The sukuk market continues to be an important segment of the bond market with potential for exponential growth, according to Ranjit Ajit Singh, Chairman Securities Commission (SC) Malaysia.
In a statement published by Malaysia International Islamic Financial Centre (MIFC), Ranjit said that sukuk makes up an extensive portion of the Malaysian bond market, constituting 63 per cent of total corporate bonds outstanding.
“Malaysia needs to focus on three key areas in order to be able to bring its bonds and Sukuk market to the next level of growth and competitiveness, although the country is eminently able to provide a sound platform for issuers and investors across the region to tap into its domestic bonds and Sukuk market,” he explained in his keynote address at the RAM Annual Bond Market Conference, which was held in Kuala Lumpur.
The Conference theme “Making the Asian Bond Market a Reality”, the Chairman highlighted the importance of a wider issuer base; the empowerment of investors to make the right investment choices and decisions; and the continuing importance of the Sukuk market.
The issuer base could be widened through greater product innovation to expand the current product range to include for example, bonds with variable features that would suit the specific needs of the issuers and also be transparent.
While the current bond financing profile has largely been for large projects with long gestation periods, the challenge is for the market to explore bonds as a viable means of financing smaller and relatively shorter-term projects undertaken by the small and medium-sized (SME) companies as well as those operating in niche segments.
“I believe that credit guarantee institutions have a significant role to play in widening the credit spectrum as it enables smaller and lower-rated issuers to access the bond market since these guarantees provide investors comfort on the viability of an issuer,” he added.
Whilst the retail segment currently has access to the bond market via bond funds, the SC, he revealed, has been working towards greater financial inclusion in the market to attract foreign investors and increase direct access into the market for retail investors. In this regard, the SC has been collaborating with the industry to promote retail participation. A framework to facilitate the offering of bonds to retail investors is currently in the final stages of development.
However, he had a word of warning. “Despite being a leading provider of Shariah-compliant products, Malaysia must continue to scale up, using our expertise to further expand offshore, and work with both regional partners and the private sector, to create a bigger and more integrated Sukuk market.”
The Chairman commended the robust growth of the Asian capital markets, in particular the bond markets, over the last decade. In the Malaysian context, the SC has also worked hard to promote the Malaysian market at the international level, including at the International Organisation of Securities Commissions (IOSCO) as well as through the Asian Bond Market Initiative (ABMI).
Despite the various regional initiatives including the establishment of a $1 billion Asian bond in 2003 under the auspices of the Executives’ Meeting of East Asia and Pacific Central Banks and Monetary Authorities (EMEAP); the setting up of ABMI; the Credit Guarantee Investment Facility (CGIF); the Asian Bond Online; and the ASEAN Infrastructure Fund (AIF), more needs to be done to bring about substantial development to the regional bond market.
This is reflected in the fact that East Asia’s local currency bond markets have grown from $948 billion in 2001 to $5.7 trillion in 2011, while growth in foreign currency issuances in the region has increased from $241 billion to $603 billion over the same period.
The Malaysian bond market, said the SC Chairman, has increased from RM137 billion in 1997 to close to RM1 trillion today to become the third largest bond market in Asia, as a percentage of GDP. Correspondingly, the corporate bond market has grown to RM382 billion from RM63 billion.
In the first half of 2012, total bonds and Sukuk issuance amounted to RM66 billion compared with RM70 billion for the whole of 2011.
“Given this trend, we expect to see two consecutive years of record level issuances which augur well for the Malaysian bond market. The issuance of RM30 billion Sukuk by PLUS Berhad in January 2012 is a particular milestone as it represents the largest ever Sukuk issuance in the world. This also further underscores the attractiveness of the Malaysian Sukuk market which currently accounts for more than two-thirds of global Sukuk,” he added.
Malaysia is seeing a greater number of foreign issuers and international investors participating in the Malaysian bond/Sukuk market. “This shows that the fundamentals and the infrastructure of our bond market are able to support these activities. However, existing cross-border issuances are still largely denominated in Ringgit, and as such, there is an opportunity for us to promote the issuance of multi-currency bonds in Malaysia,” he said.