Dubai: The development of Islamic capital markets is important in enabling financing for productive economic activities at competitive prices, said Dr Zeit Akhtar Azis, Governor of Central Bank of Malaysia addressing the 10th World Islamic Economic Forum.
“A core underpinning of Islamic finance is the tenet that requires Islamic financial transactions to be supported by genuine productive economic activity. Islamic finance is also a financial regime that places emphasis on risk-sharing, thereby strengthening further the link of finance to the real economy. Thus, it provides a greater understanding on the fundamental relationship between the financial sector and the real economy,” said Dr Aziz.
Acceptance of Islamic financing is gaining momentum across the world and the increasing number of corporates and non-Muslim sovereigns that are issuing sukuk are evidence that the global financial markets are appreciating the benefits embedded in the concept of risk-sharing in Islamic finance, she said.
Dr Aziz said sukuk market is evolving as a distinct platform to foster greater international linkages, and gaining interest from multilateral institutions and multinational corporations in addition to gaining greater geographic reach.
Dr. Aziz said that with domicile in over 20 countries and in multiple currencies, the sukuk market offers a strong opportunity to drive infrastructure development. While Asia requires over $8.3 trillion through 2020 to meet infrastructure needs, the Middle East requires over $2 trillion (Dh7.3 trillion) in the same period. Additionally, African markets are also tapping the sukuk market.
She added that the international linkages formed through Sukuks supporting infrastructure and growth projects will contribute to global financial stability that will be mutually beneficial for all stakeholders.
“The development towards a more equity-based financial system where risk-sharing takes place reduces the over-reliance on debt funding, thus avoiding excessive leverage and speculation,” said Dr Aziz.
The use of risk-sharing transactions and undertakings under participatory finance models in Islamic finance thus offers the potential to reinforce the links between finance and the real economy. The contractual arrangements between the financier and the entrepreneur place strong emphasis on the value creation and economic viability of the enterprise. This results in a close link between the growth of the financial sector and real sector activities in which the expansion or contraction of credit is dependent on developments in the real sector.
The last three years have seen the global sukuk market double, with a compounded annual growth rate of 30 per cent for the previous 10 years. The stock of sukuk outstanding almost quadrupled during that period as annual issuance rose sharply from less than $32 billion in 2010 to a record $83 billion at year-end 2012. Worldwide offerings fell to $64 billion in 2013 due to heightened perceptions of credit risk in emerging markets caused by the announcement of the tapering policy of the US Federal Reserve.
The sovereign sukuk market has grown strongly over the last three years, with annual issuance rising sharply from less than $15 billion in 2010 to $33 billion and $23 billion in 2012 and 2013, respectively according to global rating agency Moody’s.
Sovereign sukuk outstanding now accounts for around 36 per cent of the $296 billion outstanding global sukuk market as of July 2014. Taking into account government-related entities — which often have quasi-sovereign credit risk — the combined total exceeds one half of total sukuk issuance.
Sovereign volumes have grown strongly over the past decade and now reach a cumulative issuance total of $438 billion as of July 2014. Many sovereign sukuk have matured and those sukuk outstanding amounted to $105 billion as of July 2014. Moody’s expect the outstanding volume to reach $115 billion by year-end 2014.
Malaysia continue to dominate sovereign issuances, though the UAE and Qatar lead the international volumes. Sovereign volumes will remain concentrated in regions that have a natural cultural affinity with the sector, such as in Malaysia and in the more established GCC markets, although a number of non-Islamic sovereigns are showing interest in sukuk issuance.
“The growing sovereign interest in sukuk issuance across the world is a healthy sign as a sovereign issue is the beginning of the creation of benchmark for corporate issuers,” said Dr Aziz.
