Malaysia has long dominated both global and domestic sukuk issuance worldwide – a function, it is assumed, of the country having put in place the enabling infrastructure much earlier than anywhere else. But after 15 years of catch-up by the rest of the world, Malaysia’s dominance is if anything increasing. Why?
New data released by the International Islamic Financial Market shows that between January 2001 and December 2015, Malaysia accounted for 67.34% of all global sukuk issuance and 88.34% of global short-term sukuk issuance, with international sukuk (which accounts for about one fifth of the market) the only area where Malaysia does not lead, lagging the UAE.
“We have been building from strength to strength since 2000,” says John Chong, chief executive officer of Maybank Investment Bank and of Maybank Kim Eng. “Malaysia always accounts for the high end of the 60s [in percentage terms] of global sukuk issuance.”
The question is why this figure is not declining as other markets gain critical mass. As of December 31 Malaysia still accounted for 57% of all outstanding sukuk worldwide – a metric within which Malaysia’s early head-start should be nullified, since most of those deals will have long since matured. This is despite the fact that Bank Negara Malaysia stopped issuing short-term investment sukuk last year; the shortfall has been made up by an increase in longer-term sovereign issuance.
“This year we project M$80 billion to M$85 billion [$19.7 billion to $20.9 billion] of new issuance in Malaysia: better than last year,” says Chong.
One reason may be that Malaysia has a very clear need for the paper. “A lot of this funding is for infrastructure projects in Malaysia,” Chong says. “All the MRTs, LRTs [mass and light rail transit], power plants, ports, road projects, the up-coming pan-[Borneo] highway; they are all going to be funded by sukuk. That will keep the market active through next year.”
The whole Islamic world has infrastructure needs, but Malaysia stands out for having created a market for long-term sukuk issuance domestically, which suits infrastructure funding. “Highways generate long-term cashflows,” Chong says. “One reason Malaysia has been successful in growing its sukuk market is because it can use long-term fixed financings for these projects.” He says that this year around M$40 billion of sukuk issuance will be to support infrastructure.
“It should be one of the models of financing for the Islamic world,” he says. “Indonesia is looking at it, but there, infrastructure is funded by bank debt.”
Beyond that, it still appears that most Islamic countries have failed to build large-scale sukuk markets, whether through a lack of enabling infrastructure or the fact that issuers do not come when they can rely so heavily on bank liquidity.
“Looking around the region, there is only so much you can do if the policies and infrastructure are not in place,” says Chong. “In Thailand, for example, you are limited by the lack of regulations.
“We had the benefit of first-mover position and it established us at the top... We are seeing other countries becoming more prominent in issuing,” notably Saudi Arabia and the UAE, “but we maintain our position because we have conducive infrastructure. We will continue to be the front runner.”
One area where the Islamic form has not become dominant in Malaysia is fund management. After decades of encouragement from Bank Negara and the Securities Commission, the Islamic fund management industry does experience double digit growth, but still accounts for only about 20% of the overall mutual fund market.