives

Tax neutrality

Productinnovation

Infrastructure



Costcompetitivene…

Benchmarkyield curve

Indonesia - “developing (intermediate)”

Turkey - “developing (beginner)” Nigeria – “infancy”

0

1

2

3

4

5

Legalframework &…

Regulatoryframework


Tax incentives

Tax neutrality

Productinnovation

Infrastructure



Costcompetitiven…


0

1

2

3

4

5

Legalframework &…

Regulatoryframework


Tax incentives

Tax neutrality

Productinnovation

Infrastructure



Costcompetitiven…


0

1

2

3

4

5

Legalframework &…

Regulatoryframework


Tax incentives

Tax neutrality

Productinnovation

Infrastructure



Costcompetitivene…


Hong Kong – “developing”

9

Key findings and policy recommendations – Malaysia

0

1

2

3

4

5

Legal framework & disputeresolution


Shariah governance framework

Tax incentives

Tax neutrality

Product innovationInfrastructure

Diversification of investor base

Diversification of issuer


Benchmark yield curve

“Malaysia’s distinct ICM puts sukuk at an advantage compared to conventional bonds”

10

Key findings and policy recommendations – Malaysia

Components Policy recommendations

Market and infrastructure development

Diversified market players on demand and supply sides

Promote a shift in mindset to consider social impact objectives.

VBI initiatives to achieve social justice in light of UN’s SDGs.

Continuous development of liquidity management tools to support the growth of Islamic banks.

Create awareness among Islamic finance community on impact investing.

Increase awareness among members of the public to invest in retail sukuk.

11

Key findings and policy recommendations – UAE

“UAE’s healthy pipeline of corporate sukuk supports the market’s level of competitiveness”

0

1

2

3

4

5




Tax incentives

Tax neutrality






12

Key findings and policy recommendations – UAE


Legal and regulatory framework



Greater push by sovereigns and GREs to support issuance of LT sukuk and provide benchmark yield curves for corporates to follow.

Support for Shariah standards will facilitate product innovation in liquidity management products and help grow the local Islamic banking industry.

Improve intermediation of NBFIs to finance local infrastructure projects

Heighten public visibility in investing in retail sukuk.

Greater clarity on investor protection and enforcement of security charges to avoid defaults/disputes.

Some level of standardization in legal documents, sukuk structures and Shariah rulings will create greater market certainty.

13

Key findings and policy recommendations – Indonesia

“Indonesia’s growth potential makes it a market to contend with”

0

1

2

3

4

5




Tax incentives

Tax neutrality






14

Key findings and policy recommendations – Indonesia




Taxation


Openness of NBFIs to hold LT papers will spur supply of infrastructure-based sukuk.

Educative forums supported by regulators to increase knowledge and understanding of sukuk structuring, processes, etc.

Explore product innovation with social welfare benefits (e.g. awqaf-linked sukuk).

Identify SOEs/corporates to issue retail sukuk linked to infrastructure projects.

Continuous awareness by regulators to institutional investors on the benefits of investing in LT papers.

Synergistic approach to bring all key stakeholders together will provide the necessary mileage to move the sukuk market forward.

Expand coverage of fiscal stimulus to include domestic corporate issuance and institutional investors.

15

Key findings and policy recommendations – Turkey

“Turkish regulators’ concerted efforts will help strengthen its ICM landscape”

0

1

2

3

4

5




Tax incentives

Tax neutrality






16

Key findings and policy recommendations – Turkey






Establish a stable Islamic money market and improve liquidity.

Government to encourage development of institutional funds (e.g. pension, pilgrimage fund, etc) and create demand for Shariah-compliant assets.

Encourage the government, SOEs and blue-chip corporates to issue retail sukuk linked to infrastructure projects.

Provide tax incentives to promote local corporates to raise funding via its capital market.

Revise guidelines to allow multinationals to issue bonds/sukuk and corporates to issue FCY bonds/sukuk domestically.

17

Key findings and policy recommendations – Nigeria

“Initial pillars for ICM will set the stage to advance Nigeria’s sukuk market growth”

0

1

2

3

4

5



Shariah governanceframework

Tax incentives

Tax neutrality






18

Key findings and policy recommendations – Nigeria




Taxation



The government and central bank to issue short-term Shariah-compliant papers and build a base for liquidity management.

Reach of takaful products has been successful through usage of fintech. Explore other fintech solutions in educating the public.

Through government and regulator led initiatives, heighten awareness on wealth protection and preservation.

Identify gaps in existing guidelines to further strengthen policies and facilitate a robust legal and regulatory framework.

Establish a central shariah authority to oversee the activities of ICM products.

Concerted efforts by the government and regulators to accelerate process of addressing tax provisions that may impinge sukuk issuance or product development.

19

Key findings and policy recommendations – Hong Kong

“Inclusiveness of sukuk adds value to Hong Kong’s status as an International Financial Centre”

0

1

2

3

4

5




Tax incentives

Tax neutrality






20

Key findings and policy recommendations – Hong Kong






Identify suitable SOEs to finance project-based sukuk and create a benchmark yield curve for other corporates to follow.

Government to encourage development of institutional funds (e.g. pension, pilgrimage fund, etc) and create demand for Shariah-compliant assets.

Expand guidelines to include SOEs and provide the necessary regulatory incentives to promote sukuk issuance from the corporate sector.

21

General recommendations in developing a vibrant sukuk market

Well-diversified investor base

Co

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pet

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22

General policy recommendations

Policy General recommendations

1Developing an enabling legal and regulatory framework for ICM and promote solid collaboration among key market stakeholders to improve the ecosystem for sukuk issuance.

2 Improving market infrastructure and the existing tax framework for enhancing sukuk issuance.

3Developing a sustainable liquidity base to support demand for Shariah-compliant assets, and facilitating diversification of market players on the demand side of the sukuk market.

4Promoting a sustainable supply of sukuk issuance from the private sector in order to foster diversification of industry participants on the supply side and expand the benchmark yield curve.

5Developing a seamless Shariah governance process for facilitating faster turnaround time for sukukissuance, improving clarity of sukuk structures, promoting product innovation, building market confidence and increasing market awareness among the industry practitioners.

Thank you

Lorong Universiti A, 59100 Kuala Lumpur, Malaysia

Tel: +603-7651 4200Fax: +603-7651 4242ISRA: www.isra.my

I-FIKR: www.ifikr.isra.my

Suite 20.01, Level 20, The Gardens South Tower, Mid Valley City,

Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia

Tel: +603-7628 1010Fax: +603-7620 8251

www.ram.com.my

The Role of Sukuk in Islamic Capital Markets · global sukuk issuance. Classified as “matured”....

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Transcript of The Role of Sukuk in Islamic Capital Markets · global sukuk issuance. Classified as “matured”....