Global sukuk market has "significant potential" to fund new infrastructure, says head of Malaysian central bank

Out-Law News | 31 Oct 2014 | 5:31 pm | 1 min. read

The $270 billion global market for sukuk, the Islamic equivalent of a bond, could become an "important source of funding" for infrastructure and other long-term projects, according to the governor of Malaysia's central bank, Bank Negara Malaysia.

Speaking at the 10th World Islamic Economic Forum in Dubai, Dr Zeti Akhtar Aziz said that the sukuk market had "significant potential" to fund infrastructure projects in the Gulf Cooperation Council (GCC), Africa and Asia. She said that some developing economies in Africa were already looking to the sukuk market as a means of obtaining financing for infrastructure.

"The success of the sukuk market reflects its ability to meet the changing and differentiated demands of the modern economy, to develop innovative and cutting edge structures and products, and to achieve such issuances at competitive pricing," she said.

"Going forward, the financing requirements for economic development are envisaged to be massive, particularly for emerging and developing economies in the Asian and Middle Eastern regions that are seeking huge amounts of capital to fund new infrastructure and to support economic development. Given the sheer size of these projects, equity and government budgets cannot be the only source of financing for this next phase of economic growth and industrialisation in our regions," she said.

According to Dr Zeti, more than 10 different countries have already issued a combined $95bn of infrastructure sukuk. An estimated $8.3 trillion is required for infrastructure projects in Asia until 2020, while projects in the Middle East will likely require $2trn over the same period, she said.

In her speech, Dr Zeti highlighted the growing geographical reach of the sukuk market, with those sukuk yet to mature now domiciled in more than 20 countries. In addition, given that the product is based on underlying assets, issuers are "discouraged from leveraging in excess of the asset value" with the accompanying potential for over-indebtedness and consequences for financial stability, she said.

"There is also potential for direct participation of investors in the project, thereby granting investors beneficial ownership in the underlying assets, with the rights to receive a share of profits or rental income from the underlying asset of the sukuk while taking the associated risk of such ownership," she said.

Sukuk are financial instruments that resemble government-issued sovereign bonds, but adhere to the principles of Islamic law. Islamic, or shari'a, finance prohibits interest, or 'riba', and does not allow one party to make money unjustly at another's expense. Investors receive a fixed return based on the profit generated by an underlying asset.

Islamic finance expert Amir Ahmad of Pinsent Masons, the law firm behind Out-Law.com, said that this "recourse on real assets" made infrastructure projects a "natural choice" for sukuk issuance.

"At present, there seems to be ample liquidity on the Islamic finance market which can be used towards infrastructure growth in Islamic countries," he said.