Malaysia’s Sukuk market has remained resilient despite generally less upbeat market sentiment. Notably, Sukuk issuance in the first 10 months of 2016 has already matched RAM Ratings’s full-year projection for the local currency Sukuk market, ie RM100-120 billion (equivalent to US$23-28 billion based on an exchange rate of US$1 = RM4.3) which RAM had forecasted on the 23rd March 2016.
Review of 2016
As at the end of October 2016, outstanding bonds amounted to RM1.2 trillion (US$275 billion) with some 57% comprising Sukuk.
At the same time, Shariah compliant securities accounted for 55% of the market’s total issuance of RM210.9 billion (US$49 billion)-worth of government, quasi-government and corporate debt issues. Breaking this down further, corporate debt securities contributed 41%, followed by government (34%) and quasi-government (25%) Islamic debt securities.
Backed by such strong support, especially from the corporate sector, Sukuk issuance summed up to RM115 billion (US$26.7 billion) for the first 10 months of 2016. This already equals RAM’s forecast of RM100-120 billion for the entire year.
Based on RAM’s analysis, the growth of a domestic Sukuk market is best measured by the issuance of quasi-government and corporate debt Sukuk.
To date, Sukuk issuances from these sectors have dominated the Malaysian bond market, with funding largely channeled toward Islamic financial institutions (37% of total quasi-government and corporate issuances) tapping the Sukuk market to meet their capital requirements as well as for infrastructure projects (31% of total quasi-government and corporate issuances).
In October 2016, US dollar-denominated Malaysian Sukuk were included in the EMBI Global Diversified Index. Together with the visibility provided by the incorporation of Malaysia’s government investment issues (GII) into Barclay’s Global Aggregate Index in March 2015, significant recognition has been attained among international investors. This is underlined by the 198% year-on-year surge in foreign holdings of GII to US$7 billion as at the end of October 2016.
Preview of 2017
Malaysia’s economic pump-priming through infrastructure-led projects has been a boon to the Sukuk market, and is likely to remain a key catalyst. Issuances from the quasi-government and corporate sectors are expected to continue playing a significant role in expanding the breadth and depth of the domestic Sukuk market.
Table 1: Top 10 issuers in Malaysia’s local currency Sukuk market (as at the end of September 2016) |
|||
|
Amount (RM million) |
Amount (RM million) |
Market share (%) |
33 |
8.25 |
33.2 |
|
11.3 |
2.83 |
11.3 |
|
5.54 |
1.39 |
5.6 |
|
4.5 |
1.13 |
4.5 |
|
4 |
1 |
4 |
|
3.64 |
0.91 |
3.7 |
|
3.5 |
0.88 |
3.5 |
|
3.2 |
0.8 |
3.2 |
|
3.05 |
0.76 |
3.1 |
|
Jambatan Kedua |
2.6 |
0.65 |
2.6 |
Top 10 issuers |
74.33 |
18.6 |
74.7 |
Total Malaysian local currency market |
99.53 |
24.88 |
100 |
Source: BPAM |
Conclusion
The performance of Malaysia’s Sukuk market is anchored by its unique value proposition, underscored by an ecosystem that has been progressively developed into an international center for Islamic finance.
To fuel this growth, the regulators are promoting the linkage between Islamic finance and sustainable responsible investing. This augurs well for the domestic Sukuk market’s thrust into its next phase of development and, ultimately, its sustainability as a competitive product amid the mainstream financial markets.
Ruslena Ramli is the head of Islamic finance at RAM Ratings. She can be contacted at [email protected].