‘Sukuk Has Key Role in Development’

LONDON, 23 June 2007 — Sukuk has a key role in facilitating economic development especially through financing large-scale investment projects, stressed Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank, in London on Thursday.

At the same time, just as the old Silk Road in the 14th century offered a route that facilitated the spice trade from the East to the West, “we can now envisage the new Silk Road which financial flows across borders between the East and West, thereby promoting international financial integration. In this context, the Islamic capital market, in particular the Sukuk market has a major role in strengthening this interlinkage.”

Zeti was delivering the keynote address at a packed Sukuk Summit at the Royal Horse Guards Hotel in Whitehall, which was also attended by Etsuaki Yoshida, deputy director of the Japan Bank for International Cooperation (JBIC) and Michael Ainley, head of financial institutions at the UK’s Financial Services Authority (FSA).

The summit, whose main theme is titled “Demystifying Islamic Capital Markets” attracted delegates from the GCC and the Middle East; Southeast Asia; the UK and Europe; Russia and South Africa. The Sukuk market is experiencing an average growth of 40 percent per annum. The current market size for Sukuk is estimated at $50 billion, with demand set to grow dramatically over the next few years especially in Asia and the GCC regions.

Zeti stressed that the global development of the Sukuk market has played a significant role in the evolution of Islamic finance and has contributed “to enhancing the effectiveness and efficiency of the mobilization and allocation of funds within national financial systems and in the international financial system.”

Asia alone, reminded Zeti, will be spending an estimated $1 trillion on infrastructure over the next five years, while infrastructure requirements in the Middle East are estimated to be $500 billion over the same period. “The challenge is put in place an intermediation system that will channel the surplus savings in both these regions into productive investments. It is in this context that the Islamic capital market, in particular the Sukuk market will serve as an important avenue to efficiently mobilize longer term funds to meet these funding requirements,” she added.

The central merit of the Sukuk structure is that it is based on real underlying assets. “The Ijarah Sukuk, for example,” explained Zeti, “an Islamic bond which applies a sale and leaseback arrangement — is an asset-backed instrument providing continuous security to the investor. This approach discourages over-exposure of the financing facility beyond the value of the underlying asset, given the issuer cannot leverage in excess of the asset value.”

Zeti praised the current initiatives in the UK where the Treasury has announced a market consultation to study the feasibility of issuing Shariah-compliant instruments in the wholesale sterling market. “The participation of a financial centre like London will foster the global growth an international integration of this market,” she reiterated.

Ever since Malaysia saw the first Sukuk issuance — by Shell Malaysia in 1990, the market has increased both in volume and diversification. By January 2007, Malaysia accounted for 67 percent of the global Sukuk outstanding, amounting to about $47 billion.