Answering a question from moderator Abdulkader Thomas on whether the industry has a level playing field in terms of legal platform, Jal Othman highlighted that in Malaysia the Capital Market and Services Act (CMSA) was enacted with the aim to achieve regulatory parity between conventional finance and Islamic finance. “The Act is in place to ensure that the players in the banking, insurance and funds sector are equally regulated, no more, no less.”

Mahmoud Abushamma noted that the Indonesian government is in the process of drafting the Sukuk law. “Indonesian operates based on civil law, thus it is very important to establish a framework regarding beneficial ownership and trust structure to enable Sukuk issuance in Indonesia. The new regulation has been drafted by the Indonesian ministry of finance and is currently under discussion in Parliament,” he elucidated. Indonesia represents abundant investment opportunities as the government is estimated to utilize US$10 billion over the next four years to fund developments. This funding must aim to attract the excess liquidity in the Middle East and elsewhere, Mahmoud said. Kavilash Chawla then emphasized that currently, there is a lot of interest in the Islamic space even from western investors. However, there has been poor communication regarding all the regulatory changes that are taking place (like in Indonesia, for example).

Rahail Ali noted that to ensure a level playing field, the regulators need to take a step back and analyze Islamic finance. “In Islamic finance money can not be rented out, instead we need to buy and sell assets. Generally buying and selling will have cost implications (withholding tax, capital gains tax) that would put the customers in a disadvantaged position. A wise regulator would look at the nature of Islamic finance and recognize that it is ultimately about providing finance although it involves buying and selling. Then they need to provide the framework that would facilitate this.”

Abdulkader then asked the panel which products they thought were good for the development of the Islamic finance market. Salman Ashraf stressed the need to come up with risk management products that could help the players manage the profit rate risk efficiently. Jal Othman then pointed out three hurdles in finding the best product:

1. Asset class scarcity — there is lack of alternative asset classes to invest in.
2. Asset suitability — having found the asset class, one needs to evaluate whether it is suitable to meet their financing requirement
3. Level playing field — having passed the first two hurdles, then a level playing field would become an important issue. How do we ensure the investors are not in a disadvantaged position due to different instruments used in Islamic finance.

Mahmoud added that currently the industry even lacks investor group diversity. “Sukuk is only subscribed by banks currently. We need to develop Takaful and pension funds to grow additional investor base, he said. In addition, issuers need to take into account what they have already invested in and what they would like to invest into. In infrastructure projects for example, a five to seven years funding would suffice and syndicated finance would be able to meet that need. If the market requires longer term funding, then there will be a need to create a secondary market so that investors could exit after five or seven years.

Abdulkader concluded the session by asking the panel to name a landmark transaction that has occurred thus far. The panel’s view was:

1. Salman: The second Khazanah Sukuk — it managed to secure a wider acceptance from the Middle East investor.
2. Jal: Khazanah Sukuk — the exchangeability feature helped the issuance achieve parity with conventional bonds.
3. Rahail: PCFC Sukuk — demonstrated that a debt-based instrument could be changed to an equity note at the end
4. Mahmoud: Saudi Power Co — largest Saudi Sukuk that represents a new asset class in the Middle East
5. Kavilash: East Cameroon Gas Sukuk — a US company looking to tap into Middle East liquidity.