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Reaching the masses with sukuk

July 8, 2013

Sukuk have provided an avenue for issuers to tap new sources of funding and provided a new asset class for investors.

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By Dr Nik Ramlah Mahmood

Sukuk have provided an avenue for issuers to tap new sources of funding and provided a new asset class for investors.

As at Dec 31, 2012, the size of sukuk outstanding globally was Ł160 billion (RM758.4 billion) with Malaysia making up 68% of the market.

Despite the increasingly impressive figures, sukuk, like bonds, continue to be the domain of the “big boys”, both on the demand and supply sides.

Issues like rating requirements, cost of issuance and complexity of documentation meant that capital raising through sukuk is predominantly by larger corporations and entities.

The sizeable denomination and the fact that sukuk are almost always traded in the over-the-counter market, limits the subscription capacity to institutional and high net worth investors. All these factors means that sukuk, while successful, offers no opportunity for direct investments by retail investors.

How do we ensure that the phenomenal success of the sukuk market can be shared with the man in the street, the small investors?

With a view to facilitating greater direct retail participation in the corporate bonds and sukuk market, the Securities Commission Malaysia in 2012 developed the framework for retail bonds and sukuk as envisaged under the Capital Market Masterplan 2, enabling retail investors’ access to a wider range of investment products.

Under the Exchange Traded Bonds and Sukuk framework, retail investors will have direct access to sukuk thereby broadening the range of low-risk investment products available to them and facilitating diversification for risk management purposes. Under the framework, sukuk issued by a public company guaranteed by the government, public companies listed on Bursa Malaysia Securities Bhd, Cagamas Bhd and licensed Malaysian banks can be offered to retail investors. In addition, all sukuk issued to retail investors must be rated although no minimum rating requirement is required.

Pursuant to the release of the framework, Malaysia’s first retail (exchange-traded) sukuk was issued by a government-owned entity, DanaInfra Nasional Bhd, a company tasked to undertake the development of the country’s first mass rapid transit project.

Of course, as with anything new, the introduction of retail bonds and sukuk in Malaysia has not been without challenges.

One area that requires considerable effort is investor education. While Malaysian investors have a long history of affiliation and familiarity with the equity market, they have had no direct exposure to bonds and sukuk.

While the introduction of retail sukuk gave retail investors in Malaysia direct access to the sukuk market, it is important to note that long before that retail investors have already participated in the sukuk market albeit indirectly through Shariah-compliant unit trust funds which in itself is a huge success story in Malaysia.

Big strides have been made since the launch of the first Shariah- compliant unit trust funds in 1993. While early Shariah-compliant unit trust funds were largely equity based, these funds also began to invest in sukuk, which was only accessible by institutional investors.

With the growth of the sukuk market, there were more opportunities for our unit trust management companies to offer other types of funds including Islamic mixed asset funds, balanced funds and sukuk funds.

The first (retail) sukuk fund in Malaysia was offered in 2000 and there are currently 23 sukuk funds with net asset value of RM4.7 billion. Thus efforts to strengthen the investment management industry especially in the context of developing the sukuk funds is another important means to widen retail participation in the sukuk market.

Reaching the masses

Viewing the development of retail sukuk in isolation does not do justice to the many other efforts that have and continue to be pursued in Malaysia to extend the reach and relevance of Islamic capital market products and services to a wider spectrum of issuers and investors.

In Malaysia, products such as Shariah-compliant real estate investment trusts (REITs) and exchange-traded funds (ETFs) have gained traction among retail investors. Listed Islamic REITs, for example, remain a popular alternative asset-class that enables retail investors to have exposure in a portfolio or pool of real estate from various segments of the economy either domestic or global. These products are being offered and traded in an ecosystem that is supported by a strong regulatory and supervisory framework such as product regulation, trusteeship and custodian for the protection of investors’ interest.

Earlier this year saw the listing of the first Shariah-compliant stapled securities which comprise a combination of ordinary shares of a public-listed company and units of an Islamic REIT with the underlying being the Petronas Twin Tower and its commercial buildings.

The listing of the Shariah-compliant stapled securities marks retail participation in an asset class that provides a stable and sustainable income stream to investors. We have also introduced a new fund raising framework in the form of business trusts which will provide access to investments in an Islamic product with characteristics that resemble a normal listed company.

These initiatives enable the masses to tap into such offerings, create liquidity and a sustainable marketplace for wealth creation and extend the reach of the capital market.

The introduction of retail investment products that seek to widen access of the masses to the capital market requires considerable effort.

Often these products may not achieve overnight successes but if we believe in the ultimate goal of widening access to the capital market and ensuring that Islamic finance takes the path of inclusiveness, then we must persevere.

Dr Nik Ramlah Mahmood is the Securities Commission deputy CEO. This is an excerpt of her speech entitled ‘Facilitating Retail Participation in the Sukuk Market’ at the 2013 London Sukuk Summit.

This content is provided by FMT content partner The Malaysian Reserve.


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