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In the early 2000s, the term “Sukuk” was hardly heard or used. However, as the Islamic finance landscape shows remarkable progress in terms of size and sophistication, “Sukuk” is no longer an uncommon term in the Islamic capital markets. Indeed, it has become a new buzzword reflecting of the progression of the Islamic debt capital markets.
Literally, Sukuk (plural of word sak) is defined as papers representing financial obligations originating from trade and other commercial activities. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines Sukuk as “certificates of equal value representing after closing subscription, receipt of the value of the certificates and putting it to use as planned, common title to shares and rights in tangible assets, usufructs and services, or equity of a given project or equity of a special investment activity”.
Development of Islamic Debt Capital Markets
The presence of various types of Sukuk in the Islamic debt capital market complementing the conventional bonds has gained great interest from both investors and issuers globally. The unabated development of Islamic debt capital markets started in late 2001, when First Global Sukuk Inc issued its global Sukuk out of Labuan International Offshore Financial Center, which marked the first cross-border Sukuk transaction in the world. Since then, the proliferation of Sukuk issues has continued to expand from only three Sukuk worth US$336 million issued in 2000 (when there was no sovereign Sukuk) to over 170 new Sukuk worth US$26.8 billion issued last year, bringing the total amount of global Sukuk outstanding to US$53.4 billion (see table).
The growth achieved in 2003 of 483% has been the most impressive. Last year was probably the busiest for Islamic bankers and experts, when over 170 new Sukuk were issued. It is anticipated that the tremendous growth of the Islamic capital markets will continue in years to come.
Current Climate of Islamic Debt Capital Markets
The Sukuk Market Report First Half 2007 (January to June) compiled by Islamic Finance Information Service analysts shows that the domestic Sukuk market experienced a growth rate of 71.4% while the international Sukuk market expanded by 83.3% over the previous year.
These statistics simply illustrate that the cross-border fundraising activities are gaining strong momentum, amid the market liberalization, particularly in Asia. From the perspective of international issuers, the influx of petrodollars money from the Middle East would strongly encourage them to tap the Islamic debt capital markets as a means of raising funds at competitive rates, given the high demand from a wider base of investors as against that of the conventional debt papers. As for the institutional fund managers and investors such as pension funds, mutual funds and financial institutions, which are seek to diversify their investment portfolios or those promoting ethical funds, Shariah compliant fixed income securities would offer them alternatives as target investment products.
New Worldwide Emerging Participants
On the Asia-Pacific front, the development of the Islamic debt capital market can be further enhanced with the likely entrance of more capital market participants from emerging markets such as Indonesia, China, India, and Vietnam.
The Thai government has shown keen interest in tapping opportunities in Islamic debt capital markets. In the next decade, it is estimated that Thailand would require financing of up to US$50 billion to meet its infrastructure development works such as power sector, petrochemical and manufacturing.
In the US, the issuance of Musharakah Sukuk last year (the first US Sukuk ever) by East Cameron Partners, an independent oil and gas exploration and production company based in Texas, was a significant milestone in the global development of Islamic debt capital markets. The issue has perhaps boosted confidence among the prospective issuers in the west with regard to increasing global acceptance of Sukuk as an alternative means of fundraising. With this inaugural issuance, it is hoped that the Islamic debt capital markets in the US will see greater growth.
The UK government also took a proactive step in February this year, with the establishment of the world’s first secondary market for trading Sukuk. In addition, it has announced plans to introduce legislation to allow issuers of Sukuk to deduct the profit payments (equivalent to coupon payments) paid to investors against company profits in calculating the taxable income, so as to accord a similar privilege of interest deduction in the case of conventional debt papers.
Malaysian Islamic Debt Capital Market
The development of the Malaysian Islamic debt capital market gained impetus when Bank Negara Malaysia, the Securities Commission and other stakeholders launched the Malaysian International Islamic Finance Center (MIFC) initiative last year to position the country as an international Islamic financial center. Apart from the various tax incentives accorded to issuers and investors of Sukuk, further market liberalization has also taken place in the Malaysian Islamic debt capital market to attract, among others, multilateral development banks and multilateral financial institutions, foreign governments and foreign multinational corporations to raise foreign-currency denominated Sukuk and also multilateral development banks or multilateral financial institutions to raise ringgit-denominated bonds out of Malaysia.
The result thus far, in 2006, the SC approved Islamic Sukuk amounting to RM42 billion, which accounted for 53% of all local bonds issued. This record has given Malaysia the distinction of having issued 67% of the world’s Sukuk issues. In 1Q2007, the Malaysian Islamic debt capital market continued its aggressive stance with 12 new Sukuk issued worth RM3.76 billion, which made up 28.46% of the total size of bonds approved. Note that the types of Sukuk issued in the Malaysian debt capital market have slowly evolved from the traditional Ijarah and Bai Bithaman Ajil to more widely accepted Shariah compliant products, namely Murabahah, Musharakah and Istisnah. Istisnah Sukuk recorded 38.61% of the total approved Sukuk in 1Q2007, outperforming Sukuk Musharakah and Sukuk Murabahah, which registered 21% and 16.48% respectively.
Conclusion
In an effort to sustain and promote the robust growth of Islamic debt capital markets amid the global and liberalized markets, all the Islamic capital market players and other key industry intermediaries, including the regulators, will have to collectively get their act together towards minimizing inherent impediments (i.e. regulatory and tax frameworks) as well as build on the foundation, infrastructure and outfit. Given the current environment which stimulates innovation in the Islamic capital markets, such progress should not compromise the integrity of the Islamic papers issued, both from the market and Shariah perspective.
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